Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Input/Output Inc - December 31, 2001 60 363K
2: EX-10.13 Form of Change in Control Agreement 7 34K
3: EX-10.14 Non-Qualified Deferred Compensation Plan 4 10K
4: EX-10.19 Separation Agreement 5 28K
5: EX-10.20 Consulting Agreement 8 41K
6: EX-21.1 Subsidiaries of the Company 1 6K
7: EX-23.1 Consent of Pricewaterhousecoopers LLP 1 6K
8: EX-23.2 Consent of Kpmg LLP 1 8K
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
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)
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DELAWARE 22-2286646
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12300 PARC CREST DR., 77477
STAFFORD, TEXAS (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(281) 933-3339
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
RIGHTS TO PURCHASE SERIES A PREFERRED STOCK NEW YORK STOCK EXCHANGE
(Title of Class) (Name of each exchange on which registered)
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: [X] No: [ ]
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. [X]
Aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant at March 1, 2002 (for purposes of the
below-stated amount only, all directors, officers and 5% or more stockholders
are presumed to be affiliates):
$143,004,904
Indicate the number of shares outstanding of each of the registrant's
classes of Common Stock, as of the latest practicable date.
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NUMBER OF SHARES OUTSTANDING
TITLE OF EACH CLASS OF COMMON STOCK AT MARCH 1, 2002
----------------------------------- ----------------------------
Common Stock, $0.01 par value 50,911,902
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PART I
PRELIMINARY NOTE: THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING
STATEMENTS AS DEFINED BY 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 RESULTS OF OPERATIONS AND FINANCIAL
CONDITION -- CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS FOR
A DESCRIPTION OF IMPORTANT FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS.
ITEM 1. BUSINESS
INPUT/OUTPUT, INC.
We are a leading designer and manufacturer of seismic data acquisition
products. Our data acquisition products are particularly well suited for
advanced three-dimensional ("3-D") and four dimensional ("4-D") data collection
techniques, as well as the newer and more advanced three-component ("3C") data
collection techniques. Seismic data is used extensively in the oil and gas
industry as an exploration risk management tool and is also increasingly
employed in field development and reservoir management activities.
We offer a broad range of related products for land and marine
environments. These include central electronics units, remote ground equipment,
vibrators, energy source control and positioning equipment, geophones, specialty
cables and connectors, land geophysical survey planning software, marine
streamers, in-water and shipboard electronics, hydrophones, airguns, data
telemetry quality control systems and streamer positioning systems, compasses,
acoustical devices, and velocimeters. You can find information about the
performance of our Land and Marine Divisions, as well as information about
geographic distribution of our sales, in Management's Discussion and Analysis of
Results of Operations and Financial Condition and Note 10 to Consolidated
Financial Statements.
RECENT DEVELOPMENTS
Traditionally our net sales have been directly related to the level of
worldwide oil and gas exploration activity and the profitability and cash flows
of oil and gas companies and seismic contractors. These factors are affected by
expectations regarding the supply and demand for oil and natural gas, energy
prices, and discovery and development costs. The recent decline in oil and
natural gas prices combined with the use of surplus seismic data, principally
library data, to generate prospects rather than new exploration activity has
significantly reduced demand for our products. Other factors which may limit the
demand for our products may include, but are not limited to, those described in
Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Cautionary Statement for Purposes of Forward Looking Statements.
In response to prevailing seismic industry conditions and in order to
return to profitability, 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 increasing profitability where practicable.
During the year ended December 31, 2001, conditions marginally improved due
to an increase in demand for our products, principally land products. However,
by year-end, commodity prices, rig counts and seismic crew counts all declined,
creating uncertainty about the continued level of demand for seismic services
and equipment in the near term. Recent world events and a weakened world economy
coupled with continuing equipment oversupply in the marine seismic fleets
indicate that demand for seismic equipment in the near term will be less robust.
This has led us to conclude that near-term revenue and operating profits will be
substantially lower than recent levels and we have previously issued earning
guidance stating our expectation of a loss in the first quarter. We expect
revenues for the first quarter of 2002 to be in the range of $23-27 million,
depending in part on the timing of a large international shipment, and we expect
to report a net loss applicable to common shareholders between ($0.09) and
($0.13). Actual first quarter results will be announced in the first week of May
2002. In response to a weakening demand in the short-term, we have reduced our
total work force by over 18% since December 31, 2001, and look to further reduce
our cost
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structure without hindering our long-term growth prospects. However, we believe
long term fundamentals for the sector remain strong and that we should be
well-positioned to benefit from new product sales and potentially strengthening
sector fundamentals when economic conditions improve.
Simultaneous with the filing of this Form 10-K, we are also filing a Form
8-K discussing the accounting treatment of the lease for our Stafford facilities
which we sold and leased back during the third quarter of 2001. See Note 5 of
Notes to Consolidated Financial Statements.
LAND PRODUCTS
During the fiscal year ended December 31, 2001, net sales of data
acquisition products of our Land Division accounted for 77% of total revenues.
Data acquisition products for the Land Division primarily include the following:
Data Acquisition Systems. Our land data acquisition system consists of a
central electronics unit and multiple remote ground equipment modules, which are
either connected by cable or utilize radio transmission and retrievable data
storage. The central electronics unit, which acts as the control center of our
data acquisition 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. The central electronics unit also provides
calibration, status and test functionality. The remote ground equipment of the
I/O system consists of multiple remote modules ("MRX(TM)") and line taps
positioned over the survey area. Seismic signals from geophones are collected by
the MRX, which collects multiple channels of analog seismic data. The MRX
filters and digitizes the data, which is then transmitted by the MRX via cable
to a line tap. Alternatively, our radio telemetry system ("RSR(TM)") records
data across a variety of environments, including transition zones, swamps,
mountain ranges, jungles and other seismic environments. RSR's are radio
controlled, and do not require cables for data transmission since the
information is stored at the unit source and subsequently retrieved. To
complement our new VectorSeis(R) digital sensor we also offer an all-digital
version of our radio telemetry system ("VRSR(TM)").
Geophones and Digital Sensors. Geophones are analog mechanical seismic
sensor devices designed to detect acoustical energy reflected from the earth's
subsurface. The product line includes low distortion seismic sensors designed
for land and transition zone environments. Our newly commercialized VectorSeis
sensor is a revolutionary fully digital sensor which is capable of both
traditional single component compression wave ("P-wave") data collection, as
well as shear wave multi-component 3C data collection. The VectorSeis digital
sensor uses three micro-machined accelerometers configured to measure
compression and shear waves. The inclusion of information from shear waves can
be used to create better structural images of complex geological prospects and
to infer physical properties of rock structures to reduce exploration risk.
Vibrators and Traditional Energy Sources. Vibrators are mechanical devices
carried by a large vehicle and used as a source of seismic energy on land. Our
vibrators offer patented features which extend the life of the vibrator and
lower the distortion of the sound source. In addition, we offer a new tracked
vibrator principally for use in Arctic and desert environments, providing a more
environmentally friendly, as well as efficient option to our customers. Our
Pelton acquisition in early 2001 adds energy source control and positioning
systems to our vibrator product offerings as well as control units for managing
traditional energy sources such as dynamite.
Specialty Cables and Connectors. Cables and connectors are used in
conjunction with most seismic equipment. Our cables not only offer a replacement
option to correct for ordinary wear, but also offer performance improvement and
specialization for new environments and applications.
Applications Software. We offer a wide range of geophysical software used
in seismic planning and execution.
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MARINE PRODUCTS
During the fiscal year ended December 31, 2001, net sales of data
acquisition products by our Marine Division accounted for 23% of total revenues.
Data acquisition products for the Marine Division primarily include the
following:
Data Acquisition Systems. Our marine data acquisition system consists
primarily of towed marine streamers and shipboard electronics ("MSX(TM)") that
collect seismic data in deep-water environments. 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. Hydrophones are
seismic sensor devices designed to detect acoustical energy reflected from the
earth's subsurface. Marine electronics include seismic and data telemetry
quality control systems and related software products, as well as electronics
for shipboard recording.
Airguns. Airguns are the primary seismic energy source used in marine
environments to initiate the energy transmitted through the earth's subsurface.
An airgun fires a high compression burst of air under water to create an energy
wave for seismic measurement. Additionally, we offer an airgun source
synchronizing system that can control up to 128 airguns simultaneously.
Marine Positioning Systems. Our positioning systems include birds,
compasses, velocimeters and acoustical devices. Positioning systems control
streamer cable depth during towing, ensuring consistent data recovery while
minimizing turbulence induced distortions.
RESERVOIR PRODUCTS
For 2002 we formed a Reservoir Division which will include ocean bottom
systems (previously accounted for as part of the Marine Division) and in-well
applications (previously accounted for as part of the Land Division).
Ocean Bottom Systems. Our ocean bottom systems historically have been very
similar to our land systems with modifications to adapt these products for use
in water depths of several thousand meters and to provide for deployment in a
marine environment. We are currently developing ocean bottom products that will
utilize our VectorSeis technology to collect multi-component seismic data with
the potential to dramatically improve economics of ocean bottom seismic data
acquisition.
In-Well Applications. We are developing in-well systems for production
monitoring and optimization that utilize our VectorSeis multi-component data
technology. Our recently commercialized retrievable vertical seismic profiling
device ("MegaLevel VSP(TM)") allows more of a reservoir to be imaged, and at a
higher resolution than the bore hole imaging provided by traditional VSP
products. Currently our MegaLevel VSP product uses conventional multi-component
analog geophones, but we are developing a version that incorporates our
VectorSeis technology. We are also developing permanently placed arrays for
reservoir monitoring and recently installed our first permanent installation
utilizing a combination of VectorSeis and conventional technology in the Middle
East.
APPLIED MEMS
We recently formed a business unit, Applied MEMS, to hold our
micro-electro-mechanical systems ("MEMS") technology and manufacturing
capabilities. In addition to producing the accelerometers for our VectorSeis
digital sensor, this business unit is also actively pursuing sales of
accelerometer products for nonseismic applications, foundry services for third
parties, and other MEMS opportunities.
PRODUCT RESEARCH AND DEVELOPMENT
Our strategic focus for research and development is driven by our desire to
improve the quality of the subsurface image and the overall acquisition
economics of our customers. Our ability to compete effectively and maintain a
leading market position in the manufacture and sale of seismic instruments and
data acquisition systems depends upon continued technological innovation.
Development cycles, from initial
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conception through product introduction, may extend over several years. Research
and development expenditures have principally related to the continued
enhancement and evolution of our land, marine data acquisition and reservoir
product lines.
During 2001, our primary research and development efforts were focused on
field testing and commercialization of a land-based seismic data acquisition
recording system incorporating VectorSeis digital sensors for single and
multi-component recording. In 2002 our principal research and development goals
include the migration of our VectorSeis platform into ocean-bottom systems and
in-well products.
We continue to develop a lightweight land seismic system with a view toward
commercial introduction of this system during 2002 and are developing a next
generation marine seismic data acquisition system, based in part on components
used in our new land system, for commercial deployment in 2003. We have a number
of other products under development including reservoir monitoring applications
for land, transition zone (i.e. marshes and shallow bays) and ocean-bottom
reservoirs.
Because the 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.
MARKETS AND CUSTOMERS
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. During the year
ended December 31, 2001, three customers (PGS Offshore, Schlumbeger and Veritas
DGC) accounted for approximately 51% of consolidated net sales. PGS Offshore and
Veritas DGC have recently announced their intention to merge. 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 and Note 10 of
Notes to Consolidated Financial Statements.
A significant part of our marketing efforts are focused on areas outside
the United States. Foreign sales are subject to special risks inherent in doing
business outside of the United States, including the risk of war, civil
disturbances, exchange rate fluctuations, embargo and governmental activities,
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 through several international
third-party sales representatives responsible for key geographic areas. During
the year ended December 31, 2001, sales to areas outside the United States
accounted for approximately 63% of net sales. Further, systems sold to domestic
customers are frequently deployed internationally and, from time to time,
certain foreign sales require export licenses. See Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Cautionary
Statement for Purposes of Forward Looking Statements -- We derive a substantial
amount of our revenues from foreign sales which pose additional risks and Note
10 of Notes to Consolidated Financial Statements.
Sales to customers are normally on standard net 30-day terms. We also
provide financing arrangements to customers through long-term notes receivable.
Notes receivable are generally collateralized by the products sold, bear
interest at contractual rates up to 13% per year and are due at various dates
through 2004. See Note 1 and 7 of Notes to Consolidated Financial Statements.
SUPPLIERS
We purchase a substantial portion of the electronic components used in our
systems and products from third-party vendors. Certain items, such as integrated
circuits used in I/O systems are purchased from sole source vendors. Although we
attempt to maintain an adequate inventory of these single source items, the loss
4
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.
COMPETITION
The market for seismic data acquisition systems and seismic instrumentation
is highly competitive and is characterized by consolidation, as well as
continual and rapid changes in technology. Our principal competitors for land
and marine seismic equipment are, among others, Fairfield Industries; Geo-X
Systems, Limited; JGI, Incorporated; OYO Geospace Corporation; Bolt Technology
Corporation; Teledyne Brown Engineering, an affiliate of Allegheny Teledyne
Company; Thomson Marconi Sonar P/L; Geoscience Corp. and Societe d'etudes
Recherches et Construction Electroniques ("Sercel"), both affiliates of
Compagnie General de Geophysique. Unlike I/O, companies such as Sercel and
Geoscience Corp. possess an advantage of selling to an affiliated seismic
contractor.
INTELLECTUAL PROPERTY
We rely on a combination of trade secrets, patents, copyrights and
technical measures to protect our proprietary hardware and software
technologies. Although patents are considered important to our operations, no
one patent is considered essential to our success. Copyright and trade secret
protection may be unavailable in certain foreign countries in which we sell
products. In addition, we seek to protect trade secrets through confidentiality
agreements with employees and agents and through ownership of a number of
trademarks.
REGULATORY MATTERS
Our export activities are subject to extensive and evolving trade
regulations. Certain countries in which products may be utilized are subject to
trade restrictions, embargoes and sanctions imposed by the U.S. government.
These restrictions and sanctions, generally speaking, 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. We do not currently foresee the
need for significant expenditures to ensure 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.
EMPLOYEES
At December 31, 2001, we had 799 full-time employees worldwide, 634 of whom
were employed in the United States. U.S. employees are not subject to any
collective bargaining agreements and we have never experienced a work stoppage.
We consider ourselves to have a good relationship with our employees.
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ITEM 2. PROPERTIES
Primary manufacturing facilities are as follows:
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SQUARE
MANUFACTURING FACILITIES FOOTAGE
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Stafford, Texas**........................................... 110,000
Alvin, Texas*............................................... 240,000
New Orleans, Louisiana**.................................... 40,000
Norwich, England**.......................................... 31,000
Voorschoten, The Netherlands**.............................. 30,000
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451,000
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* Owned
** Leased
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 leased are considered by management to be
sufficiently maintained and adequate for current operations.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, we have been named in various lawsuits
or threatened actions. While the final resolution of these matters may have an
impact on our consolidated financial results for a particular reporting period,
we believe that the ultimate resolution of these matters will not have a
material adverse impact on our financial position, results of operations or
liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 on the NYSE composite tape.
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PRICE RANGE
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PERIOD HIGH LOW
------ ------ -----
Year ended December 31, 2001
Fourth Quarter............................................ $ 9.45 $7.10
Third Quarter............................................. 12.70 7.90
Second Quarter............................................ 14.25 8.67
First Quarter............................................. 13.10 8.50
Seven months ended December 31, 2000
December.................................................. $10.25 $7.50
Second Quarter............................................ 10.25 7.38
First Quarter............................................. 9.63 6.81
Year ended May 31, 2000
Fourth Quarter............................................ $ 8.25 $5.50
Third Quarter............................................. 6.69 4.25
Second Quarter............................................ 8.38 4.94
First Quarter............................................. 8.94 7.00
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 considers relevant.
We are permitted to pay dividends on our common stock, as long as all dividends
on our outstanding Series B and Series C Preferred Stock are current. See Note 8
of Notes to Consolidated Financial Statements.
On December 31, 2001, there were 313 stockholders of record of common stock
outstanding and one stockholder of 55,000 shares of Series B and Series C
Preferred Stock outstanding.
In October 2001 our Board of Directors authorized the repurchase of up to
1,000,000 shares of our 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, 2001, we had repurchased 461,900 shares of our common stock
under this repurchase program for a total purchase price of $3.6 million and at
an average price of $7.78 per share. Under a prior repurchase program, we had
repurchased 37,898 shares of our common stock during 2001, for a total purchase
price of $0.4 million.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to
our consolidated statements of operations for the year ended December 31, 2001,
the seven months ended December 31, 2000 and the four fiscal years ended May 31,
2000, 1999, 1998, and 1997, and with respect to our consolidated balance sheets
at December 31, 2001, and 2000 and May 31, 2000, 1999, 1998, and 1997 have been
derived from our audited consolidated financial statements. Our results of
operations and financial condition have been affected by acquisitions of
businesses and significant charges during certain periods presented, which may
affect the comparability of the financial information. This information should
be read in conjunction with Management's Discussion and Analysis of Results of
Operations and Financial Condition and the consolidated financial statements and
the notes thereto included elsewhere in this Form 10-K.
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SEVEN MONTHS
YEAR ENDED ENDED YEARS ENDED MAY 31,
DECEMBER 31, DECEMBER 31, ------------------------------------------
2001 2000 2000 1999 1998 1997
------------ ------------ -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales...................... $212,050 $ 78,317 $121,454 $ 197,415 $385,861 $281,845
Cost of sales(1)............... 135,798 58,554 106,642 205,215 226,514 183,438
-------- -------- -------- --------- -------- --------
Gross profit (loss).......... 76,252 19,763 14,812 (7,800) 159,347 98,407
-------- -------- -------- --------- -------- --------
Operating expenses:
Research and development(2).... 29,442 16,051 28,625 42,782 32,957 22,967
Marketing and sales............ 14,274 5,934 10,284 14,193 14,646 13,288
General and
administrative(3)............ 19,695 8,127 21,885 80,932 28,295 36,186
Amortization and impairment of
intangibles(4)............... 4,936 2,757 39,488 16,247 6,008 4,551
-------- -------- -------- --------- -------- --------
Total operating
expenses........... 68,347 32,869 100,282 154,154 81,906 76,992
-------- -------- -------- --------- -------- --------
Earnings (loss) from
operations................... 7,905 (13,106) (85,470) (161,954) 77,441 21,415
Interest expense............... (695) (627) (826) (897) (1,081) (793)
Interest income................ 4,685 4,583 4,930 7,981 7,517 3,942
Other income (expense)......... 574 176 1,306 (370) (202) (267)
-------- -------- -------- --------- -------- --------
Earnings (loss) before income
taxes........................ 12,469 (8,974) (80,060) (155,240) 83,675 24,297
Income tax (benefit) expense... 3,128 1,332 (6,097) (49,677) 26,776 7,700
-------- -------- -------- --------- -------- --------
Net earnings (loss)............ 9,341 (10,306) (73,963) (105,563) 56,899 16,597
Preferred dividend............. 5,632 3,051 4,557 -- -- --
-------- -------- -------- --------- -------- --------
Net earnings (loss) applicable
to common shares............. $ 3,709 $(13,357) $(78,520) $(105,563) $ 56,899 $ 16,597
======== ======== ======== ========= ======== ========
Basic earnings (loss) per
common share................. $ 0.07 $ (0.26) $ (1.55) $ (2.17) $ 1.29 $ 0.38
======== ======== ======== ========= ======== ========
Weighted average number of
common shares outstanding.... 51,166 50,840 50,716 48,540 43,962 43,181
======== ======== ======== ========= ======== ========
Diluted earnings (loss) per
common share................. $ 0.07 $ (0.26) $ (1.55) $ (2.17) $ 1.28 $ 0.38
======== ======== ======== ========= ======== ========
Weighted average number of
diluted common shares
outstanding.................. 52,309 50,840 50,716 48,540 44,430 43,820
======== ======== ======== ========= ======== ========
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SEVEN MONTHS
YEAR ENDED ENDED YEARS ENDED MAY 31,
DECEMBER 31, DECEMBER 31, ------------------------------------------
2001 2000 2000 1999 1998 1997
------------ ------------ -------- --------- -------- --------
BALANCE SHEET DATA (END OF
YEAR):
Working capital................ $204,600 $181,366 $183,412 $ 213,612 $245,870 $170,427
Total assets......... 383,171 365,633 381,769 451,748 493,016 384,658
Short-term debt, including
current maturities of
long-term debt............... 2,312 1,207 1,154 1,067 986 912
Long-term debt, net of current
maturities................... 20,088 7,077 7,886 8,947 10,011 11,000
Stockholders' equity........... 331,037 325,403 335,015 396,974 415,700 338,614
OTHER DATA:
Capital expenditures........... $ 9,202 $ 2,837 $ 3,077 $ 9,326 $ 6,960 $ 26,966
Depreciation and
amortization................. 17,535 11,448 22,835 20,776 16,816 12,558
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(1) Results for the year ended May 31, 2000 include charges of $12.0 million and
results for the year ended May 31, 1999 include charges of $77.0 million.
See Note 15 of Notes to Consolidated Financial Statements for further
information with respect to these charges.
(2) Results for the year ended May 31, 1999 include charges of $1.1 million. See
Note 15 of Notes to Consolidated Financial Statements for information with
respect to these charges.
(3) Results for the year ended May 31, 2000 include charges of $7.2 million;
results for the year ended May 31, 1999 include charges of $53.2 million and
results for the year ended May 31, 1997 include charges of $15.6 million.
See Note 15 of Notes to Consolidated Financial Statements for information
with respect to these charges.
(4) Results for the year ended May 31, 2000 include charges for $31.6 million
and results for the year ended May 31, 1999 include charges of $7.7 million.
See Note 15 of Notes to Consolidated Financial Statements for information
with respect to these charges.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
SUMMARY REVIEW AND OUTLOOK
Our key strategies remain optimizing the performance of our core business,
bringing our key technology initiatives to fruition, monetizing our
underutilized assets and growing our business through acquisitions and
alliances.
Our focus on optimizing the performance of our core business began with
organizing our existing land and marine divisions into a series of individually
accountable business units focused along product lines within the land and
marine divisions. The formation of these business units has led to improved cost
control, faster customer response and better identification of market
opportunities. An example of this was the rapid development and successful
introduction of our new tracked vibrators during 2001. These new tracked units,
which carry our vibrator control and positioning systems, were not only designed
with input from our customers to be more environmentally friendly than
traditional wheeled vehicles, but also increase efficiency of seismic crews when
deployed in the field.
Our efforts to bring key technology initiatives to fruition has led to
commercialization of our VectorSeis line of products and the construction of the
first VectorSeis fleet of approximately 3,500 stations for deployment in early
2002. Veritas DGC, our initial VectorSeis commercialization partner, conducted
sixteen pilot surveys during 2001 using prototype VectorSeis stations. In March
2002 we entered into an alliance with Veritas in which we will provide use of
VectorSeis recording equipment in exchange for a portion of the revenues derived
from use of our equipment. Feedback from Veritas and the end-users has been
favorable. We
9
are continuing to invest resources and seek improvements in seismic data
acquisition technology. Other goals for 2002 include further development of our
land seismic ground equipment and central electronics, commencing development of
a next generation marine seismic data acquisition system, and development of new
product offerings in hydrocarbon reservoir monitoring and characterization.
Monetizing under-utilized assets has included the identification of
alternative revenue-producing opportunities for other assets. We have created a
new business unit for our MEMS facility to provide for the production of MEMS
components for VectorSeis products and also to seek additional non-seismic
applications and revenue sources for our MEMS facility's capacity and
technology.
FISCAL YEAR CHANGE
In September 2000, our Board of Directors approved changing our fiscal
year-end to December 31 of each year. The consolidated statements of operations,
stockholders' equity and comprehensive loss and cash flows for the period from
June 1, 2000 to December 31, 2000 represent a transition period of seven months.
The following is a comparative summary of the operating results for the years
ended December 31, 2001 and 2000 and the seven month periods ended December 31,
2000 and 1999 (in thousands, except per share amounts).
[Enlarge/Download Table]
YEAR ENDED SEVEN MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
2001 2000 2000 1999
-------- ----------- -------- -----------
(UNAUDITED) (UNAUDITED)
Net sales............................... $212,050 $137,384 $ 78,317 $ 62,244
Cost of sales........................... 135,798 117,493 58,554 47,703
-------- -------- -------- --------
Gross profit............................ 76,252 19,891 19,763 14,541
-------- -------- -------- --------
Operating expenses:
Research and development.............. 29,442 28,084 16,051 16,590
Marketing and sales................... 14,274 10,504 5,934 5,713
General and administrative............ 19,695 17,632 8,127 12,396
Amortization and impairment of
intangibles........................ 4,936 37,758 2,757 4,471
-------- -------- -------- --------
Earnings (loss) from operations......... 7,905 (74,087) (13,106) (24,629)
Interest expense........................ (695) (973) (627) (480)
Interest and other income............... 5,259 8,223 4,759 2,767
Income tax expense (benefit)............ 3,128 5,372 1,332 (6,702)
Preferred dividend...................... 5,632 5,000 3,051 2,608
-------- -------- -------- --------
Net earnings (loss) applicable to common
shares................................ $ 3,709 $(77,209) $(13,357) $(18,248)
======== ======== ======== ========
Net earnings (loss) per common share:
Basic................................. $ 0.07 $ (1.52) $ (0.26) $ (0.31)
======== ======== ======== ========
Diluted............................... $ 0.07 $ (1.52) $ (0.26) $ (0.31)
======== ======== ======== ========
COMPARABILITY OF PERIODS
Results of operations and financial condition have been affected by
acquisitions of businesses and pre-tax charges during certain periods discussed,
which may affect the comparability of the financial information. See Notes 9 and
15 of Notes to Consolidated Financial Statements.
10
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Net Sales: Net sales of $212.1 million for the year ended December 31,
2001 increased $74.7 million, or 54%, compared to the prior year. The increase
is primarily due to increased demand for products produced by our Land Division.
Our Land Division's net sales increased $70.5 million, or 77%, to $162.3
million, primarily as a result of improving industry conditions and introduction
of products such as our new tracked vibrator. Our Marine Division's net sales
increased $4.2 million or 9%, to $49.8 million, 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 $135.8 million for the year ended December
31, 2001 increased $18.3 million, or 16%, compared to the prior year. Cost of
sales of our Land Division was $106.7 million and cost of sales of our Marine
Division was $29.1 million. Results for the year ended December 31, 2000
included $10.6 million, net, in pre-tax charges for inventory write-downs
partially offset by favorable legal settlements. Excluding the effect of these
pre-tax net charges, cost of sales increased $28.9 million, or 27%, compared to
the prior year.
Gross Profit and Gross Profit Percentage: Gross profit of $76.3 million
for the year ended December 31, 2001 increased $56.4 million, or 283%, compared
to the prior year. Excluding the effect of pre-tax charges in the prior period,
gross profits for the year ended December 31, 2001 increased $45.8 million, or
150%, compared to the prior year. Gross profit percentage for the year ended
December 31, 2001 was 36% compared to 14% in the prior year. Excluding the
effect of pre-tax charges, gross profit percentage for the year ended December
31, 2000 was 22%. The return to a more normal pricing regime, success in
reducing costs, improving absorption of fixed and semi-fixed overhead, as well
as the continued elimination from the sales mix of products that had been highly
discounted during recent periods of weaker demand contributed to the higher 2001
gross profit percentage.
Research and Development: Research and development expense of $29.4
million for the year ended December 31, 2001 increased $1.4 million, or 5%,
compared to the prior year. Research and development expense has remained
relatively constant due to the ongoing VectorSeis development efforts.
Marketing and Sales: Marketing and sales expense of $14.3 million for the
year ended December 31, 2001 increased $3.8 million, or 36%, compared to the
prior year. The increase is primarily related to higher sales in certain foreign
jurisdictions for which we owe commissions to independent sales representatives.
Compensation expense to our in-house sales force also increased because of the
higher net sales and gross profit percentage compared to the prior year.
Marketing and sales expense as a percentage of revenues remained relatively
constant in both years.
General and Administrative: General and administrative expense of $19.7
million for the year ended December 31, 2001 increased $2.1 million, or 12%,
compared to the prior year. This increase in general and administrative expense
is primarily attributable to increased compensation expense, reflecting
profit-based bonuses in 2001, and the inclusion of Pelton in the current year's
results.
Amortization and Impairment of Intangibles: Amortization and impairment of
intangibles of $4.9 million for the year ended December 31, 2001 decreased $32.8
million, or 87%, compared to the prior year. The decrease is due to the
impairment of $31.6 million of goodwill during the prior year.
Total Other Income: Total net interest and other income of $4.6 million
for the year ended December 31, 2001 decreased $2.7 million, or 37%, compared to
the prior year, primarily due to fluctuations in exchange rates and falling
interest rates.
Income Tax Expense (Benefit): Income tax expense of $3.1 million for the
year ended December 31, 2001 decreased $2.2 million from the prior year. Income
tax expense decreased from the prior period despite higher earnings before
income taxes because: (i) we returned to profitability and are currently
recording an income tax provision that reflects a year-end effective tax rate of
38% before resolution of certain tax issues, (ii) during the prior period we
were profitable in certain foreign tax jurisdictions but recognized no
offsetting
11
benefit from domestic net operating losses, and (iii) we resolved certain tax
issues in the current year and received a $1.6 million cash benefit. This
benefit is not expected to recur in future periods.
In assessing the realizability of our deferred income tax assets, we
considered whether it is more likely than not that some portion or all of the
deferred income tax assets will be realized. The ultimate realization of
deferred income tax assets is dependent upon the generation of future taxable
income during the periods in which those deferred income tax assets become
deductible. We considered the scheduled reversal of deferred income tax
liabilities and projected future taxable income in making this assessment.
In order to fully realize the deferred income tax assets, we will need to
generate future U.S. taxable income of approximately $120 million over the next
19-20 years. Although we have experienced significant losses in recent fiscal
years, taxable income for the years 1996 through 1998 aggregated approximately
$128 million. Regardless, the ultimate realization of the net deferred tax
assets, prior to the expiration of the net operating loss carry-forward in the
next 19-20 years, will require a return to sustained profitability.
Preferred Stock Dividends: Preferred stock dividends for the year ended
December 31, 2001 and 2000 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 at time of preferred stock conversion and 1% is paid as a
quarterly cash dividend. See Note 8 of Notes to Consolidated Financial
Statements). The preferred stock dividend charge for the year ended December 31,
2001 was $5.6 million, compared to $5.0 million for the prior year.
SEVEN MONTHS ENDED DECEMBER 31, 2000 COMPARED TO SEVEN MONTHS ENDED DECEMBER
31, 1999
Net Sales: Net sales of $78.3 million for the seven months ended December
31, 2000 increased $16.1 million, or 26%, compared to the corresponding period
one year prior. The increase is primarily due to increased demand for products
produced by our Land Division. Our Land Division's net sales increased $18.7
million or 45%, to $60.6 million, compared to the corresponding period one year
prior. Increased sales of our Land Division were partially offset by decreased
net sales of our Marine Division where equipment oversupply in the marine
seismic fleets adversely affected sales. Our Marine Division's net sales
decreased $2.6 million or 13%, to $17.7 million, compared to the corresponding
period one year prior.
Cost of Sales: Cost of sales of $58.6 million for the seven months ended
December 31, 2000 increased $10.9 million, or 23%, compared to the corresponding
period one year prior. Cost of sales of our Land Division was $44.7 million and
cost of sales of our Marine Division was $13.9 million. Results for the seven
months ended December 31, 1999 included $1.4 million in pre-tax charges
primarily for product-related warranties. Excluding the effect of these pre-tax
charges, cost of sales increased $12.3 million, or 26% compared to the
corresponding period one year prior.
Gross Profit and Gross Profit Percentage: Gross profit of $19.8 million
for the seven months ended December 31, 2000 increased $5.2 million, or 36%,
compared to the corresponding period one year prior. Excluding the effect of
pre-tax charges in the prior period, gross profits for the seven months ended
December 31, 2000 increased $3.8 million compared to the corresponding period
one year prior. Gross profit percentage for the seven months ended December 31,
2000 was 25%. Excluding the effect of these pre-tax charges, gross profit
percentage remained relatively constant with the corresponding period one year
prior.
Research and Development: Research and development expense of $16.1
million for the seven months ended December 31, 2000 decreased $0.5 million, or
3%, compared to the corresponding period one year prior. Research and
development expense remained relatively constant due to ongoing VectorSeis
development efforts.
Marketing and Sales: Marketing and sales expenses of $5.9 million for the
seven months ended December 31, 2000 remained relatively constant, increasing
$0.2 million, or 4%, compared to the corresponding period one year prior. The
increase reflects higher commissions attributable to higher net sales and gross
profit percentage, partially offset by our cost reduction initiatives
implemented during the current year.
12
General and Administrative: General and administrative expenses of $8.1
million for the seven months ended December 31, 2000 decreased $4.3 million, or
34%, compared to the corresponding period one year prior. The decrease is
primarily due to $3.3 million prior period pre-tax charges for employee
severance and facility closings.
Amortization and Impairment of Intangibles: Amortization and impairment of
intangibles of $2.8 million for the seven months ended December 31, 2000
decreased $1.7 million, or 38%, compared to the corresponding period one year
prior. The decrease is due to the impairment of $31.6 million of goodwill during
early calendar year 2000.
Total Other Income: Total net interest and other income of $4.1 million
for the seven months ended December 31, 2000 increased $1.8 million, or 81%,
compared to the corresponding period one year prior. The increase is a result of
increased interest earned on notes receivable and new treasury management
strategies.
Income Tax Expense (Benefit): Income tax expense of $1.3 million for the
seven months ended December 31, 2000 increased $8.0 million, compared to a $6.7
million tax benefit in the corresponding period one year prior. The change in
income tax expense (benefit) is primarily the result of: (i) increased
profitability of operations in foreign tax jurisdictions, and (ii) no
recognition for benefit from domestic net operating losses (see discussion of
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000).
Preferred Stock Dividends: Preferred stock dividends for the seven months
ended December 31, 2000 and 1999 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 at time of preferred stock conversion and 1% is paid as a
quarterly cash dividend). The preferred stock dividend charge for the seven
months ended December 31, 2000 was $3.1 million, compared to $2.6 million for
the corresponding period one year prior.
YEAR ENDED MAY 31, 2000 COMPARED TO YEAR ENDED MAY 31, 1999
Net Sales: Net sales of $121.5 million for the year ended May 31, 2000
decreased $76.0 million, or 39%, compared to the prior year. Our Land Division's
net sales for the year ended May 31, 2000 decreased $23.1 million, or 24%, to
$73.2 million. Our Marine Division's net sales decreased $52.9 million, or 52%,
to $48.3 million. The decline in both our Land and Marine Division net sales was
attributable to the deterioration in the seismic service industry, resulting in
weak demand for seismic data acquisition equipment and pricing pressures from
competitors.
Cost of Sales: Cost of sales of $106.6 million for the year ended May 31,
2000 decreased $98.6 million, or 48%, compared to the prior year. Cost of sales
of our Land Division was $66.8 million and cost of sales of our Marine Division
was $39.8 million, compared to $100.6 million and $104.6 million, respectively,
for the prior year. Results for both periods include pre-tax charges of $12.0
million and $77.0 million in the years ended May 31, 2000 and 1999,
respectively. The charges for the year ended May 31, 2000 were primarily for
inventory write downs of $12.3 million and increases in product related warranty
reserves, net of recoveries of $.6 million. The charges for the year ended May
31, 1999 were primarily for inventory write downs of $57.0 million and increases
in product related warranty reserves of $20.0 million. Excluding the effect of
pre-tax charges, cost of sales decreased $33.6 million, or 26% compared to the
prior year.
Gross Profit and Gross Profit Percentage: Gross profit of $14.8 million
for the year ended May 31, 2000 increased $22.6 million or 290% compared to the
prior year. Excluding the effect of pre-tax charges, gross profit decreased
$42.4 million or 61% compared to the prior year. Gross profit percentage was
12.2% and (0.03)% for the years ended May 31, 2000 and 1999, respectively.
Excluding the effect of pre-tax charges in both years, gross profit percentage
was 22% and 35% for the years ended May 31, 2000 and 1999. Pricing pressures
from competitors, a shift in product mix to lower margin product lines and lower
volumes leading to under absorption of fixed overhead costs contributed to the
lower gross profit percentage.
Research and Development: Research and development expenses of $28.6
million for the year ended May 31, 2000 decreased $14.2 million, or 33%,
compared to the prior year. The decrease is primarily due to
13
reduced costs and expenditures for salaries, contract labor, outside services,
and product development relating to a significantly narrowed focus on our
development of new product offerings.
Marketing and Sales: Marketing and sales expense of $10.3 million for the
year ended May 31, 2000 decreased $3.9 million, or 28%, compared to the prior
year. The decrease is primarily due to cost reduction initiatives and
commissions on lower levels of sales.
General and Administrative: General and administrative expense of $21.9
million for the year ended May 31, 2000 decreased $59.0 million, or 73%,
compared to the prior year. Results for the years ended May 31, 2000 and 1999
include pre-tax charges of $7.2 million and $53.2 million, respectfully. Charges
for the year ended May 31, 2000 were for receivable related charges of $6.0
million, facility charges of $0.7 million and personnel related charges of $10.7
million, offset by favorable settlement for previously reserved receivables.
Charges for the year ended May 31, 1999 were for receivable related charges of
$39.9 million, facility closure and asset impairments of $6.8 million and
personnel related costs of $6.5 million. Excluding the pre-tax charges for the
years ended May 31, 2000 and 1999, general and administrative expenditures for
the year ending May 31, 2000 were $14.7 million, a decrease of $13.0 million, or
47%, compared to the prior year. The decrease is due to reductions in work
force, cost reduction initiatives and decreased contractor and professional
service fees.
Amortization and Impairment of Intangibles: Amortization and impairment of
intangibles of $39.5 million for the year ended May 31, 2000 increased $23.2
million, or 143%, compared to the prior year. The increase was principally the
result of a charge for intangible asset impairment of $31.6 million. Excluding
the charge, amortization of identified intangibles for the year ended May 31,
2000 was $7.9 million, a decrease of $8.4 million from the prior year.
Total Other Income: Total net interest income and other income of $5.4
million for the year ended May 31, 2000 decreased $1.3 million or 19% primarily
due to impairments and other reductions in notes receivable balances. This was
offset by an increase in income from investments as a result of higher average
cash balances on hand during the year.
Income Tax Expense (Benefit): Income tax benefit of $6.1 million for the
year ended May 31, 2000 decreased $43.6 million, or 88%, compared with the tax
benefit in the year ended May 31, 1999. The change in income tax expense
(benefit) is primarily the result of (i) lower pretax losses for year ended May
31, 2000 compared to year ended May 31, 1999, and (ii) reduced recognition for
benefit from domestic net operating losses (see discussion of Year Ended
December 31, 2001 Compared to Year Ended December 31, 2000.)
Preferred Stock Dividends: Preferred stock dividends for the year ended
May 31, 2000 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
at time of preferred stock conversion and 1% is paid as a quarterly cash
dividend). The preferred stock dividend charge for the year ended May 31, 2000
was $4.6 million.
LIQUIDITY AND CAPITAL RESOURCES
We have typically financed operations from internally generated cash and
funds from equity financings. Cash and cash equivalents were $101.7 million at
December 31, 2001, an increase of $9.3 million, or 10%, compared to December 31,
2000. The increase is due to cash flows provided by operating activities and
financing activities, offset by cash flows used in investing activities. Net
cash provided by operating activities was $17.5 million for the year ended
December 31, 2001 compared to the net cash used in operating activities of $3.7
million for the seven months ending December 31, 2000. The changes in working
capital items for the year ended December 31, 2001 represented a $8.7 million
use of cash, due primarily to an increase in receivables as a result of
increased net sales and a decrease in accounts and tax payable. The various
working capital accounts can vary in amount substantially from period to period,
depending upon timing and levels of sales, product mix sold, demand for
products, percentages of cash versus credit sales, collection rates,
14
inventory levels, and general economic and industry factors. Excluding changes
in working capital items, operating cash flow was a positive $26.2 million.
Net cash flow used in investing activities was $14.8 million for the year
ended December 31, 2001, a decrease of $11.9 million, compared to the seven
months ended December 31, 2000. The principal investing activities were capital
expenditure projects and the acquisition of Pelton. 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 alliance partner. Capital
expenditures could increase should the Company enter into additional similar
alliances to commercialize VectorSeis.
Cash flow provided by financing activities was $7.6 million for the year
ended December 31, 2001, an increase of $8.0 million compared to the seven
months ending December 31, 2000. The principal source was proceeds from the
financing transaction related to the sale of our Stafford Facilities, offset by
repayment of other long-term debt and the purchase of treasury 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.
RECENT ACCOUNTING PRONOUNCEMENTS.
SFAS No. 141 entitled "Business Combinations" was issued in June 2001 and
became effective July 1, 2001. SFAS No. 141 requires that all business
combinations be accounted for using the purchase method of accounting, which
requires that acquisitions be recorded at fair value as of the date of
acquisition. The pooling-of-interests method of accounting allowed under prior
standards, which reflected business combinations using historical financial
information, is now prohibited.
In June 2001, the FASB issued SFAS No. 142 entitled "Goodwill and Other
Intangible Assets", which became effective on January 1, 2002. Under SFAS 142,
existing goodwill ($45.6 million at December 31, 2001) 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 us to perform the first goodwill impairment test on all reporting
units within six months of adoption. The first step is to compare the fair value
with the book value of a reporting unit. If the fair value of the reporting unit
is less than its book value, the second step will be to calculate the impairment
loss, if any. Any impairment loss from the initial adoption of SFAS No. 142 will
be recognized as a change in accounting principle. After the initial adoption,
we 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. We are
still reviewing SFAS No. 142 to determine the effect, if any, of the initial
goodwill impairment testing. During the year ended December 31, 2001, the seven
months ended December 31, 2000, and the years ended May 31, 2000 and May 31,
1999, we recorded goodwill amortization of $3.9 million, $2.2 million, $37.1
million and $9.0 million, respectively.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Due to the nature of our
business, this new accounting pronouncement is not expected to have a
significant impact on our reported results of operations and financial
condition.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations -- Reporting the Effects of a Disposal of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business.
15
This Statement also amends ARB No. 51, "Consolidated Financial Statements," to
eliminate the exception to consolidation for a subsidiary for which control is
likely to be temporary. SFAS No. 144 became effective on January 1, 2002. The
provisions of this Statement are to be applied prospectively.
FUTURE CONVERSION OF SERIES B AND SERIES C PREFERRED STOCK
In 1999, we issued 40,000 shares of Series B Preferred Stock and 15,000
shares of Series C Preferred Stock to SCF-IV, L.P. ("SCF") for approximately $55
million in a privately negotiated transaction. Both the Series B and Series C
Preferred Stock are convertible into shares of our Common Stock at SCF's option
at any time after May 7, 2002, and will automatically convert into shares of our
Common Stock on May 7, 2004. SCF may convert the shares of Series B and Series C
Preferred Stock into shares of our Common Stock at either:
- SCF's initial per share purchase price divided by a fixed conversion
price (currently $8.00 for the Series B Preferred Stock and $8.50 for the
Series C Preferred Stock); or
- SCF's initial per share purchase price increased at a rate of 8% per year
compounded quarterly, less any cash dividends paid, divided by a trailing
10 day average market price for our Common Stock.
If the conversion of the Series B and Series C Preferred Stock would result
in more than 10,099,979 shares of Common Stock being issued, we would be
required to redeem any excess in cash. Therefore, if we experience a significant
decline in our stock price prior to conversion of the Series B and Series C
Preferred Stock, our liquidity and capital resources may be materially and
adversely affected.
Under the terms of a registration rights agreement, SCF has the right,
first exercisable on March 8, 2002, to demand us to file a registration
statement for the resale of the shares of Common Stock SCF acquires upon
conversion of the Series B and Series C Preferred Stock. Sales or the
availability for sale of a substantial number of our shares of Common Stock in
the public market could adversely affect the market price for our Common Stock.
We recognize dividends on the preferred stock as a charge to retained
earnings at a stated rate of 8% per year, compounded quarterly (of which 7% is
accounted for as a non-cash event recorded to additional paid-in capital so as
to reflect potential dilution at time of preferred stock conversion and 1% is
paid as a quarterly cash dividend). The charge to retained earnings will cease
following conversion.
Because the number of shares we will issue upon conversion of the Series B
and Series C Preferred Stock depends on the market price of our common stock at
the time of conversion, we do not know the ultimate impact conversion will have
on our reported results. However, if conversion had occurred at December 31,
2001, it would have been accretive to our earnings per share for the year ended
December 31, 2001. See Note 8 of Notes to Consolidated Financial Statements.
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 our 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. During the year
ended December 31, 2001, three customers (PGS Offshore, Schlumbeger and Veritas
DGC) accounted for approximately 51% of consolidated net sales. PGS Offshore and
Veritas DGC have recently announced their intention to merge. 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 consol-
16
idation among our significant customers could materially and adversely affect us
and Note 10 of Notes to Consolidated Financial Statements.
During the year ended December 31, 2001, there were $23.5 million of sales
to customers in Russia and other former Soviet Union countries, $3.8 million of
sales to customers in Latin American countries and $20.8 million of sales to
customers in China (substantially all sales to Russia and China were backed by
irrevocable letters of credit). The majority of our foreign sales are
denominated in U.S. dollars. Russia and certain Latin American countries have
experienced economic problems and uncertainties and devaluations of their
currencies in recent years. To the extent that economic conditions negatively
affect our future sales to customers in those regions or the collectibility of
our existing receivables, our future results of operations, liquidity and
financial condition may be adversely affected.
ACCOUNTING ESTIMATES AND CHOICES
Preparation of financial statements under generally accepted accounting
principles in the United States requires us to make choices between acceptable
methods of accounting and to make estimates of future events to determine the
value we report for certain assets and liabilities at the date of our financial
statements and the value we report for revenues and expenses in a period covered
by our financial statements. While we try to be as precise as possible in making
these estimates, many of them are subjective in nature and involve matters of
judgement. We believe the most subjective and material estimates in our
financial statements are the reserve for uncollectible accounts and notes
receivable, inventory, the recoverability of our deferred tax assets and the
extent of future warranty obligations.
- 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 for loan loss through
an increase (decrease) in bad debt expense. Notes receivable are
generally collateralized by the products sold, bear interest at
contractual rates up to 13% per year and are due at various dates through
2004. 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.
- We provide reserves for estimated obsolescence or excess inventory equal
to the difference between cost of inventory and estimated market value
based upon assumptions about future demand for our products and market
conditions. We note that due to declines in recent levels of our sales,
some portion of our inventory at December 31, 2001 is in excess of our
near-term requirements. We have developed a program to reduce our
inventory to a more desirable level in the near term and believe no loss
will be incurred on its disposition in excess of current reserve
estimates. However, if we are unsuccessful we will need to take a larger
reserve for inventory and this could materially affect our results of
operations.
- We record a valuation allowance to reduce our deferred income tax assets
to the amount that we believe to be realizable under the
"more-likely-than-not" recognition criteria. While we considered future
taxable income and ongoing prudent, feasible tax planning strategies in
assessing the need for a valuation allowance, in the future we may change
our estimate of the amount of the deferred income tax assets that would
"more-likely-than-not" be realized, resulting in an adjustment to the
deferred income tax asset valuation allowance that would either increase
or decrease, as applicable, reported net income in the period.
- We record an accrual for product warranty and other contingencies when
estimated future expenditures associated with such contingencies become
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).
17
We believe that all of the 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.
RELATED PARTIES
In connection with the acquisition of DigiCourse in November 1998, we
entered into a service agreement under which Laitram agreed to provide
accounting, software, manufacturing and maintenance services. The service
agreement expired September 30, 2001 and Laitram now charges us on an invoice
basis. Our chairman of the board is the chairman and a principal stockholder of
Laitram. We paid Laitram an aggregate $1.4 million, $0.8 million, $1.5 million
and $2.7 million under the services agreement for the year ended December 31,
2001, seven months ended December 31, 2000 and years ended May 31, 2000 and
1999, respectively.
A former director and former officer assisted in the collection efforts of
certain accounts and notes receivable. In return, he was paid a commission on
actual amounts collected. Commissions earned amounted to $0, $0.1 million, $0.5
million and $0 for the year ended December 31, 2001, seven months ended December
31, 2000 and years ended May 31, 2000 and 1999, respectively.
We have guaranteed $0.2 million of bank indebtedness for one officer
related to the open market purchases of our common stock. The share purchases
were made in conjunction with shares issued in May 2000 under the Input/Output,
Inc. 2000 Restricted Stock Plan. The outstanding loan balance at December 31,
2001 was $0.2 million.
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:
- our expected revenues, operating profit and net income for 2002 or the
three months ended March 31, 2002;
- future demand for seismic equipment and services;
- future commodity prices;
- future economic conditions, including conditions in Russia and certain
Asian and Latin American countries;
- anticipated timing of commercialization and capabilities of our products
under development;
- potential alliances with strategic partners for development of new
products;
- non-seismic applications for our Applied MEMS business unit;
- our expectations regarding our future mix of business and future asset
recoveries;
- our expectations regarding realization of our deferred tax assets;
- the anticipated effects of changes in accounting standards;
- our belief regarding accounting estimates we make;
- the result of pending or threatened disputes and other contingencies; and
- 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
18
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.
In recent years our competitors have expanded or improved their product
lines, which has adversely affected our results of operations. For instance, one
competitor recently introduced a lightweight land seismic system which we
believe has made our current land system more difficult to sell at acceptable
margins. In addition, one of our competitors has introduced a marine solid
streamer product that competes with our oil-filled product. Our net sales of
marine streamers have been, and will continue to be, adversely affected by
customer preferences for solid products. We are currently exploring strategies
to offer a marine solid streamer. We can not assure you that we will find a
cost-effective way to market a solid streamer product or that we will be able to
compete effectively in the future for sales of marine streamers.
Further consolidation among our significant customers could materially and
adversely affect us. A relatively small number of customers account for the
majority of our net sales in any period. During the year
19
ended December 31, 2001, three customers (Western Geco, Veritas and PGS)
accounted for approximately 51% of our net sales. In recent years, our customers
have been rapidly consolidating, shrinking the demand for our products. Veritas
DGC and PGS have recently announced that they intend to merge. The loss of any
of our significant customers to further consolidation or otherwise could
materially and adversely affect our results of operations and financial
condition.
Large fluctuations in our sales and gross margin can result in operating
losses. Because our products have a high sales price and are technologically
complex, we experience a very long sales cycle. In addition, the revenues from
any particular sale can vary greatly from our expectations due to changes in
customer requirements. These factors create substantial fluctuations in our net
sales from period to period. Variability in our gross margins compounds the
uncertainty associated with our sales cycle. Our gross margins are affected by
the following factors:
- pricing pressures from our customers and competitors;
- product mix sold in a period;
- inventory obsolescence;
- unpredictability of warranty costs;
- changes in sales and distribution channels;
- availability and pricing of raw materials and purchased components; and
- 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 foreign customers accounted for approximately
63% of our consolidated net sales for the year ended December 31, 2001. United
States export restrictions affect the types and specifications of products we
can export. Additionally, to complete certain sales, U.S. 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:
- expropriation and nationalization;
- political and economic instability;
20
- armed conflict and civil disturbance;
- currency fluctuations, devaluations and conversion restrictions;
- confiscatory taxation or other adverse tax policies;
- governmental activities that limit or disrupt markets, restrict payments
or the movement of funds; and
- governmental activities that may result in the deprivation of contractual
rights.
The majority of our foreign sales are denominated in U.S. 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:
- increased levels of goodwill subject to potential impairment;
- increased interest expense or increased dilution from issuance of equity;
- disruption of existing and acquired business from our integration
efforts; and
- loss of uniformity in standards, controls, procedures and policies.
In addition, other potential buyers could compete with us for acquisitions
and strategic alliances. Competition could cause us to pay a higher price for an
acquisition than we otherwise might have to pay or reduce the available
strategic alternatives. We might be unsuccessful in identifying attractive
acquisition candidates, completing and financing additional acquisitions on
favorable terms or integrating the acquired businesses or assets into our
operations.
Our operations are subject to numerous government regulations which could
adversely limit our operating flexibility. Our operations are subject to laws,
regulations, government policies and product certification requirements
worldwide. Changes in such laws, regulations, policies or requirements could
affect the demand for our products or result in the need to modify products,
which may involve substantial costs or delays in sales and could have an adverse
effect on our future operating results. Certain countries are subject to
restrictions, sanctions and embargoes imposed by the United States government.
These restrictions, sanctions and embargoes prohibit or limit us from
participating in certain business activities in those countries.
Disruption in vendor supplies will adversely effect 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
21
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 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 and rates. We
traditionally have 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.
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
See Item 14(b) of this Form 10-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is included in our definitive proxy
statement for our 2002 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is included in our definitive proxy
statement for our 2002 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by Item 12 is included in our definitive proxy
statement for our 2002 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is included in our definitive proxy
statement for our 2002 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(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.
22
(2) Financial Statement Schedules:
The following financial statement schedule 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:
[Download Table]
3.1 -- Amended and Restated Certificate of Incorporation filed as
Exhibit 3.1 to the Company's Transition Report on Form 10-K
for the seven months ended December 31, 2000, and
incorporated herein by reference.
3.2 -- Certificate of Amendment to the Amended and Restated
Certificate of Incorporation, dated October 11, 1996, filed
as Exhibit 3.2 to the Company's Annual Report on Form 10-K
for the fiscal year ended May 31, 1997, and incorporated
herein by reference.
3.3 -- Amended and Restated Bylaws filed as Exhibit 4.3 to the
Company's Current Report or Form 8-K filed with the
Securities and Exchange Commission on March 8, 2002, and
incorporated herein by reference.
4.1 -- Form of Certificate of Designation, Preferences 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 10.6) and
incorporated herein by reference.
4.2 -- Form of Certificate of Designation, Preferences and Rights
of Series B Preferred Stock of Input/Output, Inc., filed as
Exhibit 4.1 to the Company's Form 8-K dated April 21, 1999,
and incorporated herein by reference.
4.3 -- Form of Certificate of Designation, Preferences and Rights
of Series C Preferred Stock of Input/Output, Inc., filed as
Exhibit 4.2 to the Company's Form 10-K for the fiscal year
ended May 31, 1999, and incorporated herein by reference.
10.1 -- Royalty Agreement, dated November 6, 1992, between I/O
Sensors, Inc., Triton and Triton Technologies, Inc., filed
as exhibit 10.2 to the Company's 10-K for fiscal year ended
May 31, 1999, and incorporated herein by reference.
**10.2 -- Amended and Restated 1990 Stock Option Plan, filed as
Exhibit 4.2 to the Company's Registration Statement on Form
S-8 (Registration No. 333-80299), filed with the Securities
and Exchange Commission on June 9, 1999, and incorporated
herein by reference.
10.3 -- Lease Agreement dated as of August 20, 2001, between NL
Ventures III Stafford L.P. and Input/Output, Inc. filed as
Exhibit 10.28 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001, and incorporated
herein by reference.
**10.4 -- Amended Directors Retirement Plan, filed as Exhibit 10.7 to
the Company's Annual Report on form 10-K for the fiscal year
ended May 31, 1997, and incorporated herein by reference.
**10.5 -- Input/Output, Inc. Amended and Restated 1996 Non-Employee
Director Stock Option Plan, filed as Exhibit 4.3 to the
Company's Registration Statement on Form S-8 (Registration
No. 333-80299), filed with the Securities and Exchange
Commission on June 9, 1999, and incorporated herein by
reference.
10.6 -- 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 as
Exhibit 4 to the Company's Form 8-A dated January 27, 1997,
and incorporated herein by reference.
**10.7 -- Input/Output, Inc. Employee Stock Purchase Plan, filed as
Exhibit 4.4 to the Company's Registration Statement on Form
S-8 (Registration No. 333-24125) filed with the Securities
and Exchange Commission on March 18, 1997, and incorporated
herein by reference.
10.8 -- Purchase Agreement by and between the Company and SCF-IV,
L.P. dated April 21, 1999, filed as Exhibit 10.1 to the
Company's Form 8-K dated April 21, 1999, and incorporated
herein by reference.
23
[Download Table]
10.9 -- Registration Rights Agreement by and between the Company and
SCF-IV, L.P. dated May 7, 1999, filed as Exhibit 10.2 to the
Company's Form 8-K dated April 21, 1999, and incorporated
herein by reference.
10.10 -- First Amendment to Rights Agreement by and between the
Company and Harris Trust and Savings Bank as Rights Agent,
dated April 21, 1999, filed as Exhibit 10.3 to the Company's
Form 8-K dated April 21, 1999, and incorporated herein by
reference.
10.11 -- Registration Rights Agreement by and among the Company and
The Laitram Corporation, dated November 16, 1998, filed as
Exhibit 99.2 to the Company's Form 8-K dated November 16,
1998, and incorporated herein by reference.
**10.12 -- Input/Output, Inc. 1998 Restricted Stock Plan, filed as
Exhibit 4.7 to the Company's Registration Statement on Form
S-8 (Registration No. 333-80297), filed with the Securities
and Exchange Commission on June 9, 1999, and incorporated
herein by reference.
* **10.13 -- Form of Change in Control Agreement.
* **10.14 -- Input/Output, Inc. Non-qualified Deferred Compensation Plan.
**10.15 -- Amendment No. 1 to the Input/Output, Inc. Amended and
Restated 1996 Non-Employee Director Stock Option Plan, dated
September 13, 1999, filed as Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
August 31, 1999, and incorporated herein by reference.
**10.16 -- Employment Agreement by and between the Company and Timothy
J. Probert dated effective as of March 1, 2000 filed as
Exhibit 10.44 to the Company's Annual Report on Form 10-K
for the fiscal year ended May 31, 2000, and incorporated
herein by reference.
**10.17 -- Input/Output, Inc. 2000 Restricted Stock Plan, effective as
of March 13, 2000 filed as Exhibit 10.27 to the Company's
Annual Report on Form 10-K for the fiscal year ended May 31,
2000, and incorporated herein by reference.
**10.18 -- Input/Output, Inc. 2000 Long-Term Stock Plan, filed as
Exhibit 4.7 to the Company's Registration Statement on Form
S-8 (No. 333-49382) dated November 6, 2000 and incorpo-
rated by reference herein.
* **10.19 -- Separation Agreement and General Release between
Input/Output, Inc. and Rex Reavis dated August 10, 2001.
* **10.20 -- Consulting Agreement between Input/Output, Inc. and Rex
Reavis dated August 10, 2001.
*21.1 -- Subsidiaries of the Company.
*23.1 -- Consent of PricewaterhouseCoopers LLP.
*23.2 -- Consent of KPMG LLP.
*24.1 -- The Power of Attorney is set forth on the signature page
hereof.
---------------
* Filed herewith.
** Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
On September 21, 2001, we filed a Current Report on Form 8-K reporting
under Item 4. Changes in Registrant's Certifying Accountants the engagement
of PricewaterhouseCoopers LLP as our independent accountant, effective
September 14, 2001 and the dismissal of our former independent accountant,
KPMG LLP effective September 14, 2001.
On March 8, 2002, we filed a Current Report on Form 8-K reporting
under Item 5. Other Events certain amendments to our Bylaws.
(c) Exhibits required by Item 601 of Regulation S-K.
Reference is made to subparagraph (a) (3) of this Item 14 which is
incorporated herein by reference.
(d) Not applicable.
24
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 April 1, 2002.
INPUT/OUTPUT, INC.
By /s/ MARTIN DECAMP
------------------------------------
Vice President -- Accounting
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Timothy J. Probert and C. Robert Bunch 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,
2001, 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, 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.
[Enlarge/Download Table]
NAME CAPACITIES DATE
---- ---------- ----
/s/ JAMES M. LAPEYRE, JR. Director and Chairman of the Board April 1, 2002
------------------------------------------------
James M. Lapeyre, Jr.
/s/ TIMOTHY J. PROBERT Director, President and Chief April 1, 2002
------------------------------------------------ Executive Officer (principal
Timothy J. Probert executive officer)
/s/ C. ROBERT BUNCH Vice President and Chief April 1, 2002
------------------------------------------------ Administrative Officer (principal
C. Robert Bunch financial officer)
/s/ MARTIN B. DECAMP Vice President -- Accounting April 1, 2002
------------------------------------------------ (principal accounting officer)
Martin B. DeCamp
/s/ ERNEST E. COOK Director April 1, 2002
------------------------------------------------
Ernest E. Cook
/s/ THEODORE H. ELLIOTT, JR. Director April 1, 2002
------------------------------------------------
Theodore H. Elliott, Jr.
25
[Download Table]
NAME CAPACITIES DATE
---- ---------- ----
/s/ DAVID C. BALDWIN Director April 1, 2002
------------------------------------------------
David C. Baldwin
/s/ WILLIAM F. WALLACE Director April 1, 2002
------------------------------------------------
William F. Wallace
/s/ ROBERT P. PEEBLER Director April 1, 2002
------------------------------------------------
Robert P. Peebler
/s/ SAM K. SMITH Director April 1, 2002
------------------------------------------------
Sam K. Smith
/s/ FRANKLIN MYERS Director April 1, 2002
------------------------------------------------
Franklin Myers
26
INPUT/OUTPUT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
[Download Table]
PAGE
----
Input/Output, Inc. and Subsidiaries:
Reports of Independent Accountants........................ F-2
Consolidated Balance Sheets
December 31, 2001 and December 31, 2000 and May 31,
2000.................................................. F-4
Consolidated Statements of Operations
Year ended December 31, 2001, Seven months ended
December 31, 2000 and Years ended May 31, 2000 and
1999.................................................. F-5
Consolidated Statements of Stockholders' Equity and
Comprehensive Earnings (Loss)
Year ended December 31, 2001, Seven months ended
December 31, 2000 and Years ended May 31, 2000 and
1999.................................................. F-6
Consolidated Statements of Cash Flows
Year ended December 31, 2001, Seven months ended
December 31, 2000 and Years ended May 31, 2000 and
1999.................................................. F-8
Notes to Consolidated Financial Statements................ F-9
Schedule II -- Valuation and Qualifying Accounts.......... S-1
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Input/Output, Inc.:
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 (the "Company") at December
31, 2001, and the results of their operations and their cash flows for the year
then ended 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 audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit 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
audit provides a reasonable basis for our opinion. The financial statements and
financial statement schedule of the Company as of December 31, 2000 and May 31,
2000 and for the seven months ended December 31, 2000 and for the years ended
May 31, 2000 and 1999 were audited by other independent accountants whose report
dated February 1, 2001 expressed an unqualified opinion on those statements.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 28, 2002
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Input/Output, Inc.:
We have audited the consolidated balance sheets of Input/Output, Inc. and
subsidiaries as of December 31, 2000, and May 31, 2000, and the related
consolidated statements of operations, stockholders' equity and comprehensive
earnings (loss) and cash flows for the seven-month period ended December 31,
2000, and each of the years in the two-year period ended May 31, 2000. We have
also audited the financial statement schedule for the seven-month period ended
December 31, 2000, and each of the years in the two-year period ended May 31,
2000 as listed in the accompanying index. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Input/Output, Inc. and subsidiaries as of December 31, 2000, and May 31, 2000,
and the results of their operations and their cash flows for the seven-month
period ended December 31, 2000 and each of the years in the two-year period
ended May 31, 2000, in conformity with accounting principles generally accepted
in the United States of America. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
Houston, Texas
February 1, 2001
F-3
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
[Enlarge/Download Table]
DECEMBER 31,
--------------------- MAY 31,
2001 2000 2000
--------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents................................. $101,681 $ 92,376 $ 99,210
Restricted cash........................................... 221 1,115 1,006
Accounts receivable, net.................................. 46,434 30,920 24,944
Current portion notes receivable, net..................... 1,078 7,889 12,224
Income taxes receivable................................... -- -- 705
Inventories............................................... 68,283 67,646 69,185
Deferred income tax asset................................. 15,083 12,081 13,459
Prepaid expenses.......................................... 3,115 2,217 1,274
-------- -------- --------
Total current assets............................... 235,895 214,244 222,007
Notes receivable............................................ 5,800 6,150 6,013
Deferred income tax asset................................... 40,745 42,771 41,393
Property, plant and equipment, net.......................... 47,538 51,267 58,419
Goodwill, net............................................... 45,584 47,098 49,256
Other assets, net........................................... 7,609 4,103 4,681
-------- -------- --------
Total assets....................................... $383,171 $365,633 $381,769
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 2,312 $ 1,207 $ 1,154
Accounts payable.......................................... 10,169 8,283 8,011
Accrued expenses.......................................... 18,814 23,388 29,430
-------- -------- --------
Total current liabilities.......................... 31,295 32,878 38,595
Long-term debt, net of current maturities................... 20,088 7,077 7,886
Other long-term liabilities................................. 751 275 273
Stockholders' equity:
Cumulative convertible preferred stock, $.01 par value;
authorized 5,000,000 shares; issued and outstanding
55,000 shares at December 31, 2001 and December 31, 2000
and May 31, 2000 (liquidation value of $55 million at
December 31, 2001)...................................... 1 1 1
Common stock, $.01 par value; authorized 100,000,000
shares; outstanding 50,865,729 shares at December 31,
2001, 50,936,420 shares at December 31, 2000 and
50,744,180 shares at May 31, 2000....................... 516 512 510
Additional paid-in capital................................ 360,147 352,294 348,743
Retained deficit.......................................... (15,713) (19,422) (6,065)
Accumulated other comprehensive loss...................... (7,499) (5,353) (5,427)
Treasury stock, at cost, 743,298 shares at December 31,
2001, 243,500 shares at December 31, 2000 and 232,500
shares at May 31, 2000.................................. (5,769) (1,737) (1,651)
Unamortized restricted stock compensation................. (646) (892) (1,096)
-------- -------- --------
Total stockholders' equity......................... 331,037 325,403 335,015
-------- -------- --------
Total liabilities and stockholders' equity......... $383,171 $365,633 $381,769
======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
SEVEN MONTHS
YEAR ENDED ENDED YEARS ENDED MAY 31,
DECEMBER 31, DECEMBER 31, -------------------------
2001 2000 2000 1999
------------ ------------ ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Net sales................................ $ 212,050 $ 78,317 $ 121,454 $ 197,415
Cost of sales............................ 135,798 58,554 106,642 205,215
----------- ----------- ----------- -----------
Gross profit (loss)............ 76,252 19,763 14,812 (7,800)
----------- ----------- ----------- -----------
Operating expenses:
Research and development............... 29,442 16,051 28,625 42,782
Marketing and sales.................... 14,274 5,934 10,284 14,193
General and administrative............. 19,695 8,127 21,885 80,932
Amortization and impairment of
intangibles......................... 4,936 2,757 39,488 16,247
----------- ----------- ----------- -----------
Total operating expenses....... 68,347 32,869 100,282 154,154
----------- ----------- ----------- -----------
Earnings (loss) from operations.......... 7,905 (13,106) (85,470) (161,954)
Interest expense......................... (695) (627) (826) (897)
Interest income.......................... 4,685 4,583 4,930 7,981
Other income (expense)................... 574 176 1,306 (370)
----------- ----------- ----------- -----------
Earnings (loss) before income taxes...... 12,469 (8,974) (80,060) (155,240)
Income tax (benefit) expense............. 3,128 1,332 (6,097) (49,677)
----------- ----------- ----------- -----------
Net earnings (loss)...................... 9,341 (10,306) (73,963) (105,563)
Preferred dividend....................... 5,632 3,051 4,557 --
----------- ----------- ----------- -----------
Net earnings (loss) applicable to common
shares................................. $ 3,709 $ (13,357) $ (78,520) $ (105,563)
=========== =========== =========== ===========
Basic earnings (loss) per common share... $ 0.07 $ (0.26) $ (1.55) $ (2.17)
=========== =========== =========== ===========
Weighted average number of common shares
outstanding............................ 51,166,026 50,840,256 50,716,378 48,540,143
Diluted earnings (loss) per common
share.................................. $ 0.07 $ (0.26) $ (1.55) $ (2.17)
=========== =========== =========== ===========
Weighted average number of diluted common
shares outstanding..................... 52,308,578 50,840,256 50,716,378 48,540,143
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE EARNINGS
(LOSS)
YEAR ENDED DECEMBER 31, 2001, SEVEN MONTHS ENDED DECEMBER 31, 2000 AND YEARS
ENDED MAY 31, 2000 AND 1999
[Enlarge/Download Table]
CUMULATIVE
CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED OTHER
--------------- ------------------- PAID-IN EARNINGS COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) LOSS
------ ------ ---------- ------ ---------- --------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance at May 31, 1998............ -- $-- 44,584,634 $446 $240,746 $ 178,018 $(2,196)
Comprehensive loss:
Net loss......................... -- -- -- -- -- (105,563) --
Other comprehensive loss:
Translation adjustment........... -- -- -- -- -- -- (1,046)
Equity reduction for Outside
Directors Retirement Plan...... -- -- -- -- -- -- (307)
Total comprehensive loss.........
Amortization of restricted stock
compensation................... -- -- -- -- -- -- --
Issuance of restricted stock
awards......................... -- -- 42,500 -- 329 -- --
Issuance of stock in conjunction
with business acquisition...... -- -- 5,794,000 58 45,715 -- --
Preferred stock offering......... 40,000 -- -- -- 39,452 -- --
Exercise of stock options........ -- -- 64,944 1 157 -- --
Issuance of stock for the
Employee Stock Purchase Plan... -- -- 177,280 2 1,059 -- --
Stock compensation expense....... -- -- -- -- 387 -- --
------ --- ---------- ---- -------- --------- -------
Balance at May 31, 1999............ 40,000 -- 50,663,358 507 327,845 72,455 (3,549)
Comprehensive loss:
Net loss......................... -- -- -- -- -- (73,963) --
Other comprehensive earnings
(loss):
Translation adjustment........... -- -- -- -- -- -- (1,920)
Equity adjustment for Outside
Directors Retirement Plan...... -- -- -- -- -- -- 42
Total comprehensive loss.........
Amortization of restricted stock
compensation................... -- -- -- -- -- -- --
Issuance of restricted stock
award.......................... -- -- 133,000 1 1,028 -- --
Cancelation of restricted stock
awards......................... -- -- (25,000) -- (193) -- --
Purchase treasury stock.......... -- -- (250,000) -- -- -- --
Reissue treasury stock........... -- -- 17,500 -- (43) -- --
Preferred stock offering......... 15,000 1 -- -- 14,794 -- --
Preferred dividend............... -- -- -- -- 4,011 (4,557) --
Exercise of stock options........ -- -- 8,473 -- 136 -- --
Issuance of stock for the
Employee Stock Purchase Plan... -- -- 196,849 2 972 -- --
Stock compensation expense....... -- -- -- -- 193 -- --
------ --- ---------- ---- -------- --------- -------
Balance at May 31, 2000............ 55,000 1 50,744,180 510 348,743 (6,065) (5,427)
UNAMORTIZED TOTAL
TREASURY RESTRICTED STOCK STOCKHOLDERS'
STOCK COMPENSATION EQUITY
-------- ---------------- --------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance at May 31, 1998............ $ -- $(1,314) $ 415,700
Comprehensive loss:
Net loss......................... -- -- (105,563)
Other comprehensive loss:
Translation adjustment........... -- -- (1,046)
Equity reduction for Outside
Directors Retirement Plan...... -- -- (307)
---------
Total comprehensive loss......... (106,916)
Amortization of restricted stock
compensation................... -- 1,359 1,359
Issuance of restricted stock
awards......................... -- (329) --
Issuance of stock in conjunction
with business acquisition...... -- -- 45,773
Preferred stock offering......... -- -- 39,452
Exercise of stock options........ -- -- 158
Issuance of stock for the
Employee Stock Purchase Plan... -- -- 1,061
Stock compensation expense....... -- -- 387
------- ------- ---------
Balance at May 31, 1999............ -- (284) 396,974
Comprehensive loss:
Net loss......................... -- -- (73,963)
Other comprehensive earnings
(loss):
Translation adjustment........... -- -- (1,920)
Equity adjustment for Outside
Directors Retirement Plan...... -- -- 42
---------
Total comprehensive loss......... (75,841)
Amortization of restricted stock
compensation................... -- 24 24
Issuance of restricted stock
award.......................... -- (1,029) --
Cancelation of restricted stock
awards......................... -- 193 --
Purchase treasury stock.......... (1,794) -- (1,794)
Reissue treasury stock........... 143 -- 100
Preferred stock offering......... -- -- 14,795
Preferred dividend............... -- -- (546)
Exercise of stock options........ -- -- 136
Issuance of stock for the
Employee Stock Purchase Plan... -- -- 974
Stock compensation expense....... -- -- 193
------- ------- ---------
Balance at May 31, 2000............ (1,651) (1,096) 335,015
F-6
[Enlarge/Download Table]
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE EARNINGS (LOSS) -- (CONTINUED)
CUMULATIVE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED
--------------- ------------------- PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT)
------ ------ ---------- ------ ---------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
Comprehensive earnings (loss):
Net loss......................... -- -- -- -- -- (10,306)
Other comprehensive earnings:
Translation adjustment........... -- -- -- -- -- --
Total comprehensive (loss).......
Amortization of restricted stock
compensation................... -- -- -- -- -- --
Purchase treasury stock.......... -- -- (11,000) -- -- --
Preferred dividend............... -- -- -- -- 2,730 (3,051)
Exercise of stock options........ -- -- 97,500 1 395 --
Issuance of stock for the
Employee Stock Purchase Plan... -- -- 105,740 1 426 --
------ --- ---------- ---- -------- ---------
Balance at December 31, 2000....... 55,000 1 50,936,420 512 352,294 (19,422)
Comprehensive earnings:
Net earnings..................... -- -- -- -- -- 9,341
Other comprehensive loss:
Translation adjustment........... -- -- -- -- -- --
Total comprehensive earnings.....
Amortization of restricted stock
compensation................... -- -- -- -- -- --
Purchase treasury stock.......... -- -- (499,798) -- -- --
Preferred dividend............... -- -- -- -- 5,082 (5,632)
Exercise of stock options........ -- -- 326,921 4 2,003 --
Issuance of stock for the
Employee Stock Purchase Plan... -- -- 102,186 -- 768 --
------ --- ---------- ---- -------- ---------
Balance at December 31, 2001....... 55,000 $ 1 50,865,729 $516 $360,147 $ (15,713)
====== === ========== ==== ======== =========
[Enlarge/Download Table]
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE EARNINGS (LOSS) -- (CONTINUED)
ACCUMULATED
OTHER UNAMORTIZED TOTAL
COMPREHENSIVE TREASURY RESTRICTED STOCK STOCKHOLDERS'
LOSS STOCK COMPENSATION EQUITY
------------- -------- ---------------- --------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Comprehensive earnings (loss):
Net loss......................... -- -- -- (10,306)
Other comprehensive earnings:
Translation adjustment........... 74 -- -- 74
---------
Total comprehensive (loss)....... (10,232)
Amortization of restricted stock
compensation................... -- -- 204 204
Purchase treasury stock.......... -- (86) -- (86)
Preferred dividend............... -- -- -- (321)
Exercise of stock options........ -- -- -- 396
Issuance of stock for the
Employee Stock Purchase Plan... -- -- -- 427
------- ------- ------- ---------
Balance at December 31, 2000....... (5,353) (1,737) (892) 325,403
Comprehensive earnings:
Net earnings..................... -- -- -- 9,341
Other comprehensive loss:
Translation adjustment........... (2,146) -- -- (2,146)
---------
Total comprehensive earnings..... 7,195
Amortization of restricted stock
compensation................... -- -- 246 246
Purchase treasury stock.......... -- (4,032) -- (4,032)
Preferred dividend............... -- -- -- (550)
Exercise of stock options........ -- -- -- 2,007
Issuance of stock for the
Employee Stock Purchase Plan... -- -- -- 768
------- ------- ------- ---------
Balance at December 31, 2001....... $(7,499) $(5,769) $ (646) $ 331,037
======= ======= ======= =========
See accompanying notes to consolidated financial statements.
F-7
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
SEVEN
MONTHS
ENDED YEARS ENDED MAY 31,
DECEMBER 31, DECEMBER 31, --------------------
2001 2000 2000 1999
------------ ------------ -------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Net earnings (loss)......................... $ 9,341 $(10,306) $(73,963) $(105,563)
Depreciation and amortization............... 17,535 11,448 22,835 20,776
Impairment of intangibles and other
assets................................... -- -- 31,596 8,495
Amortization of restricted stock and other
stock compensation....................... 246 204 317 1,746
Deferred income tax......................... (976) -- (8,545) (43,691)
Bad debt expense (collections) and loan
losses................................... (269) (1,437) (17,106) 43,683
Loss on disposal or impairment of property,
plant and equipment...................... 372 1,129 1,219 6,573
Accounts and notes receivable............... (5,639) (341) 22,790 46,731
Inventories................................. 1,143 1,539 29,457 38,149
Accounts payable and accrued expenses....... (1,900) (6,487) (5,530) (13,684)
Income taxes payable/receivable............. (1,868) 1,420 14,295 (23,139)
Other assets and liabilities................ (444) (900) 1,006 (4,912)
-------- -------- -------- ---------
Net cash provided by (used in)
operating activities.............. 17,541 (3,731) 18,371 (24,836)
-------- -------- -------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment... (9,202) (2,837) (3,077) (9,326)
Business acquisition........................ (7,608) -- -- (6,303)
Cash of acquired business................... 2,032 -- -- --
-------- -------- -------- ---------
Net cash used in investing
activities........................ (14,778) (2,837) (3,077) (15,629)
-------- -------- -------- ---------
Cash flows from financing activities:
Payments on long-term debt.................. (9,409) (756) (974) (983)
Payments of preferred dividends............. (550) (321) (454) --
Purchase of treasury stock.................. (4,032) (86) (1,794) --
Proceeds from issuance of debt.............. 18,837 -- -- --
Proceeds from exercise of stock options..... 2,007 396 136 158
Proceeds from issuance of common stock...... 768 427 974 1,061
Net proceeds from preferred stock
offering................................. -- -- 14,795 39,452
-------- -------- -------- ---------
Net cash provided by (used in)
financing activities.............. 7,621 (340) 12,683 39,688
-------- -------- -------- ---------
Effect of change in foreign currency exchange
rates on cash and cash equivalents.......... (1,079) 74 (76) (189)
-------- -------- -------- ---------
Net increase (decrease) in cash and cash
equivalents................................. 9,305 (6,834) 27,901 (966)
-------- -------- -------- ---------
Cash and cash equivalents at beginning of
period...................................... 92,376 99,210 71,309 72,275
-------- -------- -------- ---------
Cash and cash equivalents at end of period.... $101,681 $ 92,376 $ 99,210 $ 71,309
======== ======== ======== =========
See accompanying notes to consolidated financial statements.
F-8
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 design, manufacture and market seismic data
acquisition products for the oil and gas exploration and production industry
worldwide. The consolidated financial statements include the accounts of
Input/Output, Inc. and its wholly-owned subsidiaries (collectively referred to
as the "Company"). Significant intercompany balances and transactions have been
eliminated.
Fiscal Year Change. In September 2000, the Company's Board of Directors
approved the Company's changing of its fiscal year-end to December 31 of each
year. The consolidated statements of operations, stockholders' equity and
comprehensive earnings (loss) and cash flows for the period from June 1, 2000 to
December 31, 2000 represent a transition period of seven months. The Company
filed a Transition Report on Form 10-K for the transition period ended December
31, 2000 and commenced reporting on a calendar year basis with the filing of the
Form 10-Q for the quarter ended March 31, 2001. The following is a comparative
summary of the condensed and consolidated operating results for the years ended
December 31, 2001 and 2000 and the seven month periods ended December 31, 2000
and December 31, 1999 (in thousands, except per share amounts).
[Enlarge/Download Table]
SEVEN MONTHS ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
------------------------ ----------------------
2001 2000 2000 1999
--------- ------------ -------- -----------
(UNAUDITED) (UNAUDITED)
Net sales............................... $212,050 $137,384 $ 78,317 $ 62,244
Cost of sales........................... 135,798 117,493 58,554 47,703
-------- -------- -------- --------
Gross profit............................ 76,252 19,891 19,763 14,541
Operating expenses
Research and development.............. 29,442 28,084 16,051 16,590
Marketing and sales................... 14,274 10,504 5,934 5,713
General and administrative............ 19,695 17,632 8,127 12,396
Amortization and impairment of
intangibles........................ 4,936 37,758 2,757 4,471
-------- -------- -------- --------
Earnings (loss) from operations......... 7,905 (74,087) (13,106) (24,629)
Interest expense........................ (695) (973) (627) (480)
Interest and other income............... 5,259 8,223 4,759 2,767
Income taxes expense (benefit).......... 3,128 5,372 1,332 (6,702)
Preferred dividend...................... 5,632 5,000 3,051 2,608
-------- -------- -------- --------
Net earnings (loss) applicable to common
shares................................ $ 3,709 $(77,209) $(13,357) $(18,248)
======== ======== ======== ========
Net earnings (loss) per common share
Basic................................. $ 0.07 $ (1.52) $ (0.26) $ (0.31)
======== ======== ======== ========
Diluted............................... $ 0.07 $ (1.52) $ (0.26) $ (0.31)
======== ======== ======== ========
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States 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
F-9
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimates include, but are not limited to, accounts and notes receivable,
inventory, 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, 2001, there was approximately $0.2 million 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 loan loss. The
Company considers current information and events regarding the customers'
ability to repay obligations, and 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 for loan
loss through an increase (decrease) in bad debt expense. Notes receivable are
generally collateralized by the products sold, bear interest at contractual
rates up to 13% per year and are due at various dates through 2004. 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.
Inventories. Inventories are stated at the lower of cost (primarily
first-in, first-out) or market.
Property, Plant and Equipment. Property, plant and equipment are stated at
cost. Depreciation expense is provided straight-line over the following
estimated useful lives:
[Download Table]
YEARS
-----
Machinery and equipment..................................... 3-8
Buildings................................................... 25
Leased equipment and other.................................. 3-10
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.
Goodwill and Other Intangible Assets. Goodwill results from business
acquisitions and represents the excess of acquisition costs over the fair value
of the net assets of businesses acquired. Through December 31, 2001 goodwill and
other intangibles were amortized on a straight-line basis over 5 to 20 years.
Goodwill, intangibles and other long-lived assets are reviewed for impairment
whenever an event or change in circumstances indicates that the carrying amount
of the assets may not be recoverable. The impairment review includes comparison
of future cash flows expected to be generated by the Company's operations with
the carrying value of goodwill and other long-lived assets. If the carrying
value of such assets exceeds the expected undiscounted future cash flows, an
impairment loss is recognized to the extent the carrying amount of the assets
exceeds their fair values which is calculated using the discounted cash flows.
Research and Development. Research and development costs are expensed as
incurred.
Revenue Recognition and Product Warranty. Revenue is primarily derived
from the sale of data acquisition systems and related equipment. Revenue is
recognized when products are shipped and risk of ownership has passed to the
customer. The Company warrants that all manufactured equipment will be free from
defects in workmanship, material and parts. Warranty periods 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.
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
F-10
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 records a valuation allowance
to reduce its deferred income tax assets to the amount that is believed to be
realizable under the "more-likely-than-not" recognition criteria. 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.
Comprehensive Earnings (Loss). Comprehensive earnings (loss), consisting
of net earnings (loss), foreign currency translation adjustment and minimum
pension liabilities, is presented in the consolidated statements of
stockholders' equity and comprehensive earnings (loss). The balance in
accumulated other comprehensive loss consists primarily of foreign currency
translation adjustments.
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 as defined 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):
[Enlarge/Download Table]
SEVEN MONTHS
YEAR ENDED ENDED YEARS ENDED MAY 31,
DECEMBER 31, DECEMBER 31, -------------------------
2001 2000 2000 1999
------------ ------------ ----------- -----------
Net earnings (loss) applicable to
common shares.................. $ 3,709 $ (13,357) $ (78,520) $ (105,563)
Weighted average number of common
shares outstanding............. 51,166,026 50,840,256 50,716,378 48,540,143
Effect of dilutive stock
options........................ 1,142,552 -- -- --
----------- ----------- ----------- -----------
Weighted average number of
diluted common shares
outstanding.................... 52,308,578 50,840,256 50,716,378 48,540,143
=========== =========== =========== ===========
Basic earnings (loss) per common
share.......................... $ 0.07 $ (0.26) $ (1.55) $ (2.17)
=========== =========== =========== ===========
Diluted earnings (loss) per
common share................... $ 0.07 $ (0.26) $ (1.55) $ (2.17)
=========== =========== =========== ===========
At December 31, 2001, December 31, 2000, May 31, 2000 and May 31, 1999,
3,718,248, 4,778,478, 5,238,352 and 4,550,463 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 (Note 8).
Foreign Currency Gains and Losses. The foreign-owned assets and
liabilities of the Company 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 Earnings (Loss)" in the Consolidated
Statements of Stockholders' Equity and Comprehensive Earnings (Loss). Foreign
currency transaction gains and losses are included in the Consolidated
Statements of Operations as they occur.
F-11
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Credit Risk. 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 earnings (loss), basic earnings (loss) per share and diluted
earnings (loss) per share for the periods presented would have been reduced
(increased) (Note 8).
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation: an Interpretation of APB Opinion No. 25". Among other issues,
Interpretation No. 44 clarifies the application of Accounting Principles Board
Opinion ("APB") No. 25 regarding (a) the definition of employee for purposes of
applying APB No. 25, (b) the criteria for determining whether a plan qualifies
as a non-compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock options in a business combination. The
provisions of Interpretation No. 44 were applied on a prospective basis
effective July 1, 2000, and have not had a material impact on the consolidated
financial position or results of operations.
Recent Accounting Pronouncements. SFAS No. 141 entitled "Business
Combinations" was issued in June 2001 and became effective July 1, 2001. SFAS
No. 141 requires that all business combinations be accounted for using the
purchase method of accounting, which requires that acquisitions be recorded at
fair value as of the date of acquisition. The pooling-of-interests method of
accounting allowed under prior standards, which reflected business combinations
using historical financial information, is now prohibited.
In June 2001, the FASB issued SFAS No. 142 entitled "Goodwill and Other
Intangible Assets" which became effective on January 1, 2002. Existing goodwill
($45.6 million at December 31, 2001) will no longer be amortized, but will be
tested for impairment using a fair value approach. SFAS No. 142 requires
goodwill to be tested for impairment at a level referred to as a reporting unit,
generally one level lower than reportable segments. SFAS No. 142 requires the
Company to perform the first goodwill impairment test on all reporting units
within six months of adoption. The first step is to compare the fair value with
the book value of a reporting unit. If the fair value of the reporting unit is
less than its book value, the second step will be to calculate the impairment
loss, if any. Any impairment loss from the initial adoption of SFAS No. 142 will
be recognized as a change in accounting principle. After the initial adoption,
the Company will test goodwill for impairment on an annual basis and between
annual tests if an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying amount.
The Company is reviewing SFAS No. 142 to determine the effect, if any, of the
initial goodwill impairment testing. During the year ended December 31, 2001,
the seven months ended December 31, 2000, and the years ended May 31, 2000 and
May 31, 1999, the Company recorded goodwill amortization and impairments of $3.9
million, $2.2 million, $37.1 million and $9.0 million, respectively.
F-12
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Due to the nature of the
Company's business, this new accounting pronouncement is not expected to have a
significant impact on our reported results of operations and financial
condition.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations -- Reporting the Effects of a Disposal of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business. This Statement also amends ARB No. 51,
"Consolidated Financial Statements," to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. SFAS No. 144
became effective on January 1, 2002. The provisions of this Statement are to be
applied prospectively. The Company has not determined the effect, if any,
adoption of SFAS No. 144 will have on the financial position and results of
operations.
Reclassification. Certain amounts previously reported in the consolidated
financial statements have been reclassified to conform to the current year
presentation.
(2) SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows (in
thousands):
[Enlarge/Download Table]
SEVEN MONTHS
YEAR ENDED ENDED YEARS ENDED MAY 31,
DECEMBER 31, DECEMBER 31, --------------------
2001 2000 2000 1999
------------ ------------ --------- --------
Cash paid (received) during the period
for:
Interest.............................. $(4,385) $(4,143) $ (5,562) $(5,999)
Income taxes.......................... 5,551 642 (13,396) 16,966
Unamortized restricted stock
compensation.......................... -- -- (1,029) (329)
Repossession of equipment due to
customers' default on trade notes
receivable:
Decrease in trade notes receivable.... -- -- (8,464) --
Increase in property, plant and
equipment.......................... -- -- 4,893 --
Increase in inventories............... -- -- 3,571 --
Issuance of note receivable in
connection with sale of other assets:
Long-term trade notes receivable...... -- -- -- 5,387
Other assets.......................... -- -- -- (5,387)
Issuance of common stock in connection
with business acquisitions............ -- -- -- 49,386
Deferred financing costs................ 1,688 -- -- --
F-13
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment is as follows (in thousands):
[Enlarge/Download Table]
DECEMBER 31, DECEMBER 31, MAY 31,
2001 2000 2000
------------ ------------ --------
Land.............................................. $ 2,769 $ 2,769 $ 2,782
Buildings......................................... 27,604 26,565 26,413
Machinery and equipment........................... 62,348 60,178 65,450
Leased equipment.................................. 14,185 14,206 12,219
Other............................................. 7,966 6,100 5,615
-------- -------- --------
114,872 109,818 112,479
Less accumulated depreciation..................... 67,334 58,551 54,060
-------- -------- --------
Property, plant and equipment, net................ $ 47,538 $ 51,267 $ 58,419
======== ======== ========
Approximately $15.0 million of land and buildings, net are recorded
pursuant to a twelve year non-cancelable lease agreement as described below in
Note 5.
(4) ACCRUED EXPENSES
A summary of accrued expenses is as follows (in thousands):
[Enlarge/Download Table]
DECEMBER 31, DECEMBER 31, MAY 31,
2001 2000 2000
------------ ------------ -------
Compensation, including compensation-related taxes,
commissions and severance........................ $ 8,462 $ 5,326 $ 6,321
Warranty........................................... 4,669 6,302 6,470
Accrued legal settlement........................... -- -- 5,000
Income tax payable................................. 1,323 2,884 4,226
Accrued property tax............................... 1,916 1,872 802
Other.............................................. 2,444 7,004 6,611
------- ------- -------
Accrued expenses................................... $18,814 $23,388 $29,430
======= ======= =======
(5) LONG-TERM DEBT AND LEASE OBLIGATIONS
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") (Note 9), the Company entered into a $3 million two-year
unsecured promissory note payable to the former shareholder
F-14
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 December 31, 2001 was $1.9 million.
A summary of future principal obligations under the note payable and lease
obligation is as follows (in thousands):
[Download Table]
YEARS ENDED DECEMBER 31,
------------------------
2002........................................................ $ 2,312
2003........................................................ 1,264
2004........................................................ 973
2005........................................................ 1,184
2006........................................................ 1,470
2007 and thereafter......................................... 15,197
-------
Total....................................................... $22,400
=======
(6) INVENTORIES
A summary of inventories is as follows (in thousands):
[Enlarge/Download Table]
DECEMBER 31, DECEMBER 31, MAY 31,
2001 2000 2000
------------ ------------ -------
Raw materials...................................... $46,729 $39,988 $43,110
Work-in-process.................................... 4,191 6,774 6,559
Finished goods..................................... 17,363 20,884 19,516
------- ------- -------
$68,283 $67,646 $69,185
======= ======= =======
At December 31, 2001, 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.
(7) ACCOUNTS AND NOTES RECEIVABLE
A summary of accounts receivable is as follows (in thousands):
[Enlarge/Download Table]
DECEMBER 31, DECEMBER 31, MAY 31,
2001 2000 2000
------------ ------------ -------
Accounts receivable, principally trade............. $48,186 $32,491 $26,510
Less allowance for doubtful accounts............... (1,752) (1,571) (1,566)
------- ------- -------
Accounts receivable, net........................... $46,434 $30,920 $24,944
======= ======= =======
F-15
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The recorded investment in notes receivable, excluding accrued interest,
was $17.4 million at December 31, 2001. A summary of notes receivable, accrued
interest and allowance for loan-loss is as follows (in thousands):
[Enlarge/Download Table]
DECEMBER 31, DECEMBER 31, MAY 31,
2001 2000 2000
------------ ------------ --------
Notes receivable and accrued interest............. $ 17,613 $ 24,986 $ 31,955
Less allowance for loan loss...................... (10,735) (10,947) (13,718)
-------- -------- --------
Notes receivable, net............................. 6,878 14,039 18,237
Less current portion notes receivable, net........ 1,078 7,889 12,224
-------- -------- --------
Long-term notes receivable........................ $ 5,800 $ 6,150 $ 6,013
======== ======== ========
The activity in the allowance for note receivable loan loss is as follows
(in thousands):
[Enlarge/Download Table]
SEVEN MONTHS
YEAR ENDED ENDED YEARS ENDED MAY 31,
DECEMBER 31, DECEMBER 31, --------------------
2001 2000 2000 1999
------------ ------------ --------- --------
Balance at beginning of period........... $10,947 $13,718 $ 28,778 $ 3,954
Additions charged to bad debt expense.... 1,597 1,305 7,057 25,903
Recoveries reducing bad debt expense..... (1,609) (2,796) (23,558) --
Write-downs charged against the
allowance.............................. (200) (1,280) (10,799) (1,079)
Reclassification of account receivable... -- -- 12,240 --
------- ------- -------- -------
Balance at end of period................. $10,735 $10,947 $ 13,718 $28,778
======= ======= ======== =======
Recoveries for the year ended December 31, 2001 and for the seven months
ended December 31, 2000 include $1.6 million and $2.8 million, respectively, of
various recoveries of previously non-performing notes receivable. Recoveries for
the year ended May 31, 2000 include $10.2 million attributable to a more
favorable than anticipated resolution of a customer's bankruptcy settlement,
$8.5 million of recoveries in the form of repossessed equipment and inventories
and $4.9 million of various recoveries of previously non-performing notes
receivable.
(8) STOCKHOLDERS' EQUITY
Series B and Series C Preferred Stock. In May 1999, SCF-IV, L.P., ("SCF"),
purchased, in a privately negotiated transaction, 40,000 shares of Series B
Cumulative, Convertible Preferred Stock, par value $0.01 per share (the "Series
B Preferred Stock"). The purchase price paid for the Series B Preferred Stock
was $1,000 per share, resulting in net proceeds of approximately $39.5 million.
In August 1999, SCF exercised its option to purchase 15,000 shares of
Series C Cumulative, Convertible Preferred Stock, par value $0.01 per share (the
"Series C Preferred Stock"). The option to purchase Series C Preferred Stock was
granted to SCF by the Company in connection with SCF's purchase of 40,000 shares
of Series B Preferred Stock. The purchase price paid for the Series C Preferred
Stock was $1,000 per share, resulting in net proceeds of approximately $14.8
million.
The net cash proceeds of Series B and Series C Preferred Stock were used to
fund research and development projects, to provide additional working capital
and for general corporate purposes. The issuance of the Series B and Series C
Preferred Stock and the underlying shares of common stock were exempt from the
registration requirements of Section 5 of the Securities Act of 1933 in
accordance with Section 4(2) of that Act. Series B and C Preferred Stock have
substantially the same terms and conditions, except the fixed conversion price
for the Series C Preferred Stock is $8.50 per share, compared to $8.00 per share
for the
F-16
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Series B Preferred Stock. The holders of Series B and C Preferred Stock are
entitled to receive cumulative cash dividends of $10.00 per share per year (1%
of the liquidation preference) for each share of Series B and C Preferred Stock
outstanding. Each share of Series B and C Preferred Stock is entitled to a
liquidation preference of $1,000 per share, plus all accrued and unpaid
dividends.
The Series B and C Preferred Stock are convertible, at the holder's option
(the "Initial Conversion Date"), after the first to occur of any of the
following: (i) May 7, 2002, (ii) the approval by the Board of Directors of an
agreement relating to a Business Combination (as defined), (iii) the approval or
recommendation by the Board of Directors for a tender offer for common stock, or
(iv) the redemption, repurchase or reacquisition by the Company of rights issued
pursuant to its Stockholder Rights Plan or any waiver of the application of
Stockholder Rights Plan to any beneficial owner other than SCF or its affiliates
(except as approved by SCF's representative on the Board of Directors). On May
7, 2004 (the "Mandatory Conversion Date"), each outstanding share of Series B
and C Preferred Stock respectively shall, without any action on the part of the
holder, be converted automatically into a number of fully paid and nonassessable
shares of common stock.
After the Initial Conversion Date and prior to the Mandatory Conversion
Date, the holders of Series B and C Preferred Stock will be entitled to convert
their shares into a number of fully paid and nonassessable shares of common
stock per share equal to the greater of the following (such amount being
referred to as the "Conversion Ratio Amount"): (a) the quotient of $1,000 (plus
any accrued and unpaid dividends through the record date for determining
stockholders entitled to vote) divided by a fixed conversion price of $8.00 and
$8.50 for Series B and C respectively (and adjusted from time to time in
accordance with certain anti-dilution provisions) or (b) the quotient of $1,000
increased at a rate of eight percent per annum from August 17, 1999, compounded
quarterly, less the amount of cash dividends actually paid through the
applicable conversion date, divided by the average market price for our common
stock during the ten trading day period prior to the date of conversion.
In the event of a conversion of Series B and C Preferred Stock pursuant to
which the Conversion Ratio Amount is determined using clause (b) above, then the
Company may redeem for cash up to 50% (or such greater percentage as the holders
shall agree) of the shares of Series B and C Preferred Stock submitted for
conversion. The maximum number of shares which the Company may issue upon
conversion is 10,099,979 with any shares in excess of this amount to be
mandatorily redeemed by the Company in cash.
A charge to retained earnings at a stated rate of 8% per year, compounded
quarterly is recognized (of which 7% is accounted for as a non-cash event
recorded to additional paid-in capital so as to reflect potential dilution at
time of preferred stock conversion and 1% is paid as a quarterly cash dividend).
This is shown as a preferred stock dividend and reduces net earnings applicable
to common stock accordingly. The Company is permitted to pay dividends on common
stock as long as the Series B and C Preferred Stock cumulative cash dividends of
$10 per preferred share per year are current. During the year ended December 31,
2001 net earnings applicable to common shares included a charge of $5.6 million
for dividends provided on the Series B Preferred Stock and Series C Preferred
Stock of which $.6 million represents cash dividends paid by the Company (and
for which the company is current) and $5.0 million represents potential dilution
due to conversion.
Treasury Stock. During the year ended May 31, 2000, the Company purchased
100,000 shares of common stock from a former officer for $0.8 million and the
Company purchased in open market transactions 150,000 shares of common stock for
an aggregate purchase price of $1.0 million. 11,000 shares of common stock were
repurchased by the Company in open market transactions during the seven months
ended December 31, 2000. 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, 2001, the Company had
repurchased 461,900 shares of common stock under this repurchase program for a
total purchase price of $3.6 million and
F-17
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
at an average price of $7.78 per share. Under a prior repurchase program, the
Company had repurchased 37,898 shares of common stock during 2001, for a
purchase price of $0.4 million. At December 31, 2001, the Company owned 743,298
shares of treasury stock.
Stock Option Plans. The Company has adopted an employee stock option plan
for eligible employees which provides for the granting of options to purchase a
maximum of 9,700,000 shares of common stock. The Company has also adopted a
directors 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.
At December 31, 2001, 1,447,108 shares remained available for issuance pursuant
to these plans.
Transactions under the stock option plans are summarized as follows:
[Enlarge/Download Table]
OPTION PRICE AVAILABLE FOR
PER SHARE OUTSTANDING VESTED GRANT
--------------- ----------- --------- -------------
May 31, 1998...................... 2.03 - 30.38 4,168,246 1,051,743 723,204
Increase in shares authorized... -- -- -- 1,800,000
Granted......................... 6.38 - 24.50 2,449,732 -- (2,449,732)
Vested.......................... -- -- 513,563 --
Exercised....................... 2.03 - 16.88 (39,700) (39,700) --
Canceled/forfeited.............. 9.38 - 30.38 (2,027,815) -- 2,027,815
--------------- ---------- --------- ----------
May 31, 1999...................... 2.03 - 30.00 4,550,463 1,525,606 2,101,287
Granted......................... 5.25 - 10.00 1,975,790 -- (1,975,790)
Vested.......................... -- -- 750,707 --
Exercised....................... 2.03 - 8.19 (8,200) (8,200) --
Canceled/forfeited.............. 3.50 - 30.00 (1,279,701) (47,165) 1,279,701
--------------- ---------- --------- ----------
May 31, 2000...................... 2.03 - 30.00 5,238,352 2,220,948 1,405,198
Increase in shares authorized... -- -- -- 1,200,000
Granted......................... 7.69 - 9.44 592,840 -- (592,840)
Vested.......................... -- -- 677,400 --
Exercised....................... 2.03 - 6.38 (71,500) (71,500) --
Canceled/forfeited.............. 5.06 - 29.82 (981,214) (504,289) 981,214
--------------- ---------- --------- ----------
December 31, 2000................. $ 2.03 - $30.00 4,778,478 2,322,559 2,993,572
Granted......................... 8.45 - 12.45 929,000 -- (929,000)
Vested.......................... -- -- 860,632 --
Exercised....................... 2.03 - 11.00 (326,921) (326,921) --
Canceled/forfeited.............. 2.03 - 29.69 (519,757) (404,508) (617,464)
--------------- ---------- --------- ----------
December 31, 2001................. $ 2.03 - $30.00 4,860,800 2,451,762 1,447,108
=============== ========== ========= ==========
F-18
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock options outstanding at December 31, 2001 are summarized as follows:
[Enlarge/Download Table]
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE AVERAGE EXERCISE PRICE
OPTION PRICE OF OUTSTANDING REMAINING OF VESTED
PER SHARE OUTSTANDING OPTIONS CONTRACT LIFE VESTED OPTIONS
--------------- ----------- -------------- ------------- --------- --------------
$ 2.03 - $ 3.91........... 16,725 $ 3.60 0.8 16,725 $ 3.60
3.92 - 7.85........... 2,168,007 6.06 7.7 799,275 6.16
7.86 - 11.77........... 1,303,000 10.40 8.0 420,625 9.36
11.78 - 15.70........... 191,600 12.67 5.1 156,475 12.71
15.71 - 19.63........... 417,768 17.92 4.9 393,725 17.84
19.64 - 23.56........... 534,100 21.38 5.0 440,087 21.31
23.57 - 27.48........... 19,400 24.61 6.3 14,650 24.60
27.49 - 30.00........... 210,200 29.49 4.5 210,200 29.49
--------------- --------- ------ --- --------- ------
$ 2.03 - $30.00........... 4,860,800 $11.26 7.0 2,451,762 $13.82
=============== ========= ====== === ========= ======
The Company has elected to continue to use the intrinsic value method to
account for stock-based compensation plans; however, if the Company had adopted
the fair value method, net earnings (loss) applicable to common stock, basic
earnings (loss) per share and diluted earnings (loss) per share for the year
ended December 31, 2001, seven months ended December 31, 2000 and years ended
May 31, 2000 and 1999 would have been reduced (increased) as follows (in
thousands, except per share amounts):
[Enlarge/Download Table]
YEARS ENDED MAY 31,
YEAR ENDED SEVEN MONTHS ENDED --------------------------------------------
DECEMBER 31, 2001 DECEMBER 31, 2000 2000 1999
------------------- ------------------- -------------------- ---------------------
REPORTED PROFORMA REPORTED PROFORMA REPORTED PROFORMA REPORTED PROFORMA
-------- -------- -------- -------- -------- --------- --------- ---------
Net earnings (loss)
applicable to common
stock.................... $3,709 $ (289) $(13,357) $(20,365) $(78,520) $ (74,926) $(105,563) $(112,186)
Basic earnings (loss) per
common share............. $ 0.07 $(0.01) $ (0.26) $ (0.41) $ (1.55) $ (1.48) $ (2.17) $ (2.31)
Diluted earnings (loss) per
common share............. $ 0.07 $(0.01) $ (0.26) $ (0.41) $ (1.55) $ (1.48) $ (2.17) $ (2.31)
The weighted average fair value of options granted during the year ended
December 31, 2001, seven months ended December 31, 2000 and years ended May 31,
2000 and 1999 was $4.38, $4.02, $3.06 and $4.24 respectively. 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 and expected stock price volatility of 41% during the year ended December
31, 2001, 49% during the seven months ended December 31, 2000, 49% and 51%
during the years ended May 31, 2000 and 1999.
Restricted Stock Plans. In 1990, the Company adopted the Input/Output,
Inc. 1990 Restricted Stock Plan which provides for the award of up to 1,200,000
shares of common stock to key officers and employees with ownership vesting over
a period of four years. In May 1999, a key employee with 53,000 unvested
restricted shares resigned and as part of the employee's separation agreement,
the Company removed all restrictions and vested all 53,000 shares. All
amortization of restricted stock related to such vested shares was recognized in
the year ended May 31, 1999. At December 31, 2001, there were no unvested
restricted shares outstanding, and under terms of the plan, no further
restricted stock can be granted.
In January 1998, the Company adopted the Input/Output, Inc. 1998 Restricted
Stock Plan which provides for the award of up to 100,000 shares of common stock
to key officers and employees. Ownership of the common stock will vest over a
period as determined by the Company in its sole discretion. Shares awarded
F-19
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
2001, there were 27,500 shares outstanding, 17,500 shares of which are vested,
and 10,000 shares of which are scheduled to vest over a period through March 1,
2005. At December 31, 2001 there are 72,500 shares available for grant under
this plan.
In March 2000 the Company adopted the Input/Output, Inc. 2000 Restricted
Stock Plan which provides for the award of up to 200,000 shares of common stock
to key employees. Ownership of the common stock will vest over a period as
determined by the Company in its sole discretion. 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, 2001,
the Company had 112,850 unvested shares outstanding, 0 shares of which are
vested, and 112,850 shares of which are scheduled to vest over a period through
June 7, 2006. At December 31, 2001 there are 87,150 shares available for grant
under this plan.
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.
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 our 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 102,186, 105,740, 196,849 and 177,280 shares purchased by
employees during the year ended December 31, 2001, the seven months ended
December 31, 2000 and years ended May 31, 2000 and 1999.
(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.
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 allocation of the purchase price as of December 31, 2001, including related
direct costs, for the acquisition of Pelton is as follows (in thousands):
[Download Table]
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
=======
F-20
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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) SEGMENT AND GEOGRAPHIC 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. Prior to May 31,
1999, certain information with respect to the Land and Marine Divisions was not
practically attainable. A summary of segment information is as follows (in
thousands):
[Enlarge/Download Table]
SEVEN MONTHS
YEAR ENDED ENDED YEARS ENDED MAY 31,
DECEMBER 31, DECEMBER 31, -------------------
2001 2000 2000 1999
------------ ------------ -------- --------
Net sales:
Land................................. $162,256 $ 60,590 $ 73,201 $ 96,276
Marine............................... 49,794 17,727 48,253 101,139
-------- -------- -------- --------
$212,050 $ 78,317 $121,454 $197,415
======== ======== ======== ========
Gross profit (loss):
Land................................. $ 55,603 $ 15,930 $ 6,397 $ (4,308)
Marine............................... 20,649 3,833 8,415 (3,492)
-------- -------- -------- --------
$ 76,252 $ 19,763 $ 14,812 $ (7,800)
======== ======== ======== ========
Earnings (loss) from operations
Land................................. $ 15,631 $ 1,056 $(28,254)
Marine............................... 5,662 (4,877) (34,466)
Corporate............................ (13,388) (9,285) (22,750)
-------- -------- --------
$ 7,905 $(13,106) $(85,470)
======== ======== ========
Depreciation and amortization
Land................................. $ 8,194 $ 4,210 $ 10,106
Marine............................... 3,537 2,504 7,117
Corporate............................ $ 5,804 4,774 5,612
-------- -------- --------
$ 17,535 $ 11,488 $ 22,835
======== ======== ========
F-21
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
[Download Table]
DECEMBER 31, DECEMBER 31, MAY 31,
2001 2000 2000
------------ ------------ --------
Total assets:
Land................................. $139,978 $116,554 $106,431
Marine............................... 62,422 69,897 77,411
Corporate............................ 180,771 179,182 197,927
-------- -------- --------
$383,171 $365,633 $381,769
======== ======== ========
Total assets by geographic area:
North America........................ $340,375 $333,603 $354,645
Europe............................... 42,796 32,030 27,124
-------- -------- --------
$383,171 $365,633 $381,769
======== ======== ========
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 follows (in thousands):
[Enlarge/Download Table]
SEVEN MONTHS
YEAR ENDED ENDED YEARS ENDED MAY 31,
DECEMBER 31, DECEMBER 31, -------------------
2001 2000 2000 1999
------------ ------------ -------- --------
United States of America............... $ 79,115 $29,974 $ 36,946 $117,083
Middle East............................ 46,189 15,835 22,156 1,835
Europe................................. 27,034 11,193 16,169 40,196
Asia................................... 25,530 6,047 19,754 6,980
Former Soviet Union.................... 23,544 6,892 16,388 10,192
Other.................................. 10,638 8,376 10,041 21,129
-------- ------- -------- --------
$212,050 $78,317 $121,454 $197,415
======== ======= ======== ========
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. Net
sales to individual customers representing 10% or more of net sales were as
follows:
[Enlarge/Download Table]
SEVEN MONTHS YEARS ENDED
YEAR ENDED ENDED MAY 31,
DECEMBER 31, DECEMBER 31, -----------
CUSTOMER 2001 2000 2000 1999
-------- ------------ ------------ ---- ----
A.............................................. 37% 37% 29% 38%
B.............................................. 8% 4% 4% 3%
C.............................................. 6% 23% 12% 6%
D.............................................. 2% 2% 11% 2%
E.............................................. 0% 0% 0% 11%
F-22
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) INCOME TAXES
[Enlarge/Download Table]
SEVEN MONTHS
YEAR ENDED ENDED YEARS ENDED MAY 31,
DECEMBER 31, DECEMBER 31, --------------------
2001 2000 2000 1999
------------ ------------ -------- ---------
Components of income taxes follows (in
thousands):
Federal............................... $(1,116) $ -- $ -- $ (9,279)
Foreign............................... 4,917 877 1,583 1,769
State and local....................... 303 455 865 1,524
Deferred.............................. (976) -- (8,545) (43,691)
------- ------ ------- --------
Total income tax (benefit) expense.... $ 3,128 $1,332 $(6,097) $(49,677)
======= ====== ======= ========
A reconciliation of the expected income tax (benefit) expense on earnings
(loss) before income taxes using the statutory Federal income tax rate of 35%
for the year ended December 31, 2001, seven months ended December 31, 2000 and
years ended May 31, 2000 and 1999, to the income taxes reported herein is as
follows (in thousands):
[Enlarge/Download Table]
SEVEN MONTHS
YEAR ENDED ENDED YEARS ENDED MAY 31,
DECEMBER 31, DECEMBER 31, -------------------
2001 2000 2000 1999
------------ ------------ -------- --------
Expected income tax (benefit) expense
at 35%............................... $4,365 $(3,141) $(28,022) $(54,334)
Foreign taxes, net..................... 1,729 467 685 989
State and local taxes.................. 197 296 556 991
Deferred tax asset valuation allowance
and provision for other
liabilities.......................... (3,991) 3,134 19,632 2,421
Nondeductible amortization............. 979 610 919 1,254
Other.................................. (151) (34) 133 (998)
------ ------- -------- --------
Total income tax (benefit)
expense.................... $3,128 $ 1,332 $ (6,097) $(49,677)
====== ======= ======== ========
F-23
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) is as follows (in thousands):
[Enlarge/Download Table]
DECEMBER 31, DECEMBER 31, MAY 31,
2001 2000 2000
------------ ------------ --------
Current deferred:
Deferred income tax assets:
Accrued expenses............................. $ 3,185 $ 2,056 $ 2,115
Allowance accounts........................... 11,370 9,497 10,798
Inventory.................................... 528 528 546
-------- -------- --------
Total current deferred income tax
asset................................. $ 15,083 $ 12,081 $ 13,459
======== ======== ========
Noncurrent deferred:
Deferred income tax assets:
Basis in identified intangibles.............. 8,838 12,565 11,941
Net operating loss carryforward.............. 41,970 51,226 47,862
Basis in property, plant and equipment....... 419 -- --
Basis in research and development............ 4,279 -- --
Foreign tax credit carryforward.............. -- 4,222 3,812
Alternative minimum tax credit............... 1,336 1,336 1,336
Other........................................ 931 1,274 1,274
-------- -------- --------
Total deferred income tax asset......... 57,773 70,623 66,225
Valuation allowance..................... (12,864) (16,855) (16,855)
-------- -------- --------
Net noncurrent deferred income tax
asset................................. 44,909 53,768 49,370
-------- -------- --------
Deferred income tax liabilities:
Basis in property, plant and equipment....... -- (2,665) (2,779)
Other liabilities............................ (4,164) (8,332) (5,198)
-------- -------- --------
Total deferred income tax liability..... (4,164) (10,997) (7,977)
-------- -------- --------
Net noncurrent deferred income tax
asset................................. $ 40,745 $ 42,771 $ 41,393
======== ======== ========
In assessing the realizability of deferred income tax assets, the Company
considers whether it is more likely than not that some portion or all of the
deferred income tax assets will be realized. The ultimate realization of
deferred income tax assets is dependent upon the generation of future taxable
income during the periods in which those deferred income tax assets become
deductible. The Company considers the scheduled reversal of deferred income tax
liabilities and projected future taxable income in making this assessment. In
order to fully realize the deferred income tax assets, the Company will need to
generate future taxable income of approximately $120 million over the next 19
years. Although the Company experienced significant losses in fiscal years 2000
and 1999, taxable income for the years 1996 through 1998 aggregated
approximately $128 million. Regardless, the ultimate realization of the net
deferred tax assets, prior to the expiration of the net operating loss
carry-forward in the next 17-19 years, will require a return to sustained
profitability.
A tax valuation allowance was established due to the uncertainty of
realizing certain net operating loss carry-forwards. The valuation allowance of
$16.9 million was established during the year ended May 31, 2000; and decreased
$4.0 million during the year ended December 31, 2001 to $12.9 million. The
decrease in valuation allowance was due to the write-off of deferred tax assets
relating to foreign tax credits. At December 31, 2001, the Company had
unreserved net operating loss carry-forwards of approximately
F-24
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$83 million for federal income tax purposes, which ultimately expire in 2018
through 2020 if not otherwise utilized. Other liabilities at December 31, 2001
primarily consists of reserves for various tax issues.
(12) OPERATING LEASES
Leasee. The Company leases certain equipment, offices and warehouse space
under non-cancelable operating leases. Rental expense was $1.8 million, $1.1
million, $2.2 million and $1.3 million for the year ended December 31, 2001,
seven months ended December 31, 2000 and years ended May 31, 2000 and 1999,
respectively.
A summary of future rental commitments under non-cancelable operating
leases is as follows (in thousands):
[Download Table]
YEARS ENDED DECEMBER 31,
------------------------
2002........................................................ $2,706
2003........................................................ 2,412
2004........................................................ 1,907
2005........................................................ 441
2006........................................................ 280
2007 and thereafter......................................... 213
------
$7,959
======
Lessor. The Company leases seismic equipment to customers under short-term
operating leases of less than one year. The Company also leases under-utilized
facilities under various lease and sub-lease agreements. A summary of lease
revenues is as follows (in thousands):
[Enlarge/Download Table]
SEVEN
MONTHS YEARS ENDED
YEAR ENDED ENDED MAY 31,
DECEMBER 31, DECEMBER 31, -------------
2001 2000 2000 1999
------------ ------------ ------ ----
Equipment rental............................ $3,749 $2,195 $3,184 $673
Facility rental............................. 736 529 205 187
------ ------ ------ ----
Total rentals..................... $4,485 $2,724 $3,389 $860
====== ====== ====== ====
(13) BENEFIT PLANS
401(k). The Company has a 401(k) retirement savings plan which covers
substantially all employees. Employees may voluntarily contribute up to 15% 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. Company contributions to the plan were
$0.7 million, $0.4 million, $0 and $1.7 million during the year ended December
31, 2001, seven months ended December 31, 2000 and years ended May 31, 2000 and
1999, respectively.
Supplemental executive retirement plan. The Company has a non-qualified,
supplemental executive retirement ("SERP") plan. The SERP Plan provides for
certain compensation to become payable on the participants' death, retirement or
total disability as set forth in the plan. Assets of this plan consist of the
cash surrender value of life insurance policies. The consolidated financial
statements include pension expense (benefit) of $0, $0, $(0.5) million, and $0.1
million for the year ended December 31, 2001 and the seven
F-25
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
months ended December 31, 2000 and years ended May 31, 2000 and 1999,
respectively. All benefits under this plan have previously been frozen.
Directors Plan. The Company has also adopted a non-qualified, unfunded
outside directors retirement plan. 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 million, $0.1 million, $0.1 million, and $0.1 million, for the year ended
December 31, 2001, the seven months ended December 31, 2000 and years ended May
31, 2000 and 1999, respectively. All benefits under this plan have previously
been frozen.
(14) SELECTED QUARTERLY INFORMATION -- (UNAUDITED)
A summary of selected quarterly information is as follows (in thousands,
except per share amounts):
[Enlarge/Download Table]
THREE MONTHS ENDED
-----------------------------------------------
YEAR ENDED DECEMBER 31, 2001 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------------------------- -------- ------- ------------ -----------
Net sales.................................... $42,409 $59,868 $58,647 $51,126
Gross profit................................. 16,710 21,010 18,536 19,996
Earnings (loss) from operations.............. (175) 3,949 2,252 1,879
Interest expense............................. (207) (383) (55) (50)
Interest and other income.................... 1,598 788 1,546 1,327
Income tax expense (benefit)................. 1,026 1,370 (352) 1,084
Net earnings (loss) applicable to common
shares..................................... $(1,200) $ 1,589 $ 2,679 $ 641
======= ======= ======= =======
Basic earnings (loss) per share.............. $ (0.02) $ 0.03 $ 0.05 $ 0.01
======= ======= ======= =======
Diluted earnings (loss) per share............ $ (0.02) $ 0.03 $ 0.05 $ 0.01
======= ======= ======= =======
[Enlarge/Download Table]
THREE MONTHS THREE MONTHS
ENDED ENDED
TRANSITION PERIOD 2000 AUGUST 31 NOVEMBER 30
---------------------- ------------ ------------
Net sales.................................................. $27,141 $40,880
Gross profit............................................... 6,361 12,105
Loss from operations....................................... (6,802) (2,781)
Interest expense........................................... (261) (259)
Interest and other income.................................. 1,471 2,240
Income tax expense......................................... 667 1,507
Net loss................................................... $(7,474) $(3,682)
======= =======
Basic loss per share....................................... $ (0.15) $ (0.07)
======= =======
Diluted loss per share..................................... $ (0.15) $ (0.07)
======= =======
F-26
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
[Enlarge/Download Table]
THREE MONTHS ENDED
-------------------------------------------------
YEAR ENDED MAY 31, 2000 AUGUST 31 NOVEMBER 30 FEBRUARY 29* MAY 31*
----------------------- --------- ----------- ------------ --------
Net sales............................... $ 29,979 $24,438 $33,424 $ 33,613
Gross profit (loss)..................... 5,985 5,273 (389) 3,943
Loss from operations.................... (12,938) (9,792) (9,814) (52,926)
Interest expense........................ (212) (202) (197) (215)
Interest and other income............... 1,034 1,220 1,761 2,221
Income tax expense (benefit)............ (3,877) (2,389) 168 1
Net loss................................ $ (9,320) $(7,528) $(9,574) $(52,098)
======== ======= ======= ========
Basic loss per share.................... $ (0.18) $ (0.15) $ (0.19) $ (1.03)
======== ======= ======= ========
Diluted loss per share.................. $ (0.18) $ (0.15) $ (0.19) $ (1.03)
======== ======= ======= ========
[Enlarge/Download Table]
THREE MONTHS ENDED
--------------------------------------------------
YEAR ENDED MAY 31, 1999 AUGUST 31* NOVEMBER 30 FEBRUARY 28* MAY 31*
----------------------- ---------- ----------- ------------ --------
Net sales.............................. $66,995 $73,918 $ 37,755 $ 18,747
Gross profit (loss).................... 21,963 27,982 (45,894) (11,851)
Earnings (loss) from operations........ 745 3,642 (95,368) (70,973)
Interest expense....................... (242) (217) (229) (209)
Interest and other income.............. 2,843 2,122 1,824 822
Income tax expense (benefit)........... 1,071 1,775 (32,553) (19,970)
Net earnings (loss).................... $ 2,275 $ 3,772 $(61,220) $(50,390)
======= ======= ======== ========
Basic earnings (loss) per share........ $ 0.05 $ 0.08 $ (1.21) $ (1.00)
======= ======= ======== ========
Diluted earnings (loss ) per share..... $ 0.05 $ 0.08 $ (1.21) $ (1.00)
======= ======= ======== ========
---------------
* See Note 15 concerning charges occurring during the years ended May 31, 2000
and 1999.
(15) SIGNIFICANT CHARGES AND RECOVERIES
Pre-tax charges of $85.7 million were recorded in the third quarter of year
ended May 31, 1999 and included an impairment of long-lived assets totaling $2.8
million (included in general and administrative expenses); an impairment of
intangible assets totaling $1.4 million; an inventory write-down of $47.3
million due to adverse industry conditions and planned product revisions
(included in cost of sales); charges for the early termination of a facility
lease and restructuring costs totaling $2.6 million (included in general and
administrative expenses); an accounts and notes receivable allowance of $17.6
million related to a customer's vessel seizure followed by filing for creditor
protection and management's assessment of business risk relating to three North
American customer trade notes receivable as a result of the depressed market
environment (included in general and administrative expenses); and a charge for
warranty reserves and other product related contingencies of $14.0 million
(included in cost of sales).
Pre-tax charges of $53.3 million were recorded in the fourth quarter of the
year ended May 31, 1999, and included an accounts and trade notes receivable
allowance of $22.3 million, primarily related to business risk resulting from
the depressed market environment, and from political and currency risks in
certain developing countries (included in general and administrative expenses);
an inventory write-down of $9.7 million primarily due to further reduction in
customer demand for products rendered excess or obsolete as a result of
prevailing industry conditions and as a result of planned product revisions
(included in cost of sales); a charge of
F-27
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$6.0 million relating to certain warranty reserves and other product-related
contingencies (included in cost of sales); an impairment of long-lived assets
totaling $4.0 million related to the downturn in business activity and resizing
efforts (included in general and administrative expenses); an impairment of
intangibles totaling $6.3 million related to the deterioration of certain
product lines (included in amortization and impairment of intangibles); a charge
of $3.3 million related to employee severances and a charge of $0.6 million for
other expenses (included in general and administrative expenses) and a charge of
$1.1 million primarily related to prototype development costs (included in
research and development expenses).
Pre-tax charges of $4.7 million were recorded in the first quarter of the
year ended May 31, 2000 and included $3.3 million related to employee severance
arrangements and the closing of a facility (included in general and
administrative expenses) and charges of $1.4 million for product-related
warranties (included in cost of sales). These charges resulted from continued
weak customer demand for seismic equipment.
Pre-tax charges and recoveries of $0.3 million, net, were recorded in the
third quarter of the year ended May 31, 2000 and included $8.7 million of
inventory charges (included in cost of sales) related to a decision to
commercialize VectorSeis digital sensor products having higher technical
standards than the products previously produced. The Company had previously
determined to commercialize these earlier VectorSeis products which subsequently
were proven not to be commercially feasible based on data gathered from trial
surveys, the anticipated longer-term market recovery for new seismic
instrumentation and given current and expected market conditions. Other charges
were $2.4 million of bad debt expense (included in general and administrative
expense); $1.3 million of charges related to the employee reduction in workforce
worldwide (included in general and administrative expense); and $0.7 million of
charges related to legal settlements (included in cost of sales -- $0.3 million,
and in general and administrative expense -- $0.4 million). These charges were
offset in part by $12.8 million of recoveries attributable to a more favorable
than anticipated resolution of a customer's bankruptcy settlement, consisting of
a $10.2 million reduction in allowance for loan loss (recorded as a reduction to
general and administrative expense) and a $2.6 million reversal of warranty
reserves based on the bankruptcy settlement (recorded as a reduction to cost of
sales).
Pre-tax charges of $45.8 million were recorded in the fourth quarter of the
year ended May 31, 2000 and included $4.2 million of inventory and warranty
charges (included in cost of sales) primarily related to write-down of certain
marine streamer and related products, reflecting the deterioration of the marine
towed array seismic sector. Additionally, $10.0 million was charged to general
and administrative expenses consisting of a $5.0 million charge for settlement
of litigation, a $3.6 million loan loss expense, $0.7 million related to the
sale of certain idle manufacturing capacity in Europe, and $0.7 million of
charges related to employee severance and continued cost reduction efforts
worldwide. Finally, $31.6 million was charged to amortization and impairment of
intangibles, reflecting the impairment of certain goodwill recorded in
conjunction with the acquisition of manufacturing assets of Western Geophysical
in 1995 and the acquisition of CompuSeis, Inc. in 1998. The impairment of the
Western Geophysical goodwill principally reflects the diminished outlook for the
marine towed array seismic sector in general, evidenced by customers' decisions
to reduce the size of their marine fleets, and changes in customers' preferences
and technology for certain products within that sector. The impairment of the
CompuSeis goodwill reflects the result of certain technological changes relating
to land seismic systems.
F-28
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No significant charges were reported during the year ended December 31,
2001 and the seven months ended December 31, 2000 and cash related accruals have
been substantially paid as of December 31, 2001. The table below summarizes the
significant pre-tax charges during the periods presented (in thousands):
[Enlarge/Download Table]
LONG-LIVED WARRANTY PERSONNEL/
INVENTORY RECEIVABLE ASSET PRODUCT FACILITY
RELATED RELATED RELATED RELATED AND OTHER
CHARGES CHARGES CHARGES CHARGES CHARGES TOTAL
--------- ---------- ---------- -------- ---------- --------
Charges for year ended May 31,
1999 by business segment:
Marine....................... $30,986 $ 18,298 $ 729 $17,025 $ 775 $ 67,813
Land......................... 25,978 21,034 12,539 2,975 2,787 65,313
Corporate.................... 1,136 568 1,232 -- 2,938 5,874
------- -------- ------- ------- ------- --------
$58,100 $ 39,900 $14,500 $20,000 $ 6,500 $139,000
======= ======== ======= ======= ======= ========
Charges for year ended May 31,
1999 by category:
Cost of sales................ $57,000 $ -- $ -- $20,000 $ -- $ 77,000
General and administrative... -- 39,900 6,800 -- 6,500 53,200
Research and development..... 1,100 -- -- -- -- 1,100
Amortization and impairment
of intangibles............ -- -- 7,700 -- -- 7,700
------- -------- ------- ------- ------- --------
$58,100 $ 39,900 $14,500 $20,000 $ 6,500 $139,000
======= ======== ======= ======= ======= ========
Charges for year ended May 31,
2000 by business segment:
Marine....................... $ 3,607 $ 2,400 $25,200 $ 1,993 $ 1,700 $ 34,900
Land......................... 8,700 3,600 7,100 -- 1,400 20,800
Corporate.................... -- -- -- -- 7,900 7,900
------- -------- ------- ------- ------- --------
$12,307 $ 6,000 $32,300 $ 1,993 $11,000 $ 63,600
======= ======== ======= ======= ======= ========
Adjustments to prior year
during year ended May 31,
2000......................... $ -- $(10,200) $ -- $(2,600) $ -- $(12,800)
Charges for year ended May 31,
2000 by category:
Cost of sales................ 12,307 -- -- 1,993 300 14,600
General and administrative... -- 6,000 700 -- 10,700 17,400
Amortization and impairment
of intangibles............ -- -- 31,600 -- -- 31,600
------- -------- ------- ------- ------- --------
$12,307 $ (4,200) $32,300 $ (607) $11,000 $ 50,800
======= ======== ======= ======= ======= ========
(16) LEGAL MATTERS
In the ordinary course of business, the Company has been named in various
lawsuits. While the final resolution of these matters could have an impact on
the 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 the financial position, results of operations or
liquidity of the Company.
F-29
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) RELATED PARTIES
In connection with the acquisition of DigiCourse in November 1998, the
Company entered into a service agreement under which Laitram agreed to provide
accounting, software, manufacturing and maintenance services. The service
agreement expired September 30, 2001 and Laitram now charges the company on an
invoice basis. The Company's chairman of the board is the chairman and a
principal stockholder of Laitram. The Company paid Laitram an aggregate $1.4
million, $0.8 million, $1.5 million and $2.7 million under the services
agreement for the year ended December 31, 2001, seven months ended December 31,
2000 and years ended May 31, 2000 and 1999, respectively.
A former director and former company officer assisted in the collection
efforts of certain accounts and notes receivable. In return, he was paid a
commission on actual amounts collected. Commissions earned amounted to $0, $0.1
million, $0.5 million and $0 for the year ended December 31, 2001, seven months
ended December 31, 2000 and years ended May 31, 2000 and 1999, respectively.
The Company has guaranteed $0.2 million of bank indebtedness for one
officer related to the open market purchases of the Company's common stock. The
share purchases were made in conjunction with shares issued in May 2000 under
the Input/Output, Inc. 2000 Restricted Stock Plan. The outstanding loan balance
at December 31, 2001 was $0.2 million.
F-30
SCHEDULE II
INPUT/OUTPUT, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
[Enlarge/Download Table]
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
YEAR ENDED MAY 31, 1999 OF YEAR EXPENSES DEDUCTIONS END OF YEAR
----------------------- ---------- ---------- ---------- -----------
(IN THOUSANDS)
Allowance for doubtful accounts................... $3,137 $17,780 $ 1 $20,916
Reserves for excess and obsolete inventory........ 4,949 58,848 47,550 16,247
Warranty.......................................... 4,245 19,280 9,650 13,875
[Enlarge/Download Table]
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
YEAR ENDED MAY 31, 2000 OF YEAR EXPENSES DEDUCTIONS OTHER END OF YEAR
----------------------- ---------- ---------- ---------- -------- -----------
(IN THOUSANDS)
Allowance for doubtful accounts...... $20,916 $(1,107)(1) $ 6,003 $(12,240)(3) $ 1,566
Reserves for excess and obsolete
inventory.......................... 16,247 16,360 17,616 -- 14,991
Warranty............................. 13,875 (1,731)(2) 5,674 -- 6,470
[Enlarge/Download Table]
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
SEVEN MONTHS ENDED DECEMBER 31, 2000 OF PERIOD EXPENSES DEDUCTIONS PERIOD
------------------------------------ ---------- ---------- ---------- ----------
(IN THOUSANDS)
Allowance for doubtful accounts.................... $ 1,566 $ 54 $ 49 $ 1,571
Reserves for excess and obsolete inventory......... 14,991 1,599 2,549 14,041
Warranty........................................... 6,470 2,267 2,435 6,302
[Enlarge/Download Table]
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
YEAR ENDED DECEMBER 31, 2001 OF YEAR EXPENSES DEDUCTIONS END OF YEAR
---------------------------- ---------- ---------- ---------- -----------
(IN THOUSANDS)
Allowance for doubtful accounts................... $ 1,571 $ 269 $ 88 $ 1,752
Reserves for excess and obsolete inventory........ 14,041 3,618 3,308 14,351
Warranty.......................................... 6,302 2,132 3,765 4,669
---------------
(1) Includes recoveries of $2.1 million.
(2) Includes reversal of $2.6 million based on bankruptcy settlement of a
customer.
(3) Represents transfer to loan loss allowance as a result of conversion of
trade receivable to a note receivable.
S-1
INDEX TO EXHIBITS
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3.1 -- Amended and Restated Certificate of Incorporation filed as
Exhibit 3.1 to the Company's Transition Report on Form 10-K
for the seven months ended December 31, 2000, and
incorporated herein by reference.
3.2 -- Certificate of Amendment to the Amended and Restated
Certificate of Incorporation, dated October 11, 1996, filed
as Exhibit 3.2 to the Company's Annual Report on Form 10-K
for the fiscal year ended May 31, 1997, and incorporated
herein by reference.
3.3 -- Amended and Restated Bylaws filed as Exhibit 4.3 to the
Company's Current Report or Form 8-K filed with the
Securities and Exchange Commission on March 8, 2002, and
incorporated herein by reference.
4.1 -- Form of Certificate of Designation, Preferences 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 10.6) and
incorporated herein by reference.
4.2 -- Form of Certificate of Designation, Preferences and Rights
of Series B Preferred Stock of Input/ Output, Inc., filed as
Exhibit 4.1 to the Company's Form 8-K dated April 21, 1999,
and incorporated herein by reference.
4.3 -- Form of Certificate of Designation, Preferences and Rights
of Series C Preferred Stock of Input/ Output, Inc., filed as
Exhibit 4.2 to the Company's Form 10-K for the fiscal year
ended May 31, 1999, and incorporated herein by reference.
10.1 -- Royalty Agreement, dated November 6, 1992, between I/O
Sensors, Inc., Triton and Triton Technologies, Inc., filed
as exhibit 10.2 to the Company's 10-K for fiscal year ended
May 31, 1999, and incorporated herein by reference.
**10.2 -- Amended and Restated 1990 Stock Option Plan, filed as
Exhibit 4.2 to the Company's Registration Statement on Form
S-8 (Registration No. 333-80299), filed with the Securities
and Exchange Commission on June 9, 1999, and incorporated
herein by reference.
10.3 -- Lease Agreement dated as of August 20, 2001, between NL
Ventures III Stafford L.P. and Input/Output, Inc. filed as
Exhibit 10.28 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001 and incorporated
herein by reference.
**10.4 -- Amended Directors Retirement Plan, filed as Exhibit 10.7 to
the Company's Annual Report on form 10-K for the fiscal year
ended May 31, 1997, and incorporated herein by reference.
**10.5 -- Input/Output, Inc. Amended and Restated 1996 Non-Employee
Director Stock Option Plan, filed as Exhibit 4.3 to the
Company's Registration Statement on Form S-8 (Registration
No. 333-80299), filed with the Securities and Exchange
Commission on June 9, 1999, and incorporated herein by
reference.
10.6 -- 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 as
Exhibit 4 to the Company's Form 8-A dated January 27, 1997,
and incorporated herein by reference.
**10.7 -- Input/Output, Inc. Employee Stock Purchase Plan, filed as
Exhibit 4.4 to the Company's Registration Statement on Form
S-8 (Registration No. 333-24125) filed with the Securities
and Exchange Commission on March 18, 1997, and incorporated
herein by reference.
10.8 -- Purchase Agreement by and between the Company and SCF-IV,
L.P. dated April 21, 1999, filed as Exhibit 10.1 to the
Company's Form 8-K dated April 21, 1999, and incorporated
herein by reference.
10.9 -- Registration Rights Agreement by and between the Company and
SCF-IV, L.P. dated May 7, 1999, filed as Exhibit 10.2 to the
Company's Form 8-K dated April 21, 1999, and incorporated
herein by reference.
10.10 -- First Amendment to Rights Agreement by and between the
Company and Harris Trust and Savings Bank as Rights Agent,
dated April 21, 1999, filed as Exhibit 10.3 to the Company's
Form 8-K dated April 21, 1999, and incorporated herein by
reference.
10.11 -- Registration Rights Agreement by and among the Company and
The Laitram Corporation, dated November 16, 1998, filed as
Exhibit 99.2 to the Company's Form 8-K dated November 16,
1998, and incorporated herein by reference.
[Download Table]
**10.12 -- Input/Output, Inc. 1998 Restricted Stock Plan, filed as
Exhibit 4.7 to the Company's Registration Statement on Form
S-8 (Registration No. 333-80297), filed with the Securities
and Exchange Commission on June 9, 1999, and incorporated
herein by reference.
* **10.13 -- Form of Change in Control Agreement.
* **10.14 -- Input/Output, Inc. Non-qualified Deferred Compensation Plan.
**10.15 -- Amendment No. 1 to the Input/Output, Inc. Amended and
Restated 1996 Non-Employee Director Stock Option Plan, dated
September 13, 1999, filed as Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
August 31, 1999, and incorporated herein by reference.
**10.16 -- Employment Agreement by and between the Company and Timothy
J. Probert dated effective as of March 1, 2000 filed as
Exhibit 10.44 to the Company's Annual Report on Form 10-K
for the fiscal year ended May 31, 2000, and incorporated
herein by reference.
**10.17 -- Input/Output, Inc. 2000 Restricted Stock Plan, effective as
of March 13, 2000 filed as Exhibit 10.27 to the Company's
Annual Report on Form 10-K for the fiscal year ended May 31,
2000, and incorporated herein by reference.
**10.18 -- Input/Output, Inc. 2000 Long-Term Stock Plan, filed as
Exhibit 4.7 to the Company's Registration Statement on Form
S-8 (No. 333-49382) dated November 6, 2000 and incorpo-
rated by reference herein.
* **10.19 -- Separation Agreement and General Release between
Input/Output, Inc. and Rex Reavis dated August 10, 2001.
* **10.20 -- Consulting Agreement between Input/Output, Inc. and Rex
Reavis dated August 10, 2001.
*21.1 -- Subsidiaries of the Company.
*23.1 -- Consent of PricewaterhouseCoopers LLP.
*23.2 -- Consent of KPMG LLP.
*24.1 -- The Power of Attorney is set forth on the signature page
hereof.
---------------
* Filed herewith.
** Management contract or compensatory plan or arrangement.
Dates Referenced Herein and Documents Incorporated by Reference
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