REGISTRATION NO. 333-112263
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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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 DRIVE
STAFFORD, TEXAS 77477
(281) 933-3339
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J. MICHAEL KIRKSEY
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
INPUT/OUTPUT, INC.
12300 PARC CREST DRIVE
(281) 933-3339
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
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COPIES OF COMMUNICATIONS TO:
MARC H. FOLLADORI
FULBRIGHT & JAWORSKI L.L.P.
1301 MCKINNEY, SUITE 5100
(713) 651-5151
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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The information in this prospectus is not complete and may be changed. The
selling securityholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and we are not soliciting
offers to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, DATED APRIL 21, 2004
PROSPECTUS
$60,000,000
INPUT/OUTPUT, INC.
5.50% CONVERTIBLE SENIOR NOTES DUE 2008
AND
COMMON STOCK ISSUABLE UPON CONVERSION OF THE NOTES
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In December 2003, we issued and sold $60,000,000 aggregate principal amount
of our 5.50% Convertible Senior Notes due 2008 in a private placement to the
initial purchaser. The initial purchaser resold the notes to persons to it
reasonably believed to be qualified institutional buyers in accordance with Rule
144A under the Securities Act of 1933, as amended (the Securities Act). Selling
securityholders will use this prospectus from time to time to resell their notes
and the common stock issuable upon conversion of their notes.
The notes bear interest at an annual rate of 5.50% on the principal amount
from December 10, 2003. We will pay interest on June 15 and December 15 of each
year, beginning June 15, 2004.
Holders may convert the notes into shares of our common stock at a
conversion rate of 231.4815 shares per $1,000 principal amount of notes
(representing a conversion price of $4.32), subject to adjustment, at any time
before the close of business on December 15, 2008.
We may not redeem the notes prior to maturity.
The notes are our senior unsecured debt and rank on a parity with all of
our other existing and future senior unsecured debt and prior to all
subordinated debt. The notes are effectively junior to all existing and future
obligations of our subsidiaries. In addition, as of December 31, 2003, we had
approximately $18.8 million in obligations outstanding under certain
sale-leaseback arrangements that are effectively senior to the notes to the
extent of the leased assets.
If a designated event (as described in this prospectus under "Description
of Notes -- Repurchase at Option of the Holder Upon a Designated Event") occurs
prior to maturity of the notes, securityholders may require us to repurchase all
or a portion of their notes.
Prior to this offering, the notes have been eligible for trading on the
PORTAL Market of the Nasdaq National Market. Notes sold by means of this
prospectus are not expected to remain eligible for trading on the PORTAL Market.
We do not intend to list the notes for trading on any national securities
exchange or on the Nasdaq National Market. Our common stock trades on the New
York Stock Exchange under the symbol "IO." On April 20, 2004, the last reported
sale price for our common stock on the New York Stock Exchange was $9.01 per
share.
We will not receive any proceeds from the sale by the selling
securityholders of the notes or the common stock issuable upon conversion of the
notes. The selling securityholders may sell the securities offered by this
prospectus from time to time on any exchange on which the securities are listed
on terms to be negotiated with buyers. They may also sell the securities in
private sales or through dealers or agents. The selling securityholders may
offer the notes or the underlying common stock, in negotiated transactions or
otherwise, at market prices prevailing at the time of sale or at negotiated
prices. See "Plan of Distribution" on page 47. The selling securityholders may
be deemed to be "underwriters" as defined in the Securities Act. Any profits
realized by the selling securityholders, and if any broker-dealers are used by
the selling securityholders, the compensation of those broker-dealers, may be
deemed to be underwriting discounts and commissions. Other than selling
commissions and fees and stock transfer taxes, we will pay all expenses of the
registration of the notes and the common stock and certain other expenses as set
forth in the registration rights agreement that we entered into with the initial
purchaser of the notes.
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INVESTING IN THE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE
6.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
April 21, 2004
TABLE OF CONTENTS
PAGE
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About This Prospectus....................................... i
Summary..................................................... 1
Risk Factors................................................ 6
Forward-Looking Statements.................................. 20
Use of Proceeds............................................. 21
Ratio of Earnings to Fixed Charges.......................... 21
Description of Notes........................................ 22
Description of Capital Stock................................ 33
United States Federal Income Tax Considerations............. 37
Selling Securityholders..................................... 43
Plan of Distribution........................................ 47
Legal Matters............................................... 48
Experts..................................................... 48
Where You Can Find More Information......................... 48
Incorporation by Reference.................................. 49
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission (SEC) using a "shelf" registration or
continuous offering process. Under this shelf registration process, selling
securityholders may from time to time sell the securities described in this
prospectus in one or more offerings.
This prospectus provides you with a general description of the securities
that the selling securityholders may offer. A selling securityholder may be
required to provide you with a prospectus supplement containing specific
information about the selling securityholder and the terms of the securities
being offered. That prospectus supplement may include additional risk factors or
other special considerations applicable to those securities. A prospectus
supplement may also add, update or change information in this prospectus. If
there is any inconsistency between the information in this prospectus and any
prospectus supplement, you should rely on the information in that prospectus
supplement. You should read both this prospectus and any prospectus supplement
together with the additional information described under the heading "Where You
Can Find More Information."
In this prospectus and any prospectus supplement, "Input/Output," "I/O,"
"company," "we," "our," "ours" and "us" refer to Input/Output, Inc. and its
consolidated subsidiaries, except where the context otherwise requires or as
otherwise indicated.
The information contained or incorporated by reference in this prospectus
contains references to trademarks, service marks and registered marks of
Input/Output and our subsidiaries, as indicated. Except where stated otherwise
or unless the context otherwise requires, the terms "VectorSeis," "Tescorp,"
"DigiCourse" and "VectorSeis System Four" refer to our VectorSeis(R),
Tescorp(R), DigiCourse(R) and VectorSeis System Four(R) registered marks, and
the terms "AZIM," "True Digital," "DigiShot," "Applied MEMS," "MRX," "RSR," "Vib
Pro" and "Image" refer to our AZIM(TM), True Digital(TM), DigiShot(TM), Applied
MEMS(TM), MRX(TM), RSR(TM), Vib Pro(TM) and Image(TM) trademarks and service
marks.
We have not authorized any dealer, salesman or other person to give any
information or to make any representation other than those contained or
incorporated by reference in this prospectus and any accompanying supplement to
this prospectus. You must not rely upon any information or representation not
contained or incorporated by reference in this prospectus or any accompanying
prospectus supplement. This prospectus and any accompanying supplement to this
prospectus do not constitute an offer to sell or the solicitation of an offer
i
to buy any securities other than the registered securities to which they relate,
nor do this prospectus and any accompanying supplement to this prospectus
constitute an offer to sell or the solicitation of an offer to buy securities in
any jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction. The information contained in this prospectus
and any supplement to this prospectus is accurate as of the date on their
respective covers. When a selling securityholder delivers this prospectus or a
supplement or makes a sale pursuant to this prospectus or a supplement, neither
we nor the selling securityholder are implying that the information is current
as of the date of the delivery or sale.
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ii
SUMMARY
This summary contains basic information about us and this offering. Because
it is a summary, it does not contain all of the information that you should
consider before investing. You should read this entire prospectus (and any
prospectus supplement) carefully and the information we incorporate by reference
into it, including the section entitled "Risk Factors," before making an
investment decision.
COMPANY OVERVIEW
We are a leading provider of seismic acquisition imaging technology for
exploration, production and reservoir monitoring in land and marine as well as
shallow water and marsh environments. We offer a full suite of related products
and services for seismic data acquisition and processing, including products
incorporating traditional analog technologies and products incorporating our
proprietary VectorSeis and True Digital technology.
Our VectorSeis platform is based on a multi-component digital sensor
incorporating a unique micro-electro-mechanical systems (MEMS) based
accelerometer, or measuring device, that we design and manufacture. MEMS are
micromachined mechanical and electromechanical elements, sensors and electronics
integrated on a single silicon chip using techniques similar to traditional
integrated circuit process technology. Each of our MEMS-based accelerometers is
then combined with a specially designed application-specific integrated circuit
(ASIC) microchip that converts analog signals from the MEMS accelerometer into
digital signals, thereby becoming a digital "sensor." Each combined MEMS
accelerometer/ASIC emits a signal, or "component," and three of them are mounted
on one element, which we refer to as multi-component digital sensors. Compared
to traditional seismic technologies, we believe that our VectorSeis platform
offers improved seismic data quality and operational efficiency and the
potential to substantially improve finding and development economics.
Our data acquisition products are well suited for both traditional
three-dimensional (3-D) and four-dimensional (4-D) data collection techniques,
as well as for more advanced multi-component data collection techniques. Based
on historical revenues, we believe that we are a market leader in numerous
product lines, such as geophones, vibrators and marine positioning systems. We
face strong competition from other established companies, and for certain mature
product lines within the land imaging segment our historical revenues indicate
that a competitor of ours currently holds greater market share. Nevertheless, we
intend to be the leading company in delivering cost-effective imaging technology
that we believe will improve exploration and production economics for the energy
industry.
INDUSTRY OVERVIEW
Oil and gas companies have traditionally used seismic data to reduce
exploration risk by creating an image of the subsurface. Typically, an oil and
gas company will contract with a geophysical contracting company to acquire data
in a selected area. After collection, either the geophysical contractor or
another data processor will process the data with algorithms designed to create
an image. Finally, a geoscientist interprets the data by reviewing the image and
integrating known facts about the surrounding geology.
Two principal factors have affected demand for seismic data by oil and gas
companies in recent years: the maturation of 3-D data collection technology and
the business model adopted by geophysical contractors to leverage large fixed
investments in equipment. Advances in computing power made commercial collection
of 3-D seismic data possible in the 1980s. Oil and gas companies reacted to the
availability of 3-D data by sharply increasing demand for seismic data during
the 1990s. Without further advances in imaging technology, however, oil and gas
companies do not have a compelling reason to continue purchasing seismic surveys
at the same high rate. Much of the demand for conventional analog 3-D seismic
surveys currently comes from areas where use of the technology was not quickly
adopted, such as China and the Commonwealth of Independent States (CIS). In an
effort to achieve higher utilization of large investments in equipment needed to
conduct a 3-D survey, geophysical contractors increasingly began to collect
speculative surveys for their own account. Contractors typically selected an
area and acquired data using generic acquisition parameters and generic
processing algorithms. The contractors capitalized the costs of their data
acquisitions and sold the survey
1
results to multiple partners. The availability of data collected by geophysical
contractors in speculative surveys has contributed to an oversupply of seismic
data. Additionally, since contractors incurred most of the costs of speculative
seismic data at the time of acquisition, contractors continue to lower prices to
recover as much of the fixed investment as possible.
Despite the widespread availability of 3-D seismic data, oil and gas
companies continue to seek improvement in image quality in order to identify
promising drilling prospects. Generic surveys using conventional analog 3-D
acquisition technology and generic processing algorithms can present general
subsurface spatial relationships, but these techniques cannot address the
increasingly complex reservoir interpretive issues faced by oil and gas
companies. We believe the adoption of new technologies that can address
characteristics of more complicated reservoirs should stimulate oil and gas
companies to shoot new surveys. Exploration and production companies also
require partners who can design surveys to address specific problems and apply
technologies that account for the differences of the geology in a particular
area. With the limitations of traditional analog technologies, lithology and
fluid properties remain challenges. Digital sensors allow collection of higher
quality seismic data and allow collection of new measurements that enable a
clearer subsurface image.
Oil and gas companies are increasingly using seismic data to enhance
production of known fields as well as explore for new reservoirs. By repeating a
seismic survey over a defined area, oil and gas companies can detect untapped
areas of a reservoir and adjust their drilling program to optimize production.
Time-lapsed seismic images are referred to as "four-dimensional" surveys.
Four-dimensional surveys make seismic data relevant to the entire life of a
reservoir from exploration to development to production to closure. However, for
results to be valid, 4-D surveys require data to be collected in the same spot
on multiple occasions. In marine environments where data is collected by towing
large streamers containing sensors, repeatability is a challenge and oil and gas
companies are demanding better positioning equipment that ensures proper
placement of the streamer.
CURRENT ATTRIBUTES
We believe our strengths include the following:
A Leader in Seismic Imaging Technology. We believe that our technology is
central to the next generation of seismic data acquisition and processing. Our
proprietary technologies include our:
- VectorSeis digital sensors, which allow full wave data acquisition on
land, on the seabed and in-well, and which have been proven effective in
over 60 field surveys;
- Processing services incorporating our proprietary AZIM technology which,
when combined with VectorSeis data, result in advanced seismic imaging;
and
- DigiCourse positioning technology which supports highly accurate and
repeatable surveys in marine applications.
Experienced Management. Our executive management team has extensive
industry experience in the seismic technology and services industry. In April
2003, Robert P. Peebler became our chief executive officer after serving as a
member of our Board of Directors since 1999. Mr. Peebler has over 30 years
experience in the oil and gas industry, during most of which time he has focused
on recognizing and commercializing new technology to enhance hydrocarbon
exploration and production. To help lead the implementation of our seismic
imaging-based strategy, Mr. Peebler has recruited several new senior executives
to augment our management team, including Jorge Machnizh, Executive Vice
President and Chief Operating Officer, J. Michael Kirksey, Executive Vice
President and Chief Financial Officer, Chris Friedemann, Vice President --
Commercial Development, and Jim Hollis, Vice President -- Land Imaging Systems.
In addition, Bjarte Fageras, formerly our Vice President -- Chief Technology
Officer, has become Vice President of our Marine Imaging Systems Division.
Strategic Alliances with Oil Companies. In October 2003, we entered into a
memorandum of understanding to form a strategic seismic technology alliance with
Apache Corporation, a leading independent
2
oil and gas exploration and production company. This proposed partnership is
designed to accelerate the adoption of our VectorSeis and AZIM technologies
while solving some of the more complex reservoir problems in Apache's global
portfolio. We are pursuing similar strategic alliances with other oil and gas
exploration and production companies.
Operating Efficiencies. We have reduced our headcount by 40% since the
beginning of 2002 by closing five facilities, outsourcing a broad range of
operations and combining several business units. Outsourcing, in particular, has
enabled us to reduce our fixed costs and to enhance our manufacturing
efficiency. Overall, we believe these changes will enable us to improve our
gross margins, increase both our operating and net income and enhance our cash
flows.
Despite these strengths, we continue to face a number of serious challenges
in our business. We experienced operating losses for the years ended December
31, 2003 and 2002, the seven months ended December 31, 2000, and the years ended
May 31, 2000 and 1999. As of December 31, 2003, we had an accumulated deficit of
approximately $159.7 million. A number of factors have contributed to our
operating losses, including a downturn in the seismic equipment market,
significant charges related to our restructuring activities and research and
development expenditures. Furthermore, our business is subject to numerous
risks. For example, because our current strategy depends on market acceptance
for our VectorSeis products, any actual or perceived failures in system
reliability of those products would negatively impact our sales and our results
of operations. In addition, our reliance on a relatively small number of
significant customers exposes us to risks related to customer concentration. For
a discussion of the risks related to our business, please see "Risk Factors"
beginning on page 6.
OUR STRATEGY
Our goal is to provide the seismic imaging industry with the next
generation of sensors and image processing technology that will enable oil and
gas companies to cost-effectively find and manage reservoirs throughout the
discovery and production life cycle. We intend to do this by building on our
current technology platforms through both internal development and selective
acquisitions. In addition, we intend to use our technology to drive down the
cost of seismic surveys by replacing labor-intensive processes with more
efficient systems. Specifically, we intend to:
Lead the Next Generation of Seismic Imaging Technology. The oil and gas
industry has largely realized the benefits of current seismic imaging
technology, which provides a basic 3-D image of oil and gas reservoirs on land
and beneath the seabed. Our VectorSeis sensor captures significantly greater
data during the seismic imaging process. We intend to use this advanced
technology in combination with our AZIM family of data processing techniques to
provide more detailed images of oil and gas reservoirs. Without these more
detailed images, we believe that oil and gas companies will not be able to
produce as cost-effectively from the deeper and more geologically complex fields
where they are increasingly working.
Provide High-End Seismic Imaging Services. The reservoir discovery and
management process has grown increasingly challenging due to more complex
structures and greater depths. We intend to provide oil and gas companies with
higher value consulting and processing services on a more collaborative basis
throughout the entire planning, processing and image interpretation cycle. We
purchased AXIS Geophysics, Inc. (AXIS) in 2002 to provide us with a technology
and services platform to realize this strategy. We expect AXIS to enjoy rapid,
high-margin growth over the next several years, and to provide us with a new
source of revenue from oil and gas companies.
Extend our Seismic Imaging Solutions Across the Full Reservoir Life
Cycle. In the past, seismic imaging has mainly been used to determine whether
and where to drill the next well, but has not been used routinely in production
operations. By comparing detailed images of the same reservoir at different
points in time, oil and gas companies can enhance production from a given
reservoir. We intend to aggressively work with oil and gas companies to assist
them in using our advanced seismic imaging technology to increase overall
production throughout the life of the reservoir.
3
Make Selective Acquisitions. We intend to pursue selective acquisitions of
products and services that accelerate the adoption of our advanced seismic
imaging products and services through complementary technologies. We seek to
acquire and integrate technologies and services that will expand our ability to
provide next generation imaging services and products directly to oil and gas
companies throughout the life of a reservoir. We will continue to identify,
evaluate and pursue acquisitions of products, services and organizations that
are strategically important to us and our growth strategy. In February 2004, we
announced our acquisition of Concept Holdings Systems Limited. See "Recent
Developments" below.
Expand our Strategic Alliances. We intend to pursue strategic alliances
with oil and gas exploration and production companies, which we believe will
enable us to more effectively influence the types of equipment that seismic
contractors purchase from us. These alliances will also provide us with the
opportunity to directly market our consulting and processing services for use
throughout the reservoir life cycle. Working directly with oil and gas companies
will also provide us with valuable feedback for our product development efforts.
Our alliance with Apache Corporation is the first of these strategic alliances
that we are working towards.
RECENT DEVELOPMENTS
On February 24, 2004, we announced that we had purchased all of the share
capital of Concept Holdings System Limited (Concept), a private limited company
incorporated in Scotland, in a privately negotiated transaction. Concept, based
in Edinburgh, is a provider of software, systems and services for towed
streamer, seabed and land seismic operations. The total purchase price was
approximately US$36 million cash and 1,680,000 shares of our common stock. On
February 23, 2004, the closing price per share of our common stock on the New
York Stock Exchange was $6.41. The cash used to acquire Concept was primarily
from the proceeds from our notes offering completed in December 2003 and from
general corporate funds. A portion of the cash component of the purchase price
was used to pay down certain outstanding debt of Concept totaling approximately
US$26 million. Under a registration rights agreement dated February 23, 2004, we
granted to former Concept securityholders certain demand and piggyback
registration rights for the shares of our common stock issued in the
transaction.
4
SUMMARY OF NOTES
Securities Offered............ $60,000,000 principal amount of 5.50%
Convertible Senior Notes due 2008.
Maturity Date................. December 15, 2008
Interest...................... 5.50% per annum on the principal amount,
payable semi-annually in arrears in cash on
June 15 and December 15 of each year, beginning
June 15, 2004.
Conversion.................... You may convert the notes into shares of our
common stock at a conversion rate of 231.4815
shares per $1,000 principal amount of notes (a
conversion price of $4.32), subject to
adjustment prior to the close of business on
the final maturity date. The conversion price
can only be decreased for certain dilutive
events; as a result, the terms of the notes do
not require a beneficial conversion feature to
be recorded for financial accounting purposes.
Redemption.................... The notes will not be redeemable by us prior to
maturity.
Designated Event.............. If a designated event (as described under
"Description of Notes -- Repurchase at Option
of the Holder Upon a Designated Event") occurs
prior to maturity, you may require us to
repurchase all or part of your notes at a
repurchase price equal to 100% of their
principal amount, plus accrued and unpaid
interest, and liquidated damages, if any, to,
but excluding, the repurchase date.
Use of Proceeds............... We will not receive any of the proceeds from
the sale by any selling securityholder of the
notes or the shares of common stock issuable
upon conversion of the notes. See "Use of
Proceeds" on page 21.
Ranking....................... The notes are senior unsecured indebtedness of
I/O and rank on a parity with all of our other
existing and future senior unsecured debt and
prior to any subordinated debt. Except for
outstanding obligations under our
sale-leaseback arrangements described below, as
of December 31, 2003, we had approximately $2.4
million of other senior unsecured debt
outstanding that ranked on a parity with the
notes. However, the notes are effectively
junior to all future obligations of our
subsidiaries; as of December 31, 2003, our
subsidiaries had no outstanding indebtedness.
As of December 31, 2003, we had approximately
$18.8 million of obligations outstanding under
certain sale-leaseback arrangements that are
effectively senior to the notes to the extent
of the leased assets.
Trading....................... The notes are new securities for which no
market currently exists. While the initial
purchaser has informed us that it intends to
make a market in the notes, it is under no
obligation to do so and may discontinue such
activities at any time without notice. The
notes will not be listed on any securities
exchange or included in any automated quotation
system. While the notes are designated for
trading in The PORTAL Market, we cannot assure
you that any active or liquid market will
develop for the notes.
New York Stock Exchange Symbol
for our Common Stock.......... IO.
5
RISK FACTORS
- You should carefully consider the risks described below before making an
investment decision. The risks described below are not the only ones facing
our company. Additional risks not presently known to us or that we currently
deem immaterial may also impair our business operations.
- Our business, financial condition or results of operations could be materially
adversely affected by any of these risks. The trading price of the notes and
our common stock could decline due to any of these risks, and you may lose all
or part of your investment.
- This prospectus, including the documents it incorporates by reference, also
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including the risks
faced by us described below and elsewhere in this prospectus.
RISKS RELATED TO OUR BUSINESS AND OUR COMMON STOCK
WE MAY NOT GAIN RAPID MARKET ACCEPTANCE FOR OUR VECTORSEIS PRODUCTS, WHICH
COULD MATERIALLY AND ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL
CONDITION.
We have spent considerable time and capital developing our VectorSeis
products line. Because VectorSeis products rely on a new digital sensor, our
ability to sell our VectorSeis products will depend on acceptance of our digital
sensor and technology solutions by geophysical contractors and exploration and
production companies. If our customers do not believe that our digital sensor
delivers higher quality data with greater operational efficiency, our results of
operations and financial condition will be materially and adversely affected.
System reliability is an important competitive consideration for seismic
data acquisition systems. Even though we attempt to assure that our systems are
always reliable in the field, the many technical variables related to operations
can cause a combination of factors that can and have from time to time caused
service issues with our analog products. If our customers believe that our
analog products have reliability issues, then those customers may delay
acceptance of our new products and reduce demand for our analog products. Our
business, our results of operations and our financial condition, therefore, may
be materially and adversely affected.
While we believe that our new VectorSeis System Four land data acquisition
system has made significant improvements in both field troubleshooting and
reliability compared to our legacy systems, products as complex as this system,
however, sometimes contain undetected errors or bugs when first introduced.
Despite our testing program, these undetected errors 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. Errors may be found in future releases of
our products, and these errors could impair the market acceptance of our
products. If our customers do not accept our new products as rapidly as we
anticipate, our business, our results of operations and our financial condition
may be materially and adversely affected.
THE LOSS OF ANY SIGNIFICANT CUSTOMER COULD MATERIALLY AND ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
We rely on a relatively small number of significant customers.
Consequently, our business is exposed to the risks related to customer
concentration. In 2002, two of our largest customers, Western-Geco and
Laboratory of Regional Geo-Dynamics Limited, were responsible for approximately
11% and 10%, respectively, of our consolidated net sales. In 2003, BGP, an
international seismic contractor and subsidiary of the China National Petroleum
Corporation (BGP), accounted for approximately 28% of our consolidated net
sales. The loss of any of our significant customers or a deterioration in our
relations with any of them could materially and adversely affect our results of
operations and financial condition.
6
OUR BUSINESS REORGANIZATION AND FACILITIES CLOSURE PLANS MAY NOT YIELD THE
BENEFITS WE EXPECT AND COULD HARM OUR FINANCIAL CONDITION, REPUTATION AND
PROSPECTS.
We have significantly reduced our corporate and operational headcount,
closed certain manufacturing facilities and combined certain of our business
units. These activities may not yield the benefits we expect, and may raise
product costs, delay product production, result in or exacerbate labor
disruptions and labor-related legal actions against us, and create
inefficiencies in our business. In addition, if the markets for our products do
not improve, we will take additional restructuring actions to address these
market conditions. Any such additional actions could result in additional
restructuring charges.
IF WE FAIL TO IMPLEMENT OUR BUSINESS STRATEGY, OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS COULD BE MATERIALLY AND ADVERSELY AFFECTED.
Our future financial performance and success are dependent in large part
upon our ability to successfully implement our business strategy to introduce
new seismic technologies, and to reduce costs through outsourcing manufacturing
and certain research and development activities. We cannot assure you that we
will be able to successfully implement our business strategy or be able to
improve our operating results. In particular, we cannot assure you that we will
be able to stimulate sufficient demand for our VectorSeis products, our AZIM
processing services or our traditional analog product line, to execute our
growth strategy (including acquisitions) or to sufficiently reduce our costs to
achieve required efficiencies. Our strategic direction also may give rise to
unforeseen costs, which could wholly or partially offset any expense reductions
or other financial benefits we attain as a result of the changes to our
business.
We are in the process of evaluating and may, from time to time in the
future, evaluate the acquisition of assets or operations that complement our
existing businesses. We cannot estimate what impact, if any, our acquisition of
these assets or operations may have on our business.
Furthermore, we cannot assure you that we will be successful in our
acquisition efforts or that we will be able to effectively manage expanded or
acquired operations. Our ability to achieve our acquisition or expansion
objectives and to effectively manage our growth depends on a number of factors,
including:
- our ability to identify appropriate acquisition targets and to negotiate
acceptable terms for their acquisition;
- our ability to integrate new businesses into our operations; and
- the availability of capital on acceptable terms.
Our business strategy may require additional funding, which may be provided
in the form of additional debt, equity financing or a combination thereof. We
cannot assure you that we will be able to obtain this financing, and if so, on
advantageous terms and conditions.
Implementation of our business strategy could be affected by a number of
factors beyond our control, such as increased competition, general economic
conditions or increased operating costs. Any failure to successfully implement
our business strategy could materially and adversely affect our financial
condition and results of operations. We may, in addition, decide to alter or
discontinue certain aspects of our business strategy at any time.
TECHNOLOGIES AND BUSINESSES THAT WE ACQUIRE MAY BE DIFFICULT TO INTEGRATE,
DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE OR DIVERT MANAGEMENT ATTENTION.
An important aspect of our current business strategy is to seek new
technologies, products and businesses to broaden the scope of our existing and
planned product lines and technologies. While we intend to focus on acquisitions
that complement our technologies and our general business strategy, there can be
no assurance that we will be successful in locating such acquisitions or that
any completed acquisition will achieve the expected benefit.
7
In addition, an acquisition may result in unexpected costs, expenses and
liabilities. For example, during 2002, we acquired certain assets of S/N
Technologies and, in April 2003, we invested $3.0 million in Energy Virtual
Partners. These transactions were not successful, and we have since completely
written down the costs of the assets we purchased from S/N Technologies and have
written down our investment in Energy Virtual Partners to its approximate
liquidation value of $1.0 million.
Our ability to achieve our expansion and acquisition objectives will also
depend on the availability of capital on acceptable terms. Our combined
businesses resulting from any acquisitions may not be able to generate
sufficient operating cash flows in order for us to obtain additional financing
or fund our acquisition strategy.
Acquisitions expose us to:
- increased costs associated with the acquisition and operation of the new
businesses or technologies and the management of geographically dispersed
operations;
- risks associated with the assimilation of new technologies, operations,
sites and personnel;
- the possible loss of key employees;
- risks that any technology we acquire may not perform as well as we had
anticipated;
- the diversion of management's attention and other resources from existing
business concerns;
- the potential inability to replicate operating efficiencies in the
acquired company's operations;
- the inability to generate revenues to offset associated acquisition
costs;
- the continuing need to maintain uniform standards, controls, and
procedures;
- the impairment of relationships with employees and customers as a result
of any integration of new and inexperienced management personnel; and
- the risk that acquired technologies do not provide us with the benefits
we anticipated.
The identification of suitable acquisition candidates can be difficult,
time-consuming and costly, and we may not be able to successfully complete
identified potential acquisitions. Integration of acquired businesses require
significant efforts from each entity, including coordinating existing business
plans and research and development efforts. Integrating operations may distract
management's attention from the day-to-day operation of the combined companies.
If we are unable to successfully integrate the operations of acquired
businesses, our future results will be negatively impacted.
Acquisitions may also result in the issuance of dilutive equity securities,
the incurrence or assumption of debt and additional expenses associated with the
amortization of acquired intangible assets or potential businesses. There is no
assurance that past or future acquisitions will generate additional income, cash
flows or provide any benefit to our business.
WE HAVE DEVELOPED OUTSOURCING ARRANGEMENTS WITH THIRD PARTIES TO MANUFACTURE
SOME OF OUR PRODUCTS. IF THESE THIRD PARTIES FAIL TO DELIVER QUALITY PRODUCTS
OR COMPONENTS AT REASONABLE PRICES ON A TIMELY BASIS, WE MAY ALIENATE SOME OF
OUR CUSTOMERS AND OUR REVENUES, PROFITABILITY AND CASH FLOW MAY DECLINE.
As part of our strategic direction, we are increasing our use of contract
manufacturers as an alternative to our own manufacture of products. If, in
implementing this initiative, we are unable to identify contract manufacturers
willing to contract with us on competitive terms and to devote adequate
resources to fulfill their obligations to us or if we do not properly manage
these relationships, our existing customer relationships may suffer. In
addition, by undertaking these activities, we run the risk that the reputation
and competitiveness of our products and services may deteriorate as a result of
the reduction of our control over quality and delivery schedules. We also may
experience supply interruptions, cost escalations and competitive disadvantages
if our contract manufacturers fail to develop, implement, or maintain
manufacturing methods appropriate for our products and customers.
8
If any of these risks are realized, our revenues, profitability and cash
flow may decline. In addition, as we come to rely more heavily on contract
manufacturers, we may have fewer personnel resources with expertise to manage
problems that may arise from these third-party arrangements.
THE CURRENT OVERSUPPLY OF SEISMIC DATA AND DOWNWARD PRICING PRESSURES HAS, AND
MAY CONTINUE TO, ADVERSELY AFFECT OUR OPERATIONS AND SIGNIFICANTLY REDUCE OUR
OPERATING MARGINS AND INCOME.
The current industry-wide oversupply of speculative surveys conducted and
collected by geophysical contractors, and their practice of lowering prices to
their customers for these surveys in order to recover investments in assets used
to conduct 3-D surveys, has in recent years adversely affected our results of
operations and financial condition. Particularly during periods of reduced
levels of exploration for oil and gas, the oversupply of seismic data and
downward pricing pressures limit our ability to meet sales objectives and
maintain profit margins for our products and sustain growth of our business.
These industry conditions have reduced, and if continued into the future, will
reduce, our revenues and operating margins.
OIL AND GAS COMPANIES AND GEOPHYSICAL CONTRACTORS WILL REDUCE DEMAND FOR OUR
PRODUCTS AND SERVICES IF THE LEVEL OF EXPLORATION EXPENDITURES CONTINUES TO
REMAIN RELATIVELY LOW.
Historically, demand for our products has been 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. Prolonged
reductions in oil and gas prices will generally depress the level of exploration
activity and correspondingly depress demand for our products and services. A
prolonged downturn in market demand for our products or services will have a
material adverse effect on our results of operations and financial condition.
Additionally, we cannot assure you that increases in oil and gas prices will
increase demand for our products and services or otherwise have a positive
effect on our results of operations or financial condition.
Factors affecting the prices of oil and gas include:
- level of demand for oil and gas;
- worldwide political, military and economic conditions, including the
ability of the Organization of Petroleum Exporting Countries (OPEC) to
set and maintain production levels and prices for oil;
- level of oil and gas production;
- government policies regarding the exploration for, and production and
development of, oil and gas reserves in their jurisdictions; and
- global weather conditions.
The markets for oil and gas historically have been volatile and are likely
to continue to be so in the future.
WE HAVE A HISTORY OF OPERATING LOSSES AND WE MAY HAVE LOSSES IN THE FUTURE.
As of and for the year ended December 31, 2003, we had:
- an accumulated deficit of approximately $159.7 million; and
- incurred operating losses of $21.3 million and net loss of $23.2 million.
We also had operating losses and net losses for the years ended December
31, 2002, the seven months ended December 31, 2000 and the year ended May 31,
2000. While we intend to increase revenues, operating income and net income
through acquisitions and internal growth, there can be no assurance we will be
successful and our business and financial condition could be materially and
adversely affected.
9
WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH TO FUND OUR OPERATIONS AND FUTURE
ACQUISITIONS. WE MAY HAVE DIFFICULTY RAISING NEEDED CAPITAL IN THE FUTURE.
We became significantly more leveraged after the consummation of the
offering of the notes. As of December 31, 2003, our outstanding indebtedness was
$81.2 million. As a result, our interest expense is expected to increase for
2004 and in the foreseeable future. In addition, we presently estimate that our
capital expenditures for plant, property and equipment for 2004 will be
approximately $5.8 million and that we will need approximately $28.0 million to
meet our contractual obligations in 2004. Moreover, we have expended and will
continue to expend substantial funds to complete the research, development and
testing of our products and services. We will require additional funds for these
purposes, to establish additional manufacturing arrangements and to provide for
the marketing of our products and services.
We have typically financed operations from internally generated cash and
funds from equity and debt financings. Our cash and cash equivalents decreased
$16.7 million, or 22%, from December 31, 2002 to December 31, 2003. This
decrease was primarily due to net cash used in operating activities of $33.1
million and the payment of $31.0 million of indebtedness under an unsecured
promissory note payable to SCF-IV, L.P. (SCF) scheduled to mature in May 2004
(the SCF Note). These factors were partially offset by $56.5 million of net
proceeds from the notes offering. The net cash used in operating activities was
mainly due to the loss from operations for the year, an increase in accounts and
notes receivables, an increase in our inventory and a decrease in our accounts
payable and accrued expenses. The increase in our accounts receivable was
primarily due to a continued shift in our sales to foreign customers, which
historically have been slower to pay. Our cash and cash equivalents also
decreased approximately 24% from December 31, 2001 to December 31, 2002.
There is increasing risk that our collections cycle will further lengthen
as we anticipate a larger percentage of our sales will be to foreign customers,
particularly in China and the CIS.
We cannot assure you that our sources of cash will be sufficient to meet
our anticipated future capital requirements. We used a substantial portion of
the proceeds from the sale of the notes to repay in full the approximately $16.0
million of remaining outstanding indebtedness under the SCF Note and we used a
total of $36 million cash from such proceeds and from our general corporate
funds for the Concept acquisition in February 2004. As a result, the proceeds
from the offering of the notes are not available to fund our future capital
requirements and contractual obligations. Additional funds may not be available
on acceptable terms, if at all. If adequate funds are unavailable from
operations or additional sources of financing, we might be forced to reduce or
delay acquisitions or capital expenditures, sell assets, reduce operating
expenses, refinance all or a portion of our debt, or delay or reduce important
initiatives, such as marketing programs and research or development programs.
In addition, we may seek to raise any necessary additional funds through
equity or debt financings, convertible debt financing, alliance arrangements
with corporate partners or other sources, which may be dilutive to existing
stockholders and may cause the price of our common stock to decline.
WE DERIVE A SUBSTANTIAL AMOUNT OF OUR REVENUES FROM FOREIGN SALES, WHICH POSE
ADDITIONAL RISKS.
Sales to destinations outside of North America accounted for approximately
77% of our consolidated net sales for the year ended December 31, 2003, and we
believe that export sales will remain a significant percentage of our revenue.
United States export restrictions affect the types and specifications of
products we can export. Additionally, to complete certain sales, United States
laws may require us to obtain export licenses, and we cannot assure you that we
will not experience difficulty in obtaining these licenses. Operations and sales
in countries other than the United States are subject to various risks peculiar
to each country. With respect to any particular country, these risks may
include:
- expropriation and nationalization;
- political and economic instability;
- armed conflict and civil disturbance;
10
- currency fluctuations, devaluations and conversion restrictions;
- confiscatory taxation or other adverse tax policies;
- tariff regulations and import/export restrictions;
- governmental activities that limit or disrupt markets, or restrict
payments or the movement of funds; and
- governmental activities that may result in the deprivation of contractual
rights.
There is increasing risk that our collections cycle will further lengthen
as we anticipate a larger percentage of our sales will be to foreign customers,
particularly those in China and the CIS.
The majority of our foreign sales are denominated in United States dollars.
An increase in the value of the dollar relative to other currencies will make
our products more expensive, and therefore less competitive, in foreign markets.
In addition, we are subject to taxation in many jurisdictions and the final
determination of our tax liabilities involves the interpretation of the statutes
and requirements of taxing authorities worldwide. Our tax returns are subject to
routine examination by taxing authorities, and these examinations may result in
assessments of additional taxes, penalties and/or interest.
THE RAPID PACE OF TECHNOLOGICAL CHANGE IN THE SEISMIC INDUSTRY REQUIRES US TO
MAKE SUBSTANTIAL RESEARCH AND DEVELOPMENT 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 a 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, our results of operations
and financial condition will be materially and adversely affected.
COMPETITION FROM SELLERS OF SEISMIC DATA ACQUISITION SYSTEMS AND EQUIPMENT IS
INTENSIFYING AND COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL
CONDITION.
Our industry is highly competitive. Our competitors have been consolidating
into better-financed companies with broader product lines. Certain 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. Our
ability to compete effectively in the manufacture and sale of seismic
instruments and data acquisition systems depends principally upon continued
technological innovation, as well as our reputation for quality, our ability to
deliver on schedule and price.
Our competitors have expanded or improved their product lines, which has
adversely affected our results of operations. One competitor has introduced a
lightweight land seismic system that we believe has made our current land system
more difficult to sell at acceptable margins. In addition, another competitor
introduced a marine solid streamer product that competes with our oil-filled
towed streamer product. Streamers are towed behind marine vessels to acquire
seismic data in marine environments and can either be solid or oil-filled. Our
net sales of marine streamers have been, and will continue to be, adversely
affected by customer preferences for solid products. In May 2003, we decided to
cancel our internal project to develop a solid streamer product.
FURTHER CONSOLIDATION AMONG OUR SIGNIFICANT CUSTOMERS COULD MATERIALLY AND
ADVERSELY AFFECT US.
Historically, a relatively small number of customers has accounted for the
majority of our net sales in any period. In recent years, our customers have
been rapidly consolidating, shrinking the demand for our products. The loss of
any of our significant customers to further consolidation could materially and
adversely affect our results of operations and financial condition.
11
LARGE FLUCTUATIONS IN OUR SALES AND GROSS MARGINS CAN RESULT IN OPERATING
LOSSES.
As our products 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 compound 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 margins. 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 not all of our expenses vary with
our revenues.
WRITE-OFFS RELATED TO THE IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER NON-CASH
CHARGES MAY ADVERSELY IMPACT OR DELAY OUR PROFITABILITY.
We may incur significant non-cash charges related to impairment write-downs
of our long-lived assets, including goodwill and other intangible assets. In
accordance with Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, we recorded an impairment charge of $15.1
million in 2002 relating to our analog land products reporting unit. Also, in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," we recorded an impairment charge relating to other
long-lived assets of $6.3 million in 2002 (relating to the impairment of our
Alvin, Texas manufacturing facility, the leasehold improvements in our Norwich,
U.K. geophone stringing facility and certain related manufacturing equipment at
both facilities) and $1.1 million in 2003 (relating to the cancellation of our
solid streamer project within our Marine Imaging segment in the first quarter of
2003).
We will continue to incur non-cash charges related to amortization of other
intangible assets. We are required to perform periodic impairment reviews of our
goodwill at least annually. To the extent these reviews conclude that the
carrying value of our goodwill exceeds its implied fair value, we will be
required to record an impairment charge to write down our goodwill to its
implied fair value. Also, we periodically evaluate the net realizable values of
our other long-lived assets. To the extent these reviews conclude that the
expected future cash flows generated from our business activities are not
sufficient to recover the cost of our other long-lived assets, we will be
required to measure and record an impairment charge to write down these assets
to their net realizable values. We will conduct our annual goodwill assessment
in the fourth quarter. We cannot assure you that upon completion of this and
subsequent reviews, a material impairment charge will not be recorded. If this
and future periodic reviews determine that our assets are impaired and a write
down is required, it will adversely impact or delay our profitability.
OUR OUTSOURCING RELATIONSHIPS MAY REQUIRE US TO PURCHASE INVENTORY WHEN DEMAND
FOR PRODUCTS PRODUCED BY THIRD-PARTY MANUFACTURERS IS LOW.
Under a few of our outsourcing arrangements, our manufacturing outsourcers
purchase agreed-upon inventory levels to meet our forecasted demand. Since we
typically operate without a significant backlog of orders for our products, our
manufacturing plans and inventory levels are principally based on sales
forecasts. If demand proves to be less than we originally forecasted, these
manufacturing outsourcers have the right to
12
require us to purchase any excess or obsolete inventory. Should we be required
to purchase inventory under these provisions, we may have to hold inventory that
we may never utilize.
To date, we have not been required to purchase any fixed amount of excess
inventory under our outsourcing arrangements, and we have no existing obligation
to purchase any such fixed amount of excess inventory. We are in the process of
revising our sales forecasting techniques with our outsourcers, providing
short-term forecasts (usually less than three months) rather than long-term
forecasts, which should mitigate the risk that we will significantly
overestimate our inventory needs from these outsourcers.
WE MAY BE UNABLE TO OBTAIN BROAD INTELLECTUAL PROPERTY PROTECTION FOR OUR
CURRENT AND FUTURE PRODUCTS AND WE MAY BECOME INVOLVED IN INTELLECTUAL PROPERTY
DISPUTES.
We rely on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary technologies. We believe that the technological and creative skill
of our employees, new product developments, frequent product enhancements, name
recognition and reliable product maintenance are the foundations of our
competitive advantage. Although we have a considerable portfolio of patents,
copyrights and trademarks, these property rights offer us only limited
protection. Our competitors may attempt to copy aspects of our products despite
our efforts to protect our proprietary rights, or may design around the
proprietary features of our products. Policing unauthorized use of our
proprietary rights is difficult, and we are unable to determine the extent to
which such use occurs. Our difficulties are compounded in certain foreign
countries where the laws do not offer as much protection for proprietary rights
as the laws of the United States.
Third parties inquire and claim from time to time that we have infringed
upon their intellectual property rights. Any such claims, with or without merit,
could be time consuming, result in costly litigation, result in injunctions,
require product modifications, cause product shipment delays or require us to
enter into royalty or licensing arrangements. Such claims could have a material
adverse affect on our results of operations and financial condition.
As of the date of this prospectus, we are not aware of any parties that
intend to pursue intellectual property claims against us.
SIGNIFICANT PAYMENT DEFAULTS UNDER EXTENDED FINANCING ARRANGEMENTS COULD
ADVERSELY AFFECT US.
We often sell to customers on payment terms other than cash on delivery. We
allow many of our customers to finance substantial purchases of our products
through the issuance to us of promissory notes. The terms of these promissory
notes initially range from eight months to five years. As of December 31, 2003,
we had outstanding accounts receivable of approximately $34.3 million and notes
receivable of approximately $20.8 million. Significant payment defaults by
customers could have a material adverse effect on our results of operations and
financial condition.
Approximately $9.7 million of our total notes receivable at December 31,
2003 related to one Russian customer. During 2003, this customer became
delinquent on approximately $0.8 million of its scheduled principal and interest
payments, in addition to becoming delinquent on $1.8 million of its trade
receivables. In January 2004, we refinanced the delinquent portion of its notes
and accounts receivable into a new note totaling $2.6 million, with payments due
in equal installments over a twelve month period.
With respect to customer defaults, our levels of expense for loan loss in
recent years have been as follows:
EXPENSE FOR LOAN LOSS
PERIOD ENDED (IN THOUSANDS)
------------ ---------------------
Year ended May 31, 2000..................................... $7,057
Seven months ended December 31, 2000........................ $1,305
Year ended December 31, 2001................................ $1,577
Year ended December 31, 2002................................ $ 158
Year ended December 31, 2003................................ --
13
OUR OPERATIONS, AND THE OPERATIONS OF OUR CUSTOMERS, ARE SUBJECT TO NUMEROUS
GOVERNMENT REGULATIONS, WHICH COULD ADVERSELY LIMIT OUR OPERATING FLEXIBILITY.
Our operations are subject to laws, regulations, government policies and
product certification requirements worldwide. Changes in such laws, regulations,
policies or requirements could affect the demand for our products or result in
the need to modify products, which may involve substantial costs or delays in
sales and could have an adverse effect on our future operating results. Our
export activities are also subject to extensive and evolving trade regulations.
Certain countries are subject to restrictions, sanctions and embargoes imposed
by the United States government. These restrictions, sanctions and embargoes
also prohibit or limit us from participating in certain business activities in
those countries. Our operations are subject to numerous local, state and federal
laws and regulations in the United States and in foreign jurisdictions
concerning the containment and disposal of hazardous materials, the remediation
of contaminated properties and the protection of the environment. These laws
have been changed frequently in the past, and there can be no assurance that
future changes will not have a material adverse effect on us. In addition, our
customers' operations are also significantly impacted by laws and regulations
concerning the protection of the environment and endangered species.
Consequently, changes in governmental regulations applicable to our customers
may reduce demand for our products. For instance, regulations regarding the
protection of marine mammals in the Gulf of Mexico may reduce demand for our
airguns and other marine products. To the extent that our customer's operations
are disrupted by future laws and regulations, our business and results of
operations may be materially and adversely affected.
DISRUPTION IN VENDOR SUPPLIES WILL ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Our manufacturing processes require a high volume of quality components.
Certain components used by us are currently provided by only one supplier. We
may, from time to time, experience supply or quality control problems with
suppliers, and these problems could significantly affect our ability to meet
production and sales commitments. Reliance on certain suppliers, as well as
industry supply conditions, generally involve several risks, including the
possibility of a shortage or a lack of availability of key components and
increases in component costs and reduced control over delivery schedules; any of
these could adversely affect our future results of operations.
OUR STOCK PRICE MAY FLUCTUATE, AND YOUR INVESTMENT IN OUR STOCK COULD DECLINE
IN VALUE.
The average daily trading volume of our common stock for the twelve months
ended December 31, 2003, was approximately 198,000 shares. The trading volume of
our stock may contribute to its volatility, and an active trading market in our
stock might not continue.
If substantial amounts of our common stock were to be sold in the public
market, the market price of our common stock could fall. Some of the other
factors that can affect our stock price are:
- future demand for seismic equipment and services;
- the announcement of new products, services or technological innovations
by us or our competitors;
- the adequacy of our liquidity and capital resources;
- consolidation among our significant customers;
- continued variability in our revenues or earnings;
- changes in quarterly revenue or earnings estimates for us made by the
investment community; and
- speculation in the press or investment community about our strategic
position, financial condition, results of operations, business or
significant transactions.
The market price of our common stock may also fluctuate significantly in
response to factors which are beyond our control. The stock market in general
has recently experienced extreme price and volume fluctuations. In addition, the
market prices of securities of technology companies have also been extremely
volatile, and have experienced fluctuations that often have been unrelated or
disproportionate to the operating
14
performance of these companies. These broad market fluctuations could result in
extreme fluctuations in the price of our common stock, which could cause a
decline in the value of our investors' stock.
OUR CERTIFICATE OF INCORPORATION, OUR BYLAWS, DELAWARE LAW AND OUR STOCKHOLDER
RIGHTS PLAN CONTAIN PROVISIONS THAT COULD DISCOURAGE ANOTHER COMPANY FROM
ACQUIRING US.
Provisions of Delaware law, our certificate of incorporation, bylaws and
stockholder rights plan may discourage, delay or prevent a merger or acquisition
that stockholders may consider favorable, including transactions in which you
might otherwise receive a premium for share of our common stock. These
provisions include:
- authorizing the issuance of "blank check" preferred stock without any
need for action by stockholders;
- providing for a dividend on our common stock, commonly referred to as a
"poison pill", which can be triggered after a person or group acquires,
obtains the right to acquire, or commences a tender or exchange offer to
acquire, 20% or more of our outstanding common stock;
- providing for a classified board of directors with staggered terms;
- requiring supermajority stockholder voting to effect certain amendments
to our certificate of incorporation and by-laws;
- eliminating the ability of stockholders to call special meetings of
stockholders;
- prohibiting stockholder action by written consent; and
- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
THE LOSS OF CERTAIN MEMBERS OF OUR SENIOR MANAGEMENT TEAM (MANY OF WHOM HAVE
ONLY RECENTLY JOINED OUR COMPANY) COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our success depends, in part, on the efforts of our senior management and
other key employees. These individuals possess sales, marketing, technical,
engineering, manufacturing and processing skills that are critical to executing
our business strategy. If we lose or suffer an extended interruption in the
services of one or more of our senior officers, our financial condition and
results of operations may be adversely affected. Moreover, the market for
qualified individuals may be highly competitive, and we may not be able to
attract and retain qualified personnel to replace or succeed members of our
senior management or other key employees, should the need arise.
While many members of our current senior management team have significant
experience working at various large corporations, with some of them working
together at those corporations, our senior management has had limited experience
working together at our company and implementing our current business strategy.
In April 2003, Robert P. Peebler became our chief executive officer after
serving as a member of our Board of Directors since 1999. To help lead the
implementation of our seismic imaging-based strategy, Mr. Peebler has recruited
several new senior executives to augment our management team, including Jorge
Machnizh, Executive Vice President and Chief Operating Officer, J. Michael
Kirksey, Executive Vice President and Chief Financial Officer, Chris Friedemann,
Vice President -- Commercial Development, and Jim Hollis, Vice President -- Land
Imaging Systems.
SALES (OR THE EXPECTATION OF SALES) OF SHARES OF OUR COMMON STOCK UNDER OUR
REGISTRATION RIGHTS AGREEMENTS MAY CAUSE THE MARKET PRICE OF OUR COMMON STOCK
TO DECLINE.
In addition to the underlying shares of our common stock issuable upon
conversion of the notes that are being offered by this prospectus, holders of
approximately 7,474,000 of our shares of common stock are subject to
registration rights, including the right to require us to register the sale of
their shares or the right to include their shares in secondary public offerings
we undertake in the future. These holders include Laitram L.L.C., which
beneficially owns approximately 10.9% of our common stock subject to piggyback
registration rights.
15
We also may enter into additional registration rights agreements in the future
in connection with any subsequent acquisitions we may undertake. Any sales of
our common stock under these registration rights arrangements with these
stockholders could be negatively perceived in the trading markets and negatively
affect the price of our common stock. Sales of a substantial number of our
shares of common stock in the public market under these arrangements, or the
expectation of such sales, could cause the market price of our common stock to
decline. See "Description of Common Stock -- Registration Rights."
RISKS RELATED TO THE NOTES
OUR SIGNIFICANT DEBT OBLIGATIONS COULD LIMIT OUR FLEXIBILITY IN MANAGING OUR
BUSINESS AND EXPOSE US TO CERTAIN RISKS.
As a result of the offering of the notes, we now have an increased level of
indebtedness outstanding. As of December 31, 2003, we had $81.2 million of
indebtedness outstanding (including our lease obligations under our facilities'
sale-leaseback arrangements). As a result, our interest expense is expected to
increase for 2004 and in the foreseeable future. Our ability to make scheduled
payments of principal or interest on, or to refinance, our indebtedness depends
on our future business performance, which is subject to many economic,
financial, competitive and other factors beyond our control. We do not have a
working capital or other senior credit facility in place to finance our working
capital needs. Our degree of leverage may have important consequences to you,
including the following:
- we may have difficulty satisfying our obligations under the notes or
other indebtedness and, if we fail to comply with these requirements, an
event of default could result;
- we may be required to dedicate a substantial portion of our cash flow
from operations to required payments on indebtedness, thereby reducing
the availability of cash flow for working capital, capital expenditures
and other general corporate activities;
- covenants relating to future debt may limit our ability to obtain
additional financing for working capital, capital expenditures and other
general corporate activities;
- covenants relating to future debt may limit our flexibility in planning
for, or reacting to, changes in our business and the industry in which we
operate;
- we may be more vulnerable to the impact of economic downturns and adverse
developments in our business; and
- we may be placed at a competitive disadvantage against any less leveraged
competitors.
The occurrence of any one of these events could have a material adverse
effect on our business, financial condition, results of operations, prospects
and ability to satisfy our obligations under the notes.
WE MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FLOWS TO MEET OUR OPERATIONAL,
GROWTH AND DEBT SERVICE NEEDS.
Our cash and cash equivalents declined from $76.2 million at December 31,
2002 to $59.5 million at December 31, 2003, a decrease of $16.7 million, or 22%.
Our ability to fund our operations, grow our business and to make scheduled
payments on our indebtedness and our other obligations, including the notes,
will depend on our financial and operating performance, which in turn will be
affected by general economic conditions in the energy industry and by many
financial, competitive, regulatory and other factors beyond our control. We
cannot assure you that our business will generate sufficient cash flow from
operations or that future sources of capital will be available to us in an
amount sufficient to enable us to service our indebtedness, including the notes,
or to fund our other liquidity needs.
If we are unable to generate sufficient cash flows to fund our operations,
grow our business and satisfy our debt obligations, we may have to undertake
additional or alternative financing plans, such as refinancing or restructuring
our debt, selling assets, reducing or delaying capital investments or seeking to
raise additional capital. We cannot assure you that any refinancing would be
possible, that any assets could be sold, or, if sold,
16
of the timing of the sales and the amount of proceeds that may be realized from
those sales, or that additional financing could be obtained on acceptable terms,
if at all. Our inability to generate sufficient cash flows to satisfy debt
obligations, or to refinance our indebtedness on commercially reasonable terms,
would materially and adversely affect our financial condition and results of
operations and our ability to satisfy our obligations under the notes.
THE NOTES ARE UNSECURED AND, THEREFORE, ARE EFFECTIVELY SUBORDINATED TO ANY OF
OUR SECURED DEBT AND ARE EFFECTIVELY SUBORDINATED TO ALL OBLIGATIONS OF OUR
SUBSIDIARIES.
The notes are not secured by any of our assets or those of our
subsidiaries. As a result, the notes are effectively subordinated to any secured
debt we currently have, or may incur. In any liquidation, dissolution,
bankruptcy or other similar proceeding, the holders of our secured debt may
assert rights against the secured assets in order to receive full payment of
their debt before the assets may be used to pay the holders of the notes. In
addition, as debt of Input/Output, Inc., the notes are effectively subordinated
to all debt and other liabilities, including trade payables, of our
subsidiaries.
As of December 31, 2003, we had approximately $18.8 million of obligations
outstanding under certain sale-leaseback arrangements for our principal physical
facilities in Stafford, Texas, which arrangements are effectively senior to the
notes to the extent of the leased assets. The carrying value of these facilities
must be included as assets, and the value of the related lease obligations must
be included as liabilities, on our consolidated balance sheets under U.S.
generally accepted accounting principles. As of December 31, 2003, the net
carrying value of the facilities on our consolidated balance sheet was
approximately $12.6 million. Since these facilities are assets owned by our
landlord, they would not be available to satisfy claims of our creditors,
including the holders of the notes.
WE MAY ISSUE, WITHOUT CONSENT OF THE NOTEHOLDERS, AN UNLIMITED QUANTITY OF
ADDITIONAL NOTES HAVING THE SAME TERMS AS THE NOTES OFFERED HEREBY.
Under the terms of the indenture and without the consent of holders of the
notes, we may issue an unlimited aggregate principal amount of additional notes
having the same terms and CUSIP number as the notes offered hereby. Any
additional issuance of notes will increase our leverage and interest payment
obligations, which could adversely affect our financial condition, our results
of operations and our ability to obtain future financing to fund our working
capital requirements and other capital requirements. In that event, we would
also have increased exposure to economic cycles and industry conditions which
could place us at a competitive disadvantage compared to less leveraged
competitors. Upon any issuance of additional notes, the notes offered hereby may
experience additional volatility in their trading value and may trade at a
discount.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE
DESIGNATED EVENT REPURCHASE OPTION.
If a designated event, as described under the heading "Description of
Notes -- Repurchase at Option of the Holder Upon a Designated Event," occurs
prior to maturity, we may be required to repurchase all or part of the notes. We
may not have enough funds to pay the repurchase price for all tendered notes. In
addition, any credit agreement or other agreements relating to our indebtedness
may contain provisions prohibiting repurchase of the notes under certain
circumstances, or expressly prohibit our repurchase of the notes upon a
designated event or may provide that a designated event constitutes an event of
default under that agreement. Our failure to repurchase tendered notes would
constitute an event of default under the indenture, which might also constitute
a default under the terms of our other indebtedness.
NO PUBLIC MARKET EXISTS FOR THE NOTES, AND THE RESALE OF THE NOTES IS SUBJECT
TO SIGNIFICANT RESTRICTIONS AS WELL AS UNCERTAINTIES REGARDING THE EXISTENCE OF
ANY TRADING MARKET FOR THE NOTES.
The notes are a new issue of securities for which there is currently no
public market. We do not intend to list the notes on any national securities
exchange or automated quotation system. We cannot assure you that an active or
sustained trading market for the notes will develop or that the holders will be
able to sell their
17
notes. The initial purchaser of the notes, Morgan Stanley & Co. Incorporated,
has informed us that it intends to make a market in the notes, but it is not
obligated to do so, and if it does make a market in the notes it may stop at any
time, without notice. As a result, we cannot assure you that a market will
develop for the notes or that you will be able to sell your notes. Accordingly,
you may be required to bear the financial risk of an investment in the notes for
an indefinite period of time. Any notes traded after their initial issuance may
trade at a discount to their initial offering price.
Moreover, even if the holders are able to sell their notes, we cannot
assure you as to the price at which any sales will be made. Future trading
prices of the notes will depend on many factors, including, among other things,
prevailing interest rates, our operating results, the price of our common stock
and the market for similar securities. Historically, the market for convertible
debt has been subject to disruptions that have caused volatility in prices. It
is possible that the market for the notes will be subject to disruptions which
may have a negative effect on the holders of the notes, regardless of our
prospects or financial performance.
THE TRADING PRICES FOR THE NOTES WILL BE DIRECTLY AFFECTED BY THE TRADING
PRICES FOR OUR COMMON STOCK, WHICH ARE IMPOSSIBLE TO PREDICT.
The notes are convertible into shares of common stock and, as a result, the
trading price for the notes will be directly affected by the trading price of
our common stock. The price of our common stock could be affected by possible
sales of our common stock by investors who view the notes as a more attractive
means of equity participation in our company and by hedging or arbitrage trading
activity that may develop involving our common stock. The hedging or arbitrage
could, in turn, affect the trading prices of the notes. Our stock price could
also be affected by some of the other factors specified above under "Risks
Related to Our Business and Our Common Stock -- Our stock price may fluctuate,
and your investment in our stock could decline in value."
THE CONVERSION RATE OF THE NOTES MAY NOT BE ADJUSTED FOR ALL DILUTIVE EVENTS.
The conversion rate of the notes is subject to adjustment for certain
events including, but not limited to, the issuance of stock dividends on our
common stock, the issuance of certain rights or warrants, subdivisions or
combinations of our common stock, certain distributions of assets, debt
securities, capital stock or cash to holders of our common stock and certain
issuer tender or exchange offers as described under "Description of Notes --
Conversion Rate Adjustments." The conversion rate will not be adjusted for other
events, such as an issuance of common stock for cash, that may adversely affect
the trading price of the notes or our common stock. There can be no assurance
that an event that adversely affects the value of the notes, but does not result
in an adjustment to the conversion rate, will not occur.
THE REPURCHASE RIGHTS IN THE NOTES TRIGGERED BY A FUNDAMENTAL CHANGE COULD
DISCOURAGE A POTENTIAL ACQUIRER.
The repurchase rights in the notes triggered by a fundamental change, as
described under the heading "Description of Notes -- Repurchase at Option of the
Holder Upon a Designated Event," could discourage a potential acquirer. However,
this repurchase feature is not the result of our management's knowledge of any
specific effort to obtain control of us by means of a merger, tender offer or
solicitation, or part of a plan by management to adopt a series of anti-takeover
provisions. The term "fundamental change" is limited to specified transactions
and may not include other events that might adversely affect our financial
condition or business operations. Our obligation to offer to repurchase the
notes upon a fundamental change would not necessarily afford you protection in
the event of a highly leveraged transaction, reorganization, merger or similar
transaction involving us.
YOU MAY HAVE TO PAY TAXES WITH RESPECT TO DISTRIBUTIONS ON OUR COMMON STOCK
THAT YOU DO NOT RECEIVE.
The conversion rate of the notes is subject to adjustment for certain
events arising from stock splits and combinations, stock dividends, certain cash
dividends and certain other actions by us that modify our capital structure.
Please read "Description of Notes -- Conversion Rate Adjustments." If the
conversion rate is
18
adjusted as a result of a distribution that is taxable to our common stock
holders, such as a cash dividend, you would be required to include an amount in
income for federal income tax purposes, notwithstanding the fact that you do not
actually receive such distribution. The amount that you would have to include in
income will generally be equal to the amount of the distribution that you would
have received if you had converted your notes into our common stock. In
addition, non-U.S. holders of the notes may, in certain circumstances, be deemed
to have received a distribution subject to U.S. federal withholding tax
requirements. Please read "United States Federal Income Tax Considerations."
CONVERSION OF THE NOTES WILL DILUTE THE OWNERSHIP INTEREST OF EXISTING
STOCKHOLDERS, INCLUDING HOLDERS WHO HAD PREVIOUSLY CONVERTED THEIR NOTES.
The conversion of some or all of the notes will dilute the ownership
interests of existing stockholders. Any sales in the public market of the common
stock issuable upon such conversion could adversely affect prevailing market
prices of our common stock. In addition, the existence of the notes may
encourage short selling by market participants because the conversion of the
notes could depress the price of our common stock.
IF YOU HOLD NOTES, YOU WILL NOT BE ENTITLED TO ANY RIGHTS WITH RESPECT TO OUR
COMMON STOCK, BUT YOU WILL BE SUBJECT TO ALL CHANGES MADE WITH RESPECT TO OUR
COMMON STOCK.
If you hold notes, you will not be entitled to any rights with respect to
our common stock (including, without limitation, voting rights and rights to
receive any dividends or other distributions on our common stock), but you will
be subject to all changes affecting the common stock. You will have rights with
respect to our common stock only if and when we deliver shares of common stock
to you upon conversion of your notes and, in limited cases, under the conversion
rate adjustments applicable to the notes. For example, in the event that an
amendment is proposed to our articles or incorporation or bylaws requiring
stockholder approval and the record date for determining the stockholders of
record entitled to vote on the amendment occurs prior to delivery of common
stock to you, you will not be entitled to vote on the amendment, although you
will nevertheless be subject to any changes in the powers, preferences or
special rights of our common stock.
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FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated by reference herein contain
statements concerning our future results and performance and other matters that
are "forward-looking" statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act). These statements involve known and unknown risks,
uncertainties, and other factors that may cause our or our industry's results,
levels of activity, performance, or achievements to be materially different from
any future results, levels of activity, performance, or achievements expressed
or implied by such forward-looking statements. Such factors include, among
others, those listed under "Risk Factors" and elsewhere in this prospectus. In
some cases, you can identify forward-looking statements by terminology such as
"may," "will," "should," "intend," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "potential," or "continue" or the negative of such terms
or other comparable terminology.
Examples of other forward-looking statements contained or incorporated by
reference in this prospectus include statements regarding:
- our expected revenues, gross margins, operating income, net income and
cash flows;
- future growth rates and margins for certain of our products and services;
- the adequacy of our future liquidity and capital resources;
- anticipated timing and success of commercialization and capabilities of
products and services under development;
- our plans for facility closures and other future business
reorganizations;
- charges we expect to take for future reorganization activities;
- savings we expect to achieve from our restructuring activities;
- future demand for seismic equipment and services;
- future seismic industry fundamentals;
- future oil and gas commodity prices;
- future worldwide economic conditions;
- our expectations regarding future mix of business and future asset
recoveries;
- our expectations regarding realization of deferred tax assets;
- our beliefs regarding accounting estimates we make;
- the result of pending or threatened disputes and other contingencies;
- our future acquisitions and levels of capital expenditures; and
- our proposed strategic alliances.
These forward-looking statements reflect our best judgment about future
events and trends based on the information currently available to us. Our
results of operations can be affected by inaccurate assumptions we make, or by
risks and uncertainties known or unknown to us. Therefore, we cannot guarantee
the accuracy of the forward-looking statements. Actual events and results of
operations may vary materially from our current expectations and assumptions.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, levels of
activity, performance, or achievements. We do not assume responsibility for the
accuracy and completeness of the forward-looking statements. We do not intend to
update any of the forward-looking statements after the date of this prospectus
to conform them to actual results.
20
USE OF PROCEEDS
The selling securityholders will receive all of the proceeds from the sale
under this prospectus of the notes and the common stock issuable upon conversion
of the notes. We will not receive any proceeds from these sales. See "Selling
Securityholders" for a list of those persons or entities entitled to receive
proceeds from the sale of the notes and underlying common stock.
RATIO OF EARNINGS TO FIXED CHARGES
We have computed the ratio of earnings to fixed charges for each of the
following periods on a consolidated basis. For purposes of computing the ratio
of earnings to fixed charges, "earnings" consist of earnings (loss) before
income tax expense (benefit) and minority interest, plus fixed charges, cash
dividends received from equity interests, less the equity income recorded. Fixed
charges consist of interest expense, including amortization of debt issuance
costs and capitalized interest and the interest portion of rental expense, and
preferred stock dividend requirements.
YEARS ENDED YEARS ENDED
DECEMBER 31, SEVEN MONTHS MAY 31,
------------------ ENDED -----------
2003 2002 2001 DECEMBER 31, 2000 2000 1999
---- ---- ---- ----------------- ---- ----
Ratio of Earnings to
Fixed Charges(1)........................... -- -- 2.5x -- -- --
---------------
(1) For the years ended December 31, 2003 and 2002 and the seven months ended
December 31, 2000, and the years ended May 31, 2000 and 1999, earnings were
insufficient to cover fixed charges by approximately $22.8 million, $62.0
million, $9.0 million, $80.1 million and $155.2 million, respectively.
21
DESCRIPTION OF NOTES
We issued the notes under an indenture dated as of December 10, 2003,
between Input/Output, Inc., as issuer, and The Bank of New York Trust Company,
N.A. (formerly known as The Bank of New York Trust Company of Florida, N.A.), as
trustee. The notes and the shares of common stock issuable upon conversion of
the notes are covered by a registration rights agreement between us and Morgan
Stanley & Co. Incorporated, as initial purchaser listed in that agreement, dated
as of December 10, 2003. You may request a copy of the indenture and the
registration rights agreement from the trustee.
The following description is a summary of the material provisions of the
notes, the indenture and the registration rights agreement. It does not purport
to be complete. This summary is subject to and is qualified by reference to all
the provisions of the indenture, including the definitions of certain terms used
in the indenture. Wherever particular provisions or defined terms of the
indenture or form of note are referred to, these provisions or defined terms are
incorporated in this prospectus by reference. We urge you to read the indenture
because it and not this description defines your rights as a holder of notes.
As used in this "Description of Notes" section, references to
"Input/Output," "we," "I/O," "our" or "us" refer solely to Input/Output, Inc.
and not to our subsidiaries, unless the context otherwise requires.
GENERAL
The notes are senior unsecured indebtedness of I/O and rank on a parity
with all of our other existing and future senior unsecured debt and prior to any
subordinated debt. Except for outstanding obligations under our sale-leaseback
arrangements described below, as of December 31, 2003, we had approximately $2.4
million of other senior unsecured debt outstanding that ranked on a parity with
the notes. However, the notes are effectively junior to all future obligations
of our subsidiaries; as of December 31, 2003, our subsidiaries had no
outstanding indebtedness. As of December 31, 2003, we had approximately $18.8
million of obligations outstanding under certain sale-leaseback arrangements
that are effectively senior to the notes to the extent of the leased assets. The
notes are convertible into common stock as described under "-- Conversion of
Notes."
We issued and sold $60,000,000 aggregate principal amount of the notes in
private placements in December 2003. The notes were issued only in denominations
of $1,000 and multiples of $1,000. We use the term "note" in this prospectus to
refer to each $1,000 principal amount of notes. The notes will mature on
December 15, 2008 unless earlier converted or repurchased.
We may, without the consent of the holders, reopen the notes and issue
additional notes under the indenture with the same terms and with the same CUSIP
numbers as the notes offered hereby in an unlimited aggregate principal amount,
provided that no such additional notes may be issued unless fungible with the
notes offered hereby for U.S. federal income tax purposes. We may also from time
to time repurchase the notes in open market purchases or negotiated transactions
without prior notice to holders.
Neither we nor any of our subsidiaries is subject to any financial
covenants under the indenture. In addition, neither we nor any of our
subsidiaries is restricted under the indenture from paying dividends, incurring
debt, or issuing or repurchasing our securities.
You are not afforded protection under the indenture in the event of a
highly leveraged transaction or a change in control of us except to the extent
described below under "-- Repurchase at Option of the Holder Upon a Designated
Event."
The notes bear interest at an annual rate of 5.50% from December 10, 2003,
or from the most recent date to which interest has been paid or duly provided
for. Interest will be calculated on the basis of a 360-day year consisting of
twelve 30-day months. We will pay interest and liquidated damages, if any, on
June 15 and December 15 of each year, beginning June 15, 2004, to record holders
at the close of business on the preceding June 1 and December 1, as the case may
be.
We will maintain an office in the Borough of Manhattan, The City of New
York, where we will pay the principal and premium, if any, on the notes and you
may present the notes for conversion, registration of
22
transfer or exchange for other denominations, which shall initially be an office
or agency of the paying agent. The paying agent initially will be the trustee.
We may pay interest by check mailed to your address as it appears in the note
register, provided that if you are a holder with an aggregate principal amount
in excess of $2.0 million, you shall be paid, at your written election, by wire
transfer in immediately available funds. However, payments to The Depository
Trust Company, New York, New York, which we refer to as DTC, will be made by
wire transfer of immediately available funds to the account of DTC or its
nominee.
The notes are not subject to a sinking fund provision and are not subject
to defeasance or covenant defeasance under the indenture.
Because the conversion price may only be decreased for certain dilutive
events, the notes are not subject to a beneficial conversion feature for
financial accounting purposes; therefore, no such feature has been recorded.
CONVERSION OF NOTES
You may convert all or some of your notes, in whole or in part, into common
stock prior to the close of business on the final maturity date of the notes,
subject to prior repurchase of the notes.
The number of shares of common stock you will receive upon conversion of
your notes will be determined by multiplying the number of $1,000 principal
amount of notes you convert by the conversion rate on the date of conversion.
You may convert your notes in part so long as such part is $1,000 principal
amount or an integral multiple of $1,000.
If you have submitted your notes for repurchase upon a designated event,
you may convert your notes only if you withdraw your repurchase election. Upon
conversion of notes, a holder will not receive any cash payment of interest or
liquidated damages. Our delivery to the holder of the full number of shares of
our common stock into which the note is convertible, together with any cash
payment for such holder's fractional shares will be deemed to satisfy our
obligation to pay:
- the principal amount of the note; and
- accrued but unpaid interest and liquidated damages, if any, attributable
to the period from the most recent interest payment date to the
conversion date.
As a result, accrued but unpaid interest and liquidated damages, if any, to
the conversion date is deemed to be paid in full rather than cancelled,
extinguished or forfeited.
Notwithstanding the preceding paragraph, if notes are converted after a
record date but prior to the next succeeding interest payment date, holders of
such notes at the close of business on the record date will receive the interest
payable on such notes on the corresponding interest payment date notwithstanding
the conversion. Such notes, upon surrender for conversion, must be accompanied
by funds equal to the amount of interest payable on that interest payment date
with respect to the notes so converted; provided that no such payment need be
made (1) if we have specified a repurchase date following a designated event
that is after a record date but on or prior to the next succeeding interest
payment date or (2) to the extent of any overdue interest at the time of
conversion with respect to such note.
The initial conversion rate for the notes is 231.4815 shares of common
stock per $1,000 principal amount of notes, subject to adjustment as described
below, which represents an initial conversion price of $4.32. We will not issue
fractional shares of common stock upon conversion of notes. Instead, we will pay
cash in lieu of fractional shares based on the last reported sale price of the
common stock on the trading day prior to the conversion date. Except as
described above, you will not receive any accrued interest or dividends upon
conversion.
To convert your note into common stock you must do the following (or comply
with DTC procedures for doing so in respect of your beneficial interest in notes
evidenced by a global note):
- complete and manually sign the conversion notice on the back of the note
or facsimile of the conversion notice and deliver this notice to the
conversion agent;
23
- surrender the note to the conversion agent;
- if required, furnish appropriate endorsements and transfer documents;
- if required, pay all transfer or similar taxes; and
- if required, pay funds equal to interest payable on the next interest
payment date.
The date you comply with these requirements is the conversion date under the
indenture.
CONVERSION RATE ADJUSTMENTS
We will adjust the conversion rate if any of the following events occurs:
(1) We issue common stock as a dividend or distribution on our common
stock.
(2) We issue to all holders of common stock certain rights or warrants
to purchase our common stock, for a period expiring within 45 days of the
record date for such issuance, at a price per share that is less than the
closing sale prices of our common stock for the 10 trading days preceding
the declaration date for such distribution.
(3) We subdivide or combine our common stock.
(4) We distribute to all holders of our common stock, shares of our
capital stock, evidences of indebtedness or assets, including cash or
securities but excluding rights or warrants specified above and dividends
or distributions specified above.
If we distribute capital stock of, or similar equity interests in, a
subsidiary or other business unit of ours, then the conversion rate will be
adjusted based on the market value of the securities so distributed
relative to the market value of our common stock, in each case based on the
average closing sales price of those securities (where such closing sale
prices are available) for the 10 trading days commencing on and including
the fifth trading day after the date on which "ex-dividend trading"
commences for such distribution on the NYSE or such other national or
regional exchange or market on which the securities are then listed or
quoted.
If we distribute cash (excluding any dividend or distribution in
connection with our liquidation, dissolution or winding up), then the
conversion rate shall be increased so that it equals the rate determined by
multiplying the conversion rate in effect on the record date with respect
to the cash distribution by a fraction, (1) the numerator of which shall be
the current market price of a share of our common stock on the record date,
and (2) the denominator of which shall be the same price of a share on the
record date less the amount of the distribution.
(5) We or one of our subsidiaries makes a payment in respect of a
tender offer or exchange offer for our common stock to the extent that the
cash and value of any other consideration included in the payment per share
of common stock exceeds the closing sale price per share of common stock on
the trading day next succeeding the last date on which tenders or exchanges
may be made pursuant to such tender or exchange offer.
(6) Someone other than us or one of our subsidiaries makes a payment
in respect of a tender offer or exchange offer in which, as of the closing
date of the offer, our board of directors is not recommending rejection of
the offer.
The adjustment referred to in this clause (6) will only be made if:
- the tender offer or exchange offer is for an amount that increases the
offeror's ownership of common stock to more than 25% of the total shares
of common stock outstanding; and
- the cash and value of any other consideration included in the payment per
share of common stock exceeds the closing sale price per share of common
stock on the trading day next succeeding the last date on which tenders
or exchanges may be made pursuant to the tender or exchange offer.
24
However, the adjustment referred to in this clause (6) will generally
not be made if as of the closing of the tender or exchange offer, the
offering documents disclose a plan or an intention to cause us to engage in
a consolidation or merger or a sale of all or substantially all of our
assets.
"Current market price" of our common stock on any day means the average of
the daily closing sales price per share of our common stock for each of the 10
consecutive trading days ending on the earlier of the day in question and the
day before the "ex-date" with respect to the issuance or distribution requiring
such computation. For purposes of this paragraph, "ex-date" means the first date
on which the shares of our common stock trade on the applicable exchange or in
the applicable market, regular way, without the right to receive such issuance
or distribution.
To the extent that we have a stockholder rights plan in effect upon
conversion of the notes into common stock, you will receive, in addition to the
common stock, the rights under the stockholder rights plan, unless prior to any
conversion, the rights have separated from the common stock, in which case the
conversion rate will be adjusted at the time of separation as if we distributed
to all holders of our common stock, shares of our capital stock, evidences of
indebtedness or assets as described above, subject to readjustment in the event
of the expiration, termination or redemption of such rights.
In the event of:
- any reclassification of our common stock;
- a consolidation, merger or combination involving us; or
- a sale or conveyance to another person or entity of all or substantially
all of our property and assets;
in which holders of our common stock would be entitled to receive stock, other
securities, other property, assets or cash for their common stock, upon
conversion of your notes you will be entitled to receive the same type of
consideration that you would have been entitled to receive if you had converted
the notes into our common stock immediately prior to any of these events.
We may, from time to time, increase the conversion rate if our board of
directors has made a determination that this increase would be in our best
interests. Any such determination by our board will be conclusive. In addition,
we may increase the conversion rate if our board of directors deems it advisable
to avoid or diminish any income tax to holders of common stock resulting from
any stock or rights distribution. Please read "United States Federal Income Tax
Considerations."
The holders of the notes may, in certain circumstances, be deemed to have
received a distribution subject to U.S. federal income tax as a dividend. If the
conversion rate is increased to compensate holders of notes for the payment of
cash dividends to holders of our common stock, then holders of notes will be
deemed for U.S. federal income tax purposes to have received a distribution from
us in the amount of the additional shares issuable upon conversion, which will
be taxable as a dividend to the extent of our earnings and profits. In addition,
there are other cases in which an adjustment to the conversion rate (or failure
to adjust the conversion rate) could potentially give rise to deemed dividend
treatment. In addition, non-U.S. holders of notes in certain circumstances may
be deemed to have received a distribution subject to U.S. federal withholding
tax requirements. Please read "United States Federal Income Tax
Considerations -- U.S. Holders -- Constructive Dividends" and "-- Non-U.S.
Holders -- Dividends."
Except as described above in this section, we will not adjust the
conversion rate for any issuance of our common stock or convertible or
exchangeable securities or rights to purchase our common stock or convertible or
exchangeable securities.
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OPTIONAL REDEMPTION BY INPUT/OUTPUT
We may not redeem the notes at our option in whole or in part prior to
maturity.
REPURCHASE AT OPTION OF THE HOLDER UPON A DESIGNATED EVENT
If a designated event occurs at any time prior to the maturity of the
notes, you may require us to repurchase your notes, in whole or in part, on a
repurchase date set by us that is not less than 20 nor more than 35 business
days after the date of our notice of the designated event. The notes will be
repurchased only in integral multiples of $1,000 principal amount.
We will repurchase the notes at a price equal to 100% of the principal
amount to be repurchased, plus accrued and unpaid interest, and liquidated
damages, if any, to, but excluding, the repurchase date. If such repurchase date
falls after a record date and on or prior to the corresponding interest payment
date, we will pay the full amount of accrued and unpaid interest payable on such
interest payment date to the holder of record on the close of business on the
corresponding record date.
We will mail to all record holders a notice of a designated event within 15
days after it has occurred. We are also required to deliver to the trustee a
copy of the designated event notice. If you elect to require us to repurchase
your notes, you must deliver to us or our designated agent, on or before the
repurchase date specified in our designated event notice, your repurchase notice
and any notes to be repurchased, duly endorsed for transfer. We will promptly
pay the repurchase price for notes surrendered for repurchase following the
repurchase date.
You may withdraw any written repurchase notice by delivering a written
notice of withdrawal to the paying agent prior to the close of business on the
repurchase date. The withdrawal notice must state:
- the principal amount of the withdrawn notes;
- if certificated notes have been issued, the certificate number of the
withdrawn notes (or, if your notes are not certificated, your withdrawal
notice must comply with appropriate DTC procedures); and
- the principal amount, if any, which remains subject to the repurchase
notice.
Payment of the repurchase price for a note for which a repurchase notice
has been delivered and not withdrawn is conditioned upon book-entry transfer or
delivery of the note, together with necessary endorsements, to the paying agent
at its corporate trust office in the Borough of Manhattan, The City of New York,
or any other office of the paying agent, at any time after delivery of the
repurchase notice. Payment of the repurchase price for the note will be made
promptly following the later of the repurchase date and the time of book-entry
transfer or delivery of the note. If the paying agent holds money sufficient to
pay the repurchase price of the note on the repurchase date, then, on and after
the business day following the repurchase date:
- the note will cease to be outstanding;
- interest will cease to accrue; and
- all other rights of the holder will terminate, other than the right to
receive the repurchase price upon delivery of the note.
This will be the case whether or not book-entry transfer of the note has
been made or the note has been delivered to the paying agent.
A "designated event" will be deemed to have occurred upon a fundamental
change or a termination of trading.
A "fundamental change" is any transaction or event (whether by means of an
exchange offer, liquidation, tender offer, consolidation, merger, combination,
reclassification, recapitalization or otherwise) in connection
26
with which all or substantially all of our common stock is exchanged for,
converted into, acquired for or constitutes solely the right to receive,
consideration which is not all or substantially all common stock that:
- is listed on, or immediately after the transaction or event will be
listed on, a United States national securities exchange, or
- is approved, or immediately after the transaction or event will be
approved, for quotation on the NASDAQ National Market or any similar
United States system of automated dissemination of quotations of
securities prices.
A "termination of trading" will be deemed to have occurred if our common
stock (or other common stock into which the notes are then convertible) is
neither listed for trading on a United States national securities exchange nor
approved for trading on the NASDAQ National Market.
We will comply with any applicable provisions of Rule 13e-4 and any other
tender offer rules under the Exchange Act in the event of a designated event.
These designated event repurchase rights could discourage a potential
acquirer of I/O. However, this designated event repurchase feature is not the
result of management's knowledge of any specific effort to obtain control of us
by means of a merger, tender offer or solicitation, or part of a plan by
management to adopt a series of anti-takeover provisions. The term "designated
event" is limited to specified transactions and may not include other events
that might adversely affect our financial condition or business operations. Our
obligation to offer to repurchase the notes upon a designated event would not
necessarily afford you protection in the event of a highly leveraged
transaction, reorganization, merger or similar transaction involving us. No
notes may be repurchased by us at the option of holders upon a designated event
if the principal amount of the notes has been accelerated and such acceleration
has not been rescinded.
We may be unable to repurchase the notes in the event of a designated
event. If a designated event were to occur, we may not have enough funds to pay
the repurchase price for all tendered notes. Any future credit agreements or
other agreements relating to our indebtedness may contain provisions prohibiting
repurchase of the notes under certain circumstances, or expressly prohibit our
repurchase of the notes upon a designated event or may provide that a designated
event constitutes an event of default under that agreement. If a designated
event occurs at a time when we are prohibited from repurchasing notes, we could
seek the consent of our lenders to repurchase the notes or attempt to refinance
this debt. If we do not obtain consent, we would not be permitted to repurchase
the notes. Our failure to repurchase tendered notes would constitute an event of
default under the indenture, which might constitute a default under the terms of
our other indebtedness.
MERGER AND SALE OF ASSETS BY I/O
The indenture provides that we may not consolidate with or merge with or
into any other person or convey, transfer or lease our properties and assets
substantially as an entirety to another person; unless:
- we are the surviving person, or the resulting, surviving or transferee
person, if other than I/O is organized and existing under the laws of the
United States, any state thereof or the District of Columbia;
- the successor person, if other than I/O, assumes, by supplemental
indenture satisfactory in form to the trustee, all of our obligations
under the notes and the indenture;
- after giving effect to such transaction, there is no event of default
under the indenture, and no event which, after notice or passage of time
or both, would become an event of default; and
- we have delivered to the trustee an officers' certificate and an opinion
of counsel each stating that such transaction complies with these
requirements.
When such a person assumes our obligations in such circumstances, subject
to certain exceptions, we shall be discharged from all obligations under the
notes and the indenture.
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EVENTS OF DEFAULT; NOTICE AND WAIVER
The following will be events of default under the indenture:
- we fail to pay principal or premium, if any, when due at maturity, upon
repurchase or otherwise on the notes;
- we fail to pay any interest and liquidated damages, if any, on the notes,
when due and such failure continues for a period of 30 days;
- we fail to provide timely notice of a designated event;
- we fail to perform or observe any of the covenants in the indenture for
60 days after written notice to us from the trustee (or to us and the
trustee from the holders of at least 25% in principal amount of the
outstanding notes);
- payment defaults or other defaults causing acceleration of indebtedness
prior to maturity, where the principal amount of the indebtedness subject
to such defaults aggregates $5 million or more;
- we fail to deliver shares of our common stock upon conversion of the
notes within the time period required by the indenture, and such failure
continues for a period of 5 days; or
- certain events involving our bankruptcy, insolvency or reorganization.
The trustee may withhold notice to the holders of the notes of any default,
except defaults in payment of premium, interest or liquidated damages, if any,
on the notes. However, the trustee must consider it to be in the interest of the
holders of the notes to withhold this notice.
If an event of default occurs and continues, the trustee or the holders of
at least 25% in principal amount of the outstanding notes may declare the
principal, premium, if any, and accrued interest and liquidated damages, if any,
on the outstanding notes to be immediately due and payable. In case of certain
events of bankruptcy or insolvency involving us, the principal, premium, if any,
and accrued interest and liquidated damages, if any, on the notes will
automatically become due and payable. However, if we cure all defaults, except
the nonpayment of principal, premium, if any, interest or liquidated damages, if
any, that became due as a result of the acceleration, and meet certain other
conditions, with certain exceptions, this declaration may be cancelled and the
holders of a majority of the principal amount of outstanding notes may waive
these past defaults.
Payments of principal, premium, if any, interest or liquidated damages, if
any, on the notes that are not made when due will accrue interest from the
required payment date at the annual rate of 1% above the then-applicable
interest rate for the notes.
The holders of a majority of outstanding notes will have the right to
direct the time, method and place of any proceedings for any remedy available to
the trustee, subject to limitations specified in the indenture.
No holder of the notes may pursue any remedy under the indenture, except in
the case of a default in the payment of principal, premium, if any, or interest
on the notes, unless:
- the holder has given the trustee written notice of an event of default;
- the holders of at least 25% in principal amount of outstanding notes make
a written request, and offer reasonable indemnity, to the trustee to
pursue the remedy;
- the holder or holders have offered reasonable security or indemnity to
the trustee against any costs, liability or expense of the trustee;
- the trustee does not receive an inconsistent direction from the holders
of a majority in principal amount of the notes; and
- the trustee fails to comply with the request within 60 days after receipt
of the request and offer of indemnity.
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MODIFICATION AND WAIVER
The consent of the holders of a majority in principal amount of the
outstanding notes is required to modify or amend the indenture. However, a
modification or amendment requires the consent of the holder of each outstanding
note if it would:
- extend the fixed maturity of any note;
- reduce the rate or extend the time for payment of interest or liquidated
damages, if any, of any note;
- reduce the principal amount or premium of any note;
- reduce any amount payable upon repurchase of any note;
- adversely change our obligation to repurchase any note upon a designated
event;
- impair the right of a holder to institute suit for payment on any note;
- change the currency in which any note is payable;
- impair the right of a holder to convert any note or reduce the number of
shares of common stock or the amount of any other property receivable
upon conversion;
- reduce the quorum or voting requirements under the indenture;
- subject to specified exceptions, modify certain of the provisions of the
indenture relating to modification or waiver of provisions of the
indenture; or
- reduce the percentage of notes required for consent to any modification
of the indenture.
We are permitted to modify certain provisions of the indenture without the
consent of the holders of the notes.
FORM, DENOMINATION AND REGISTRATION
The notes were issued:
- in fully registered form;
- without interest coupons; and
- in denominations of $1,000 principal amount and integral multiples of
$1,000.
GLOBAL NOTE, BOOK-ENTRY FORM
Notes that were sold to "qualified institutional buyers" as defined in Rule
144A under the Securities Act were evidenced by one or more global notes which
were deposited with, or on behalf of, DTC and registered in the name of Cede &
Co. as DTC's nominee. Except as set forth below, a global note may be
transferred, in whole or in part, only to another nominee of DTC or to a
successor of DTC or its nominee.
You may hold your beneficial interests in a global note directly through
DTC if you are a participant in DTC, or indirectly through organizations that
are participants in DTC (called "participants"). Transfers between participants
will be effected in the ordinary way in accordance with DTC rules and will be
settled in clearing house funds. The laws of some states require that certain
persons take physical delivery of securities in definitive form. As a result,
the ability to transfer beneficial interests in the global note to such persons
may be limited.
If you are not a participant, you may beneficially own interests in a
global note held by DTC only through participants, or certain banks, brokers,
dealers, trust companies and other parties that clear through or maintain a
custodial relationship with a participant, either directly or indirectly (called
"indirect participants"). So long as Cede & Co., as the nominee of DTC, is the
registered owner of a global note, Cede & Co.
29
for all purposes will be considered the sole holder of such global note. Except
as provided below, owners of beneficial interests in a global note will:
- not receive physical delivery of certificates in definitive registered
form; and
- not be considered holders of the global note.
We will pay interest and liquidated damages, if any, on and the repurchase
price of a global note to Cede & Co., as the registered owner of the global
note, by wire transfer of immediately available funds on each interest payment
date or the repurchase date, as the case may be. Neither we, the trustee nor any
paying agent will be responsible or liable:
- for the records relating to, or payments made on account of, beneficial
ownership interests in a global note; or
- for maintaining, supervising or reviewing any records relating to the
beneficial ownership interests.
Neither we, the trustee, registrar, paying agent nor conversion agent will
have any responsibility for the performance by DTC or its participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations. DTC has advised us that it will take any
action permitted to be taken by a holder of notes, including the presentation of
notes for transfer, only at the direction of one or more participants to whose
account with DTC interests in the global note are credited, and only in respect
of the principal amount of the notes represented by the global note as to which
the participant or participants has or have given such direction.
DTC has advised us that it is:
- a limited purpose trust company organized under the laws of the State of
New York, and a member of the Federal Reserve System;
- a "clearing corporation" within the meaning of the Uniform Commercial
Code; and
- a "clearing agency" registered pursuant to the provisions of Section 17A
of the Exchange Act.
DTC was created to hold securities for its participants and to facilitate
the clearance and settlement of securities transactions between participants
through electronic book-entry changes to the accounts of its participants.
Participants include securities brokers, dealers, banks, trust companies and
clearing corporations and other organizations. Some of the participants or their
representatives, together with other entities, own DTC. Indirect access to the
DTC system is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
DTC has agreed to the foregoing procedures to facilitate transfers of
interests in a global note among participants. However, DTC is under no
obligation to perform or continue to perform these procedures, and may
discontinue these procedures at any time.
We will issue the notes in definitive certificated form if DTC notifies us
that it is unwilling or unable to continue as depositary or DTC ceases to be a
clearing agency registered under the Exchange Act, as amended and a successor
depositary is not appointed by us within 90 days. In addition, beneficial
interests in a global note may be exchanged for definitive certificated notes
upon request by or on behalf of DTC in accordance with customary procedures. We
may determine at any time and in our sole discretion that notes shall no longer
be represented by global notes, in which case we will issue certificates in
definitive form in exchange for the global notes.
REGISTRATION RIGHTS OF THE NOTEHOLDERS
We entered into a registration rights agreement with the initial purchaser
of the notes under which we were required to file a shelf registration
statement, of which this prospectus forms a part, with the SEC covering resale
of the registrable securities by March 9, 2004, and we are required to use our
reasonable best efforts to cause the shelf registration statement to become
effective by June 7, 2004. In addition, we are
30
required to use our reasonable best efforts to keep the shelf registration
statement, of which this prospectus is a part, effective until the date there
are no longer any registrable securities.
When we use the term "registrable securities" in this section, we are
referring to the notes and the common stock issuable upon conversion of the
notes until the earliest of:
- the effective registration under the Securities Act and the resale of the
registrable securities in accordance with the registration statement of
which this prospectus forms a part;
- the expiration of the holding period with respect to the registrable
securities under Rule 144(k) under the Securities Act; and
- the sale of the registrable securities to the public pursuant to Rule 144
under the Securities Act.
We may suspend the use of this prospectus under certain circumstances
relating to pending corporate developments, public filings with the SEC and
similar events. Any suspension period shall not:
- exceed 30 days in any three-month period; or
- an aggregate of 90 days for all periods in any 12-month period.
Notwithstanding the foregoing, we are permitted to suspend the use of this
prospectus for up to 60 days in any 3-month period under certain circumstances,
relating to possible acquisitions, financings or other similar transactions.
We will pay predetermined liquidated damages on the interest payment dates
for the notes if the shelf registration statement is not timely declared
effective or if this prospectus is unavailable for periods in excess of those
permitted above:
- on the notes at an annual rate equal to 0.5% of the aggregate principal
amount of the notes outstanding until the registration statement is filed
or declared effective or during the additional period the prospectus is
unavailable; and
- on the common stock that has been converted, at an annual rate equal to
0.5% of an amount equal to $1,000 divided by the conversion rate in
effect during such periods.
A holder who elects to sell registrable securities pursuant to the shelf
registration statement, of which this prospectus forms a part, will be required
to:
- be named as a selling stockholder in this prospectus or a supplement to
this prospectus;
- deliver a prospectus to purchasers; and
- be subject to the provisions of the registration rights agreement,
including indemnification provisions.
Under the registration rights agreement we will:
- pay all expenses of the shelf registration statement (provided, however,
that each holder will be required to bear the expense of any broker's
commissions, agency fees or underwriter's discount or commission);
- provide each registered holder copies of this prospectus;
- notify holders when the shelf registration statement has become
effective; and
- take other reasonable actions as are required to permit unrestricted
resales of the registrable securities in accordance with the terms and
conditions of the registration rights agreement.
The plan of distribution of the shelf registration statement, of which this
prospectus forms a part, permits resales of registrable securities by selling
security holders though brokers and dealers.
Holders previously have been provided with a form of notice and
questionnaire to be completed and delivered by holders interested in selling
their registrable securities pursuant to the shelf registration statement, of
which this prospectus forms a part,. In order to sell your registrable
securities, you must
31
complete and deliver the notice and questionnaire to us at least three business
days prior to your intended distribution. This summary of the registration
rights agreement is not complete. This summary is subject to, and is qualified
in its entirety by reference to, all the provisions of the registration rights
agreement.
RULE 144A INFORMATION REQUEST
We will furnish to the holders or beneficial holders of the notes or the
underlying common stock and prospective purchasers, upon their request, the
information required under Rule 144A(d)(4) under the Securities Act until such
time as such securities are no longer "restricted securities" within the meaning
of Rule 144 under the Securities Act, assuming these securities have not been
owned by an affiliate of ours.
INFORMATION CONCERNING THE TRUSTEE
We have appointed The Bank of New York Trust Company, N.A. (formerly known
as The Bank of New York Trust Company of Florida, N.A.), the trustee under the
indenture, as paying agent, conversion agent, note registrar and custodian for
the notes.
The trustee or its affiliates may provide banking and other services to us
in the ordinary course of their business. The indenture contains certain
limitations on the rights of the trustee, if it or any of its affiliates is then
our creditor, to obtain payment of claims in certain cases or to realize on
certain property received on any claim as security or otherwise. The trustee and
its affiliates will be permitted to engage in other transactions with us.
However, if a default occurs with respect to the notes under the indenture and
the trustee or any affiliate has or acquires any conflicting interest within the
meaning of the Trust Indenture Act of 1939, as amended, the trustee must
eliminate such conflict within 90 days, apply to the SEC for permission to
continue or resign.
The holders of a majority of outstanding notes will have the right to
direct the time, method and place of conducting any proceeding for exercising
any remedy available to the trustee, subject to certain limitations specified in
the indenture. The indenture provides that in case an event of default shall
occur and be continuing, the trustee will be required, in the exercise of its
power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the request of any
holder of notes, unless such holder shall have offered to the trustee reasonable
security or indemnity satisfactory to it against any costs, expenses or
liabilities that may be incurred by the trustee.
GOVERNING LAW
The notes and the indenture shall be governed by, and construed in
accordance with, the laws of the State of New York.
32
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common
stock, $0.01 par value, and 5,000,000 shares of preferred stock, $0.01 par
value, of which 100,000 shares have been designated as Series A Preferred Stock.
As of March 2, 2004, there were 53,106,079 shares of common stock outstanding.
No shares of Series A Preferred Stock are outstanding.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders, and do not have
any cumulative voting rights. Holders of common stock are entitled to receive
ratably such dividends, if any, as may be declared by our board of directors out
of funds legally available therefor, and may be subject to any preferential
dividend rights of our preferred stock that we may issue in the future. In the
event of our liquidation, dissolution or winding up, the holders of common stock
are entitled to share ratably in all of our assets remaining after the payment
of all debt and other liabilities and subject to any liquidation preference of
any then outstanding preferred stock. Holders of common stock have no
preemptive, subscription or conversion rights. There are no redemption or
sinking fund provisions applicable to the common stock.
PREFERRED STOCK
Our board of directors is authorized, subject to certain restrictions,
without further stockholder approval, to issue at any time and from time to
time, preferred stock in one or more series. Each such series shall have such
number of shares, designations, preferences, voting powers, qualifications, and
special or relative rights or privileges and restrictions as shall be determined
by our board of directors. These rights, privileges and restrictions may include
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and preemptive rights, to
the full extent now or hereafter provided by Delaware law.
The rights of holders of common stock will be subject to, and may be
adversely affected by, the rights of holders of any preferred stock that may be
issued in the future. In addition, the issuance of preferred stock may have the
effect of delaying, deferring or preventing a change in control of I/O without
further action by our stockholders. The issuance of preferred stock having
voting and conversion rights may adversely affect the holders of our common
stock. Satisfaction of any dividend preferences of outstanding preferred stock
would reduce the amount of funds available, if any, for the payment of dividends
on our common stock. Holders of preferred stock would typically be entitled to
receive a preference payment upon our liquidation. Under certain circumstances,
the issuance of preferred stock could have the effect of decreasing the market
price of our common stock.
In August 2002, we repurchased from SCF all of our then-outstanding Series
B Convertible Preferred Stock and Series C Convertible Preferred Stock in
exchange for $30.0 million in cash and the issuance to SCF of a $31.0 million
principal amount unsecured promissory note due May 2004 and a warrant to
purchase 2,673,517 shares of our common stock. All outstanding indebtedness
remaining under the SCF Note was repaid with the proceeds from our offering and
sale of the notes in December 2003. The warrant was acquired by us at the same
time in exchange for our issuance of 125,000 shares to SCF in a
privately-negotiated transaction exempt from the registration requirements under
the Securities Act.
OPTIONS
As of December 31, 2003, options to purchase a total of 5,588,832 shares of
our common stock were outstanding, having a weighted-average exercise price of
$8.40 per share. As of that date, 353,358 additional shares of common stock were
available for options that could be granted in the future under our stock option
plans.
REGISTRATION RIGHTS
In connection with our August 2002 repurchase of our Series B and Series C
Preferred Stock, we entered into a registration rights agreement with SCF, which
was terminated in December 2003 in connection with our exchange of 125,000
shares of our common stock for the warrant.
33
In connection with our acquisition of our marine positioning systems
subsidiary in November 1998, we entered into a registration rights agreement
with a predecessor of Laitram, L.L.C. (Laitram) with respect to our shares of
common stock acquired by Laitram under the transaction. This registration rights
agreement grants piggyback registration rights to Laitram, which allow it to
participate in underwritten public offerings initiated by us, subject to certain
limitations and conditions set forth in the agreement. In addition, the
registration rights agreement grants Laitram two demand registration rights,
subject to certain limitations and conditions, including a requirement that each
demand for registration shall not be made for less than 1,000,000 shares of our
common stock.
In connection with our acquisition of Concept in February 2004, we entered
into a registration rights agreement with certain former securityholders of
Concept with respect to shares of our common stock acquired by them in the
transaction. The agreement provides for certain piggyback registration rights
and two demand registrations. Any demand registration may not be made for less
than 420,000 shares.
Our registration rights agreements with Laitram and the former
securityholders of Concept contain provisions whereby we have agreed to
indemnify the selling stockholders against certain liabilities, including
liabilities under the Securities Act. 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.
STOCKHOLDER RIGHTS PLAN
Our board of directors has adopted a stockholder rights plan. The
stockholder rights plan was adopted to give our board of directors increased
power to negotiate in our best interests and to discourage appropriation of
control of us at a price that is unfair to our stockholders. It is not intended
to prevent fair offers for acquisition of control determined by our board of
directors to be in the best interest of us and our stockholders, nor is it
intended to prevent a person or group from obtaining representation on or
control of our board of directors through a proxy contest, or to relieve our
board of directors of its fiduciary duty to consider any proposal for our
acquisition in good faith.
The stockholder rights plan involved the distribution of one preferred
share purchase "right" as a dividend on each outstanding share of our common
stock to all holders of record on January 27, 1997. Each right will entitle the
holder to purchase one one-thousandth of a share of our Series A Preferred Stock
at an purchase price of $200 per one one-thousandth of a share of Series A
Preferred Stock, subject to adjustment. The rights trade in tandem with our
common stock until, and become exercisable following, the occurrence of certain
triggering events. Our board of directors retains the right to discontinue the
stockholder rights plan through the redemption of all rights or to amend the
stockholder rights plan in any respect prior to our announcement of the
occurrence of any such triggering event, including the acquisition of 20% or
more of our voting stock by an acquiror. The rights will expire at the close of
business on January 27, 2007, unless earlier redeemed by us.
The description and terms of the rights are set forth in a rights agreement
between us and our transfer agent as successor to Harris Trust and Savings Bank,
as rights agent.
EFFECTS OF CERTAIN CERTIFICATE OF INCORPORATION AND BYLAWS PROVISIONS
Certain provisions of our certificate of incorporation and bylaws
summarized below may be deemed to have an anti-takeover effect and may delay,
defer or prevent a tender offer or takeover attempt that an investor might
consider in that investor's best interest, including any attempt that might
result in a premium over the market price for shares of our common stock.
Our board of directors is divided into three classes that are elected for
staggered three-year terms. Our stockholders may only remove a director for
cause.
Our certificate of incorporation provides that our directors generally will
not be personally liable for monetary damages for breach of their fiduciary
duties as a director. These provisions would not limit the liability of a
director for breach of the director's duty of loyalty, acts or omissions not in
good faith or which
34
involve intentional misconduct or a knowing violation of law, payment of an
unlawful dividend or any unlawful stock purchase or redemption, or any
transaction for which the director derived an improper benefit.
Our certificate of incorporation and bylaws also provide that we will
indemnify our directors and officers to the fullest extent permitted by Delaware
law. We have entered into separate indemnification agreements with our directors
and executive officers. In addition, we carry officer and director liability
insurance.
Our certificate of incorporation contains a "fair price" provision that
requires the approval of holders of not less than 75% of the outstanding shares
of our voting stock (including not less than 66 2/3% of the outstanding shares
of voting stock not owned, directly or indirectly, by persons who are "Related
Persons") as a condition for mergers, consolidations and certain other business
combinations, including management buyouts, involving I/O and any Related
Person; however, this 66 2/3% voting requirement is not applicable if the
business combination is approved by the holders of not less than 90% of the
outstanding shares of our voting stock. "Related Persons" include the holders of
10% or more of our outstanding voting stock and any affiliate of such persons.
The 75% voting requirement of the "fair price" provision is not applicable to a
business combination between I/O and any wholly-owned subsidiary, or a business
combination involving a holder of 10% or more of our outstanding voting stock so
long as the acquisition by such holder of such stock or the proposed transaction
is approved in advance of such person becoming a holder of 10% of our
outstanding voting stock by not less than 75% of our directors then holding
office, or if the following conditions are met:
- the transaction is a merger or consolidation proposed to occur within one
year of the time such holder acquired 10% of our outstanding voting stock
and the price to be paid to holders of common stock is at least as high
as the highest price paid by such holder in acquiring any of our common
stock;
- the consideration to be paid in the transaction is cash or the same form
of consideration paid by such holder to acquire a majority of its
holdings of common stock;
- between the date of the acquisition by the holder of 10% of our
outstanding voting stock and the transaction, there has been no failure
to declare and pay preferred stock dividends and no reduction in common
stock dividends (except as approved by a majority of our unaffiliated
directors), no further acquisition of voting stock by such holder and no
benefit, direct or indirect, received by such holder through loans or
other financial assistance from I/O or tax credits or other tax
advantages provided by I/O; and
- a proxy statement shall have been mailed to stockholders at least 30 days
prior to the consummation of the transaction for the purpose of
soliciting stockholder approval of this transaction.
Our certificate of incorporation also provides that
- special meetings of stockholders can be called only by our board of
directors;
- stockholders may act only at an annual or special meeting of stockholders
and may not act by written consent;
- our bylaws may be amended only by our board of directors or with the vote
of not less than 75% of the outstanding shares of our voting stock;
- a 75% vote of the outstanding voting stock is required to amend our
certificate of incorporation with respect to certain matters, including,
without limitation, the matters set forth in the two immediately
preceding clauses above and the 75% voting requirement for certain
business combinations described in the preceding paragraph; and
- in addition to the 75% voting requirement referred to in the immediately
preceding clause above, a 66 2/3% vote of the outstanding shares of our
voting stock not owned by a Related Person is required to amend the
provisions of our certificate of incorporation relating to certain
business combinations described in the preceding paragraph.
35
Our bylaws establish advance notice procedures with regard to the
nomination, other than those made by or at the direction of the board of
directors, of candidates for election as directors and as to any other business
to be brought before an annual or special meeting of our stockholders. These
procedures provide that the notice of proposed stockholder nominations for the
election of directors must be timely given in writing to our corporate secretary
prior to the meeting at which directors are to be elected. To be timely, notice
must be delivered to or mailed and received at our principal executive offices
(a) for annual meetings of stockholders, not later than the close of business on
the one hundred twentieth day prior to the first anniversary of the date our
proxy statement was released to stockholders in connection with our previous
year's annual meeting of stockholders, or (b) for special meetings at which our
board of directors has determined that directors shall be elected, not later
than the close of business on the one hundred twentieth day prior to such
special meeting or the tenth day following the day on which public announcement
is first made of the date of the special meeting and of the nominees proposed by
the board of directors to be elected at such meeting. The procedures also
provide that at an annual meeting, and subject to any other applicable
requirements, only such business may be conducted as has been brought before the
meeting by, or at the direction of, the board of directors or by a stockholder
who has given timely prior written notice to our corporate secretary of that
stockholder's intention to bring such business before the meeting. For such
stockholder's notice to be timely, notice must be delivered to or mailed and
received at our principal executive offices not later than the close of business
on the date that is 120 days prior to the first anniversary of the date our
proxy statement was released to stockholders in connection with our previous
year's annual meeting of stockholders. The notices must contain certain
information, and are subject to other qualifications, specified in the bylaws.
DELAWARE LAW
We are incorporated in Delaware and are subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with a Delaware corporation for three years following
the date such person became an interested stockholder, unless (i) before such
person became an interested stockholder, the board of directors of the
corporation approved the transaction in which the interested stockholder became
an interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owns at least 85%
of the voting stock of the corporation outstanding at the time the transaction
commenced (excluding stock held by directors who are also officers of the
corporation and by employee stock plans that do not provide employees with the
right to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer); or (iii) on or subsequent to the
date of the transaction in which such person became an interested stockholder,
the business combination is approved by the board of directors of the
corporation and authorized at a meeting of the stockholders by the affirmative
vote of the holders of two-thirds of the outstanding voting stock of the
corporation not owned by the interested stockholder.
Under Section 203, the restrictions described above also do not apply to
certain business combinations proposed by an interested stockholder following
the announcement or notification of one of certain extraordinary transactions
involving the corporation and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of a majority of the corporation's directors, if
such extraordinary transaction is approved or not opposed by a majority of the
directors who were directors prior to any person becoming an interested
stockholder during the previous three years or were recommended for election or
elected to succeed such directors by a majority of such directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Computershare
Investor Service L.L.C. It is located at 2 North LaSalle St., Chicago, Illinois
60602-3705 and its telephone number is (312) 360-5286.
36
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
This section summarizes the material U.S. federal income tax considerations
relating to the beneficial ownership and disposition of the notes and the shares
of common stock into which the notes may be converted. This summary is based on
the currently existing provisions of the Internal Revenue Code of 1986, as
amended (the Code), existing and proposed Treasury Regulations, administrative
pronouncements and judicial decisions, each as available on the date hereof. All
of the foregoing are subject to change, possibly with retroactive effect, or
different interpretations. In such event, the federal income tax consequences of
purchasing, owning or disposing of the notes, or the common stock acquired upon
conversion of the notes, could differ from those described in this summary. No
advance tax ruling has been sought or obtained from the Internal Revenue Service
(IRS) regarding the U.S. federal income tax consequences of any of the
transactions described herein, and this discussion is not binding on the IRS or
any court. Accordingly, the IRS may challenge some or all of the conclusions set
forth herein. This summary generally applies only to holders that purchased the
notes in the initial offering at their issue price and hold the notes, or common
stock acquired upon conversion of the notes, as capital assets, within the
meaning of Section 1221 of the Code. The summary does not address any aspect of
state, local or foreign tax law, nor does it address U.S. federal, estate and
gift tax law.
As used herein the term "U.S. holder" means a beneficial owner of the notes
or the common stock that is for U.S. federal income tax purposes:
- a citizen or resident of the United States (including certain former
citizens and former long-term residents);
- a corporation, or other entity taxable as a corporation for U.S. federal
income tax purposes, created or organized under the laws of the United
States or any State thereof (including the District of Columbia);
- an estate if its income is subject to U.S. federal income taxation
regardless of its source; or
- a trust if such trust validly elects to be treated as a United States
person for U.S. federal income tax purposes, or if (1) a court within the
United States is able to exercise primary supervision over its
administration, and (2) one or more United States persons have the
authority to control all of the substantial decisions of such trust.
A "non-U.S. holder" is a holder that is not a U.S. holder.
If a partnership is a beneficial owner of our notes or common stock, the
treatment of a partner in the partnership will generally depend upon the status
of the partner and the activities of the partnership. A beneficial owner that is
a partnership and partners in such a partnership should consult their tax
advisors about the U.S. federal income tax consequences of the acquisition,
ownership and disposition of our notes and common stock.
This summary is for general information only and does not address federal
income tax considerations that may be relevant to particular holders, such as:
- financial institutions;
- insurance companies;
- partnerships or other entities classified as partnerships for U.S.
federal income tax purposes;
- real estate investment trusts;
- grantor trusts;
- regulated investment companies;
- dealers or traders in securities or currencies;
- tax-exempt entities;
37
- persons that will hold the notes or common stock as part of a "hedging"
or "conversion" transaction or as a position in a "straddle" for U.S.
federal income tax purposes;
- U.S. holders that have a "functional currency" other than the United
States dollar; and
- persons subject to the alternative minimum tax.
YOU SHOULD CONSULT YOUR OWN TAX ADVISOR REGARDING THE APPLICATION OF THE
U.S. FEDERAL INCOME TAX LAWS TO YOUR PARTICULAR SITUATION AND THE CONSEQUENCES
OF FEDERAL ESTATE OR GIFT TAX LAWS, FOREIGN, STATE, OR LOCAL LAWS AND TAX
TREATIES.
U.S. HOLDERS
TAXATION OF INTEREST
U.S. holders will be required to recognize as ordinary income any interest
paid or accrued on the notes in accordance with their regular method of tax
accounting for U.S. federal income tax purposes. The notes were not issued with
original issue discount for U.S. federal income tax purposes; however, if we do
not comply with our obligations under the registration rights agreement, we may
be required to make additional payments to holders of the notes, as described
under "Description of Notes -- Registration Rights of the Noteholders." The
original issue discount rules allow contingent payments such as these to be
disregarded in determining whether a note is subject to the special rules that
apply to debt instruments that provide for contingent payments if the
contingency is "remote." We believe that the possibility is remote that we will
make the additional payments described above; and we do not intend to treat the
possibility of payment of such additional amounts as affecting the timing or
amount of interest on the notes. Our determination in this regard is binding on
U.S. holders unless they disclose their contrary position.
CONSTRUCTIVE DIVIDENDS
The conversion rate will be adjusted in certain circumstances. If at any
time the conversion rate of the notes is increased, such increase may be deemed
to be the payment of a constructive taxable distribution, for U.S. federal
income tax purposes, to the holders of the notes. For example, an increase in
the conversion rate in the event of distributions of our debt instruments, or
our assets, or cash, generally will result in deemed distribution treatment to
the holders of the notes, but an increase in the event of stock dividends or the
distribution of rights to subscribe for our common stock generally will not. In
certain circumstances, the failure to make an adjustment of the conversion rate
under the indenture may result in a taxable distribution to holders of our
company's common stock. Any deemed distribution will be taxable as a dividend,
return of capital or capital gain in accordance with the earnings and profits
rules under U.S. federal income tax principles.
SALE, EXCHANGE OR REDEMPTION OF THE NOTES
A U.S. holder will generally recognize capital gain or loss if the holder
disposes of a note in a sale, redemption or exchange, other than a conversion of
the note into common stock. The holder's gain or loss will equal the difference
between the proceeds received by the holder and the holder's adjusted tax basis
in the note. The proceeds received by the holder will include the amount of any
cash and the fair market value of any other property received for the note. The
holder's tax basis in the note generally will equal the amount the holder paid
for the note, decreased by the amount of any payments (other than interest)
received by such U.S. holder. The portion of any proceeds that is attributable
to accrued interest will not be taken into account in computing the holder's
capital gain or loss. Instead, that portion will be recognized as ordinary
interest income to the extent that the holder has not previously included the
accrued interest in income.
The gain or loss recognized by a U.S. holder on a disposition of the note
will be long-term capital gain or loss if the U.S. holder's holding period for
the note is more than one year. Long-term capital gains of non-corporate
taxpayers are currently taxed at lower rates than those applicable to ordinary
income. The deductibility of capital losses is subject to limitations. U.S.
holders of notes should consult their tax advisors regarding the treatment of
capital gains and losses.
38
The registration of the notes will not constitute a taxable exchange for
U.S. federal income tax purposes and, thus, a U.S. holder will not recognize any
gain or loss upon such registration.
CONVERSION OF THE NOTES INTO COMMON STOCK
A U.S. holder generally will not recognize any income, gain or loss on
converting a note into common stock, except that the fair market value of common
stock received with respect to accrued interest will be taxed as a payment of
interest as described under "-- U.S. Holders -- Taxation of Interest," above. If
the holder receives cash in lieu of a fractional share of common stock, however,
the holder would be treated as if such holder received the fractional share and
then the fractional share was redeemed for the cash. The holder would recognize
capital gain or loss equal to the difference between the cash received and that
portion of such holder's tax basis in the common stock attributable to the
fractional share. The holder's aggregate tax basis in the common stock will
equal the holder's adjusted tax basis in the note, increased, for a cash method
holder, by the amount of income recognized with respect to accrued interest, and
decreased by the portion of tax basis allocable to the fractional share. The
holder's holding period for the common stock will include the period during
which such holder held the note, except that the holding period of any common
stock received with respect to accrued interest will commence on the day after
the date of conversion.
DIVIDENDS
If, after a U.S. holder converts a note into common stock, we make a
distribution in respect of that stock, other than certain pro rata distributions
of common shares, the distribution will be treated as a dividend, taxable to the
U.S. holder as ordinary income, to the extent that the distribution is paid from
our current or accumulated earnings and profits (as determined under U.S.
federal income tax principles). Under recently enacted legislation, in the case
of certain taxpayers, including individuals, the federal income tax rate
applicable to dividends received in years beginning prior to 2009 may be lower
than the rate applicable to other categories of ordinary income if certain
conditions are met. U.S. holders should consult their tax advisors regarding the
implications of this new legislation to such U.S. holder's particular
circumstances.
If the distribution exceeds our current and accumulated earnings and
profits, the excess will be treated first as a tax-free return of the holder's
investment, up to the holder's basis in the common stock. Any remaining excess
will be treated as capital gain. If the U.S. holder is a U.S. corporation, it
generally would be able to claim a dividends received deduction equal to a
portion of any dividends received, subject to specific limitations and
conditions.
SALE OR EXCHANGE OF COMMON STOCK
A U.S. holder will generally recognize capital gain or loss on a sale or
exchange of common stock. The holder's gain or loss will equal the difference
between the proceeds received by the holder and the holder's adjusted tax basis
in the stock. The proceeds received by the holder will include the amount of any
cash and the fair market value of any other property received for the stock.
The gain or loss recognized by a holder on a sale or exchange of stock will
be long-term capital gain or loss if the U.S. holder's holding period for the
shares is more than one year. U.S. holders should consult their tax advisors
regarding the treatment of capital gains and losses.
The registration of the common stock issuable upon conversion of the notes
will not constitute a taxable exchange for U.S. federal income tax purposes and,
thus, a U.S. holder will not recognize any gain or loss upon such registration.
NON-U.S. HOLDERS
TAXATION OF INTEREST
Although payments of interest to non-U.S. holders generally are subject to
U.S. federal income tax at a rate of 30%, collected by means of withholding by
the payor, payments of interest on the notes to most non-U.S. holders will
qualify as portfolio interest, and thus will be exempt from the withholding tax,
if the holders
39
certify their nonresident status as described below. The portfolio interest
exemption will not apply to payments of interest to a non-U.S. holder where:
- the payments are treated as effectively connected with the non-U.S.
holder's United States trade or business;
- the payments are deemed to be contingent interest under the terms of the
portfolio interest provisions;
- the holder is a bank whose receipt of interest on a note is described in
Section 881(c)(3)(A) of the Code;
- the holder owns, directly or indirectly (taking into account certain
constructive ownership rules), at least 10% of our voting stock; or
- the holder is a "controlled foreign corporation" that is related to us.
Even if the portfolio interest exemption does not apply, the 30%
withholding tax might not apply, or might apply at a reduced rate, under the
terms of an income tax treaty between the United States and the non-U.S.
holder's country of residence. The portfolio interest exemption, entitlement to
treaty benefits and several of the special rules for non-U.S. holders described
below apply only if the holder certifies its nonresident status. A non-U.S.
holder can meet this certification requirement in the manner described under
"-- Backup Withholding and Information Reporting," below.
SALE, EXCHANGE OR REDEMPTION OF NOTES
Subject to the discussion below concerning backup withholding, non-U.S.
holders generally will not be subject to U.S. federal income tax on any gain
realized on the sale, exchange, or other disposition of the notes. This general
rule, however, is subject to several exceptions. For example, the gain would be
subject to U.S. federal income tax if:
- the gain is effectively connected with the conduct by the non-U.S. holder
of a U.S. trade or business;
- the non-U.S. holder was a citizen or resident of the United States and is
subject to special rules that apply to expatriates;
- the non-U.S. holder is an individual present in the United States for 183
days or more in the taxable year of such sale or exchange and certain
other conditions are met: or
- the rules of the Foreign Investment in Real Property Tax Act (FIRPTA)
(described below) treat the gain as effectively connected with a U.S.
trade or business.
The FIRPTA rules may apply to a sale, exchange or other disposition of
notes if we are, or have been within the shorter of the five-year period
preceding such sale, exchange or disposition and the period the non-U.S. holder
held the notes, a U.S. real property holding corporation (USRPHC). In general,
we would be a USRPHC if the fair market value of our interests in U.S. real
estate, equals or exceeds 50% of the fair market value of our assets. We do not
believe that we are a USRPHC or that we will become one in the future.
CONVERSION OF THE NOTES
A non-U.S. holder generally will not recognize any income, gain or loss on
converting a note into common stock, except that the fair market value of common
stock received with respect to accrued interest will be taxed as a payment of
interest as described under "-- Non-U.S. Holders -- Taxation of Interest,"
above. If the holder receives cash in lieu of a fractional share of common
stock, however, the holder would be treated as if such holder received the
fractional share and then the fractional share was redeemed for the cash. Any
gain recognized as a result of the holder's receipt of cash in lieu of a
fractional share of common stock would also generally not be subject to U.S.
federal income tax. Please read "Non-U.S. Holders -- Sale or Exchange of Common
Stock," below.
40
DIVIDENDS
Dividends, including any constructive dividends resulting from certain
adjustments to the conversion rate (please read "U.S. Holders -- Constructive
Dividends," above) paid to a non-U.S. holder on common stock received on
conversion of a note generally will be subject to U.S. withholding tax at a 30%
rate. In the case of any constructive dividend, it is possible that this tax
would be withheld from interest or sales proceeds subsequently paid or credited
to you. The withholding tax might not apply, however, or might apply at a
reduced rate, under the terms of a tax treaty between the United States and the
non-U.S. holder's country of residence. A non-U.S. holder must demonstrate its
entitlement to treaty benefits by certifying its nonresident status as described
under "-- Backup Withholding and Information Reporting," below.
SALE OR EXCHANGE OF COMMON STOCK
Non-U.S. holders will generally not be subject to U.S. federal income tax
on any gains realized on the sale, exchange or other disposition of common
stock. This general rule, however, is subject to exceptions. For example, the
gain would be subject to U.S. federal income tax if:
- the gain is effectively connected with the conduct by the non-U.S. holder
of a U.S. trade or business;
- the non-U.S. holder was a citizen or resident of the United States and is
subject to special rules that apply to expatriates;
- the non-U.S. holder is an individual present in the United States for 183
days or more in the taxable year of such sale or exchange and certain
other conditions are met; or
- the FIRPTA rules treat the gain as effectively connected with a U.S.
trade or business. For a discussion of FIRPTA rules, please read
"-- Sale, Exchange or Redemption of Notes," above.
INCOME OR GAINS EFFECTIVELY CONNECTED WITH A U.S. TRADE OR BUSINESS
The preceding discussion of the tax consequences of the purchase, ownership
or disposition of notes or common stock by a non-U.S. holder generally assumes
that the holder is not engaged in a U.S. trade or business. If any interest on
notes, dividends on common stock or gain from the sale, exchange or other
disposition of notes or common stock is effectively connected with a U.S. trade
or business conducted by the non-U.S. holder, then the income or gain will be
subject to U.S. federal income tax in the same manner as if derived by a U.S.
holder. If the non-U.S. holder is eligible for the benefits of a tax treaty
between the United States and the holder's country of residence, any
"effectively connected" income or gain will generally be subject to U.S. federal
income tax only if it is also attributable to a permanent establishment
maintained by the holder in the United States. Payments of interest or dividends
that are effectively connected with a U.S. trade or business, and therefore
included in the gross income of a non-U.S. holder, will not be subject to the
30% withholding tax. To claim this exemption from withholding, the holder must
certify its qualification by filing IRS Form W-8ECI. If the non-U.S. holder is a
corporation, that portion of its earnings and profits that are effectively
connected with its U.S. trade or business may be subject to a branch profits
tax. The branch profits tax rate is generally 30%, although an applicable tax
treaty might provide for a lower rate.
BACKUP WITHHOLDING AND INFORMATION REPORTING
The Code and the Treasury regulations require those who make specified
payments to report the payments to the IRS. Among the specified payments are
interest, dividends and proceeds paid by brokers to their customers. The
required information returns enable the IRS to determine whether the recipient
properly included the payments in income. This reporting regime is reinforced by
backup withholding rules. These rules require the payors to withhold tax from
payments subject to information reporting if the recipient fails to cooperate
with the reporting regime by failing to provide the recipient's taxpayer
identification number to the payor, furnishing an incorrect identification
number or repeatedly failing to report interest or dividends on the recipient's
returns. The backup withholding rate is currently 28%. For taxable years
beginning after December 31, 2010, the backup withholding rate is scheduled to
be increased to 31%. The information reporting and backup withholding rules do
not apply to payments to corporations, whether domestic or foreign.
41
Payments of interest or dividends to non-corporate U.S. holders of notes or
common stock will generally be subject to information reporting, and will be
subject to backup withholding unless the holder provides us or our paying agent
with a correct taxpayer identification number.
If the appropriate certification requirements are satisfied, the
information reporting and backup withholding rules generally will not apply to
payments that are subject to the 30% (or lower treaty rate) withholding tax on
dividends or interest paid to nonresidents, or to payments that are exempt from
that tax by application of a tax treaty or special exception. However,
information reporting on IRS Form 1042-S may still apply with respect to
interest and dividend payments. A non-U.S. holder (or the holder's agent, as
described further below) can meet this certification requirement by providing a
completed IRS Form W-8BEN, IRS Form W-8EXP, or IRS Form W-8IMY, as applicable,
or appropriate substitute form to us or our paying agent. If the holder holds
the notes through a financial institution or other agent acting on the holder's
behalf, the holder will be required to provide appropriate documentation to the
agent. The holder's agent will then be required to provide certification to us
or our paying agent, either directly or through other intermediaries.
Payments made to U.S. holders by a broker upon a sale of notes or common
stock generally will be subject to information reporting and backup withholding.
If, however, the sale is made through a foreign office of a U.S. broker, the
sale will be subject to information reporting but not backup withholding. If the
sale is made through a foreign office of a foreign broker, the sale will
generally not be subject to either information reporting or backup withholding.
This exception may not apply, however, if the foreign broker is owned or
controlled by U.S. persons, or is engaged in a U.S. trade or business.
Payments made to a non-U.S. holder by a broker upon a sale of notes or
common stock will not be subject to information reporting or backup withholding
provided the holder certifies its foreign status or otherwise establishes an
exemption.
Any amounts withheld from a payment to a holder of notes or common stock
under the backup withholding rules can be credited against any U.S. federal
income tax liability of the holder and may entitle the holder to a refund,
provided the required information is furnished to the IRS.
THE PRECEDING DISCUSSION OF MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
IS FOR GENERAL INFORMATION ONLY. IT IS NOT TAX ADVICE. YOU SHOULD CONSULT YOUR
OWN TAX ADVISOR REGARDING THE PARTICULAR U.S. FEDERAL, STATE, LOCAL AND FOREIGN
TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF OUR NOTES OR COMMON
STOCK, INCLUDING THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAWS.
42
SELLING SECURITYHOLDERS
We originally issued the notes in a private placement to the initial
purchaser in December 2003. The notes were sold by the initial purchaser of the
notes in a transaction exempt from the registration requirements of the
Securities Act to persons reasonably believed by the initial purchaser to be
qualified institutional buyers as defined by Rule 144A under the Securities Act.
Selling securityholders, including their transferees, pledgees or donees or
their successors, may from time to time offer and sell pursuant to this
prospectus any or all of the notes and shares of common stock into which the
notes are convertible.
The following table sets forth information with respect to the selling
securityholders and the principal amount of notes and underlying shares of
common stock beneficially owned by each selling securityholder that may be
offered pursuant to this prospectus. The information is based on information
provided by or on behalf of the selling securityholders. The selling
securityholders may offer all, some or none of the notes or the common stock
into which the notes are convertible. Because the selling securityholders may
offer all or some portion of the notes or the common stock, we cannot estimate
the amount of the notes or the common stock that will be held by the selling
securityholders upon termination of any of these sales. In addition, the selling
securityholders identified below may have sold, transferred or otherwise
disposed of all or a portion of their notes since the date on which they
provided the information regarding their notes in transactions exempt from the
registration requirements of the Securities Act. The percentage of notes
outstanding beneficially owned by each selling securityholder is based on
$60,000,000 aggregate principal amount of notes outstanding.
The number of shares of common stock issuable upon conversion of the notes
shown in the table below assumes conversion of the full amount of notes held by
each selling securityholder at an initial conversion rate of 231.4815 shares per
$1,000 principal amount of notes and a cash payment in lieu of any fractional
shares. Except as set forth in the table below, no selling securityholder named
in the table beneficially owns one percent or more of our common stock.
NUMBER OF
AMOUNT PERCENTAGE AMOUNT OF SHARES OF NUMBER OF SHARES
OF NOTES OF NOTES NOTES THAT COMMON STOCK OF COMMON STOCK
BENEFICIALLY BENEFICIALLY MAY BE SOLD BENEFICIALLY THAT MAY BE
SELLING SECURITYHOLDER OWNED ($) OWNED (%) ($)(1) OWNED(2)(3) SOLD(1)(3)
---------------------- ------------ ------------ ----------- ------------ ----------------
BNP Paribas Equity Strategies, SNC
c/o BNP Paribas Brokerage
Services, Inc.(7)................ 1,750,000 2.92 1,750,000 406,631(4) 405,092
CNH CA Master Account, L.P.(8)..... 750,000 1.25 750,000 173,611 173,611
Context Convertible Arbitrage Fund,
LP(9)............................ 2,200,000 3.67 2,200,000 509,259 509,259
Context Convertible Arbitrage
Offshore, LTD(9)................. 6,850,000 11.42 6,850,000 1,585,648(5) 1,585,648
CopperNeff Convertible Strategies
(Cayman) Master Fund, L.P. c/o
BNP Paribas Brokerage Services,
Inc.(7).......................... 1,846,000 3.08 1,846,000 427,314 427,314
HighBridge International
L.L.C.(10)....................... 1,500,000 2.5 1,500,000 347,222 347,222
KBC Financial Products USA,
Inc. ............................ 500,000 * 500,000 115,740 115,740
Kdc Convertible Arbitrage Master
Fund CV.......................... 500,000 * 500,000 115,740 115,740
LDG Limited........................ 93,000 * 93,000 21,527 21,527
Lexington Vantage Fund c/o TQA
Investors, L.L.C. ............... 23,000 * 23,000 5,324 5,324
Lyxor/Convertible Arbitrage Fund,
Limited c/o BNP Paribas Brokerage
Services, Inc. .................. 309,000 * 309,000 71,527 71,527
Lyxor/Context Fund LTD(9).......... 1,000,000 1.67 1,000,000 231,481 231,481
43
NUMBER OF
AMOUNT PERCENTAGE AMOUNT OF SHARES OF NUMBER OF SHARES
OF NOTES OF NOTES NOTES THAT COMMON STOCK OF COMMON STOCK
BENEFICIALLY BENEFICIALLY MAY BE SOLD BENEFICIALLY THAT MAY BE
SELLING SECURITYHOLDER OWNED ($) OWNED (%) ($)(1) OWNED(2)(3) SOLD(1)(3)
---------------------- ------------ ------------ ----------- ------------ ----------------
Lyxor/Gaia II Fund Ltd. ........... 100,000 * 100,000 23,148 23,148
Man Convertible Bond Master Fund,
Ltd.(11)......................... 4,971,000 8.30 4,971,000 1,150,694(5) 1,150,694
National Bank of Canada c/o Context
Capital Management............... 400,000 * 400,000 92,592 92,592
National Bank of Canada c/o Putnam
Lovell NBF Securities,
Inc.(12)......................... 500,000 * 500,000 115,740 115,740
Polygon Global Opportunities Master
Fund............................. 500,000 * 500,000 115,740 115,740
Royal Bank of Canada (Norshield)
c/o Context Capital Management,
LLC.............................. 475,000 * 475,000 109,953 109,953
St. Thomas Trading, Ltd.(11)....... 8,579,000 14.30 8,579,000 1,985,879(5) 1,985,879
Singlehedge U.S. Convertible
Arbitrage Fund c/o BNP Paribas
Brokerage Services, Inc. ........ 494,000 * 494,000 114,351 114,351
Sphinx Fund c/o TQA Investors,
L.L.C. .......................... 63,000 * 63,000 14,583 14,583
Sturgeon Limited................... 351,000 * 351,000 81,250 81,250
TQA Master Fund, LTD(13)........... 928,000 1.55 928,000 214,814 214,814
TQA Master Plus Fund, LTD c/o TQA
Investors, L.L.C.(13)............ 1,427,000 2.38 1,427,000 330,324 330,324
TQA Special Opportunities Master
Fund Ltd. c/o TQA Investors,
L.L.C.(13)....................... 1,250,000 2.08 1,250,000 289,351 289,351
UBS O'Connor L.L.C. F/B/O O'Connor
Global Convertible Arbitrage
Master Limited(16)............... 6,000,000 10.00 6,000,000 1,388,888(5) 1,388,888
Univest Convertible Arbitrage Fund
II LTD (Norshield) c/o Context
Capital Management, LLC.......... 175,000 * 175,000 40,509 40,509
Wolverine Asset Management
LLC(14).......................... 960,000 1.60 960,000 222,222 222,222
Xavex Convertible Arbitrage 7 Fund
c/o TQA Investors, L.L.C. ....... 270,000 * 270,000 62,500 62,500
Zazove Convertible Arbitrage Fund,
L.P.(15)......................... 3,000,000 5.00 3,000,000 694,444(5) 694,444
Zurich Institutional Benchmarks
Master Fund Ltd. c/o TQA
Investors, L.L.C. ............... 196,000 * 196,000 45,370 45,370
All other securityholders or any
future transferees, pledgees,
donees or successors of such
securityholders(6)...............
Total.........................
44
---------------
* Represents less than 1%
(1) Because a selling securityholder may sell all or a portion of the notes and
common stock issuable upon conversion of the notes pursuant to this
prospectus, no estimate can be given as to the number or percentage of
notes and common stock that the selling securityholder will hold upon
termination of any sales.
(2) Includes shares of common stock issuable upon conversion of the notes.
(3) The number of shares of our common stock issuable upon conversion of the
notes is calculated assuming conversion of the full amount of notes held by
such holder at the initial conversion price of $4.32 which equals a
conversion rate of 231.4815 shares per $1,000 principal amount of notes.
This conversion rate is subject to adjustment as described under
"Description of Notes -- Conversion Price Adjustments". Accordingly, the
number of shares of our common stock to be sold may increase or decrease
from time to time. Fractional shares will not be issued upon conversion of
the notes. Cash will be paid in lieu of fractional shares.
(4) Includes shares of common stock beneficially owned in addition to the
shares of common stock deemed beneficially owned that are issuable upon
conversion of the notes.
(5) Would represent, upon conversion of the securityholder's notes into shares
of common stock, greater than 1% of our shares of common stock outstanding
as of March 2, 2004.
(6) Assumes that any other holders of the notes or any future transferees,
pledgees, donees or successors of such holders of the notes do not
beneficially own any shares of common stock other than the common stock
issuable upon conversion of the notes at the initial conversion rate.
(7) Christian Mestrier may be deemed to be the beneficial owner of these
securities since he exercises voting and investment power over them.
(8) Robert Krail, Mark Mitchell and Todd Pulvino may be deemed to be the
beneficial owner of these securities since they exercise voting and
investment power over them.
(9) Michael Rosen and William Sertig may be deemed to be the beneficial owner
of these securities since they exercise voting and investment power over
them.
(10) Glen Dubin and Henry Swieca may be deemed to be the beneficial owner of
these securities since they exercise voting and investment power over them.
(11) Jeffrey Hansen and John Null may be deemed to be the beneficial owner of
these securities since they exercise voting and investment power over them.
(12) Robin Shah and Alexander Robinson may be deemed to be the beneficial owner
of these securities since they exercise voting and investment power over
them.
(13) Paul Bucci, Robert Butman, George Esser, John Idone, Darren Langis and Bart
Tesoriero may be deemed to be the beneficial owner of these securities
since they exercise voting and investment power over them.
(14) Chris Gust may be deemed to be the beneficial owner of these securities
since he exercises voting and investment power over them.
(15) Gene Pretti may be deemed to be the beneficial owner of these securities
since he exercises voting and investment power over them.
(16) UBS O'Connor Global Convertible Arbitrage Master Limited may be deemed to
be the beneficial owner of these securities. UBS O'Connor Global
Convertible Arbitrage Master Limited is a hedge fund managed by UBS
O'Connor L.L.C. (a wholly owned subsidiary of UBS AG which is traded on the
New York Stock Exchange).
None of the selling securityholders nor any of their affiliates, officers,
directors or principal equity holders have held any position or office or has
had any material relationship with us within the past three years.
The initial purchaser purchased all of the notes from us in private
transactions in December 2003. All of the notes were "restricted securities"
under the Securities Act prior to this registration. The selling
45
securityholders have represented to us that they purchased the notes for their
own account for investment only and not with a view toward selling or
distributing them, except pursuant to sales registered under the Securities Act
or exempt from such registration.
Information concerning the securityholders may change from time to time and
any changed information will be set forth in amendments to the registration
statement of which this prospectus is a part, or in prospectus supplements to
this prospectus, if and when necessary. In addition, the number of shares of
common stock issuable upon conversion of the notes is subject to adjustment
under certain circumstances. Accordingly, the aggregate principal amount of
notes and the number of shares of common stock into which the notes are
convertible may increase or decrease.
46
PLAN OF DISTRIBUTION
We will not receive any of the proceeds from the sale of the notes and the
shares of our common stock issuable upon conversion of the notes offered by this
prospectus. The notes and the shares of our common stock issuable upon
conversion of the notes may be offered and sold from time to time by the selling
securityholders. The term "selling securityholders" includes transferees,
pledges, donees or other successors selling notes and shares of our common stock
issuable upon conversion of the notes received after the date of this prospectus
from a selling securityholder as a gift, pledge, partnership distribution or
other non-sale related transfer. The selling securityholders will act
independently of us in making decisions with respect to the timing, manner and
size of each sale.
If the notes and the shares of our common stock issuable upon conversion of
the notes are sold through underwriters, broker-dealers or agents, the selling
securityholders will be responsible for underwriting discounts or commissions
and/or agents' commissions. Such notes and shares may be sold in one or more
transactions at fixed prices, at prevailing market prices at the time of sale,
at prices related to such prevailing market prices, at varying prices determined
at the time of sale and/or at negotiated prices. Such sales may be effected in
one or more transactions, which may involve block transactions:
- on any national securities exchange or quotation service on which the
notes and shares may be listed or quoted at the time of sale;
- in the over-the-counter market;
- in transactions otherwise than on such exchanges or services or in the
over-the-counter market; or
- any combination of the foregoing.
The selling securityholders may sell notes and shares of our common stock
issuable upon conversion of the notes by one or more of, or a combination of,
the following methods:
- purchases by a broker-dealer as principal and resale by such
broker-dealer for its own account pursuant to this prospectus;
- ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
- block trades in which the broker-dealer so engaged will attempt to sell
the shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
- in privately negotiated transactions; and
- in options transactions.
In addition, any notes and shares that qualify for sale pursuant to Rule
144 or Rule 144A under the Securities Act may be sold under Rule 144 or Rule
144A rather than pursuant to this prospectus.
Selling securityholders that are also registered broker-dealers that sell
the notes or shares of common stock hereunder may be deemed to be "underwriters"
within the meaning of the Securities Act and any commissions they receive and
any profits on the sale of the notes and shares of our common stock issuable
upon the conversion of the notes may be deemed to be underwriting discounts and
commissions under the Securities Act. Neither we nor any selling securityholder
can presently estimate the amount of any such compensation. We understand that
Forest Fulcrum Fund L.P. and KBC Financial Products USA, Inc. are registered
broker-dealers, and as a result, they are deemed to be "underwriters" within the
meaning of the Securities Act of 1933 in connection with the sale of the notes
or the common stock.
We understand that several of the selling securityholders are affiliates of
broker-dealers. Each of these selling securityholders has informed us that: (1)
such selling securityholder purchased its notes in the ordinary course of
business, and (2) at the time that the notes were purchased, the selling
securityholder had no agreements or understandings, directly or indirectly, with
any person to distribute the notes.
To the extent required, this prospectus may be amended or supplemented from
time to time to describe a specific plan of distribution. Any selling
securityholder may pledge or grant a security interest in some or all of
47
the notes and the shares of our common stock issuable upon conversion of the
notes owned by it and, if such selling securityholder defaults in performance of
its secured obligations, the pledgees or secured parties may offer and sell the
pledged notes and the shares of our common stock issuable upon conversion of the
notes from time to time pursuant to this prospectus. The selling securityholders
may also transfer and donate the notes and the shares of our common stock
issuable upon conversion of the notes in other circumstances in which case the
transferees, donees, pledgees or other successors in interest will be the
selling securityholder for purposes of this prospectus.
To our knowledge, there are currently no plans, arrangements or
understandings between any selling securityholders and any underwriter,
broker-dealer or agent regarding the sale of the notes or the underlying common
stock by the selling securityholders. Selling securityholders may decide to sell
all or a portion of the notes or the underlying common stock offered by them
under this prospectus. In addition, any selling securityholder may transfer,
devise or give the notes or the underlying common stock by other means not
described in this prospectus.
Our common stock is quoted on the New York Stock Exchange under the symbol
"IO." We do not intend to apply for listing of the notes on any securities
exchange or national market system. Accordingly, no assurance can be given as to
the liquidity of, or development of any trading markets for, the notes.
The selling securityholders and any other person participating in the
distribution of the notes or underlying common stock will be subject to the
Exchange Act. The Exchange Act rules include, without limitation, Regulation M,
which may limit the timing of purchases and sales of any of the notes and the
underlying common stock by the selling securityholders and any such other
person. In addition, Regulation M of the Exchange Act may restrict the ability
of any person engaged in the distribution of the notes and the underlying common
stock to engage in market making activities with respect to the particular notes
and underlying common stock being distributed for a period of up to five
business days prior to the commencement of such distribution. This may affect
the marketability of the notes and the underlying common stock and the ability
to engage in market making activities with respect to the notes and the
underlying common stock.
Under the registration rights agreement that has been filed as an exhibit
to the registration statement of which this prospectus is a part, we and the
selling securityholders will each indemnify the other against certain
liabilities, including certain liabilities under the Securities Act, or will be
entitled to contribution in connection with these liabilities.
We have agreed to pay substantially all of the expenses incidental to the
registration, offering and sale of the notes and the underlying common stock to
the public other than commissions, fees and discounts of underwriters, brokers,
dealers and agents.
LEGAL MATTERS
Fulbright & Jaworski L.L.P., Houston, Texas, has passed on the validity of
the issuance of the securities offered in this prospectus.
EXPERTS
The consolidated financial statements incorporated in this Registration
Statement by reference to the Annual Report on Form 10-K for the year ended
December 31, 2003, have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy materials that we have filed
with the SEC at the SEC public reference room located at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. You may obtain information about the public
48
reference room by calling the SEC at 1-800-SEC-0330. Our SEC filings are also
available to the public on the SEC's Internet website at http://www.sec.gov.
Our common stock is listed on the New York Stock Exchange (NYSE) and we are
required to file reports, proxy statements and other information with the NYSE.
You may read any document we file with the NYSE at the offices of the New York
Stock Exchange, Inc. which is located at 20 Broad Street, New York, New York
10005.
INCORPORATION BY REFERENCE
We incorporate by reference into this prospectus the documents listed below
and any filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of
the Exchange Act after the date of this prospectus and prior to the termination
of the offering of the notes and common stock under this prospectus. The
information incorporated by reference into this prospectus is considered a part
of this prospectus, and information that we file later with the SEC, prior to
the termination of the offering of the notes and common stock under this
prospectus, will automatically update and supercede the previously filed
information.
- Our Annual Report on Form 10-K for our fiscal year ended December 31,
2003.
- Our Current Report on Form 8-K filed on March 5, 2004.
- The description of our common stock contained in our Form 8-A dated
October 14, 1994 filed under Section 12(b) of the Exchange Act, as
amended by our Current Report on Form 8-K filed on February 8, 2002.
- Our Form 8-A12B filed on January 27, 1997 and on Form 8-A12B/A filed on
May 7, 1999.
You may request a copy of these filings, at no cost, by writing to or
telephoning us at the following address:
Input/Output, Inc.
12300 Parc Crest Drive
Stafford, Texas 77477
Tel: (281) 933-3339
Attention: Corporate Secretary
49
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
An estimate (other than the SEC registration fee) of the fees and expenses
of issuance and distribution of the securities offered hereby (all of which will
be paid by Input/Output, Inc. ("I/O") is as follows:
SEC registration fee........................................ $ 4,854
Legal fees and expenses..................................... $125,000
Accounting fees and expenses................................ $ 25,000
Printing costs.............................................. $ 15,000
Miscellaneous expenses...................................... $ 10,000
--------
Total..................................................... $179,854
========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The General Corporation Law of the State of Delaware ("DGCL") permits I/O
and its stockholders to limit directors' exposure to liability for certain
breaches of the directors' fiduciary duty, either in a suit on behalf of I/O or
in an action by stockholders of I/O. The Restated Certificate of Incorporation
of I/O (the "Charter") provides that a director of I/O shall not be personally
liable to I/O or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to I/O or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the General Corporation Law of the State of
Delaware, or (iv) for any transaction from which the director derived an
improper personal benefit.
The Amended and Restated Bylaws (the "Bylaws") of I/O provide that I/O
shall, to the full extent permitted by applicable laws (including the DGCL),
indemnify its directors, officers, employees and agents with respect to expenses
(including counsel fees), judgments, fines, penalties, other liabilities and
amounts incurred by any such person in connection with any threatened, pending
or completed action, suit or proceeding to which such person is or was a party,
or is or was threatened to be made a party, by reason of the fact that such
person is or was serving as a director, officer, employee or agent of I/O or any
of its subsidiaries, or is or was serving at the request of I/O or any of its
subsidiaries as a director, officer, employee, agent or trustee of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise. The Bylaws provide that the indemnification provided pursuant to the
Bylaws is not exclusive of any other rights to which those seeking
indemnification may be entitled under any provision of law, certificate of
incorporation, bylaws, governing documents, agreement, vote of stockholders or
disinterested directors or otherwise. I/O has entered into indemnification
agreements with each of its officers and directors and intends to enter into
indemnification agreements with each of its future officers and directors.
Pursuant to such indemnification agreements, I/O has agreed to indemnify its
officers and directors against certain liabilities.
I/O maintains a standard form of officers' and directors' liability
insurance policy which provides coverage to the officers and directors of I/O
for certain liabilities, including certain liabilities which may arise out of
this Registration Statement.
II-1
ITEM 16. EXHIBITS.
The exhibits listed in the Exhibit Index are filed as part of this
Registration Statement.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*4.1 Indenture dated as of December 10, 2003 between
Input/Output, Inc. and The Bank of New York Trust Company,
N.A. (formerly known as The Bank of New York Trust Company
of Florida, N.A.), as Trustee.
*4.2 Registration Rights Agreement dated as of December 10, 2003
between Input/Output, Inc., as Issuer, and Morgan Stanley &
Co. Incorporated, as the sole Initial Purchaser.
*5.1 Opinion of Fulbright & Jaworski L.L.P.
*12.1 Statement Regarding Computation of Ratios.
**23.1 Consent of PricewaterhouseCoopers LLP.
*23.3 Consent of Fulbright & Jaworski L.L.P. (incorporated by
reference to Exhibit 5.1).
*24.1 Power of Attorney (included in Signature Page).
*25.1 Statement of Eligibility of Trustee on Form T-1.
---------------
* Previously filed.
** Filed herewith.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement: (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act of
1933; (ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that (i) and (ii) above do not apply if the
Registration Statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by (i) and (ii)
is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by reference
in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such
II-2
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be
deemed to be part of this Registration Statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-3
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 2 to
the Registration Statement (333-112263) to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Stafford, State of Texas,
on April 20, 2004.
INPUT/OUTPUT, INC.
By: /s/ ROBERT P. PEEBLER
------------------------------------
Robert P. Peebler
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement (333-112263) has been signed by the
following persons in the capacities and on the dates indicated:
NAME TITLE DATE
---- ----- ----
/s/ ROBERT P. PEEBLER President, Chief Executive Officer April 20, 2004
-------------------------------------- and Director (principal executive
Robert P. Peebler officer)
/s/ J. MICHAEL KIRKSEY Executive Vice President and Chief April 20, 2004
-------------------------------------- Financial Officer (principal
J. Michael Kirksey financial officer)
/s/ MICHAEL L. MORRISON Controller and Director of April 20, 2004
-------------------------------------- Accounting (principal accounting
Michael L. Morrison officer)
* Chairman of the Board of Directors April 20, 2004
-------------------------------------- and Director
James M. Lapeyre, Jr.
* Director April 20, 2004
--------------------------------------
Bruce S. Appelbaum, Ph.D
* Director April 20, 2004
--------------------------------------
Theodore H. Elliott, Jr.
* Director April 20, 2004
--------------------------------------
Franklin Myers
* Director April 20, 2004
--------------------------------------
John N. Seitz
Director
--------------------------------------
Sam K. Smith
*By: /s/ ROBERT P. PEEBLER
------------------------------
Name: Robert P. Peebler
Attorney-in-Fact
II-4
INDEX TO EXHIBITS
*4.1 Indenture dated as of December 10, 2003 between
Input/Output, Inc. and The Bank of New York Trust Company,
N.A. (formerly known as The Bank of New York Trust Company
of Florida, N.A.), as Trustee.
*4.2 Registration Rights Agreement dated as of December 10, 2003
between Input/Output, Inc., as Issuer, and Morgan Stanley &
Co. Incorporated, as the sole Initial Purchaser.
*5.1 Opinion of Fulbright & Jaworski L.L.P.
*12.1 Statement Regarding Computation of Ratios.
**23.1 Consent of PricewaterhouseCoopers LLP.
*23.3 Consent of Fulbright & Jaworski L.L.P. (incorporated by
reference to Exhibit 5.1).
*24.1 Power of Attorney (included in Signature Page).
*25.1 Statement of Eligibility of Trustee on Form T-1.
---------------
* Previously filed.
** Filed herewith.