e10vq
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER: 1-12691
ION GEOPHYSICAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE
(State or other jurisdiction of
incorporation or organization)
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22-2286646
(I.R.S. Employer Identification No.) |
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2105 CityWest Blvd.
Suite 400
Houston, Texas
(Address of principal executive offices)
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77042-2839
(Zip Code) |
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 933-3339
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes:
þ No: o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). * Yes o No o
* The registrant has not yet been phased into the interactive data requirements.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes: o No: þ
At October 30, 2009, there were 118,447,777 shares of common stock, par value $0.01 per share,
outstanding.
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS FOR FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2009
2
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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September 30, |
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December 31, |
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2009 |
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2008 |
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(In thousands, except share data) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
19,556 |
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$ |
35,172 |
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Restricted cash |
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1,503 |
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6,610 |
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Accounts receivable, net |
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73,999 |
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150,565 |
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Current portion notes receivable |
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10,523 |
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11,665 |
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Unbilled receivables |
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30,669 |
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36,472 |
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Inventories, net |
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227,111 |
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262,519 |
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Prepaid expenses and other current assets |
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14,075 |
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20,386 |
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Total current assets |
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377,436 |
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523,389 |
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Notes receivable |
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3,517 |
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4,438 |
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Deferred income tax asset |
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19,036 |
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11,757 |
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Property, plant, equipment and seismic rental equipment, net |
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85,568 |
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59,129 |
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Multi-client data library, net |
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127,657 |
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89,519 |
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Goodwill |
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52,043 |
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49,772 |
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Intangible assets, net |
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63,601 |
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107,443 |
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Other assets |
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18,976 |
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15,984 |
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Total assets |
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$ |
747,834 |
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$ |
861,431 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Notes payable and current maturities of long-term debt |
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$ |
264,066 |
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$ |
38,399 |
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Accounts payable |
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43,191 |
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94,586 |
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Accrued expenses |
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67,148 |
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77,046 |
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Accrued multi-client data library royalties |
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19,031 |
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28,044 |
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Deferred revenue and other current liabilities |
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12,971 |
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18,159 |
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Total current liabilities |
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406,407 |
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256,234 |
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Long-term debt, net of current maturities |
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7,122 |
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253,510 |
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Non-current deferred income tax liability |
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1,562 |
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22,713 |
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Other long-term liabilities |
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3,789 |
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3,904 |
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Total liabilities |
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418,880 |
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536,361 |
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Stockholders equity: |
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Cumulative convertible preferred stock |
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68,786 |
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68,786 |
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Common stock, $0.01 par value; authorized 200,000,000
shares; outstanding 118,447,777 and 99,621,926 shares at
September 30, 2009 and December 31, 2008, respectively,
net of treasury stock |
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1,184 |
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|
996 |
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Additional paid-in capital |
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743,300 |
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694,261 |
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Accumulated deficit |
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(438,426 |
) |
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(376,552 |
) |
Accumulated other comprehensive loss |
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(39,325 |
) |
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|
(55,859 |
) |
Treasury stock, at cost, 849,539 and 848,422 shares at
September 30, 2009 and December 31, 2008, respectively |
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(6,565 |
) |
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(6,562 |
) |
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Total stockholders equity |
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328,954 |
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325,070 |
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Total liabilities and stockholders equity |
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$ |
747,834 |
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$ |
861,431 |
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See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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(In thousands, except per share amounts) |
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Product revenues |
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$ |
51,263 |
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$ |
140,332 |
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$ |
162,777 |
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$ |
337,726 |
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Service revenues |
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51,107 |
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78,197 |
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135,740 |
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201,627 |
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Total net revenues |
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102,370 |
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218,529 |
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298,517 |
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539,353 |
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Cost of products |
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34,114 |
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92,347 |
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108,007 |
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224,601 |
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Cost of services |
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33,627 |
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53,561 |
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92,209 |
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135,716 |
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Gross profit |
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34,629 |
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|
72,621 |
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98,301 |
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179,036 |
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Operating expenses: |
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Research, development and engineering |
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10,659 |
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13,498 |
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33,917 |
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37,507 |
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Marketing and sales |
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8,006 |
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12,062 |
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26,207 |
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35,440 |
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General and administrative |
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17,523 |
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15,487 |
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53,779 |
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|
44,484 |
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Impairment of intangible assets |
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|
|
|
|
|
|
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|
38,044 |
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|
|
|
|
|
|
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|
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|
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Total operating expenses |
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36,188 |
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|
41,047 |
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|
151,947 |
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|
117,431 |
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|
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Income (loss) from operations |
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|
(1,559 |
) |
|
|
31,574 |
|
|
|
(53,646 |
) |
|
|
61,605 |
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Interest expense |
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|
(6,380 |
) |
|
|
(1,592 |
) |
|
|
(20,658 |
) |
|
|
(2,731 |
) |
Interest income |
|
|
451 |
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|
|
40 |
|
|
|
1,447 |
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|
|
1,117 |
|
Other income (expense) |
|
|
1,669 |
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|
(404 |
) |
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|
(4,734 |
) |
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
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Income (loss) before income taxes |
|
|
(5,819 |
) |
|
|
29,618 |
|
|
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(77,591 |
) |
|
|
60,092 |
|
Income tax expense (benefit) |
|
|
131 |
|
|
|
3,760 |
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(18,342 |
) |
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|
9,343 |
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|
|
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|
|
|
|
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|
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Net income (loss) |
|
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(5,950 |
) |
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|
25,858 |
|
|
|
(59,249 |
) |
|
|
50,749 |
|
Preferred stock dividends |
|
|
875 |
|
|
|
925 |
|
|
|
2,625 |
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|
|
2,743 |
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|
|
|
|
|
|
|
|
|
|
|
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|
Net income (loss) applicable to common shares |
|
$ |
(6,825 |
) |
|
$ |
24,933 |
|
|
$ |
(61,874 |
) |
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$ |
48,006 |
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|
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Earnings per share: |
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|
|
|
|
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|
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Basic net income (loss) per share |
|
$ |
(0.06 |
) |
|
$ |
0.26 |
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|
$ |
(0.57 |
) |
|
$ |
0.51 |
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|
|
|
|
|
|
|
|
|
|
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|
Diluted net income (loss) per share |
|
$ |
(0.06 |
) |
|
$ |
0.25 |
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|
$ |
(0.57 |
) |
|
$ |
0.49 |
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Weighted average number of common shares outstanding: |
|
|
|
|
|
|
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|
|
|
|
|
|
|
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Basic |
|
|
118,380 |
|
|
|
95,823 |
|
|
|
107,816 |
|
|
|
94,676 |
|
Diluted |
|
|
118,380 |
|
|
|
102,653 |
|
|
|
107,816 |
|
|
|
102,127 |
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
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Nine Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
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2008 |
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|
(In thousands) |
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|
|
|
|
|
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Cash flows from operating activities: |
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|
|
|
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|
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Net income (loss) |
|
$ |
(59,249 |
) |
|
$ |
50,749 |
|
Adjustments to reconcile net income (loss) to cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization (other than multi-client library) |
|
|
34,113 |
|
|
|
20,897 |
|
Amortization of multi-client library |
|
|
37,011 |
|
|
|
64,526 |
|
Stock-based compensation expense related to stock options, nonvested stock and
employee stock purchases |
|
|
10,399 |
|
|
|
6,138 |
|
Bad debt expense |
|
|
2,828 |
|
|
|
418 |
|
Impairment of intangible assets |
|
|
38,044 |
|
|
|
|
|
Deferred income tax |
|
|
(28,139 |
) |
|
|
585 |
|
Excess tax benefit from exercise of stock options |
|
|
|
|
|
|
(1,657 |
) |
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts and notes receivable |
|
|
78,458 |
|
|
|
1,991 |
|
Unbilled receivables |
|
|
5,803 |
|
|
|
(43,190 |
) |
Inventories |
|
|
(4,753 |
) |
|
|
(69,686 |
) |
Accounts payable, accrued expenses and accrued royalties |
|
|
(71,157 |
) |
|
|
41,644 |
|
Deferred revenue |
|
|
(5,889 |
) |
|
|
(12,943 |
) |
Other assets and liabilities |
|
|
14,128 |
|
|
|
(6,971 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
51,597 |
|
|
|
52,501 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
|
(2,456 |
) |
|
|
(11,201 |
) |
Investment in multi-client data library |
|
|
(75,149 |
) |
|
|
(87,841 |
) |
Business acquisition |
|
|
|
|
|
|
(241,589 |
) |
Cash of acquired business |
|
|
|
|
|
|
10,677 |
|
Other investing activities |
|
|
(361 |
) |
|
|
110 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(77,966 |
) |
|
|
(329,844 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net proceeds from issuance of debt |
|
|
19,218 |
|
|
|
165,072 |
|
Net proceeds from issuance of common stock |
|
|
38,220 |
|
|
|
|
|
Borrowings under revolving line of credit |
|
|
37,000 |
|
|
|
175,000 |
|
Repayments under revolving line of credit |
|
|
(5,000 |
) |
|
|
(97,000 |
) |
Payments on notes payable and long-term debt |
|
|
(73,337 |
) |
|
|
(6,894 |
) |
Costs associated with debt amendments |
|
|
(4,046 |
) |
|
|
|
|
Issuance of preferred stock |
|
|
|
|
|
|
35,000 |
|
Payment of preferred dividends |
|
|
(2,625 |
) |
|
|
(2,743 |
) |
Proceeds from employee stock purchases and exercise of stock options |
|
|
276 |
|
|
|
6,249 |
|
Restricted stock cancelled for employee minimum income taxes |
|
|
(119 |
) |
|
|
(1,354 |
) |
Excess tax benefit from exercise of stock options |
|
|
|
|
|
|
1,657 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
9,587 |
|
|
|
274,987 |
|
|
|
|
|
|
|
|
Effect of change in foreign currency exchange rates on cash and cash equivalents |
|
|
1,166 |
|
|
|
(1,864 |
) |
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(15,616 |
) |
|
|
(4,220 |
) |
Cash and cash equivalents at beginning of period |
|
|
35,172 |
|
|
|
36,409 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
19,556 |
|
|
$ |
32,189 |
|
|
|
|
|
|
|
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation and Overview
Basis of Presentation. The consolidated balance sheet of ION Geophysical Corporation and its
subsidiaries (collectively referred to in this Part I - Item 1 as the Company or ION, unless
the context otherwise requires) at December 31, 2008 has been derived from the Companys audited
consolidated financial statements at that date. The consolidated balance sheet at September 30,
2009, the consolidated statements of operations for the three and nine months ended September 30,
2009 and 2008, and the consolidated statements of cash flows for the nine months ended September
30, 2009 and 2008 are unaudited. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have been included. The
results of operations for the three and nine months ended September 30, 2009 are not necessarily
indicative of the operating results for a full year or of future operations.
The accompanying financial statements for the nine months ended September 30, 2009 include
approximately $3.3 million of stock-based compensation expense related to 2006, 2007 and 2008.
Accounting Standards Codification (ASC) 718. Share-Based Payments, requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The prior-period stock-based compensation expense relates
to adjustments between estimated and actual forfeitures which should have been recognized over the
vesting period of such awards. Such amounts were not deemed material with respect to either the
results of prior years or the anticipated results and the trend of earnings for the current year
and were therefore recorded in the second quarter of 2009.
These consolidated financial statements have been prepared using accounting principles
generally accepted in the United States for interim financial information and the instructions to
Form 10-Q and applicable rules of Regulation S-X of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements presented in
accordance with accounting principles generally accepted in the United States have been omitted.
The accompanying consolidated financial statements should be read in conjunction with the Companys
Annual Report on Form 10-K for the year ended December 31, 2008.
On September 18, 2008, the Company completed the acquisition of ARAM Systems Ltd. and Canadian
Seismic Rentals Inc. (sometimes collectively referred to herein as ARAM). The results of
operations of the Company for the three and nine months ended September 30, 2009 have been affected
by this acquisition, which may affect the comparability of certain of the financial information
contained in this Quarterly Report on Form 10-Q. This acquisition is described in more detail in
Note 2 ARAM Acquisition.
In connection with preparation of the consolidated financial statements and in accordance with
the recently issued ASC 855-10, Subsequent Events, the Company evaluated subsequent events after
the balance sheet date of September 30, 2009 through November 9, 2009, the date of the Companys
filing of this Form 10-Q.
Overview. Demand for the Companys products and services is cyclical and substantially
dependent upon activity levels in the oil and gas industry, particularly the willingness and
ability of the Companys customers to expend their capital for oil and natural gas exploration and
development projects. This demand is highly sensitive to current and expected future oil and
natural gas prices.
The recent global financial crisis, which has contributed, among other things, to significant
reductions in available capital and liquidity from banks and other providers of credit, has
resulted in the worldwide economy entering into a recessionary period, which may be prolonged and
severe. Oil prices have been highly volatile in recent years, increasing to record levels in the
second quarter of 2008 and then sharply declining thereafter, falling to approximately $35 per
barrel during the first quarter of 2009. By the end of September 2009, oil prices were
approximately $65 per barrel. Due to oversupply, natural gas prices at the Henry Hub
interconnection point at the end of September 2009 were approximately 75% below the July 2008 price
of $13.31 per mmBtu. These conditions have sharply curtailed demand for exploration activities in
North America and other regions.
The weakness in demand for the Companys products, the uncertainty surrounding future economic
activity levels and the tightening of credit availability have resulted in decreased sales for the
Companys business units. The Companys seismic contractor customers and the exploration and
production companies (E&P companies) that are users of the Companys products, services and
technology have reduced their capital spending from mid-2008 levels. The Company expects that the
level of customers exploration
6
and production expenditures will continue to be low for the
remainder of 2009 and will continue to be reduced to the extent that E&P
companies and seismic contractors are limited in their access to the credit markets as a
result of further disruptions in, or the more conservative lending practices by, the lending
markets. There continues to be significant uncertainty about future exploration and production
activity levels and the impact on the Companys businesses.
While the ongoing global recession and the lower oil and gas prices have slowed demand for the
Companys products and services in the near term, the Company believes that the industrys
long-term prospects remain favorable because of the declining rates in oil and gas production. The
Company believes that technology that adds a competitive advantage through cost reductions or
improvements in productivity will continue to be valued in its marketplace, even in the current
difficult market. For example, the Company believes that its new technologies, such as
FireFly®, DigiFIN and Orca®, will continue to attract interest
from its customers because those new technologies are designed to deliver improvements in image
quality within more productive delivery systems.
In response to this downturn in the demand for the Companys products and services, the
Company has taken measures to reduce its cost structure. In addition, the Company has slowed its
capital spending, including investments for its multi-client data library. To date, the most
significant cost reduction has related to reduced headcount. Beginning in the fourth quarter of
2008 and continuing through the first nine months of 2009, the Company reduced its headcount by 378
positions, or approximately 25% of its employee headcount, in order to adjust to the expected lower
levels of activity. Including all contractors and employees, the Company reduced its headcount by
483 positions, or 27%. In April 2009, the Company also initiated a salary reduction program that
reduced employee base salaries. The salary reductions reduced affected employees annual base
salaries by 12% for the Companys chief executive officer, chief operating officer and chief
financial officer, 10% for all other executives and senior management, and 5% for most other
employees. The Company has adopted a payment plan whereby employees affected by the salary
reduction program may receive a payment in the beginning of 2010 in an amount that is approximately
equal to the amount of their salary reduction plus interest if the Company achieves certain
predetermined levels of adjusted EBITDA during 2009 and the Company determines that its liquidity
levels are sufficient to make the payments. Additionally, the Board of Directors elected to
implement a 15% reduction in director fees. In addition to the salary reduction program, the
Company elected to suspend its matching contributions to its employee 401(k) plan contributions.
See further discussion of the reinstatement of employees salaries at Note 5 Restructuring
Activities. The Company has also reduced its research and development spending but intends to
continue to fund strategic programs to position it for the expected recovery in economic activity.
Overall, the Company has and will continue to give priority to generating cash flow and reducing
its cost structure, while maintaining its long-term commitment to continued technology development.
On June 4, 2009, the Company completed a private placement transaction in which the Company
issued and sold 18,500,000 shares of its common stock in privately-negotiated transactions for
aggregate gross proceeds of approximately $40.7 million. The $38.2 million in net proceeds from the
offering, along with $2.6 million of cash on hand, were applied to repay in full the outstanding
indebtedness under the Bridge Loan Agreement with Jefferies Finance LLC dated as of December 30,
2008 (the Bridge Loan Agreement). The indebtedness under the Bridge Loan Agreement had been
scheduled to mature on January 31, 2010 and had an effective interest rate at the time of repayment
of 25.3%. The Company also entered into an additional amendment (the Fifth Amendment) to the
amended commercial banking credit facility (the Amended Credit Facility) which, among other
things, modified certain of the financial and other covenants contained in the Amended Credit
Facility.
In
addition, on
June 29, 2009, the Company also entered into a $20.0 million secured equipment financing
term loan with ICON ION, LLC (ICON), an affiliate of ICON Capital Inc. The Company received
$12.5 million from ICON on June 29, 2009 and $7.5 million on July 20, 2009. All borrowed
indebtedness under this arrangement is scheduled to mature on July 31, 2014 and constitutes
permitted indebtedness under the Amended Credit Facility. The proceeds of the secured term loan
are being applied for working capital and general corporate purposes. See further discussion at
Note 9 Notes Payable, Long-term Debt and Lease Obligations.
On October 23, 2009, the Company entered into a binding term sheet (the Term Sheet) with BGP
Inc., China National Petroleum Corporation, a company organized under the laws of the Peoples
Republic of China (BGP), which sets forth, among other things, the principal terms for a proposed
joint venture between BGP and the Company. In connection with the execution of the Term Sheet, the
Company entered into a Sixth Amendment to the Amended Credit Facility dated effective as of October
23, 2009 (the Sixth Amendment), which, among other things, (i) increases the aggregate revolving
commitment amount under the Amended Credit Facility from $100.0 million to $140.0 million, (ii)
permits Bank of China, New York Branch (the New Lender), to join the Amended Credit Facility as a
lender, and (iii) modifies, or provides limited waivers of, certain of the financial and other
covenants
7
contained in the Amended Credit facility. Additionally, contemporaneously with the
execution of the Term Sheet, the Company entered into bridge financing arrangements consisting of
the following:
|
|
|
Two promissory notes (the Convertible Notes) issued to the New Lender under
the Amended Credit Facility as amended by the Sixth Amendment, convertible into shares of
the Companys common stock; and |
|
|
|
|
A Warrant Issuance Agreement with BGP, under which the Company granted BGP a
warrant (the Warrant) to purchase shares of the Companys common stock that may be
exercised in lieu of conversion of the Convertible Notes. |
See further discussion below at Note 8 Term Sheet with BGP and Bridge Financing
Transactions.
As a result of the Companys bridge financing arrangements that the Company entered into in
October 2009, the Company believes that its liquidity will be sufficient to fund its operations for
the remainder of 2009 and into the first quarter of 2010. Additionally, as a result of the
Companys entering into the Sixth Amendment, the Company believes that the waivers of the
financial covenants contained in the Amended Credit Facility for the fiscal quarters ending
September 30, 2009, December 31, 2009, March 31, 2010 and June 30, 2010 should enable the Company
to conduct its operations without defaulting under the Amended Credit Facility until the
transactions under the Term Sheet are completed, which the Company currently expects to occur
during the first quarter of 2010. Without these waivers, the Company would not have been in
compliance with certain of its financial covenants at September 30, 2009. However, any failure to
comply with the Companys other covenants under the Amended Credit Facility could result in an
event of default that, if not cured or waived, could have a material adverse effect on the
Companys financial condition, results of operations and debt service capabilities.
If
the Company
is not able to satisfy all of these covenants, the Company would need to seek to amend, or seek
additional covenant waivers under, the Amended Credit Facility. There can be no assurance that the
Company would be able to obtain any such waivers or amendments, in which case the Company would
likely seek to obtain new secured debt, unsecured debt or equity financing. However, there also can
be no assurance that such debt or equity financing would be available on terms acceptable to the
Company or at all. Additionally, if the proposed transactions under the Term Sheet are not
completed as anticipated or if the proposed transactions with BGP were to be abandoned, even for
reasons beyond the Companys control (such as failure to obtain certain regulatory approvals), then
the waivers, upon notice from the lenders, would cease to be effective and the Company at that time
would likely not be in compliance with certain of the financial covenants contained in the Amended
Credit Facility, which could then result in an event of default. Therefore, the Company has
classified its long-term indebtedness under its revolving line of credit and term loan facility
under the Amended Credit Facility as current at September 30, 2009. As a result of the
cross-default provisions in its secured equipment financing and its amended and restated
subordinated seller note, the Company has also classified these long-term obligations
as current at
September 30, 2009.
(2) ARAM Acquisition
In September 2008, the Company acquired the outstanding shares of ARAM. The following
summarized unaudited pro forma consolidated income statement information for the three and nine
months ended September 30, 2008, assumes that the ARAM acquisition had occurred as of the beginning
of the period presented. The Company has prepared these unaudited pro forma financial results for
comparative purposes only. These unaudited pro forma financial results may not be indicative of the
results that would have occurred if ION had completed the acquisition as of the beginning of the
period presented or the results that may be attained in the future. Amounts presented below are in
thousands, except for the per share amounts:
|
|
|
|
|
|
|
|
|
|
|
Pro forma |
|
Pro forma |
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, 2008 |
|
September 30, 2008 |
Pro forma net revenues |
|
$ |
237,440 |
|
|
$ |
603,452 |
|
Pro forma income from operations |
|
$ |
37,210 |
|
|
$ |
78,142 |
|
Pro forma net income applicable to common shares |
|
$ |
23,588 |
|
|
$ |
43,522 |
|
Pro forma basic net income per common share |
|
$ |
0.24 |
|
|
$ |
0.44 |
|
Pro forma diluted net income per common share |
|
$ |
0.23 |
|
|
$ |
0.43 |
|
(3) Impairment of Intangible Assets
In the first quarter of 2009, the Company recorded an impairment charge of $38.0 million,
before tax, associated with a portion of
8
its proprietary technology and the remainder of its
customer relationships related to the ARAM acquisition. In the fourth quarter of 2008, the Company
had recorded an intangible asset impairment charge of $10.1 million, before tax, related to ARAMs
customer relationships, trade name and non-compete agreements. This additional impairment during
the first quarter of 2009 was the result of
the continued overall economic and financial crisis, which has continued to adversely affect
the demand for the Companys products and services, especially for its land analog acquisition
products within North America and Russia. As of September 30, 2009, no further impairment
indicators were noted and no additional impairments of the Companys intangible assets had
occurred. The Companys net book value associated with ARAMs acquired intangibles was $35.0
million at September 30, 2009.
On January 1, 2008, the Company adopted ASC 820-10, Fair Value Measurements, (ASC 820-10),
as well as the subsequent amendments to ASC 820-10. ASC 820-10 defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value measurements. The
effective date for ASC 820-10 was delayed, until the first quarter of fiscal year 2009 for all
non-financial assets and non-financial liabilities, except those that are recognized or disclosed
at fair value in the financial statements on a recurring basis (at least annually). Based upon
first quarter impairment indicators, the Company performed a valuation of its intangible assets
related to its ARAM acquisition, which resulted in the $38.0 million impairment charge noted above.
The valuation was performed using Level 3 inputs. The fair value of these assets was estimated
using a discounted cash flow model, which included a variety of inputs. The key inputs for the
model included the operational five-year forecast for the Company, the then-current market discount
factor and the forecasted cash flows related to each intangible asset. The forecasted operational
and cash flow amounts were determined using the current activity levels in the Company as well as
the current and expected short-term market conditions.
(4) Segment and Product Information
In order to allow for increased visibility and accountability of costs and more focused
customer service and product development, the Company evaluates and reviews results based on four
segments: three of these segments Land Imaging Systems, Marine Imaging Systems and Data
Management Solutions make up the ION Systems Division, and the fourth segment is the ION
Solutions Division. The Company measures segment operating results based on income from operations.
A summary of segment information for the three and nine months ended September 30, 2009 and
2008 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Imaging Systems |
|
$ |
15,187 |
|
|
$ |
81,562 |
|
|
$ |
68,531 |
|
|
$ |
177,270 |
|
Marine Imaging Systems |
|
|
29,400 |
|
|
|
49,016 |
|
|
|
72,077 |
|
|
|
133,872 |
|
Data Management Solutions |
|
|
7,618 |
|
|
|
10,408 |
|
|
|
24,081 |
|
|
|
29,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ION Systems |
|
|
52,205 |
|
|
|
140,986 |
|
|
|
164,689 |
|
|
|
340,312 |
|
ION Solutions |
|
|
50,165 |
|
|
|
77,543 |
|
|
|
133,828 |
|
|
|
199,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
102,370 |
|
|
$ |
218,529 |
|
|
$ |
298,517 |
|
|
$ |
539,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Imaging Systems |
|
$ |
(10,328 |
) |
|
$ |
11,216 |
|
|
$ |
(25,920 |
) |
|
$ |
15,831 |
|
Marine Imaging Systems |
|
|
9,386 |
|
|
|
14,063 |
|
|
|
19,890 |
|
|
|
35,245 |
|
Data Management Solutions |
|
|
4,277 |
|
|
|
6,820 |
|
|
|
14,525 |
|
|
|
17,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ION Systems |
|
|
3,335 |
|
|
|
32,099 |
|
|
|
8,495 |
|
|
|
68,572 |
|
ION Solutions |
|
|
9,321 |
|
|
|
14,019 |
|
|
|
19,129 |
|
|
|
36,316 |
|
Corporate |
|
|
(14,215 |
) |
|
|
(14,544 |
) |
|
|
(43,226 |
) |
|
|
(43,283 |
) |
Impairment of intangible assets |
|
|
|
|
|
|
|
|
|
|
(38,044 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(1,559 |
) |
|
$ |
31,574 |
|
|
$ |
(53,646 |
) |
|
$ |
61,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5) Restructuring Activities
During the first nine months of 2009, the Company continued its restructuring program that was
initiated in the fourth quarter of
9
2008. Under this program, the Company reduced its employee
headcount by a total of approximately 25% (or 378 positions) through the first nine months of 2009.
When terminated independent contractors are included, the Company reduced its headcount by a total
of 483 positions, or 27%. At December 31, 2008, the Company had accrued $1.8 million related to
severance costs. In the first nine months of 2009, the Company accrued an additional $2.6 million
related to severance costs and made cash payments to employees of
$3.7 million, resulting in an accrual as of September 30, 2009 of $0.7 million. Of the amount
expensed for the nine months ended September 30, 2009, approximately $1.6 million was included in
operating expenses, with the remaining $1.0 million included in cost of sales. During the remainder
of 2009, the Company will continue to evaluate its staffing needs and may reduce its employee
headcount further as necessary.
In April 2009, the Company initiated a salary reduction program that reduced employee base
salaries. The salary reductions ranged from 12% for the Companys chief executive officer, chief
operating officer and chief financial officer, 10% for all other executives and senior management,
and 5% for most other employees. The Company has adopted a variable payment plan whereby employees
affected by the salary reduction program may receive a payment in the beginning of 2010
approximately equal to the amount of the salary reduction plus interest if the Company achieves
certain predetermined levels of adjusted EBITDA during 2009 and the Companys Board of Directors
determines that the liquidity levels of the Company are sufficient to allow the payments. The
Companys Board of Directors also elected to implement a 15% reduction in director fees. In
addition to the salary reduction program, the Company suspended its match to employee 401(k) plan
contributions.
Following the October 23, 2009 announcement of the Company and BGP entering into the Term
Sheet, which provides for, among other things, the formation of a joint venture between the Company
and BGP involving the Companys land-based seismic data acquisition equipment business (see
further discussion at Note 8 Term Sheet with BGP and Bridge Financing Transactions"), the
Companys management decided to reinstate all employees salaries on a prospective basis. However,
the variable payment as described above is not currently expected to be paid; therefore, the
Company has not accrued any amounts under the variable payment plan as of September 30, 2009.
(6) Inventories
A summary of inventories is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Raw materials and subassemblies |
|
$ |
109,841 |
|
|
$ |
104,862 |
|
Work-in-process |
|
|
11,171 |
|
|
|
20,698 |
|
Finished goods |
|
|
129,716 |
|
|
|
161,065 |
|
Reserve for excess and obsolete inventories |
|
|
(23,617 |
) |
|
|
(24,106 |
) |
|
|
|
|
|
|
|
Inventories, net |
|
$ |
227,111 |
|
|
$ |
262,519 |
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2009, the Company transferred approximately $46.0
million of inventories, at cost, to its seismic rental equipment pool.
(7) Net Income (Loss) per Common Share
Basic net income (loss) per common share is computed by dividing net income (loss) applicable
to common shares by the weighted average number of common shares outstanding during the period.
Diluted net income (loss) per common share is determined based on the assumption that dilutive
restricted stock and restricted stock unit awards have vested and outstanding dilutive stock
options have been exercised and the aggregate proceeds were used to reacquire common stock using
the average price of such common stock for the period. The total number of shares issued or
committed for issuance under outstanding stock options at September 30, 2009 and 2008 was 7,330,563
and 6,476,325, respectively, and the total number of shares of restricted stock and restricted
stock units outstanding at September 30, 2009 and 2008 was 574,358 and 772,606, respectively.
During the nine months ended September 30, 2009 and 2008, the Company issued 6,462 and 656,166
shares under stock option exercises, respectively.
As of September 30, 2009, the Company had 30,000, 5,000 and 35,000 outstanding shares,
respectively, of Series D-1, Series D-2, and Series D-3 Cumulative Convertible Preferred Stock
(collectively referred to as the Series D Preferred Stock), which may currently
10
be converted, at
the holders election, into up to 9,669,434 shares of common stock. See further discussion of the
Series D Preferred Stock at Note 12 Commitments and Contingencies. The outstanding shares of
Series D-1 Preferred Stock were dilutive for the three and nine months ended September 30, 2008;
however, the outstanding shares of Series D-2 Preferred Stock and of Series D-3 Preferred Stock
were anti-dilutive for the same three and nine-month periods. For the three and nine months ended
September 30,
2009, all of the outstanding shares of Series D Preferred Stock were anti-dilutive. As shown
in the table below, the Companys convertible senior notes that matured on December 15, 2008 were
dilutive for the three and nine months ended September 30, 2008.
The following table summarizes the computation of basic and diluted net income (loss) per
common share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net income (loss) applicable to common shares |
|
$ |
(6,825 |
) |
|
$ |
24,933 |
|
|
$ |
(61,874 |
) |
|
$ |
48,006 |
|
Impact of assumed convertible debt conversion, net of tax |
|
|
|
|
|
|
48 |
|
|
|
|
|
|
|
250 |
|
Impact of assumed Series D Preferred Stock conversions |
|
|
|
|
|
|
396 |
|
|
|
|
|
|
|
1,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) after impact of assumed convertible debt
and preferred stock conversions |
|
$ |
(6,825 |
) |
|
$ |
25,377 |
|
|
$ |
(61,874 |
) |
|
$ |
49,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
118,380 |
|
|
|
95,823 |
|
|
|
107,816 |
|
|
|
94,676 |
|
Effect of dilutive stock awards |
|
|
|
|
|
|
2,036 |
|
|
|
|
|
|
|
2,196 |
|
Effect of convertible debt conversion |
|
|
|
|
|
|
982 |
|
|
|
|
|
|
|
1,443 |
|
Effect of assumed Series D-1 Preferred Stock conversion |
|
|
|
|
|
|
3,812 |
|
|
|
|
|
|
|
3,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of diluted common shares outstanding |
|
|
118,380 |
|
|
|
102,653 |
|
|
|
107,816 |
|
|
|
102,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
(0.06 |
) |
|
$ |
0.26 |
|
|
$ |
(0.57 |
) |
|
$ |
0.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
$ |
(0.06 |
) |
|
$ |
0.25 |
|
|
$ |
(0.57 |
) |
|
$ |
0.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8) Term Sheet with BGP and Bridge Financing Transactions
On October 23, 2009, the Company entered into the Term Sheet with BGP, which provides for,
among other things, the formation of a joint venture between the Company and BGP involving the
Companys land-based seismic data acquisition equipment business.
The Term Sheet contemplates that the Company will enter into a purchase agreement with BGP
under which (i) BGP will acquire a 51% equity interest in the joint venture for an aggregate
purchase price of $108.5 million cash to be paid to the Company and the contribution by BGP to the
joint venture of certain assets and certain related liabilities of BGP that relate to the joint
ventures business and (ii) the Company will acquire a 49% interest in the joint venture in
exchange for the contribution of certain assets and certain related liabilities that relate to the
Companys land business. The assets of each party to be transferred to the joint venture will
include seismic recording systems, inventory, certain intellectual property rights and contract
rights, all as may be necessary to own and operate the business of the joint venture.
The scope of the joint ventures business is defined in the Term Sheet as being the business
of designing, development, engineering, manufacturing, research and development, distribution,
sales and marketing and field support of land-based equipment used in seismic data acquisition for
the energy and petroleum industry. Excluded from the scope of the joint ventures business will be
(x) the analog sensor businesses of the Company and BGP and (y) the businesses of certain companies
in which BGP or the Company are currently a minority owner. In addition to these excluded
businesses, all of the Companys other businesses including the Marine Imaging Systems, Concept
Systems, Data Management Solutions and ION Solutions, which includes GXTs Imaging Solutions,
Integrated Seismic Solutions (ISS) and BasinSPAN and seismic data libraries will
remain owned and operated by the Company and will not comprise a part of the joint venture.
Under the Term Sheet, the parties have agreed to use their best efforts to cause the closing
of the joint venture and related transactions to occur as soon as practicable following the
execution of the definitive transaction documents, and on or before the later to occur of the
following dates: (i) December 31, 2009 or (ii) 10 business days following the date on which all
necessary regulatory approvals (including receiving clearance from the Committee on Foreign
Investment in the United States (CFIUS) to complete the transactions) have been obtained, but in
any event, no later than March 31, 2010.
11
The parties obligations under the Term Sheet may be terminated (i) by written agreement
of the parties, (ii) by either party in the event that such partys conditions have not been
satisfied on or before March 31, 2010 (subject to a 15-day cure period) or (iii) by either party in
the event that certain mutual conditions have not been satisfied on or before March 31, 2010. In
addition, BGP and the Company have each agreed to pay the other a break-up fee of $5.0 million if
either party determines to terminate its obligations under the Term Sheet because the other party
has failed to satisfy certain conditions (including conditions precedent to closing that (a) the
other party has not experienced a material adverse event or condition that has resulted in a
material adverse effect on its business, prospects and results of operations change, (b) the other
party has not breached any of its representations and warranties contained in the Term Sheet and
such representations and warranties continue to be true and correct and (c) with respect to BGPs
obligations under the Term Sheet, the Company has not suffered any material default or
accelerations of any of its liabilities).
On October 27, 2009, the Company borrowed an aggregate of $40 million in the form of revolving
credit bridge financing arranged by BGP from Bank of China, New York Branch and evidenced by the
Convertible Notes. This borrowing was permitted by the terms of the Sixth Amendment to the Credit
Facility, which increased the aggregate revolving commitment amount under the Amended Credit
Facility from $100.0 million to $140.0 million and permitted the New Lender to join the Amended
Credit Facility as a lender. The Company also granted to BGP a warrant to purchase a number of
shares of the Companys common stock, equal to $40.0 million divided by an exercise price of $2.80
per share (subject to adjustment). At such time as the Warrant becomes exercisable, it would
initially be fully exercisable for 14.3 million shares of common stock.
The exercise price under the Warrant and conversion prices under the Convertible Notes will be
subject to adjustment upon the occurrence of a Triggering Event. A Triggering Event will occur
in the event that the joint venture transactions cannot be completed by March 31, 2010, solely as a
result of the occurrence of a statement, order or other indication from any relevant governmental
regulatory agency that (a) the transactions would not be approved, would be opposed, objected to or
sanctioned or (b) the transactions or BGPs business and operations would be required to be altered
(or upon the earlier abandonment of such transactions due to any such statement, indication or
order). In such event, the exercise price and conversion price per share will be adjusted (but not
to an amount that exceeds $2.80 per share) to a price per share that is equal to 75% of the lowest
trading price of the Companys common stock over a ten-consecutive-trading-day period, beginning on
and inclusive of the first trading day following the public announcement of any failure to complete
such transactions (or the abandonment thereof), which failure of abandonment was the result of the
Triggering Event. The exercise price of the Warrant and conversion prices of the Convertible Notes
are also subject to certain customary anti-dilution adjustment.
Additionally, the Term Sheet provides that when the joint venture transactions are closed:
|
|
|
BGP will purchase approximately 23.8 million shares of the Companys common stock for
$66.6 million, and thereby own, after giving effect to the issuance of those shares,
approximately 16.66% of the Companys outstanding common stock. |
|
|
|
|
To the extent that shares are not purchased by BGP under the Warrant prior to closing,
the new revolving credit loans from the New Lender, evidenced by the Convertible Notes will
convert into approximately 14.3 million shares of ION common stock at a conversion price of
$2.80 per share (such number of shares and conversion price subject to adjustment), and will
be credited against the approximately 23.8 million shares of ION stock to be purchased by
BGP at the transaction closing. |
|
|
|
|
ION will appoint a designee of BGP to its Board of Directors to serve with the current
nine members of IONs Board of Directors. |
|
|
|
|
BGP will arrange for the Companys then-outstanding long-term debt under the Amended
Credit Facility (currently $106.3 million outstanding at November 9, 2009) to be refinanced
at the joint venture closing. |
|
|
|
|
ION will use a portion of the proceeds from the transactions to pay off and retire the
Companys outstanding indebtedness under its current revolving credit facility (after giving
effect to the $40.0 million in additional revolving credit borrowings under the existing
Amended Credit Facility, approximately $118.0 million is currently outstanding at November
9, 2009) and $35.0 million in seller subordinated indebtedness incurred in connection with
the acquisition of ARAM in September 2008. |
|
|
|
|
ION will receive a new $100 million revolving credit facility at the joint venture
closing.
|
12
|
|
|
The $19.8 million (as of September 30, 2009) secured equipment financing transaction with
ICON will be assigned to and
become indebtedness of the joint venture. |
(9) Notes Payable, Long-term Debt and Lease Obligations
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
Obligations (in thousands) |
|
2009 |
|
|
2008 |
|
$100.0 million revolving line of credit |
|
$ |
98,000 |
|
|
$ |
66,000 |
|
Term loan facility |
|
|
106,250 |
|
|
|
120,313 |
|
Secured equipment financing |
|
|
19,774 |
|
|
|
|
|
Amended and restated subordinated seller note |
|
|
35,000 |
|
|
|
35,000 |
|
Bridge loan |
|
|
|
|
|
|
40,816 |
|
Subordinated seller note |
|
|
|
|
|
|
10,000 |
|
Facility lease obligation |
|
|
4,292 |
|
|
|
4,610 |
|
Equipment capital leases and other notes payable |
|
|
7,872 |
|
|
|
15,170 |
|
|
|
|
|
|
|
|
Total |
|
|
271,188 |
|
|
|
291,909 |
|
Current portion of notes payable, long-term debt and lease obligations |
|
|
(264,066 |
) |
|
|
(38,399 |
) |
|
|
|
|
|
|
|
Non-current portion of notes payable, long-term debt and lease obligations |
|
$ |
7,122 |
|
|
$ |
253,510 |
|
|
|
|
|
|
|
|
Revolving Line of Credit and Term Loan Amended Credit Facility. The Company, its
subsidiary, ION International S.à r.l. (ION Sàrl), and certain of the Companys domestic and other
foreign subsidiaries (as guarantors) are parties to a $100.0 million amended and restated revolving
credit facility and a $125.0 million original principal amount term loan facility under the terms
of its Amended Credit Facility, which is governed by the terms of its amended credit agreement with
its commercial bank lenders. The revolving credit facility provides additional flexibility for the
Companys international capital needs by permitting non-U.S. borrowings by ION Sàrl under the
facility and providing the Company and ION Sàrl the ability to borrow in alternative currencies.
Under the terms of the Amended Credit Agreement, up to $84.0 million (or its equivalent in foreign
currencies) is available for borrowings by ION Sàrl and up to $105.0 million is available for
borrowings by the Company; however, the total level of outstanding borrowings under the revolving
credit facility may not exceed $140.0 million. The term loan indebtedness was borrowed in September
2008 to fund a portion of the cash consideration for the ARAM acquisition.
The interest rate on borrowings under the Amended Credit Facility is, at the Companys option,
(i) an alternate base rate (either the prime rate of HSBC Bank USA, N.A., or a federals funds
effective rate plus 0.50%, plus an applicable interest margin) or (ii) for Eurodollar borrowings
and borrowings in Euros, pounds sterling or Canadian dollars, a LIBOR-based rate, plus an
applicable interest margin. The amount of the applicable interest margin is determined by reference
to a leverage ratio of total funded debt to consolidated EBITDA for the four most recent trailing
fiscal quarters. The interest rate margins range from 2.875% to 5.5% for alternate base rate
borrowings, and from 3.875% to 6.5% for Eurodollar borrowings. As of September 30, 2009, the
$106.3 million in outstanding term loan indebtedness under the Amended Credit Facility and the
$98.0 million in total outstanding revolving credit indebtedness under the Amended Credit Facility
accrued interest at an applicable LIBOR-based interest rate of 6.0% per annum. The average
effective interest rates for the quarter ended September 30, 2009 under the LIBOR-based rates for
both the term loan indebtedness and the Amended Credit Facility (as a whole) were 5.8%,
respectively.
At March 31, 2009, the Company was in compliance with all of the financial covenants under the
terms of the Amended Credit Facility and the Bridge Loan Agreement. However, based upon the
Companys first quarter results and its then-current operating forecast for the remainder of 2009,
management for the Company determined that it was probable that, if the Company and its
subsidiaries did not take any mitigating actions, they would not be in compliance with one or more
of the Companys financial covenants under those two debt agreements for the period ending
September 30, 2009. As a result, the Company approached the lenders under the Amended Credit
Facility to obtain amendments to relax certain of these financial covenants and completed a private
placement of the Companys common stock, which, along with the Companys cash on hand, generated
sufficient funds to repay the outstanding indebtedness under the Bridge Loan Agreement.
The Company and its bank lenders entered into a Fifth Amendment to the Amended Credit Facility
in June 2009. The principal
13
modifications, excluding the amended financial covenants listed further below, to the terms of the
Amended Credit Agreement resulting from the Fifth Amendment were as follows:
|
|
|
Increased applicable maximum interest rate margins in the event that the
Companys leverage ratio exceeds 2.25 to 1.0 from 4.5% to up to 5.5% for alternate base
rate loans, and from 5.5% to up to 6.5% for LIBOR-rate loans; |
|
|
|
|
Modified a restricted payments covenant, permitting the Company to apply up to
$6.0 million of its available cash on hand to prepay the indebtedness under the Bridge Loan
Agreement; |
|
|
|
|
Added a requirement for the Company to apply 50% of its Excess Cash Flow, if
any, calculated with respect to a just-completed fiscal year, to the prepayment of the term
loan under the Amended Credit Agreement if the Companys fixed charge coverage ratio or its
leverage ratio for the just-completed fiscal year does not meet certain requirements; and |
|
|
|
|
Modified Section 2.18 of the Credit Agreement to (i) prohibit any increase in
the revolving commitments under the Amended Credit Facility until the Company has delivered
its compliance certificate for the period ending September 30, 2009, and then only if
certain fixed charge coverage ratio and leverage ratio requirements are met, and (ii) reduce
the maximum revolving credit facility amount to which the Amended Credit Facility can be
increased to $140.0 million. |
The Amended Credit Agreement contains covenants that restrict the Company, subject to certain
exceptions, from:
|
|
|
Incurring additional indebtedness (including capital lease obligations), granting or
incurring additional liens on the Companys properties, pledging shares of the Companys
subsidiaries, entering into certain merger or other similar transactions, entering into
transactions with affiliates, making certain sales or other dispositions of assets, making
certain investments, acquiring other businesses and entering into certain sale-leaseback
transactions with respect to certain of the Companys properties; or |
|
|
|
|
Paying cash dividends on the Companys common stock and repurchasing and acquiring shares
of the Companys common stock unless (i) there is no event of default under the Amended
Credit Facility and (ii) the amount of cash used for cash dividends, repurchases and
acquisitions does not, in the aggregate, exceed an amount equal to the excess of 30% of
IONs domestic consolidated net income for the Companys most recently completed fiscal year
over $15.0 million. |
The Amended Credit Facility also requires the Company to be in compliance with certain
financial covenants, including requirements for the Company and its domestic subsidiaries to:
|
|
|
maintain a minimum fixed charge coverage ratio (which must be not less than 1.00 to 1.0
for the fiscal quarter ending September 30, 2009; 1.10 to 1.0 for the fiscal quarter ending
December 31, 2009; 1.15 to 1.0 for the fiscal quarter ending March 31, 2010; 1.25 to 1.0 for
the fiscal quarter ending June 30, 2010; 1.35 to 1.0 for the fiscal quarter ending September
30, 2010; and 1.50 to 1.0 the fiscal quarter ending December 31, 2010 and thereafter); |
|
|
|
|
not exceed a maximum leverage ratio (3.00 to 1.0 for each of the fiscal quarters ending
September 30, 2009 and December 31, 2009; 2.75 to 1.0 for the fiscal quarter ending March
31, 2010 and June 30, 2010; 2.5 to 1.0 for the fiscal quarter ending September 30, 2010; and
2.25 to 1.0 the fiscal quarter ending December 31, 2010 and thereafter); and |
|
|
|
|
maintain a minimum tangible net worth of at least 80% of the Companys tangible net worth
as of September 18, 2008 (the date that the Company completed its acquisition of ARAM), plus
50% of the Companys consolidated net income for each quarter thereafter, and 80% of the
proceeds from any mandatorily convertible notes and preferred and common stock issuances for
each quarter thereafter. |
The execution of the Sixth Amendment, which included waivers of the financial covenants
contained in the Amended Credit Facility for the fiscal quarters ending September 30, 2009,
December 31, 2009, March 31, 2010 and June 30, 2010, should enable the Company to conduct its
operations without defaulting under the Amended Credit Facility until the transactions with BGP are
completed, which is currently believed to occur during the first quarter of 2010. Without these
waivers, the Company would not have been in compliance with certain of its financial covenants at
September 30, 2009. However, any failure to comply with the Companys other covenants under the
Amended Credit Facility could result in an event of default that, if not cured or waived, could
have a
14
material adverse effect on the Companys financial condition, results of operations and debt
service capabilities.
If the Company is not able to satisfy all of these covenants, the Company
would need to seek to amend, or seek additional covenant waivers under the Amended Credit Facility.
There can be no assurance that the Company would be able to obtain any such waivers or amendments,
in which case the Company would likely seek to obtain new secured debt, unsecured debt or equity
financing. However, there also can be no assurance that such debt or equity financing would be
available on terms acceptable to the Company or at all. Additionally, if the proposed transactions
with BGP are not completed as anticipated or if the proposed transactions with BGP were to be
abandoned, even for reasons beyond the Companys control (such as failure to obtain certain
regulatory approvals), then the waivers, upon notice from the lenders, would cease to be effective
and the Company at that time would likely not be in compliance with certain of the financial
covenants contained in the Amended Credit Facility, which could then result in an event of default.
Therefore, the Company has classified its long-term indebtedness under its revolving line of credit
and term loan facility under the Amended Credit Facility as current at September 30, 2009.
The term loan indebtedness under the Amended Credit Facility is subject to scheduled quarterly
amortization payments of $4.7 million per quarter until December 31, 2010. Commencing on December
31, 2010, the quarterly principal amortization increases to $6.3 million per quarter until December
31, 2012, when the quarterly principal amortization amount increases to $9.4 million for each
quarter until maturity on September 17, 2013. The term loan indebtedness matures on September 17,
2013, but the terms of the Amended Credit Facility allow the administrative agent to accelerate the
maturity date to a date that is six months prior to the maturity date of additional debt financing
that the Company may incur to refinance certain indebtedness incurred in connection with the ARAM
acquisition.
The Amended Credit Facility contains customary events of default provisions (including an
event of default upon any change of control event affecting the Company), the occurrence of which
could lead to an acceleration of IONs payment obligations under the Amended Credit Facility.
The Amended Credit Facility includes a $35.0 million sub-limit for the issuance of documentary
and stand-by letters of credit, of which $1.7 million was outstanding at September 30, 2009. As of
September 30, 2009, the Company had available $0.3 million of additional revolving credit borrowing
capacity, which can be used solely for funding additional letters of credit under the Amended
Credit Facility.
The obligations of the Company and ION Sàrl under the Amended Credit Facility are guaranteed
by certain domestic and foreign subsidiaries of the Company and are secured by security interests
in stock of the domestic guarantors and certain first-tier foreign subsidiaries, and by
substantially all of the Companys other assets and those of the guarantors. The obligations of ION
Sàrl and the foreign guarantors are secured by security interests in all of the stock of the
foreign guarantors and the domestic guarantors, and substantially all of the Companys assets and
the other assets of the foreign guarantors and the domestic guarantors.
Secured Equipment Financing. On June 29, 2009, the Company entered into a $20.0 million
secured equipment financing transaction with ICON. Two master loan agreements were entered into
with ICON in connection with this financing transaction: (i) the Company, ARAM Rentals Corporation,
a Nova Scotia unlimited company (ARC), and ICON entered into a Canadian Master Loan and Security
Agreement dated as of June 29, 2009 with regard to certain seismic equipment leased to customers by
ARC, and (ii) the Company, ARAM Seismic Rentals, Inc., a Texas corporation (ASRI), and ICON
entered into a Master Loan and Security Agreement (U.S.) dated as of June 29, 2009 with regard to
certain seismic equipment leased to customers by ASRI (collectively, the ICON Loan Agreements).
All borrowed indebtedness under the ICON Loan Agreements is scheduled to mature on July 31, 2014.
The Company used the proceeds of the secured term loans for working capital and general corporate
purposes.
Under the ICON Loan Agreements, ICON advanced $12.5 million on June 29, 2009 and $7.5 million
on July 20, 2009. The indebtedness under the ICON Loan Agreements is secured by first-priority
liens in (a) certain ARAM seismic rental equipment owned by ARC or ASRI located in the United
States and Canada (subject to certain exceptions), and certain additional and replacement seismic
equipment owned by such subsidiaries from time to time, (b) written leases or other agreements
evidencing payment obligations relating to the leasing by ARC or ASRI of this equipment to their
respective customers, including their related receivables, (c) the cash or cash equivalents held by
such subsidiaries and (d) any proceeds thereof.
The repayment obligations of each of ARC and ASRI under the ICON Loan Agreements are
guaranteed by the Company under a Guaranty dated as of June 29, 2009 (the Guaranty). The
indebtedness under the ICON Loan Agreements and the Guaranty constitute
15
permitted indebtedness under the Amended Credit Facility.
Under both ICON Loan Agreements, interest on the outstanding principal amount will accrue at a
fixed interest rate of 15% per annum calculated monthly, and is payable monthly on the first day of
each month. Principal and interest are payable, commencing on September 1, 2009, in 60 monthly
installments until the maturity date, when all remaining outstanding principal and interest will be
due and payable. Pursuant to the ICON Loan Agreements, ICON received a non-refundable upfront fee
of $0.3 million. In addition, ICON will receive an administrative fee equal to 0.5% of the
aggregate principal amount of advances under the ICON Loan Agreements, payable at the end of each
of the first four years during their terms. Inclusive of these additional fees, the effective
interest rate on the secured equipment financing was 16.3% as of September 30, 2009.
Beginning on August 1, 2012, and continuing until January 31, 2014, the outstanding principal
balances of the loans may be prepaid in full by giving ICON 30 days prior written notice and
paying a prepayment fee equal to 3.0% of the then-outstanding principal amount of the loans.
Commencing on February 1, 2014, the loans may be prepaid in full by giving ICON 30 days prior
written notice and without payment of any prepayment penalty or fee.
The ICON Loan Agreements contain certain cross-default provisions with respect to defaults
under the Companys Amended Credit Facility. Therefore, similar to the current classification of
the Amended Credit Facility indebtedness, the Company has also classified this long-term
indebtedness as current.
Amended and Restated Subordinated Seller Note. As part of the purchase price for the ARAM
acquisition, in September 2008, the Companys acquisition subsidiary (ION Sub) issued an
unsecured senior promissory note in the original principal amount of $35.0 million (the Senior
Seller Note) to one of the selling shareholders of ARAM, now known as Maison Mazel Ltd. On
December 30, 2008, in connection with other acquisition refinancing transactions that were
completed on that date, the terms of the Senior Seller Note were amended and restated pursuant to
an Amended and Restated Subordinated Promissory Note dated December 30, 2008 (the Amended and
Restated Subordinated Note). The principal amount of the Amended and Restated Subordinated Note is
$35.0 million and matures on September 17, 2013. The Company also entered into a guaranty dated
December 30, 2008, whereby the Company guaranteed on a subordinated basis, ION Subs repayment
obligations under the Amended and Restated Subordinated Note. Interest on the outstanding
principal amount under the Amended and Restated Subordinated Note accrues at the rate of 15% per
annum, and is payable quarterly.
The terms of the Amended and Restated Subordinated Note provide that the particular covenants
contained in the Amended Credit Agreement (or in any successor agreement or instrument) that
restrict the Companys ability to incur additional indebtedness will be incorporated into the
Amended and Restated Subordinated Note. However, under the Amended and Restated Subordinated Note,
neither Maison Mazel nor any other holder of the Amended and Restated Subordinated Note have a
separate right to consent to or approve any amendment or waiver of the covenant as contained in the
Amended Credit Facility.
In addition, ION Sub agreed that if it incurs indebtedness under any financing that:
|
|
|
qualifies as Long Term Junior Financing (as defined in the Amended Credit Agreement), |
|
|
|
|
results from a refinancing or replacement of the Amended Credit Facility such that the
aggregate principal indebtedness (including revolving commitments) thereunder would be in
excess of $275.0 million, or |
|
|
|
|
qualifies as unsecured indebtedness for borrowed money that is evidenced by notes or
debentures, has a maturity date of at least five years after the date of its issuance and
results in total gross cash proceeds to the Company of not less than $40.0 million, |
then ION Sub is obligated to repay in full from the total proceeds from such financing the
then-outstanding principal of and interest on the Amended and Restated Subordinated Note.
The indebtedness under the Amended and Restated Subordinated Note is subordinated to the prior
payment in full of the Companys Senior Obligations, which is defined in the Amended and Restated
Subordinated Note as the principal, premium (if any), interest and other amounts that become due in
connection with:
16
|
|
|
the Companys obligations under the Amended Credit Facility, |
|
|
|
|
the Companys liabilities with respect to capital leases and obligations that qualify as a
Sale/Leaseback Agreement (as that term is defined in the Amended Credit Agreement), |
|
|
|
|
guarantees of the indebtedness described above, and |
|
|
|
|
debentures, notes or other evidences of indebtedness issued in exchange for, or in the
refinancing of, the Senior Obligations described above, or any indebtedness arising from the
payment and satisfaction of any Senior Obligations by a guarantor. |
In April 2009, ION Sub assigned the Amended and Restated Subordinated Note to the Company, and
the related guaranty by the Company of ION Subs repayment obligations was terminated. In
connection with this assignment, ION Sub was released from its obligations under the Amended and
Restated Subordinated Note.
The Amended and Restated Subordinated Seller Note contains certain cross-default provisions
with respect to defaults and acceleration of indebtedness
under the Companys Amended Credit Facility.
Therefore, similar to the current classification of the Amended Credit Facility, the Company has
also classified this long-term indebtedness as current.
The fair market value of the Companys outstanding notes payable and long-term debt was
determined to be $271.2 million at September 30, 2009. Approximately $141.3 million of the
Companys total outstanding indebtedness was re-negotiated on December 30, 2008, and an additional
$98.0 million of the Companys revolving credit borrowings was re-negotiated in June 2009.
Additionally, the debt under the ICON Loan Agreements totaling $19.8 million at September 30, 2009
was negotiated on June 29, 2009. As a result, all of the Companys principal debt facilities were
negotiated within the last nine months using current market rates. Also, a majority of the
Companys indebtedness is variable-rate, which approximates fair value.
(10) Income Taxes
The Company maintains a valuation allowance for a significant portion of its U.S. deferred tax
assets. The valuation allowance is calculated in accordance with the provisions of ASC 740,
Accounting for Income Taxes, which requires that a valuation allowance be established or
maintained when it is more likely than not that all or a portion of deferred tax assets will not
be realized. In the event the Companys expectations of future operating results or the
availability of certain tax planning strategies change, an additional valuation allowance may be
required to be established on the Companys existing unreserved net U.S. deferred tax assets, which
total $21.4 million at September 30, 2009. These existing unreserved U.S. deferred tax assets are
currently considered to be more likely than not realized. The Companys effective tax rates for
the three months ended September 30, 2009 and 2008 were (2.3)% (provision on a loss) and 12.7%
(provision on income), respectively. The decrease in the Companys effective tax rate for the three
months ended September 30, 2009 was due primarily to changes in the distribution of earnings
between U.S. and foreign jurisdictions. The Companys effective tax rates for the nine months ended
September 30, 2009 and 2008 were 23.6% (benefit on a loss) and 15.5% (provision on income),
respectively. The increase in the Companys effective tax rate during the nine months ended
September 30, 2009 related primarily to the tax benefit on the impairment of intangible assets,
which is taxed at 29%.
The Company has no significant unrecognized tax benefits and does not expect to recognize
significant increases in unrecognized tax benefits during the next twelve month period. Interest
and penalties, if any, related to unrecognized tax benefits are recorded in income tax expense.
The Companys U.S. federal tax returns for 2004 and subsequent years remain subject to
examination by tax authorities. The Company is no longer subject to IRS examination for periods
prior to 2004, although carryforward attributes that were generated prior to 2004 may still be
adjusted upon examination by the IRS if they either have been or will be used in a future period.
In the Companys foreign tax jurisdictions, tax returns for 2005 and subsequent years generally
remain open to examination.
(11) Comprehensive Net Income (Loss)
The components of comprehensive net income (loss) are as follows (in thousands):
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net income (loss) applicable to common shares |
|
$ |
(6,825 |
) |
|
$ |
24,933 |
|
|
$ |
(61,874 |
) |
|
$ |
48,006 |
|
Foreign currency translation adjustment |
|
|
2,410 |
|
|
|
1,542 |
|
|
|
16,534 |
|
|
|
1,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive net income (loss) |
|
$ |
(4,415 |
) |
|
$ |
26,475 |
|
|
$ |
(45,340 |
) |
|
$ |
49,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12) Commitments and Contingencies
Legal Matters. On June 12, 2009, WesternGeco L.L.C. (WesternGeco) filed a lawsuit against
the Company in the United States District Court for the Southern District of Texas, Houston
Division. In the lawsuit, styled WesternGeco L.L.C. v. ION Geophysical Corporation, WesternGeco
alleges that the Company has infringed several United States patents regarding marine seismic
streamer steering devices that are owned by WesternGeco. WesternGeco is seeking unspecified
monetary damages and an injunction prohibiting the Company from making, using, selling, offering
for sale or supplying any infringing products in the United States. Based on the Companys review
of the lawsuit filed by WesternGeco and the WesternGeco patents at issue, the Company believes that
its products do not infringe any WesternGeco patents, that the claims asserted by WesternGeco are
without merit and that the ultimate outcome of the claims against it will not result in a material
adverse effect on the Companys financial condition or results of operations. The Company intends
to defend the claims against it vigorously.
On June 16, 2009, the Company filed an answer and counterclaims against WesternGeco, in which
the Company denies that it has infringed WesternGecos patents and asserts that the WesternGeco
patents are invalid or unenforceable. The Company also asserts that WesternGecos Q-Marine system,
components and technology infringe upon a United States patent owned by the Company related to
marine seismic streamer steering devices. The claims by the Company also assert that WesternGeco
misappropriated the Companys proprietary technology and breached a confidentiality agreement
between the parties by using the Companys technology in its patents and products and that
WesternGeco tortiously interfered with the Companys relationship with its customers. In addition,
the Company claims that the lawsuit by WesternGeco is an illegal attempt by WesternGeco to control
and restrict competition in the market for marine seismic surveys performed using laterally
steerable streamers. In its counterclaims, the Company is requesting various remedies and relief,
including a declaration that the WesternGeco patents are invalid or unenforceable, an injunction
prohibiting WesternGeco from making, using, selling, offering for sale or supplying any infringing
products in the United States, a declaration that the WesternGeco patents should be co-owned by the
Company, and an award of unspecified monetary damages.
On July 10, 2009, Fletcher International, Ltd. (Fletcher), the holder of shares of the
Companys Series D Preferred Stock, filed a books and records proceeding in the Delaware Court of
Chancery under Section 220(b) of the Delaware General Corporation Law, asking the Court to require
the Company to produce a broad range of the Companys documents and records for inspection.
Section 220(b) allows stockholders of a Delaware corporation to make a demand on the corporation
for access to certain books and records of the corporation, provided that such demand is made with
appropriate specificity and is made for a proper purpose. The Company intends to vigorously defend
this proceeding with respect to information that it believes has not been requested with
appropriate specificity or for a proper purpose as required by law.
Under the Companys agreement with Fletcher regarding the Series D Preferred Stock held by
Fletcher, the aggregate number of shares of common stock issued or issuable to Fletcher upon
conversion or redemption of, or as dividends paid on, the Series D Preferred Stock could not exceed
a designated maximum number of shares (the Maximum Number), and such Maximum Number could be
increased by Fletcher providing the Company with a 65-day notice of increase, but under no
circumstance could the total number of shares of common stock issued or issuable to Fletcher with
respect to the Series D Preferred Stock ever exceed 15,724,306 shares. The Fletcher agreement had
originally designated 7,669,434 shares as the original Maximum Number. On November 28, 2008,
Fletcher delivered a notice to the Company to increase the Maximum Number to 9,669,434 shares,
effective February 1, 2009. On September 15, 2009, Fletcher purported to deliver a second notice
to the Company purporting to increase the Maximum Number from 9,669,434 shares to 11,669,434
shares, to become effective on November 19, 2009. The Company believes that its agreement with
Fletcher gives Fletcher the right to issue only one notice to increase the Maximum Number. On
November 6, 2009, the Company filed an action in the Court of Chancery of the State of Delaware,
seeking a declaration that, under the relevant agreement, Fletcher is permitted to deliver only one
notice to increase the Maximum Number and that its purported second notice is legally invalid.
18
In 2002, the Company filed a lawsuit against operating subsidiaries of battery manufacturer
Greatbatch, Inc., including its Electrochem division (collectively Greatbatch), in the
24th Judicial District Court for the Parish of Jefferson in the State of Louisiana. In
the lawsuit, styled Input/Output, Inc. and I/O Marine Systems, Inc. v. Wilson Greatbatch
Technologies, Inc., Wilson Greatbatch, Ltd. d/b/a Electrochem Lithium Batteries, and WGL
Intermediate Holdings, Inc., Civil Action No. 578-881, Division A, the Company alleged that
Greatbatch had fraudulently misappropriated the Companys product designs and other trade secrets
related to the batteries and battery pack used in the Companys DigiBIRD® marine towed
streamer vertical control device and used the Companys confidential information to manufacture and
market competing batteries and battery packs. After a two-week trial, on October 1, 2009 the jury
concluded that Greatbatch had committed fraud, violated the Louisiana Unfair Trade Practices Act
and breached a trust and nondisclosure agreement between Greatbatch and the Company, and awarded
the Company $21.7 million in compensatory damages. On October 13, 2009, the presiding trial judge
signed and entered the judgment, awarding the Company the amount of the jury verdict, together with
legal interest from the date of filing the lawsuit, plus the Companys attorneys fees and costs.
Through October 14, 2009, accrued legal interest totaled $11.0 million, and interest will continue
to accrue at the statutory annual rate of 8.5% until paid. Including the verdict amount and
accrued interest, the total judgment amount as of October 14, 2009 was $32.7 million plus the
Companys attorneys fees and costs. The Company has not accrued any amounts related to this gain
contingency as of September 30, 2009.
The Company has been named in various other lawsuits or threatened actions that are incidental
to its ordinary business. Litigation is inherently unpredictable. Any claims against the Company,
whether meritorious or not, could be time consuming, cause the Company to incur costs and expenses,
require significant amounts of management time and result in the diversion of significant
operational resources. The results of these lawsuits and actions cannot be predicted with
certainty. Management currently believes that the ultimate resolution of these matters will not
have a material adverse impact on the financial condition, results of operations or liquidity of
the Company.
Warranties. The Company generally warrants that all of its manufactured equipment will be free
from defects in workmanship, materials and parts. Warranty periods generally range from 30 days to
three years from the date of original purchase, depending on the product. The Company provides for
estimated warranty as a charge to cost of sales at time of sale, which is when estimated future
expenditures associated with such contingencies become probable and reasonably estimated. However,
new information may become available, or circumstances (such as applicable laws and regulations)
may change, thereby resulting in an increase or decrease in the amount required to be accrued for
such matters (and therefore a decrease or increase in reported net income in the period of such
change). Additionally, as warranties expire, any remaining estimated warranty cost is credited to
the income statement and would reduce the cost of products. A summary of warranty activity is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Balance at beginning of period |
|
$ |
7,800 |
|
|
$ |
11,660 |
|
|
$ |
10,526 |
|
|
$ |
13,439 |
|
Opening balance for accruals for warranties for acquired entity |
|
|
|
|
|
|
845 |
|
|
|
|
|
|
|
845 |
|
Accruals (expirations) for warranties issued/expired during
the period |
|
|
(703 |
) |
|
|
2,080 |
|
|
|
(1,343 |
) |
|
|
4,570 |
|
Settlements made (in cash or in kind) during the period |
|
|
(793 |
) |
|
|
(1,217 |
) |
|
|
(2,879 |
) |
|
|
(5,486 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
6,304 |
|
|
$ |
13,368 |
|
|
$ |
6,304 |
|
|
$ |
13,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13) Concentration of Credit and Foreign Sales Risks
The majority of the Companys foreign sales are denominated in U.S. dollars. Product revenues
are allocated to geographical locations on the basis of the ultimate destination of the equipment,
if known. If the ultimate destination of such equipment is not known, product revenues are
allocated to the geographical location of initial shipment. Service revenues related primarily to
the ION Solutions division are allocated based upon the billing location of the customer. For the
nine months ended September 30, 2009 and 2008, international sales comprised 62% and 58%,
respectively, of total net revenues. For the nine months ended September 30, 2009, the Company
recognized $59.0 million of sales to customers in Europe, $37.4 million of sales to customers in
the Asia Pacific region, $36.8 million of sales to customers in the Middle East, $27.1 million of
sales to customers in Latin American countries, $4.3 million of sales to customers in the
Commonwealth of Independent States, or former Soviet Union (CIS) and $21.5 million of sales to
19
customers in Africa. In recent years, the CIS and certain Latin American countries have experienced
economic problems and uncertainties. However, as a result of the recent market downturn, additional
countries and areas of the world have experienced economic problems and uncertainties. To the
extent that world events or economic conditions negatively affect the Companys future sales to
customers in these and other regions of the world or the collectibility of the Companys existing
receivables, the Companys future results of operations, liquidity, and financial condition would
be adversely affected.
(14) Recent Accounting Pronouncements
In October 2009, the Financial Accounts Standards Board (FASB) issued Accounting Standard
Update (ASU) No. 2009-13 on Accounting Standards Codification (ASC) 605, Revenue Recognition
Multiple Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force
(ASU 2009-13). ASU 2009-13 amended guidance related to multiple-element arrangements which requires
an entity to allocate arrangement consideration at the inception of an arrangement to all of its
deliverables based on their relative selling prices. The consensus eliminates the use of the
residual method of allocation and requires the relative-selling-price method in all circumstances.
All entities must adopt the guidance no later than the beginning of their first fiscal year
beginning on or after June 15, 2010. Entities may elect to adopt the guidance through either
prospective application for revenue arrangements entered into, or materially modified, after the
effective date or through retrospective application to all revenue arrangements for all periods
presented. The Company is currently evaluating the impact, if any, of ASU 2009-13 on the Companys
financial position, results of operations and cash flows.
In October 2009, the FASB issued ASU No. 2009-14 on ASC 985, Certain Revenue Arrangements
That Include Software Elements (ASU 2009-14). ASU 2009-14 amended guidance that is expected to
significantly affect how entities account for revenue arrangements that contain both hardware and
software elements. As a result, many tangible products that rely on software will be accounted for
under the revised multiple-element arrangements revenue recognition guidance, rather than the
software revenue recognition guidance. The revised guidance must be adopted by all entities no
later than fiscal years beginning on or after June 15, 2010. An entity must select the same
transition method and same period for the adoption of both this guidance and the revisions to the
multiple-element arrangements guidance noted above. The Company is currently evaluating the
impact, if any, of ASU 2009-14 on the Companys financial position, results of operations and cash
flows.
In August 2009, the FASB issued ASU 2009-05, Fair Value Measurements and Disclosures,
Measuring Liabilities at Fair Value (Topic 820) (ASU 2009-05). ASU 2009-05 provides additional
clarification on valid valuation techniques using acquired prices in active markets for identical
liabilities. The provisions for ASU 2009-05 were effective for interim period ending after August
2009. The adoption of ASU 2009-05 did not have a material impact to the companys financial
position, results of operations or cash flows.
In June 2009, the FASB issued ASC 105-10, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles a
replacement of FASB Statement No. 162 (ASC 105-10). ASC 105-10 is the single, official source of
authoritative, nongovernmental GAAP, other than guidance issued by the SEC and is effective for
interim or annual financial periods ending after September 15, 2009. The Company adopted this
statement on September 15, 2009 and has updated all existing GAAP references to the new
codification.
In June 2009, the FASB issued ASC 855-10, Subsequent Events, (ASC 855-10). ASC 855-10
provides further background and clarification on the definition and disclosure requirements of
subsequent events. The requirements under ASC 855-10 provide that a Companys financial statements
reflect the effect of all subsequent events that provide additional evidence about conditions that
existed at the date of the balance sheet, including the estimates inherent in the process of
preparing the financial statements. The Company is not required to reflect the effects of
subsequent events that relate to conditions arising after the date of the balance sheet. The
provisions for ASC 855-10 were effective for interim or annual periods beginning after June 15,
2009 and shall be applied prospectively. The adoption of ASC 855-10 did not have a material impact
to the Companys financial position, results of operations or cash flows.
In April 2009, the FASB issued ASC 825-10-65-1, Interim Disclosures about Fair Value of
Financial Instruments (ASC 825-10-65-1). ASC 825-10-65-1 provides additional clarification on
interim disclosures and require public companies to disclose the fair value of financial
instruments whenever companies publish interim financial summary information. The provisions for
ASC 825-10-65-1 were effective for interim periods ending after June 15, 2009 with earlier adoption
permitted. The Company adopted ASC 825-10-65-1 on the effective date. The adoption of ASC
825-10-65-1 did not have a material impact to the Companys financial position,
20
results of operation or cash flows.
In April 2009, the FASB issued ASC 320-10, The Meaning of Other-Than-Temporary Impairment and
its Application to Certain Investments (ASC 320-10). ASC 320-10 provides additional guidance
designed to create greater clarity and consistency in accounting for and presenting impairment
losses on securities. This issuance changes (i) the method for determining whether an
other-than-temporary impairment exists for debt securities and for cost method investments; and
(ii) the amount of an impairment charge to be recorded in earnings. ASC 320-10 was effective for
interim and annual periods ending after June 15, 2009. The Company has determined that it is not
practicable to estimate the fair value of its cost method investments, as quoted market prices are
not available. During 2009, there have been no events or changes in circumstances that would
indicate a significant adverse effect on the fair value of the Companys investments. The aggregate
carrying amount of cost method investments was $5.0 million at September 30, 2009, and was included
within Other Assets. The adoption of ASC 320-10 did not have a material impact to the Companys
financial position, results of operation or cash flows.
In September 2008, the FASB issued ASC 260-10, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities (ASC 260-10), which was effective
for fiscal years beginning after December 15, 2008. ASC 260-10 would require unvested share-based
payment awards containing non-forfeitable rights to dividends or dividend equivalents (whether paid
or unpaid) to be included in the computation of basic earnings per share according to the two-class
method. The adoption of ASC 260-10 did not have a material impact on the Companys earnings per
share computation.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
Our Business. We are a technology-focused seismic solutions company that provides advanced
seismic data acquisition equipment, seismic software and seismic planning, processing and
interpretation services to the global energy industry. Our products, technologies and services are
used by oil and gas exploration and production (E&P) companies and seismic contractors to
generate high-resolution images of the Earths subsurface for exploration, exploitation and
production operations.
We operate our company through four business segments. Three of our business segments Land
Imaging Systems, Marine Imaging Systems and Data Management Solutions make up our ION Systems
division. Our fourth business segment is our ION Solutions division.
|
|
|
Land Imaging Systems cable-based, cableless and radio-controlled seismic data
acquisition systems, digital and analog geophone sensors, vibroseis vehicles (i.e., vibrator
trucks) and source controllers for detonator and vibrator energy sources. |
|
|
|
|
Marine Imaging Systems towed streamer and redeployable ocean bottom cable seismic data
acquisition systems and shipboard recorders, streamer positioning and control systems and
energy sources (such as air guns and air gun controllers). |
|
|
|
|
Data Management Solutions software systems and related services for navigation and
data management involving towed marine streamer and seabed operations. |
|
|
|
|
ION Solutions advanced seismic data processing services for marine and land
environments, seismic data libraries, and Integrated Seismic Solutions (ISS) services. |
Our Current Debt Levels. In September 2008, we completed our acquisition of ARAM Systems Ltd.
and Canadian Seismic Rentals, Inc. (which we sometimes collectively refer to in this Form 10-Q as
ARAM). In connection with the ARAM acquisition, we increased our indebtedness significantly. As
of September 30, 2009, we had outstanding total indebtedness of approximately $271.2 million,
including capital lease obligations. Total indebtedness on that date included $106.3 million of
outstanding five-year term indebtedness and $98.0 million in outstanding revolving credit debt, in
each case incurred under our amended commercial banking credit facility (the Amended Credit
Facility). Total indebtedness on that date also included $19.8 million in borrowings under a
secured equipment financing transaction. Additionally, we had $35.0 million of subordinated
indebtedness outstanding as of that date under an amended and restated subordinated promissory note
(the Amended and Restated Subordinated Note) that we had issued to one of ARAMs selling
shareholders as part of the purchase price consideration for the acquisition of ARAM.
21
On June 4, 2009, we completed a private placement transaction under which we issued and sold
18,500,000 shares of our common stock in privately-negotiated transactions, for aggregate gross
proceeds of approximately $40.7 million. The $38.2 million of net proceeds from the offering,
along with $2.6 million of cash on hand, were applied to repay in full the outstanding indebtedness
under the our Bridge Loan Agreement dated as of December 30, 2008 (the Bridge Loan Agreement)
with Jefferies Finance LLC (Jefferies). The indebtedness under the Bridge Loan Agreement had been
scheduled to mature on January 31, 2010 and had an effective interest rate at the time of repayment
of 25.3%. We also entered into an additional amendment (the Fifth Amendment) to the Amended
Credit Facility, which among other things, modified certain of the financial and other covenants
contained in the Amended Credit Facility. See further discussion below at Liquidity and
Capital Resources Sources of Capital and at Note 9 Notes Payable, Long-term Debt and Lease
Obligations.
On June 29, 2009, we entered into a $20.0 million secured equipment financing with ICON ION,
LLC, an affiliate of ICON Capital Inc. (ICON). We received $12.5 million in funding from ICON on
June 29, 2009 and $7.5 million on July 20, 2009. All borrowed indebtedness under the master loan
agreements governing this equipment financing arrangement is scheduled to mature on July 31, 2014.
The indebtedness under these master loan agreements constitutes permitted indebtedness under the
Amended Credit Facility. We used the proceeds of the secured term loans for working capital and
general corporate purposes. See further discussion below at Liquidity and Capital Resources
Sources of Capital and at Note 9 Notes Payable, Long-term Debt and Lease Obligations.
On October 23, 2009, we entered into a binding term sheet (the Term Sheet) with BGP Inc.,
China National Petroleum Corporation, a company organized under the laws of the peoples Republic
of China (BGP), which sets forth, among other things, the principal terms for a proposed joint
venture between BGP and us. In connection with the execution of the Term Sheet, we entered into a
Sixth Amendment to the Amended Credit Facility dated effective as of October 23, 2009 (the Sixth
Amendment), which, among other things, (i) increases the aggregate revolving commitment amount
under the Amended Credit Facility from $100.0 million to $140.0 million, (ii) permits Bank of
China, New York Branch (the New Lender), to join the Amended Credit Facility as a lender, and
(iii) modifies, or provides limited waivers of, certain of the financial and other covenants
contained in the Amended Credit Facility. Additionally, contemporaneously with the execution of the
Term Sheet, we entered into bridge financing arrangements consisting of the following:
|
|
|
Two promissory notes (the Convertible Notes) issued to the New Lender under the Amended
Credit Facility as amended by the Sixth Amendment, convertible into shares of our common
stock; and |
|
|
|
|
A Warrant Issuance Agreement with BGP, under which we granted to BGP a warrant (the
Warrant) to purchase shares of our common stock that may be exercised in lieu of
conversion of the Convertible Notes. |
See further discussion below at Proposed Joint Venture and Related Transactions with BGP.
We had disclosed in our Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2009 that, as a result of our entering into the Fifth Amendment, repaying the indebtedness
outstanding under the Bridge Loan Agreement and entering into the secured equipment financing
transaction in June 2009, we expected that we would remain in compliance with the financial
covenants under the Amended Credit Facility and that our cash on hand and cash generated from our
operations would be sufficient to fund our operations for the remainder of 2009. However,
lower-than-expected sales revenues realized during the third quarter of 2009 resulted in a high
likelihood that, as of September 30, 2009, we would not be in compliance with certain of such
financial covenants.
As
a result of our bridge financing arrangements with Bank of China, New York Branch,
that we entered into in October 2009, we
believe that our liquidity will be sufficient to fund our operations for the remainder of 2009 and
into the first quarter of 2010. Additionally, as a result of our entering into the Sixth Amendment,
we believe that the waivers of the financial covenants contained in the Amended Credit Facility for
the fiscal quarters ending September 30, 2009, December 31, 2009, March 31, 2010 and June 30, 2010
should enable us to conduct our operations without defaulting under our Amended Credit Facility
until the transactions under the Term Sheet are completed, which we currently expect will occur
during the first quarter of 2010. Without these waivers, we would not have been in compliance with
certain of our financial covenants at September 30, 2009.
However, our failure to comply with any
of our other covenants under the Amended Credit Facility could result in an event of default that,
if not cured or waived, could have a material adverse effect on our financial condition, results of
operations and debt service capabilities.
If we are not able to satisfy all of these covenants, we
would need to seek to amend, or seek additional covenant waivers under the Amended Credit Facility.
There can be no assurance that we would be able to obtain any such waivers or amendments, in which
case we would likely seek to obtain new secured debt, unsecured debt or equity financing. However,
there also can be no assurance that such debt or equity financing would be available on terms
acceptable to us or at all. Additionally, if our proposed transactions under the Term Sheet are not
completed as anticipated or if the proposed transactions with BGP were to be abandoned, even for
reasons beyond our control (such as failure to obtain certain regulatory approvals), then the
waivers, upon notice from the lenders, would cease to be effective and we would at that time likely
not be in compliance with certain of the financial covenants contained in the Amended Credit
Facility, which could then result in an event of
22
default. Therefore, we have classified the long-term indebtedness under our revolving
line of credit and term loan facility under our Amended Credit Facility as current at September 30,
2009. As a result of the cross-default provisions in our secured equipment financing and our
amended and restated subordinated seller note, we have also classified these long-term
obligations as current at September 30, 2009.
Economic and Credit Market Conditions. Demand for our products and services is cyclical and
substantially dependent upon activity levels in the oil and gas industry, particularly our
customers willingness and ability to expend their capital for oil and natural gas exploration and
development projects. This demand is highly sensitive to current and expected future oil and
natural gas prices.
The ongoing global financial crisis, which has contributed, among other things, to significant
reductions in available capital and liquidity from banks and other providers of credit, has
resulted in the worldwide economy entering into a recessionary period, which may be prolonged and
severe. Oil prices have been highly volatile over the past two years, increasing to record levels
in the second quarter of 2008 and then sharply declining thereafter, falling to approximately $35
per barrel during the first quarter of 2009. By the end of September 2009, oil prices were
approximately $65 per barrel. Due to oversupplies of natural gas, prices for natural gas at the
Henry Hub interconnection point at the end of September 2009 were approximately 75% below the July
2008 price of $13.31 per mmBtu. These conditions have sharply curtailed demand for exploration
activities in North America and other regions. The uncertainty surrounding future economic activity
levels and the tightening of credit availability have resulted in decreased sales levels for
several of our businesses in 2009. Our land seismic equipment businesses in North America and
Russia have been particularly adversely affected.
Our seismic contractor customers and the E&P companies that are users of our products,
services and technology have generally reduced their capital spending. We expect that exploration
and production expenditures will continue to be constrained to the extent E&P companies and seismic
contractors are limited in their access to the credit markets as a result of further disruptions
in, or continued conservative lending practices in, the credit markets. There continues to be
significant uncertainty about future activity levels and the impact on our businesses.
We expect that the level of customers exploration and production expenditures will continue
to be low for the remainder of 2009 and will continue to be reduced to the extent that E&P
companies and seismic contractors are limited in their access to the credit markets as a result of
further disruptions in, or the more conservative lending practices by, the lending markets. There
continues to be significant uncertainty about future exploration and production activity levels and
the impact on our businesses.
In response to this downturn, we have taken measures to further reduce operating costs in our
businesses. This year has been a challenging year for our North America and Russia land systems and
vibroseis truck sales. In addition, we have slowed our capital spending, including investments for
our multi-client data library. For the nine months ended September 30, 2009, total capital
expenditures were $77.6 million, and we are projecting additional capital expenditures for the
fourth quarter of 2009 to be between $12 million to $17 million. Of that total, we expect to spend
approximately $10 million to $15 million on investments in our multi-client data library during the
fourth quarter of 2009, and we anticipate that a majority of this investment will be underwritten
by our customers. To the extent our customers commitments do not reach an acceptable level of
pre-funding, the amount of our anticipated investment could significantly decline. The remaining
sums are expected to be funded from internally generated cash.
Through a variety of other resources, we are continuing to explore ways to reduce our cost
structure. We have taken a deliberate approach to analyzing product and service demand in our
business and are taking a more conservative approach in offering extended financing terms to our
customers. To date, our most significant cost reduction has related to reduced headcount. During
the fourth quarter of 2008 and continuing through the first nine months of 2009, we reduced our
headcount by 378 positions, or approximately 25% of our employee headcount, in order to adjust to
the expected lower levels of activity. Including all contractors and employees, we reduced our
headcount by 483 positions, or 27%. In April 2009, we also initiated a salary reduction program
that reduced employee salaries. The salary reductions reduced affected employees annual base
salaries by 12% for our chief executive officer, chief operating officer and chief financial
officer, 10% for all other executives and senior management, and 5% for most other employees. We
have adopted a variable payment plan whereby employees affected by the salary reduction program may
receive a payment in the beginning of 2010 approximately equal to the amount of the salary
reduction plus interest if we achieve certain predetermined levels of adjusted EBITDA during 2009
and our Board of Directors determines that our liquidity levels are sufficient to allow the
payments. Our Board also elected to implement a 15% reduction in director fees. In addition to
the salary reduction
23
program, we suspended our matching contributions to employee 401(k) plan contributions.
With the October 23, 2009 announcement of our company and BGP entering into a binding Term
Sheet, which provides for, among other things, the formation of a joint venture between our company
and BGP involving our land-based seismic data acquisition equipment business (see further
discussion at Proposed Joint Venture and Related Transactions with BGP.), we decided to
reinstate all employees salaries. However, the variable payment as described above is not
currently expected to be paid; therefore, we have not accrued any amounts under the variable
payment plan as of September 30, 2009.
We have also reduced our research and development spending but will continue to fund strategic
programs to position us for the expected recovery in economic activity. Overall, we will give
priority to generating cash flow and reducing our cost structure, while maintaining our long-term
commitment to continued technology development. Our business is mainly technology-based. We are not
in the field crew business, and therefore do not have large amounts of capital and other resources
invested in vessels or other assets necessary to support contracted acquisition services, nor do we
have large manufacturing facilities. This cost structure gives us the flexibility to rapidly adjust
our expense base when downward economic cycles affect our industry. This business model has also
allowed us to reduce our annual operating expense by approximately $48 million in a very short
period of time. We have focused on rapidly adjusting our headcount to better match the current
level of activity, while preserving investment in our longer-term research and development
programs. This flexibility should allow us to be better positioned for the expected recovery.
While the current global recession and the decline in oil and gas prices have slowed demand
for our products and services in the near term, we believe that our industrys long-term prospects
remain favorable because of the declining rates in oil and gas production and the relatively small
number of new discoveries of oil and gas reserves. We believe that technology that adds a
competitive advantage through cost reductions or improvements in productivity will continue to be
valued in our marketplace, even in the current difficult market. For example, we believe that our
new technologies, such as FireFly®, DigiFIN and Orca®, will continue to
attract interest from our customers because those technologies are designed to deliver improvements
in image quality within more productive delivery systems. We have adjusted much of our sales
efforts for our ARIES® land seismic systems from North America to international sales
channels (other than Russia). In late 2008, we announced the commercialization of our ARIES
II system, which we believe will provide more flexibility for users.
International oil companies (IOCs) continue to have difficulty accessing new sources of
supply, partially as a result of the growth of national oil companies. This situation is also
affected by increasing environmental issues, particularly in North America, where companies may be
denied access to some of the most promising onshore and offshore exploration opportunities. It is
estimated that approximately 85%-90% of the worlds reserves are controlled by national oil
companies, which increasingly prefer to develop resources on their own or by working directly with
the oil field services and equipment providers. These dynamics often prevent capital, technology
and project management capabilities from being optimally deployed on the best exploration and
production opportunities, which results in global supply capacity being less than it otherwise
might be. As a consequence, the pace of new supply additions may be insufficient to keep up with
demand once the global recession ends.
2009 Developments. Our overall total net revenues of $298.5 million for the nine months ended
September 30, 2009 decreased $240.8 million, or 44.7%, compared to total net revenues for the nine
months ended September 30, 2008. Our overall gross profit percentage for the first nine months of
2009 was 32.9% compared to 33.2% for the first nine months of 2008. In the first nine months of
2009, we recorded a loss from operations of ($53.6) million (which includes the effect of an
impairment of intangible assets charge of $38.0 million taken in the first quarter of 2009),
compared to $61.6 million income from operations for the first nine months of 2008.
Developments to date in 2009 include the following:
|
|
|
In January 2009, we announced our first commercial delivery of a multi-thousand station
FireFly system equipped with digital, full-wave VectorSeis® sensors to the
worlds largest land contractor. The deployment in the second quarter of 2009 of our first
commercialized FireFly system occurred in a producing hydrocarbon basin containing
reservoirs that have proven difficult to image with conventional seismic techniques. |
24
|
|
|
In March 2009, we announced that we had signed an agreement with The Polarcus Group of
Companies for the provision of seismic data processing services. Under the agreement, we
will provide hardware, software and geophysicists in order to support a seismic projects
entire imaging lifecycle, from the vessel to an onshore data processing center. |
|
|
|
|
In April 2009, we announced that a 6,100 station FireFly system will be utilized by a
major oil company to undertake two high channel count, multicomponent (full-wave) seismic
acquisition programs in northeast Texas, and, in July 2009, we announced that our client had
sanctioned the second phase of the program. Data acquisition of the first phase began in May
2009. |
|
|
|
|
In April 2009, we announced the first commercial sale of our cable-based ARIES II seismic
recording platform to one of the worlds largest geophysical services providers. The sale
includes two 5,000 channel ARIES II recording systems that the customer plans to deploy on
upcoming, high-channel count seismic surveys. |
|
|
|
|
In May 2009, we announced that an 8,000 station FireFly system will be utilized by
Compania Mexicana de Exploraciones (Comesa), an oilfield services company majority-owned by
PEMEX, the national oil company of Mexico, on three projects in Mexico. |
|
|
|
|
In May 2009, we announced that we had successfully acquired an additional 6,200
kilometers of regional seismic data offshore Indias western coast as part of our ongoing
IndiaSPAN program. Another 3,800 kilometers has since been acquired off the east
coast of India. |
|
|
|
|
In July 2009, we announced that we had successfully completed the data processing and
interpretation for ArgentineSPAN, a basin-scale seismic program offshore
Argentina. ArgentineSPAN contains approximately 11,800 kilometers of new, regional data. |
|
|
|
|
In July 2009, we announced that we had successfully acquired 5,000 kilometers of regional
seismic data covering the Bight Basin and Ceduna Sub-basin offshore southern Australia.
Known as BightSPAN, this latest addition to our global BasinSPAN seismic data
library offers the first regional geologic study of Australias deepwater southern coast. |
|
|
|
|
In October 2009, we announced our proposed joint venture with BGP and the related bridge
financing transactions. See Proposed Joint Venture and Related Transactions with BGP. |
Key Financial Metrics. The following table provides an overview of key financial metrics for
our company as a whole and our four business segments during the three and nine months ended
September 30, 2009, compared to those periods one year ago (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable |
|
|
|
|
|
|
|
|
|
|
Comparable |
|
|
|
Three Months Ended |
|
|
Quarter |
|
|
Nine Months Ended |
|
|
Year-to-Date |
|
|
|
September 30, |
|
|
Increase |
|
|
September 30, |
|
|
Increase |
|
|
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Imaging Systems |
|
$ |
15,187 |
|
|
$ |
81,562 |
|
|
|
(81.4 |
%) |
|
$ |
68,531 |
|
|
$ |
177,270 |
|
|
|
(61.3 |
%) |
Marine Imaging Systems |
|
|
29,400 |
|
|
|
49,016 |
|
|
|
(40.0 |
%) |
|
|
72,077 |
|
|
|
133,872 |
|
|
|
(46.2 |
%) |
Data Management Solutions |
|
|
7,618 |
|
|
|
10,408 |
|
|
|
(26.8 |
%) |
|
|
24,081 |
|
|
|
29,170 |
|
|
|
(17.4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ION Systems |
|
|
52,205 |
|
|
|
140,986 |
|
|
|
(63.0 |
%) |
|
|
164,689 |
|
|
|
340,312 |
|
|
|
(51.6 |
%) |
ION Solutions Division |
|
|
50,165 |
|
|
|
77,543 |
|
|
|
(35.3 |
%) |
|
|
133,828 |
|
|
|
199,041 |
|
|
|
(32.8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
102,370 |
|
|
$ |
218,529 |
|
|
|
(53.2 |
%) |
|
$ |
298,517 |
|
|
$ |
539,353 |
|
|
|
(44.7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Imaging Systems |
|
$ |
(10,328 |
) |
|
$ |
11,216 |
|
|
|
(192.1 |
%) |
|
$ |
(25,920 |
) |
|
$ |
15,831 |
|
|
|
(263.7 |
%) |
Marine Imaging Systems |
|
|
9,386 |
|
|
|
14,063 |
|
|
|
(33.3 |
%) |
|
|
19,890 |
|
|
|
35,245 |
|
|
|
(43.6 |
%) |
Data Management Solutions |
|
|
4,277 |
|
|
|
6,820 |
|
|
|
(37.3 |
%) |
|
|
14,525 |
|
|
|
17,496 |
|
|
|
(17.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ION Systems |
|
|
3,335 |
|
|
|
32,099 |
|
|
|
(89.6 |
%) |
|
|
8,495 |
|
|
|
68,572 |
|
|
|
(87.6 |
%) |
ION Solutions Division |
|
|
9,321 |
|
|
|
14,019 |
|
|
|
(33.5 |
%) |
|
|
19,129 |
|
|
|
36,316 |
|
|
|
(47.3 |
%) |
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable |
|
|
|
|
|
|
|
|
|
|
Comparable |
|
|
|
Three Months Ended |
|
|
Quarter |
|
|
Nine Months Ended |
|
|
Year-to-Date |
|
|
|
September 30, |
|
|
Increase |
|
|
September 30, |
|
|
Increase |
|
|
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
Corporate |
|
|
(14,215 |
) |
|
|
(14,544 |
) |
|
|
(2.3 |
%) |
|
|
(43,226 |
) |
|
|
(43,283 |
) |
|
|
0.1 |
% |
Impairment of intangible assets |
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
(38,044 |
) |
|
|
|
|
|
|
(100.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(1,559 |
) |
|
$ |
31,574 |
|
|
|
(104.9 |
%) |
|
$ |
(53,646 |
) |
|
$ |
61,605 |
|
|
|
(187.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to
common shares |
|
$ |
(6,825 |
) |
|
$ |
24,933 |
|
|
|
|
|
|
$ |
(61,874 |
) |
|
$ |
48,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per
common share |
|
$ |
(0.06 |
) |
|
$ |
0.26 |
|
|
|
|
|
|
$ |
(0.57 |
) |
|
$ |
0.51 |
|
|
|
|
|
Diluted net income (loss) per
common share |
|
$ |
(0.06 |
) |
|
$ |
0.25 |
|
|
|
|
|
|
$ |
(0.57 |
) |
|
$ |
0.49 |
|
|
|
|
|
We intend that the following discussion of our financial condition and results of operations
will provide information that will assist in understanding our consolidated financial statements,
the changes in certain key items in those financial statements from quarter to quarter, and the
primary factors that accounted for those changes. Our results of operations for the three and nine
months ended September 30, 2009 have been affected by our acquisition of ARAM on September 18,
2008, which may affect the comparability of certain of the financial information contained in this
Form 10-Q.
There are a number of factors that could impact our future operating results and financial
condition, and may, if realized, cause our expectations set forth in this Form 10-Q and elsewhere
to vary materially from what we anticipate. See Item 1A. Risk Factors below.
The information contained in this Quarterly Report on Form 10-Q contains references to our
trademarks, service marks and registered marks, as indicated. Except where stated otherwise or
unless the context otherwise requires, the terms VectorSeis, GATOR, Scorpion, SPECTRA,
Orca, ARAM and FireFly refer to our VectorSeis®, GATOR®,
Scorpion®, SPECTRA®, Orca®, ARAM® and
FireFly® registered marks, and the terms BasinSPAN, DigiFIN, DigiSTREAMER and
ARIES II refer to our BasinSPAN, DigiFIN, DigiSTREAMER and
ARIES II trademarks and service marks.
Proposed Joint Venture and Related Transactions with BGP
On October 23, 2009, we entered into a binding Term Sheet with BGP, which provides for, among
other things, the formation of a joint venture between our company and BGP involving our land-based
seismic data acquisition equipment business.
The Term Sheet contemplates that we will enter into a purchase agreement with BGP under which
(i) BGP will acquire a 51% equity interest in the joint venture for an aggregate purchase price of
$108.5 million cash to be paid to us and the contribution by BGP to the joint venture of certain
assets and certain related liabilities of BGP that relate to the joint ventures business and (ii)
we will acquire a 49% interest in the joint venture in exchange for our contribution of certain
assets and certain related liabilities that relate to the joint venture business. The assets of
each party to be transferred to the joint venture will include seismic recording systems,
inventory, certain intellectual property rights and contract rights, all as may be necessary to own
and operate the business of the joint venture.
The scope of the joint ventures business is defined in the Term Sheet as being the business
of designing, development, engineering, manufacturing, research and development, distribution,
sales and marketing and field support of land-based equipment used in seismic data acquisition for
the energy and petroleum industry. Excluded from the scope of the joint ventures business will be
(x) the analog sensor businesses of our company and BGP and (y) the businesses of certain companies
in which BGP or we are currently a minority owner. In addition to these excluded businesses, all of
our other businesses including our Marine Imaging Systems, Concept Systems, Data Management
Solutions and ION Solutions, which includes GXTs Imaging Solutions, Integrated Seismic Solutions
(ISS) and BasinSPAN and seismic data libraries, will remain owned and operated by us
and will not comprise a part of the joint venture.
26
Under the Term Sheet, the parties have agreed to use their best efforts to cause the closing
of the joint venture and related transactions to occur as soon as practicable following the
execution of the definitive transaction documents, and on or before the later to occur of the
following dates: (i) December 31, 2009 or (ii) 10 business days following the date on which all
necessary regulatory approvals (including receiving clearance from the Committee on Foreign
Investment in the United States (CFIUS) to complete the transactions) have been obtained, but in
any event, no later than March 31, 2010. The parties obligations under the Term Sheet may be
terminated (i) by written agreement of the parties, (ii) by either party in the even that such
partys conditions have not been satisfied on or before March 31, 2010 (subject to a 15-day cure
period) or (iii) by either party in the event that certain mutual conditions have not been
satisfied on or before March 31, 2010. In addition, BGP and we have each agreed to pay the other a
break-up fee of $5.0 million if either party determines to terminate its obligations under the Term
Sheet because the other party has failed to satisfy certain conditions (including conditions
precedent to closing that (a) the other party has not experienced a material adverse event or
condition that has resulted in a material adverse effect on its business, prospects and results of
operations change, (b) the other party has not breached any of its representations and warranties
contained in the Term sheet and such representations and warranties continue to be true and correct
and (c) with respect to BGPs obligations under the Term Sheet, we have not suffered any material
default or accelerations of any of our liabilities.
On October 27, 2009, we borrowed an aggregate of $40 million in the form of revolving credit
bridge financing arranged by BGP from Bank of China, New York Branch and evidenced by the
Convertible Notes. This borrowing was permitted by the terms of the Sixth Amendment to the Credit
Facility, which increased the aggregate revolving commitment amount under the Amended Credit
Facility from $100.0 million to $140.0 million and permitted the New Lender to join the Amended
Credit Facility as a lender. We also granted to BGP a warrant to purchase a number of shares of our
common stock, equal to $40.0 million divided by an exercise price of $2.80 per share (subject to
adjustment).
Additionally, the Term Sheet provides that when the joint venture transactions are closed:
|
|
|
BGP will purchase approximately 23.8 million shares of our common stock for $66.6
million, and thereby own, after giving effect to the issuance of those shares, approximately
16.66% of our outstanding common stock. |
|
|
|
|
To the extent that shares are not purchased by BGP under the Warrant prior to closing,
the new revolving credit loans from the New Lender, evidenced by the Convertible Notes will
convert into approximately 14.3 million shares of ION common stock at a conversion price of
$2.80 per share (such number of shares and conversion price subject to adjustment), and will
be credited against the approximately 23.8 million shares of ION stock to be purchased by
BGP at the transaction closing. |
|
|
|
|
ION will appoint a designee of BGP to its Board of Directors to serve with the current
nine members of IONs Board of Directors. |
|
|
|
|
BGP will arrange for our then-outstanding long-term debt under the Amended Credit
Facility (currently $106.3 million outstanding at November 9, 2009) to be refinanced at the
joint venture closing. |
|
|
|
|
We will use a portion of the proceeds from the transactions to pay off and retire our
outstanding indebtedness under our current revolving credit facility (after giving effect to
the $40.0 million in additional revolving credit borrowings under our existing Amended
Credit Facility, approximately $118.0 million is currently outstanding at November 9, 2009)
and $35.0 million in seller subordinated indebtedness incurred in connection with our
acquisition of ARAM in September 2008. |
|
|
|
|
We will receive a new $100 million revolving credit facility at the joint venture
closing. |
|
|
|
|
The $19.8 million (as of September 30, 2009) secured equipment financing transaction with
ICON will be assigned to and become indebtedness of the joint venture. |
The proposed joint venture is intended to provide a number of benefits and opportunities,
including the following:
|
|
|
Preferred access to BGP, currently the worlds largest land seismic contractor; |
27
|
|
|
Anticipated improved economies of scope and scale in our land data acquisition system
manufacturing and sales operations, enabling us to deliver products in a more timely manner
at an overall lower cost to its customers; |
|
|
|
|
Combining our strengths in land equipment technologies with BGPs emerging geophysical
product portfolio and expertise in operating land seismic acquisition crews, which should
permit new joint venture products to be designed and field-tested for reliability, quality
and productivity to the benefit of all customers; and |
|
|
|
|
Aligning the joint venture engineering teams to develop innovative, market-leading land
recording systems, 3C (full-wave) sensor and vibroseis products. |
We believe that the joint venture will enable us to continue developing land systems and
sensor technologies, but by partnering with BGP, with lessened primary capital requirements.
Results of Operations
Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
Net Revenues. Net revenues of $102.4 million for the three months ended September 30, 2009
decreased $116.2 million, or 53.2%, compared to the corresponding period last year. Land Imaging
Systems net revenues decreased by $66.4 million, to $15.2 million compared to $81.6 million in the
corresponding period of last year. This decrease related mainly to the continued decreased market
demand in North America and Russia for land seismic equipment and decreased sales across all
product lines compared to the third quarter of 2008. Marine Imaging Systems net revenues for the
three months ended September 30, 2009 decreased by $19.6 million to $29.4 million compared to $49.0
million in the corresponding period of last year, principally due to the decrease in VectorSeis
Ocean (VSO) system sales in 2008 which were not repeated during the three months ended September
30, 2009. This decrease was partially offset by multiple sales of our DigiFIN positioning systems.
Revenues from our Data Management Solutions segment (our Concept Systems subsidiary) decreased
compared to the corresponding period of last year due to decreased software sales of
SPECTRA® and GATOR® and partially offset by increased sales of
ORCA® software.
Our ION Solutions divisions net revenues decreased by $27.4 million, to $50.2 million for the
three months ended September 30, 2009, compared to $77.5 million in the corresponding quarter of
2008. The results for the third quarter of 2009 reflected decreased multi-client data library and
new venture program sales, partially offset by increases in data processing service revenues.
Gross Profit and Gross Profit Percentage. Gross profit of $34.6 million for the three months
ended September 30, 2009 decreased $38.0 million, compared to the corresponding period last year.
Gross profit percentages for the three months ended September 30, 2009 and 2008 were 33.8% and
33.2%, respectively. The increase in gross margin percentage occurred primarily in our Marine
Imaging Systems division and is principally due to product mix combined with lower sales of
VectorSeis Ocean (VSO) acquisition system equipment compared to prior year. We experienced higher
margin sales in our ION Solutions segment as well. Data Management Solutions segments gross profit
percentage slightly decreased due to product mix, while the Land Imaging Systems business segment
showed a decrease in margins primarily due to increased restructuring charges and increased
amortization expense related to ARAMs acquired intangibles.
Research, Development and Engineering. Research, development and engineering expense was $10.7
million, or 10.4% of net revenues, for the three months ended September 30, 2009, a decrease of
$2.8 million compared to $13.5 million, or 6.2% of net revenues, for the corresponding period last
year. The decrease was due primarily to decreased salary and payroll expenses related to our
reduced headcount and lower supply and equipment costs due to the focus on cost reduction during
the current market downturn. Based upon the recently initiated restructuring programs, we expect to
continue to incur lower costs related to our research, development and engineering efforts than in
prior periods as mentioned in Item 2. Executive Summary above.
Marketing and Sales. Marketing and sales expense of $8.0 million, or 7.8% of net revenues, for
the three months ended September 30, 2009 decreased $4.1 million compared to $12.1 million, or 5.5%
of net revenues, for the corresponding period last year. The decrease in our sales and marketing
expenditures reflects decreased salary and payroll expenses related to our reduced headcount, a
decrease in travel expenses as part of our cost reduction measures and a decrease in conventions,
exhibits and advertising expenses related to cost reduction measures and the timing of the expenses
throughout the year. Based upon the recently initiated restructuring
28
programs, we expect to
continue to incur lower costs related to our marketing and sales efforts than in prior periods as
mentioned in Item 2. Executive Summary above.
General and Administrative. General and administrative expenses of $17.5 million for the three
months ended September 30, 2009 increased $2.0 million compared to $15.5 million for the third
quarter of 2008. General and administrative expenses as a percentage of net revenues for the three
months ended September 30, 2009 and 2008 were 17.1% and 7.1%, respectively. The increase in general
and administrative expense was mainly due to stock-based compensation expense related to a change
in our estimate of anticipated forfeitures of our previously-granted options, restricted stock and
restricted stock units equity compensation awards. Additionally, general and administrative
expenses also reflected increased professional legal fees related to ongoing litigation and other
legal matters and partially offset by lower salary and payroll expenses related to our reduced
headcount. Based upon the recently initiated restructuring programs, we expect to incur lower costs
related to our general and administrative activities than in prior periods as mentioned in Item 2.
Executive Summary above.
Interest Expense. Interest expense of $6.4 million for the three months ended September 30,
2009 increased $4.8 million compared to $1.6 million for the third quarter of 2008. The increase is
due to the higher levels of outstanding indebtedness and the secured equipment financing
transaction that occurred during the second and third quarters of 2009 combined with increased
revolver borrowings of $98.0 million. See Liquidity and Capital Resources Sources of
Capital below. Because of these increased levels of borrowed indebtedness, our interest expense
will continue to be significantly higher in 2009 than we experienced in prior years.
Other Income (Expense). Other income for the three months ended September 30, 2009 was $1.7
million compared to ($0.4) million of other expense for the third quarter of 2008. The other
income for the third quarter of 2009 mainly relates to higher foreign currency exchange gains that
primarily resulted from our operations in the United Kingdom.
Income Tax Expense. Income tax expense for the three months ended September 30, 2009 was $0.1
million compared to $3.8 million for the three months ended September 30, 2008. We continue to
maintain a valuation allowance for a significant portion of our U.S. federal net deferred tax
assets. Our effective tax rates for the three months ended September 30, 2009 and 2008 were (2.3)%
(provision on a loss) and 12.7% (provision on income), respectively. The decrease in the Companys
effective tax rate for the three months ended September 30, 2009 was due primarily to changes in
the distribution of earnings between U.S. and foreign jurisdictions.
Preferred Stock Dividends. The preferred stock dividend relates to our Series D-1, Series D-2
and Series D-3 Cumulative Convertible Preferred Stock (collectively referred to as the Series D
Preferred Stock) that we issued in February 2005, December 2007 and February 2008, respectively.
Quarterly dividends must be paid in cash. Dividends are paid at a rate equal to the greater of (i)
5% per annum or (ii) the three month LIBOR rate on the last day of the immediately preceding
calendar quarter plus 21/2% per annum. All dividends paid to date on the Series D Preferred Stock
have been paid in cash. The Series D Preferred Stock dividend rate was 5.0% at September 30, 2009.
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
Net Revenues. Net revenues of $298.5 million for the nine months ended September 30, 2009
decreased $240.8 million, or 44.7%, compared to the corresponding period last year. Land Imaging
Systems net revenues decreased by $108.7 million, to $68.5 million compared to $177.3 million in
the corresponding period of last year. This decrease related mainly to the continued decreased
market demand in North America and Russia for land seismic equipment. Marine Imaging Systems net
revenues for the nine months ended September 30, 2009 decreased by $61.8 million to $72.1 million
compared to $133.9 million in the corresponding period of last year, principally due to the fact
that the VectorSeis Ocean (VSO) system sales that occurred in 2008 were not repeated during the
nine months ended September 30, 2009, and the timing of new marine vessels being introduced into
the market. This decrease was partially offset by multiple sales of our DigiFIN system and several
marine streamer positioning system sales in the second and third quarters of 2009. Revenues from
our Data Management Solutions segment (our Concept Systems subsidiary) of $24.1 million for the
first nine months of 2009 decreased from the $29.2 million in revenues for the corresponding period
of last year. This decrease was due entirely to the effect of foreign currency exchange rate
fluctuations compared to a year ago. Converting those revenues to Data Management Solutions
domestic currency of British Pounds Sterling, revenues for the first nine months of 2009 slightly
increased by £0.5 million compared to revenues for the first nine months of 2008.
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Our ION Solutions divisions net revenues decreased by $65.2 million, to $133.8 million for
the nine months ended September 30, 2009, compared to $199.0 million in the corresponding period of
2008. The results for the first nine months of 2009 reflected decreased multi-client data library
and new venture program sales, partially offset by increases in data processing service revenues.
Gross Profit and Gross Profit Percentage. Gross profit of $98.3 million for the nine months
ended September 30, 2009 decreased $80.7 million, compared to the corresponding period last year.
Gross profit percentages for the nine months ended September 30, 2009 and 2008 were 32.9% and
33.2%, respectively. The small reduction gross margins was due mainly to decreases in the margins
of our
Land Imaging Systems sales, which were principally to the result of increased amortization
expense related to ARAMs acquired intangibles and the restructuring charges taken during 2009. We
experienced higher margin sales in our Marine Imaging Systems segments compared to the prior year.
ION Solutions and Data Management Solutions segments gross profit percentage remained flat due to
product mix sold for the quarter.
Research, Development and Engineering. Research, development and engineering expense was $33.9
million, or 11.4% of net revenues, for the nine months ended September 30, 2009, a decrease of $3.6
million compared to $37.5 million, or 7.0% of net revenues, for the corresponding period last year.
The decrease was due primarily to decreased salary and payroll expenses related to our reduced
headcount. Based upon the recently initiated restructuring programs, we expect to incur lower costs
related to our research, development and engineering efforts than in prior periods as mentioned in
Item 2. Executive Summary above.
Marketing and Sales. Marketing and sales expense of $26.2 million, or 8.8% of net revenues,
for the nine months ended September 30, 2009 decreased $9.2 million compared to $35.4 million, or
6.6% of net revenues, for the corresponding period last year. The decrease in our sales and
marketing expenditures reflects decreased salary and payroll expenses related to our reduced
headcount, a decrease in travel expenses as part of our cost reduction measures and a decrease in
conventions, exhibits and advertising expenses related to cost reduction measures and the timing of
the expenses throughout the year. Based upon the recently initiated restructuring programs, we
expect to continue to incur lower costs related to our marketing and sales efforts than in prior
periods as mentioned in Item 2. Executive Summary above.
General and Administrative. General and administrative expenses of $53.8 million for the nine
months ended September 30, 2009 increased $9.3 million compared to $44.5 million for the first nine
months of 2008. General and administrative expenses as a percentage of net revenues for the nine
months ended September 30, 2009 and 2008 were 18.0% and 8.2%, respectively. The increase in general
and administrative expense was mainly due to stock-based compensation expense related to
adjustments between estimated and actual forfeitures of $4.5 million, of which $3.3 million is an
out-of-period adjustment. The remaining $1.2 million represents a change in our estimate of
anticipated forfeitures. Additionally, general and administrative expenses also reflect the
inclusion of ARAMs expenses in 2009, severance charges related to reductions in headcount,
increased professional legal fees related to ongoing litigation and other legal matters and
increased bad debt expenses. Based upon the recently initiated restructuring programs, we expect to
incur lower costs related to our general and administrative activities than in prior periods as
mentioned in Item 2. Executive Summary above.
Impairment of Intangible Assets. At March 31, 2009, we further evaluated our intangible assets
for potential impairment. Based upon our evaluation and given the current market conditions, we
determined that approximately $38.0 million of proprietary technology and customer relationships
(written off entirely) related to ARAM acquired intangibles were impaired. In the fourth quarter of
2008, we recorded an impairment charge of $10.1 million related to ARAMs customer relationships,
trade name and non-compete agreements. Our net book value associated with ARAMs acquired
intangibles is $35.0 million at September 30, 2009 and has a remaining weighted average life of 6.4
years.
Interest Expense. Interest expense of $20.7 million for the nine months ended September 30,
2009 increased $18.0 million compared to $2.7 million for the first quarter of 2008. The increase
is due to the higher levels of outstanding indebtedness and the higher effective interest rate of
the Bridge Loan Agreement with Jefferies Finance LLC that we extinguished in the second quarter of
2009, combined with increased revolver borrowings of $98.0 million. See Liquidity and Capital
Resources Sources of Capital below. Because of these increased levels of borrowed indebtedness,
our interest expense will continue to be significantly higher in 2009 than we experienced in prior
years.
Other Income (Expense). Other expense for the nine months ended September 30, 2009 was $4.7
million compared to other income of $0.1 million for the nine months ended September 30,
2008. The
other expense for the nine months ended September 30,
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2009 mainly relates to higher foreign
currency exchange losses that primarily resulted from our operations in Canada and in the United
Kingdom.
Income Tax Expense (Benefit). Income tax benefit for the nine months ended September 30, 2009
was ($18.3) million compared to income tax expense of $9.3 million for the nine months ended
September 30, 2008. We continue to maintain a valuation allowance for a significant portion of our
U.S. federal net deferred tax assets. Our effective tax rates for the nine months ended September
30, 2009 and 2008 were 23.6% (benefit on a loss) and 15.5% (provision on income), respectively. The
increase in our effective tax rate relates primarily to the tax benefit related to the further
impairment of intangible assets (discussed above), which is taxed at 29%. The inclusion of this
benefit at the higher rate increased the overall effective tax rate for the nine month period. See
Note 10 Income Taxes of Part I, Item 1 of this Form 10-Q.
Liquidity and Capital Resources
Sources of Capital
Our cash requirements include our working capital requirements, debt service payments,
dividend payments on our preferred stock, data acquisitions and capital expenditures. In recent
years, our primary sources of funds have been cash flow from operations, existing cash balances,
equity issuances and our revolving credit facility (see Revolving Line of Credit and Term Loan
Facilities below).
At September 30, 2009, our outstanding credit facilities and debt consisted of:
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Our Amended Credit Facility, comprised of: |
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An amended revolving line of credit sub-facility (including the $40.0 million of revolving
credit indebtedness evidenced by
the Convertible Notes); and |
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A $125.0 million original principal amount term loan; |
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A $20.0 million secured equipment financing term loan; and |
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A $35.0 million Amended and Restated Subordinated Promissory Note. |
Revolving Line of Credit and Term Loan Facilities. In July 2008, we, ION Sàrl, and certain of
our domestic and other foreign subsidiaries (as guarantors) entered into a $100 million amended and
restated revolving credit facility under the terms of an amended credit agreement with our
commercial bank lenders (this agreement, as it has been further amended, is referred to as the
Amended Credit Agreement). This amended and restated revolving credit facility provided us with
additional flexibility for our international capital needs by not only permitting borrowings by one
of our foreign subsidiaries under the facility but also providing us the ability to borrow in
alternative currencies.
On September 17, 2008, we added a new $125.0 million term loan sub-facility under the Amended
Credit Agreement, and borrowed $125.0 million in term loan indebtedness and $72.0 million under
the revolving credit sub-facility to fund a portion of the cash consideration for the ARAM
acquisition.
The interest rate on borrowings under our Amended Credit Facility is, at our option, (i) an
alternate base rate (either the prime rate of HSBC Bank USA, N.A., or a federals funds effective
rate plus 0.50%, plus an applicable interest margin) or (ii) for Eurodollar borrowings and
borrowings in Euros, pounds sterling or Canadian dollars, a LIBOR-based rate, plus an applicable
interest margin. The amount of the applicable interest margin is determined by reference to a
leverage ratio of total funded debt to consolidated EBITDA for the four most recent trailing fiscal
quarters. The interest rate margins currently range from 2.875% to 5.5% for alternate base rate
borrowings, and from 3.875% to 6.5% for Eurodollar borrowings. As of September 30, 2009, both the
$106.3 million in term loan indebtedness under the Amended Credit Facility and the $98.0 million in
total revolving credit indebtedness under the Amended Credit Facility accrued interest at the
then-applicable LIBOR-based interest rate of 6.0% per annum. The average effective interest rates
for the quarter ended September 30, 2009 under the LIBOR-based rates for both the term loan
indebtedness and the revolving
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credit indebtedness were 5.8%.
At March 31, 2009, we were in compliance with all of the financial covenants under the terms
of the Amended Credit Facility and the Bridge Loan Agreement. However, based upon our first quarter
results and our then-current operating forecast for the remainder of 2009, we determined that it
was probable that, if we did not take any mitigating actions, we would not be in compliance with
one or more of our financial covenants under those two debt agreements for the period ending
September 30, 2009. As a result, we approached the lenders under the Amended Credit Facility to
obtain amendments to relax certain of these financial covenants and pursued the private placement
of our common stock, which, along with our cash on hand, we believed would generate sufficient
funds to repay the outstanding indebtedness under the Bridge Loan Agreement. See further discussion
of the private placement offering below at Private Placement of 18.5 Million Shares of Common
Stock.
In June 2009, we entered into an additional amendment (the Fifth Amendment) to our Amended
Credit Facility that, among other things, modified certain of the financial and other covenants
contained in the Amended Credit Facility and permitted us to repay
our Bridge Loan Agreement indebtedness. Principal modifications to the terms of the Amended
Credit Agreement resulting from the Fifth Amendment included the following:
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The Fifth Amendment provided for an increase in applicable maximum interest rate margins
in the event that our leverage ratio exceeds 2.25 to 1.0 from 4.5% to up to 5.5% for
alternate base rate loans, and from 5.5% to up to 6.5% for LIBOR-rate loans; |
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The Fifth Amendment modified a restricted payments covenant, permitting us to apply up to
$6.0 million of our available cash on hand to prepay the indebtedness under the Bridge Loan
Agreement; |
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The Fifth Amendment contained a new defined term Excess Cash Flow, and now requires
us to apply 50% of our Excess Cash Flow, if any, calculated with respect to a just-completed
fiscal year, to the prepayment of the term loan under the Amended Credit Agreement if our
fixed charge coverage ratio or our leverage ratio for the just-completed fiscal year does
not meet certain requirements; and |
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The Fifth Amendment modified Section 2.18 of the Credit Agreement to fix the maximum
revolving credit facility (accordion feature) amount to which the Amended Credit Facility
could be increased at $140.0 million. |
The Amended Credit Agreement contains covenants that restrict us, subject to certain
exceptions, from:
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Incurring additional indebtedness (including capital lease obligations), granting or
incurring additional liens on our properties, pledging shares of our subsidiaries, entering
into certain merger or other similar transactions, entering into transactions with
affiliates, making certain sales or other dispositions of assets, making certain
investments, acquiring other businesses and entering into certain sale-leaseback
transactions with respect to certain of our properties; |
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Paying cash dividends on our common stock and repurchasing and acquiring shares of our
common stock unless (i) there is no event of default under the Amended Credit Facility and
(ii) the amount of cash used for cash dividends, repurchases and acquisitions does not, in
the aggregate, exceed an amount equal to the excess of 30% of our domestic consolidated net
income for our most recently completed fiscal year over $15.0 million. |
The Amended Credit Facility requires us to be in compliance with certain financial covenants,
including requirements for us and our domestic subsidiaries to:
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maintain a minimum fixed charge coverage ratio (which must be not less than 1.00 to 1.0
for the fiscal quarter ending September 30, 2009; 1.10 to 1.0 for the fiscal quarter ending
December 31, 2009; 1.15 to 1.0 for the fiscal quarter ending March 31, 2010; 1.25 to 1.0 for
the fiscal quarter ending June 30, 2010; 1.35 to 1.0 for the fiscal quarter ending September
30, 2010; and 1.50 to 1.0 the fiscal quarter ending December 31, 2010 and thereafter); |
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not exceed a maximum leverage ratio (3.00 to 1.0 for the fiscal quarters ending September
30, 2009 and December 31, 2009; 2.75 to 1.0 for the fiscal quarter ending March 31, 2010 and
June 30, 2010; 2.5 to 1.0 for the fiscal quarter ending September 30, 2010; and 2.25 to 1.0
the fiscal quarter ending December 31, 2010 and thereafter); and |
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maintain a minimum tangible net worth of at least 80% of our tangible net worth as of
September 18, 2008 (the date that we completed our acquisition of ARAM), plus 50% of our
consolidated net income for each quarter thereafter, and 80% of the proceeds from any
mandatorily convertible notes and preferred and common stock issuances for each quarter
thereafter. |
The $125.0 million original principal amount of term loan indebtedness borrowed under the
Amended Credit Facility is subject to scheduled quarterly amortization payments of $4.7 million per
quarter until December 31, 2010. On that date, the quarterly principal amortization increases to
$6.3 million per quarter until December 31, 2012, when the quarterly principal amortization amount
increases to $9.4 million for each quarter until maturity on September 17, 2013. The term loan
indebtedness matures on September 17, 2013, but the administrative agent under the Amended Credit
Facility may accelerate the maturity date to a date that is six months prior to the maturity date
of any additional debt financing that we may incur to refinance certain indebtedness incurred in
connection with the ARAM acquisition, by giving us written notice of such acceleration between
September 17, 2012 and October 17, 2012.
The Amended Credit Facility contains customary event of default provisions (including an event
of default upon any change of control event affecting us), the occurrence of which could lead to
an acceleration of IONs obligations under the Amended Credit
Facility.
On October 23, 2009, we entered into the Sixth Amendment to the Amended and Restated Credit
Agreement that, among other things, (i) increases the aggregate revolving commitment amount under
the Amended Credit Facility from $100.0 million to $140.0 million, (ii) permitted Bank of China,
New York Branch as the New Lender to join the Amended Credit Facility, (iii) modified, or provided
limited waivers of, certain of the financial and other covenants contained in the Amended Credit
Facility (including waivers to the extent necessary to permit the issuance of the Warrant) and (iv)
permitted the principal amount of the new revolving credit loans from the New Lender (as evidenced
by the Convertible Notes) to be convertible into shares of our common stock. We borrowed on October
27, 2009 an aggregate of $40.0 million in revolving credit indebtedness under the Amended Credit
Facility (as amended by the Sixth Amendment), pursuant to the Convertible Notes. The Convertible
Notes were issued by us to the New Lender under the terms and conditions of the Amended Credit
Facility. The outstanding indebtedness under the Convertible Notes is currently scheduled to mature
on the maturity date of the revolving credit indebtedness under the Amended Credit Facility, which
is July 3, 2013.
Under the terms of the Amended Credit Agreement, up to $84.0 million (or its equivalent in
foreign currencies) is available for non-U.S. borrowings by ION Sàrl and up to $105.0 million is
available for domestic borrowings; however, the total level of outstanding borrowings under the
revolving credit facility cannot exceed $140.0 million. Revolving credit borrowings under the
Amended Credit Facility are available to fund our working capital needs, to finance acquisitions,
investments and share repurchases and for general corporate purposes. In addition, the Amended
Credit Facility includes a $35.0 million sub-limit for the issuance of documentary and stand-by
letters of credit, of which $1.7 million was outstanding at September 30, 2009. Borrowings under
the Amended Credit Facility may be prepaid without penalty.
As discussed above under Executive Summary Current Debt Levels, the indebtedness
under our outstanding revolving credit loan and our term loan under our Amended Credit Facility,
under the ICON Loan Agreements and under our Amended and Restated Subordinated Seller Note has been
reclassified as current indebtedness. The reclassification of this long-term indebtedness to
short-term indebtedness has not resulted in any violations of the terms of our outstanding
indebtedness.
Convertible Notes and Warrant. The Convertible Notes, issued in October 2009 in connection
with the execution of the Term Sheet with BGP, accrued interest, as of October 30, 2009, at the
rate of 5.7% per annum, and provide that at the stated initial conversion price of $2.80 per share,
the full $40.0 million principal amount under the Convertible Notes would be convertible into
14,285,714 shares of Common Stock. The Convertible Notes provide that the conversion price and the
number of shares into which the notes may be converted are subject to adjustment on terms and
conditions similar to those contained in the Warrant.
The Warrant will be exercisable, in whole or in part, at any time and from time to time,
subject to the conditions described below. The Warrant will initially entitle the holder thereof to
purchase a number of shares of commons tock equal to $40.0 million divided by
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the exercise price of
$2.80 per shares, subject to adjustment as described below. At the initial exercise price of $2.80
per share, at such time as the Warrant becomes exercisable, it would initially be fully exercisable
for 14,285,714 shares of common stock.
The Warrant will only become exercisable and the Convertible Notes will only become
convertible upon receipt of certain governmental approvals. Any conversions of the Convertible
Notes and prior exercises of the Warrant will reduce the dollar amount under the Warrant into which
the exercise price may be divided to determine the number of shares that may be acquired upon
exercise.
The exercise price under the Warrant and conversion prices under the Convertible Notes will be
subject to adjustment upon the occurrence of a Triggering Event. A Triggering Event will occur
in the event that the joint venture transactions cannot be completed by March 31, 2010, solely as a
result of the occurrence of a statement, order or other indication from any relevant governmental
regulatory agency that (a) the transactions would not be approved, would be opposed, objected to or
sanctioned or (b) the transactions or BGPs business and operations would be required to be altered
(or upon the earlier abandonment of such transactions due to any such statement, indication or
order). In such event, the exercise price and conversion price per share will be adjusted (but not
to an amount that exceeds $2.80 per share) to a price per share that is equal to 75% of the lowest
trading price of our common stock over a ten-consecutive-trading-day period, beginning on and
inclusive of the first trading day following the public announcement of any failure to complete
such transactions (or the abandonment thereof), which failure of abandonment was the result of the
Triggering Event. The exercise price of the Warrant and conversion prices of the Convertible notes
are also subject to certain customary anti-dilution adjustment.
The Warrant provides for certain cashless exercise rights that are exercisable by the holder
of the Warrant in the event that certain governmental approvals from the Peoples Republic of China
permitting the exercise of the Warrant for cash are not obtained.
At the same time as the closing of the joint venture transactions, all of the then-outstanding
principal amounts under the Convertible Notes will be automatically converted into shares of common
stock unless, at the option of the holder of the Warrant, the holder elects to exercise the Warrant
in whole or in part, in lieu of the full conversion of such remaining principal amounts under the
Convertible Notes.
Assuming that no adjustments to the exercise or conversion prices of (or the number of shares
to be issued under) the Warrant or the Convertible Notes are required prior to closing the joint
venture transactions, the Term Sheet provides that at the closing of the transactions, BGP would
purchase directly from us a number of shares of Common Stock at a purchase price of $2.80 per
shares such that, when added to the total number of shares of Common Stock that may have been
previously issued pursuant to conversion of the Convertible Notes and /or exercise of the Warrant,
BGP (and its transferees and permitted assignees) would own, together, 19.99% of the issued and
outstanding shares of Common Stock (i.e. 23,789,536 shares).
Secured Equipment Financing. On June 29, 2009, we entered into a $20.0 million secured
equipment financing transaction with ICON ION, LLC (the Lender), an affiliate of ICON Capital
Inc. Two master loan agreements were entered into with ICON in connection with this transaction:
(i) we, ARAM Rentals Corporation, a Nova Scotia unlimited company (ARC), and ICON entered into a
Canadian Master Loan and Security Agreement dated as of June 29, 2009 with regard to certain
equipment leased to customers by ARC, and (ii) we, ARAM Seismic Rentals, Inc., a Texas corporation
(ASRI), and ICON entered into a Master Loan and Security Agreement (U.S.) dated as of June 29,
2009 with regard to certain equipment leased to customers by ASRI (collectively, the ICON Loan
Agreements). All borrowed indebtedness under the ICON Loan Agreements is scheduled to mature on
July 31, 2014. We used the proceeds of the secured term loans for working capital and general
corporate purposes.
Under the terms of the ICON Loan Agreements, ICON advanced $12.5 million on June 29, 2009 and
$7.5 million on July 20, 2009. The indebtedness under the ICON Loan Agreements is secured by
first-priority liens in (a) certain of our ARAM seismic rental equipment located in the United
States and Canada (subject to certain exceptions), and certain additional and replacement seismic
equipment, (b) written leases or other agreements evidencing payment obligations relating to the
leasing by ARC or ASRI of this equipment to their respective customers, including their related
receivables, (c) the cash or cash equivalents held by such subsidiaries and (d) any proceeds
thereof.
The obligations of each of ARC and ASRI under the ICON Loan Agreements are guaranteed by us
under a Guaranty dated as of June 29, 2009 (the ICON Guaranty). The ICON Loan Agreements and the
ICON Guaranty constitute permitted indebtedness under the Amended Credit Facility.
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Under both ICON Loan Agreements, interest on the outstanding principal amount will accrue at a
fixed interest rate of 15% per annum calculated monthly, and is payable monthly on the first day of
each month. Principal and interest are payable, commencing on September 1, 2009, in 60 monthly
installments until the maturity date, when all remaining outstanding principal and interest will be
due and payable. Pursuant to the ICON Loan Agreements, in connection with the closing in June 2009,
ARC and ASRI paid ICON a non-refundable upfront fee of $0.3 million. In addition, ICON will receive
an administrative fee equal to 0.5% of the aggregate principal amount of advances under the ICON
Loan Agreements, payable at the end of each of the first four years during their terms. Inclusive
of these additional fees, the effective interest rate on the ICON loan was 16.3% as of September
30, 2009.
Beginning on August 1, 2012, and continuing until January 31, 2014, we may prepay the
outstanding principal balances of the loans in full by giving ICON 30 days prior written notice
and paying a prepayment fee equal to 3.0% of the then-outstanding principal amount of the loans.
Commencing on February 1, 2014, the loans may be prepaid in full without payment of any prepayment
penalty or fee, subject to our giving ICON 30 days prior written notice.
The ICON Loan Agreements contain certain cross-default provisions with respect to defaults
under our Amended Credit Facility. Therefore, similar to the current classification of the
Amended Credit Facility indebtedness, we have also classified this long-term indebtedness as
current.
Amended and Restated Subordinated Seller Note. As part of the purchase price for the ARAM
acquisition, one of our subsidiaries issued an unsecured senior promissory note (the Senior Seller
Note) in the original principal amount of $35.0 million to Maison Mazel Ltd., one of the selling
shareholders of ARAM. On December 30, 2008, in connection with other acquisition refinancing
transactions that were completed on that date, the Senior Seller Note was amended and restated
pursuant to an Amended and Restated Subordinated Promissory Note (the Amended and Restated
Subordinated Note) issued to Maison Mazel, the selling shareholder. The principal amount of the
Amended and Restated Subordinated Note is $35.0 million and matures on September 17, 2013. We also
entered into a guaranty dated December 30, 2008, whereby we guaranteed on a subordinated basis
the subsidiarys repayment obligations under the Amended and Restated Subordinated Note.
Effective April 9, 2009, (i) the subsidiary transferred the Amended and Restated Subordinated
Note to us and we assumed in full the obligations of ION Sub under such note, and (ii) our guaranty
of payment of the indebtedness under the Amended and Restated Subordinated Note was terminated.
The subsidiary was also released from its obligations under the Amended and Restated Promissory
Note by Maison Mazel.
Interest on the outstanding principal amount under the Amended and Restated Subordinated Note
accrues at the rate of fifteen percent (15%) per annum, and is payable quarterly.
The terms of the Amended and Restated Subordinated Note provide that the particular covenants
contained in the Amended Credit Agreement (or in any successor agreement or instrument) that
restricts our ability to incur additional indebtedness will be incorporated into the Amended and
Restated Subordinated Note. However, under the Amended and Restated Subordinated Note, neither
Maison Mazel nor any other holder of the Amended and Restated Subordinated Note will have a
separate right to consent to or approve any amendment or waiver of the covenant as contained in the
Amended Credit Facility.
In addition, we have agreed that if we incur indebtedness under any financing that:
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qualifies as Long Term Junior Financing (as defined in the Amended Credit Agreement), |
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results from a refinancing or replacement of the Amended Credit Facility such that the
aggregate principal indebtedness (including revolving commitments) thereunder would be in
excess of $275.0 million, or |
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qualifies as unsecured indebtedness for borrowed money that is evidenced by notes or
debentures, has a maturity date of at least five years after the date of its issuance and
results in total gross cash proceeds to us of not less than $40.0 million, |
then we will be obligated to repay in full from the total proceeds from such financing the
then-outstanding principal of and interest on the Amended and Restated Subordinated Note.
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The indebtedness under the Amended and Restated Subordinated Note is subordinated to the prior
payment in full of our Senior Obligations, which are defined in the Amended and Restated
Subordinated Note as the principal, premium (if any), interest and other amounts that become due in
connection with:
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our obligations under the Amended Credit Facility, |
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our liabilities with respect to capital leases and obligations that qualify as a
Sale/Leaseback Agreement (as that term is defined in the Amended Credit Agreement), |
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guarantees of the indebtedness described above, and |
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debentures, notes or other evidences of indebtedness issued in exchange for, or in the
refinancing of, the Senior Obligations described above, or any indebtedness arising from the
payment and satisfaction of any Senior Obligations by a guarantor. |
It is contemplated that at the closing of the joint venture transactions, we will obtain
sources of financing sufficient to enable us to repay in full the indebtedness under the Amended
and Restated Subordinated Note.
The Amended and Restated Subordinated Seller Note contains certain cross-default provisions
with respect to defaults and acceleration of indebtedness
under our Amended Credit Facility.
Therefore, similar to the current classification of the Amended Credit Facility, we have also
classified this long-term indebtedness as current.
Private Placement of 18.5 Million Shares of Common Stock. On June 4, 2009, we completed the
offering and sale of 18,500,000 shares of our common stock in privately-negotiated transactions
with several institutional investors. The purchase price per share of common stock sold was $2.20,
representing total gross proceeds of approximately $40.7 million. The net proceeds from the
offering of $38.2 million were applied, along with $2.6 million of our cash on hand, to repay in
full the outstanding indebtedness under the Bridge Loan Agreement. In accordance with the terms of
the stock purchase agreements, we filed with the Securities and Exchange Commission (SEC) on June
11, 2009, a registration statement with respect to potential resales of the shares purchased by the
investors, which was declared effective on June 19, 2009. The offering and sale by us of the
shares of common stock in the private placement were not registered under the Securities Act of
1933, as amended, in reliance on an exemption from the registration requirements of that Act.
Cumulative Convertible Preferred Stock. During 2005, we entered into an Agreement dated
February 15, 2005 with Fletcher International, Ltd. (Fletcher) (this Agreement, as amended to the
date hereof, is referred to as the Fletcher Agreement) and issued to Fletcher 30,000 shares of
our Series D-1 Preferred Stock in a privately-negotiated transaction, receiving $29.8 million in
net proceeds. The Fletcher Agreement also provided to Fletcher an option to purchase up to an
additional 40,000 shares of additional series of preferred stock from time to time, with each
series having a conversion price that would be equal to 122% of an average daily volume-weighted
market price of our common stock over a trailing period of days at the time of issuance of that
series. In 2007 and 2008, Fletcher exercised this option and purchased 5,000 shares of Series D-2
Preferred Stock for $5.0 million (in December 2007) and the remaining 35,000 shares of Series D-3
Preferred Stock for $35.0 million (in February 2008). Fletcher remains the sole holder of all of
our outstanding shares of Series D Preferred Stock. Dividends on the shares of Series D Preferred
Stock must be paid in cash.
Under the Fletcher Agreement, if a 20-day volume-weighted average trading price per share of
our common stock fell below $4.4517 (the Minimum Price), we were required to deliver a notice
(the Reset Notice) to Fletcher. On November 28, 2008, the 20-day volume-weighted average trading
price per share of our common stock on the New York Stock Exchange for the previous 20 trading days
was calculated to be $4.328, and we delivered the Reset Notice to Fletcher in accordance with the
terms of the Fletcher Agreement. In the Reset Notice, we elected to reset the conversion prices
for the Series D Preferred Stock to the Minimum Price ($4.4517 per share), and Fletchers
redemption rights were terminated. The adjusted conversion price resulting from this election was
effective on November 28, 2008.
In addition, under the Fletcher Agreement, the aggregate number of shares of common stock
issued or issuable to Fletcher upon conversion or redemption of, or as dividends paid on, the
Series D Preferred Stock could not exceed a designated maximum number of shares (the Maximum
Number), and such Maximum Number could be increased by Fletcher providing us with a 65-day notice
of increase, but under no circumstance could the total number of shares of common stock issued or
issuable to Fletcher with respect to
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the Series D Preferred Stock ever exceed 15,724,306 shares.
The Fletcher Agreement had designated 7,669,434 shares as the original Maximum Number. On November
28, 2008, Fletcher purported to deliver a second notice to us to increase the Maximum Number to
9,669,434 shares, effective February 1, 2009. On September 15, 2009, Fletcher delivered a notice
to us purporting to increase the Maximum Number from 9,669,434 shares to 11,669,434 shares, to
become effective on November 19, 2009. We believe that our agreement with Fletcher gives Fletcher
the right to issue only one notice to increase the Maximum Number. On November 6, 2009, we filed
an action in the Court of Chancery of the State of Delaware seeking a declaration that, under the
relevant agreement, Fletcher is permitted to deliver only one notice to increase the Maximum Number
and that its purported second notice is legally invalid.
The conversion prices and number of shares of common stock to be acquired upon conversion are
also subject to customary anti-dilution adjustments. Converting the shares of Series D Preferred
Stock at one time could result in significant dilution to our stockholders that could limit our
ability to raise additional capital. See Part II Item 1. Legal Proceedings and Item 1A. Risk
Factors below.
Meeting our Liquidity Requirements
As of December 31, 2008, our total outstanding indebtedness (including capital lease
obligations) was $291.9 million and included $120.3 million in borrowings under our term loans and
$66.0 million of revolving credit indebtedness under our Amended Credit Facility, $40.8 million
under the Bridge Loan Agreement and $35.0 million of subordinated indebtedness under our Amended
and Restated Subordinated Note. As of September 30, 2009, our total outstanding indebtedness
(including capital lease obligations) had been reduced to approximately $271.2 million, consisting
of approximately $106.3 million in borrowings under the term loans and $98.0 million in revolving
credit indebtedness under the Amended Credit Facility, $19.8 million of borrowings under our new
secured equipment financing and $35.0 million of outstanding subordinated indebtedness under the
Amended and Restated Subordinated Note. The repayment in full in June 2009 of the Bridge Loan
Agreement indebtedness was significant because it represented at that time short-term indebtedness
scheduled to mature in January 2010. Inclusive of the additional fees (and an upfront fee
previously paid of 5.0%), the effective interest rate under the Bridge Loan Agreement was 25.3% at
the time of repayment. Currently, by their terms, none of our principal debt facilities mature
prior to 2013.
We had disclosed in our Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2009 that, as a result of our entering into the Fifth Amendment, repaying the indebtedness
outstanding under the Bridge Loan Agreement and entering into the secured equipment financing
transaction in June 2009, we expected that we would remain in compliance with the financial
covenants under the Amended Credit Facility and that our cash on hand and cash generated from our
operations would be sufficient to fund our operations for the remainder of 2009. However,
lower-than-expected sales revenues realized during the third quarter of 2009 resulted in a high
likelihood that, as of September 30, 2009, we would not be in compliance with certain of such
financial covenants.
As a result of obtaining the $40.0 million of additional revolving credit indebtedness
pursuant to the Convertible Notes in October 2009, we believe that our liquidity will be sufficient
to fund our operations for the remainder of 2009 and into the first quarter of 2010. Additionally,
as a result of the execution of the Sixth Amendment, we have obtained sufficient waivers of, the
financial covenants
under the Amended Credit Facility for the remainder of 2009 and through the second quarter of
2010. Without these waivers, we would not have been in compliance with certain of our financial
covenants at September 30, 2009. However, our failure to comply with certain other covenants could
result in an event of default under the Amended Credit Facility that, if not cured or waived, would
have a material adverse effect on our financial condition, results of operations and debt service
capabilities. Additionally, if the proposed joint venture with BGP is not timely formed by March
31, 2010 or if the proposed transactions with BGP were to be abandoned, even for reasons beyond our
control (such as failure to obtain certain regulatory approvals), then the waivers, upon notice
from the lenders, would cease to be effective and we could at that time likely not be in compliance
with certain of the financial covenants contained in the Amended Credit Facility.
If we were not
able to comply with or satisfy all of these covenants, such failure could result in an event of
default under the Amended Credit Facility that, if not cured or further waived, could have a
material adverse effect on our financial conditions, results of operations and debt service
capabilities. In such event, we would need to seek to amend, or seek one or more waivers of, those
covenants under the Amended Credit Facility. There can be no assurance that we would be able to
obtain any such waivers or amendments, in which case we would likely seek to obtain new secured
debt, unsecured debt or equity financing. However, there also can be no assurance that such debt
or equity financing would be available on terms acceptable to us or at all. In the event that we
would need to amend the Amended Credit Facility, or obtain new financing, we would likely incur up
front fees and higher interest costs and other terms in the amendment would likely be less
favorable to us than those currently provided under the Amended Credit Facility. See Revolving
Line of Credit and Term Loan Facilities above.
For the nine months ended September 30, 2009, total capital expenditures, including
investments in our multi-client data library, were $77.6 million, and we are projecting additional
capital expenditures for the fourth quarter of 2009 to be between $12 million to $17 million, which
would be less than our 2008 capital expenditures of $127.9 million. If there continues to be weak
demand for our products and services, we would expect continued reduced levels of capital
expenditures, which will, in turn, lessen our requirements for working capital. This reduction
could therefore permit improved operating cash flows and liquidity compared to prior periods and
offset reduced cash generated from operations (excluding working capital changes). Of the total, we
are estimating that approximately
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$10 million to $15 million will be spent on investments in our
multi-client data library during the fourth quarter of 2009, but we are anticipating that most of
these investments will be underwritten by our customers. To the extent our customers commitments
do not reach an acceptable level of pre-funding, the amount of our anticipated investment in these
data libraries could significantly decline.
Cash Flow from Operations
We have historically financed operations from internally generated cash and funds from equity
and debt financings. Cash and cash equivalents were $19.6 million at September 30, 2009, a decrease
of $15.6 million from December 31, 2008. Net cash provided by operating activities was
approximately $51.6 million for the nine months ended September 30, 2009, compared to $52.5 million
for the nine months ended September 30, 2008. The cash provided by our operating activities was
primarily driven by increased collections on our receivables and a decrease in our unbilled
receivables due to timing of sales and invoicing. This increase was partially offset by a decrease
in our accounts payable and accrued expenses associated with payments of our obligations.
Cash Flow from Investing Activities
Net cash flow used in investing activities was $78.0 million for the nine months ended
September 30, 2009, compared to $329.8 million for the nine months ended September 30, 2008. The
principal uses of cash in our investing activities during the nine months ended September 30, 2009
were $75.1 million for investments in our multi-client data library, compared to $87.8 million for
the nine months ended September 30, 2008. Despite the downturn, we have continued to believe in the
long-term value of our multi-client surveys performed using our equipment and technologies.
Additionally, we had contracted for a number of the vessels and crews necessary to perform the
surveys in advance of the current downturn.
Cash Flow from Financing Activities
Net cash flow provided by financing activities was $9.6 million for the nine months ended
September 30, 2009, compared to $275.0 million for the nine months ended September 30, 2008. The
net cash flow provided by financing activities during the nine months ended September 30, 2009 was
primarily related to $32.0 million of net borrowings on our revolving credit facility, the net
proceeds from the ICON Loan Agreements of $19.2 million, and the net proceeds of $38.2 million from
the private placement of our common stock. This cash inflow was partially offset by scheduled
principal payments on our term loan under our Amended Credit Facility, the prepayment of the
principal balance on the Bridge Loan Agreement and payments under our other notes payable and
capital lease obligations all totaling $73.3 million. Additionally, we paid $2.6 million in cash
dividends on our outstanding Series D-1, Series D-2 and Series D-3 Preferred Stock and $4.0 million
in financing costs related to the Fifth Amendment during the nine months ended September 30, 2009.
Inflation and Seasonality
Inflation in recent years has not had a material effect on our costs of goods or labor or the
prices for our products or services. Traditionally, our business has been seasonal, with strongest
demand in the second half of our fiscal year. However, for the fourth quarter of 2009, we will
likely not experience the level of normal seasonal year-end spending by oil and gas companies and
seismic contractor customers due to these customers taking a more conservative approach and
lowering their spending plans.
Critical Accounting Policies and Estimates
General. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2008,
for a complete discussion of our other significant accounting policies and estimates. There have
been no material changes in the current period regarding our critical accounting policies and
estimates.
Recent Accounting Pronouncements
See Note 14 of Notes to Unaudited Condensed Consolidated Financial Statements.
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Credit and Foreign Sales Risks
The majority of our foreign sales are denominated in United States dollars. Product revenues
are allocated to geographical locations on the basis of the ultimate destination of the equipment,
if known. If the ultimate destination of such equipment is not known, product revenues are
allocated to the geographical location of initial shipment. Service revenues primarily relate to
our ION Solutions division are allocated based upon the billing location of the customer. For the
nine months ended September 30, 2009 and 2008, international sales comprised 62% and 58%,
respectively of total net revenues. For the nine months ended September 30, 2009, we recognized
$59.0 million of sales to customers in Europe, $37.4 million of sales to customers in Asia Pacific,
$36.8 million of sales to customers in the Middle East, $27.1 million of sales to customers in
Latin American countries, $4.3 million of sales to customers in the Commonwealth of Independent
States, or former Soviet Union (CIS) and $21.5 million of sales to customers in Africa. In recent
years, the CIS and certain Latin American countries have experienced economic problems and
uncertainties. However, as a result of the recent market downturn, additional countries and areas
of the world have experienced economic problems and uncertainties. To the extent that world events
or economic conditions negatively affect our future sales to customers in these and other regions
of the world or the collectibility of our existing receivables, our future results of operations,
liquidity, and financial condition may be adversely affected. We currently require customers in
these higher risk countries to provide their own financing and in some cases assist the customer in
organizing international financing and export-import credit guarantees provided by the United
States government. We do not currently extend long-term credit through promissory notes or similar
credit agreements to companies in countries we consider to be inappropriate for credit risk
purposes.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Please refer to Item 7A of our Annual Report on Form 10-K for the year ended December 31,
2008, for a discussion regarding the Companys quantitative and qualitative disclosures about
market risk. There have been no material changes to those disclosures during the nine months ended
September 30, 2009.
Foreign Currency Exchange Rate Risk. Our operations are conducted in various countries around
the world, and we receive revenue from these operations in a number of different currencies with
the most significant of our international operations using Canadian dollars (CAD) and pounds
sterling (GBP). As such, our earnings are subject to movements in foreign currency exchange rates
when transactions are denominated in currencies other than the U.S. dollar, which is our functional
currency, or the functional currency of many of our subsidiaries, which is not necessarily the U.S.
dollar. To the extent that transactions of these subsidiaries are settled in currencies other than
the U.S. dollar, a devaluation of these currencies versus the U.S. dollar could reduce the
contribution from these subsidiaries to our consolidated results of operations as reported in U.S.
dollars.
Through our subsidiaries, we operate in a wide variety of jurisdictions, including the United
Kingdom, Canada, the Netherlands, China, Venezuela, India, Russia, the United Arab Emirates, and
other countries. Our financial results may be affected by changes in foreign currency exchange
rates. Our consolidated balance sheet at September 30, 2009 reflected approximately $37.0 million
of net working capital related to our foreign subsidiaries. A majority of our foreign net working
capital is within Canada and the United Kingdom. The subsidiaries in those countries receive their
income and pay their expenses primarily in CDN and GBP, respectively. To the extent that
transactions of these subsidiaries are settled in Canadian dollars (CDN) or Great Britain Pounds
(GBP), a devaluation of these currencies versus the U.S. dollar could reduce the contribution from
these subsidiaries to our consolidated results of operations as reported in U.S. dollars.
Interest Rate Risk. On September 30, 2009, we had outstanding total indebtedness of
approximately $271.2 million, including capital lease obligations. Of that indebtedness,
approximately $204.3 million accrues interest under rates that fluctuate based upon market rates
plus an applicable margin. Both the $106.3 million in term loan indebtedness and the $98.0 million
in total revolving credit indebtedness outstanding under the Amended Credit Facility accrued
interest using LIBOR-based interest rate of 6.0% per annum. The average effective interest rate for
the quarter ended September 30, 2009 under the LIBOR-based rates for both the term loan
indebtedness and the revolving credit loans were 5.8%. Each 100 basis point increase in the
interest rate would have the effect of increasing the annual amount of interest to be paid by
approximately $2.0 million.
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Item 4. Controls and Procedures
Disclosure Controls and Procedures. As of September 30, 2009, we carried out an evaluation,
under the supervision and with the participation of our Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act)). Our disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports we file with or submit to the SEC under the Exchange Act is
recorded, processed, summarized and reported within the time period specified by the SECs rules
and forms and that such information is accumulated and communicated to management, including our
CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. In light of
the material weakness described below, these officers have concluded that our disclosure controls
and procedures were not effective as of September 30, 2009.
Material Weaknesses in Internal Control over Financial Reporting.
As reported in our Current Report on Form 8-K filed with the SEC on November 4, 2009, we announced
that our condensed consolidated financial statements as of and for the three and six months periods
ended June 30, 2009 should no longer be relied upon, because of an error in revenue recognition of
certain product revenues in connection with the delivery of our
FireFly® land seismic
data acquisition system and related hardware and components in China. As a result of this error in revenue recognition, we determined that we
should restate our unaudited consolidated financial statements as of and for the three and six
months ended June 30, 2009. The error resulted from the fact that the sales records in the
possession of our management at June 30, 2009 did not contain all relevant documentation relating
to that particular sale. On October 28, 2009, after obtaining and reviewing all additional
documentation related to the sale, our management ascertained that the additional documentation
provided additional terms with respect to that sale. On October 29, 2009, our management and our
Board of Directors, upon the recommendation of the Audit Committee of the Board of Directors,
concluded that we should not have recognized the revenues from the sale in our results of
operations for the second fiscal quarter of 2009, and that, as a result, our previously reported
unaudited consolidated financial statements as of and for the three and six month periods ended
June 30, 2009 should no longer be relied upon.
The reason for the incomplete documentation in our sales records for this sale resulted from a
sales employee in our China sales office failing to forward all material documentation related to
the sale, as is required by our revenue recognition policies. The discovery of the existence of the
additional documentation relating to the sale in question occurred during the course of due
diligence procedures that had been performed in connection with our proposed joint venture and
related transactions with BGP Inc., China National Petroleum Corporation (BGP), which we publicly
announced on October 16, 2009. In connection with this due diligence process, our employees
discovered certain documentation irregularities regarding the sale of the FireFly system, including
that a portion of the documentation reflecting the terms for the sale had not been made available
to our management for assessment with respect to the recording and reporting of the sale.
Because the controls in effect at our sales office in China at September 30, 2009 regarding
our revenue recognition policies did not effectively confirm the accuracy and completeness of
documentation relating to a large sale of our products, we determined that there was a material
weakness in our internal control over financial reporting that existed as of September 30, 2009.
As
a result, we are implementing the following procedures to remediate this material weakness:
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We will implement a quarterly certification requiring our regional sales force to
confirm that all documentation related to sales transactions have been provided to Company
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Certain regional sales offices (including China) will no longer have the
authority to enter into sales contracts without the review and approval of designated
corporate management; and |
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We will provide further training and education on the Companys revenue
recognition policies and procedures on an annual basis to our regional sales force. |
Changes in Internal Control in Financial Reporting. There were no changes in our internal controls over financial reporting during the
quarterly period ended September 30, 2009 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings.
On June 12, 2009, WesternGeco L.L.C. (WesternGeco) filed a lawsuit against us in the United
States District Court for the Southern District of Texas, Houston Division. In the lawsuit, styled
WesternGeco L.L.C. v. ION Geophysical Corporation, WesternGeco alleges that we have infringed
several United States patents regarding marine seismic streamer steering devices that are owned by
WesternGeco. WesternGeco is seeking unspecified monetary damages and an injunction prohibiting us
from making, using, selling, offering for sale or supplying any infringing products in the United
States. Based on our review of the lawsuit filed by WesternGeco and the WesternGeco patents at
issue, we believe that our products do not infringe any WesternGeco patents, that the claims
asserted by WesternGeco are without merit and that the ultimate outcome of the claims will not
result in a material adverse effect on our financial condition or results of operations. We intend
to defend the claims against us vigorously.
On June 16, 2009, we filed an answer and counterclaims against WesternGeco, in which we deny
that we have infringed WesternGecos patents and assert that the WesternGeco patents are invalid or
unenforceable. We also assert that WesternGecos Q-Marine system, components and technology
infringe upon our United States patent related to marine seismic streamer steering devices. We
also assert that WesternGeco misappropriated our proprietary technology and breached a
confidentiality agreement by using our technology in its patents and products and that WesternGeco
tortiously interfered with our relationship with our customers. In addition, we are claiming that
the lawsuit by WesternGeco is an illegal attempt by WesternGeco to control and restrict competition
in the market for marine seismic surveys performed using laterally steerable streamers. We are
requesting various remedies and relief, including a declaration that the WesternGeco patents are
invalid or unenforceable, an injunction prohibiting WesternGeco from making, using, selling,
offering for sale or supplying any infringing products in the United States, a declaration that the
WesternGeco patents should be co-owned by us, and an award of unspecified monetary damages.
On July 10, 2009, Fletcher International, Ltd. (Fletcher), the holder of shares of our
Series D Preferred Stock, filed a books and records proceeding in the Delaware Court of Chancery
under Section 220(b) of the Delaware General Corporation Law asking the Court to require us to
produce a broad range of our documents and records for inspection. Section 220(b) allows
stockholders of Delaware corporations to make a demand on the corporation for access to certain
books and records of the corporation, provided that such demand is made with appropriate
specificity and is made for a proper purpose. We intend to vigorously defend the claims alleged by
Fletcher in this proceeding with respect to information that we believe has not been requested with
appropriate specificity or for a proper purpose as required by law.
On September 15, 2009, Fletcher delivered a second notice to us purporting to increase the
Maximum Number from 9,669,434 shares to 11,669,434 shares, to become effective on November 19,
2009. The Company believes that its agreement with Fletcher gives Fletcher the right to issue only
one notice to increase the Maximum Number. On November 6, 2009, we filed an action in the Court of
Chancery of the State of Delaware, seeking a declaration that, under the relevant agreement,
Fletcher is permitted to deliver only one notice to increase the Maximum Number and that its
purported second notice is legally invalid. For more information on the shares of our Series D
Preferred Stock, please refer above to Liquidity and Capital Resources Sources of Capital.
In 2002, we filed a lawsuit against operating subsidiaries of battery manufacturer Greatbatch,
Inc., including its Electrochem division (collectively Greatbatch), in the 24th
Judicial District Court for the Parish of Jefferson in the State of Louisiana. In the lawsuit,
styled Input/Output, Inc. and I/O Marine Systems, Inc. v. Wilson Greatbatch Technologies, Inc.,
Wilson Greatbatch, Ltd. d/b/a Electrochem Lithium Batteries, and WGL Intermediate Holdings, Inc.,
Civil Action No. 578-881, Division A, we alleged that Greatbatch had fraudulently misappropriated
our product designs and other trade secrets related to the batteries and battery pack used in our
DigiBIRD® marine towed streamer vertical control device and used our confidential
information to manufacture and market competing batteries and battery packs. After a two-week
trial, on October 1, 2009 the jury concluded that Greatbatch had committed fraud, violated the
Louisiana Unfair Trade Practices Act and breached a trust and nondisclosure agreement between us
and Greatbatch, and awarded us $21.7 million in compensatory damages. On October 13, 2009, the
presiding trial judge signed and entered the judgment, awarding us the amount of the jury verdict,
together with legal interest from the date of filing the lawsuit, plus our attorneys fees and
costs. Through October 14, 2009, accrued legal interest totaled $11.0 million, and interest will
continue to accrue at the statutory annual rate of 8.5% until paid. Including the verdict amount
and accrued interest, the total judgment amount as of October 14, 2009 was $32.7, million plus our
attorneys fees and costs.
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We have been named in various other lawsuits or threatened actions that are incidental to our
ordinary business. Litigation is inherently unpredictable. Any claims against us, whether
meritorious or not, could be time consuming, cause us to incur costs and expenses, require
significant amounts of management time and result in the diversion of significant operational
resources. The results of these lawsuits and actions cannot be predicted with certainty. We
currently believe that the ultimate resolution of these matters will not have a material adverse
impact on our financial condition, results of operations or liquidity.
Item 1A. Risk Factors.
This report contains or incorporates by reference statements concerning our future results and
performance and other matters that are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities
Exchange Act of 1934, as amended (Exchange Act). These statements involve known and unknown
risks, uncertainties, and other factors that may cause our or our industrys results, levels of
activity, performance, or achievements to be materially different from any future results, levels
of activity, performance, or achievements expressed or implied by such forward-looking statements.
In some cases, you can identify forward-looking statements by terminology such as may, will,
would, 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 report include
statements regarding:
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the expected effects of current and future worldwide economic conditions and demand for
oil and natural gas and seismic equipment and services; |
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future compliance with our debt financial covenants; |
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expectations regarding the completion of our proposed joint venture with BGP; |
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future benefits to be derived from our proposed joint venture with BGP; |
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future availability of cash to fund our operations and pay our obligations; |
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the timing of anticipated sales; |
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future levels of spending by our customers; |
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future oil and gas commodity prices; |
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future cash needs and future sources of cash, including availability under our revolving
line of credit facility; |
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expected net revenues, income from operations and net income; |
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expected gross margins for our products and services; |
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future benefits to our customers to be derived from new products and services, such as
Scorpion and FireFly and our full-wave digital products and services; |
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future growth rates for certain of our products and services; |
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future sales to our significant customers; |
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the degree and rate of future market acceptance of our new products and services; |
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expectations regarding future mix of business and future asset recoveries; |
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our expectations regarding oil and gas exploration and production companies and
contractor end-users purchasing our more |
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expensive, more technologically advanced products and services; |
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the degree and rate of future market acceptance of our new products and services; |
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expectations regarding future mix of business and future asset recoveries; |
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anticipated timing and success of commercialization and capabilities of products and
services under development and start- up costs associated with their development; |
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expected improved operational efficiencies from our full-wave digital products and
services; |
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potential future acquisitions; |
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future levels of capital expenditures; |
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our ability to maintain our costs at consistent percentages of our revenues in the
future; |
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the outcome of pending or threatened disputes and other contingencies; |
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future demand for seismic equipment and services; |
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future seismic industry fundamentals; |
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the adequacy of our future liquidity and capital resources; |
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future opportunities for new products and projected research and development expenses; |
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success in integrating our acquired businesses; |
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expectations regarding realization of deferred tax assets; and |
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anticipated results regarding accounting estimates we make. |
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.
Information regarding factors that may cause actual results to vary from our expectations,
called risk factors, appears in our Annual Report on Form 10-K for the year ended December 31,
2008 in Part II, Item 1A. Risk Factors and in our Quarterly Reports on Form 10-Q for the periods
ended March 31, 2009 and June 30, 2009 in Part II, Item 1A Risk Factors thereof. Other than as
set forth below, there have been no material changes from the risk factors previously disclosed in
that Form 10-K and those Form 10-Qs.
We have a substantial amount of outstanding indebtedness, and we will need to pay or refinance our
existing indebtedness or incur additional indebtedness, which may adversely affect our operations.
As of September 30, 2009, we had outstanding total indebtedness of approximately $271.2
million, including capital lease obligations. Total indebtedness on that date included $106.3
million in borrowings under five-year term indebtedness and $98.0 million in borrowings under our
revolving credit facility, in each case incurred under our Amended Credit Facility. On October 27,
2009, we borrowed an additional $40.0 million in revolving credit indebtedness under the Amended
Credit Facility.
Our substantial levels of indebtedness and our other financial obligations increase the
possibility that we may be unable to generate
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cash sufficient to pay, when due, the principal of, interest on or other amounts due, in respect of our outstanding indebtedness. Our substantial debt
could also have other significant consequences. For example, it could:
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increase our vulnerability to general adverse economic, competitive and industry
conditions; |
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limit our ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions, general corporate purposes or other purposes on
satisfactory terms, or at all; |
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require us to dedicate a substantial portion of our cash flow from operations to the
payment of our indebtedness, thereby reducing funds available to us for operations and any
future business opportunities; |
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expose us to the risk of increased interest rates because certain of our borrowings,
including borrowings under our Amended Credit Facility, are at variable rates of interest; |
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restrict us from making strategic acquisitions or cause us to make non-strategic
divestitures; |
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limit our planning flexibility for, or ability to react to, changes in our business and
the industries in which we operate; |
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limit our ability to adjust to changing market conditions; and |
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place us at a competitive disadvantage to our competitors who may have less indebtedness
or greater access to financing. |
Our ability to obtain any financing, including any additional debt financing, whether through
the issuance of new debt securities or otherwise, and the terms of any such financing are dependent
on, among other things, our financial condition, financial market conditions within our industry,
credit ratings and numerous other factors. There can be no assurance that we will be able to obtain
financing on acceptable terms or within an acceptable time, if at all. If we are unable to obtain
financing on terms and within a time acceptable to us (or to negotiate extensions with our lenders
on terms acceptable to us), it could, in addition to other negative effects, have a material
adverse effect on our operations, financial condition, ability to compete or ability to comply with
regulatory requirements. Such defaults, if not rescinded or cured, would have a materially adverse
effect on our operations, financial condition and cash flows.
There is no guarantee that we will enter into our proposed joint venture with BGP, and if we are
successful entering into the joint venture with BGP, we may be subject to additional risks relating
to our ability to perform our obligations under the joint venture, including funding future joint
venture capital requirements and repaying our share of future indebtedness and other joint venture
obligations.
In October 2009, we announced that we had entered into the Term Sheet with BGP to form a joint
venture company. Completion of the joint venture transactions contemplated by this Term Sheet is
conditioned upon, among other things, approvals by Chinese and U.S. authorities and the lack of
adverse regulatory actions that would materially prohibit, restrict or delay the completion of the
joint venture transactions or the anticipated operations of the joint venture. There can be no
assurances given that we will receive approvals from these Chinese and U.S. authorities, that no
adverse regulatory actions will be taken or that we will be able to complete the joint venture
transactions as contemplated by the Term Sheet. Our inability to complete the joint venture
transactions as contemplated may impact adversely our ability to execute our business strategy and,
consequently, the marketability and market price of our common stock. In addition, if we are not
successful in completing the joint venture transactions as presently contemplated, we will likely
have to modify our plans to refinance our senior secured indebtedness under our Amended Credit
Facility, which may entail additional time and costs, and may prove unsuccessful. In addition, the
limited waivers of our financial covenants contained in our Amended Credit Facility may be
terminated in such event, and we may at that time be in violation of the financial covenants and
other covenants contained in our Amended Credit Facility and the terms of other indebtedness that
contain cross-default provisions.
If the transactions contemplated by the Term Sheet are not completed, it could have a number
of adverse consequences for our business, including the following:
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we may lose the anticipated benefits of our proposed joint venture with BGP, which would
include the potential savings from |
44
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economies of scope and scale for our land seismic business and potential benefits from combined technological and new product development offerings; |
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we may lose our ability to successfully refinance and restructure our senior secured
indebtedness on terms favorable to our company, which refinancing and restructuring are
transactions contemplated by the Term Sheet; |
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our business and operations may be harmed to the extent that customers, suppliers and
other believe that our ability to successfully compete will be less effective without the
joint venture of there is customer or employee uncertainty surrounding the future direction
of our company; |
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our results of operations, financial condition and cash flows are adversely affected due
to marketplace reaction, reduced sales levels and weakened financial condition caused by any
of the factors mentioned above; and |
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the exercise price under the Warrant and the conversion prices under the Convertible
Notes could be adjusted and reduced below their current amounts to considerably
lower-than-then-current-market-price levels. |
Entering into joint ventures and alliances entails risks, including difficulties in developing
and expanding the business of a newly formed joint venture, funding capital calls for the joint
venture, exercising influence over the management and activities of joint venture, quality control
concerns regarding joint venture products and services and potential conflicts of interest with the
joint venture and our joint venture partner. The completion of the joint venture is subject to,
among other things, the completion of definitive documents governing the terms of the joint
venture, and we cannot guarantee that, if completed, the joint venture operations will be
successful. Any inability to meet our obligations as a joint venture partner under the joint
venture could result in penalties and reduced percentage interest in the joint venture for our
company. Also, we could be disadvantaged in the event of disputes an controversies with our joint
venture partner, since our joint venture partner is a relatively significant customer of our
products and services.
To comply with our indebtedness and other obligations, we will require a significant amount of cash
and will be required to satisfy certain debt financial covenants. Our ability to generate cash and
satisfy debt covenants depends on many factors beyond our control.
Our ability to make payments on and to refinance our indebtedness and to fund our working
capital needs and planned capital expenditures, will depend on our ability to generate cash in the
future. This, to a certain extent, is subject to general economic, financial, competitive and other
factors that are beyond our control.
We cannot assure you that our business will generate sufficient cash flows from operations or
that future borrowings will be available to us under the Amended Credit Facility or otherwise in an
amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We
will need to repay or refinance our indebtedness on or before the maturity thereof. We cannot
assure you that we will be able to refinance any of such indebtedness on commercially reasonable
terms, or at all.
In addition, if for any reason we are unable to meet our debt service obligations, we would be
in default under the terms of our agreements governing our outstanding debt. If such a default were
to occur, the lenders under the Amended Credit Facility could elect to declare all amounts
outstanding under the Amended Credit Facility immediately due and payable, and the lenders would
not be obligated to continue to advance funds to us. In addition, if such a default were to occur,
our other indebtedness would become immediately due and payable under their cross-default
provisions.
The Amended Credit Facility and other outstanding debt instruments to which we are a party
impose significant operating and financial restrictions, which may prevent us from capitalizing on
business opportunities and taking other actions.
Subject to certain exceptions and qualifications, the Amended Credit Facility contains
customary restrictions on our activities, including covenants that restrict us and our restricted
subsidiaries from:
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incurring additional indebtedness and issuing preferred stock; |
45
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creating liens on our assets; |
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making certain investments or restricted payments; |
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consolidating or merging with, or acquiring, another business; |
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selling or otherwise disposing of our assets; |
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paying dividends and making other distributions with respect to capital stock, or
repurchasing, redeeming or retiring capital stock or subordinated debt; and |
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entering into transactions with our affiliates. |
The ICON Loan Agreements contain a number of restrictive covenants that affect us, and our
Amended and Restated Subordinated Note contains additional restrictions on our ability to incur
additional debt. Any further debt financing we obtain is likely to have similarly restrictive
covenants.
The Amended Credit Facility also contains covenants that require us to meet certain financial
ratios and minimum thresholds. For example, the Amended Credit Facility requires that we and our domestic subsidiaries meet
certain minimum fixed charge coverage ratio requirements, not exceed certain maximum leverage ratio
limitations for each fiscal quarter, and maintain certain minimum tangible net worth. The lenders
party to our Amended Credit Facility agreed in the Sixth Amendment to the Credit Agreement dated
October 23, 2009 to waive these financial covenants for the fiscal quarters ending September 30,
2009, December 31, 2009, March 31, 2010 and June 30, 2010. Without these waivers, we would not have
been in compliance with certain of our financial covenants at September 30, 2009, However, these
waivers would not be effective with respect to any violations by us of any other covenants
contained in the Amended Credit Facility.
If we were not able to satisfy all of these covenants, we would need to seek to amend, or seek
one or more waivers of, the covenants under the Amended Credit Facility. If we cannot satisfy the
covenants and are unable to obtain further waivers or amendments, the lenders could declare a
default under the Amended Credit Facility. Any default under our Amended Credit Facility would
allow the lenders under the facility the option to demand repayment of the indebtedness outstanding
under the facility, and would allow certain other lenders to exercise their rights and remedies
under cross-default provisions contained in their debt instruments. If these lenders were to
exercise their rights to accelerate the indebtedness outstanding, there can be no assurance that we
would be able to refinance or otherwise repay any amounts that may become accelerated under the
agreements. The acceleration of a significant portion of our indebtedness would have a material
adverse effect on our business, liquidity, and financial condition.
The restrictions in the Amended Credit Facility and our other debt instruments may prevent us
from taking actions that we believe would be in the best interest of our business, and may make it
difficult for us to successfully execute our business strategy or effectively compete with
companies that are not similarly restricted. We also may incur future debt obligations that might
subject us to additional restrictive covenants that could affect our financial and operational
flexibility. We cannot assure you that we will be granted waivers or amendments to these agreements
if for any reason we are unable to comply with these agreements or that we will be able to
refinance our debt on terms acceptable to us, or at all. The breach of any of these covenants and
restrictions could result in a default under the Amended Credit Facility and our other debt
instruments. An event of default under our debt agreements would permit the holders of such
indebtedness to declare all amounts borrowed to be due and payable.
We are exposed to risks relating to the effectiveness of our internal controls.
Following the end of our third quarter of 2009, we discovered an error in revenue recognition
of certain product revenues in connection with the delivery of a FireFly®
land seismic data acquisition system and related hardware and components in China, which we had
recorded in revenues for the second fiscal quarter of 2009. On November 4, 2009, we announced that
we were restating our unaudited consolidated financial statements as of and for the three and six
month periods ended June 30, 2009, as a result of this error in revenue recognition.
We have concluded that, as of September 30, 2009, our internal control over financial reporting was
not effective because this error in revenue recognition necessitating the restatement of our second
quarter 2009 results of operations constituted a material weakness in our internal control over
financial reporting. A material weakness is a deficiency, or a combination of control deficiencies, in
internal control over financial reporting such that there is a reasonable possibility that a
material misstatement of our annual or interim financial statements will not
46
be prevented or detected on a
timely basis. For a description of this material weakness in our internal control over
financial reporting identified in November 2009, see our Form 10-Q/A, Amendment
No. 1 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2009.
Although we have developed a remediation plan for the material weakness, there can be no
assurance that such controls will effectively prevent material misstatements in our consolidated
financial statements in future periods. We may experience controls deficiencies or material
weakness in the future, which could adversely impact the accuracy and timeliness of our future
reporting and reports and filings we make with the SEC.
If we, our option holders or others holding registration rights, sell additional shares of our
common stock in the future, the market price of our common stock could decline.
The market price of our common stock could decline as a result of sales of a large number
of shares of our common stock in the market in the future, or the perception that such sales could
occur. These sales, or the possibility that these sales may occur, could make it more difficult for
us to sell equity securities in the future at a time and at a price that we deem appropriate.
As of October 30, 2009, we had 118,447,777 shares of common stock issued and outstanding.
Substantially all of these shares are available for public sale, subject in some cases to volume
and other limitations or delivery of a prospectus. At September 30, 2009, we had outstanding stock
options to purchase up to 7,330,563 shares of our common stock at a weighted average exercise price
of $7.82 per share. We also had, as of that date, 14,798 shares of common stock reserved for
issuance under outstanding restricted stock unit awards. Additionally, the holder of our Series D
Preferred Stock currently has the right to convert the preferred shares it holds into 9,669,434
shares of our common stock. Under our agreement with the holder of our Series D Preferred Stock,
the holder has the ability to sell the shares of our common stock (under effective registration statements)
issuable to it upon conversion of the Series D Preferred Stock. Sales in the public market of
shares of common stock issued upon conversion would apply downward pressure on then-prevailing
market prices of our common stock. In addition, the very existence of the Series D Preferred Stock
represents a future issuance, and perhaps a future sale, of our common stock to be acquired on
conversion, which could also depress trading prices for our common stock.
The 18,500,000 shares of common stock we issued in June 2009 to certain institutional
investors may be resold into the public markets in transactions pursuant to a currently-effective
registration statement that was declared effective by the SEC on June 16, 2009. Thus, these
purchasing institutional investors currently have the right to dispose of their shares in the
public markets.
In October 2009, we issued and sold the Convertible Notes and the Warrant that will be
initially convertible into, or exercisable for, in the aggregate, up to 14,285,714 shares. This
number of shares is subject to adjustment under the terms of these instruments. Any conversion of
the Convertible Notes or exercise of the Warrant will be conditioned upon certain governmental
approvals from the Chinese government. At the closing of the transactions contemplated under the
Term Sheet, it is expected that BGP (along with any permitted assignees and designees) will own
23,789,536 shares of common stock, whether through exercise of the Warrant, conversions of the
Convertible Notes or by direct purchase of shares of common stock from us. Under a registration
rights agreement that we entered into with BGP on October 23, 2009, we agreed to register certain
resales of shares of commons stock acquired by BGP or its assignees or designees under the
Convertible Notes or the Warrant. Any sales in the public market of shares of common stock issued
upon conversion or exercise would exert downward pressure on the then-prevailing market prices of
our common stock. In addition, the very existence of the Convertible Notes and the Warranty
represents a future issuance, and perhaps a future sale, of our commons stock to be acquired on
conversion or exercise, which could also depress trading prices for our common stock.
Shares of our common stock are also subject to certain demand and piggyback registration
rights held by Laitram, L.L.C. We also may enter into additional registration rights agreements in
the future in connection with any subsequent acquisitions or securities transactions we may
undertake. Any sales of our common stock under these registration rights arrangements with Laitram
or other 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.
47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) On October 23, 2009, we issued a Warrant to BGP to purchase shares of our common stock
and on October 23, 2009, we issued two Convertible Notes to Bank of China, New York Branch that are
convertible into shares of our common stock, and on October 27, 2009, we issued a Warrant to BGP to
purchase shares of our common stock. These issuances were made in privately-negotiated transactions
exempt from the registration requirements under the Securities Act of 1933, as amended.
(b) Not applicable.
(c) During the three months ended September 30, 2009, in connection with the vesting of (or
lapse of restrictions on) shares of our restricted stock held by certain employees, we acquired
shares of our common stock in satisfaction of tax withholding obligations that were incurred on the
vesting date. The date of cancellation, number of shares and average effective acquisition price
per share, were as follows:
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(d) Maximum Number |
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(or Approximate |
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(c) Total Number of |
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Dollar Value) of |
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Shares Purchased |
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Shares That |
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(a) |
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(b) |
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as Part of Publicly |
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May Yet Be Purchased |
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Total Number of |
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Average Price |
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Announced Plans or |
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Under the Plans or |
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Period |
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Shares Acquired |
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Paid Per Share |
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Program |
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Program |
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July 1, 2009 to July 31, 2009 |
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177 |
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$ |
2.05 |
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Not applicable |
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Not applicable |
August 1, 2009 to August 31, 2009 |
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$ |
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Not applicable |
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Not applicable |
September 1, 2009 to September 30, 2009 |
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27,868 |
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$ |
3.16 |
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Not applicable |
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Not applicable |
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Total |
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28,045 |
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$ |
3.15 |
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Item 6. Exhibits
31.1 |
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Certification of President and Chief Executive Officer Pursuant to Rule 13a-14(a). |
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31.2 |
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Certification of Executive Vice President and Chief Financial Officer Pursuant to Rule 13a-14(a). |
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32.1 |
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Certification of President and Chief Executive Officer Pursuant to 18 U.S.C. §1350. |
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32.2 |
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Certification of Executive Vice President and Chief Financial Officer Pursuant to 18 U.S.C. §1350. |
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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ION GEOPHYSICAL CORPORATION
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By |
/s/ R. Brian Hanson
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R. Brian Hanson |
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Executive Vice President and Chief Financial Officer
(Duly authorized executive officer and principal financial officer) |
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Date: November 9, 2009
49
EXHIBIT INDEX
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Exhibit No. |
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Description |
31.1
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Certification of Chief Executive Officer Pursuant to Rule 13a-14(a). |
31.2
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Certification of Executive Vice President and Chief Financial
Officer Pursuant to Rule 13a-14(a). |
32.1
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Certification of Chief Executive Officer Pursuant to 18 U.S.C. §1350. |
32.2
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Certification of Executive Vice President and Chief Financial
Officer Pursuant to 18 U.S.C. §1350. |
50