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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED MAY 31, 19961997
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 1-13402
INPUT/OUTPUT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2286646
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11104 WEST AIRPORT BLVD., STAFFORD, TEXAS 77477
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713)(281) 933-3339
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
(TITLE OF CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes: [X] No: [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X][ ]
Aggregate market value of the voting stockand non-voting common equity held by
non-affiliates of the registrant at June 30, 19961997 (for purposes of the
below-stated amount only, all directors, officers and 5% or more stockholders
are presumed to be affiliates):
$963,635,000.$716,633,000
Indicate the number of shares outstanding of the registrant's classes of Common
Stock, as of the latest practicable date.
TITLE OF EACH CLASS NUMBER OF SHARES OUTSTANDING
OF COMMON STOCK AT JUNE 30, 19961997
--------------- ----------------
COMMON STOCK, $0.01 PAR VALUE 42,969,67643,222,851
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's 19961997 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
P A R T I
ITEM 1. BUSINESS
THE COMPANY
Input/Output is a leading designer and manufacturer of seismic data
acquisition products used acrosson land, in transition zonezones (i.e. marshes and shallow
bays) and in marine environments. The Company believes that its I/O SYSTEMs are
the most technologically advanced seismic data acquisition systems and are
particularly well-suited for advanced three-dimensional ("3-D") data collection
techniques. The Company's principal customers are seismic contractors and major,
independent and foreign oil and gas companies around the world. During fiscal
1996,1997, approximately 45%43% of the Company's net sales and other revenues were to
customers outside the United States. See "Markets and Customers".
Recent improvements in drilling success rates through the use of advanced
seismic survey techniques, particularly 3-D techniques, have substantially
increased the demand for seismic data. In addition, advances in technology have
significantly reduced the size, weight, cost and power requirements of seismic
data acquisition systems and increased the quality and quantity of data
available to geoscientists, thereby improving the cost-effectiveness of
large-
scalelarge-scale 3-D surveys. As a result, 3-D surveys utilizing these advanced
technologies have gained increasing acceptance in the oil and gas industry as an
exploration risk management tool. Moreover, 3-D surveys are increasingly
employed in field development and reservoir management activities. Since 1988, the Company has applied these technological advances to its
seismic data acquisition systems. The technological evolution of the I/O SYSTEM
has permitted the economical utilization of substantially greater channel
recording capacities. As a result,
shipments of I/O SYSTEMs have grown from 14 systems shipped in fiscal 1991 to 6551
systems in fiscal 1996. Increased sales1997.
The Company offers a complete range of seismic data acquisition systems
and related equipment. On land, the Company offers the I/O SYSTEMs with larger average channel countsSYSTEM TWO
- -Registered Trademark- MRX and customers upgrading existingRSR systems by expanding channel counts have increased(see "Background and Growth
Strategy" below) as well as its Vibrators, a land energy source, and
Geophones, acoustical receivers whose sole purpose is to transform vibrations
from substrata within the number of recording
channels shippedearth into electrical signals which are recorded by
the I/O System. The Company from approximately 8,000also offers transition zone systems in fiscal 1991 to
77,000 in fiscal 1996.shallow
water with marine versions of the MRX, RSR and an Ocean Bottom Cable System.
The Company's marine data acquisition systems were introduced as new
product lines by the Company during fiscal 1996. See "WGEP Acquisition." These systems consist primarily of marine
streamers and shipboard electronics that collect seismic data in deep water
environments. The systems feature second generation 24-bit digital electronics
inside the streamer module, high-quality Company-manufactured hydrophones,
digital filtering and other components, and 12,000-meter streamer length
capabilities. Other marine products manufactured and sold by the Company include
airguns (or energy sources) and integrated shipboard navigation, positioning, and data telemetry
quality control systems. See "Products - New and
Acquired Product Lines."
The Company believes that its future success will depend on its ability to
continue to introduce technological innovations by enhancing its existing
products and services to its customers, as well as by developing new products,
such as those designed for time-lapse 3-D ("4-D")three and three-component 3-D ("9-
D")four-component seismic survey techniques.techniques
and 4-D seismic surveys. See "Product Development" below.
BACKGROUND AND GROWTH STRATEGY
The Company has achieved its growth by pursuing a strategy focused on: (i)
technological leadership; (ii) complementing internal product development with
product line acquisitions; and (iii) implementing innovative marketing
initiatives. These key elements of the Company's growth strategy can be
summarized as follows:
1
- - TECHNOLOGICAL LEADERSHIP. The Company's research efforts have resulted in
the development of numerous inventions, processes and techniques which the
Company believes have established the I/O SYSTEM TWO-Registered Trademark-TWO as the most
technologically advanced land seismic data acquisition system. The I/O
SYSTEM TWO is upgradable and expandable to accommodate system enhancements
and follow-on orders for components and related accessories as customers
increase the capacities of their systems. The Company's ongoing research
efforts have also led to the introduction of new products such as the I/O
SYSTEM TWO RSR, the Company's first radio telemetry system. The I/O SYSTEM
TWO RSR is designed to acquire data across a variety of difficult
environments,
including surftransition zones, marshes, swamps, mountain ranges, jungles and
mountain ranges.
Research andother land seismic environments. The I/O System MSX Marine Recorder,
introduced in fiscal 1997, is the latest development efforts are complemented by the Company's Output
Exploration Company, Inc. subsidiary ("OPEX"), which serves as a field
laboratoryCompany. It
features monitoring capabilities with components and software designed for
testing new products and obtaining feedback regarding
customer requirements.greater operational flexibility.
- - COMPLEMENTARY ACQUISITIONS. The Company has expanded its product line in
recent years through the completion of several complementary acquisitions.acquisitions
and product enhancements developed by the Company. See "WGEP Acquisition" and "Product
Development and Support"Development".
- - INNOVATIVE MARKETING INITIATIVES. The Company employs three key initiatives
to stimulate product sales around the world. First, throughThrough its finance subsidiary, Global
Charter Corporation subsidiary ("Global Charter"), the Company offers lease/purchase
programs and assists customers in arranging financing for their equipment
purchases.
Second, Global Charter conducts seminars and
equipment demonstrations and provides training for prospective and existing
customers. Third, OPEX serves as a vehicle to introduce and educate
prospective customers regardingA principal development of the Company's products and capabilities.
WGEP ACQUISITION
During 1995, the Company completed theproduct line growth has been
its fiscal 1996 acquisition ("WGEP Acquisition") of the Western Geophysical
Exploration Products Group ("WGEP") from Western Atlas International, Inc.
("WAII"). WAII and its affiliates together constituted the Company's largest
customer during fiscal 1997, 1996 1995 and 1994.1995. The business of WGEPacquired included the
manufacture, sale and marketing of marine and land seismic data acquisition
systems; marine streamers; marine streamer navigation, positioning and quality
control systems and related software products; vibrators and airgun equipment;
seismic cables and connectors; geophones and hydrophones; and certain other
products and equipment used in the domestic and international businessacquisition of acquiring seismic data in land,
transition zone and marine environments. The principal assets relatedSee Note 14 of Notes to Consolidated
Financial Statements.
PRODUCTS
LAND DATA ACQUISITION SYSTEMS
A land I/O SYSTEM consists of a Central Electronics Unit containing a
number of modular components, which may vary depending upon customer
specifications, and multiple remote ground equipment modules, including Line
Taps and Remote Signal Conditioners (each designated as an "MRX" which acquires
six channels of analog seismic data). A typical system consists of a Central
Electronics Unit, 12 Line Taps, approximately 200 MRXs and various accessories,
although larger or smaller systems may be assembled. Once a customer purchases a
Central Electronics Unit, the customer can purchase additional Line Taps, MRXs
and accessory equipment to expand and modify a system to fulfill specific
requirements. In addition, a customer may transform an I/O SYSTEM into two or
more separate systems with the purchase of additional Central Electronics Units.
In addition to the WGEP operations acquiredstandard I/O SYSTEM components, several optional
components are available as accessory equipment. The Company manufactures most
of the components sold as a part of the I/O SYSTEM product line, and purchases
certain separate components for resale, including the operator console,
oscilloscope, printer and digital camera. Depending upon the system's
configuration, the price of an I/O SYSTEM typically ranges from $800,000 to $4.5
million.
2
CENTRAL ELECTRONICS UNIT
The Central Electronics Unit, which acts as the control center of the
I/O SYSTEM, consists of several components which are typically mounted within a
vehicle or helicopter transportable enclosure. The Company can also package the
Central Electronics Unit to be portable for jungle and other difficult terrain
applications. The Central Electronics Unit receives digitized data from the
MRXs, stores it on magnetic tape for subsequent processing, and displays the
data on optional monitoring devices. The Central Electronics Unit also controls
the data collection parameters of the MRXs, as well as calibrates and provides
operating status analysis and tests all functions of the system.
REMOTE GROUND EQUIPMENT
The remote ground equipment of the I/O SYSTEM consists of multiple
Remote Signal Conditioners ("MRXs") and Line Taps positioned over the survey
area. Seismic signals from sensors called geophones are collected by the MRXs,
each of which handles the collection process for six channels of analog seismic
data. The MRX filters and digitizes the data, which is then transmitted by the
MRX via cable to a Line Tap. The Line Taps manage the seismic data collection
process on each seismic line, further organize the seismic data and transmit
this data and remote equipment operating status information via cable to the
Central Electronics Unit. The MRX automatically routes around cable faults,
thereby increasing crew productivity. In addition, the MRX provides high quality
data through its geophone performance capabilities.
OTHER I/O SYSTEM FEATURES
The I/O SYSTEM has been designed to maximize the efficiency of seismic
crew operations. Menu-driven software incorporated into the Central Electronics
Unit allows a crew to quickly calibrate, test and verify the status of each MRX
deployed. The status of each cable, channel and MRX battery pack also can be
verified. These rapid deployment and remote testing and calibration capabilities
can significantly improve the productivity of seismic crews in the field.
Land-based seismic data acquisition systems require electrical power
and must be designed to operate in diverse environmental conditions. The I/O
SYSTEM TWO has the flexibility to power the MRX via cable from a central power
source or a rechargeable or solar powered battery pack. An MRX's battery pack
may be replaced without terminating or interrupting the MRX's operation. The
battery packs may also be monitored by the Central Electronics Unit during
actual field use to forecast usable time remaining for each battery.
A seismic crew may collect data from sound waves produced by one of
several energy sources. Historically, dynamite and other explosives have been
used. In recent years, large, truck-mounted earth vibrators have been used more
frequently as energy sources. See "Vibrators" below. When non-explosive energy
sources are used, an optional component, the Correlator Stacker Module, is added
to the data acquisition system to correlate the seismic data for further
processing. The Correlator Stacker Module incorporates several advanced noise
control and editing programs to improve data quality and resolution.
RADIO TELEMETRY SYSTEM
The Company's radio telemetry system ("RSR" recorder system) records
data across a variety of environments, including transition zones, marshes and
swamps, as well as mountain ranges, jungle and other land and transition zone
seismic environments. The RSR radio telemetry systems are radio controlled, and
utilize the same electronics as the MRX to record, process and digitize seismic
signals at the remote unit. However, instead of transmitting data back to the
Central Electronics Unit, the RSR stores the seismic data for later retrieval.
The RSR does not require cables for data transmission, since the information is
stored at the unit source.
3
MARINE DATA ACQUISITION SYSTEM
The Company's marine data acquisition system consists primarily of
marine streamers and shipboard electronics that collect seismic data in deep
water environments. Marine streamers, which contain encapsulated Marine Remote
Signal Conditioner ("MSX") modules and cabling, may measure up to 12,000 meters
in length and are towed behind a special purpose vessel to record seismic data.
Marine electronics include navigation, positioning and data telemetry quality
control systems and related software products, as well as electronics for
shipboard recording.
The marine systems feature second generation 24-bit digital MSX
modules, each of which contain 16 channels per module. This feature, along with
utilization of fiber-optic data transmission and titanium connectors and
inserts, results in reduced size and power consumption, and higher quality and
reliability of acquired marine seismic data, and permits a complete MSX system
to record up to 7,680 channels.
Important features of the Company's marine systems include
Company-manufactured components, such as its hydrophones. In addition, as larger
marine surveys are conducted by seismic crews, the Company were: (i) inventory, machinerybelieves that its
marine streamers having up to 12,000-meter length capabilities offer many
competitive advantages, including physical strength and equipment; (ii)flexibility through
specially-designed non-metallic stress members, down-line power capabilities,
and fiber-optic data transmission.
OTHER PRODUCTS AND COMPONENTS
GEOPHONES AND HYDROPHONES. Geophones and hydrophones are seismic
sensor devices designed to detect acoustical energy reflected from the earth's
subsurface. The product line includes low distortion seismic sensors designed
for land (geophones), transition zone (marshphones) and marine (hydrophones)
environments. This product line includes a manufacturing plant in
Alvin, Texas; (iii) certain intellectual propertygeophone checking technology as well
as three-component geophones that could be used in three-component 3-D seismic
recording. See "Product Development" below.
AIRGUNS. Airguns are the manufacturing
operationsprimary energy source used to initiate the
energy transmitted through the earth's subsurface which are subsequently
recorded as data signals in the marine environment. The Company's sleeve gun, a
specialized type of WGEP; (iv) certain customer contracts, accounts receivableairgun, is well suited for high resolution 3-D seismic data
collection because of its expanded frequency band. Additionally, the Company
offers an airgun source synchronizing system that can control up to 128 airguns
simultaneously, offering real time monitoring of airgun firings.
VIBRATORS. Vibrators are controlled mechanical devices used as a
source of seismic energy on land. The vibrators offered can be supplied with
seven different vehicles (many of which are manufactured by the Company) and
general intangibles; (v) leases for property locatedoffer a maximum of 62,000 pounds of peak force. The Company believes that its
vibrators are the only vibrators in Texas and England; and
(vi) allthe industry to offer patented pre-load
series which significantly extends the life of the capital stock of two Dutch companies which manufacture
geophones.
The sourcevibrator and lowers the
distortion of the funds for the $121.3 million cash purchase was
approximately $51.3 million cash on hand and $70 million borrowed under a credit
facility. See "Management's Discussion and Analysis of Results of Operations and
Financial Condition - Liquidity and Capital Resources." In November 1995, the
Company paid WAII an additional $747,000 to reflect certain post-closing net
purchase price adjustments.sound source.
PRODUCT AGREEMENT
In connection with the transaction,WGEP Acquisition, the Company and WAII entered
into a product purchase agreement (the "Product Agreement") governing the
continuing relationship between the parties regarding sales of seismic products
and equipment to WAII by the Company. The products covered by the Product Agreement
include those previously manufactured by the Company as well as
2
former WGEP products now manufactured by the Company. In the event that WAII purchases products
in any year in an aggregate amount exceeding $70 million (which amount is
subject to adjustment under the Product Agreement), WAII will be entitled to a
rebate (determined pursuant to a formula) based upon the amount of the shortfall.exceeding $70
million. The Product Agreement has a five-year term, but may earlierprovides that it will terminate upon WAII's
purchase of an aggregate of $350 million (subject to adjustment) in products
from the Company. WAII may also terminate the agreement if (i) the Company sells
all or substantially all of its assets, (ii) the Company merges or consolidates
and, as a result, experiences a change of control (as defined therein) or (iii)
the Company breaches a
4
material term or condition of the Product Agreement and such breach or violation
is not cured within 60 days of notice thereof.
WAII also agreed, for a period of five years from the closing date, or
until the earlier termination of the Product Agreement and subject to certain
exceptions, not to manufacture any of the product lines sold to the Company in
the transaction. The exceptions principally relate to business conducted by
other affiliates or divisions of WAII or Western Atlas Inc., WAII's ability to
perform research and development activities and WAII's having a secondary source
of supply if the Company discontinues manufacturing a former WGEP product. The
parties also agreed that if the Company discontinues manufacturing a former WGEP
product, or fails to manufacture or deliver a former WGEP product to WAII
specifications and the Company fails or chooses not to remedy WAII's objection
to such discontinuance, then subject to certain dispute resolution procedures
being first carried out, WAII would have a limited, worldwide, perpetual,
irrevocable, non-exclusive, royalty-free license under the intellectual property
assigned to the Company under the Asset Purchase AgreementWGEP Acquisition with respect to that
particular product.
PRODUCTS
GENERAL
The Company's principal product line has been the I/O SYSTEMs and their
related components, which has been the major focus of the Company's research and
development efforts. In 1982, the Company initiated a project to design a
technologically advanced land-based seismic data acquisition system which would
use remote seismic data collection modules to digitize the seismic signal in the
field and enhance the quality of the recorded data. Design of such a system was
the major effort of the Company's research and development group over the next
six years. As a result of these efforts, the 15-bit I/O SYSTEM ONE-Registered
Trademark- was introduced in fiscal 1989. In fiscal 1992, the Company introduced
the I/O SYSTEM TWO-Registered Trademark-, the first commercially available
system to utilize a 24-bit analog-to-digital converter. The 24-bit analog-to-
digital converter extended the decibel range of seismic signal recording and
reduced system distortion to provide superior signal fidelity. This
technological innovation provided higher resolution data, which is especially
beneficial for 3-D surveys in geological complicated and/or noisy areas, and
substantially reduced power consumption, which improves the operational
efficiencies.
An I/O SYSTEM consists of a Central Electronics Unit containing a number of
modular components, which may vary depending upon customer specifications, and
multiple remote ground equipment modules, including Line Taps and Remote Signal
Conditioners (each designated as an "MRX" which acquires six channels of analog
seismic data). A typical system consists of a Central Electronics Unit, 12 Line
Taps, approximately 200 MRXs and various accessories, although larger or smaller
systems may be assembled. Once a customer purchases a Central Electronics Unit,
the customer can purchase additional Line Taps, MRXs and accessory equipment to
expand and modify a system to fulfill specific requirements. In addition, a
customer may transform an I/O SYSTEM into two or more separate systems with the
purchase of additional Central Electronics Units.
In addition to the standard I/O SYSTEM components, several optional
components are available as accessory equipment. The Company manufactures most
of the components sold as a part of the I/O SYSTEM product line, and purchases
certain separate components for resale,
3
including the operator console, oscilloscope, printer and digital camera.
Depending upon the system's configuration, the price of an I/O SYSTEM typically
ranges from $800,000 to $4.5 million.
The Company's transition zone data acquisition system, the I/O SYSTEM TWO
BCX, incorporates a proprietary cable which lays on the ocean bottom in depths
up to 200 meters and in marine areas of congestion or obstruction and collects
data in a similar manner as a land seismic data acquisition system. Depending
upon the system's configuration, the price of the I/O SYSTEM TWO BCX will
typically range from $4.0 million to $8.0 million.
CENTRAL ELECTRONICS UNIT
The Central Electronics Unit, which acts as the control center of the I/O
SYSTEM, consists of several components which are typically mounted within a
vehicle or helicopter transportable enclosure. The Company also can package the
Central Electronics Unit to be portable for jungle and other difficult terrain
applications. The Central Electronics Unit receives digitized data from the
MRXs, stores it on magnetic tape for subsequent processing, and displays the
data on optional monitoring devices. The Central Electronics Unit also controls
the data collection parameters of the MRXs, as well as calibrates and provides
operating status analysis and tests all functions of the system.
REMOTE GROUND EQUIPMENT
The remote ground equipment of the I/O SYSTEM consists of multiple Remote
Signal Conditioners and Line Taps positioned over the survey area. In September
1993, the Company introduced the MRX, a miniaturized Remote Signal Conditioner
for land seismic applications, which featured significant advances in diagnostic
capabilities. Seismic signals from sensors called geophones are collected by the
MRXs, each of which handles the collection process for six channels of analog
seismic data. The MRX filters and digitizes the data, which is then transmitted
by the MRX via cable to a Line Tap. The Line Taps manage the seismic data
collection process on each seismic line, further organize the seismic data and
transmit this data and remote equipment operating status information via cable
to the Central Electronics Unit. The MRX automatically routes around cable
faults, thereby increasing crew productivity. In addition, the MRX provides high
quality data through its geophone performance capabilities.
OTHER I/O SYSTEM FEATURES
The I/O SYSTEM has been designed to maximize the efficiency of seismic crew
operations. Menu-driven software incorporated into the Central Electronics Unit
allows a crew to quickly calibrate, test and verify the status of each MRX
deployed. The status of each cable, channel and MRX battery pack also can be
verified. These rapid deployment and remote testing and calibration capabilities
can significantly improve the productivity of seismic crews in the field. The
Company believes that competing systems do not offer similarly extensive
capabilities.
Land-based seismic data acquisition systems require electrical power and
must be designed to operate in diverse environmental conditions. The I/O SYSTEM
TWO has the flexibility to power the MRX via cable from a central power source
or a rechargeable or solar powered battery pack. An MRX's battery pack may be
replaced without terminating or interrupting the MRX's operation. The battery
packs may also be monitored by the Central Electronics Unit during actual field
use to forecast usable time remaining for each battery.
A seismic crew may collect data from sound waves produced by one of several
energy sources. Historically, dynamite and other explosives have been used. In
recent years, large, truck-mounted earth vibrators have been used more
frequently as energy sources. See "New and Acquired Product Lines." When non-
explosive energy sources are used, an optional component, the Correlator Stacker
Module, is added to the data acquisition system to correlate the seismic data
for further processing. The Correlator Stacker Module incorporates several
advanced noise control and editing programs to improve data quality and
resolution.
4
NEW AND ACQUIRED PRODUCT LINES
RSR SYSTEM. In June 1995, the Company introduced its first radio telemetry
system, the I/O SYSTEM TWO RSR. This system records data across a variety of
environments, including transition zones, surf zones, marshes, swamps or
mountain ranges. Depending upon the system's configuration, the price of the I/O
SYSTEM TWO RSR ranges from $1.2 million to $4.0 million.
MARINE DATA ACQUISITION SYSTEM. The Company's marine data acquisition
system consists primarily of marine streamers and shipboard electronics that
collect seismic data in deep water environments. Marine streamers, which contain
encapsulated Marine Remote Signal Conditioner ("MSX") modules and cabling, may
measure up to 12,000 meters in length and are towed behind a special purpose
vessel to record seismic data. Marine electronics include navigation,
positioning and data telemetry quality control systems and related software
products, as well as electronics for shipboard recording.
The marine systems feature second generation 24-bit digital MSX modules,
each of which contain 16 channels per module. This feature, along with
utilization of fiber-optic data transmission and titanium connectors and
inserts, results in reduced size and power consumption, lower repair costs and
higher quality and reliability of acquired marine seismic data, and permits a
complete MSX system to record up to 1,920 channels.
Important features of the Company's marine systems include Company-
manufactured components, such as its hydrophones. In addition, as larger marine
surveys are conducted by seismic crews, the Company believes that its marine
streamers having up to 12,000-meter length capabilities offer many competitive
advantages, including physical strength and flexibility through specially-
designed non-metallic stress members, down-line power capabilities, and fiber-
optic data transmission.
GEOPHONES AND HYDROPHONES. Geophones and hydrophones are seismic sensor
devices designed to detect energy reflected from the earth's subsurface. The
product line includes low distortion seismic sensors designed for land
(geophones), transition zone (marshphones) and marine (hydrophones)
environments. This product line includes a geophone checking technology as well
as three-component geophones that could be used in 9-D seismic recording.
AIRGUNS. Airguns are the primary energy source used to initiate the energy
transmitted through the earth's subsurface which are subsequently recorded as
data signals in the marine environment. The Company's sleeve gun, a specialized
type of airgun, is well suited for high resolution 3-D seismic data collection
because of its expanded frequency band. Additionally, the Company offers an
airgun source synchronizing system that can control up to 128 airguns
simultaneously, offering real time monitoring of airgun firings.
VIBRATORS. Vibrators are controlled mechanical devices used as a source of
seismic energy on land. The vibrators offered can be supplied with seven
different vehicles (many of which are manufactured by the Company) and offer a
maximum of 62,000 pounds of peak force. The Company believes that its vibrators
are the only vibrators in the industry to offer patented pre-load series which
significantly extends the life of the vibrator and lowers the distortion of the
sound source.
5
PRODUCT DEVELOPMENT AND SUPPORT
The Company's ability to compete effectively and maintain a leading
market position in the manufacture and sale of seismic data acquisition systems
and seismic instruments depends to a substantial degree upon continued
technological innovation. While the market for these products is characterized
by continual and rapid changes in technology, development cycles from initial
conception through product introduction tend to extend over several years. Since
introducing its first I/O SYSTEM in fiscal 1989, the Company has targeted an
amount for research and development expenditures equal to approximately 10% of
its annual budgeted revenues. These research and development expenditures have
principally related to the continued enhancement of the I/O SYSTEMsSYSTEM product line
and basic research and development on other emerging technologies having
potential applicability to the seismic industry. See Item 6.- "Selected
Consolidated Financial Data" and Item 7.- "Management's Discussion and Analysis
of Results of Operations and Financial Condition." These efforts have resulted
in the development of numerous inventions, processes and techniques, a number of
which have been incorporated as enhancements to the I/O SYSTEM product line. See
"-
Intellectual Property."
The Company evaluates the acquisition"Intellectual Property" below.
As a result of businesses or technologies
relevant to future systems or complementary products. In addition, acquired
technologies in combination with other Companyits ongoing research and development activities could result in products that may enableefforts, the
Company expects to enter non-
geophysical markets. Inintroduce during fiscal 1995,1998 certain new products and
enhancements to its existing product lines. These product and enhancement
releases are intended to constitute the Company acquired Q.C. Tools, Inc., a
Houston-based developerinitial stage in the latest evolution of geophysical software for seismic data acquisition
applications, which enhances
the Company's ability to provide quality control
capabilitiesseismic system product line, as well as represent certain
improvements in functionalities, operator efficiencies and has a database structure suitable for large channel 3-D seismic
surveys. The Company also acquired,interfaces. No
assurance can be given concerning the successful development of new products or
enhancements, the specific timing of their release or their level of acceptance
in fiscal 1995, DeRegt Special Cable, Ltd.,
a cable manufacturing company in Ireland, to increase its previously acquired
cable manufacturing capacity and to enhance the Company's ability to meet the
growing need for cables. DeRegt's location should enable the Company to more
effectively serve markets in Europe, Africa, the Middle East and the Former
Soviet Union.marketplace.
Seismic survey techniques being investigated for future commercial
applicability in the industry include 4-Dthree and 9-Dfour-component techniques. The
4-D process, or time-lapse 3-D, measures the same length, depth and width of
data acquired in 3-D surveys, but also features the capability to record time
intervals between two or more surveys. The process is well-suited for reservoir
management applications, and is intended to identify fluid movements and changes
in the producing status of the reservoir. The 9-D technique, or three-componentThree-component 3-D is an experimental
seismic technique being investigated by a consortium of companies and research
firms (to whom the Company serves as a technical advisor). The 9-D technique delineates reservoir characteristics not easily
depicted by 3-D seismic surveys. The 9-D surveys would measure shear wave data
in addition to conventional 3-D measurements of compressional wave data, thereby
significantly expanding the geophysicist's ability to determine the location of
a potential formation as well as the probability of hydrocarbons. Several advances in
technology and processing will haveremain to be accomplished in order for 4-D and
9-Dthree-component 3-D processes to become commercially viable.feasible.
MARKETS AND CUSTOMERS
The Company's principal customers are seismic contractors, which
operate seismic data acquisition systems to collect data in accordance with
their customers' specifications or for their own seismic data libraries. In
addition, the Company markets and sells its products to major, independent and
foreign oil and gas companies, which typically specify seismic data acquisition
5
program parameters to contractors and consequently may stipulate use of the
Company's equipment, or may operate their own seismic crews. WAII and its
affiliates and
Geco-Prakla accounted for approximately 32% and 10%, respectively,39% of the Company's net sales and other
revenue in fiscal 1996.1997. See Note 8 of Notes to Consolidated Financial
Statements.
6
Published industry sources indicate that the number of seismic crews
operating worldwide has decreased over the past ten years. Although the Company
believes that such crews' utilization of high-channel 3-D seismic systems has
increased during the same period, the Company believes that most of the world's
seismic crews are not yet equipped with advanced seismic data acquisition
systems, such as the I/O SYSTEM TWO.
A significant part of the Company's marketing efforts are focused on
areas outside the United States. Foreign sales are subject to special risks
inherent in doing business outside of the United States, including the risk of
war, civil disturbances, embargo and government activities, as well as risks of
compliance with additional laws, including tariff regulations and import/export
restrictions. The Company sells its products through a direct sales force
consisting of Company employees and through several international third-party
sales representatives responsible for key geographic areas. Sales personnel
generally have either oil and gas exploration or production expertise or
experience in selling advanced technology-based systems.
During fiscal 1997, 1996, and 1995, approximately 43%, 45% and 1994, approximately 45%, 68% and 70%,
respectively, of the Company's net sales and other revenues were derived from
sales to customers outside the United States. See Note 8 of Notes to
Consolidated Financial Statements for information concerning geographic
distribution of sales. The principal reason for the decline, in fiscal 1997 and
1996, in the percentage of sales and other revenues derived from sales to
customers outside the U.S. was the increased level of sales during fiscal 1997
and 1996 to WAII, which are considered sales to a U.S. customer. Systems sold to
domestic customers (including WAII) are frequently deployed internationally.
Company sales are predominantly denominated in U.S. dollars. From time to time,
certain foreign sales require export licenses.
The Company normally sells its systems and products to customers on
standard net 30-day terms. Through Global Charter, the Company provides
financing arrangements to customers by installment sales contracts under which
the Company typically retains a security interest in the products sold and rents
certain system components to customers from time to time pursuant to short-term
rental arrangements with options to purchase. In addition, through the Company's
revolving line of credit with its principal lender, the Company has also
arrangesarranged financing for customer purchases through direct loans to customers from
such lender, which loans are in turn have been guaranteed by the Company. See Item
7.- "Management's Discussion and Analysis of Results of OperationOperations and Financial
Condition - Liquidity and Capital Resources".
The Company's installment sales contracts are secured by the equipment
under the contract and typically require a down
payment of approximately 15% of the purchase price, normally range in length
from 24 to 48 months and bear interest at rates ranging from 7.0% to 12.0% per
annum. See Note 3 of Notes to Consolidated Financial Statements.
The Company has entered into installment sales contracts with certain
customers located in the Former Soviet Union. The terms of such contracts have
traditionally varied from the terms of the Company's standard installment sales
contracts and typically required such customers to make an initial down payment
of approximately one-half of the total sales price prior to shipment and pay the
remaining balance of the sales price within one year of shipment. However,
recent sales to customers in the Former Soviet Union during the second half of
fiscal 1996 have featured installment contracts containing more standard terms.
The Company's rental program is designed to provide its customers a
convenient and cost effective method to upgrade their system recording capacity
while building equity in the rental equipment. Typical rental terms provide for
a six monthsix-month term with 80% of the monthly rental payments applying toward the
purchase of the rental equipment. Upon expiration of the rental term, the
customer either exercises the purchase option or returns the equipment and
forfeits the accrued purchase credits.
The Company has from time to time sold and assigned certain of these
installment sales contracts and leases to third-party financing sources (or sold
equipment to leasing companies which equipment is then leased to customers), the
terms of which often obligate the Company to (i) 7
guarantee or repurchase all or
a portion of the contracts and leases in the event of a default by the customer
or upon certain other occurrences and/or (ii) assist the financing parties in
remarketing the equipment to satisfy the obligation. AsSee Item 7.- "Management's
Discussion and Analysis of May 31, 1996, such third party financing sources had purchased
equipment contractsResults of Operations and leases which, in the aggregate, obligate the Company to
guarantee or repurchase up to approximately $30.3 million. Performance of the
Company's obligations under a number of these arrangements could have a material
adverse effect on the Company's financial condition; in addition, a number of
significant payment defaults by customers could have a material adverse effect
on the Company's financial positionFinancial Condition -
Liquidity and results of operations.Capital Resources".
6
MANUFACTURING
Prior to the WGEP Acquisition, the Company manufactured or assembled its
products, produced spare parts and renovated and repaired instruments at its
facilities in Stafford and Houston, Texas, as well as facilities in Ireland and
Canada. As a result of the WGEP Acquisition, the Company added approximately
300,000 square feet of manufacturing-related space in Alvin, Texas, the
Netherlands and England. In JanuaryNovember 1996, the Company announcedcompleted the commencement
of construction ofmove to a new 109,896 square
feet manufacturing facility to replace the Company's currentformer electronics assembly
facility. This new facility has technological features for use in future
products, enables the Company to manufacture additional products and components
assembled previously by outside vendors and contains additional features related
to manufacturing efficiency and safety. See Item 2. -"Properties"Facilities". Upon
completion of assembly, products undergo functional and environmental testing to
the extremes of product specifications and final quality assurance inspection.
The Company's experience has been to normally fill and ship customer orders
within 45 days of receipt.
SUPPLIERS
The Company purchases a substantial portion of the electronic components
used in its systems and products. Currently, the Company purchases the 24-bit
analog-to-digital converters used in its I/O SYSTEMs from a single vendor. While
the Company purchases that vendor's standard converter, the other components of
the I/O SYSTEM are designed for use with that particular converter. Even though
the Company believes that it could replace such a converter with a functional
equivalent, if such 24-bit converter were not available, redesign of the I/O
SYSTEM would be required and costly delays could result.
In addition, certain other components, such as the flash memory
microprocessor used in the Company's I/O SYSTEM TWO RSR, are from time to time
subject to supplier allocation. If the Company's inventory and supplier
allocation of such components were insufficient to meet the Company's
requirements, sales of the Company's systems and products containing those
components could be constrained.
COMPETITION
The market for seismic data acquisition systems and seismic instrumentation
is highly competitive and is characterized by continual and rapid changes in
technology. The Company's principal competitor for land seismic equipment is
Societe d'Etudes Recherches et Construction Electroniques, an affiliate of
Compagnie General de Geophysique which, unlike the Company, possesses the
advantage of being able to sell to an affiliated seismic contractor. The
Company's principal competitor in the marine seismic systems market is
GeoScience Corporation, an affiliate of Tech-Sym Corporation.
The Company believes that technology is the primary basis of competition in
the industry, as oil and gas exploration and production companies demand higher
quality seismic data and seismic contractors require improved productivity from
their equipment and crews. The remaining principal competitive factors in the
industry are price and customer support services.
8
OIL AND GAS ACTIVITIES
As an adjunct to its research, development and marketing efforts, the
Company, through its subsidiary, OPEX,Output Exploration Company, Inc. ("OPEX"), has
acquired and explored certain oil and gas exploration prospects.
In fiscal 1995, OPEX designed the survey of the 109,000-
acre Kenedy RanchFrom its organization in south Texas. OPEX also designed the 3-D survey of the
Brownsville Salt Dome in Mississippi; this survey acquired 2,600 channels of
seismic data, which the Company believes is the largest known survey conducted
on land to date. These activities are intended to demonstrate product
capabilities for potential customers to encourage broader usage of the I/O
SYSTEM and also serve as test sites for Company-developed products, processes
and techniques.
In fiscal 1996, OPEX participated in the drilling of two wells on the
Brownsville Dome prospect. OPEX owns a 47% working interest in the Brownsville
Dome prospect and a 25% working interest in the Kenedy Ranch prospect. OPEX's
remaining rights regarding the Kenedy Ranch prospect, as well as the Santa Fe
and Garcia Ranches in south Texas, are in the nature of seismic options which
expire at various dates in 1996. After the options are exercised and seismic
work is conducted, blocks of leasehold acreage may be purchased by the
participants. If exercised, OPEX anticipates that it would own a 25% working
interest in the particular optioned acreage with respect to the Ranches. Since
fiscal 1994,1992 through July 31, 1997, OPEX has participated
in the drilling of twelve18 wells. Seven wells six of which were dry holes; six of theeight wells are
currently classified as productive.productive, and as of July 31, 1997, three wells have
been completed but not fully tested. The Company expects to participate in up to
five additional wells in fiscal 19971998 and depending upon the results, could
participate in additional wellsdrilling activities over the next few years. The
Company'sCompany currently anticipates that total expenditures for fiscal 1998 for
exploration and development activities will be $2.5 million and expects to fund
these expenditures from its cash flow from operations. However, the Company
currently expects that its future level of participation in oil and gas drilling
activities has not had any
material effect upon the Company's revenues, net earnings or assets to date.will be funded primarily by cash flows from its productive
properties. See also, Item 7.- "Management's Discussion and Analysis of Results
of Operations and Financial Condition".
7
INTELLECTUAL PROPERTY
The Company relies on a combination of patents, trade secrets, patents, copyrights
and technical measures to protect its proprietary hardware and software
technologies. While certain technologies have been patented by the Company, it
does not normally attempt to patent most proprietary technology, even where
regarded as patentable. The Company believes that in most cases this technology
is more effectively protected by system enhancements, innovations and
maintaining confidentiality, rather than through disclosure and a comprehensive
patent enforcement program. Although the Company's patents are considered important to its
operations, no one patent is considered essential to the success of the Company.
Copyright and trade secret protection may be unavailable in certain foreign
countries in which the Company sells its products. In addition, the Company
seeks to protect its trade secrets through confidentiality agreements with its
employees and agents. The Company also owns a number of trademarks, including
I/O-Registered Trademark-, I/O SYSTEM ONE-Registered Trademark- and I/O SYSTEM
TWO-Registered Trademark-.
Other trademarks used by the Company have been considered less
important to the Company since they pertain to products traditionally producing
substantially smaller revenues to the Company than the seismic data acquisition
system product line.
REGULATORY MATTERS
The Company's operations are subject to numerous local, state and federal
laws and regulations in the United States and in foreign jurisdictions
concerning the containment and disposal of hazardous materials. The Company does
not foresee the need for significant expenditures to ensure continued compliance
with current environmental protection laws. Regulations in this area are subject
to change, and there can be no assurance that future laws or regulations will
not have a material adverse effect on the Company.
9
EMPLOYEES
At June 30, 1996,1997, the Company had 1,2321,176 employees worldwide, of whom 988which 949
were employed in the United States. The Company's domestic employees are not
subject to any collective bargaining agreement. The Company has never
experienced a work stoppage and considers its relations with its employees to be
satisfactory.
ITEM 2. FACILITIES
The Company's primary manufacturing facilities are as follows:
Manufacturing Facility Square Footage
---------------------- --------------
Stafford, Texas* 35,200109,896
Houston, Texas** 68,880
Alvin, Texas* 240,000
Cork County, Ireland* 35,630
Norwich, England** 31,000
-------
Voorschoten, The Netherlands** 30,000
-------
440,710515,406
-------
-------
- -----------------------------
* Owned
** Leased
The Company's executive headquarters (utilizing approximately 50,84555,060 square
feet) is located at 11104 West Airport, Stafford, Texas and its research and
development headquarters (utilizing approximately 79,566 square feet) is
located
at 12300 Parc Crest Drive, Stafford, Texas; bothadjacent to the headquarters' facility. Both facilities are owned by the Company.Company
and are mortgaged to secure long-term facility indebtedness. See Item 7.-
"Management's Discussion and Analysis of Results of Operations and Financial
Condition". The Company also leases an aggregate of 111,884326,889 square feet of
additional warehouse manufacturing and office space under short-term operating leases. The
machinery, equipment, buildings and other facilities owned and leased by the
Company are considered by management to be sufficiently maintained and adequate
for the Company's current operations.
The Company has received a commitment for a $12.5 million ten-year loan to
finance the construction of its new 109,896 square feet manufacturing facility
in Stafford, Texas, adjacent to its corporate executive offices. The loan is to
be secured by a mortgage on the new manufacturing facility as well as the
Company's executive headquarters and its adjacent research and development
headquarters. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Liquidity and Capital Resources."8
The Company anticipates these facilities will accommodate the Company's
growth for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any pending legal proceedings to which the
Company or any of its property is subject which, if adversely determined, could
have a material adverse effect on the business or financial condition of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a Special Meeting of Stockholders of the Company held on March 4, 1996,
the Company's stockholders were asked to approve an amendment to the Company's
Restated Certificate of Incorporation (the "Certificate") to (i) increase the
number of authorized shares of
10
Common Stock, par value $0.01 per share, of the Company from 50,000,000 to
200,000,000 shares and (ii) increase the number of authorized shares of
preferred stock, par value $0.01 per share, of the Company from 5,000,000 to
25,000,000 shares. Approximately 46.5% (19,633,133 shares) of the Company's
outstanding Common Stock voted in favor of this proposal; approximately 30%
(12,683,647 shares) voted against the proposal and 286,280 shares (less than 1%)
abstained. The proposal required for its approval the affirmative vote of a
majority of shares of Common Stock outstanding and entitled to vote at the
meeting, and was therefore rejected.None.
P A R T II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the New York Stock Exchange ("NYSE")
under the symbol "I/O". Prior to November 1994 the Company's Common
Stock was traded on the National Market System of the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") under the symbol
"IPOP""IO". The following table sets forth the high and low last
reported sales prices of the Common Stock for the periods indicated, as reported
on the NYSE composite tape and NASDAQ National Market System, and have been adjusted to reflect the Company's
two-for-one share split (in the nature of a 100% stock distribution) on January
9, 1996.
PRICE RANGE
----------------------------------------------
PERIOD HIGH LOW
------ ---- ---
Fiscal 1996
-----------1997
Fourth Quarter. . . . . . . . . . . . . $ 21 $ 13 3/4
Third Quarter . . . . . . . . . . . . . 23 7/8 16 3/8
Second Quarter. . . . . . . . . . . . . 36 1/8 24
First Quarter . . . . . . . . . . . . . 39 1/4 29
Fiscal 1996
Fourth Quarter. . . . . . . . . . . . . $ 40 1/2 $ 27
Third Quarter . . . . . . . . . . . . . 30 1/4 22
Second Quarter. . . . . . . . . . . . . 23 3/8 17 3/16
First Quarter . . . . . . . . 20 7/8 16 15/16
Fiscal 1995
-----------
Fourth Quarter. . . . . . . . $18 1/20 7/8 16 $ 11 1/2
Third Quarter . . . . . . . . 13 5/15/16 9 9/16
Second Quarter. . . . . . . . 12 3/4 9 5/8
First Quarter . . . . . . . . 13 3/8 8 23/64
The Company historically has not paid and does not intend to pay cash
dividends on its Common Stock in the foreseeable future. The Company presently
intends to retain earnings for use in its business, with any future decision to
pay cash dividends dependent upon its growth, profitability, financial condition
and other factors the Board of Directors may deem relevant. The Company's
revolving line of credit agreement contains post-default prohibitions on
payments of dividends and other distributions payable in cash or property. See"Management'sSee
Item 7.- "Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Liquidity and Capital Resources".
On June 30, 1996,1997, there were 184313 stockholders of record of the Common Stock and
the Company believes that there were approximately 4,81211,057 beneficial owners of the
Common Stock as of such date. 11
During the period covered by this report, the
Company made no unregistered sales of its equity securities.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to
the Company's consolidated statements of operations for the five fiscal years
ended May 31, 1997, 1996, 1995, 1994 1993 and 19921993 and with respect to the Company's
consolidated balance sheets at May 31, 1997, 1996, 1995, 1994 1993 and 19921993 have been
derived from the Company's audited consolidated financial statements. This
information should be read in conjunction with Item 7 - "Management's Discussion
9
and Analysis of Results of Operations and Financial Condition" and the
consolidated financial statements of the Company and the notes thereto included
elsewhere in this Form 10-K. The share data set forth below has been adjusted to
reflect the Company's two two-for-one splits of its Common Stock, which occurred
in May 1994 and January 1996.
Year Ended May 31,
--------------------------------------------------------------------------------------------------------------------------------
1997 1996 (1) 1995 1994 1993
1992
--------- --------- --------- --------- ------------- ---- ---- ---- ----
(in thousands, except per share data)
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Net sales and other revenues . . . . . . . . . . . . . . $281,845 $278,283 $134,698 $95,752 $54,205
$45,501
Cost of sales.sales . . . . . . . . . . . . . . . . . . . . . . 183,438 163,811 71,440 50,560 26,677
22,999
-------- -------- -------- -------- --------------- -------
Gross profit.profit . . . . . . . . . . . . . . . . . . . 98,407 114,472 63,258 45,192 27,528
22,502
-------- -------- -------- -------- --------------- -------
Operating expenses:
Research and development.development . . . . . . . . . . . . . . . 22,967 23,243 11,400 7,931 5,004 4,362
Marketing and sales . . . . . . . . . . . . . . . . . . 13,288 12,027 6,789 4,673 4,492
2,765
General and administrative.administrative . . . . . . . . . . . . . . 20,592 19,096 11,817 8,980 5,007
3,860Non-recurring items (2). . . . . . . . . . . . . . . . . 15,594 -- -- -- --
Amortization of identified intangibles.intangibles . . . . . . . . 4,551 4,305 1,331 762 698
495
-------- -------- -------- -------- --------------- -------
Total operating expenses. . . . . . . . . . . . . . 76,992 58,671 31,337 22,346 15,201
11,482
-------- -------- -------- -------- --------------- -------
Earnings from operations . . . . . . . . . . . . . . . . . 21,415 55,801 31,921 22,846 12,327 11,020
Interest expense . . . . . . . . . . . . . . . . . . . . . (793) (2,515) (30) (160) (203) (296)
Other income . . . . . . . . . . . . . . . . . . . . . . . 3,675 3,091 3,944 1,466 1,222
1,135
-------- -------- -------- -------- --------------- -------
Earnings before income taxes . . . . . . . . . . . . . . . 24,297 56,377 35,835 24,152 13,346 11,859
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 7,700 17,700 11,335 7,589 4,204
4,032
-------- -------- -------- -------- --------------- -------
Net earnings . . . . . . . . . . . . . . . . . . . . . . . $16,597 $38,677 $24,500 $16,563 $9,142
$7,827
-------- -------- -------- ------- -------
-------- -------- -------- -------- -------- -------- --------------- -------
Earnings per common share. . . . . . . . . . . . . . . . . $0.38 $0.94 $0.66 $0.53 $0.31
$0.27
-------- -------- -------- ------- -------
-------- -------- -------- -------- -------- -------- --------------- -------
Weighted average common shares
outstanding . . . . . . . . . . . . . . . . . . . 43,820 41,125 37,381 31,448 29,786 29,326
BALANCE SHEET DATA (END OF YEAR):
Working capital.capital . . . . . . . . . . . . . . . . . . . . . $170,427 $165,225 $104,908 $87,558 $29,685 $21,782
Total assets . . . . . . . . . . . . . . . . . . . . . . 384,658 355,465 165,487 132,000 61,542 46,349
Short-term debt, including current
installments of long-term debt (1)(3) . . . . . . . . . . . 912 -- -- 591 1,961
1,636
Long-term debt (1)(3) . . . . . . . . . . . . . . . . . . . . 11,000 -- -- -- 427 545
Stockholders' equity . . . . . . . . . . . . . . . . . . . 338,614 317,204 146,712 115,659 47,877 37,430
OTHER DATA:
Capital expenditures . . . . . . . . . . . . . . . . . . . $26,966 $10,240 $5,979 $4,010 $3,703 $1,824
Depreciation and amortization. . . . . . . . . . . . . . . 12,558 10,152 3,570 1,877 1,452 1,086
- ------------------
__________________
(1) See Note 14 of Notes to Consolidated Financial Statements for information
with respect to the Company's WGEP Acquisition.
(2) See Note 15 of Notes to Consolidated Financial Statements for information
with respect to the Company's Non-recurring items.
(3) See Notes 6 and 12 of Notes to Consolidated Financial Statements for
information with respect to the Company's indebtedness and certain contingent
obligations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion and analysis of the Company's results of
operations and financial condition should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto included
elsewhere in this Form 10-K.
10
ANNUAL RESULTS OF OPERATIONS
The Company's results of operations improved significantly in each of the
last two fiscal years principally as a result of the continued market acceptance
of the I/O SYSTEM product line. Net sales and other revenues consist principally
of seismic data acquisition systems, related
12
component sales, and rental income relating to operating leases of I/O SYSTEM
components. For the fiscal year ended May 31, 1996, the Company shipped 65 I/O
SYSTEMS.
The results of operations of the Company for the year ended May 31, 1996
and certain balance sheet items as of that date were significantly impacted by
the WGEP Acquisition and the purchase of the specified assets and assumption of
the specified liabilities in connection therewith. The gross profit margins on a
number of former WGEP products have traditionally been lower than the gross
profit margins for I/O SYSTEMs and their components. Accordingly, the Company's
average gross profit margin following the WGEP Acquisition has been lower than
that realized by the Company in the past.
The following table sets forth for fiscal years 1997, 1996 1995 and 1994,1995, the
percentage relationship to net sales and other revenues of certain expenses and
earnings together with the percentage change in such items:
AS A PERCENTAGE OF NET SALES
--------------------------------------------------------------
YEAR ENDED MAY 31, PERCENT CHANGE
------------------------------------ ------------------------------------------------------- -----------------------
1997 1996 1995 19941996-1997 1995-1996 1994-1995
---- ---- ---- --------- ---------
Statement of Operations Data:
Net sales and other revenues.revenues . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 1.3% 106.6% 40.7%
Cost of sales . . . . . . . . . . . . . . . . . . . . . 65.1 58.9 53.0 52.812.0 129.3
41.3
----- ----- --------- ---- ----
Gross profit.profit . . . . . . . . . . . . . . . . . . . . . 34.9 41.1 47.0 47.2(14.0) 81.0
40.0
----- ----- --------- ---- ----
Operating expenses:
Research and development.development . . . . . . . . . . . . . . 8.2 8.4 8.5 8.3(1.2) 103.9 43.7
Marketing and sales . . . . . . . . . . . . . . . . . 4.7 4.3 5.0 4.910.5 77.2 45.3
General and administrative.administrative . . . . . . . . . . . . . . 7.3 6.9 8.8 9.37.8 61.6
31.6Non-recurring items. . . . . . . . . . . . . . . . . . 5.5 -- -- 100.0 --
Amortization of identified
intangibles . . . . . . . . . . . . . . . . . . . . 1.6 1.5 1.0 0.85.7 223.4
74.7
----- ----- --------- ---- ----
Total operating expenses.expenses . . . . . . . . . . . . . 27.3 21.1 23.3 23.331.2 87.2
40.2
----- ----- --------- ---- ----
Earnings from operations . . . . . . . . . . . . . . . . . 7.6 20.1 23.7 23.9(61.6) 74.8 39.7
Interest expense . . . . . . . . . . . . . . . . . . . . . (0.3) (0.9) (0.0) (0.2)(68.5) 8,283.3 (81.3)
Other income . . . . . . . . . . . . . . . . . . . . . . 1.3 1.1 2.9 1.518.9 (21.6)
169.0
----- ----- --------- ---- ----
Earnings before income taxes . . . . . . . . . . . . . . . 8.6 20.3 26.6 25.2(56.9) 57.3 48.4
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 2.7 6.4 8.4 7.9(56.5) 56.2
49.4
----- ----- --------- ---- ----
Net earnings . . . . . . . . . . . . . . . . . . . . . . 5.9% 13.9% 18.2% 17.3%(57.1)% 57.9%
47.9%
----- ----- -----
----- ----- --------- ---- ----
---- ---- ----
NET SALES AND OTHER REVENUES
Net sales and other revenuerevenues consist primarily of seismic data acquisition
systems and component sales and rental income from I/O SYSTEM component
operating leases. Net sales and other revenues for fiscal 1997 were $281.8
million, an increase of $3.6 million, or 1%, over fiscal 1996. Although
year-to-year sales were comparable, the mix of sales changed. Marine equipment
sales increased with the sale of 12 of the Company's new MSX marine systems
introduced in fiscal 1997. This increase in marine equipment sales was partially
offset by a decline in land equipment sales.
Net sales and other revenues for fiscal 1996 were $278.3 million, an
increase of $143.6 million, or 107%, over the prior year, primarily due to sales
from product lines acquired during fiscal 1995 and 1996, (44%), increased sales to the
Company's largest customer, continued sales of the Company's traditional
land-based seismic data acquisition systems (30%), and market acceptance of its new
radio telemetry system, the I/O SYSTEM TWO RSR (13%).
Net salesRSR.
GROSS PROFITS
The gross profit margins of the Company for the years ended May 31, 1997
and other revenues for1996 were negatively impacted by the addition of lower margin products
resulting from the WGEP Acquisition. In addition, during fiscal 1995 were $134.7 million, an
increase of $38.9 million,1997 the Company
experienced competitive pricing pressures related to its land seismic
acquisition systems which negatively impacted its gross profit margins.
11
RESEARCH AND DEVELOPMENT
Fiscal 1997 research and development expenses decreased $276,000, or 41%1%,
overfrom the prior year, primarily due to new
sales to Russia and Kazakhstan, increased revenues derived from businesses
acquired by$23.0 million. Expenses were consistent with the Company in fiscal 1994 and 1995, the introductionprior
year's expenses as a percent of the new BCX
ocean bottom cable system and continued acceptance of the I/O SYSTEM TWO.
RESEARCH AND DEVELOPMENTsales.
Fiscal 1996 research and development expenses increased $11.8 million, or
104%, over the prior year, to $23.2 million, primarily due to increased
personnel and related costs associated with the WGEP Acquisition, and increased
supplies and equipment expense due to additional research and development
projectsprojects.
MARKETING AND SALES
Fiscal 1997 marketing and the WGEP Acquisition.
13
Fiscal 1995 research and developmentsales expenses increased $3.5$1.3 million, or 44%10%,
over the prior year, to $11.4 million,fiscal 1996, primarily due to expenditures
attributableincreased convention/exhibition costs and
advertising expense related to new product lines acquired in fiscal 1995 and 1994, and advanced
system design work.
MARKETING AND SALESlines.
Fiscal 1996 marketing and sales expenses increased $5.2 million, or 77%,
over the prior year, to $12.0 million, primarily due to increased personnel and
associated marketing expenses related to the WGEP Acquisition, increased outside
sales commissions resulting from higher sales levels, and increased advertising
and exhibition costs for new products and recently acquired product lines.
GENERAL AND ADMINISTRATIVE
Fiscal 1995 marketing1997 general and salesadministrative expenses increased $2.1$1.5 million, or
45%8%, over the prior year, to $6.8$20.6 million, primarily due to marketing expenses
related to new product lines resulting from acquisitionsincreased
non-recurring advisory and higher advertisingprofessional fees and exhibition costs for new products.
GENERAL AND ADMINISTRATIVEincreased bad-debt allowance.
Fiscal 1996 general and administrative expenses increased $7.3 million, or
62%, over the prior year, to $19.1 million, primarily due to increased
personnel, insurance costs and property taxes as a result of acquisitions,
increased bad-debt allowance due to higher sales levels, and increased costs
related to the creation of a company-wide data processing services network.
NON-RECURRING ITEMS
Fiscal 1995 general1997 non-recurring items were $15.6 million, consisting of losses
related to the insolvency of a customer, a write-down of capitalized exploration
costs and administrativepersonnel expenses incurred in organizational changes. There were no
non-recurring item charges in fiscal 1996.
AMORTIZATION OF IDENTIFIED INTANGIBLES
Fiscal 1997 amortization of identified intangibles increased $2.8 million,$246,000, or
32%6%, over the prior year, to $11.8 million, primarily due to increased personnel
costs as a resultthe amortization of acquisitions and outside services.
AMORTIZATION OF IDENTIFIED INTANGIBLESadditional goodwill related
to acquisitions.
Fiscal 1996 amortization of identified intangibles increased $3.0
million, or 223%, over the prior year, primarily due to amortization of goodwill
related to the WGEP Acquisition.
Fiscal 1995 amortization of identified intangibles increased $569,000OPERATING INCOME
Earnings from operations decreased $34.4 million, or 75%62%, overin fiscal 1997 to
$21.4 million compared to $55.8 million in the prior year, primarily due to
decreased profit margins and the intangible costs added as a result of
acquisitions.
OPERATING INCOMEfiscal 1997 non-recurring charges.
12
Earnings from operations increased $23.9 million, or 75%, in fiscal 1996 to
$55.8 million compared to $31.9 million in the prior year, primarily due to
increased revenues.
Earnings from operations increased $9.1INTEREST EXPENSE
Interest expense decreased $1.7 million or 40% in fiscal 1995 to
$31.9 million1997 compared to $22.8 million in the prior year, primarilyfiscal
1996 due to increased revenues.
INTEREST EXPENSEthe repayment in fiscal 1996 of a $70 million acquisition term loan,
which was partially offset by the ten-year-term facilities financing completed
in August 1996. Interest expense in fiscal 1997 was $793,000. See "Liquidity and
Capital Resources" below and Note 6 of Notes to Consolidated Financial
Statements.
Interest expense in fiscal 1996 increased $2.5 million over the prior year,
primarily due to interest on the $70 million acquisition term loan and borrowing
under the $40 million revolving line of credit incurred in connection with the
WGEP Acquisition.
The Company had no long-term debt outstanding as of May 31, 1996.
Interest expense in fiscal 1995 declined $130,000 primarily due to
repayment of bank debt. The Company had no long-term debt outstanding as of May
31, 1995.
14
INCOME TAX EXPENSE
The effective tax rate for fiscal 19961997 and 19951996 was approximately 31.4%31.7% and
31.6%31.4%, respectively. Income tax expense increaseddecreased in both1997 as compared to 1996 and 1995 in
proportion towith the increasedecrease in those years inthe 1997 earnings before taxes. See Note 1 and
Note 9 of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations from internally
generated cash, its working capital credit facilities, and funds from equity
financings. Cash flows from operating activities before changes in working
capital items were $49.0$43.4 million for the year ended May 31, 1996.1997. However, cash
flows from operating activities after changes in working capital items were a
negative $21.0$19.9 million for the year ended May 31, 1996,1997, primarily due to
increases in trade accounts receivable resulting from a lower level of cash
sales in fiscal 1997 and higher inventory requiredlevels maintained to support increased
anticipated sales levels. The Company believes that it has sufficient credit
facilities in place to finance these increases in its working capital
requirements.
In connection with the WGEP Acquisition, theThe Company established in June 1995 a $110 million credit facility with
First Interstate Bank of Texas, N.A. (now Wells Fargo Bank, N.A.), comprised of
a $70 million term loan to fund the WGEP Acquisition and a $40 million revolving
line of credit for working capital purposes. The Company retired the term loan
and repaid the amounts outstanding under the revolving facility with certain of
the proceeds from a $120 million public offering of 5,750,000 shares of the
Company's common stock in November 1995. In May 1996, the Company renegotiated
its Credit Facility with First Interstate Bank of
Texas, N.A. (as agent and issuing bank), increasing the maximum amount of the working capital
revolving line of credit up to $50 million. Included under this maximum $50
million facility are subfacilities for (i) letters of credit of up to $15
million for the benefit of the Company and (ii) purchases from the Company of
conditional sales obligations of the Company's customers and making direct loans
to the Company's customers of up to $25 million (which purchases or loans by the
lender(s) will require guaranties from the Company). As of July 31, 1997, no
amounts of indebtedness were outstanding under the Credit Facility and $37.7
million was available for borrowings under the revolving facility.
The loan agreement contains restrictive covenants in favor of the
lender(s), including limitations on future indebtedness of the Company,
restrictions on business combinations involving the Company and its
subsidiaries, post-default limitations on dividends and other distributions
payable in cash or property, a $25 million per fiscal year limitation on the
amounts of certain investments by the Company, and limitations on capital
expenditures of $30 million per fiscal year (which does not include $20 million
in connection with the financing of the construction of the Company's new plant
and related facilities in Stafford, Texas). See Item 2. "Facilities". The loan agreement also contains
provisions requiring the Company to maintain a consolidated tangible net worth
in an amount not less than $180 million, limitations on the ratio of
indebtedness to consolidated net worth and a
13
provision requiring the ratio of consolidated liabilities to consolidated net
worth to not exceed .50 to 1. See also Notes 4,5 and 6 of Notes to Consolidated
Financial Statements.
Certain of the Company's international sales in developing countries, such
as the Commonwealth of Independent States, have been made on extended-term
arrangements. Political and economic instabilities in certain of these countries
as well as changes in internal laws and policies affecting trade and investment
in these markets may have the effect of increasing the Company's credit risk
with regards to the receivables resulting from these sales.
The Company has from time to time sold and assigned certain of its
installment sales contracts and leases for its products to third-party financing
sources (or sold equipment to leasing companies which equipment is then leased
to customers), the terms of which often obligate the Company to (i) guarantee or
repurchase all or a portion of the contracts and leases in the event of a
default by the customer or upon certain other occurrences and/or (ii) assist the
financing parties in remarketing the purchased equipment to satisfy the
obligation. As of July 31, 1997, such third party financing sources had
purchased equipment contracts and leases which, in the aggregate, obligated the
Company to guarantee or repurchase up to approximately $8.2 million. Depending
upon the Company's level of exposure to these contingent obligations from time
to time, performance of the Company's obligations under a number of these
arrangements could have a material adverse effect on the Company's financial
condition and results of operation. In Juneaddition, a number of significant payment
defaults by customers could have a material adverse effect on the Company's
financial position and results of operations.
On December 6, 1996, Grant Geophysical, Inc. ("Grant"), a geophysical
services company, filed for protection under Chapter 11 of the US Bankruptcy
Code. The Company's records reflect that on the filing date the Company had
outstanding current and long-term notes and accounts receivable of approximately
$10.6 million secured by certain seismic equipment sold by the Company to Grant
and an obligation to repurchase $1.1 million in Grant debt. In addition, the
Company has guaranteed, on a partial recourse basis, certain lease obligations
owed by Grant to an institutional lender/purchaser of Company equipment for
which the Company has certain rights to purchase the lessor's interest under
certain circumstances. A proposed plan of reorganization has been filed in the
case that provides for payment in full to holders of secured claims and the
assumption of these lease obligations. If this plan is confirmed, the Company
would be repaid all or substantially all of the outstanding indebtedness owed to
it by Grant. In addition, another customer is in default to the Company with
respect to approximately $11.0 million in secured equipment purchase debt owed
to the Company. The Company has taken a charge of $11.2 million to cover
anticipated losses in connection with this trade debt. No assurance can be given
as to the amount and timing of any recovery to the Company regarding these
defaulted obligations.
In August 1996, the Company obtained a commitment for a $12.5 million ten-
yearten-year term mortgage
loan to finance the construction of the Company's new manufacturing facility in
Stafford, Texas. The loan will beis secured by the Company's land, buildings and
improvements housing its executive and research and development headquarters as
well as its adjacent new plant site.manufacturing facility. The mortgage loan will bear
interest at the rate of 7.875% per annum and is repayable in equal monthly
installments of principal and interest. Funding is
currently expectedThe promissory note contains certain
prepayment penalties. As of July 31, 1997, $11.8 million in August 1996. The commitment also requires the Company to
pledge a $6.8 million letter of credit for the benefit of theindebtedness was
outstanding under this mortgage lender as
additional security during the construction phase for the new plant, which is to
be released upon timely completion of construction in accordance with the terms
and conditions of the loan agreement.
15
The Company anticipates expenditures for the current fiscal year for
exploration and development of oil and gas properties to be $6.3 million and
expects to fund this level of expenditures through cash flows from operations.
Actual levels of exploration and development expenditures may vary significantly
due to many factors, including oil and gas prices, industry conditions, and the
success of the Company's exploration and development projects. The Company's
exploration and development projects are operated by third parties which control
the timing and amount of expenditures required to exploit the participant's
interests in these prospects. The Company's participation in oil and gas
activities is accounted for on a full cost basis.loan.
Capital expenditures for property, plant, and equipment totaled $10.2$27.0
million for fiscal 19961997 and are expected to aggregate $26.0$10.0 million for fiscal
1997.1998. The Company believes that the combination of its existing working capital,
unused credit available under its working capital credit facility, internally
generated cash flow and access to other financing sources (including sales
finance facilities), will be adequate to meet its anticipated capital and
liquidity requirements for the foreseeable future.
14
OTHER FACTORS
AFFECTING OPERATIONSIn interim and annual periods ending after December 15, 1997, the Company
will adopt Statement of Financial Accounting Standards No. 128 "Earnings per
Share". This standard specifies the compilation, presentation and disclosure
requirements for earnings per share for entities with publicly held common stock
or potential common stock. Management does not believe that the adoption of this
standard will have a material effect on the financial statements.
In interim and annual periods beginning after December 15, 1997, the
Company will adopt Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income". This statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Management does not believe that the
adoption of this standard will have a material effect on the financial
statements.
CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS
Certain statements contained in Items 1 and 7 of this Form 10-K may be
deemed to be forward-looking within the meaning of The Private Securities
Litigation Reform Act of 1995 and are subject to the "safe harbor" provisions of
that act, including without limitation, statements concerning future sales,
earnings, costs, expenses, acquisitions or corporate combinations, asset
recoveries, operations, business prospects, demand for products, industry
conditions, working capital, capital expenditures, financial condition, and
other results of operations. Such statements involve risks and uncertainties.
Actual results could differ materially from the expectations expressed in such
forward-looking statements. The Company identifies the following important risk
factors which could affect the Company's actual results and cause actual results
to differ materially from any such results which might be projected, forecast,
estimated or budgeted by the Company in such forward-looking statements:
RISK RELATED TO NEW PRODUCTS AND TECHNOLOGICAL CHANGE. The markets for the
Company's product lines are characterized by rapidly changing technology and
frequent product introductions. Whether the Company can develop and produce
successfully, on a timely basis, new and enhanced products that embody new
technology, meet evolving industry standards and practice, and achieve levels of
capability and price that are acceptable to its customers, will be significant
factors in the Company's ability to compete in the future. There can be no
assurance that the Company will not encounter resource constraints or technical
or other difficulties that could delay introduction of new products in the
future. If the Company is unable, for technological or other reasons, to develop
competitive products in a timely manner in response to changes in the seismic
data acquisition industry or other technological changes, its business and
operating results will be materially and adversely affected. In addition, the
Company's continuing development of new products inherently carries the risk of
inventory obsolescence with respect to its older products.
RISKS RELATED TO TIMING OF PRODUCT SHIPMENTS. Due to the relatively high
sales price of an I/O SYSTEM TWO (typically
ranging from $800,000 to more than $4.5 million)the Company's products and relatively low unit sales volume, the
timing in the shipment of systems and the mix of products sold can produce
fluctuations in quarter-to-quarter financial performance. See Note 13 of Notes
to Consolidated Financial Statements. One of the factors which may affect the
Company's operating results from time to time is that a substantial portion of
its net sales and other revenues in any period may result from shipments during
the latter part of a period. Because the Company establishes its sales and
operating expense levels based on its operational goals, if shipments in any
period do not meet goals, revenues and net profits may be adversely affected.
The Company believes that factors which could affect such timing in shipments
include, among others, seasonality of end-user markets, availability of
purchaser financing, manufacturing lead times, customer purchases of leased
equipment and shortages of system components. In addition, because the Company
typically operates, and expects to continue to operate, without a significant
backlog of orders for its products, the Company's manufacturing plans and
expenditure levels are based principally on sales forecasts. See Note 13forecasts, which sometimes
results in inventory excesses and imbalances from time to time.
15
RISKS RELATED TO GROSS MARGIN. The Company's gross margin percentage is a
function of Notesthe product mix sold in any period. Other factors, such as unit
volumes, inventory obsolescence, heightened price competition, changes in sales
and distribution channels, shortages in components due to Consolidated Financial
Statements.timely supplies or
ability to obtain items at reasonable prices, and availability of skilled labor,
may also continue to affect the cost of sales and the fluctuation of gross
margin percentages in future periods.
UNCERTAINTY OF ENERGY INDUSTRY CONDITIONS. Demand for the Company's
products is dependent upon the level of worldwide oil and gas exploration and
development activity. Such activity in turn is primarily dependent upon oil and
gas prices, which have been subject to wide fluctuation in recent years in
response to relatively minor changes in the supply and demand for oil and
natural gas, market uncertainty and a variety of additional factors that are
beyond the control of the Company. It is impossible to predict future oil and
natural gas price movements with any certainty. No assurances can be given as to
the future level of activity in the oil and gas exploration and development
industry and its relationship to the future demand for the Company's products.
CREDIT RISK FROM SALES ARRANGEMENTS. The Company sells to many customers
on extended-term arrangements. Moreover, in connection with certain sales of its
systems and equipment, the Company has guaranteed certain loans from
unaffiliated parties to purchasers of such systems and equipment. In addition,
the Company has sold contracts and leases to third-party financing sources, the
terms of which often obligate the Company to repurchase the contracts and leases
in the event of a customer default or upon certain other occurrences.
Performance of the Company's obligations under these arrangements could have a
material adverse effect on the Company's financial condition. A number of
significant payment defaults by customers could have a material adverse effect
on the Company's financial position and results of operations.
DISRUPTION IN VENDOR SUPPLIES. The Company's manufacturing process
requires a high volume of quality components. Certain components used by the
Company are currently provided by only one vendor. In the future, the Company
may, from time to time, experience supply or quality control problems with its
suppliers, and such problems could significantly affect its ability to meet
production and sales commitments. The Company's reliance on certain vendors, as
well as industry supply conditions generally, involve several risks, including
the possibility of a shortage or a lack of availability of key components,
increases in component costs and reduced control over delivery schedules, any of
which could adversely affect the Company's future financial results.
RELIANCE ON SIGNIFICANT CUSTOMERS. A relatively small number of customers
has accounted for most of the Company's net sales, although the degree of sales
concentration with any one customer has varied from fiscal year to year. During
fiscal 1995, 1996 and 1997 the two largest customers in each of those years
accounted for 26%, 42% and 45%, respectively, of the Company's net sales and
other revenues. The loss of any of these customers could have a material adverse
effect on the Company's sales revenues.
COMPETITION. The design, manufacture and marketing of seismic data
acquisition systems is highly competitive and is characterized by continual and
rapid changes in technology. The Company's principal competitor for land seismic
equipment is Societe d'Etudes Recherches et Construction Electroniques, an
affiliate of Compagnie General de Geophysique which, unlike the Company,
possesses the advantage of being able to sell to an affiliated seismic
contractor.
Competition in the industry is expected to intensify and could adversely
affect the Company's future results. Several of the Company's competitors have
greater name recognition, more extensive engineering, manufacturing and
marketing capabilities, and greater financial, technological and personnel
resources than those available to the Company. In addition, certain companies in
the industry have expanded their product lines or technologies in recent years
as a result of acquisitions. There can be no assurance that the Company will be
able to compete successfully in the future with existing or new competitors.
Pressures from competitors offering lower-priced products could result in future
price reductions for the Company's products.
16
RISK FROM SIGNIFICANT AMOUNT OF FOREIGN SALES. Sales outside the United
States have historically accounted for a significant part of the Company's net
sales and other revenues. Foreign sales are subject to special risks inherent in
doing business outside of the United States, including the risk of war, civil
disturbances, embargo and government activities, which may disrupt markets and
affect operating results. Foreign sales are also generally subject to the risks
of compliance with additional laws, including tariff regulations and
import/export restrictions. The Company is, from time to time, required to
obtain export licenses and there can be no assurance that it will not experience
difficulty in obtaining such licenses as may be required in connection with
export sales.
Demand for the Company's products from customers in developing countries is
difficult to predict and can fluctuate significantly from year to year. See Note
8 of Notes to Consolidated Financial Statements. The Company believes that these
changes in demand patterns result primarily from the instability of economies and
governments in certain developing countries, as well as from
changes in internal laws and
policies affecting trade and investment.investment, and because those markets are only
beginning to adopt new technologies and establish purchasing practices. These
risks may adversely affect the Company's future operating results and financial
position. In fiscal 1997,addition, sales to customers in developing countries on extended
terms can present heightened credit risks for the Company, for the reasons
discussed above.
PROTECTION OF INTELLECTUAL PROPERTY. The Company believes that technology
is the primary basis of competition in the industry. Although the Company
currently holds certain intellectual property rights relating to its product
lines, there can be no assurance that these rights will not be challenged by
third parties or that the Company will adopt SFAS No. 121, "Accounting forobtain additional patents or other
intellectual property rights in the Impairment of Long-Lived Assets and Long-Lived Assets tofuture. Additionally, there can be Disposed of." This
standard requires that long-lived assets and certain identified intangibles held
and used by an entity be reviewed for impairment whenever events indicate the
carrying amount of an asset may not be recoverable. Management believesno
assurance that the adoption of this standardCompany's efforts to protect its trade secrets will be
successful or that others will not materially affect reported earnings,
financial conditionindependently develop products similar to the
Company's or cash flows.
In fiscal 1997,design around any of the intellectual property rights owned by the
Company.
DEPENDENCE ON PERSONNEL. The Company's success depends upon the continued
contributions of its personnel, many of whom would be difficult to replace. The
success of the Company will adopt SFAS No. 123 "Accountingdepend on the ability of the Company to attract and
retain skilled employees. Changes in personnel, therefore, could adversely
affect operating results.
RISKS RELATED TO GOVERNMENT REGULATIONS AND PRODUCT CERTIFICATION. The
Company's operations are also subject to laws, regulations, government policies,
and product certification requirements worldwide. Changes in such laws,
regulations, policies, or requirements could affect the demand for Stock-
Based Compensation." This standard establishesthe Company's
products or result in the need to modify products, which may involve substantial
costs or delays in sales and could have an adverse effect on the Company's
future operating results.
RISKS OF STOCK VOLATILITY AND ABSENCE OF DIVIDENDS. In recent years, the
stock market in general and the market for energy and technology stocks in
particular, including the Company's common stock, have experienced extreme price
fluctuations. There is a fair value method for
accounting for stock-based compensation plans either through recognitionrisk that stock price fluctuation could impact the
Company's operations. Changes in the price of the Company's common stock could
affect the Company's ability to successfully attract and retain qualified
personnel or disclosure.complete desirable business combinations or other transactions in
the future. The Company intendshas historically not paid cash dividends on its capital
stock, and there can be no assurances that the Company will do so.
RISKS RELATED TO ACQUISITIONS. To implement its business plans, the
Company may make further acquisitions in the future. Acquisitions require
significant financial and management resources both at the time of the
transaction and during the process of integrating the newly acquired business
into the Company's operations. The Company's operating results could be
adversely affected if it is unable to adoptsuccessfully integrate such new companies
into its operations. Certain acquisitions or strategic transactions may be
subject to approval by the standardother party's board or shareholders, domestic or
foreign governmental agencies, or other third parties. Accordingly, there is a
risk that important acquisitions or transactions could fail to be concluded as
planned.
17
Future acquisitions by disclosing the proforma
netCompany could also result in issuances of equity
securities or the rights associated with the equity securities, which could
potentially dilute earnings per share. In addition, future acquisitions could
result in the incurrence of additional debt, taxes, or contingent liabilities,
and amortization expenses related to goodwill and other intangible assets. These
factors could adversely affect the Company's future operating results and
financial position.
OIL AND GAS OPERATIONS. The Company's oil and gas operations are subject to
the economic risks typically associated with exploration, development, and
production activities, including the necessity of significant expenditures to
drill exploratory wells. In conducting exploration and development activities,
the Company may drill unsuccessful wells and experience losses and changes to
earnings and, earnings per share amounts assumingif oil or natural gas is discovered, there can be no assurance
that such oil or natural gas can be economically produced or satisfactorily
marketed. Historically, the fair value method was
adopted June 1, 1996. The adoption of this standardmarkets for oil and natural gas have been volatile
and are likely to continue to be volatile in the opinionfuture. The nature of management
willthe oil
and gas business involves certain operating hazards such as well blowouts,
cratering, explosions, uncontrollable flows of oil, natural gas or well fluids,
fires, formations with abnormal pressures, pollution, releases of toxic gas and
other environmental hazards and risks, any of which could result in losses to
the Company. While the Company's current practice is not to act as operator of
any drilling prospect, and while the Company does maintain insurance in
accordance with customary industry practices under the circumstances against
some, but not all, of such risks and losses, the occurrence of such an event not
fully covered by insurance could have a material impact on results of operations, financial condition or
cash flows.
Management does not believe that inflation has had a material impactadverse affect on the Company's
businessfinancial position and results of operation.
The foregoing review of factors pursuant to the Private Securities
Litigation Reform Act of 1995 should not be construed as exhaustive. In
addition to the foregoing, the Company wishes to refer readers to the Company's
other filings and reports with the Securities and Exchange Commission, including
its recent reports on Forms 10-Q, for a further discussion of risks and
uncertainties which could cause actual results to differ materially from those
contained in forward-looking statements. The Company undertakes no obligation to
publicly release the result of any revisions to any such forward-looking
statements which may be made to reflect the events or operations.
16
circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item begin at page F-1 hereof.
Form 11-K Information. The Company, pursuant to Rule 15d-21 promulgated
under the Securities Exchange Act of 1934, as amended, will file as an amendment
to this Annual Report on Form 10-K the information, financial statements and
exhibits required by Form 11-K with respect to the Input/Output, Inc. Employee
Stock Purchase Plan.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
P A R T I I I
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is contained in the Company's
definitive Proxy Statement to be distributed in connection with its 19961997 Annual
Meeting of Stockholders under the captioncaptions "Management" and "Voting and Stock
Ownership of Management and Principal Stockholders" and is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is contained in the Company's
definitive Proxy Statement to be distributed in connection with its 19961997 Annual
Meeting of Stockholders under the caption "Remuneration of Directors and
Officers" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is contained in the Company's
definitive Proxy Statement to be distributed in connection with its 19961997 Annual
Meeting of Stockholders under the caption "Voting and Stock Ownership of
Management and Principal Stockholders" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
17
P A R T IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents Filed.
(1) Financial Statements:
The financial statements filed as part of this report are listed
in the "Index to Consolidated Financial Statements" on page F-1
hereof.
(2) Financial Statement Schedules:
Not applicable.The following financial statement schedule is included as part of
this Annual Report on Form 10-K:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are inapplicable or
the requested information is shown in the financial statements or
noted therein.
(3) Exhibits:
3.1 -- Amended--Amended and Restated Certificate of Incorporation, filed
as Exhibit 3.1 to the Company's Annual Report on Form 10-K
for the fiscal year ended May 31, 1995 and incorporated
herein by reference.
3.2 --19
*3.2 --Certificate of Amendment to the Amended and Restated
Certificate of Incorporation, dated October 11, 1996.
3.3 --Amended and Restated Bylaws, filed as Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1995 and incorporated herein by reference.
4.1 --Form of Certificate of Designation, Preferences and Rights
of Series A Preferred Stock of Input/Output, Inc., filed
as Exhibit 2 to the Company's Registration Statement on
Form 8-A dated January 27, 1997 (attached as Exhibit 1 to
the Rights Agreement referenced in Exhibit 10.24) and
incorporated herein by reference.
10.2 -- Royalty--Royalty Agreement, dated November 6, 1992, between I/O
Sensors, Inc., Triton and Triton Technologies, Inc., filed
as Exhibit 10.2 to the 1993 Form 10-K and incorporated
herein by reference.
**10.3 -- 1990--1990 Restricted Stock Plan, filed as Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1995 and incorporated herein by reference.
***10.4 -- Amended--Amended and Restated 1990 Stock Option Plan, filed as Exhibit 4.2 to the
Company's Registration Statement on Form S-8 (Registration
No. 33-85304) filed with the Securities and Exchange
Commission on October 19, 1994, and incorporated herein by
reference.Plan.
***10.5 -- Input/--Input/Output, Inc. Amended1996 Management Incentive Plan, filed
as Exhibit 10.5 to the Company's Annual Report on Form 10-K
for the fiscal year ended May 31, 1995 and incorporated
herein by reference.Program.
10.6 -- Input/--Input/Output, Inc. 401(k) Plan, filed as Exhibit 10.6 to
the Company's Annual Report on Form 10-K for the fiscal
year ended May 31, 1995 and incorporated herein by
reference.
***10.7 ----Amended Directors Retirement Plan, filed as Exhibit 10.7 to the
Company's Registration Statement on Form S-1 (Registration
No. 33-49660) (the "1992 Form S-1") and incorporated herein
by reference.Plan.
**10.8 -- Amended--Amended and Restated 1991 Directors Stock Option Plan,
filed as Exhibit 4.3 to the Company's Registration
Statement on Form S-8 (Registration No. 33-85304) filed
with the Securities and Exchange Commission on October 19,
1994, and incorporated herein by reference.
***10.9 ----Amendment to the Amended and Restated 1991 Directors Stock
Option Plan.
***10.10 --Supplemental Executive Retirement Plan.
***10.11 --Amendment No. 1 to the Company's Supplemental Executive
Retirement Plan, filed as Exhibit 10.9effective January 17, 1997.
***10.12 --Supplemental Executive Retirement Trust.
***10.13 --Amendment No. 1 to the 1992 Form S-1, and incorporated herein by reference.
**10.10 --Company's Supplemental Executive
Retirement Trust, filed as Exhibit
10.10 to the 1992 Form S-1, and incorporated herein by
reference.effective January 17, 1997.
**10.11 -- Employment10.14 --Employment Agreement, dated February 6, 1991, between the
Company and Robert P. Brindley, filed as exhibit 10.11 to
the Company's Annual Report on Form 10-K for the fiscal
year ended May 31, 1995 and incorporated herein by
reference.
18
**10.12 --*10.15 --Amendment No. 1 to Employment Agreement dated February 6, 1991, between the
Company and Gary D. Owens, filed as Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the fiscal year
ended MayRobert P. Brindley dated March 31, 1995 and incorporated herein by reference.
**10.13 -- Employment Agreement, dated February 6, 1991, between the
Company and Michael J. Sheen, filed as Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1995 and incorporated herein by reference.
10.15 -- Asset1997.
10.16 --Asset Purchase Agreement dated June 30, 1995, by and
between Input/Output, Inc., I/O Exploration Products
(U.S.A.), Inc. and Western Atlas International, Inc. filed
as Exhibit 10.1 to the Company's Form 8-K dated June 30,
1995 and incorporated herein by reference.
10.16 -- Product10.17 --Product Purchase Agreement dated June 30, 1995, by and
between Input/Output, Inc., I/O Exploration Products
(U.S.A.), Inc. and Western Atlas International, Inc. filed
as Exhibit 10.2 to the Company's Form 8-K dated June 30,
1995 and incorporated herein by reference.
*10.17 -- Credit20
10.18 --Credit Agreement dated May 7, 1996, by and between
Input/Output, Inc. and Wells Fargo Bank N.A. (formerly
known as First Interstate Bank of Texas, N.A.
10.18 -- Program and Remarketing Agreement dated as of May 25, 1995
among the Company, Global Charter Corporation, Input/Output
of Canada, Inc., Newcourt Financial USA, Inc. and Newcourt
Credit Group, Inc.,) filed as
Exhibit 10.1810.17 to the Company's Annual Report on Form 10-K
for the fiscal year ended May 31, 1995 and incorporated herein by reference.1996.
10.19 -- Amended and Restated Remarketing and Deficiency Support
Agreement dated July 27, 1995 among the Company, Dresdner
Bank Canada, Capilano International, Inc. Capilano
Geophysical, Inc. and Capilano International Argentina S.A.,
filed as Exhibit 10.19 to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1995 and
incorporated herein by reference.
*10.20 -- Master--Master Letter of Credit Agreement dated April 16, 1996,
between the Company and ABN AMRO Bank N.V. Houston Agency.Agency
filed as Exhibit 10.20 to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1996.
10.20 --Promissory Note dated August 29, 1996 executed by IPOP
Management, Inc. to the order of The Variable Annuity Life
Insurance Company, filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
August 31, 1996 and incorporated herein by reference.
10.21 --Master Commercial Lease Agreement dated August 29, 1996,
by and between IPOP Management, Inc. and The Variable
Annuity Life Insurance Company, filed as Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 1996 and incorporated herein by
reference.
10.22 --Limited Guaranty dated August 29, 1996, executed by
Input/Output, Inc., filed as Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
August 31, 1996 and incorporated herein by reference.
***10.23 --Input/Output, Inc. 1996 Non-Employee Director Stock Option
Plan.
10.24 --Rights Agreement, dated as of January 17, 1997, by and
between Input/Output, Inc. and Harris Trust and Savings
Bank, as Rights Agent, including exhibits thereto, filed
as Exhibits 4 to the Company's Form 8-A dated January 27,
1997 and incorporated herein by reference.
10.25 --Input/Output, Inc. Employee Stock Purchase Plan, filed as
Exhibit 4.4 to the Company's Registration Statement on
Form S-8 (Registration No. 333-24125) filed with the
Securities and Exchange Commission on March 18, 1997 and
incorporated herein by reference.
***10.26 --Employment Agreement, effective as of May 16, 1997,
between the Company and Charles E. Selecman.
*11.1 -- Earnings--Earnings Per Share Computation.
*21.1 -- Subsidiaries--Subsidiaries of the Company.
*23.1 -- Consent--Consent of KPMG Peat Marwick LLP.
*24.1 -- The--The Power of Attorney is set forth on the signature page
hereof.
*27.1 -- Financial--Financial Data Schedule.
99.1 --Information required by Form 11-K with respect to the
Input/Output, Inc. Employee Stock Purchase Plan will be
filed as an amendment to this Annual Report on Form 10-K
within 120 days of the end of the fiscal year of the plan
as permitted by Rule 15d-21 under the Securities Exchange
Act of 1934, as amended.
* Filed herewithherewith.
** Management contract or compensatory plan or arrangement.
*** Management contract or compensatory plan or arrangement filed herewith.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by Input/Output, Inc. during
the quarter ended May 31, 1996 .1997.
(c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K.
Reference is made to subparagraph (a) (3) of this Item 14 which
is incorporated herein by reference.
(d) NOT APPLICABLE.
1921
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF
STAFFORD, STATE OF TEXAS, ON JULY 12, 1996.AUGUST 27, 1997.
Input/Output, Inc.
By /s/ Gary D. Owens
-------------------------------------
GARY D. OWENS,Charles E. Selecman
-----------------------------------
CHARLES E. SELECMAN,
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Gary D. OwensCharles E. Selecman and Robert P. Brindley and
each of them, as true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities, to sign any and all documents relating to the Annual Report
on Form 10-K, including any and all amendments and supplements thereto, for the
fiscal year ended May 31, 1996,1997, and to file the same with all exhibits thereto
and other documents in connection therewith with the Securities and Exchange
Commission granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully as to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or their or his substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
ANNUAL REPORT ON FORM 10-K HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON
BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
NAME CAPACITIES DATE
/s/ Charles E. Selecman Chairman of the Board July 12, 1996
- ----------------------------
CHARLES E. SELECMAN
/s/ Gary D. Owens Director, President July 12, 1996
- ---------------------------- and Chief Executive Officer
GARY D. OWENS (Principal Executive Officer)
/s/ Robert P. Brindley Director, Senior Vice President, July 12, 1996
- ---------------------------- Chief Financial Officer and
ROBERT P. BRINDLEY Secretary (Principal Financial
and Accounting Officer)
/s/ Shelby H. Carter, Jr. Director July 12, 1996
- ----------------------------
SHELBY H. CARTER, JR.
/s/ Ernest E. Cook Director July 12, 1996
- ----------------------------
ERNEST E. COOK
/s/ Glen H. Denison Director July 12, 1996
- ----------------------------
GLEN H. DENISON
/s/ Theodore H. Elliott, Jr. Director July 12, 1996
- ----------------------------
THEODORE H. ELLIOTT, JR.
/s/ Dr. Peter T. Flawn Director July 12, 1996
- ----------------------------
DR. PETER T. FLAWN
/s/ G. Thomas Graves III Director July 12, 1996
- ----------------------------
NAME CAPACITIES DATE
---- ---------- ----
/s/ Charles E. Selecman Chairman, President August 27, 1997
- -------------------------------- and Chief Executive Officer
CHARLES E. SELECMAN (Principal Executive Officer)
/s/ Robert P. Brindley Director, Executive Vice President, August 27, 1997
- -------------------------------- Chief Financial Officer and Secretary
ROBERT P. BRINDLEY (Principal Financial and
Accounting Officer)
/s/ Shelby H. Carter, Jr. Director August 27, 1997
- --------------------------------
SHELBY H. CARTER, JR.
/s/ Ernest E. Cook Director August 27, 1997
- --------------------------------
ERNEST E. COOK
/s/ Glen H. Denison Director August 27, 1997
- --------------------------------
GLEN H. DENISON
/s/ Theodore H. Elliott, Jr. Director August 27, 1997
- --------------------------------
THEODORE H. ELLIOTT, JR.
/s/ G. Thomas Graves III Director August 27, 1997
- --------------------------------
G. THOMAS GRAVES III
/s/ Michael J. Sheen Director, Senior Vice President July 12, 1996
- ---------------------------- and Chief Technical Officer
MICHAEL J. SHEEN
20
22
INPUT/OUTPUT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Input/Output, Inc. and Subsidiaries: Page
----
Independent Auditors' Report
Input/Output, Inc. and Subsidiaries: Page
----
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets -- May 31, 1997 and 1996. . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations --Years Ended May 31, 1997, 1996 and 1995 . . . F-4
Consolidated Statements of Stockholders' Equity - Years Ended May 31, 1997, 1996
and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows -- Years Ended May 31, 1997, 1996 and 1995 . . F-6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets -- May 31, 1996 and 1995 . . . . . . F-3
Consolidated Statements of Operations --
Years Ended May 31, 1996, 1995 and 1994. . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity --
Years Ended May 31, 1996, 1995 and 1994. . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows --
Years Ended May 31, 1996, 1995 and 1994. . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . F-7
Schedule II - Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . F-18
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Input/Output, Inc.:
We have audited the consolidated financial statements of Input/Output, Inc.
and subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Input/Output, Inc. and subsidiaries as of May 31, 19961997 and 1995,1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended May 31, 1996,1997, in conformity with generally accepted accounting
principles. As discussedAlso in Note 1our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Standards No. 109 "Accounting for Income Taxes", on June
1, 1993.
/s/ KPMG Peat Marwick LLPinformation set forth
therein.
KPMG PEAT MARWICK LLP
Houston, Texas
June 24, 199630, 1997
F-2
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS May 31,
-----------------------
1997 1996 1995
-------- --------
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$2,573 $34,252 $57,392
Trade accounts receivable, less allowance for doubtful accounts of $1,740
and $470 in 1997 and $1001996, respectively. . . . . . . . . . . . . . . . . . 61,788 42,989
Trade notes receivable, less allowance for doubtful notes of $7,078 and $728
in 1997 and 1996, and 1995, respectively. respectively (note 3). . . . . . . . . . . . . . . . . . 27,800 28,424
Income taxes receivable (note 9). . . . . . . . . . . . . . . . . . . . . 42,989 28,784
Trade notes receivable, less allowance for doubtful notes
of $728 and $125 in 1996 and 1995, respectively (note 3) . . . . . . . . . . . . . 28,424 5,1562,403 --
Inventories (note 2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106,337 92,787 28,032
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,939 2,004 1,467
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .202,840 200,456 120,831
Long-term trade notes receivable (note 3). . . . . . . . . . . . . . . . . . . . . . . .27,003 16,678 2,470
Deferred income tax asset (note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . .3,097 1,062 --
Property, plant and equipment, net (note 4). . . . . . . . . . . . . . . . . . . . . . .78,376 56,035 24,079
Goodwill, net of accumulated amortization of $8,001 and
$4,115 in 1997 and $654 in 1996, and 1995, respectively . . . . . . . . . . . . . . . . . . . . . . . . .61,024 64,200 4,724
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12,318 17,034 13,383
-------- --------
$384,658 $355,465 $165,487
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, principally trade . . . . . . . . . . . . . . . . . . . . . . . . .$13,143 $19,518 $8,357
Accrued expenses (note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,358 13,751
Current installments of debt (note 6) . . . 13,751 6,861. . . . . . . . . . . . . . . . . . 912 --
Income taxes payable (note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . .-- 1,962 705
-------- --------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . 32,413 35,231
Long-term debt (note 6). . 35,231 15,923. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,000 --
Other liabilities (note 11). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2,631 3,030 2,287
Deferred income tax liability (note 9) . . . . . . . . . . . . . . . . . . . . . . . . . -- 565
Commitments and contingencies (notes 10, 11 and 12)
Stockholders' equity (note 7):
Preferred stock, $.01 par value; authorized 5,000,000 shares, none issued . . . . . . -- --
Common stock, $.01 par value; authorized 50,000,000 shares; issued
43,280,851 shares in 1997 and 42,969,676 shares in 1996 and 36,275,876 shares in 1995. . . . . . . . . . . . . .433 430 363
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .218,973 214,259 83,045
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .121,116 104,145 65,658
Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . .(1,673) (762) 206
Unamortized restricted stock compensation . . . . . . . . . . . . . . . . . . . . . .(235) (868) (2,560)
-------- --------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . .338,614 317,204 146,712
-------- --------
$384,658 $355,465 $165,487
-------- --------
-------- --------
See accompanying notes to consolidated financial statements.
F-3
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Years ended May 31,
------------------------------------------------------------------------------
1997 1996 1995
1994
---------- ---------- ------------------ -------- --------
Net sales and other revenues (notes 8 and 10). . . . . . . . . . . .$281,845 $278,283 $134,698 $95,752
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . .183,438 163,811 71,440
50,560
---------- ---------- ------------------ -------- --------
Gross profit..profit. . . . . . . . . . . . . . . . . . . . . . . . . .98,407 114,472 63,258
45,192
---------- ---------- ------------------ -------- --------
Operating expenses:
Research and development. . . . . . . . . . . . . . . . . . . . .22,967 23,243 11,400 7,931
Marketing and sales . . . . . . . . . . . . . . . . 13,288 12,027 6,789
General and administrative. . . . . . . . 12,027 6,789 4,673
General and administrative.. . . . . 20,592 19,096 11,817
Non-recurring items . . . . . . . . . . . . . . . . . . . 19,096 11,817 8,98015,594 -- --
Amortization of identified intangibles. . . . . . . . . . . . . .4,551 4,305 1,331
762
---------- ---------- ------------------ -------- --------
Total operating expensesexpenses. . . . . . . . . . . . . . . . . . . . .76,992 58,671 31,337
22,346
---------- ---------- ------------------ -------- --------
Earnings from operations . . . . . . . . . . . . . . . . . . . . . .21,415 55,801 31,921 22,846
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . .(793) (2,515) (30) (160)
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . .3,675 3,091 3,944
1,466
---------- ---------- ------------------ -------- --------
Earnings before income taxes . . . . . . . . . . . . . . . . . . . .24,297 56,377 35,835 24,152
Income taxes (note 9). . . . . . . . . . . . . . . . . . . . . . . .7,700 17,700 11,335
7,589
---------- ---------- ------------------ -------- --------
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 16,597 $ 38,677 $ 24,500
$ 16,563
---------- ---------- ----------
---------- ---------- ------------------ -------- --------
-------- -------- --------
Earnings per common share. . . . . . . . . . . . . . . . . . . . . . $ 0.94.38 $ 0.66.94 $ 0.53
---------- ---------- ----------
---------- ---------- ----------.66
-------- -------- --------
-------- -------- --------
Weighted average number of common and
common equivalent shares outstanding . . . . . . . . . 43,819,595 41,125,286 37,381,458 31,448,262
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to consolidated financial statements.
F-4
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 1997, 1996, 1995, AND 19941995
(IN THOUSANDS, EXCEPT SHARE DATA)
Unamortized
Common stock Additional Cumulative restrictedUnamortized Total
-------------------------------------------- paid-in Retained Translation restricted stock stockholders'
Shares Amount capital earnings Adjustment compensation equity
---------- ------ ---------- ---------- ---------- ---------- -------------------- ----------- ---------------- -------------
Balance at May 31, 19931994. . 29,948,320 $299 $24,745 $24,782 $ -- ($1,949) $47,877
Restricted stock issued. . 344,000 3 4,104 -- -- (4,107) --35,507,676 $355 $78,571 $41,345 $-- $(4,612) $115,659
Amortization of restricted
stock compensation . . . -- -- -- -- -- 1,444 1,444
Public offering. . . . . . 4,600,000 46 47,854 -- -- -- 47,900
Exercise of stock options. 539,600 6 1,396 -- -- -- 1,402
Business acquisition . . . 75,756 1 472 -- -- -- 473
Net earnings . . . . . . . -- -- -- 16,563 -- -- 16,563
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at May 31, 1994. . 35,507,676 355 78,571 41,345 -- (4,612) 115,659
Amortization of restricted
stock compensation . . . -- -- -- -- -- 2,052 2,052
Exercise of stock options.options
and related tax benefits . . 768,200 8 4,604 -- -- -- 4,612
Equity reduction for SERP
Plan . . . . . . . . . . . -- -- -- (187) -- -- (187)
Translation adjustment . . . -- -- -- -- 206 -- 206
Public offering. . . . . . . -- -- (130) -- -- -- (130)
Net earnings . . . . . . . . -- -- -- 24,500 -- -- 24,500
---------- ---------- ---------- ---------- ---------- ---------- -------------- -------- -------- ------- ------ --------
Balance at May 31, 1995. . . 36,275,876 363 83,045 65,658 206 (2,560) 146,712
Amortization of restricted
stock compensation . . . . -- -- -- -- -- 1,692 1,692
Exercise of stock options.options
and related tax benefits . . 943,800 9 11,502 -- -- -- 11,511
Equity reduction for SERP
Plan . . . . . . . . . . . -- -- -- (187) -- -- (187)
Equity reduction for
Outside Directors
Retirement Plan. . . . . . -- -- -- (3) -- -- (3)
Translation adjustment . . . -- -- -- -- (968) -- (968)
Public offering. . . . . . . 5,750,000 58 119,712 -- -- -- 119,770
Net earnings . . . . . . . . -- -- -- 38,677 -- -- 38,677
---------- ---------- ---------- ---------- ---------- ---------- -------------- -------- -------- ------- ------ --------
Balance at May 31, 1996. . . 42,969,676 $430 $214,259430 214,259 104,145 ($762) ($868) $317,204(762) (868) 317,204
Amortization of restricted
stock compensation . . . . -- -- -- -- -- 633 633
Exercise of stock options
and related tax benefits . . 311,175 3 4,714 -- -- -- 4,717
Equity increase for SERP
Plan . . . . . . . . . . . -- -- -- 375 -- -- 375
Equity reduction for
Outside Directors
Retirement Plan. . . . . . -- -- -- (1) -- -- (1)
Translation adjustment . . . -- -- -- -- (911) -- (911)
Net earnings . . . . . . . . -- -- -- 16,597 -- -- 16,597
---------- ---- -------- -------- ------- ------ --------
Balance at May 31, 1997. . . 43,280,851 $433 $218,973 $121,116 $(1,673) $(235) $338,614
---------- ---- -------- -------- ------- ------ --------
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- -------------- -------- -------- ------- ------ --------
See accompanying notes to consolidated financial statements.
F-5
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years ended May 31,
---------------------------------------------------------------------------
1997 1996 1995
1994
-------- -------- --------------- ------- -------
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,597 $38,677 $24,500 $16,563
Adjustments to reconcile net earnings to net cash
(used in) provided byused in operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . 12,558 10,152 3,570 1,877
Amortization of restricted stock compensation. . . . . . . . 633 1,692 2,052 1,444
Deferred income taxes. . . . . . . . . . . . . . . . . . . . (2,035) (1,627) (624) 32
Pension costs. . . . . . . . . . . . . . . . . . . . . . . . 96 90 284
242Non-recurring items. . . . . . . . . . . . . . . . . . . . . 15,594 -- --
Changes in assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . . . (38,784) (47,157) (32,293) (38)
Inventories . . . . . . . . . . . . . . . . . . . . . . . (13,550) (29,094) (5,920) (5,172)
Leased equipment. . . . . . . . . . . . . . . . . . . . . (3,208) 1,332 (2,841) 1,295
Accounts payable and accrued expenses . . . . . . . . . . (2,866) 7,224 3,099 4,256
Income taxes payable. . . . . . . . . . . . . . . . . . . (4,365) (555) (1,097) 151
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (614) (1,743) (1,185)
(1,178)
-------- -------- --------------- ------- -------
Net cash (used in) provided byused in operating activities.activities . . . . . . . . . (19,944) (21,009) (10,455)
19,472
-------- -------- --------------- ------- -------
Cash flows from investing activities:
Purchase of property, plant and equipment.equipment . . . . . . . . . . . . (26,966) (10,240) (5,979) (4,010)
Acquisition of net assets and businessbusiness. . . . . . . . . . . . . . .(595) (120,467) (5,500) (5,363)
Purchase of short-term investments .investments. . . . . . . . . . . . . . . . -- -- (65,308) (49,103)
Maturities of short-term investments .investments. . . . . . . . . . . . . . . -- -- 114,411 --
Investments in other assets.assets . . . . . . . . . . . . . . . . . . . (190) (2,549) (3,697)
(1,702)
-------- -------- --------------- ------- -------
Net cash (used in) provided by investing activities.activities . . (27,751) (133,256) 33,927
(60,178)
-------- -------- --------------- ------- -------
Cash flows from financing activities:
BorrowingBorrowings from bank. . . . . . . . . . . . . . . . . . . . . . . .23,850 97,800 -- --
Payments on long-term debtdebt. . . . . . . . . . . . . . . . . . . . . . . . . (11,938) (97,800) (591) (3,797)
Proceeds from sales of notes receivable.receivable . . . . . . . . . . . . . -- -- 20,717 --
Proceeds from exercise of stock options.options and related tax benefit . . . . . . . . . . . . .4,717 11,511 4,612 1,402
Net proceeds from public offeringsofferings. . . . . . . . . . . . . . . . .-- 119,770 (130)
47,900
-------- -------- --------------- ------- -------
Net cash provided by financing activities.activities . . . . . . . 16,629 131,281 24,608
45,505
-------- -------- --------------- ------- -------
Effect of foreign currency exchange rates. . . . . . . . . . . . . . (613) (156) (1)
--
-------- -------- --------------- ------- -------
Net (decrease) increase in cash and cash equivalents . . . . . . . . (31,679) (23,140) 48,079 4,799
Cash and cash equivalents at beginning of year . . . . . . . . . . . 34,252 57,392 9,313
4,514
-------- -------- --------------- ------- -------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . $2,573 $34,252 $57,392
$9,313
-------- -------- --------
-------- -------- --------------- ------- -------
------- ------- -------
See accompanying notes to consolidated financial statements.
F-6
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION AND GENERAL
The consolidated financial statements include the accounts of Input/Output,
Inc. and its wholly-owned subsidiaries (the "Company"). All significant
intercompany balances and transactions have been eliminated in consolidation.
The Company designs, manufactures and markets seismic data acquisition
systems and peripheral seismic instruments for the oil and gas exploration and
production industry worldwide. Net sales and other operating revenues consist
primarily of net sales of products.
(b) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
(c) INVENTORIES
Inventories are stated at the lower of cost (primarily first-in, first-out)
or market. Revenue from the sale of products is recognized at the time of
shipment. The Company's obsolescence policy is to reserve for components that
have not been used in three years. The Company's components do not have an
ongoing service requirement.
(d) PROPERTY, PLANT AND EQUIPMENT
Plant and equipment are recorded at cost and depreciated principally on a
straight-line basis using estimated useful lives as follows: building - 25
years, machinery and equipment - five to eight years and other - three to eight
years. Repairs and maintenance are expensed as incurred. Gains and losses on
sales and retirements are recognized on disposal.
In fiscal 1997, the Company will adopt SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of." This
standard requires that long-lived assets and certain identified intangibles held
and used by an entity be reviewed for impairment whenever events indicate the
carrying amount of an asset may not be recoverable. Management believes that the
adoption of this standard will not materially affect reported earnings,
financial condition or cash flows.
(e) GOODWILL
Goodwill results from business acquisitions and represents the excess of
acquisition costs over the fair value of the net assets of businesses acquired.
Goodwill is amortized on a straight-line basis over 85 to 20 years. The Company
measures goodwill annually using undiscounted cash flows to assess
recoverability. The Company believes that no impairment of goodwill exists.
Accumulated amortization was $4,115,000 and $654,000 at May 31, 1996 and 1995,
respectively.
(f) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at discrete points in time based on relevant
market information. These estimates may be subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision.
F-7
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company believes that the carrying amounts of its current assets,
current liabilities, and long-term notes receivable and long-term debt approximate
the fair value of such items.
(g) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
F-7
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(h) REVENUE RECOGNITION
The Company recognizes revenue at the shipment date. No right of return
exists regarding any product(s) sold by the Company.
(i) PRODUCT WARRANTIES
The Company warrants that all equipment manufactured by it will be free
from defects in workmanship, in material and parts ranging from 90 days to three
years from the date of original purchase depending on the product.
For new customers, the Company provides operator training, as well as
start-up and on-site support. The Company provides for estimated training,
installation and warranty costs as a charge to cost of sales at the time of
sale.
(j) INCOME TAXES
As of June 1, 1993, the Company adopted the Financial Accounting Standards
Board (FASB) Statement 109, "Accounting for Income Taxes". FASB 109 requires
deferred tax assets and liabilities be recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to be recovered or settled. Under FASB 109 the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that included the enactment date. The adoption of FASB 109 had no
cumulative effect on the financial statements.
(k) EARNINGS PER COMMON SHARE
Earnings per common share are based on the weighted average number of
shares of common stock outstanding during the respective years (41,125,286
shares in 1996, 37,381,458 shares in 1995; and 31,448,262 shares in 1994) after giving
retroactive effect to the changes in capital structure discussed in Note 7. For
purposes of the computations, restricted stock has been added as a common stock
equivalent as of the date of grant. Stock options have been included from the
date of their issuance due to the dilutive effect on the computation.
(l)In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123). SFAS 123 allows a company to adopt a fair value based
method of accounting for its stock-based compensation plans, or to continue to
follow the intrinsic value method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to
Employees".
The Company has elected to continue to follow APB Opinion No. 25. If the
Company had adopted SFAS 123 the Company's net earnings and earnings per share
for the years ended May 31, 1997 and 1996 would have been reduced as discussed
in Note 7.
(k) FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries are generally translated at
current exchange rates and related translation adjustments are reported as a
component of stockholders' equity. Statements of operations are translated at
the average rates during the period.
F-8
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(m)(l) STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information follows (in
thousands):
Cash paid during the year for: 1997 1996 1995
1994
------- -------- -------
-------
Interest.Interest (net of amounts capitalized) . . . . . . . . . . . . . . . . .$ 752 $ 2,515 $ 30
$ 160------- -------- -------
------- -------
------- --------------- -------
Income taxes. . . . . . . . . . . . . . . . $10,692$11,470 $ 10,692 $10,255
$ 7,256------- -------- -------
------- -------- -------
------- ------- -------
Non-cash investing and financing activities:
Restricted stock issued:
Increase in common stock
Increase in paid in capital . . . . . . . . . $F-8
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- $ -- $ 2
. . . . . . . . . . . . . . . . . . . . . . . -- -- 4,105
Increase in unamortized restricted
stock compensation . . . . . . . . . . . . -- -- (4,107)
------- ------- -------
------- ------- -------
$ -- $ -- $ --
------- ------- -------
------- ------- -------
Issuance of common stock in connection with
business acquisition (75,756 shares) . . . . $ -- $ -- $ 473
------- ------- -------
------- ------- -------
(n)(Continued)
(m) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(o)(n) RECLASSIFICATION
Certain amounts previously reported in the financial statements have been
reclassified to conform to the current year presentation.
(O) RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). SFAS
128 specifies the compilation, presentation and disclosure requirements for
earnings per share for entities with publicly held common stock or potential
common stock. The requirements of this statement will be effective for interim
and annual periods ending after December 15, 1997. Management does not believe
that the implementation of SFAS 128 will have a material effect on the financial
statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130). SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The requirements of this statement will be effective for both interim and annual
periods beginning after December 15, 1997. Management does not believe that the
implementation of SFAS 130 will have a material effect on the financial
statements.
(2) INVENTORIES
A summary of inventories, net of reserves,
follows (in thousands):
1997 1996
1995
------- ------------- ------
Raw Materials. . . . . . . . . . . . . . . $56,573 $47,280 $17,024
Work-in-process. . . . . . . . . . . . . . 23,878 29,016 10,103
Finished goods . . . . . . . . . . . . . . 25,886 16,491
905------ ------
$106,337 $92,787
-------- -------
-------- -------
$92,787 $28,032
------- -------
------- -------
F-9
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(3) TRADE NOTES RECEIVABLE
The current and long-term trade notes receivable at May 31, 19961997 are
secured by seismic equipment sold by the Company, bearing interest at rates
ranging from 7% to 12% and are due at various dates to 2000.2001. In assessing the
exposure to loss, management has considered the financial capabilities of the
borrowers to repay the notes and the net realizable value of the equipment
securing the notes. See Note 12.
F-9
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
On December 6, 1996, Grant Geophysical, Inc. ("Grant"), an international
geophysical services company, filed for protection under Chapter 11 of the US
Bankruptcy Code. The Company's records reflect that on the filing date the
Company had outstanding current and long-term notes and accounts receivable of
approximately $10.6 million secured by certain seismic equipment sold by the
Company to Grant and an obligation to repurchase $1.1 million in Grant debt. In
addition, the Company has guaranteed, on a partial recourse basis, certain lease
obligations owed by Grant to an institutional lender/purchaser of Company
equipment for which the Company has certain rights to purchase the lessor's
interest under certain circumstances. A proposed plan of reorganization has been
filed in the case that provides for payment in full to holders of secured claims
and the assumption of these lease obligations. If this plan is confirmed, the
Company would be repaid all or substantially all of the outstanding indebtedness
owed to it by Grant. In addition, another customer is in default to the Company
with respect to approximately $11.0 million in secured equipment purchase debt
owed to the Company. The Company has taken a charge of $11.2 million to cover
anticipated losses in connection with this trade debt. No assurance can be given
as to the amount and timing of any recovery to the Company regarding these
defaulted obligations.
(4) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows (in thousands):
MAY 31,
-------------------------------------------
1997 1996 1995
------- -------
Land . . . . . . . . . . . . . . . . . . . . $ 3,819 $ 3,801 $ 2,503
Building . . . . . . . . . . . . . . . . . . 28,008 15,622 4,321
Machinery and equipment. . . . . . . . . . . 49,002 39,136 16,378
Leased equipment . . . . . . . . . . . . . . 12,573 8,338 4,846
Other. . . . . . . . . . . . . . . . . . . . 12,692 6,425 3,381
------- -------
106,094 73,322
Less accumulated depreciation. . . . . . . . 27,718 17,287
------- -------
$78,376 $56,035
------- -------
------- -------
(5) ACCRUED EXPENSES
A summary of accrued expenses follows (in thousands):
MAY 31,
---------------------
1997 1996
------- -------
Compensation, including commissions. . . . . $6,602 $7,657
Warranty, training and installation. . . . . 3,856 3,731
Other. . . . . . . . . . . . . . . . . . . . . . 73,322 31,429
Less accumulated depreciation. . . . . . . 17,287 7,3507,900 2,363
------- -------
. . . . . . . . . . . . . . . . . . . . . $56,035 $24,079
------- -------
------- -------
(5) ACCRUED EXPENSES
A summary of accrued expenses follows (in thousands):
MAY 31,
----------------------
1996 1995
------- -------
Compensation, including commissions. . . . $7,657 $4,377
Warranty, training and installation. . . . 3,731 1,771
Other. . . . . . . . . . . . . . . . . . . 2,363 713
------- -------
. . . . . . . . . . . . . . . . . . . . .$18,358 $13,751 $6,861
------- -------
------- -------
(6) LONG-TERM DEBT
In August 1996, the Company, through one of its wholly-owned subsidiaries,
obtained a $12.6 million, ten-year term loan secured by certain of its land and
buildings located in Stafford, Texas which includes the Company's executive
offices, research and development headquarters, and newly-constructed
electronics manufacturing building. The term loan, which the Company has
guaranteed under a Limited Guaranty, bears interest at a fixed rate of 7.875%
per annum and is repayable in equal monthly installments of principal and
interest of $151,439. The total installment payments in each of the next five
years would be $1,817,000 with a balance thereafter of $7,700,000. The Company
had no long-term debt outstandingleases all of the property from its subsidiary under a master lease, which lease
has been collaterally assigned to the lender as of May 31, 1996.security for the term loan. The
Company has a $50 million working capital line of credit with its lead bank
which had no current balance drawn against it as of May 31, 1996 and 1995.term loan provides for penalties for pre-payment prior to maturity. The term
loan also contains
F-10
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
certain restrictive financial covenants with which the Company was in compliance
at May 31, 1997.
(7) STOCKHOLDERS' EQUITY
(a) CHANGES IN CAPITAL STRUCTURE
On January 9, 1996, the Company effected a two-for-one stock split for
stockholders of record on December 26, 1995. The consolidated financial
statements, including all references to the number of shares of common stock and
all per share information, have been adjusted to reflect the common stock split
on a retroactive basis.
In November 1995, the Company offered and sold 5,750,000 shares of its
common stock in an underwritten public offering. The proceeds to the Company
before deducting the Company's expenses of the offering were approximately
$120,175,000. The proceeds were used to retire indebtedness incurred in
connection with the WGEP Acquisition and for general corporate purposes.
On May 4, 1994, the Company effected a two-for-one stock split for
stockholders of record on April 18, 1994. The consolidated financial statements,
including all references to the number of shares of common stock and all per
share information, have been adjusted to reflect the common stock split on a
retroactive basis.
In May 1994, subsequent to the two-for-one stock split, the Company offered
and sold 4,600,000 shares of its common stock in an underwritten public
offering. The proceeds to the Company before deducting the Company's expenses of
the offering were approximately $47,955,000. The proceeds were used for the WGEP
Acquisition and general corporate purposes.
(b) STOCK OPTIONS AND RESTRICTED STOCK
STOCK OPTION PLANS. The Company has adopted a stock option plan for
eligible employees which provides for the granting of options to purchase a
maximum of 7,000,000 shares of common stock. Transactions under the employee
stock option plan are summarized as follows:
F-11
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
EMPLOYEE STOCK OPTION PLAN
OPTION PRICE AVAILABLE
PER SHARE OUTSTANDING EXERCISABLE FOR GRANT
------------------------------ ----------- ----------- --------------------
May 31, 1993 . . . . . . . . . . . . . $2.00-3.90625 2,544,500 506,700 422,900
-------------- -------------- -------------- --------------
Granted-444,000. . . . . . . . . . . . 6.8438-11.9375 444,000 -- (444,000)
Became exercisable . . . . . . . . . . -- -- 786,000 --
Exercised. . . . . . . . . . . . . . . 2.00-3.5625 (498,600) (498,600) --
Canceled/Forfeited . . . . . . . . . . 2.0313-3.50 (18,100) -- 18,100
-------------- -------------- -------------- --------------
May 31, 1994 . . . . . . . . . . . . . 2.00-11.9375$2.00-$11.9375 2,471,800 794,100 (3,000)
-------------- -------------- -------------- ------------------------------ ----------- ----------- -----------
Increase in Shares Authorized. . . . . -- -- -- 4,000,000
Granted-139,000. . . . . . . . . . . . 9.375-16.875 139,000 -- (139,000)
Became exercisable . . . . . . . . . . -- -- 645,000 --
Exercised. . . . . . . . . . . . . . . 2.00-3.90625 (695,700) (695,700) --
Canceled/Forfeited . . . . . . . . . . 2.03125-3.50 (1,700) -- 1,700
-------------- -------------- -------------- ------------------------------ ----------- ----------- -----------
May 31, 1995 . . . . . . . . . . . . . 2.00-16.875 1,913,400 743,400 3,859,700
-------------- -------------- -------------- --------------
Granted-816,750. . . . .---------------- ----------- ----------- -----------
Granted - 816,750. . . . . . . . 17.8125-39.25 816,750 -- (816,750)
Became exercisable . . . . . . . . . . -- -- 544,600 --
Exercised. . . . . . . . . . . . . . . 2.00-11.9375 (741,300) (741,300) --
Canceled/Forfeited . . . . . . . . . . 3.50-17.8125 (6,000) -- 6,000
-------------- -------------- -------------- ------------------------------ ----------- ----------- -----------
May 31, 1996 . . . . . . . . . . 2.0313-39.25 1,982,850 546,700 3,048,950
---------------- ----------- ----------- -----------
Granted - 1,082,950. . . . . . . 16.875-21.125 1,082,950 -- (1,082,950)
Became exercisable . . . . . . . -- -- 586,800 --
Exercised. . . . . . . . . . . . 2.0313-20.125 (242,675) (242,675) --
Canceled/Forfeited . . . . . . . 3.90625-39.25 (518,600) -- 518,600
---------------- ----------- ----------- -----------
May 31, 1997 . . . . . . . . . . $2.0313-$39.25 1,982,850 546,700 3,048,950
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------21.125 2,304,525 890,825 2,484,600
---------------- ----------- ----------- -----------
---------------- ----------- ----------- -----------
F-12F-11
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
EMPLOYEE STOCK OPTIONS OUTSTANDING
Weighted Weighted Average Weighted
Option Price Average Remaining Average
Per Share Outstanding Exercise Price Contract Life Exercisable Exercise Price
- --------------- ----------- -------------- -------------- ----------- --------------
$2.0313 46,650 $2.0313 3.8 years 46,650 $2.0313
3.5-3.9063 467,675 3.8213 5.8 years 467,675 3.8213
6.8438-9.375 50,000 7.350 6.8 years 20,000 6.8438
11.0-11.9375 278,500 11.8702 6.9 years 182,500 11.8861
16.8750-21.125 1,461,700 19.0985 9.0 years 174,000 19.3361
- --------------- ----------- -------------- -------------- ----------- --------------
$2.0313-$21.125 2,304,525 $14.5242 8.0 years 890,825 $8.4780
- --------------- ----------- -------------- -------------- ----------- --------------
- --------------- ----------- -------------- -------------- ----------- --------------
The Company has also adopted a directors stock option plan which provides
for the granting of options to purchase a maximum of 1,014,0001,114,000 shares of common
stock by the Company's non-employee directors. Transactions under the directors
stock option plan are summarized as follows:
DIRECTORS STOCK OPTION PLAN
OPTION PRICE AVAILABLE
PER SHARE OUTSTANDING EXERCISABLE FOR GRANT
--------------- ----------- ----------- ---------
May 31, 1993 . .1994 . . . . . . . . . . . $2.0313-$3.2188 264,000 72,000 480,000
--------------- ---------- ----------- ---------
Granted - 120,000. . . . . . . . . . . 5.75 120,000 -- (120,000)
Became exercisable . . . . . . . . . . -- -- 66,000 --
Exercised. . . . . . . . . . . . . . . 2.0313-3.2188 (41,000) (41,000) --
--------------- ---------- ----------- ---------
May 31, 1994 . . . . . . . . . . . . . 2.0313-5.75 343,000 97,000 360,000
--------------- --------------------- ----------- ---------
Increase in shares authorized. . . . . -- -- -- 270,000
Granted - 210,000. . . . . . . . . . . 11.8438 210,000 -- (210,000)
Became exercisable . . . . . . . . . . -- -- 96,000 --
Exercised. . . . . . . . . . . . . . . 2.0313-11.8438 (72,000) (72,000) --
--------------- --------------------- ----------- ---------
May 31, 1995 . . . . . . . . . . . . . 2.0313-11.8438 481,000 121,000 420,000
--------------- --------------------- ----------- ---------
Granted - 210,000. . . . . . . . . . . . 19.1875 210,000 -- (210,000)
Became exercisable . . . . . . . . . . -- -- 112,500 --
Exercised. . . . . . . . . . . . . . . 2.0313-11.8438 (202,500) (202,500) --
--------------- --------------------- ----------- ---------
May 31, 1996 . . . . . . . . . . . . . $2.0313-$19.18752.0313-19.1875 488,500 31,000 210,000
--------------- --------------------- ----------- ---------
Increase in shares authorized. . . -- -- -- 400,000
Granted - 350,000. . . . . . . . . 29-29.625 350,000 -- (350,000)
Became exercisable . . . . . . . . -- -- 207,500 --
Exercised. . . . . . . . . . . . . -- (68,500) (68,500) --
--------------- ----------- ----------- ---------
May 31, 1997 . . . . . . . . . . . $2.0313-$29.625 770,000 170,000 260,000
--------------- ----------- ----------- ---------
--------------- --------------------- ----------- ---------
In fiscal 1997 the Company will adopt SFAS No. 123 Accounting for Stock-
Based Compensation. This standard establishes a fair value method for accounting
for stock-based compensation plans either through recognition or disclosure. The
Company intends to adopt the standard by disclosing the proforma net earnings
and earnings per share amounts assuming the fair value method was adopted June
1, 1996. The adoption of this standard in the opinion of management will not
have a material impact on results of operations, financial positions or cash
flows.
F-13DIRECTOR STOCK OPTIONS OUTSTANDING
Weighted Weighted Average Weighted
Option Price Average Remaining Average
Per Share Outstanding Exercise Price Contract Life Exercisable Exercise Price
- --------------- ----------- -------------- -------------- ----------- --------------
$3.2188 15,000 $3.2188 5.3 years 15,000 $3.2188
5.750 45,000 5.750 6.3 years 20,000 5.750
11.8438 157,500 11.8438 7.3 years 67,500 11.8438
19.1875 202,500 19.1875 8.3 years 67,500 19.1875
29.0-29.625 350,000 29.375 9.4 years -- --
- --------------- ----------- -------------- -------------- ----------- --------------
$3.2188-$29.625 770,000 $21.2197 8.4 years 170,000 $13.2817
- --------------- ----------- -------------- -------------- ----------- --------------
- --------------- ----------- -------------- -------------- ----------- --------------
F-12
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 allows a company to adopt a fair value based
method of accounting for its stock-based compensation plans, or to continue to
follow the intrinsic value method of acounting prescribed by Accounting
Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to
Employees".
The Company has elected to continue to follow APB Opinion No. 25; however,
if the Company had adopted SFAS 123 the Company's net earnings and earnings per
share for the years ended May 31, 1997 and 1996 would have been reduced as
follows (in thousands, except per share amounts):
1997 1996
As Reported Proforma As Reported Proforma
----------- -------- ----------- --------
Net Earnings . . . . . . . $16,597 $14,323 $38,677 $37,784
Earnings per Share . . . . $ .38 $ .33 $ .94 $ .92
The weighted average fair value of options granted during 1997 and 1996 was
$10.21 and $9.24, respectively. The fair value of each option was determined
using the Black-Scholes option valuation model. The key input variables used in
valuating the options were as follows: average risk-free interest rate based on
5-year Treasury bonds, stock price volatility of 44% and estimated option term
of 5 years. The effects of applying SFAS 123 as calculated above may not be
representative of the effects on reported net earnings for future years.
RESTRICTED STOCK PLAN. The Company adopted a restricted stock plan which
provides for the award of up to 610,000 shares of common stock to key officers
and employees. Ownership of the common stock will vest over a period of four
years. The restriction is removed from 50% of the shares after two year,years, 25% in
the third year and 25% in the fourth year. Shares awarded may not be sold,
assigned, transferred, pledged or otherwise encumbered by the grantee during the
vesting period. Except for these restrictions, the grantee of an award of shares
has all the rights of a stockholder, including the right to receive dividends
and the right to vote such shares. TheAs of May 31, 1997, the Company has 30,000
shares available for grant due to the cancellation of unvested shares granted all shares of
restricted stock to
certain employees.an employee.
The market value of shares of common stock granted under the restricted
stock plan was recorded as unamortized restricted stock compensation and shown
as a separate component of stockholders' equity. The restricted stock
compensation is amortized over the four-year vesting period.
F-13
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(8) EXPORT SALES AND MAJOR CUSTOMERS:
A summary of net sales and other revenues from foreign customers by
geographic area follows (in thousands):
1997 1996 1995
1994
-------- -------- --------------- ------- -------
Europe . . . . . . . . . . . . . . . . . $45,191 $26,718 $15,871 $ 3,965
Canada and Mexico. . . . . . . . . . . . 20,688 25,324 28,075
41,056South America. . . . . . . . . . . . . . 17,619 6,151 10,792
Former Soviet Union. . . . . . . . . . . 16,590 17,994 26,066
People's Republic of China . . . . . . . 10,928 16,854 2,479
Middle East. . . . . . . . . . . . 20,192 4,665 2,118
Former Soviet Union. . . . . . . . 17,994 26,066 4,493
People's Republic of China . . . . 16,854 2,479 4,7219,120 20,192 4,665
Africa . . . . . . . . . . . . . . 8,460 2,222 --
South America. . . . . . . . . . . 6,151 10,792 8,717608 8,460 2,222
Pakistan and India . . . . . . . . . . . 195 2,684 959 1,220
Other. . . . . . . . . . . . . . . . . . 260 427 835
388
-------- -------- ---------------
$121,199 $124,804 $91,964
$66,678
-------- -------- -------
-------- -------- -------- ---------------
Net sales and other revenues from individual customers representing 10% or
more of net sales and other revenues were as follows:
CustomerCUSTOMER 1997 1996 1995 1994
-------- ---- ---- ----
A. . . . . . . . . . . . . . . . . . . . 39% 32% 15% 14%
B. . . . . . . . . . . . . . . . . . . . 6% 10% 11%
13%
C.(9) INCOME TAXES
Components of income taxes follow (in thousands):
1997 1996 1995
------ ------- -------
Current:
Federal . . . . . . . . . . . . . . . . -- 5% 10%
D.$5,022 $14,615 $10,517
Foreign . . . . . . . . . . . . . . . . 1% 4% 11%
(9) INCOME TAXES
Components of income taxes follow (in thousands):
1996 1995 1994
---- ---- ----
Current:
Federal3,686 3,986 1,007
State and local . . . . . . . . . . . $14,615 $10,517 $6,550
Foreign1,027 726 435
Deferred-Federal . . . . . . . . . . . 3,986 1,007 860
State and local . . . . . . . 726 435 147
Deferred-Federal . . . . . . . . .(2,035) (1,627) (624)
32------ ------- -------
-------$7,700 $17,700 $11,335
$7,589------ ------- -------
------ ------- ------- ------- -------
F-14
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
A reconciliation of the expected income tax expense on earnings using the
statutory Federal income tax rate of 35% for the years ended 1997, 1996 1995 and
1994,1995, to the income tax expense reported herein is as follows (in thousands):
1996 1995 1994
------ ------ -----
Expected income tax expense:. . . . . . . . . . . . . . $19,732 $12,542 $8,453
Tax benefit from use of foreign sales corporation . . . (2,032) (982) (598)
Foreign tax credit. . . . . . . . . . . . . . . . . . . (305) (206) --
Research and development credit . . . . . . . . . . . . -- -- (293)
Foreign taxes . . . . . . . . . . . . . . . . . . . . . 118 (6) 431
State and local taxes . . . . . . . . . . . . . . . . . 472 283 96
Other . . . . . . . . . . . . . . . . . . . . . . . . . (285) (296) (500)
------ ------ -----
$17,700 $11,335 $7,589
------ ------ -----
------ ------ -----
1997 1996 1995
------ ------- -------
Expected income tax expense: . . . . . . $8,504 $19,732 $12,542
Tax benefit from use of foreign sales
corporation . . . . . . . . . . . . . (1,330) (2,032) (982)
Foreign tax credit . . . . . . . . . . . (142) (305) (206)
Foreign taxes. . . . . . . . . . . . . . 898 118 (6)
State and local taxes. . . . . . . . . . 667 472 283
Other. . . . . . . . . . . . . . . . . . (897) (285) (296)
------ ------- -------
$7,700 $17,700 $11,335
------ ------- -------
------ ------- -------
F-14
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The tax effects of the cumulative temporary differences resulting in the
net deferred tax (asset) liabilityasset follow (in thousands):
MAY 31,
-----------------------
1996 1995
-------- --------
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,351) $ (620)
Allowance accounts. . . . . . . . . . . . . . . . . . . . . . . . . . (1,053) (378)
Unamortized restricted stock compensation . . . . . . . . . . . . . . (1,711) (1,347)
Uniform capitalization. . . . . . . . . . . . . . . . . . . . . . . . (409) (169)
-------- --------
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . (4,524) (2,514)
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . -- --
-------- --------
Total deferred tax asset, net . . . . . . . . . . . . . . . . . . . (4,524) (2,514)
-------- --------
Basis in identified intangibles . . . . . . . . . . . . . . . . . . . 2,075 1,650
Basis in property, plant and equipment. . . . . . . . . . . . . . . . 150 1,100
Foreign taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 7
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,237 322
-------- --------
Total deferred tax liabilities. . . . . . . . . . . . . . . . . . . 3,462 3,079
-------- --------
Total deferred tax (asset) liability, net . . . . . . . . . . . . . . $ (1,062) $ 565
-------- --------
-------- --------
MAY 31,
------------------
1997 1996
------- -------
Accrued expenses . . . . . . . . . . . . . . . . . $ (1,406) $ (1,351)
Allowance accounts . . . . . . . . . . . . . . . . (3,417) (1,053)
Unamortized restricted stock compensation. . . . . (732) (1,711)
Uniform capitalization . . . . . . . . . . . . . . (817) (409)
Other. . . . . . . . . . . . . . . . . . . . . . . (1,219) --
------- -------
Total deferred tax assets . . . . . . . . . . . (7,591) (4,524)
------- -------
Valuation allowance . . . . . . . . . . . . . . -- --
------- -------
Total deferred tax asset, net . . . . . . . . . (7,591) (4,524)
------- -------
Basis in identified intangibles. . . . . . . . . . 2,102 2,075
Basis in property, plant and equipment . . . . . . 2,392 150
Other. . . . . . . . . . . . . . . . . . . . . . . -- 1,237
------- -------
Total deferred tax liabilities . . . . . . . . . . 4,494 3,462
------- -------
Total deferred tax asset, net . . . . . . . . . $(3,097) $(1,062)
------- -------
------- -------
Management believes that total deferred tax assets net of valuation
allowance, will more likely than
not be fully realized based on the Company's historical earnings and future
expectations of adjusted taxable income as well as reversing gross deferred tax
liabilities
(10) LEASES
The Company is a party to several leases as described below:
AS LESSOR: The Company leases seismic equipment to customers under
operating leases with noncancellable terms of less than one year. Rental income
relating to the operating leases was: $8,707,000 in 1997; $7,386,000 in 1996;
and $4,263,000 in 1995;
and $2,406,000 in 1994.1995. The Company also owns a building with tenants. The
rental income relating to those leases was: $344,000 in 1997; $257,000 in 1996;
and $194,000 in 1995;
and $211,000 in 1994.1995.
AS LESSEE: The Company had rental expense relating to operating leases
for a secondary facility and various equipment of: $1,575,000 in 1997;
$1,801,000 in 1996; and $680,000 in 1995; and $223,000 in 1994.1995. At May 31, 1996,1997, none of the operating
leases had noncancellable lease terms in excess of one year.
F-15
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(11) RETIREMENT PLANS
The Company has a 401(k) retirement savings plan which covers
substantially all employees. Employees may voluntarily contribute up to 16% of
their compensation, as defined, to the plan and the Company may contribute
additional amounts at its sole discretion. The Company's contributions to the
plan were: $2,007,000 in 1997; $1,933,000 in 1996; and $980,000 in 1995; and $697,000 in 1994.1995.
The Company has adopted a non-qualified, unfunded supplemental executive
retirement plan (SERP Plan). The SERP Plan provides for certain compensation to
become payable on the participant's death, retirement or total disability as set
forth in the plan. The SERP Plan is accounted for under Financial Accounting
Standards No. 87 "Employer's Accounting for Pensions". The fiscal 19961997
consolidated financial statements include pension expense of $326,000,$359,000, accrued
pension costs of $2,201,000,$1,887,000, an intangible asset for unrecognized prior service
cost of $951,000$864,000 and equity reductionincrease of $187,000.$375,000.
F-15
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company has adopted a non-qualified, unfunded outside directors
retirement plan (Directors Plan). The Directors Plan provides for certain
compensation to become payable on the participants death, retirement or total
disability as set forth in the plan. The Directors Plan is accounted for under
Financial Accounting Standards No. 87 "Employer's Accounting for Pensions." The
fiscal 19961997 consolidated financial statements include pension expense of
$102,000,$183,000, accrued pension costs of $447,000, an intangible asset for
unrecognized prior service cost of $149,000$483,000 and an equity reduction of $3,000.$1,000.
(12) CREDIT RISK
At May 31, 19961997 and 1995,1996, the Company had guaranteed approximately
$30,307,000$8,198,000 and $14,556,000,$30,307,000, respectively, of trade notes receivable sold with
recourse (note(See Note 3) and loans from unaffiliated parties to purchasers of the
Company's seismic equipment. All loans guaranteed are collateralized by the
seismic equipment. No loss from these guarantees has occurredDue to the inherent uncertainties of the guaranty agreements
the Company can not estimate the fair value of the guaranties as of May 31,
1996.1997.
(13) SELECTED QUARTERLY INFORMATION - (UNAUDITED)
THREE MONTHS ENDED
----------------------------------------------------
1997 AUG. 31 NOV. 30 FEB. 28 MAY 31
- ---- ------- ------- ------- ------
(in thousands, except per share amounts)
Net sales and other revenues . . $73,004 $67,044 $64,773 $77,024
Gross profit . . . . . . . . . . 28,634 22,212 23,886 23,675
Earnings from operations . . . . 12,485 6,223 8,687 (5,980)
Interest expense . . . . . . . . -- (172) (296) (325)
Other income . . . . . . . . . . 1,723 1,004 685 263
Income taxes . . . . . . . . . . 4,547 2,258 2,904 (2,009)
Net earnings (loss). . . . . . . $9,661 $4,797 $6,172 $(4,033)
------ ------ ------ -------
------ ------ ------ -------
Earnings per share . . . . . . . $0.22 $0.11 $0.14 $(0.09)
------ ------ ------ -------
------ ------ ------ -------
THREE MONTHS ENDED
----------------------------------------------------
1996 AUG. 31 NOV. 30 FEB. 28 MAY 31
- ---- ------- ------- ------- -------------
(in thousands, except per share amounts)
Net sales and other revenues . . . . . . . . $54,758 $70,530 $77,074 $75,921
Gross profit . . . . . . . . . . . . . . . . 21,905 28,470 31,671 32,426
Earnings from operations . . . . . . . . . . 9,404 13,642 16,669 16,086
Interest expense . . . . . . . . . . . . . . (868) (1,647) -- --
Other income . . . . . . . . . . . . . . . . 880 (23) 724 1,510
Income taxes . . . . . . . . . . . . . . . . 3,013 3,831 5,566 5,290
------- ------------- ------ ------- -------
Net earnings . . . . . . . . . . . . . . . . $ 6,403 $ 8,141$6,403 $8,141 $11,827 $12,306
------ ------ ------- -------
------- -------
------- ------------- ------ ------- -------
Earnings per share . . . . . . . . . . . . . $0.17 $0.21 $0.27 $0.28
----- ----- ----- -----
----- ----- ----- ----------- ------ ------- -------
------ ------ ------- -------
F-16
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
THREE MONTHS ENDED
----------------------------------------------------
1995 AUG. 31 NOV. 30 FEB. 28 MAY 31
- ---- ------- ------- ------- -------
(in thousands, except per share amounts)
Net sales and other revenues . . . . . . . . $27,318 $34,215 $34,512 $38,653
Gross profit . . . . . . . . . . . . . . . . 13,002 15,891 16,734 17,631
Earnings from operations . . . . . . . . . . 6,224 7,995 8,928 8,774
Interest expense . . . . . . . . . . . . . . (24) (6) -- --
Other income . . . . . . . . . . . . . . . . 911 890 948 1,195
Income taxes . . . . . . . . . . . . . . . . 2,276 2,841 3,160 3,058
Net earnings . . . . . . . . . . . . . . . . $ 4,835 $ 6,037 $ 6,717 $ 6,911
------- ------- ------- -------
------- ------- ------- -------
Earnings per share . . . . . . . . . . . . . $ 0.13 $ 0.16 $ 0.18 $ 0.18
----- ----- ----- -----
----- ----- ----- -----
(14) WGEP ACQUISITION
On June 30, 1995, the Company completed the WGEP Acquisition for
approximately $121.3 million. The transaction was accounted for by the purchase
method of accounting. Accordingly, acquired assets and assumed liabilities were
recorded at their estimated fair values, which resulted in goodwill of
approximately $62.9 million that will be amortized over 20 years. A summary of
the final purchase price allocation is as follows (in thousands):
Cash.Cash . . . . . . . . . . . . . . . . . $1,000. $ 1,000
Trade accounts receivablereceivable. . . . . . . . 4,500
InventoriesInventories. . . . . . . . . . . . . . . 35,600
Prepaid expenses.expenses . . . . . . . . . . . . 300
Property, plant and equipmentequipment. . . . . . 28,700
Other assets.assets . . . . . . . . . . . . . . 1,000
Goodwill.Goodwill . . . . . . . . . . . . . . . . 62,900
Accounts payable.payable . . . . . . . . . . . . (1,400)
Accrued expenses.expenses . . . . . . . . . . . . (9,500)
Income taxes payable.payable . . . . . . . . . . (1,800)
--------
Purchase price.price . . . . . . . . . . . . . $121,300
--------
--------
(15) NON-RECURRING ITEMS
Fiscal 1997 non-recurring items were $15.6 million, consisting of losses
related to the insolvency of a customer, a write-down of capitalized exploration
costs and personnel expenses incurred in organizational changes. There were no
non-recurring item charges in fiscal 1996.
(16) COMMITMENTS AND CONTINGENCIES
The following unaudited condensed proforma statementCompany has a working capital revolving line of operations presents
the resultscredit up to $50
million. Included under this maximum $50 million facility are subfacilities for
(i) letters of operationscredit of up to $15 million for the year endedbenefit of the Company and
(ii) purchases from the Company of conditional sales obligations of the
Company's customers and making direct loans to the Company's customers of up to
$25 million (which purchases or loans by the lender(s) will require guaranties
from the Company). As of May 31, 19961997, no amounts of indebtedness were
outstanding under the credit facility and 1995 as if$46.7 million was available for
borrowings under the purchase had occurred on June 1, 1994. The proforma results are not necessarily
indicative of the financial results that might have occurred had the transaction
actually taken place on June 1, 1994, or of future results of operations
(dollars in thousands). (Unaudited)
MAY 31,
--------------------------
1996 1995
----------- -----------
Net sales and other revenues. . . . . . . . . $ 292,405 $ 239,617
Earnings from operations. . . . . . . . . . . 52,874 11,411
Net Earnings. . . . . . . . . . . . . . . . . 36,162 4,982
----------- -----------
Earnings per common share . . . . . . . . . . $ 0.88 $ 0.13
----------- -----------
----------- -----------
Weighted average number of common shares. . . $41,125,286 $37,381,458
----------- -----------
----------- -----------revolving facility.
F-17
SCHEDULE II
INPUT/OUTPUT, INC.
VALUATION AND QUALIFYING ACCOUNTS
- ----------------- ------------ ------------ ------------ ------------ -------------
Balance at Charged to Charged to
Year Ended Beginning Costs and Other Balance at
May 31, 1995 of Year Expenses Accounts Deductions End of Year
- ----------------- ------------ ------------ ------------ ------------ -------------
Allowance for
doubtful accounts $26 $100 $-- $26 $100
Allowance for
doubtful notes
receivable 80 45 -- -- 125
Warranty, training
and installation 1,086 2,828 -- 2,143 1,771
- ----------------- ------------ ------------ ------------ ------------ -------------
Balance at Charged to Charged to
Year Ended Beginning Costs and Other Balance at
May 31, 1996 of Year Expenses Accounts Deductions End of Year
- ----------------- ------------ ------------ ------------ ------------ -------------
Allowance for
doubtful accounts $100 $508 $-- $138 $470
Allowance for
doubtful notes
receivable 125 603 -- -- 728
Warranty, training
and installation 1,771 5,378 -- 3,418 3,731
- ----------------- ------------ ------------ ------------ ------------ -------------
Balance at Charged to Charged to
Year Ended Beginning Costs and Other Balance at
May 31, 1997 of Year Expenses Accounts Deductions End of Year
- ----------------- ------------ ------------ ------------ ------------ -------------
Allowance for
doubtful accounts $470 $1,508 $-- $238 $1,740
Allowance for
doubtful notes
receivable 728 7,350 -- 1,000 7,078
Warranty, training
and installation 3,731 4,469 -- 4,344 3,856
F-18