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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, 1997
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: (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. [ ]
Aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant at June 30, 1997 (for purposes of the
below-stated amount only, all directors, officers and 5% or more stockholders
are presumed to be affiliates):
$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, 1997
--------------- ----------------
COMMON STOCK, $0.01 PAR VALUE 43,222,851
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's 1997 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 on land, in transition zones (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
1997, approximately 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-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. As a result,
shipments of I/O SYSTEMs have grown from 14 systems shipped in fiscal 1991 to 51
systems in fiscal 1997.
The Company offers a complete range of seismic data acquisition systems
and related equipment. On land, the Company offers the I/O SYSTEM TWO
- -Registered Trademark- MRX and RSR systems (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 earth into electrical signals which are recorded by
the I/O System. The Company also offers transition zone systems in shallow
water with marine versions of the MRX, RSR and an Ocean Bottom Cable System.
The Company's marine data acquisition 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 and integrated shipboard navigation, positioning, and data telemetry
quality control systems.
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 three and four-component seismic survey 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 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 environments,
including transition zones, marshes, swamps, mountain ranges, jungles and
other land seismic environments. The I/O System MSX Marine Recorder,
introduced in fiscal 1997, is the latest development by the Company. It
features monitoring capabilities with components and software designed for
greater operational flexibility.
- - COMPLEMENTARY ACQUISITIONS. The Company has expanded its product line in
recent years through the completion of several complementary acquisitions
and product enhancements developed by the Company. See "Product
Development".
- - INNOVATIVE MARKETING INITIATIVES. Through its finance subsidiary, Global
Charter Corporation ("Global Charter"), the Company offers lease/purchase
programs and assists customers in arranging financing for their equipment
purchases.
A principal development of the Company's product 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 and 1995. The business acquired 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 acquisition of seismic data in land,
transition zone and marine environments. See 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 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, 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 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.
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 geophone 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 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.
PRODUCT AGREEMENT
In connection with the 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. 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 exceeding $70
million. The Product Agreement provides 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 WGEP Acquisition with respect to that
particular product.
PRODUCT DEVELOPMENT
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 SYSTEM 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" below.
As a result of its ongoing research and development efforts, the
Company expects to introduce during fiscal 1998 certain new products and
enhancements to its existing product lines. These product and enhancement
releases are intended to constitute the initial stage in the latest evolution of
the Company's seismic system product line, as well as represent certain
improvements in functionalities, operator efficiencies and 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 the marketplace.
Seismic survey techniques being investigated for future commercial
applicability in the industry include three and four-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. Three-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). Several advances in
technology and processing remain to be accomplished in order for 4-D and
three-component 3-D processes to become commercially 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 accounted for approximately 39% of the Company's net sales and other
revenue in fiscal 1997. See Note 8 of Notes to Consolidated Financial
Statements.
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 68%,
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
arranged financing for customer purchases through direct loans to customers from
such lender, which loans in turn have been guaranteed by the Company. See Item
7.- "Management's Discussion and Analysis of Results of Operations and Financial
Condition - Liquidity and Capital Resources".
The Company's installment sales contracts 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'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-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) 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. See Item 7.- "Management's
Discussion and Analysis of Results of Operations and Financial Condition -
Liquidity and Capital Resources".
6
MANUFACTURING
In November 1996, the Company completed the move to a new 109,896 square
feet manufacturing facility to replace the Company's former 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. -"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.
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.
OIL AND GAS ACTIVITIES
As an adjunct to its research, development and marketing efforts, the
Company, through its subsidiary, Output Exploration Company, Inc. ("OPEX"), has
acquired and explored certain oil and gas exploration prospects.
From its organization in 1992 through July 31, 1997, OPEX has participated
in the drilling of 18 wells. Seven wells were dry holes; eight wells are
currently classified as 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 1998 and depending upon the results, could
participate in additional drilling activities over the next few years. The
Company 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 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 trade secrets, patents, copyrights
and technical measures to protect its proprietary hardware and software
technologies. 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-.
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.
EMPLOYEES
At June 30, 1997, the Company had 1,176 employees worldwide, of which 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* 109,896
Houston, Texas** 68,880
Alvin, Texas* 240,000
Cork County, Ireland* 35,630
Norwich, England** 31,000
-------
Voorschoten, The Netherlands** 30,000
-------
515,406
-------
-------
- ---------
* Owned
** Leased
The Company's executive headquarters (utilizing approximately 55,060 square
feet) is located at 11104 West Airport, Stafford, Texas and its research and
development headquarters (utilizing approximately 79,566 square feet) is
adjacent to the headquarters' facility. Both facilities are owned by the 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 326,889 square feet of
additional warehouse 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.
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
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 "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 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 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
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
Item 7.- "Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Liquidity and Capital Resources".
On June 30, 1997, there were 313 stockholders of record of Common Stock and
the Company believes that there were approximately 11,057 beneficial owners of
Common Stock as of such date. 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 and 1993 and with respect to the Company's
consolidated balance sheets at May 31, 1997, 1996, 1995, 1994 and 1993 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
---- ---- ---- ---- ----
(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
Cost of sales . . . . . . . . . . . . . . . . . . . . . . 183,438 163,811 71,440 50,560 26,677
-------- -------- -------- ------- -------
Gross profit . . . . . . . . . . . . . . . . . . . 98,407 114,472 63,258 45,192 27,528
-------- -------- -------- ------- -------
Operating expenses:
Research and development . . . . . . . . . . . . . . . 22,967 23,243 11,400 7,931 5,004
Marketing and sales . . . . . . . . . . . . . . . . . . 13,288 12,027 6,789 4,673 4,492
General and administrative . . . . . . . . . . . . . . 20,592 19,096 11,817 8,980 5,007
Non-recurring items (2). . . . . . . . . . . . . . . . . 15,594 -- -- -- --
Amortization of identified intangibles . . . . . . . . 4,551 4,305 1,331 762 698
-------- -------- -------- ------- -------
Total operating expenses. . . . . . . . . . . . . . 76,992 58,671 31,337 22,346 15,201
-------- -------- -------- ------- -------
Earnings from operations . . . . . . . . . . . . . . . . . 21,415 55,801 31,921 22,846 12,327
Interest expense . . . . . . . . . . . . . . . . . . . . . (793) (2,515) (30) (160) (203)
Other income . . . . . . . . . . . . . . . . . . . . . . . 3,675 3,091 3,944 1,466 1,222
-------- -------- -------- ------- -------
Earnings before income taxes . . . . . . . . . . . . . . . 24,297 56,377 35,835 24,152 13,346
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 7,700 17,700 11,335 7,589 4,204
-------- -------- -------- ------- -------
Net earnings . . . . . . . . . . . . . . . . . . . . . . . $16,597 $38,677 $24,500 $16,563 $9,142
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
Earnings per common share. . . . . . . . . . . . . . . . . $0.38 $0.94 $0.66 $0.53 $0.31
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
Weighted average common shares
outstanding . . . . . . . . . . . . . . . . . . . 43,820 41,125 37,381 31,448 29,786
BALANCE SHEET DATA (END OF YEAR):
Working capital . . . . . . . . . . . . . . . . . . . . . $170,427 $165,225 $104,908 $87,558 $29,685
Total assets . . . . . . . . . . . . . . . . . . . . . . 384,658 355,465 165,487 132,000 61,542
Short-term debt, including current
installments of long-term debt (3) . . . . . . . . . . . 912 -- -- 591 1,961
Long-term debt (3) . . . . . . . . . . . . . . . . . . . . 11,000 -- -- -- 427
Stockholders' equity . . . . . . . . . . . . . . . . . . . 338,614 317,204 146,712 115,659 47,877
OTHER DATA:
Capital expenditures . . . . . . . . . . . . . . . . . . . $26,966 $10,240 $5,979 $4,010 $3,703
Depreciation and amortization. . . . . . . . . . . . . . . 12,558 10,152 3,570 1,877 1,452
__________________
(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 following table sets forth for fiscal years 1997, 1996 and 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 1996-1997 1995-1996
---- ---- ---- --------- ---------
Statement of Operations Data:
Net sales and other revenues . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 1.3% 106.6%
Cost of sales . . . . . . . . . . . . . . . . . . . . . 65.1 58.9 53.0 12.0 129.3
---- ---- ----
Gross profit . . . . . . . . . . . . . . . . . . . . . 34.9 41.1 47.0 (14.0) 81.0
---- ---- ----
Operating expenses:
Research and development . . . . . . . . . . . . . . 8.2 8.4 8.5 (1.2) 103.9
Marketing and sales . . . . . . . . . . . . . . . . . 4.7 4.3 5.0 10.5 77.2
General and administrative . . . . . . . . . . . . . . 7.3 6.9 8.8 7.8 61.6
Non-recurring items. . . . . . . . . . . . . . . . . . 5.5 -- -- 100.0 --
Amortization of identified
intangibles . . . . . . . . . . . . . . . . . . . . 1.6 1.5 1.0 5.7 223.4
---- ---- ----
Total operating expenses . . . . . . . . . . . . . 27.3 21.1 23.3 31.2 87.2
---- ---- ----
Earnings from operations . . . . . . . . . . . . . . . . . 7.6 20.1 23.7 (61.6) 74.8
Interest expense . . . . . . . . . . . . . . . . . . . . . (0.3) (0.9) (0.0) (68.5) 8,283.3
Other income . . . . . . . . . . . . . . . . . . . . . . 1.3 1.1 2.9 18.9 (21.6)
---- ---- ----
Earnings before income taxes . . . . . . . . . . . . . . . 8.6 20.3 26.6 (56.9) 57.3
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 2.7 6.4 8.4 (56.5) 56.2
---- ---- ----
Net earnings . . . . . . . . . . . . . . . . . . . . . . 5.9% 13.9% 18.2% (57.1)% 57.9%
---- ---- ----
---- ---- ----
NET SALES AND OTHER REVENUES
Net sales and other revenues 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, increased sales to the
Company's largest customer, continued sales of the Company's traditional
land-based seismic data acquisition systems and market acceptance of its new
radio telemetry system, the I/O SYSTEM TWO RSR.
GROSS PROFITS
The gross profit margins of the Company for the years ended May 31, 1997
and 1996 were negatively impacted by the addition of lower margin products
resulting from the WGEP Acquisition. In addition, during fiscal 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 1%,
from the prior year, to $23.0 million. Expenses were consistent with the prior
year's expenses as a percent of sales.
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
projects.
MARKETING AND SALES
Fiscal 1997 marketing and sales expenses increased $1.3 million, or 10%,
over fiscal 1996, primarily due to increased convention/exhibition costs and
advertising expense related to new product lines.
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 1997 general and administrative expenses increased $1.5 million, or
8%, over the prior year, to $20.6 million, primarily due to increased
non-recurring advisory and professional fees and increased 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 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.
AMORTIZATION OF IDENTIFIED INTANGIBLES
Fiscal 1997 amortization of identified intangibles increased $246,000, or
6%, over the prior year, due to the amortization of additional 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.
OPERATING INCOME
Earnings from operations decreased $34.4 million, or 62%, in fiscal 1997 to
$21.4 million compared to $55.8 million in the prior year, primarily due to
decreased profit margins and the fiscal 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.
INTEREST EXPENSE
Interest expense decreased $1.7 million in fiscal 1997 compared to fiscal
1996 due to the 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.
INCOME TAX EXPENSE
The effective tax rate for fiscal 1997 and 1996 was approximately 31.7% and
31.4%, respectively. Income tax expense decreased in 1997 as compared to 1996 in
proportion with the decrease in the 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 $43.4 million for the year ended May 31, 1997. However, cash
flows from operating activities after changes in working capital items were a
negative $19.9 million for the year ended May 31, 1997, primarily due to
increases in trade accounts receivable resulting from a lower level of cash
sales in fiscal 1997 and higher inventory levels 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.
The 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 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). 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 addition, 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 $12.5 million ten-year term mortgage
loan to finance the construction of the Company's new manufacturing facility in
Stafford, Texas. The loan is secured by the Company's land, buildings and
improvements housing its executive and research and development headquarters as
well as its adjacent new 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. The promissory note contains certain
prepayment penalties. As of July 31, 1997, $11.8 million in indebtedness was
outstanding under this mortgage loan.
Capital expenditures for property, plant, and equipment totaled $27.0
million for fiscal 1997 and are expected to aggregate $10.0 million for fiscal
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
In 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 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, 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 the 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 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 result primarily from the instability of economies and
governments in certain developing countries, changes in internal laws and
policies affecting trade and investment, and because those markets are only
beginning to adopt new technologies and establish purchasing practices. These
risks may adversely affect the Company's future operating results and financial
position. In 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 obtain additional patents or other
intellectual property rights in the future. Additionally, there can be no
assurance that the Company's efforts to protect its trade secrets will be
successful or that others will not independently develop products similar to the
Company's or 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 depend 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 the 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 risk 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 complete desirable business combinations or other transactions in
the future. The Company has 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 successfully integrate such new companies
into its operations. Certain acquisitions or strategic transactions may be
subject to approval by the other 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 the Company 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, if 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 markets for oil and natural gas have been volatile
and are likely to continue to be volatile in the future. The nature of the 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 adverse affect on the Company's
financial 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 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 1997 Annual
Meeting of Stockholders under the captions "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 1997 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 1997 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.
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:
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 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.
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 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 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 and Restated 1990 Stock Option Plan.
***10.5 --Input/Output, Inc. 1996 Management Incentive Program.
10.6 --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.
**10.8 --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, effective January 17, 1997.
***10.12 --Supplemental Executive Retirement Trust.
***10.13 --Amendment No. 1 to the Company's Supplemental Executive
Retirement Trust, effective January 17, 1997.
**10.14 --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.
***10.15 --Amendment No. 1 to Employment Agreement between the
Company and Robert P. Brindley dated March 31, 1997.
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.
10.17 --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.
20
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.) filed as
Exhibit 10.17 to the Company's Annual Report on Form 10-K
for the fiscal year ended May 31, 1996.
10.19 --Master Letter of Credit Agreement dated April 16, 1996,
between the Company and ABN AMRO Bank N.V. Houston 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 Per Share Computation.
*21.1 --Subsidiaries of the Company.
*23.1 --Consent of KPMG Peat Marwick LLP.
*24.1 --The Power of Attorney is set forth on the signature page
hereof.
*27.1 --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 herewith.
** 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, 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.
21
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF
STAFFORD, STATE OF TEXAS, ON AUGUST 27, 1997.
Input/Output, Inc.
By /s/ 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 Charles 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, 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, 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
22
INPUT/OUTPUT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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-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, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended May 31, 1997, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Houston, Texas
June 30, 1997
F-2
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS May 31,
-----------------------
1997 1996
-------- --------
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,573 $34,252
Trade accounts receivable, less allowance for doubtful accounts of $1,740
and $470 in 1997 and 1996, respectively. . . . . . . . . . . . . . . . . . 61,788 42,989
Trade notes receivable, less allowance for doubtful notes of $7,078 and $728
in 1997 and 1996, respectively (note 3). . . . . . . . . . . . . . . . . . 27,800 28,424
Income taxes receivable (note 9). . . . . . . . . . . . . . . . . . . . . . . . 2,403 --
Inventories (note 2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106,337 92,787
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,939 2,004
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 202,840 200,456
Long-term trade notes receivable (note 3). . . . . . . . . . . . . . . . . . . . . 27,003 16,678
Deferred income tax asset (note 9) . . . . . . . . . . . . . . . . . . . . . . . . 3,097 1,062
Property, plant and equipment, net (note 4). . . . . . . . . . . . . . . . . . . . 78,376 56,035
Goodwill, net of accumulated amortization of $8,001 and
$4,115 in 1997 and 1996, respectively . . . . . . . . . . . . . . . . . . . . 61,024 64,200
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,318 17,034
-------- --------
$384,658 $355,465
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, principally trade . . . . . . . . . . . . . . . . . . . . . . $13,143 $19,518
Accrued expenses (note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,358 13,751
Current installments of debt (note 6) . . . . . . . . . . . . . . . . . . . . . 912 --
Income taxes payable (note 9) . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,962
-------- --------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . 32,413 35,231
Long-term debt (note 6). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,000 --
Other liabilities (note 11). . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,631 3,030
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 . . . . . . . . . . . 433 430
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . 218,973 214,259
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121,116 104,145
Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . . (1,673) (762)
Unamortized restricted stock compensation . . . . . . . . . . . . . . . . . . . (235) (868)
-------- --------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . 338,614 317,204
-------- --------
$384,658 $355,465
-------- --------
-------- --------
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
-------- -------- --------
Net sales and other revenues (notes 8 and 10). . . . . $281,845 $278,283 $134,698
Cost of sales. . . . . . . . . . . . . . . . . . . . . 183,438 163,811 71,440
-------- -------- --------
Gross profit. . . . . . . . . . . . . . . . . 98,407 114,472 63,258
-------- -------- --------
Operating expenses:
Research and development. . . . . . . . . . . . . . 22,967 23,243 11,400
Marketing and sales . . . . . . . . . . . . . . . . 13,288 12,027 6,789
General and administrative. . . . . . . . . . . . . 20,592 19,096 11,817
Non-recurring items . . . . . . . . . . . . . . . . 15,594 -- --
Amortization of identified intangibles. . . . . . . 4,551 4,305 1,331
-------- -------- --------
Total operating expenses. . . . . . . . . . . 76,992 58,671 31,337
-------- -------- --------
Earnings from operations . . . . . . . . . . . . . . . 21,415 55,801 31,921
Interest expense . . . . . . . . . . . . . . . . . . . (793) (2,515) (30)
Other income . . . . . . . . . . . . . . . . . . . . . 3,675 3,091 3,944
-------- -------- --------
Earnings before income taxes . . . . . . . . . . . . . 24,297 56,377 35,835
Income taxes (note 9). . . . . . . . . . . . . . . . . 7,700 17,700 11,335
-------- -------- --------
Net earnings . . . . . . . . . . . . . . . . . . . . . $ 16,597 $ 38,677 $ 24,500
-------- -------- --------
-------- -------- --------
Earnings per common share. . . . . . . . . . . . . . . $ .38 $ .94 $ .66
-------- -------- --------
-------- -------- --------
Weighted average number of common and
common equivalent shares outstanding . . . . . . . . . 43,819,595 41,125,286 37,381,458
---------- ---------- ----------
---------- ---------- ----------
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, AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
Common stock Additional Cumulative Unamortized Total
--------------------- paid-in Retained Translation restricted stock stockholders'
Shares Amount capital earnings Adjustment compensation equity
---------- ------ ---------- -------- ----------- ---------------- -------------
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
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
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. . . 42,969,676 430 214,259 104,145 (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
------- ------- -------
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,597 $38,677 $24,500
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . 12,558 10,152 3,570
Amortization of restricted stock compensation. . . . . . . . 633 1,692 2,052
Deferred income taxes. . . . . . . . . . . . . . . . . . . . (2,035) (1,627) (624)
Pension costs. . . . . . . . . . . . . . . . . . . . . . . . 96 90 284
Non-recurring items. . . . . . . . . . . . . . . . . . . . . 15,594 -- --
Changes in assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . . . (38,784) (47,157) (32,293)
Inventories . . . . . . . . . . . . . . . . . . . . . . . (13,550) (29,094) (5,920)
Leased equipment. . . . . . . . . . . . . . . . . . . . . (3,208) 1,332 (2,841)
Accounts payable and accrued expenses . . . . . . . . . . (2,866) 7,224 3,099
Income taxes payable. . . . . . . . . . . . . . . . . . . (4,365) (555) (1,097)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (614) (1,743) (1,185)
------- ------- -------
Net cash used in operating activities . . . . . . . . . (19,944) (21,009) (10,455)
------- ------- -------
Cash flows from investing activities:
Purchase of property, plant and equipment . . . . . . . . . . . . (26,966) (10,240) (5,979)
Acquisition of net assets and business. . . . . . . . . . . . . . (595) (120,467) (5,500)
Purchase of short-term investments. . . . . . . . . . . . . . . . -- -- (65,308)
Maturities of short-term investments. . . . . . . . . . . . . . . -- -- 114,411
Investments in other assets . . . . . . . . . . . . . . . . . . . (190) (2,549) (3,697)
------- ------- -------
Net cash (used in) provided by investing activities . . (27,751) (133,256) 33,927
------- ------- -------
Cash flows from financing activities:
Borrowings from bank. . . . . . . . . . . . . . . . . . . . . . . 23,850 97,800 --
Payments on debt. . . . . . . . . . . . . . . . . . . . . . . . . (11,938) (97,800) (591)
Proceeds from sales of notes receivable . . . . . . . . . . . . . -- -- 20,717
Proceeds from exercise of stock options and related tax benefit . 4,717 11,511 4,612
Net proceeds from public offerings. . . . . . . . . . . . . . . . -- 119,770 (130)
------- ------- -------
Net cash provided by financing activities . . . . . . . 16,629 131,281 24,608
------- ------- -------
Effect of foreign currency exchange rates. . . . . . . . . . . . . . (613) (156) (1)
------- ------- -------
Net (decrease) increase in cash and cash equivalents . . . . . . . . (31,679) (23,140) 48,079
Cash and cash equivalents at beginning of year . . . . . . . . . . . 34,252 57,392 9,313
------- ------- -------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . $2,573 $34,252 $57,392
------- ------- -------
------- ------- -------
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.
(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 5 to 20 years. The Company
measures goodwill annually using undiscounted cash flows to assess
recoverability. The Company believes that no impairment of goodwill exists.
(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.
The Company believes that the carrying amounts of its current assets,
current liabilities, 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) 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 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.
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.
(l) STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information follows (in
thousands):
Cash paid during the year for: 1997 1996 1995
------- -------- -------
Interest (net of amounts capitalized) . . $ 752 $ 2,515 $ 30
------- -------- -------
------- -------- -------
Income taxes. . . . . . . . . . . . . . . $11,470 $ 10,692 $10,255
------- -------- -------
------- -------- -------
F-8
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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.
(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
------ ------
Raw Materials. . . . . . . . . . . . . . . $56,573 $47,280
Work-in-process. . . . . . . . . . . . . . 23,878 29,016
Finished goods . . . . . . . . . . . . . . 25,886 16,491
------ ------
$106,337 $92,787
-------- -------
-------- -------
(3) TRADE NOTES RECEIVABLE
The current and long-term trade notes receivable at May 31, 1997 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 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
------- -------
Land . . . . . . . . . . . . . . . . . . . . $ 3,819 $ 3,801
Building . . . . . . . . . . . . . . . . . . 28,008 15,622
Machinery and equipment. . . . . . . . . . . 49,002 39,136
Leased equipment . . . . . . . . . . . . . . 12,573 8,338
Other. . . . . . . . . . . . . . . . . . . . 12,692 6,425
------- -------
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. . . . . . . . . . . . . . . . . . . . 7,900 2,363
------- -------
$18,358 $13,751
------- -------
------- -------
(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
leases all of the property from its subsidiary under a master lease, which lease
has been collaterally assigned to the lender as security for the term loan. The
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.
(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:
EMPLOYEE STOCK OPTION PLAN
OPTION PRICE AVAILABLE
PER SHARE OUTSTANDING EXERCISABLE FOR GRANT
---------------- ----------- ----------- -----------
May 31, 1994 . . . . . . . . . . $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. . . . . . . . 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-$21.125 2,304,525 890,825 2,484,600
---------------- ----------- ----------- -----------
---------------- ----------- ----------- -----------
F-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 1,114,000 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, 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 . . . . . . . . . . . 2.0313-19.1875 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
--------------- ----------- ----------- ---------
--------------- ----------- ----------- ---------
DIRECTOR 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 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. As of May 31, 1997, the Company has 30,000
shares available for grant due to the cancellation of unvested shares granted to
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
------- ------- -------
Europe . . . . . . . . . . . . . . . . . $45,191 $26,718 $15,871
Canada and Mexico. . . . . . . . . . . . 20,688 25,324 28,075
South 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. . . . . . . . . . . . . . . 9,120 20,192 4,665
Africa . . . . . . . . . . . . . . . . . 608 8,460 2,222
Pakistan and India . . . . . . . . . . . 195 2,684 959
Other. . . . . . . . . . . . . . . . . . 260 427 835
-------- -------- -------
$121,199 $124,804 $91,964
-------- -------- -------
-------- -------- -------
Net sales and other revenues from individual customers representing 10% or
more of net sales and other revenues were as follows:
CUSTOMER 1997 1996 1995
-------- ---- ---- ----
A. . . . . . . . . . . . . . . . . . . . 39% 32% 15%
B. . . . . . . . . . . . . . . . . . . . 6% 10% 11%
(9) INCOME TAXES
Components of income taxes follow (in thousands):
1997 1996 1995
------ ------- -------
Current:
Federal . . . . . . . . . . . . . . . $5,022 $14,615 $10,517
Foreign . . . . . . . . . . . . . . . 3,686 3,986 1,007
State and local . . . . . . . . . . . 1,027 726 435
Deferred-Federal . . . . . . . . . . . . (2,035) (1,627) (624)
------ ------- -------
$7,700 $17,700 $11,335
------ ------- -------
------ ------- -------
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 and
1995, to the income tax expense reported herein is as follows (in thousands):
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 follow (in thousands):
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 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. 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.
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. At May 31, 1997, none of the operating
leases had noncancellable lease terms in excess of one year.
(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.
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 1997
consolidated financial statements include pension expense of $359,000, accrued
pension costs of $1,887,000, an intangible asset for unrecognized prior service
cost of $864,000 and equity increase of $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 1997 consolidated financial statements include pension expense of
$183,000, accrued pension costs of $483,000 and an equity reduction of $1,000.
(12) CREDIT RISK
At May 31, 1997 and 1996, the Company had guaranteed approximately
$8,198,000 and $30,307,000, respectively, of trade notes receivable sold with
recourse (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. Due to the inherent uncertainties of the guaranty agreements
the Company can not estimate the fair value of the guaranties as of May 31,
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 $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)
(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 . . . . . . . . . . . . . . . . . . $ 1,000
Trade accounts receivable. . . . . . . . 4,500
Inventories. . . . . . . . . . . . . . . 35,600
Prepaid expenses . . . . . . . . . . . . 300
Property, plant and equipment. . . . . . 28,700
Other assets . . . . . . . . . . . . . . 1,000
Goodwill . . . . . . . . . . . . . . . . 62,900
Accounts payable . . . . . . . . . . . . (1,400)
Accrued expenses . . . . . . . . . . . . (9,500)
Income taxes payable . . . . . . . . . . (1,800)
--------
Purchase 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 Company has a 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 May 31, 1997, no amounts of indebtedness were
outstanding under the credit facility and $46.7 million was available for
borrowings under the 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