UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: NOVEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ____________
COMMISSION FILE NUMBER: 1-13402
INPUT/OUTPUT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 22-2286646
(STATE OR OTHER JURISDICTION OF (IRS 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
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 [ ]
At November 28, 1997 there were 43,775,426 shares of common stock, par value
$0.01 per share, outstanding.
INPUT/OUTPUT, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 30, 1997
PART I. Financial Information. Page
----
Item 1. Financial Statements.
Consolidated Balance Sheets
November 30, 1997 and May 31, 1997 . . . . . . . . . . . . . . . . 2
Consolidated Statements of Operations
Three and six months ended November 30, 1997 and 1996 . . . . . . 3
Consolidated Statements of Cash Flows
Six months ended November 30, 1997 and 1996 . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition. . . . . . . . . . . . . . . . . . 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk. . 13
PART II. Other Information.
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 13
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders . . . . . 13
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 14
1
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS NOVEMBER 30, MAY 31,
1997 1997
------------ -------
Current assets:
Cash and cash equivalents . . . . . . $ 49,814 $ 2,573
Trade accounts receivable, net . . . . 67,709 61,788
Trade notes receivable, net . . . . . 30,011 27,800
Income taxes receivable . . . . . . . -- 2,403
Inventories . . . . . . . . . . . . . 105,957 106,337
Prepaid expenses . . . . . . . . . . . 1,759 1,939
-------- --------
Total current assets . . . . . . . 255,250 202,840
Long-term trade notes receivable . . . . 36,575 27,003
Deferred income tax asset . . . . . . . . 1,762 3,097
Property, plant and equipment, net . . . 74,386 78,376
Goodwill, net . . . . . . . . . . . . . . 58,934 61,024
Other assets . . . . . . . . . . . . . . 12,718 12,318
-------- --------
$439,625 $384,658
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, principally trade . $ 31,335 $ 13,143
Accrued expenses . . . . . . . . . . 21,781 18,358
Current installments of debt . . . . . 948 912
Income taxes payable . . . . . . . . . 1,450 --
-------- --------
Total current liabilities . . . . 55,514 32,413
Long-term debt . . . . . . . . . . . . . 10,517 11,000
Other liabilities . . . . . . . . . . . . 2,755 2,631
Stockholders' equity:
Preferred stock, $.01 par value;
authorized 5,000,000 shares, none
issued. . . . . . . . . . . . . . . . -- --
Common stock, $.01 par value;
authorized 100,000,000 shares;
issued 43,775,426 shares at
November 30, 1997 and 43,280,851
shares at May 31, 1997. . . . . . . . 438 433
Additional paid-in capital . . . . . . 224,579 218,973
Retained earnings . . . . . . . . . . 147,475 121,116
Cumulative translation adjustment . . (1,625) (1,673)
Unamortized restricted stock
compensation. . . . . . . . . . . . . (28) (235)
-------- --------
Total stockholders' equity . . . . 370,839 338,614
-------- --------
$439,625 $384,658
-------- --------
-------- --------
See accompanying notes to consolidated financial statements.
2
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
-------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Net sales and other revenues. . . . . . . $ 103,683 $ 67,044 $ 186,653 $ 140,048
Cost of sales . . . . . . . . . . . . . . 61,892 44,832 111,548 89,202
----------- ----------- ----------- -----------
Gross profit. . . . . . . . . . . . 41,791 22,212 75,105 50,846
----------- ----------- ----------- -----------
Operating expenses:
Research and development. . . . . . . . 8,228 5,983 15,616 11,873
Marketing and sales . . . . . . . . . . 3,707 3,559 6,591 6,866
General and administrative. . . . . . . 8,442 5,333 14,510 11,177
Amortization of intangibles . . . . . . 1,229 1,114 2,416 2,222
----------- ----------- ----------- -----------
Total operating expenses. . . . . . 21,606 15,989 39,133 32,138
----------- ----------- ----------- -----------
Earnings from operations. . . . . . . . . 20,185 6,223 35,972 18,708
Interest expense. . . . . . . . . . . . . (258) (172) (580) (172)
Other income. . . . . . . . . . . . . . . 2,253 1,004 3,372 2,727
----------- ----------- ----------- -----------
Earnings before income taxes. . . . . . . 22,180 7,055 38,764 21,263
Income taxes. . . . . . . . . . . . . . . 7,098 2,258 12,405 6,804
----------- ----------- ----------- -----------
Net earnings. . . . . . . . . . . . . . . $ 15,082 $ 4,797 $ 26,359 $ 14,459
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per common share . . . . . . . . $ 0.34 $ 0.11 $ 0.60 $ 0.33
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of common and
common equivalent shares outstanding. . 44,414,098 43,934,991 44,103,991 43,938,456
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements.
3
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
NOVEMBER 30,
-------------------
1997 1996
-------- --------
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,359 $ 14,459
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 7,787 5,862
Amortization of restricted stock compensation . . . . . . . 34 333
Deferred income taxes . . . . . . . . . . . . . . . . . . . 1,335 401
Pension costs . . . . . . . . . . . . . . . . . . . . . . . 180 218
-------- --------
35,695 21,273
Changes in assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . . . . . . (17,704) (26,677)
Inventories. . . . . . . . . . . . . . . . . . . . . . . 380 (20,342)
Leased equipment . . . . . . . . . . . . . . . . . . . . 2,383 (1,925)
Accounts payable and accrued expenses. . . . . . . . . . 21,615 (181)
Income taxes . . . . . . . . . . . . . . . . . . . . . . 3,853 (2,393)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 299 (113)
-------- --------
Net cash provided by (used in) operating activities. . . 46,521 (30,358)
Cash flows from investing activities:
Purchases of property, plant and equipment . . . . . . . . . . . (3,684) (14,919)
Investment in other assets . . . . . . . . . . . . . . . . . . . (864) (728)
-------- --------
Net cash used in investing activities. . . . . . . . . . . . . . (4,548) (15,647)
Cash flows from financing activities:
Borrowing from bank. . . . . . . . . . . . . . . . . . . . . . . -- 12,550
Payments on debt . . . . . . . . . . . . . . . . . . . . . . . . (447) (209)
Proceeds from exercise of stock options
and related tax benefit. . . . . . . . . . . . . . . . . . . . 5,784 4,133
-------- --------
Net cash provided by financing activities. . . . . . . . 5,337 16,474
Effect of foreign currency exchange rates. . . . . . . . . . . . . (69) 181
-------- --------
Net increase (decrease) in cash and cash equivalents . . . . . . . 47,241 (29,350)
Cash and cash equivalents at beginning of year . . . . . . . . . . 2,573 34,252
-------- --------
Cash and cash equivalents at end of period . . . . . . . . . . . . $ 49,814 $ 4,902
-------- --------
-------- --------
See accompanying notes to consolidated financial statements.
4
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) GENERAL
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. The financial statements reflect all
adjustments (consisting of normal recurring accruals) which are, in the opinion
of management, necessary to fairly present such information. Although the
Company believes that the disclosures are adequate to make the information
presented not misleading, certain information and footnote disclosures,
including significant accounting policies, normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. It is suggested that
these financial statements be read in conjunction with the consolidated
financial statements and the notes thereto, as well as Item 7. "Management's
Discussion and Analysis of Results of Operations and Financial Condition,"
included in the Company's Annual Report on Form 10-K for the year ended May 31,
1997, as filed with the Securities and Exchange Commission.
(2) INVENTORIES
Inventories are stated at the lower of cost (primarily first-in, first-out)
or market. A summary of inventories follows (in thousands):
NOVEMBER 30, MAY 31,
1997 1997
------------ --------
Raw materials. . . . . . . . . . . . . . . $ 58,167 $ 56,573
Work-in-process. . . . . . . . . . . . . . 21,831 23,878
Finished goods . . . . . . . . . . . . . . 25,959 25,886
-------- --------
$105,957 $106,337
-------- --------
-------- --------
(3) STATEMENTS OF CASH FLOWS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Similar
investments with original maturities beyond three months are considered short-
term investments available for sale and are carried at market. The Company does
not use or intend to use derivatives. Exchange rate fluctuations have not had a
material effect on the Company's Statements of Cash Flows.
5
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
Supplemental disclosures of cash flow information for the six months ended
November 30, 1997 and 1996 follow (in thousands):
1997 1996
---- ----
Cash paid during the periods for:
Interest (net of amount capitalized). . . $ 629 $ 172
------ ------
------ ------
Income taxes. . . . . . . . . . . . . . . $4,561 $6,944
------ ------
------ ------
(4) 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 recently-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. 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 prepayment
prior to maturity.
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 statement will be effective for interim and annual periods
ending after December 15, 1997 and will require the restatement of all prior
period earnings per share amount. 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.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
NET SALES AND OTHER REVENUES. The Company's second quarter net sales and
other revenues increased $36.6 million, or 54.6%, to $103.7 million as compared
to the prior year's second quarter net sales and other revenues of $67.0
million. The increase in sales revenues was primarily due to increased demand
for the Company's land systems and components. During the second quarter, 17 I/O
SYSTEM TWO-Registered Trademark- MRX land systems and one MSX marine system were
sold (with total recording capacity of 37,304 channels) compared to the prior
year's second quarter sales of 12 I/O SYSTEM TWO MRX land systems and three MSX
marine systems (with total recording capacity of 17,764 channels).
Net sales and other revenues for the first six months of the current year
were $186.7 million, up 33.3% from $140.0 million for last year's first six
months reflecting increased demand for the Company's products. Sales of 30 I/O
SYSTEM TWO MRX land systems, one RSR transition zone system and two MSX marine
systems were recorded during the first six months of fiscal 1998 compared to 18
I/O SYSTEM TWO MRX land systems, three RSR transition zone systems and three MSX
marine systems for the prior year's first six months.
GROSS PROFIT MARGIN. The Company's gross profit margin increased for
the second quarter and year-to-date compared to the prior year periods from
33.1% to 40.3%, and 36.3% to 40.2% respectively. Improved demand for seismic
equipment and instrumentation (which has had the effect of stabilizing and
firming the Company's pricing scheme for substantially all of its products)
and increased sales of land systems which typically feature higher margins
than the Company's marine and other equipment were major contributing factors
in the improved gross profit margins.
OPERATING EXPENSES. Operating expenses increased $5.6 million, or 35.1%,
for the second quarter over the prior year's second quarter operating expenses.
Research and development expenses increased $2.2 million, or 37.5%, primarily
due to increased supplies and prototype costs, compared to the prior year's
second quarter. Marketing and sales expenses increased $148,000, or 4.2%,
compared to the prior year's second quarter. General and administrative expenses
increased $3.1 million, or 58.3%, primarily due to increases in compensation
expense and an increase in allowance for doubtful accounts resulting from
increased sales. Amortization of intangibles increased $115,000, or 10.3%,
primarily due to increased goodwill expense resulting from prior acquisitions.
Operating expenses for the first six months of the current year were $7.0
million, or 21.8%, above operating expenses for the first six months of the
prior year. Research and development expense increased $3.7 million, or 31.5%,
primarily due to increased expenses related to research supplies and prototype
costs, compared to the prior year's first six months. Marketing and sales
expense decreased $275,000, or 4.0%, compared to the prior year's first six
months. General and administrative expenses increased $3.3 million, or 29.8%,
primarily due to increased compensation expense and increased allowance for
doubtful accounts resulting from increased sales. Amortization of intangibles
increased $194,000, or 8.7%, primarily due to increased goodwill expense
resulting from prior acquisitions.
INTEREST EXPENSE. As a result of the ten-year term facilities financing
completed in August 1996, interest expense for the second quarter and the first
six months of the current year was $258,000 and $580,000 respectively. See "Note
(4) - Long-Term Debt" of the Notes to Consolidated Financial Statements.
Interest expense for both last year's second quarter and first six months was
$172,000, due to interest on the ten year facility note executed in August 1996.
7
INCOME TAX EXPENSE. The Company's effective income tax rate was
approximately 32%, both for the second quarters and the first six months of 1998
and 1997.
OTHER FACTORS. During the first six months of fiscal 1998, the Company
has experienced increased demand for its land seismic acquisition systems and
related products. However, during the same time, industry-wide demand for
bottom cable systems has proved less than expected. Because of these trends,
and given the finite resources of the Company's research and development
personnel, the Company has decided to redirect its engineering staff to
concentrate for the near term on land product development and enhancements.
It is expected that this redirection of development emphasis will delay the
commercial introduction of the Company's recently announced Odyssey bottom
cable system.
LIQUIDITY AND CAPITAL RESOURCES
The Company has traditionally financed its operations from internally
generated cash flow, its credit facilities, and funds from equity financings.
Cash flows from operating activities before changes in working capital items
were a positive $35.7 million for the six months ended November 30, 1997. Cash
flows from operating activities after changes in working capital items were a
positive $46.5 million for the six months ended November 30, 1997, primarily due
to increases in accounts payable and accrued expenses (which represented a
source of cash) as a result of the increased levels of sales during fiscal 1998.
As of November 30, 1997 the Company had no borrowings outstanding under its
revolving line of credit and has $42.8 million available for borrowings under
the working capital revolver.
For the first six months of fiscal 1998, the Company has experienced higher
levels of cash and cash equivalents (approximately $50.0 million as of November
30, 1997) as a result of increased sales during fiscal 1998 to date compared to
fiscal 1997 sales, as well as improvements in collection rates and receivables
turnover. For information concerning the Company's sales finance activities, see
"Item 1. Business - Markets and Customers" of the Company's Annual Report on
Form 10-K for the year ended May 31, 1997. Accounts payable and accrued expenses
at November 30, 1997 were 68.6% higher than at May 31, 1997, primarily
reflecting the increased levels of sales during the first half of fiscal 1997.
The Company's various working capital accounts can vary in amount substantially
from time to time depending upon the Company's levels of sales, product mix
sold, demand for its products, percentages of cash versus credit sales,
collection rates, inventory levels, and general economic and industry factors.
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 (or was obligated to repurchase) 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 had guaranteed, on a partial
recourse basis, certain lease obligations owed by Grant to an institutional
lender/purchaser of Company equipment. A plan of reorganization was filed and
was confirmed on September 15, 1997. In accordance with the terms of the plan,
the Company was repaid substantially all of the outstanding indebtedness owed by
Grant as of November 30, 1997.
In August 1996, a subsidiary of the Company borrowed $12.6 million in long-
term financing secured by the land, buildings and improvements housing the
Company's executive offices, research and development headquarters and new
manufacturing facility in Stafford, Texas. The loan bears interest at the rate
of 7.875% per annum and is repayable in equal monthly installments of principal
and interest of $151,439. The promissory note, which matures on September 1,
2006, contains prepayment penalties. See "Note (4) - Long-Term Debt" of the
Notes to Consolidated Financial Statements.
The Company anticipates current year expenditures for exploration and
development of oil and gas properties to be approximately $2.5 million and
expects to fund these expenditures from its cash flows 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. The Company has drilled one well in 1998, which was a dry
hole. The Company expects to participate in up to five wells in 1998.
8
Capital expenditures for property, plant and equipment totaled $3.7 million
for the first six months of 1998. Total capital expenditures are currently
expected to aggregate $15.0 million for 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 will be adequate to meet its anticipated capital and
liquidity requirements for the foreseeable future.
CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS
Certain information contained in this Quarterly Report on Form 10-Q
(including statements contained in this Part I., Item 2. "Management's
Discussion and Analysis of Results of Operation and Financial Condition" and
in Part II, Item 1. "Legal Proceedings") may be deemed to be forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act
of 1934 and is subject to the "Safe Harbor" provisions of that section. This
information includes, without limitation, statements concerning delays in
product releases (particularly the commercial introduction of the Odyssey
bottom cable system discussed in Part I, Item 2. "Management's Discussion and
Analysis of Results of Operations and Financial Condition - Results of
Operations - Other Factors"); other statements concerning future revenues,
future earnings, future costs, future margins and future expenses;
anticipated product releases and technological advances; the future mix of
business and future asset recoveries; contingent liabilities; the inherent
unpredictability of adversarial proceedings; and future demand, future
industry conditions, future capital expenditures, and future financial
condition. These statements are based on current expectations and involve a
number of risks and uncertainties including those set forth below and
elsewhere in this Quarterly Report. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to be correct.
When used in this report, the words "anticipate," "estimate," "expect,"
"may," "project" and similar expressions are intended to be among the statements
that identify forward-looking statements. Important factors which could affect
the Company's actual results and cause actual results to differ materially from
those results which might be projected, forecast, estimated or budgeted by the
Company in such forward-looking statements include, but are not limited to, the
following:
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. 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.
9
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.
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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.
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.
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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-K and 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II - OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS
On September 24, 1997, a purported class action lawsuit was filed
against the Company and the former president and chief executive officer and
the current executive vice president, chief financial officer and secretary
of the Company, in the U.S. District Court for the Southern District of
Texas, Houston Division. The action, styled NORMAN TOCK V. INPUT/OUTPUT,
INC., GARY D. OWENS AND ROBERT P. BRINDLEY, alleges violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, and state statutory
and common law fraud provisions. The action was filed on behalf of purchasers
of common stock of the Company that purchased shares during the period from
September 17, 1996 through March 18, 1997. The complaint seeks damages in an
unspecified amount plus costs and attorney's fees. The complaint alleges
misrepresentations and omissions in public filings and announcements
concerning the Company's business, sales and products and disputes certain
accounting methodologies employed by the Company. On October 21, 1997, a
stipulation and order was entered by the court, extending the time for
responses to the complaint by the defendants pending entry of an order
appointing lead plaintiff and lead counsel. The Company believes that the
plaintiff's allegations are without merit and that there are meritorious
defenses to the allegations, and intends to defend the action vigorously.
ITEM 2. CHANGES IN SECURITIES
During the fiscal quarter ended November 30, 1997, the Company made no
sales of its equity securities that were not registered under the Securities Act
of 1993, as amended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1997 Annual Meeting of Stockholders of the Company was held on
September 29, 1997 for the following purposes: (i) the election of three
directors, each for a three-year term expiring in 2000; (ii) the adoption of
the Input/Output, Inc. Employee Stock Purchase Plan; and (iii) the ratification
of the appointment of KPMG Peat Marwick LLP as the Company's independent
certified public accountants for the fiscal year ending May 31, 1998.
The vote tabulation in the election for the directors was as follows:
Robert P. Brindley received 35,815,842 affirmative votes with 149,969 votes
withheld; Shelby H. Carter, Jr. received 35,807,987 affirmative votes with
157,824 votes withheld; and Theodore H. Elliott, Jr. received 35,819,306
affirmative votes with 146,505 votes withheld. In addition to Messrs. Brindley,
Carter and Elliott, the following individuals continued their terms as
directors: Charles E. Selecman, Ernest E. Cook, Glen H. Denison and G. Thomas
Graves III. Mr. Denison retired as a member of the Board of Directors in
November 1997, but was appointed by the Board of Directors as Director Emeritus.
The vote tabulation regarding the adoption of the Input/Output, Inc.
Employee Stock Purchase Plan was 33,791,811 affirmative votes with 1,914,896
votes against and 47,594 votes abstaining.
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The vote tabulation regarding the ratification of the appointment of KPMG
Peat Marwick LLP as the Company's independent certified public accountants for
the fiscal year ending May 31, 1998 was 35,900,289 affirmative votes with 22,825
votes against and 42,697 votes abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of documents filed as Exhibits.
27.1 - Financial Data Schedule (included in EDGAR copy only)
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed by the Company with
the Securities and Exchange Commission on October 7, 1997
under Item 5. - "Other Events" concerning the filing of the
purported class action lawsuit described in Part II,
Item 1. above.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
INPUT/OUTPUT, INC.
By: /s/ Robert P. Brindley
-------------------------------------
Robert P. Brindley
Executive Vice President,
Chief Financial Officer and Secretary
(Principal Financial Officer)
By: /s/ Ronald A. Harris
-------------------------------------
Ronald A. Harris
Vice President and Controller
(Principal Accounting Officer)
Dated: January 6, 1998
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