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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, 1996
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 CHARTER)
DELAWARE 22-2286646
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11104 WEST AIRPORT BLVD., STAFFORD, TEXAS 77477
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 933-3339
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
(TITLE OF CLASS)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes: [X] No: [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
registrant at June 30, 1996 (for purposes of the below-stated amount only, all
directors, officers and 5% or more stockholders are presumed to be affiliates):
$963,635,000.
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, 1996
--------------- ----------------
COMMON STOCK, $0.01 PAR VALUE 42,969,676
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's 1996 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 across land, transition zone and marine environments.
The Company believes that its I/O SYSTEMs are the most technologically advanced
seismic data acquisition systems and are particularly well-suited for advanced
three-dimensional ("3-D") data collection techniques. The Company's principal
customers are seismic contractors and major, independent and foreign oil and gas
companies around the world. During fiscal 1996, approximately 45% 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.
Since 1988, the Company has applied these technological advances to its
seismic data acquisition systems. The technological evolution of the I/O SYSTEM
has permitted the economical utilization of substantially greater channel
recording capacities. As a result, shipments of I/O SYSTEMs have grown from 14
systems in fiscal 1991 to 65 systems in fiscal 1996. Increased sales of I/O
SYSTEMs with larger average channel counts and customers upgrading existing
systems by expanding channel counts have increased the number of recording
channels shipped by the Company from approximately 8,000 in fiscal 1991 to
77,000 in fiscal 1996.
The Company's marine data acquisition systems were introduced as new
product lines by the Company during fiscal 1996. See "WGEP Acquisition." These
systems consist primarily of marine streamers and shipboard electronics that
collect seismic data in deep water environments. The systems feature second
generation 24-bit digital electronics inside the streamer module, high-quality
Company-manufactured hydrophones and other components, and 12,000-meter streamer
length capabilities. Other marine products manufactured and sold by the Company
include airguns (or energy sources) and integrated shipboard navigation,
positioning, and data telemetry quality control systems. See "Products - New and
Acquired Product Lines."
The Company believes that its future success will depend on its ability to
continue to introduce technological innovations by enhancing its existing
products and services to its customers, as well as by developing new products,
such as those designed for time-lapse 3-D ("4-D") and three-component 3-D ("9-
D") seismic survey techniques.
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:
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- - TECHNOLOGICAL LEADERSHIP. The Company's research efforts have resulted in
the development of numerous inventions, processes and techniques which have
established the I/O SYSTEM TWO-Registered Trademark- as the most
technologically advanced land seismic data acquisition system. The I/O
SYSTEM TWO is upgradable and expandable to accommodate system enhancements
and follow-on orders for components and related accessories as customers
increase the capacities of their systems. The Company's ongoing research
efforts have also led to the introduction of new products such as the I/O
SYSTEM TWO RSR, the Company's first radio telemetry system. The I/O SYSTEM
TWO RSR is designed to acquire data across a variety of difficult
environments, including surf zones, marshes, swamps and mountain ranges.
Research and development efforts are complemented by the Company's Output
Exploration Company, Inc. subsidiary ("OPEX"), which serves as a field
laboratory for testing new products and obtaining feedback regarding
customer requirements.
- - COMPLEMENTARY ACQUISITIONS. The Company has expanded its product line in
recent years through the completion of several complementary acquisitions.
See "WGEP Acquisition" and "Product Development and Support".
- - INNOVATIVE MARKETING INITIATIVES. The Company employs three key initiatives
to stimulate product sales around the world. First, through its Global
Charter Corporation subsidiary ("Global Charter"), the Company offers
lease/purchase programs and assists customers in arranging financing for
their equipment purchases. Second, Global Charter conducts seminars and
equipment demonstrations and provides training for prospective and existing
customers. Third, OPEX serves as a vehicle to introduce and educate
prospective customers regarding the Company's products and capabilities.
WGEP ACQUISITION
During 1995, the Company completed the 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 1996, 1995 and 1994.
The business of WGEP included the manufacture, sale and marketing of marine
and land seismic data acquisition systems; marine streamers; marine streamer
navigation, positioning and quality control systems and related software
products; vibrators and airgun equipment; seismic cables and connectors;
geophones and hydrophones; and certain other products and equipment used in the
domestic and international business of acquiring seismic data in land,
transition zone and marine environments.
The principal assets related to the WGEP operations acquired by the Company
were: (i) inventory, machinery and equipment; (ii) a manufacturing plant in
Alvin, Texas; (iii) certain intellectual property used in the manufacturing
operations of WGEP; (iv) certain customer contracts, accounts receivable and
general intangibles; (v) leases for property located in Texas and England; and
(vi) all of the capital stock of two Dutch companies which manufacture
geophones.
The source of the funds for the $121.3 million cash purchase was
approximately $51.3 million cash on hand and $70 million borrowed under a credit
facility. See "Management's Discussion and Analysis of Results of Operations and
Financial Condition - Liquidity and Capital Resources." In November 1995, the
Company paid WAII an additional $747,000 to reflect certain post-closing net
purchase price adjustments.
In connection with the transaction, the Company and WAII entered into a
product purchase agreement (the "Product Agreement") governing the continuing
relationship between the parties regarding sales of seismic products and
equipment to WAII by the Company. The products covered by the Product Agreement
include those previously manufactured by the Company as well as
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former WGEP products now manufactured by the Company. In the event that WAII
purchases products in any year in an aggregate amount exceeding $70 million
(which amount is subject to adjustment under the Product Agreement), WAII will
be entitled to a rebate (determined pursuant to a formula) based upon the amount
of the shortfall. The Product Agreement has a five-year term, but may earlier
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 material term or condition
of the Product Agreement and such breach or violation is not cured within 60
days of notice thereof.
WAII also agreed, for a period of five years from the closing date, or
until the earlier termination of the Product Agreement and subject to certain
exceptions, not to manufacture any of the product lines sold to the Company in
the transaction. The exceptions principally relate to business conducted by
other affiliates or divisions of WAII or Western Atlas Inc., WAII's ability to
perform research and development activities and WAII's having a secondary source
of supply if the Company discontinues manufacturing a former WGEP product. The
parties also agreed that if the Company discontinues manufacturing a former WGEP
product, or fails to manufacture or deliver a former WGEP product to WAII
specifications and the Company fails or chooses not to remedy WAII's objection
to such discontinuance, then subject to certain dispute resolution procedures
being first carried out, WAII would have a limited, worldwide, perpetual,
irrevocable, non-exclusive, royalty-free license under the intellectual property
assigned to the Company under the Asset Purchase Agreement with respect to that
particular product.
PRODUCTS
GENERAL
The Company's principal product line has been the I/O SYSTEMs and their
related components, which has been the major focus of the Company's research and
development efforts. In 1982, the Company initiated a project to design a
technologically advanced land-based seismic data acquisition system which would
use remote seismic data collection modules to digitize the seismic signal in the
field and enhance the quality of the recorded data. Design of such a system was
the major effort of the Company's research and development group over the next
six years. As a result of these efforts, the 15-bit I/O SYSTEM ONE-Registered
Trademark- was introduced in fiscal 1989. In fiscal 1992, the Company introduced
the I/O SYSTEM TWO-Registered Trademark-, the first commercially available
system to utilize a 24-bit analog-to-digital converter. The 24-bit analog-to-
digital converter extended the decibel range of seismic signal recording and
reduced system distortion to provide superior signal fidelity. This
technological innovation provided higher resolution data, which is especially
beneficial for 3-D surveys in geological complicated and/or noisy areas, and
substantially reduced power consumption, which improves the operational
efficiencies.
An I/O SYSTEM consists of a Central Electronics Unit containing a number of
modular components, which may vary depending upon customer specifications, and
multiple remote ground equipment modules, including Line Taps and Remote Signal
Conditioners (each designated as an "MRX" which acquires six channels of analog
seismic data). A typical system consists of a Central Electronics Unit, 12 Line
Taps, approximately 200 MRXs and various accessories, although larger or smaller
systems may be assembled. Once a customer purchases a Central Electronics Unit,
the customer can purchase additional Line Taps, MRXs and accessory equipment to
expand and modify a system to fulfill specific requirements. In addition, a
customer may transform an I/O SYSTEM into two or more separate systems with the
purchase of additional Central Electronics Units.
In addition to the standard I/O SYSTEM components, several optional
components are available as accessory equipment. The Company manufactures most
of the components sold as a part of the I/O SYSTEM product line, and purchases
certain separate components for resale,
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including the operator console, oscilloscope, printer and digital camera.
Depending upon the system's configuration, the price of an I/O SYSTEM typically
ranges from $800,000 to $4.5 million.
The Company's transition zone data acquisition system, the I/O SYSTEM TWO
BCX, incorporates a proprietary cable which lays on the ocean bottom in depths
up to 200 meters and in marine areas of congestion or obstruction and collects
data in a similar manner as a land seismic data acquisition system. Depending
upon the system's configuration, the price of the I/O SYSTEM TWO BCX will
typically range from $4.0 million to $8.0 million.
CENTRAL ELECTRONICS UNIT
The Central Electronics Unit, which acts as the control center of the I/O
SYSTEM, consists of several components which are typically mounted within a
vehicle or helicopter transportable enclosure. The Company also can package the
Central Electronics Unit to be portable for jungle and other difficult terrain
applications. The Central Electronics Unit receives digitized data from the
MRXs, stores it on magnetic tape for subsequent processing, and displays the
data on optional monitoring devices. The Central Electronics Unit also controls
the data collection parameters of the MRXs, as well as calibrates and provides
operating status analysis and tests all functions of the system.
REMOTE GROUND EQUIPMENT
The remote ground equipment of the I/O SYSTEM consists of multiple Remote
Signal Conditioners and Line Taps positioned over the survey area. In September
1993, the Company introduced the MRX, a miniaturized Remote Signal Conditioner
for land seismic applications, which featured significant advances in diagnostic
capabilities. Seismic signals from sensors called geophones are collected by the
MRXs, each of which handles the collection process for six channels of analog
seismic data. The MRX filters and digitizes the data, which is then transmitted
by the MRX via cable to a Line Tap. The Line Taps manage the seismic data
collection process on each seismic line, further organize the seismic data and
transmit this data and remote equipment operating status information via cable
to the Central Electronics Unit. The MRX automatically routes around cable
faults, thereby increasing crew productivity. In addition, the MRX provides high
quality data through its geophone performance capabilities.
OTHER I/O SYSTEM FEATURES
The I/O SYSTEM has been designed to maximize the efficiency of seismic crew
operations. Menu-driven software incorporated into the Central Electronics Unit
allows a crew to quickly calibrate, test and verify the status of each MRX
deployed. The status of each cable, channel and MRX battery pack also can be
verified. These rapid deployment and remote testing and calibration capabilities
can significantly improve the productivity of seismic crews in the field. The
Company believes that competing systems do not offer similarly extensive
capabilities.
Land-based seismic data acquisition systems require electrical power and
must be designed to operate in diverse environmental conditions. The I/O SYSTEM
TWO has the flexibility to power the MRX via cable from a central power source
or a rechargeable or solar powered battery pack. An MRX's battery pack may be
replaced without terminating or interrupting the MRX's operation. The battery
packs may also be monitored by the Central Electronics Unit during actual field
use to forecast usable time remaining for each battery.
A seismic crew may collect data from sound waves produced by one of several
energy sources. Historically, dynamite and other explosives have been used. In
recent years, large, truck-mounted earth vibrators have been used more
frequently as energy sources. See "New and Acquired Product Lines." When non-
explosive energy sources are used, an optional component, the Correlator Stacker
Module, is added to the data acquisition system to correlate the seismic data
for further processing. The Correlator Stacker Module incorporates several
advanced noise control and editing programs to improve data quality and
resolution.
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NEW AND ACQUIRED PRODUCT LINES
RSR SYSTEM. In June 1995, the Company introduced its first radio telemetry
system, the I/O SYSTEM TWO RSR. This system records data across a variety of
environments, including transition zones, surf zones, marshes, swamps or
mountain ranges. Depending upon the system's configuration, the price of the I/O
SYSTEM TWO RSR ranges from $1.2 million to $4.0 million.
MARINE DATA ACQUISITION SYSTEM. The Company's marine data acquisition
system consists primarily of marine streamers and shipboard electronics that
collect seismic data in deep water environments. Marine streamers, which contain
encapsulated Marine Remote Signal Conditioner ("MSX") modules and cabling, may
measure up to 12,000 meters in length and are towed behind a special purpose
vessel to record seismic data. Marine electronics include navigation,
positioning and data telemetry quality control systems and related software
products, as well as electronics for shipboard recording.
The marine systems feature second generation 24-bit digital MSX modules,
each of which contain 16 channels per module. This feature, along with
utilization of fiber-optic data transmission and titanium connectors and
inserts, results in reduced size and power consumption, lower repair costs and
higher quality and reliability of acquired marine seismic data, and permits a
complete MSX system to record up to 1,920 channels.
Important features of the Company's marine systems include Company-
manufactured components, such as its hydrophones. In addition, as larger marine
surveys are conducted by seismic crews, the Company believes that its marine
streamers having up to 12,000-meter length capabilities offer many competitive
advantages, including physical strength and flexibility through specially-
designed non-metallic stress members, down-line power capabilities, and fiber-
optic data transmission.
GEOPHONES AND HYDROPHONES. Geophones and hydrophones are seismic sensor
devices designed to detect energy reflected from the earth's subsurface. The
product line includes low distortion seismic sensors designed for land
(geophones), transition zone (marshphones) and marine (hydrophones)
environments. This product line includes a geophone checking technology as well
as three-component geophones that could be used in 9-D seismic recording.
AIRGUNS. Airguns are the primary energy source used to initiate the energy
transmitted through the earth's subsurface which are subsequently recorded as
data signals in the marine environment. The Company's sleeve gun, a specialized
type of airgun, is well suited for high resolution 3-D seismic data collection
because of its expanded frequency band. Additionally, the Company offers an
airgun source synchronizing system that can control up to 128 airguns
simultaneously, offering real time monitoring of airgun firings.
VIBRATORS. Vibrators are controlled mechanical devices used as a source of
seismic energy on land. The vibrators offered can be supplied with seven
different vehicles (many of which are manufactured by the Company) and offer a
maximum of 62,000 pounds of peak force. The Company believes that its vibrators
are the only vibrators in the industry to offer patented pre-load series which
significantly extends the life of the vibrator and lowers the distortion of the
sound source.
5
PRODUCT DEVELOPMENT AND SUPPORT
The Company's ability to compete effectively and maintain a leading market
position in the manufacture and sale of seismic data acquisition systems and
seismic instruments depends to a substantial degree upon continued technological
innovation. While the market for these products is characterized by continual
and rapid changes in technology, development cycles from initial conception
through product introduction tend to extend over several years. Since
introducing its first I/O SYSTEM in fiscal 1989, the Company has targeted an
amount for research and development expenditures equal to approximately 10% of
its annual budgeted revenues. These research and development expenditures have
principally related to the continued enhancement of the I/O SYSTEMs product line
and basic research and development on other emerging technologies having
potential applicability to the seismic industry. See "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition." These efforts have resulted in the
development of numerous inventions, processes and techniques, a number of which
have been incorporated as enhancements to the I/O SYSTEM product line. See "-
Intellectual Property."
The Company evaluates the acquisition of businesses or technologies
relevant to future systems or complementary products. In addition, acquired
technologies in combination with other Company research and development
activities could result in products that may enable the Company to enter non-
geophysical markets. In fiscal 1995, the Company acquired Q.C. Tools, Inc., a
Houston-based developer of geophysical software for seismic data acquisition
applications, which enhances the Company's ability to provide quality control
capabilities and has a database structure suitable for large channel 3-D seismic
surveys. The Company also acquired, in fiscal 1995, DeRegt Special Cable, Ltd.,
a cable manufacturing company in Ireland, to increase its previously acquired
cable manufacturing capacity and to enhance the Company's ability to meet the
growing need for cables. DeRegt's location should enable the Company to more
effectively serve markets in Europe, Africa, the Middle East and the Former
Soviet Union.
Seismic survey techniques being investigated for future commercial
applicability in the industry include 4-D and 9-D techniques. The 4-D process,
or time-lapse 3-D, measures the same length, depth and width of data acquired in
3-D surveys, but also features the capability to record time intervals between
two or more surveys. The process is well-suited for reservoir management
applications, and is intended to identify fluid movements and changes in the
producing status of the reservoir. The 9-D technique, or three-component 3-D, is
an experimental seismic technique being investigated by a consortium of
companies and research firms (to whom the Company serves as a technical
advisor). The 9-D technique delineates reservoir characteristics not easily
depicted by 3-D seismic surveys. The 9-D surveys would measure shear wave data
in addition to conventional 3-D measurements of compressional wave data, thereby
significantly expanding the geophysicist's ability to determine the location of
a potential formation as well as the probability of hydrocarbons. Several
advances in technology and processing will have to be accomplished in order for
4-D and 9-D processes to become commercially viable.
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 program
parameters to contractors and consequently may stipulate use of the Company's
equipment, or may operate their own seismic crews. WAII and its affiliates and
Geco-Prakla accounted for approximately 32% and 10%, respectively, of the
Company's net sales and other revenue in fiscal 1996. See Note 8 of Notes to
Consolidated Financial Statements.
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Published industry sources indicate that the number of seismic crews
operating worldwide has decreased over the past ten years. Although the Company
believes that such crews' utilization of high-channel 3-D seismic systems has
increased during the same period, the Company believes that most of the world's
seismic crews are not yet equipped with advanced seismic data acquisition
systems, such as the I/O SYSTEM TWO.
A significant part of the Company's marketing efforts are focused on areas
outside the United States. Foreign sales are subject to special risks inherent
in doing business outside of the United States, including the risk of war, civil
disturbances, embargo and government activities, as well as risks of compliance
with additional laws, including tariff regulations and import/export
restrictions. The Company sells its products through a direct sales force
consisting of Company employees and through several international third-party
sales representatives responsible for key geographic areas. Sales personnel
generally have either oil and gas exploration or production expertise or
experience in selling advanced technology-based systems.
During fiscal 1996, 1995, and 1994, approximately 45%, 68% and 70%,
respectively, of the Company's net sales and other revenues were derived from
sales to customers outside the United States. See Note 8 of Notes to
Consolidated Financial Statements for information concerning geographic
distribution of sales. The principal reason for the decline in fiscal 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 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 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 also
arranges financing for customer purchases through direct loans to customers from
such lender, which loans are in turn guaranteed by the Company. See
"Management's Discussion and Analysis of Results of Operation and Financial
Condition - Liquidity and Capital Resources".
The Company's installment sales contracts are secured by the equipment
under the contract and typically require a down payment of approximately 15% of
the purchase price, normally range in length from 24 to 48 months and bear
interest at rates ranging from 7.0% to 12.0% per annum. See Note 3 of Notes to
Consolidated Financial Statements.
The Company has entered into installment sales contracts with certain
customers located in the Former Soviet Union. The terms of such contracts have
traditionally varied from the terms of the Company's standard installment sales
contracts and typically required such customers to make an initial down payment
of approximately one-half of the total sales price prior to shipment and pay the
remaining balance of the sales price within one year of shipment. However,
recent sales to customers in the Former Soviet Union during the second half of
fiscal 1996 have featured installment contracts containing more standard terms.
The Company's rental program is designed to provide its customers a
convenient and cost effective method to upgrade their system recording capacity
while building equity in the rental equipment. Typical rental terms provide for
a six 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)
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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. As of May 31, 1996, such third party financing sources had purchased
equipment contracts and leases which, in the aggregate, obligate the Company to
guarantee or repurchase up to approximately $30.3 million. Performance of the
Company's obligations under a number of these arrangements could have a material
adverse effect on the Company's financial condition; in addition, a number of
significant payment defaults by customers could have a material adverse effect
on the Company's financial position and results of operations.
MANUFACTURING
Prior to the WGEP Acquisition, the Company manufactured or assembled its
products, produced spare parts and renovated and repaired instruments at its
facilities in Stafford and Houston, Texas, as well as facilities in Ireland and
Canada. As a result of the WGEP Acquisition, the Company added approximately
300,000 square feet of manufacturing-related space in Alvin, Texas, the
Netherlands and England. In January 1996, the Company announced the commencement
of construction of a 109,896 square feet manufacturing facility to replace the
Company's current electronics assembly facility. See Item 2. -"Properties". Upon
completion of assembly, products undergo functional and environmental testing to
the extremes of product specifications and final quality assurance inspection.
The Company's experience has been to normally fill and ship customer orders
within 45 days of receipt.
SUPPLIERS
The Company purchases a substantial portion of the electronic components
used in its systems and products. Currently, the Company purchases the 24-bit
analog-to-digital converters used in its I/O SYSTEMs from a single vendor. While
the Company purchases that vendor's standard converter, the other components of
the I/O SYSTEM are designed for use with that particular converter. Even though
the Company believes that it could replace such a converter with a functional
equivalent, if such 24-bit converter were not available, redesign of the I/O
SYSTEM would be required and costly delays could result.
In addition, certain other components, such as the flash memory
microprocessor used in the Company's I/O SYSTEM TWO RSR, are from time to time
subject to supplier allocation. If the Company's inventory and supplier
allocation of such components were insufficient to meet the Company's
requirements, sales of the Company's systems and products containing those
components could be constrained.
COMPETITION
The market for seismic data acquisition systems and seismic instrumentation
is highly competitive and is characterized by continual and rapid changes in
technology. The Company's principal competitor for land seismic equipment is
Societe d'Etudes Recherches et Construction Electroniques, an affiliate of
Compagnie General de Geophysique which, unlike the Company, possesses the
advantage of being able to sell to an affiliated seismic contractor. The
Company's principal competitor in the marine seismic systems market is
GeoScience Corporation, an affiliate of Tech-Sym Corporation.
The Company believes that technology is the primary basis of competition in
the industry, as oil and gas exploration 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.
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OIL AND GAS ACTIVITIES
As an adjunct to its research, development and marketing efforts, the
Company, through its subsidiary, OPEX, has acquired certain oil and gas
exploration prospects. In fiscal 1995, OPEX designed the survey of the 109,000-
acre Kenedy Ranch in south Texas. OPEX also designed the 3-D survey of the
Brownsville Salt Dome in Mississippi; this survey acquired 2,600 channels of
seismic data, which the Company believes is the largest known survey conducted
on land to date. These activities are intended to demonstrate product
capabilities for potential customers to encourage broader usage of the I/O
SYSTEM and also serve as test sites for Company-developed products, processes
and techniques.
In fiscal 1996, OPEX participated in the drilling of two wells on the
Brownsville Dome prospect. OPEX owns a 47% working interest in the Brownsville
Dome prospect and a 25% working interest in the Kenedy Ranch prospect. OPEX's
remaining rights regarding the Kenedy Ranch prospect, as well as the Santa Fe
and Garcia Ranches in south Texas, are in the nature of seismic options which
expire at various dates in 1996. After the options are exercised and seismic
work is conducted, blocks of leasehold acreage may be purchased by the
participants. If exercised, OPEX anticipates that it would own a 25% working
interest in the particular optioned acreage with respect to the Ranches. Since
fiscal 1994, OPEX has participated in the drilling of twelve wells, six of which
were dry holes; six of the wells are currently classified as productive. The
Company expects to participate in five additional wells in fiscal 1997 and,
depending upon the results, could participate in additional wells over the next
few years. The Company's participation in oil and gas activities has not had any
material effect upon the Company's revenues, net earnings or assets to date.
INTELLECTUAL PROPERTY
The Company relies on a combination of patents, trade secrets, copyrights
and technical measures to protect its proprietary hardware and software
technologies. While certain technologies have been patented by the Company, it
does not normally attempt to patent most proprietary technology, even where
regarded as patentable. The Company believes that in most cases this technology
is more effectively protected by system enhancements, innovations and
maintaining confidentiality, rather than through disclosure and a comprehensive
patent enforcement program. Although the Company's patents are considered
important to its operations, no one patent is considered essential to the
success of the Company. Copyright and trade secret protection may be unavailable
in certain foreign countries in which the Company sells its products. In
addition, the Company seeks to protect its trade secrets through confidentiality
agreements with its employees and agents.
The Company also owns a number of trademarks, including I/O-Registered
Trademark-, I/O SYSTEM ONE-Registered Trademark- and I/O SYSTEM TWO-Registered
Trademark-. Other trademarks used by the Company have been considered less
important to the Company since they pertain to products traditionally producing
substantially smaller revenues to the Company than the seismic data acquisition
system product line.
REGULATORY MATTERS
The Company's operations are subject to numerous local, state and federal
laws and regulations in the United States and in foreign jurisdictions
concerning the containment and disposal of hazardous materials. The Company does
not foresee the need for significant expenditures to ensure continued compliance
with current environmental protection laws. Regulations in this area are subject
to change, and there can be no assurance that future laws or regulations will
not have a material adverse effect on the Company.
9
EMPLOYEES
At June 30, 1996, the Company had 1,232 employees worldwide, of whom 988
were employed in the United States. The Company's domestic employees are not
subject to any collective bargaining agreement. The Company has never
experienced a work stoppage and considers its relations with its employees to be
satisfactory.
ITEM 2. FACILITIES
The Company's primary manufacturing facilities are as follows:
Manufacturing Facility Square Footage
---------------------- --------------
Stafford, Texas* 35,200
Houston, Texas** 68,880
Alvin, Texas* 240,000
Cork County, Ireland* 35,630
Norwich, England** 31,000
Voorschoten, The Netherlands** 30,000
-------
440,710
- --------------------
* Owned
** Leased
The Company's executive headquarters (utilizing approximately 50,845 square
feet) is located at 11104 West Airport, Stafford, Texas and its research and
development headquarters (utilizing approximately 79,566 square feet) is located
at 12300 Parc Crest Drive, Stafford, Texas; both facilities are owned by the
Company. The Company also leases an aggregate of 111,884 square feet of
additional warehouse, manufacturing and office space under short-term operating
leases. The machinery, equipment, buildings and other facilities owned and
leased by the Company are considered by management to be sufficiently maintained
and adequate for the Company's current operations.
The Company has received a commitment for a $12.5 million ten-year loan to
finance the construction of its new 109,896 square feet manufacturing facility
in Stafford, Texas, adjacent to its corporate executive offices. The loan is to
be secured by a mortgage on the new manufacturing facility as well as the
Company's executive headquarters and its adjacent research and development
headquarters. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Liquidity and Capital Resources."
The Company anticipates these facilities will accommodate the Company's
growth for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any pending legal proceedings to which the
Company or any of its property is subject which, if adversely determined, could
have a material adverse effect on the business or financial condition of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a Special Meeting of Stockholders of the Company held on March 4, 1996,
the Company's stockholders were asked to approve an amendment to the Company's
Restated Certificate of Incorporation (the "Certificate") to (i) increase the
number of authorized shares of
10
Common Stock, par value $0.01 per share, of the Company from 50,000,000 to
200,000,000 shares and (ii) increase the number of authorized shares of
preferred stock, par value $0.01 per share, of the Company from 5,000,000 to
25,000,000 shares. Approximately 46.5% (19,633,133 shares) of the Company's
outstanding Common Stock voted in favor of this proposal; approximately 30%
(12,683,647 shares) voted against the proposal and 286,280 shares (less than 1%)
abstained. The proposal required for its approval the affirmative vote of a
majority of shares of Common Stock outstanding and entitled to vote at the
meeting, and was therefore rejected.
P A R T II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the New York Stock Exchange
("NYSE") under the symbol "I/O". Prior to November 1994 the Company's Common
Stock was traded on the National Market System of the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") under the symbol
"IPOP". The following table sets forth the high and low last reported sales
prices of the Common Stock for the periods indicated, as reported on the NYSE
composite tape and NASDAQ National Market System, and have been adjusted to
reflect the Company's two-for-one share split (in the nature of a 100% stock
distribution) on January 9, 1996.
PRICE RANGE
------------------------
PERIOD HIGH LOW
---- ---
Fiscal 1996
-----------
Fourth Quarter. . . . . . . . $ 40 1/2 $ 27
Third Quarter . . . . . . . . 30 1/4 22
Second Quarter. . . . . . . . 23 3/8 17 3/16
First Quarter . . . . . . . . 20 7/8 16 15/16
Fiscal 1995
-----------
Fourth Quarter. . . . . . . . $18 1/16 $ 11 1/2
Third Quarter . . . . . . . . 13 5/16 9 9/16
Second Quarter. . . . . . . . 12 3/4 9 5/8
First Quarter . . . . . . . . 13 3/8 8 23/64
The Company historically has not paid and does not intend to pay cash
dividends on its Common Stock in the foreseeable future. The Company presently
intends to retain earnings for use in its business, with any future decision to
pay cash dividends dependent upon its growth, profitability, financial condition
and other factors the Board of Directors may deem relevant. The Company's
revolving line of credit contains post-default prohibitions on payments of
dividends and other distributions payable in cash or property. See"Management's
Discussion and Analysis of Results of Operations and Financial Condition --
Liquidity and Capital Resources".
On June 30, 1996, there were 184 stockholders of record of the Common Stock
and the Company believes that there were approximately 4,812 beneficial owners
of the Common Stock as of such date.
11
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, 1996, 1995, 1994, 1993 and 1992 and with respect to the Company's
consolidated balance sheets at May 31, 1996, 1995, 1994, 1993 and 1992 have been
derived from the Company's audited consolidated financial statements. This
information should be read in conjunction with Item 7 - "Management's Discussion
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,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Net sales and other revenues . . . . . . . . $278,283 $134,698 $95,752 $54,205 $45,501
Cost of sales. . . . . . . . . . . . . . . . 163,811 71,440 50,560 26,677 22,999
-------- -------- -------- -------- --------
Gross profit. . . . . . . . . . . . . . . . 114,472 63,258 45,192 27,528 22,502
-------- -------- -------- -------- --------
Operating expenses:
Research and development. . . . . . . . . . 23,243 11,400 7,931 5,004 4,362
Marketing and sales . . . . . . . . . . . . 12,027 6,789 4,673 4,492 2,765
General and administrative. . . . . . . . . 19,096 11,817 8,980 5,007 3,860
Amortization of identified intangibles. . . 4,305 1,331 762 698 495
-------- -------- -------- -------- --------
Total operating expenses. . . . . . . . . 58,671 31,337 22,346 15,201 11,482
-------- -------- -------- -------- --------
Earnings from operations . . . . . . . . . . 55,801 31,921 22,846 12,327 11,020
Interest expense . . . . . . . . . . . . . . (2,515) (30) (160) (203) (296)
Other income . . . . . . . . . . . . . . . . 3,091 3,944 1,466 1,222 1,135
-------- -------- -------- -------- --------
Earnings before income taxes . . . . . . . . 56,377 35,835 24,152 13,346 11,859
Income taxes . . . . . . . . . . . . . . . . 17,700 11,335 7,589 4,204 4,032
-------- -------- -------- -------- --------
Net earnings . . . . . . . . . . . . . . . . $38,677 $24,500 $16,563 $9,142 $7,827
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Earnings per common share. . . . . . . . . . $0.94 $0.66 $0.53 $0.31 $0.27
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average common shares
outstanding . . . . . . . . . . . . . . . 41,125 37,381 31,448 29,786 29,326
BALANCE SHEET DATA (END OF YEAR):
Working capital. . . . . . . . . . . . . . . $165,225 $104,908 $87,558 $29,685 $21,782
Total assets . . . . . . . . . . . . . . . . 355,465 165,487 132,000 61,542 46,349
Short-term debt, including current
installments of long-term debt (1). . . . . -- -- 591 1,961 1,636
Long-term debt (1) . . . . . . . . . . . . . -- -- -- 427 545
Stockholders' equity . . . . . . . . . . . . 317,204 146,712 115,659 47,877 37,430
OTHER DATA:
Capital expenditures . . . . . . . . . . . . $10,240 $5,979 $4,010 $3,703 $1,824
Depreciation and amortization. . . . . . . . 10,152 3,570 1,877 1,452 1,086
- ------------------
(1) 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 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.
ANNUAL RESULTS OF OPERATIONS
The Company's results of operations improved significantly in each of the
last two fiscal years principally as a result of the continued market acceptance
of the I/O SYSTEM product line. Net sales and other revenues consist principally
of seismic data acquisition systems, related
12
component sales, and rental income relating to operating leases of I/O SYSTEM
components. For the fiscal year ended May 31, 1996, the Company shipped 65 I/O
SYSTEMS.
The results of operations of the Company for the year ended May 31, 1996
and certain balance sheet items as of that date were significantly impacted by
the WGEP Acquisition and the purchase of the specified assets and assumption of
the specified liabilities in connection therewith. The gross profit margins on a
number of former WGEP products have traditionally been lower than the gross
profit margins for I/O SYSTEMs and their components. Accordingly, the Company's
average gross profit margin following the WGEP Acquisition has been lower than
that realized by the Company in the past.
The following table sets forth for fiscal 1996, 1995 and 1994, 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
------------------------------------ ---------------------
1996 1995 1994 1995-1996 1994-1995
---- ---- ---- --------- ---------
Statement of Operations Data:
Net sales and other revenues. . . . . . . . . . . . . 100.0% 100.0% 100.0% 106.6% 40.7%
Cost of sales . . . . . . . . . . . . . . . . . . . . 58.9 53.0 52.8 129.3 41.3
----- ----- -----
Gross profit. . . . . . . . . . . . . . . . . . . . . 41.1 47.0 47.2 81.0 40.0
----- ----- -----
Operating expenses:
Research and development. . . . . . . . . . . . . . 8.4 8.5 8.3 103.9 43.7
Marketing and sales . . . . . . . . . . . . . . . . 4.3 5.0 4.9 77.2 45.3
General and administrative. . . . . . . . . . . . . 6.9 8.8 9.3 61.6 31.6
Amortization of identified
intangibles . . . . . . . . . . . . . . . . . . . 1.5 1.0 0.8 223.4 74.7
----- ----- -----
Total operating expenses. . . . . . . . . . 21.1 23.3 23.3 87.2 40.2
----- ----- -----
Earnings from operations . . . . . . . . . . . . . . . 20.1 23.7 23.9 74.8 39.7
Interest expense . . . . . . . . . . . . . . . . . . . (0.9) (0.0) (0.2) 8,283.3 (81.3)
Other income . . . . . . . . . . . . . . . . . . . . . 1.1 2.9 1.5 (21.6) 169.0
----- ----- -----
Earnings before income taxes . . . . . . . . . . . . . 20.3 26.6 25.2 57.3 48.4
Income taxes . . . . . . . . . . . . . . . . . . . . . 6.4 8.4 7.9 56.2 49.4
----- ----- -----
Net earnings . . . . . . . . . . . . . . . . . . . . . 13.9% 18.2% 17.3% 57.9% 47.9%
----- ----- -----
----- ----- -----
NET SALES AND OTHER REVENUES
Net sales and other revenue for fiscal 1996 were $278.3 million, an
increase of $143.6 million, or 107%, over the prior year, primarily due to sales
from product lines acquired during fiscal 1995 and 1996 (44%), increased sales
to the Company's largest customer, continued sales of the Company's traditional
land-based seismic data acquisition systems (30%), and market acceptance of its
new radio telemetry system, the I/O SYSTEM TWO RSR (13%).
Net sales and other revenues for fiscal 1995 were $134.7 million, an
increase of $38.9 million, or 41%, over the prior year, primarily due to new
sales to Russia and Kazakhstan, increased revenues derived from businesses
acquired by the Company in fiscal 1994 and 1995, the introduction of the new BCX
ocean bottom cable system and continued acceptance of the I/O SYSTEM TWO.
RESEARCH AND DEVELOPMENT
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 and
the WGEP Acquisition.
13
Fiscal 1995 research and development expenses increased $3.5 million, or
44% over the prior year, to $11.4 million, primarily due to expenditures
attributable to product lines acquired in fiscal 1995 and 1994, and advanced
system design work.
MARKETING AND SALES
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.
Fiscal 1995 marketing and sales expenses increased $2.1 million, or 45%
over the prior year, to $6.8 million, primarily due to marketing expenses
related to new product lines resulting from acquisitions and higher advertising
and exhibition costs for new products.
GENERAL AND ADMINISTRATIVE
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.
Fiscal 1995 general and administrative expenses increased $2.8 million, or
32% over the prior year, to $11.8 million, primarily due to increased personnel
costs as a result of acquisitions and outside services.
AMORTIZATION OF IDENTIFIED INTANGIBLES
Fiscal 1996 amortization of identified intangibles increased $3.0
million, or 223%, over the prior year, primarily due to amortization of goodwill
related to the WGEP Acquisition.
Fiscal 1995 amortization of identified intangibles increased $569,000 or
75%, over the prior year, due to the intangible costs added as a result of
acquisitions.
OPERATING INCOME
Earnings from operations increased $23.9 million or 75% in fiscal 1996 to
$55.8 million compared to $31.9 million in the prior year, primarily due to
increased revenues.
Earnings from operations increased $9.1 million or 40% in fiscal 1995 to
$31.9 million compared to $22.8 million in the prior year, primarily due to
increased revenues.
INTEREST EXPENSE
Interest expense in fiscal 1996 increased $2.5 million over the prior
year, primarily due to interest on the $70 million term loan and borrowing under
the $40 million revolving line of credit incurred in connection with the WGEP
Acquisition. The Company had no long-term debt outstanding as of May 31, 1996.
Interest expense in fiscal 1995 declined $130,000 primarily due to
repayment of bank debt. The Company had no long-term debt outstanding as of May
31, 1995.
14
INCOME TAX EXPENSE
The effective tax rate for fiscal 1996 and 1995 was approximately 31.4% and
31.6%, respectively. Income tax expense increased in both 1996 and 1995 in
proportion to the increase in those years in earnings before taxes. See Note 1
and Note 9 of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations from internally generated cash, its
working capital credit facilities, and funds from equity financings. Cash flows
from operating activities before changes in working capital items were $49.0
million for the year ended May 31, 1996. However, cash flows from operating
activities after changes in working capital items were a negative $21.0 million
for the year ended May 31, 1996, primarily due to increases in trade accounts
receivable and inventory required to support increased sales levels. The
Company believes that it has sufficient credit facilities to finance these
increases in its working capital requirements.
In connection with the WGEP Acquisition, the Company established in June
1995 a $110 million credit facility with First Interstate Bank of Texas, N.A.,
comprised of a $70 million term loan to fund the WGEP Acquisition and a $40
million revolving line of credit for working capital purposes. The Company
retired the term loan and repaid the amounts outstanding under the revolving
facility with certain of the proceeds from a $120 million public offering of
5,750,000 shares of the Company's common stock in November 1995. In May 1996,
the Company renegotiated its Credit Facility with First Interstate Bank of
Texas, N.A. (as agent and issuing bank), increasing the maximum amount of the
working capital revolving line of credit 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).
The loan agreement contains restrictive covenants in favor of the
lender(s), including limitations on future indebtedness of the Company,
restrictions on business combinations involving the Company and its
subsidiaries, post-default limitations on dividends and other distributions
payable in cash or property, a $25 million per fiscal year limitation on the
amounts of certain investments by the Company, and limitations on capital
expenditures of $30 million per fiscal year (which does not include $20 million
in connection with the financing of the construction of the Company's new plant
and related facilities in Stafford, Texas). See Item 2. "Facilities". The loan
agreement also contains provisions requiring the Company to maintain a
consolidated tangible net worth in an amount not less than $180 million,
limitations on the ratio of indebtedness to consolidated net worth and a
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.
In June 1996, the Company obtained a commitment for 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 will be secured by the
Company's land, buildings and improvements housing its executive and research
and development headquarters as well as its adjacent new plant site. The
mortgage loan will bear interest at the rate of 7.875% per annum and is
repayable in equal monthly installments of principal and interest. Funding is
currently expected in August 1996. The commitment also requires the Company to
pledge a $6.8 million letter of credit for the benefit of the mortgage lender as
additional security during the construction phase for the new plant, which is to
be released upon timely completion of construction in accordance with the terms
and conditions of the loan agreement.
15
The Company anticipates expenditures for the current fiscal year for
exploration and development of oil and gas properties to be $6.3 million and
expects to fund this level of expenditures through cash flows from operations.
Actual levels of exploration and development expenditures may vary significantly
due to many factors, including oil and gas prices, industry conditions, and the
success of the Company's exploration and development projects. The Company's
exploration and development projects are operated by third parties which control
the timing and amount of expenditures required to exploit the participant's
interests in these prospects. The Company's participation in oil and gas
activities is accounted for on a full cost basis.
Capital expenditures for property, plant, and equipment totaled $10.2
million for fiscal 1996 and are expected to aggregate $26.0 million for fiscal
1997. 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.
OTHER FACTORS AFFECTING OPERATIONS
Due to the relatively high sales price of an I/O SYSTEM TWO (typically
ranging from $800,000 to more than $4.5 million) 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. The Company
believes that factors which could affect such timing include, among others,
seasonality of end-user markets, availability of purchaser financing,
manufacturing lead times, customer purchases of leased equipment and shortages
of system components. In addition, because the Company typically operates, and
expects to continue to operate, without a significant backlog of orders for its
products, the Company's manufacturing plans and expenditure levels are based
principally on sales forecasts. See Note 13 of Notes to Consolidated Financial
Statements.
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
these changes in demand patterns result primarily from the instability of
economies and governments in certain developing countries, as well as from
changes in internal laws and policies affecting trade and investment.
In fiscal 1997, the Company will adopt SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of." This
standard requires that long-lived assets and certain identified intangibles held
and used by an entity be reviewed for impairment whenever events indicate the
carrying amount of an asset may not be recoverable. Management believes that the
adoption of this standard will not materially affect reported earnings,
financial condition or cash flows.
In fiscal 1997, the Company will adopt SFAS No. 123 "Accounting for Stock-
Based Compensation." This standard establishes a fair value method for
accounting for stock-based compensation plans either through recognition or
disclosure. The Company intends to adopt the standard by disclosing the proforma
net earnings and earnings per share amounts assuming the fair value method was
adopted June 1, 1996. The adoption of this standard in the opinion of management
will not have a material impact on results of operations, financial condition or
cash flows.
Management does not believe that inflation has had a material impact
on the Company's business or operations.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item begin at page F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 1996 Annual
Meeting of Stockholders under the caption "Management" 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 1996 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 1996 Annual
Meeting of Stockholders under the caption "Voting and Stock Ownership of
Management and Principal Stockholders" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
17
P A R T IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents Filed.
(1) Financial Statements:
The financial statements filed as part of this report are listed in
the "Index to Consolidated Financial Statements" on page F-1 hereof.
(2) Financial Statement Schedules:
Not applicable.
(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.
3.2 -- 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.
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 1990 Stock Option Plan, filed as Exhibit 4.2 to the
Company's Registration Statement on Form S-8 (Registration
No. 33-85304) filed with the Securities and Exchange
Commission on October 19, 1994, and incorporated herein by
reference.
**10.5 -- Input/Output, Inc. Amended Management Incentive Plan, filed
as Exhibit 10.5 to the Company's Annual Report on Form 10-K
for the fiscal year ended May 31, 1995 and incorporated
herein by reference.
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 -- Directors Retirement Plan, filed as Exhibit 10.7 to the
Company's Registration Statement on Form S-1 (Registration
No. 33-49660) (the "1992 Form S-1") and incorporated herein
by reference.
**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 -- Supplemental Executive Retirement Plan filed as Exhibit 10.9
to the 1992 Form S-1, and incorporated herein by reference.
**10.10 -- Supplemental Executive Retirement Trust filed as Exhibit
10.10 to the 1992 Form S-1, and incorporated herein by
reference.
**10.11 -- Employment Agreement, dated February 6, 1991, between the
Company and Robert P. Brindley, filed as exhibit 10.11 to
the Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1995 and incorporated herein by reference.
18
**10.12 -- Employment Agreement, dated February 6, 1991, between the
Company and Gary D. Owens, filed as Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1995 and incorporated herein by reference.
**10.13 -- Employment Agreement, dated February 6, 1991, between the
Company and Michael J. Sheen, filed as Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1995 and incorporated herein by reference.
10.15 -- Asset Purchase Agreement dated June 30, 1995, by and between
Input/Output, Inc., I/O Exploration Products (U.S.A.), Inc.
and Western Atlas International, Inc. filed as Exhibit 10.1
to the Company's Form 8-K dated June 30, 1995 and
incorporated herein by reference.
10.16 -- Product Purchase Agreement dated June 30, 1995, by and
between Input/Output, Inc., I/O Exploration Products
(U.S.A.), Inc. and Western Atlas International, Inc. filed
as Exhibit 10.2 to the Company's Form 8-K dated June 30,
1995 and incorporated herein by reference.
*10.17 -- Credit Agreement dated May 7, 1996, by and between
Input/Output, Inc. and First Interstate Bank of Texas, N.A.
10.18 -- Program and Remarketing Agreement dated as of May 25, 1995
among the Company, Global Charter Corporation, Input/Output
of Canada, Inc., Newcourt Financial USA, Inc. and Newcourt
Credit Group, Inc., filed as Exhibit 10.18 to the Company's
Annual Report on Form 10-K for the fiscal year ended May 31,
1995 and incorporated herein by reference.
10.19 -- Amended and Restated Remarketing and Deficiency Support
Agreement dated July 27, 1995 among the Company, Dresdner
Bank Canada, Capilano International, Inc. Capilano
Geophysical, Inc. and Capilano International Argentina S.A.,
filed as Exhibit 10.19 to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1995 and
incorporated herein by reference.
*10.20 -- Master Letter of Credit Agreement dated April 16, 1996,
between the Company and ABN AMRO Bank N.V. Houston Agency.
*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.
* Filed herewith
** Management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by Input/Output, Inc.
during the quarter ended May 31, 1996 .
(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.
19
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS
DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED IN THE CITY OF STAFFORD, STATE OF TEXAS, ON JULY 12, 1996.
Input/Output, Inc.
By /s/ Gary D. Owens
-------------------------------------
GARY D. OWENS,
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Gary D. Owens and Robert P. Brindley and each of
them, as true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities, to sign any and all documents relating to the Annual Report
on Form 10-K, including any and all amendments and supplements thereto, for the
fiscal year ended May 31, 1996, and to file the same with all exhibits thereto
and other documents in connection therewith with the Securities and Exchange
Commission granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully as to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or their or his substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
ANNUAL REPORT ON FORM 10-K HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON
BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
NAME CAPACITIES DATE
/s/ Charles E. Selecman Chairman of the Board July 12, 1996
- ----------------------------
CHARLES E. SELECMAN
/s/ Gary D. Owens Director, President July 12, 1996
- ---------------------------- and Chief Executive Officer
GARY D. OWENS (Principal Executive Officer)
/s/ Robert P. Brindley Director, Senior Vice President, July 12, 1996
- ---------------------------- Chief Financial Officer and
ROBERT P. BRINDLEY Secretary (Principal Financial
and Accounting Officer)
/s/ Shelby H. Carter, Jr. Director July 12, 1996
- ----------------------------
SHELBY H. CARTER, JR.
/s/ Ernest E. Cook Director July 12, 1996
- ----------------------------
ERNEST E. COOK
/s/ Glen H. Denison Director July 12, 1996
- ----------------------------
GLEN H. DENISON
/s/ Theodore H. Elliott, Jr. Director July 12, 1996
- ----------------------------
THEODORE H. ELLIOTT, JR.
/s/ Dr. Peter T. Flawn Director July 12, 1996
- ----------------------------
DR. PETER T. FLAWN
/s/ G. Thomas Graves III Director July 12, 1996
- ----------------------------
G. THOMAS GRAVES III
/s/ Michael J. Sheen Director, Senior Vice President July 12, 1996
- ---------------------------- and Chief Technical Officer
MICHAEL J. SHEEN
20
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, 1996 and 1995 . . . . . . F-3
Consolidated Statements of Operations --
Years Ended May 31, 1996, 1995 and 1994. . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity --
Years Ended May 31, 1996, 1995 and 1994. . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows --
Years Ended May 31, 1996, 1995 and 1994. . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . F-7
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. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements 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, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended May 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Standards No. 109 "Accounting for Income Taxes", on June
1, 1993.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Houston, Texas
June 24, 1996
F-2
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS May 31,
-----------------------
1996 1995
-------- --------
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $34,252 $57,392
Trade accounts receivable, less allowance for doubtful accounts of $470
and $100 in 1996 and 1995, respectively. . . . . . . . . . . . . . . . . . . . . . 42,989 28,784
Trade notes receivable, less allowance for doubtful notes
of $728 and $125 in 1996 and 1995, respectively (note 3) . . . . . . . . . . . . . 28,424 5,156
Inventories (note 2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,787 28,032
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,004 1,467
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,456 120,831
Long-term trade notes receivable (note 3). . . . . . . . . . . . . . . . . . . . . . . . 16,678 2,470
Deferred income tax asset (note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,062 --
Property, plant and equipment, net (note 4). . . . . . . . . . . . . . . . . . . . . . . 56,035 24,079
Goodwill, net of accumulated amortization of $4,115 and
$654 in 1996 and 1995, respectively . . . . . . . . . . . . . . . . . . . . . . . . . 64,200 4,724
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,034 13,383
-------- --------
$355,465 $165,487
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, principally trade . . . . . . . . . . . . . . . . . . . . . . . . . $19,518 $8,357
Accrued expenses (note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,751 6,861
Income taxes payable (note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,962 705
-------- --------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 35,231 15,923
Other liabilities (note 11). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,030 2,287
Deferred income tax liability (note 9) . . . . . . . . . . . . . . . . . . . . . . . . . -- 565
Commitments and contingencies (notes 10, 11 and 12)
Stockholders' equity (note 7):
Preferred stock, $.01 par value; authorized 5,000,000 shares, none issued . . . . . . -- --
Common stock, $.01 par value; authorized 50,000,000 shares; issued
42,969,676 shares in 1996 and 36,275,876 shares in 1995. . . . . . . . . . . . . . 430 363
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214,259 83,045
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104,145 65,658
Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . (762) 206
Unamortized restricted stock compensation . . . . . . . . . . . . . . . . . . . . . . (868) (2,560)
-------- --------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . 317,204 146,712
-------- --------
$355,465 $165,487
-------- --------
-------- --------
See accompanying notes to consolidated financial statements.
F-3
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Years ended May 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
Net sales and other revenues (notes 8 and 10). . . . . . . . . . . . $278,283 $134,698 $95,752
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . 163,811 71,440 50,560
---------- ---------- ----------
Gross profit.. . . . . . . . . . . . . . . . . . . . . . . . . . 114,472 63,258 45,192
---------- ---------- ----------
Operating expenses:
Research and development. . . . . . . . . . . . . . . . . . . . . 23,243 11,400 7,931
Marketing and sales . . . . . . . . . . . . . . . . . . . . . . . 12,027 6,789 4,673
General and administrative. . . . . . . . . . . . . . . . . . . . 19,096 11,817 8,980
Amortization of identified intangibles. . . . . . . . . . . . . . 4,305 1,331 762
---------- ---------- ----------
Total operating expenses . . . . . . . . . . . . . . . . . . . . 58,671 31,337 22,346
---------- ---------- ----------
Earnings from operations . . . . . . . . . . . . . . . . . . . . . . 55,801 31,921 22,846
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . (2,515) (30) (160)
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,091 3,944 1,466
---------- ---------- ----------
Earnings before income taxes . . . . . . . . . . . . . . . . . . . . 56,377 35,835 24,152
Income taxes (note 9). . . . . . . . . . . . . . . . . . . . . . . . 17,700 11,335 7,589
---------- ---------- ----------
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,677 $ 24,500 $ 16,563
---------- ---------- ----------
---------- ---------- ----------
Earnings per common share. . . . . . . . . . . . . . . . . . . . . . $ 0.94 $ 0.66 $ 0.53
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of common shares outstanding . . . . . . . . 41,125,286 37,381,458 31,448,262
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to consolidated financial statements.
F-4
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 1996, 1995, AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
Unamortized
Common stock Additional Cumulative restricted Total
----------------------- paid-in Retained Translation stock stockholders'
Shares Amount capital earnings Adjustment compensation equity
---------- ---------- ---------- ---------- ---------- ------------ -------------
Balance at May 31, 1993 . 29,948,320 $299 $24,745 $24,782 $ -- ($1,949) $47,877
Restricted stock issued. . 344,000 3 4,104 -- -- (4,107) --
Amortization of restricted
stock compensation . . . -- -- -- -- -- 1,444 1,444
Public offering. . . . . . 4,600,000 46 47,854 -- -- -- 47,900
Exercise of stock options. 539,600 6 1,396 -- -- -- 1,402
Business acquisition . . . 75,756 1 472 -- -- -- 473
Net earnings . . . . . . . -- -- -- 16,563 -- -- 16,563
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at May 31, 1994. . 35,507,676 355 78,571 41,345 -- (4,612) 115,659
Amortization of restricted
stock compensation . . . -- -- -- -- -- 2,052 2,052
Exercise of stock options. 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. 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
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
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,
--------------------------------------
1996 1995 1994
-------- -------- --------
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . $38,677 $24,500 $16,563
Adjustments to reconcile net earnings to net cash
(used in) provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . 10,152 3,570 1,877
Amortization of restricted stock compensation. . . . . . . . 1,692 2,052 1,444
Deferred income taxes. . . . . . . . . . . . . . . . . . . . (1,627) (624) 32
Pension costs. . . . . . . . . . . . . . . . . . . . . . . . 90 284 242
Changes in assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . . . (47,157) (32,293) (38)
Inventories . . . . . . . . . . . . . . . . . . . . . . . (29,094) (5,920) (5,172)
Leased equipment. . . . . . . . . . . . . . . . . . . . . 1,332 (2,841) 1,295
Accounts payable and accrued expenses . . . . . . . . . . 7,224 3,099 4,256
Income taxes payable. . . . . . . . . . . . . . . . . . . (555) (1,097) 151
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (1,743) (1,185) (1,178)
-------- -------- --------
Net cash (used in) provided by operating activities. . (21,009) (10,455) 19,472
-------- -------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment. . . . . . . . . . . . . (10,240) (5,979) (4,010)
Acquisition of net assets and business . . . . . . . . . . . . . . (120,467) (5,500) (5,363)
Purchase of short-term investments . . . . . . . . . . . . . . . . -- (65,308) (49,103)
Maturities of short-term investments . . . . . . . . . . . . . . . -- 114,411 --
Investments in other assets. . . . . . . . . . . . . . . . . . . . (2,549) (3,697) (1,702)
-------- -------- --------
Net cash (used in) provided by investing activities. . (133,256) 33,927 (60,178)
-------- -------- --------
Cash flows from financing activities:
Borrowing from bank. . . . . . . . . . . . . . . . . . . . . . . . 97,800 -- --
Payments on long-term debt . . . . . . . . . . . . . . . . . . . . (97,800) (591) (3,797)
Proceeds from sales of notes receivable. . . . . . . . . . . . . . -- 20,717 --
Proceeds from exercise of stock options. . . . . . . . . . . . . . 11,511 4,612 1,402
Net proceeds from public offerings . . . . . . . . . . . . . . . . 119,770 (130) 47,900
-------- -------- --------
Net cash provided by financing activities. . . . . . . 131,281 24,608 45,505
-------- -------- --------
Effect of foreign currency exchange rates. . . . . . . . . . . . . . (156) (1) --
-------- -------- --------
Net (decrease) increase in cash and cash equivalents . . . . . . . . (23,140) 48,079 4,799
Cash and cash equivalents at beginning of year . . . . . . . . . . . 57,392 9,313 4,514
-------- -------- --------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . $34,252 $57,392 $9,313
-------- -------- --------
-------- -------- --------
See accompanying notes to consolidated financial statements.
F-6
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION AND GENERAL
The consolidated financial statements include the accounts of Input/Output,
Inc. and its wholly-owned subsidiaries (the "Company"). All significant
intercompany balances and transactions have been eliminated in consolidation.
The Company designs, manufactures and markets seismic data acquisition
systems and peripheral seismic instruments for the oil and gas exploration and
production industry worldwide. Net sales and other operating revenues consist
primarily of net sales of products.
(b) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
(c) INVENTORIES
Inventories are stated at the lower of cost (primarily first-in, first-out)
or market. Revenue from the sale of products is recognized at the time of
shipment. The Company's obsolescence policy is to reserve for components that
have not been used in three years. The Company's components do not have an
ongoing service requirement.
(d) PROPERTY, PLANT AND EQUIPMENT
Plant and equipment are depreciated principally on a straight-line basis
using estimated useful lives as follows: building - 25 years, machinery and
equipment - five to eight years and other - three to eight years. Repairs and
maintenance are expensed as incurred. Gains and losses on sales and retirements
are recognized on disposal.
In fiscal 1997, the Company will adopt SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of." This
standard requires that long-lived assets and certain identified intangibles held
and used by an entity be reviewed for impairment whenever events indicate the
carrying amount of an asset may not be recoverable. Management believes that the
adoption of this standard will not materially affect reported earnings,
financial condition or cash flows.
(e) GOODWILL
Goodwill results from business acquisitions and represents the excess of
acquisition costs over the fair value of the net assets of businesses acquired.
Goodwill is amortized on a straight-line basis over 8 to 20 years. The Company
measures goodwill annually using undiscounted cash flows to assess
recoverability. The Company believes that no impairment of goodwill exists.
Accumulated amortization was $4,115,000 and $654,000 at May 31, 1996 and 1995,
respectively.
(f) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at discrete points in time based on relevant
market information. These estimates may be subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision.
F-7
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company believes that the carrying amounts of its current assets,
current liabilities, and long-term notes receivable approximate the fair value
of such items.
(g) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
(h) REVENUE RECOGNITION
The Company recognizes revenue at the shipment date. No right of return
exists regarding any product(s) sold by the Company.
(i) PRODUCT WARRANTIES
The Company warrants that all equipment manufactured by it will be free
from defects in workmanship, in material and parts ranging from 90 days to three
years from the date of original purchase depending on the product.
For new customers, the Company provides operator training, as well as
start-up and on-site support. The Company provides for estimated training,
installation and warranty costs as a charge to cost of sales at the time of
sale.
(j) INCOME TAXES
As of June 1, 1993, the Company adopted the Financial Accounting Standards
Board (FASB) Statement 109, "Accounting for Income Taxes". FASB 109 requires
deferred tax assets and liabilities be recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to be recovered or settled. Under FASB 109 the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that included the enactment date. The adoption of FASB 109 had no
cumulative effect on the financial statements.
(k) EARNINGS PER COMMON SHARE
Earnings per common share are based on the weighted average number of
shares of common stock outstanding during the respective years (41,125,286
shares in 1996, 37,381,458 shares in 1995; and 31,448,262 shares in 1994) after
giving retroactive effect to the changes in capital structure discussed in Note
7. For purposes of the computations, restricted stock has been added as a common
stock equivalent as of the date of grant. Stock options have been included from
the date of their issuance due to the dilutive effect on the computation.
(l) FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries are generally translated at
current exchange rates and related translation adjustments are reported as a
component of stockholders' equity. Statements of operations are translated at
the average rates during the period.
F-8
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(m) STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information follows (in thousands):
Cash paid during the year for: 1996 1995 1994
------- ------- -------
Interest. . . . . . . . . . . . . . . . . . $ 2,515 $ 30 $ 160
------- ------- -------
------- ------- -------
Income taxes. . . . . . . . . . . . . . . . $10,692 $10,255 $ 7,256
------- ------- -------
------- ------- -------
Non-cash investing and financing activities:
Restricted stock issued:
Increase in common stock
Increase in paid in capital . . . . . . . . . $ -- $ -- $ 2
. . . . . . . . . . . . . . . . . . . . . . . -- -- 4,105
Increase in unamortized restricted
stock compensation . . . . . . . . . . . . -- -- (4,107)
------- ------- -------
------- ------- -------
$ -- $ -- $ --
------- ------- -------
------- ------- -------
Issuance of common stock in connection with
business acquisition (75,756 shares) . . . . $ -- $ -- $ 473
------- ------- -------
------- ------- -------
(n) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(o) RECLASSIFICATION
Certain amounts previously reported in the financial statements have been
reclassified to conform to the current year presentation.
(2) INVENTORIES
A summary of inventories follows (in thousands):
1996 1995
------- -------
Raw Materials. . . . . . . . . . . . . . . $47,280 $17,024
Work-in-process. . . . . . . . . . . . . . 29,016 10,103
Finished goods . . . . . . . . . . . . . . 16,491 905
------- -------
$92,787 $28,032
------- -------
------- -------
F-9
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(3) TRADE NOTES RECEIVABLE
The current and long-term trade notes receivable at May 31, 1996 are
secured by seismic equipment sold by the Company, bearing interest at rates
ranging from 7% to 12% and are due at various dates to 2000. 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.
(4) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows (in thousands):
MAY 31,
----------------------
1996 1995
------- -------
Land . . . . . . . . . . . . . . . . . . . $ 3,801 $ 2,503
Building . . . . . . . . . . . . . . . . . 15,622 4,321
Machinery and equipment. . . . . . . . . . 39,136 16,378
Leased equipment . . . . . . . . . . . . . 8,338 4,846
Other. . . . . . . . . . . . . . . . . . . 6,425 3,381
------- -------
. . . . . . . . . . . . . . . . . . . . . 73,322 31,429
Less accumulated depreciation. . . . . . . 17,287 7,350
------- -------
. . . . . . . . . . . . . . . . . . . . . $56,035 $24,079
------- -------
------- -------
(5) ACCRUED EXPENSES
A summary of accrued expenses follows (in thousands):
MAY 31,
----------------------
1996 1995
------- -------
Compensation, including commissions. . . . $7,657 $4,377
Warranty, training and installation. . . . 3,731 1,771
Other. . . . . . . . . . . . . . . . . . . 2,363 713
------- -------
. . . . . . . . . . . . . . . . . . . . . $13,751 $6,861
------- -------
------- -------
(6) LONG-TERM DEBT
The Company had no long-term debt outstanding as of May 31, 1996. The
Company has a $50 million working capital line of credit with its lead bank
which had no current balance drawn against it as of May 31, 1996 and 1995.
F-10
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(7) STOCKHOLDERS' EQUITY
(a) CHANGES IN CAPITAL STRUCTURE
On January 9, 1996, the Company effected a two-for-one stock split for
stockholders of record on December 26, 1995. The consolidated financial
statements, including all references to the number of shares of common stock and
all per share information, have been adjusted to reflect the common stock split
on a retroactive basis.
In November 1995, the Company offered and sold 5,750,000 shares of its
common stock in an underwritten public offering. The proceeds to the Company
before deducting the Company's expenses of the offering were approximately
$120,175,000. The proceeds were used to retire indebtedness incurred in
connection with the WGEP Acquisition and for general corporate purposes.
On May 4, 1994, the Company effected a two-for-one stock split for
stockholders of record on April 18, 1994. The consolidated financial statements,
including all references to the number of shares of common stock and all per
share information, have been adjusted to reflect the common stock split on a
retroactive basis.
In May 1994, subsequent to the two-for-one stock split, the Company offered
and sold 4,600,000 shares of its common stock in an underwritten public
offering. The proceeds to the Company before deducting the Company's expenses of
the offering were approximately $47,955,000. The proceeds were used for the WGEP
Acquisition and general corporate purposes.
(b) STOCK OPTIONS AND RESTRICTED STOCK
STOCK OPTION PLANS. The Company has adopted a stock option plan for
eligible employees which provides for the granting of options to purchase a
maximum of 7,000,000 shares of common stock. Transactions under the employee
stock option plan are summarized as follows:
F-11
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
EMPLOYEE STOCK OPTION PLAN
OPTION PRICE AVAILABLE
PER SHARE OUTSTANDING EXERCISABLE FOR GRANT
-------------- ----------- ----------- ---------
May 31, 1993 . . . . . . . . . . . . . $2.00-3.90625 2,544,500 506,700 422,900
-------------- -------------- -------------- --------------
Granted-444,000. . . . . . . . . . . . 6.8438-11.9375 444,000 -- (444,000)
Became exercisable . . . . . . . . . . -- -- 786,000 --
Exercised. . . . . . . . . . . . . . . 2.00-3.5625 (498,600) (498,600) --
Canceled/Forfeited . . . . . . . . . . 2.0313-3.50 (18,100) -- 18,100
-------------- -------------- -------------- --------------
May 31, 1994 . . . . . . . . . . . . . 2.00-11.9375 2,471,800 794,100 (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
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
F-12
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company has also adopted a directors stock option plan which provides
for the granting of options to purchase a maximum of 1,014,000 shares of common
stock by the Company's non-employee directors. Transactions under the directors
stock option plan are summarized as follows:
DIRECTORS STOCK OPTION PLAN
OPTION PRICE AVAILABLE
PER SHARE OUTSTANDING EXERCISABLE FOR GRANT
--------------- ----------- ----------- ---------
May 31, 1993 . . . . . . . . . . . . . $2.0313-$3.2188 264,000 72,000 480,000
--------------- ---------- ----------- ---------
Granted - 120,000. . . . . . . . . . . 5.75 120,000 -- (120,000)
Became exercisable . . . . . . . . . . -- -- 66,000 --
Exercised. . . . . . . . . . . . . . . 2.0313-3.2188 (41,000) (41,000) --
--------------- ---------- ----------- ---------
May 31, 1994 . . . . . . . . . . . . . 2.0313-5.75 343,000 97,000 360,000
--------------- ---------- ----------- ---------
Increase in shares authorized. . . . . -- -- -- 270,000
Granted - 210,000. . . . . . . . . . . 11.8438 210,000 (210,000)
Became exercisable . . . . . . . . . . -- -- 96,000 --
Exercised. . . . . . . . . . . . . . . 2.0313-11.8438 (72,000) (72,000) --
--------------- ---------- ----------- ---------
May 31, 1995 . . . . . . . . . . . . . 2.0313-11.8438 481,000 121,000 420,000
--------------- ---------- ----------- ---------
Granted 210,000. . . . . . . . . . . . 19.1875 210,000 -- (210,000)
Became exercisable . . . . . . . . . . -- -- 112,500 --
Exercised. . . . . . . . . . . . . . . 2.0313-11.8438 (202,500) (202,500) --
--------------- ---------- ----------- ---------
May 31, 1996 . . . . . . . . . . . . . $2.0313-$19.1875 488,500 31,000 210,000
--------------- ---------- ----------- ---------
--------------- ---------- ----------- ---------
In fiscal 1997 the Company will adopt SFAS No. 123 Accounting for Stock-
Based Compensation. This standard establishes a fair value method for accounting
for stock-based compensation plans either through recognition or disclosure. The
Company intends to adopt the standard by disclosing the proforma net earnings
and earnings per share amounts assuming the fair value method was adopted June
1, 1996. The adoption of this standard in the opinion of management will not
have a material impact on results of operations, financial positions or cash
flows.
F-13
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
RESTRICTED STOCK PLAN. The Company adopted a restricted stock plan which
provides for the award of up to 610,000 shares of common stock to key officers
and employees. Ownership of the common stock will vest over a period of four
years. The restriction is removed from 50% of the shares after two year, 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. The Company has granted all shares of
restricted stock to certain employees.
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.
(8) EXPORT SALES AND MAJOR CUSTOMERS:
A summary of net sales and other revenues from foreign customers by
geographic area follows (in thousands):
1996 1995 1994
-------- -------- --------
Europe . . . . . . . . . . . . . . $26,718 $15,871 $ 3,965
Canada and Mexico. . . . . . . . . 25,324 28,075 41,056
Middle East. . . . . . . . . . . . 20,192 4,665 2,118
Former Soviet Union. . . . . . . . 17,994 26,066 4,493
People's Republic of China . . . . 16,854 2,479 4,721
Africa . . . . . . . . . . . . . . 8,460 2,222 --
South America. . . . . . . . . . . 6,151 10,792 8,717
Pakistan and India . . . . . . . . 2,684 959 1,220
Other. . . . . . . . . . . . . . . 427 835 388
-------- -------- --------
$124,804 $91,964 $66,678
-------- -------- --------
-------- -------- --------
Net sales and other revenues from individual customers representing 10% or
more of net sales and other revenues were as follows:
Customer 1996 1995 1994
-------- ---- ---- ----
A. . . . . . . . . . . . . . . . . 32% 15% 14%
B. . . . . . . . . . . . . . . . . 10% 11% 13%
C. . . . . . . . . . . . . . . . . -- 5% 10%
D. . . . . . . . . . . . . . . . . 1% 4% 11%
(9) INCOME TAXES
Components of income taxes follow (in thousands):
1996 1995 1994
---- ---- ----
Current:
Federal . . . . . . . . . . . $14,615 $10,517 $6,550
Foreign . . . . . . . . . . . 3,986 1,007 860
State and local . . . . . . . 726 435 147
Deferred-Federal . . . . . . . . . (1,627) (624) 32
------- ------- -------
$17,700 $11,335 $7,589
------- ------- -------
------- ------- -------
F-14
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
A reconciliation of the expected income tax expense on earnings using the
statutory Federal income tax rate of 35% for the years ended 1996, 1995 and
1994, to the income tax expense reported herein is as follows (in thousands):
1996 1995 1994
------ ------ -----
Expected income tax expense:. . . . . . . . . . . . . . $19,732 $12,542 $8,453
Tax benefit from use of foreign sales corporation . . . (2,032) (982) (598)
Foreign tax credit. . . . . . . . . . . . . . . . . . . (305) (206) --
Research and development credit . . . . . . . . . . . . -- -- (293)
Foreign taxes . . . . . . . . . . . . . . . . . . . . . 118 (6) 431
State and local taxes . . . . . . . . . . . . . . . . . 472 283 96
Other . . . . . . . . . . . . . . . . . . . . . . . . . (285) (296) (500)
------ ------ -----
$17,700 $11,335 $7,589
------ ------ -----
------ ------ -----
The tax effects of the cumulative temporary differences resulting in the
net deferred tax (asset) liability follow (in thousands):
MAY 31,
-----------------------
1996 1995
-------- --------
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,351) $ (620)
Allowance accounts. . . . . . . . . . . . . . . . . . . . . . . . . . (1,053) (378)
Unamortized restricted stock compensation . . . . . . . . . . . . . . (1,711) (1,347)
Uniform capitalization. . . . . . . . . . . . . . . . . . . . . . . . (409) (169)
-------- --------
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . (4,524) (2,514)
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . -- --
-------- --------
Total deferred tax asset, net . . . . . . . . . . . . . . . . . . . (4,524) (2,514)
-------- --------
Basis in identified intangibles . . . . . . . . . . . . . . . . . . . 2,075 1,650
Basis in property, plant and equipment. . . . . . . . . . . . . . . . 150 1,100
Foreign taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 7
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,237 322
-------- --------
Total deferred tax liabilities. . . . . . . . . . . . . . . . . . . 3,462 3,079
-------- --------
Total deferred tax (asset) liability, net . . . . . . . . . . . . . . $ (1,062) $ 565
-------- --------
-------- --------
Management believes that total deferred tax assets, net of valuation
allowance, will more likely than not be fully realized based on the Company's
historical earnings and future expectations of adjusted taxable income as well
as reversing gross deferred tax liabilities
(10) LEASES
The Company is a party to several leases as described below:
AS LESSOR: The Company leases seismic equipment to customers under
operating leases with noncancellable terms of less than one year. Rental income
relating to the operating leases was: $7,386,000 in 1996; $4,263,000 in 1995;
and $2,406,000 in 1994. The Company also owns a building with tenants. The
rental income relating to those leases was: $257,000 in 1996; $194,000 in 1995;
and $211,000 in 1994.
AS LESSEE: The Company had rental expense relating to operating leases for
a secondary facility and various equipment of: $1,801,000 in 1996; $680,000 in
1995; and $223,000 in 1994. At May 31, 1996, none of the operating leases had
noncancellable lease terms in excess of one year.
F-15
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(11) RETIREMENT PLANS
The Company has a 401(k) retirement savings plan which covers substantially
all employees. Employees may voluntarily contribute up to 16% of their
compensation, as defined, to the plan and the Company may contribute additional
amounts at its sole discretion. The Company's contributions to the plan were:
$1,933,000 in 1996; $980,000 in 1995; and $697,000 in 1994.
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 1996
consolidated financial statements include pension expense of $326,000, accrued
pension costs of $2,201,000, an intangible asset for unrecognized prior service
cost of $951,000 and equity reduction of $187,000.
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 1996 consolidated financial statements include pension expense of
$102,000, accrued pension costs of $447,000, an intangible asset for
unrecognized prior service cost of $149,000 and an equity reduction of $3,000.
(12) CREDIT RISK
At May 31, 1996 and 1995, the Company had guaranteed approximately
$30,307,000 and $14,556,000, respectively, of trade notes receivable sold with
recourse (note 3) and loans from unaffiliated parties to purchasers of the
Company's seismic equipment. All loans guaranteed are collateralized by the
seismic equipment. No loss from these guarantees has occurred as of May 31,
1996.
(13) SELECTED QUARTERLY INFORMATION - (UNAUDITED)
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)
THREE MONTHS ENDED
----------------------------------------------------
1995 AUG. 31 NOV. 30 FEB. 28 MAY 31
- ---- ------- ------- ------- -------
(in thousands, except per share amounts)
Net sales and other revenues . . . . . . . . $27,318 $34,215 $34,512 $38,653
Gross profit . . . . . . . . . . . . . . . . 13,002 15,891 16,734 17,631
Earnings from operations . . . . . . . . . . 6,224 7,995 8,928 8,774
Interest expense . . . . . . . . . . . . . . (24) (6) -- --
Other income . . . . . . . . . . . . . . . . 911 890 948 1,195
Income taxes . . . . . . . . . . . . . . . . 2,276 2,841 3,160 3,058
Net earnings . . . . . . . . . . . . . . . . $ 4,835 $ 6,037 $ 6,717 $ 6,911
------- ------- ------- -------
------- ------- ------- -------
Earnings per share . . . . . . . . . . . . . $ 0.13 $ 0.16 $ 0.18 $ 0.18
----- ----- ----- -----
----- ----- ----- -----
(14) WGEP ACQUISITION
On June 30, 1995, the Company completed the WGEP Acquisition for
approximately $121.3 million. The transaction was accounted for by the purchase
method of accounting. Accordingly, acquired assets and assumed liabilities were
recorded at their estimated fair values, which resulted in goodwill of
approximately $62.9 million that will be amortized over 20 years. A summary of
the final purchase price allocation is as follows (in thousands):
Cash. . . . . . . . . . . . . . . . . . $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
--------
--------
The following unaudited condensed proforma statement of operations presents
the results of operations for the year ended May 31, 1996 and 1995 as if the
purchase had occurred on June 1, 1994. The proforma results are not necessarily
indicative of the financial results that might have occurred had the transaction
actually taken place on June 1, 1994, or of future results of operations
(dollars in thousands). (Unaudited)
MAY 31,
--------------------------
1996 1995
----------- -----------
Net sales and other revenues. . . . . . . . . $ 292,405 $ 239,617
Earnings from operations. . . . . . . . . . . 52,874 11,411
Net Earnings. . . . . . . . . . . . . . . . . 36,162 4,982
----------- -----------
Earnings per common share . . . . . . . . . . $ 0.88 $ 0.13
----------- -----------
----------- -----------
Weighted average number of common shares. . . $41,125,286 $37,381,458
----------- -----------
----------- -----------
F-17