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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 1-13402
INPUT/OUTPUT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2286646
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11104 WEST AIRPORT BLVD., STAFFORD, TEXAS 77477
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 933-3339
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
(TITLE OF CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes: [X] No: [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant at June 30, 1998 (for purposes of the
below-stated amount only, all directors, officers and 5% or more stockholders
are presumed to be affiliates):
$568,991,000
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, 1998
------------------- ----------------------------
COMMON STOCK, $0.01 PAR VALUE 44,584,634
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's 1998 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
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P A R T I
ITEM 1. BUSINESS
THE COMPANY
Input/Output is a leading designer and manufacturer of seismic data
acquisition products used on land, in transition zones (i.e. marshes and shallow
bays) and in marine environments. The Company believes that its I/O SYSTEMs are
the most technologically advanced seismic data acquisition systems and are
particularly well suited for advanced three-dimensional ("3-D") data collection
techniques. The Company's principal customers are seismic contractors and major,
independent and foreign oil and gas companies around the world. During fiscal
1998, approximately 35% of the Company's net sales and other revenues were to
foreign customers. See "Markets and Customers".
Improvements in drilling success rates during the last five years through
the use of advanced seismic survey techniques, particularly 3-D techniques, have
substantially increased the demand for seismic data. In addition, advances in
technology have significantly reduced the size, weight, cost and power
requirements of seismic data acquisition systems and increased the quality and
quantity of data available to geoscientists, thereby improving the
cost-effectiveness of large-scale 3-D surveys. As a result, 3-D surveys
utilizing these advanced technologies have gained increasing acceptance in
the oil and gas industry as an exploration risk management tool. Moreover,
3-D surveys are increasingly employed in field development and reservoir
management activities. As a result, shipments of I/O SYSTEMs have grown from
14 systems shipped in fiscal 1991 to 49 in fiscal 1998.
The Company offers a complete range of seismic data acquisition systems and
related equipment. On land, the Company offers the I/O SYSTEM TWO-Registered
Trademark- MRX and RSR systems (see "Growth Strategy" below) as well as its
Vibrators, a land energy source, and Geophones, acoustical receivers whose sole
purpose is to transform vibrations from substrata within the earth into
electrical signals which are recorded by the I/O System. The Company also offers
transition zone systems in shallow water with marine versions of the MRX and RSR
systems.
The Company's marine data acquisition systems consist primarily of marine
streamers and shipboard electronics that collect seismic data in deep-water
environments. The systems feature second generation 24-bit digital electronics
inside the streamer module, high-quality Company-manufactured hydrophones,
digital filtering and other components, and 12,000-meter streamer length
capabilities. Other marine products manufactured and sold by the Company include
airguns and integrated shipboard navigation, positioning, and data telemetry
quality control systems.
The Company believes that its future success will depend on its ability to
continue to introduce technological innovations by enhancing its existing
products and services to its customers, as well as by developing new products,
such as those designed for three and four-component seismic survey techniques
and 4-D seismic surveys. See "Product Development" below.
1
GROWTH STRATEGY
The Company's growth strategy is principally comprised of two elements: (i)
technological leadership and (ii) complementing internal product development
with product line acquisitions. These key elements of the Company's growth
strategy can be summarized as follows:
- - TECHNOLOGICAL LEADERSHIP. The Company's research efforts have resulted in
the development of numerous inventions, processes and techniques which
the Company believes have established the I/O SYSTEM TWO as the most
technologically advanced land seismic data acquisition system. The I/O
SYSTEM TWO is upgradable and expandable to accommodate system enhancements
and follow-on orders for components and related accessories as customers
increase the capacities of their systems. The Company's ongoing research
efforts have also led to the introduction of many new products (see
"Products" below).
- - COMPLEMENTARY ACQUISITIONS. The Company has expanded its product line in
recent years through the completion of several complementary acquisitions.
In 1998 the Company made two acquisitions: CompuSeis Inc. and Green
Mountain Geophysical, Inc., which are companies engaged in recording system
integration and producing 3-D survey planning software, respectively (see
"Products - Software").
PRODUCTS
LAND DATA ACQUISITION SYSTEMS
A land I/O SYSTEM consists of a Central Electronics Unit containing a
number of modular components, which may vary depending upon customer
specifications, and multiple remote ground equipment modules, including Line
Taps and Remote Signal Conditioners (each designated as an "MRX", which
typically acquires six channels of analog seismic data). A typical system
consists of a Central Electronics Unit, 12 Line Taps, approximately 200 MRXs
and various accessories, although larger or smaller systems may be assembled.
Once a customer purchases a Central Electronics Unit, the customer can
purchase additional Line Taps, MRXs and accessory equipment to expand and
modify a system to fulfill specific requirements. In addition, a customer may
transform an I/O SYSTEM into two or more separate systems with the purchase
of additional Central Electronics Units.
In addition to the standard I/O SYSTEM components, several optional
components are available as accessory equipment. The Company manufactures most
of the components sold as a part of the I/O SYSTEM product line, and purchases
certain separate components for resale, including the operator console,
oscilloscope, printer and digital camera. Depending upon the system's
configuration, the price of a land I/O SYSTEM typically ranges from $800,000 to
$4.5 million.
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CENTRAL ELECTRONICS UNIT
The Central Electronics Unit, which acts as the control center of the I/O
SYSTEM, consists of several components which are typically mounted within a
vehicle or helicopter transportable enclosure. The Company can also package the
Central Electronics Unit to be portable for jungle and other difficult terrain
applications. The Central Electronics Unit receives digitized data from the
MRXs, stores the data 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 typically of
multiple Remote Signal Conditioners ("MRXs") and Line Taps positioned over
the survey area. Seismic signals from sensors called geophones are collected
by the MRXs, each of which handles the collection process for six channels of
analog seismic data. The MRX filters and digitizes the data, which is then
transmitted by the MRX via cable to a Line Tap. The Line Taps manage the
seismic data collection process on each seismic line, further organize the
seismic data and transmit this data and remote equipment operating status
information via cable to the Central Electronics Unit. The MRX automatically
routes around cable faults, thereby increasing crew productivity. In
addition, the MRX provides high quality data through its geophone performance
capabilities.
In addition, the Company's radio telemetry system ("RSR" recorder system)
records data across a variety of environments, including transition zones,
marshes and swamps, as well as mountain ranges, jungle and other land and
transition zone seismic environments. The RSR radio telemetry systems are radio
controlled, and utilize the same electronics as the MRX to record, process and
digitize seismic signals at the remote unit. However, instead of transmitting
data back to the Central Electronics Unit, the RSR stores the seismic data for
later retrieval. The RSR does not require cables for data transmission, since
the information is stored at the unit source.
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 can also be
verified. The rapid deployment, remote testing and calibration capabilities can
significantly improve the productivity of seismic crews in the field.
Land-based seismic data acquisition systems require electrical power and
must be designed to operate in diverse environmental conditions. The I/O SYSTEM
TWO has the flexibility to power the MRX via cable from a central power source
or a rechargeable or solar powered battery pack. An MRX's battery pack may be
replaced without terminating or interrupting the MRX's operation. The battery
packs may also be monitored by the Central Electronics Unit during actual field
use to forecast usable time remaining for each battery.
A seismic crew may collect data from sound waves produced by one of several
energy sources. Historically, dynamite and other explosives have been used. In
recent years, large, truck-
3
mounted earth vibrators have been used more frequently as energy sources. See
"Vibrators" below. When non-explosive energy sources are used, an optional
component, the Correlator Stacker Module, is added to the data acquisition
system to correlate the seismic data for further processing. The Correlator
Stacker Module incorporates several advanced noise control and editing
programs to improve data quality and resolution.
MARINE DATA ACQUISITION SYSTEM
The Company's marine data acquisition system consists primarily of marine
streamers and shipboard electronics that collect seismic data in deep-water
environments. Marine streamers, which contain encapsulated Marine Remote Signal
Conditioner ("MSX") modules and cabling, may measure up to 12,000 meters in
length and are towed behind a special purpose vessel to record seismic data.
Marine electronics include navigation, positioning and data telemetry quality
control systems and related software products, as well as electronics for
shipboard recording.
The marine systems feature second generation 24-bit digital MSX modules,
each of which contain 16 channels per module. This feature, along with
utilization of fiber-optic data transmission and titanium connectors and
inserts, results in reduced size and power consumption, and higher quality and
reliability of acquired marine seismic data, and permits a complete MSX system
to record up to 7,680 channels.
Important features of the Company's marine systems include
Company-manufactured components, such as its hydrophones. In addition, as
larger marine surveys are conducted by seismic crews, the Company believes
that its marine streamers having up to 12,000-meter length capabilities offer
many technological advantages, including physical strength and flexibility
through specially-designed non-metallic stress members, down-line power
capabilities, and fiber-optic data transmission.
OTHER PRODUCTS AND COMPONENTS
GEOPHONES AND HYDROPHONES. Geophones and hydrophones are seismic sensor
devices designed to detect acoustical energy reflected from the earth's
subsurface. The product line includes low distortion seismic sensors designed
for land (geophones), transition zone (marshphones) and marine (hydrophones)
environments. This product line includes a geophone checking technology as well
as three-component geophones that could be used in three-component 3-D seismic
recording. See "Product Development" below.
AIRGUNS. Airguns are the primary energy source used to initiate the energy
transmitted through the earth's subsurface which are subsequently recorded as
data signals in the marine environment. The Company's sleeve gun, a specialized
type of airgun, is well suited for high resolution 3-D seismic data collection
because of its expanded frequency band. Additionally, the Company offers an
airgun source synchronizing system that can control up to 128 airguns
simultaneously, offering real time monitoring of airgun firings.
VIBRATORS. Vibrators are controlled mechanical devices used as a source of
seismic energy on land. The vibrators offered by the Company can be supplied
with seven different vehicles
4
(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.
SOFTWARE. The Company acquired in 1998 the assets of Green Mountain
Geophysics, Inc. a developer of geophysical software used in seismic data
acquisition and processing. Green Mountain's primary software product is
Mesa-Registered Trademark-, a 3-D seismic data acquisition planning package.
This product is used by energy producers and seismic contractors to design and
execute a 3-D program to meet specific geophysical and economic requirements. A
second software product, Alpine-Registered Trademark- is used to track and
manage 3-D programs from the concept stage through data processing.
Millenium-Registered Trademark-, a third product, performs the initial data
processing stages of geometry qualifications and retraction statics. The Company
also acquired during 1998 CompuSeis, Inc., a software company that the Company
believes is an industry leader in recording system integration. Since the
acquisition, CompuSeis has principally developed system integration software for
the Company's land Central Electronics Unit.
PRODUCT AGREEMENT
In connection with the Company's acquisition in 1995 of the Western
Geophysical Exploration Products Group ("WGEP") from Western Atlas
International, Inc. ("WAII"), 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 Product Agreement provides that it will
terminate upon WAII's purchase of an aggregate of $350 million (subject to
adjustment) in products from the Company. WAII may also terminate the agreement
if (i) the Company sells all or substantially all of its assets, (ii) the
Company merges or consolidates and, as a result, experiences a change of control
(as defined therein) or (iii) the Company breaches a material term or condition
of the Product Agreement and such breach or violation is not cured within 60
days of notice thereof. The Company expects the Product Agreement to expire, by
virtue of achieving $350 million in total sales, during the first quarter of
fiscal 1999. The Company is currently negotiating the terms of a new agreement
with WAII which will cover future periods. However, no assurances can be given
whether a new agreement will be negotiated, and if so, whether the terms will be
comparable to the terms of the Product Agreement.
The Company entered into a Preferred Supplier Agreement with Mitcham
Industries, Inc. ("Mitcham") during June 1998. The terms of this agreement
provide that Mitcham will purchase a minimum of $90 to $100 million of Company
products over a five year term ending May 31, 2003, which amount includes a $15
million purchase by Mitcham of a substantial portion of the Company's equipment
lease pool during May 1998. As of July 1, 1998, Mitcham's total remaining
purchase obligations under this agreement ranged between $75 to $85 million. In
addition, the Company has agreed not to lease products covered by the Preferred
Supplier Agreement except in limited circumstances, and to refer rental
inquiries to Mitcham from the Company's customers worldwide during the term of
the agreement.
PRODUCT DEVELOPMENT
5
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 8% to 10% of its annual budgeted revenues. These
research and development expenditures have principally related to the
continued enhancement of the I/O SYSTEM product line and basic research and
development on other emerging technologies having potential applicability to
the seismic industry. See Item 6.- "Selected Consolidated Financial Data" and
Item 7.- "Management's Discussion and Analysis of Results of Operations and
Financial Condition." These efforts have resulted in the development of
numerous inventions, processes and techniques, a number of which have been
incorporated as enhancements to the I/O SYSTEM product line. See
"Intellectual Property" below.
As a result of its ongoing research and development efforts, the Company
continued in fiscal 1998 the evolution of its seismic system product line,
introducing improvements in functionality, certain increased operational
efficiencies and updated interfaces. No assurance can be given concerning the
successful development of new products or enhancements, the specific timing
of their release or their level of acceptance in the market place.
Seismic survey techniques being investigated for future commercial
applicability in the industry include 4-D technology and multicomponent
recording. The 4-D process, or time lapse 3-D, involves the repeated
recording of 3-D image volumes at different times in the life of a producing
hydrocarbon reservoir. The observed differences between the 3-D imaged
volumes can be useful in certain reservoir management applications.
Multicomponent recording is an experimental technique allowing several
different modes of wave propagation to be recorded and analyzed to enhance
understanding of the reservoir. The technique is being investigated by a
number of firms and industry consortia. Several advances in data acquisition
and processing technology remain to be accomplished in order for 4-D and
multicomponent recording to become techniques with wide application in the
industry.
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 accounted for approximately 28% of the Company's net sales
and other revenue in fiscal 1998. See Note 8 of Notes to Consolidated
Financial Statements.
A significant part of the Company's marketing efforts are focused on
areas outside the United States. Foreign sales are subject to special risks
inherent in doing business outside of the United States, including the risk
of war, civil disturbances, embargo and government activities,
6
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 1998, 1997, and 1996, approximately 35%, 43% and 45%,
respectively, of the Company's net sales and other revenues were derived from
sales to foreign customers. See Note 8 of Notes to Consolidated Financial
Statements for information concerning geographic distribution of sales.
Systems sold to domestic customers 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. The Company has also provided financing
arrangements to customers by installment sales contracts under which the
Company typically retains a security interest in the products sold. See Item
7.- "Management's Discussion and Analysis of Results of Operations and
Financial Condition - Liquidity and Capital Resources". The Company's
installment sales contracts have historically required 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.
In addition, the Company has previously sold and assigned certain of its
installment sales contracts and leases to third-party financing sources (or
sold equipment to leasing companies, which equipment is then leased to
customers), the terms of which often obligate the Company to (i) guarantee or
repurchase all or a portion of the contracts and leases in the event of a
default by the customer or upon certain other occurrences and/or (ii) assist
the financing parties in remarketing the equipment to satisfy the obligation.
See Item 7.-"Management's Discussion and Analysis of Results of Operations
and Financial Condition - Liquidity and Capital Resources" and Notes 3 and 12
of Notes to Consolidated Financial Statements.
MANUFACTURING
The Company's 109,896 square foot manufacturing facility in Stafford,
Texas houses the Company's electronics assembly process, contains
technological features for use in manufacturing future products and enables
the Company to manufacture additional products and components assembled
previously by outside vendors. The Company's 240,000 square feet facility in
Alvin, Texas houses the Company's mechanical assembly processes, which are
more labor intensive than electronics assembly. Products produced in the
Alvin facility include vibrators, sleeve guns, land and marine cable, and
marine streamers. See also Item 2. -"Facilities". Upon completion of
assembly, Company products undergo functional and environmental testing and
final quality assurance inspection.
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
7
used in its I/O SYSTEMs from a single vendor. While the Company purchases
that vendor's standard converter, the other components of the I/O SYSTEM are
designed for use with that particular converter. Even though the Company
believes that it could replace such a converter with a functional equivalent,
if such 24-bit converter were not available, redesign of the I/O SYSTEM would
be required and costly delays could result.
COMPETITION
The market for seismic data acquisition systems and seismic
instrumentation is highly competitive and is characterized by continual and
rapid changes in technology. The Company's principal competitor for land
seismic equipment is Societe d'Etudes Recherches et Construction
Electroniques, an affiliate of Compagnie General de Geophysique which, unlike
the Company, possesses the advantage of being able to sell to an affiliated
seismic contractor. The Company's principal competitor in the marine seismic
systems market is GeoScience Corporation, an affiliate of Tech-Sym
Corporation.
The Company believes that technology is the primary basis of competition
in the industry, as oil and gas exploration and production companies demand
higher quality seismic data and seismic contractors require improved
productivity from their equipment and crews. The remaining principal
competitive factors in the industry are price and customer support services.
OIL AND GAS ACTIVITIES
As an adjunct to its research, development and marketing efforts, the
Company, through its subsidiary, Output Exploration Company, Inc. ("OPEX")
has, since 1992, acquired and explored certain oil and gas exploration
prospects. Through May 31, 1998, OPEX had participated in drilling a total of
20 exploratory wells; eleven wells were dry holes, two wells are currently
shut-in and seven wells are currently classified as productive. The level of
exploration activities for the foreseeable future and the number of wells to
be drilled by OPEX will depend on the degree of success of its current
operations. The Company's oil and gas exploration and production activities
are not material to the Company's financial position or results of operations.
INTELLECTUAL PROPERTY
The Company relies on a combination of trade secrets, patents,
copyrights and technical measures to protect its proprietary hardware and
software technologies. Although the Company's patents are considered
important to its operations, no one patent is considered essential to the
success of the Company. Copyright and trade secret protection may be
unavailable in certain foreign countries in which the Company sells its
products. In addition, the Company seeks to protect its trade secrets through
confidentiality agreements with its employees and agents. The Company also
owns a number of trademarks, including I/O-Registered Trademark-, I/O SYSTEM
ONE-Registered Trademark- and I/O SYSTEM TWO-Registered Trademark-.
REGULATORY MATTERS
The Company's operations are subject to numerous local, state and
federal laws and regulations in the United States and in foreign
jurisdictions concerning the containment and
8
disposal of hazardous materials. The Company does not currently foresee the
need for significant expenditures to ensure continued compliance with current
environmental protection laws. Regulations in this area are subject to
change, and there can be no assurance that future laws or regulations will
not have a material adverse effect on the Company.
EMPLOYEES
At June 30, 1998, the Company had 1,300 employees worldwide, 1,000 of
which were employed in the United States. The Company's U.S. employees are
not subject to any collective bargaining agreement. The Company has never
experienced a work stoppage and considers its relations with its employees to
be satisfactory.
ITEM 2. FACILITIES
The Company's primary manufacturing facilities are as follows:
Manufacturing Facility Square Footage
---------------------- --------------
Stafford, Texas* 109,896
Alvin, Texas* 240,000
Cork County, Ireland* 35,630
Norwich, England** 31,000
Voorschoten, The Netherlands** 30,000
-------
446,526
-------
-------
- --------------
* Owned
** Leased
The Company's executive headquarters (utilizing approximately 55,060
square feet) is located at 11104 West Airport, Stafford, Texas and its
research and development headquarters (utilizing approximately 79,566 square
feet) is adjacent to the headquarters facility. Both facilities, along with
the adjacent Stafford electronics manufacturing facility, are owned by the
Company and are mortgaged to secure long-term facility indebtedness. See Item
7.- "Management's Discussion and Analysis of Results of Operations and
Financial Condition". The Company also leases an aggregate of 328,169 square
feet of additional warehouse and office space under short-term operating
leases. The machinery, equipment, buildings and other facilities owned and
leased by the Company are considered by management to be sufficiently
maintained and adequate for the Company's current operations.
The Company anticipates these facilities will accommodate the Company's
growth for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On September 24, 1997, a purported class action lawsuit was filed
against the Company, the former president and chief executive officer of the
Company, and an executive vice president
9
of the Company, in the U.S. District Court for the Southern District of
Texas, Houston Division. The action, styled NORMAN TOCK V. INPUT/OUTPUT,
INC., GARY D. OWENS AND ROBERT P. BRINDLEY, alleges violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, and state statutory
and common law fraud provisions. The action was filed on behalf of purchasers
of common stock of the Company that purchased shares during the period from
September 17, 1996 through March 18, 1997. The complaint seeks damages in an
unspecified amount plus costs and attorney's fees. The complaint alleges
misrepresentations and omissions in public filings and announcements
concerning the Company's business, sales and products, and disputes certain
accounting methodologies employed by the Company. On October 21, 1997, a
stipulation and order was entered by the court, extending the time for
responses to the complaint by the defendants pending entry of an order
appointing lead plaintiff and lead counsel. An amended complaint was filed on
April 17, 1998. Defendants filed a motion to dismiss and brief in support
thereof on June 8, 1998. No hearing on the motion to dismiss has been
scheduled. The Company believes that the plaintiff's allegations are without
merit, that there are meritorious defenses to the allegations and intends to
defend the action vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
P A R T II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock trades on the New York Stock Exchange
("NYSE") under the symbol "IO". The following table sets forth the high and
low last reported sales prices of the Common Stock for the periods indicated,
as reported on the NYSE composite tape.
PRICE RANGE
----------------------
PERIOD HIGH LOW
------ --------- --------
Fiscal 1998
Fourth Quarter . . . . . . . . . . $25 15/16 $21 1/16
Third Quarter. . . . . . . . . . . 31 1/8 17 1/4
Second Quarter . . . . . . . . . . 32 15/16 21 3/8
First Quarter. . . . . . . . . . . 23 7/16 16 7/16
Fiscal 1997
Fourth Quarter . . . . . . . . . . $ 21 $ 13 3/4
Third Quarter. . . . . . . . . . . 23 7/8 16 3/8
Second Quarter . . . . . . . . . . 36 1/8 24
First Quarter. . . . . . . . . . . 39 1/4 29
The Company historically has not paid, and does not intend to pay in the
foreseeable future, cash dividends on its Common Stock. The Company presently
intends to retain earnings for use in its business, with any future decision
to pay cash dividends dependent upon its growth, profitability, financial
condition and other factors the Board of Directors may deem relevant. The
Company's revolving line of credit agreement contains post-default
prohibitions on payments of dividends and other distributions payable in cash
or property. See Item 7 - "Management's Discussion and Analysis of Results
of Operations and Financial Condition -- Liquidity and Capital Resources".
On June 30, 1998, there were 324 stockholders of record of Common Stock
and the Company believes that there were approximately 9,723 beneficial
owners of Common Stock as of such date. Except as otherwise disclosed in the
Company's Quarterly Reports on Form 10-Q filed during fiscal 1998, the
Company made no unregistered sales of its equity securities during the fiscal
period covered by this report.
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, 1998, 1997, 1996, 1995 and 1994 and with respect to the
Company's consolidated balance sheets at May 31, 1998, 1997, 1996, 1995 and
1994 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.
11
Year Ended May 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA: (In thousands, except per share data)
Net sales and other revenues. . . . . . . . . . . . . . $385,861 $281,845 $278,283 $134,698 $ 95,752
Cost of sales . . . . . . . . . . . . . . . . . . . . . 226,514 183,438 163,811 71,440 50,560
-------- -------- -------- -------- --------
Gross profit. . . . . . . . . . . . . . . . . . . . . 159,347 98,407 114,472 63,258 45,192
-------- -------- -------- -------- --------
Operating expenses:
Research and development. . . . . . . . . . . . . . . . 32,957 22,967 23,243 11,400 7,931
Marketing and sales . . . . . . . . . . . . . . . . . . 14,646 13,288 12,027 6,789 4,673
General and administrative. . . . . . . . . . . . . . . 28,295 20,592 19,096 11,817 8,980
Non-recurring items (1) . . . . . . . . . . . . . . . . -- 15,594 -- -- --
Amortization of identified intangibles. . . . . . . . . 6,008 4,551 4,305 1,331 762
-------- -------- -------- -------- --------
Total operating expenses. . . . . . . . . . . . . . . . 81,906 76,992 58,671 31,337 22,346
-------- -------- -------- -------- --------
Earnings from operations. . . . . . . . . . . . . . . . 77,441 21,415 55,801 31,921 22,846
Interest expense. . . . . . . . . . . . . . . . . . . . (1,081) (793) (2,515) (30) (160)
Other income. . . . . . . . . . . . . . . . . . . . . . 7,315 3,675 3,091 3,944 1,466
-------- -------- -------- -------- --------
Earnings before income taxes. . . . . . . . . . . . . . 83,675 24,297 56,377 35,835 24,152
Income taxes. . . . . . . . . . . . . . . . . . . . . . 26,776 7,700 17,700 11,335 7,589
-------- -------- -------- -------- --------
Net earnings. . . . . . . . . . . . . . . . . . . . . . $ 56,899 $ 16,597 $ 38,677 $ 24,500 $ 16,563
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Basic earnings per common share (2) . . . . . . . . . . $ 1.29 $ 0.38 $ 0.98 $ 0.68 $ 0.55
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average number of common
shares outstanding (2). . . . . . . . . . . . . . . . 43,962 43,181 39,631 36,043 30,015
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Diluted earnings per common share (2) . . . . . . . . . $ 1.28 $ 0.38 $ 0.95 $ 0.66 $ 0.54
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average number of diluted
common shares outstanding (2) . . . . . . . . . . . . 44,430 43,820 40,609 36,928 30,789
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
As of May 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
BALANCE SHEET DATA (END OF YEAR): (In thousands)
Working capital . . . . . . . . . . . . . . . . . . . . $239,621 $170,427 $165,225 $104,908 $ 87,558
Total assets. . . . . . . . . . . . . . . . . . . . . . 489,663 384,658 355,465 165,487 132,000
Short-term debt, including current
installments of long-term debt (3). . . . . . . . . . 986 912 -- -- 591
Long-term debt (3). . . . . . . . . . . . . . . . . . . 10,011 11,000 -- -- --
Stockholders' equity. . . . . . . . . . . . . . . . . . 415,700 338,614 317,204 146,712 115,659
OTHER DATA:
Capital expenditures. . . . . . . . . . . . . . . . . . $ 6,960 $ 26,966 $ 10,240 $ 5,979 $ 4,010
Depreciation and amortization . . . . . . . . . . . . . 16,816 12,558 10,152 3,570 1,877
- ------------------
(1) See Note 14 of Notes to Consolidated Financial Statements for information
with respect to the Company's non-recurring items.
12
(2) Earnings per common share data have been retroactively restated for the
Company's adoption, in fiscal 1998, of Statement of Financial Accounting
Standard No. 128 "Earnings per Share". See note 1(k) of Notes to
Consolidated Financial Statements.
(3) See Notes 6 and 12 of Notes to Consolidated Financial Statements for
information with respect to the Company's indebtedness and certain
contingent obligations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion and analysis of the Company's results of
operations and financial condition should be read in conjunction with the
consolidated financial statements of the Company and the Notes thereto
included elsewhere in this Form 10-K.
ANNUAL RESULTS OF OPERATIONS
The following table sets forth for fiscal years 1998, 1997 and 1996, 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
------------------------------------ ------------------------
1998 1997 1996 1997-1998 1996-1997
------ ------ ------ --------- ---------
Statement of Operations Data:
Net sales and other revenues. . . . . . . . . . . . . 100.0% 100.0% 100.0% 36.9% 1.3%
Cost of sales . . . . . . . . . . . . . . . . . . . 58.7 65.1 58.9 23.5 12.0
----- ----- -----
Gross profit. . . . . . . . . . . . . . . . . . . 41.3 34.9 41.1 61.9 (14.0)
----- ----- -----
Operating expenses:
Research and development. . . . . . . . . . . . 8.5 8.2 8.4 43.5 (1.2)
Marketing and sales . . . . . . . . . . . . . . 3.8 4.7 4.3 10.2 10.5
General and administrative . . . . . . . . . . 7.3 7.3 6.9 37.4 7.8
Non-recurring items . . . . . . . . . . . . . . -- 5.5 -- (100.0) 100.0
Amortization of identified intangibles . . . . 1.6 1.6 1.5 32.0 5.7
----- ----- -----
Total operating expenses . . . . . . . . . . 21.2 27.3 21.1 6.4 31.2
----- ----- -----
Earnings from operations . . . . . . . . . . . . . . . 20.1 7.6 20.1 261.6 (61.6)
Interest expense . . . . . . . . . . . . . . . . . . . (0.3) (0.3) (0.9) 36.3 (68.5)
Other income . . . . . . . . . . . . . . . . . . . . . 1.9 1.3 1.1 99.0 18.9
----- ----- -----
Earnings before income taxes . . . . . . . . . . . . . 21.7 8.6 20.3 244.4 (56.9)
Income taxes . . . . . . . . . . . . . . . . . . . . . 6.9 2.7 6.4 247.7 (56.5)
----- ----- -----
Net earnings . . . . . . . . . . . . . . . . . . . . . 14.8% 5.9% 13.9% 242.8% (57.1)%
----- ----- -----
----- ----- -----
NET SALES AND OTHER REVENUES
Net sales and other revenues consist primarily of seismic data
acquisition system and component sales. Net sales and other revenues for
fiscal 1998 were $385.9 million, an increase of $104.0 million, or 36.9%,
over fiscal 1997 due primarily to substantially increased demand for,
13
and sales of, land seismic data acquisition systems and related components,
compared to fiscal 1997.
Net sales and other revenues for fiscal 1997 were $281.8 million, an
increase of $3.6 million, or 1.3%, over fiscal 1996. Although year-to-year
sales were comparable, the mix of sales changed. Marine equipment sales
increased with the sale of 12 of the Company's MSX marine systems introduced
in fiscal 1997. This increase in marine equipment sales was partially offset
by a decline in land equipment sales.
GROSS PROFITS
The gross profit margins of the Company for 1998 increased primarily due
to the substantial increase in land product sales, which feature higher gross
profit percentages than many of the Company's other products.
The gross profit margins of the Company for the years ended May 31, 1997
and 1996 were negatively impacted by the addition of lower margin products
resulting from the WGEP Acquisition. In addition, during fiscal 1997 the
Company experienced competitive pricing pressures related to its land seismic
acquisition systems which negatively impacted its gross profit margins.
RESEARCH AND DEVELOPMENT
Fiscal 1998 research and development expenses increased $10.0 million,
or 43.5%, from the prior year, to $33.0 million. As a percentage of sales,
expenses were consistent with the prior year's expenses.
Fiscal 1997 research and development expenses decreased $276,000, or
1.2%, from the prior year, to $23.0 million. As a percentage of sales,
expenses were consistent with the prior year's expenses.
MARKETING AND SALES
Fiscal 1998 marketing and sales expenses increased $1.4 million, or
10.2%, over fiscal 1997 primarily due to increased third party agent
commissions on sales, offset in part by a decrease in convention/exhibition
costs and advertising expense that resulted in a decline in marketing and
sales expenses as a percentage of net sales and other revenues.
Fiscal 1997 marketing and sales expenses increased $1.3 million, or
10.5%, over fiscal 1996 primarily due to increased convention/exhibition
costs and advertising expense related to new product lines.
GENERAL AND ADMINISTRATIVE
Fiscal 1998 general and administrative expenses increased $7.7 million,
or 37.4%, over the prior year to $28.3 million, primarily due to increased
compensation expense, increased bad-
14
debt allowance due to increased sales, increased data processing expense and
increased depreciation and amortization.
Fiscal 1997 general and administrative expenses increased $1.5 million,
or 7.8%, over the prior year to $20.6 million, primarily due to increased
non-recurring advisory and professional fees and increased bad-debt allowance.
NON-RECURRING ITEMS
There were no non-recurring item charges in fiscal 1998 and fiscal 1996.
Fiscal 1997 non-recurring items were $15.6 million, consisting of losses
related to the insolvency of a customer, a write-down of capitalized
exploration costs and personnel expenses incurred in organizational changes.
AMORTIZATION OF IDENTIFIED INTANGIBLES
Fiscal 1998 amortization of identified intangibles increased $1.5
million, or 32.0%, over the prior year primarily due to the amortization of
additional goodwill and intangibles related to the Company's two acquisitions
during fiscal 1998.
Fiscal 1997 amortization of identified intangibles increased
$246,000, or 5.7%, over the prior year due to the amortization of additional
goodwill related to acquisitions.
OPERATING INCOME
Earnings from operations increased $56.0 million, or 261.6%, in fiscal
1998 to $77.4 million compared to $21.4 million in the prior year, primarily
due to increased sales, improved gross profit margin and the absence of
non-recurring charges in fiscal 1998.
Earnings from operations decreased $34.4 million, or 62%, in fiscal 1997
to $21.4 million compared to $55.8 million in the prior year, primarily due
to decreased profit margins and the fiscal 1997 non-recurring charges.
INTEREST EXPENSE
Interest expense increased $288,000 in fiscal 1998 compared to fiscal
1997, primarily due to the fiscal 1998 results' including a full year of
interest expense on the ten-year-term facilities financing completed in
August 1996. Interest expense in fiscal 1998 was $1.1 million.
Interest expense decreased $1.7 million in fiscal 1997 compared to
fiscal 1996 due to the repayment during fiscal 1996 of a $70 million
acquisition term loan, which was partially offset by the ten-year-term
facilities financing completed in August 1996. Interest expense in fiscal
1997 was $793,000. See "Liquidity and Capital Resources" below and Note 6 of
Notes to Consolidated Financial Statements.
15
INCOME TAX EXPENSE
The effective tax rate for fiscal 1998, 1997 and 1996 were approximately
32.0%, 31.7% and 31.4%, respectively. See Note 1 and Note 9 of Notes to
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. The Company has traditionally 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 $73.8 million for the year ended May 31, 1998. Cash
flows from operating activities after changes in working capital items were
$75.1 million for the year ended May 31, 1998, primarily due to increases in net
earnings and increased depreciation and amortization expense. The higher level
of sales during fiscal 1998 principally accounted for the increases in
receivables, inventories, payables, and accrued expenses, compared to fiscal
1997.
The Company experienced higher levels of cash and cash equivalents
(approximately $72.3 million as of May 31, 1998) as a result of increased sales
during fiscal 1998 compared to fiscal 1997 sales. Trade notes receivable as of
May 31, 1998 increased 30.4% compared to trade notes receivable at May 31, 1997;
the increase was less than the proportionate increase in sales, signifying
slightly less reliance on financed sales during fiscal 1998. For information
concerning the Company's sales finance activities, see Item 1. "Business -
Markets and Customers".
Accounts payable and accrued expenses at May 31, 1998 were 70.2% higher
than at May 31, 1997, primarily reflecting the increased levels of sales and
increase in inventory during fiscal 1998. The Company's various working
capital accounts can vary in amount substantially from period to period
depending upon the Company's levels of sales, product mix sold, demand for
its products, percentages of cash versus credit sales, collection rates,
inventory levels, and general economic and industry factors.
Cash flows used in investing activities were $18.3 million for the year
ended May 31, 1998 as compared to $27.8 million in the prior year. The $9.5
million decrease in cash used in investing activities is primarily due to a
$20.0 million decrease in property, plant and equipment purchases, mostly
attributable to the prior year's construction of the Company's manufacturing
facility in Stafford, Texas, and related new machinery and equipment purchases
for that facility. This decrease was partially offset by a $10.3 million
increase in cash used for the acquisition of net assets and business due to the
fiscal 1998 acquisitions of Green Mountain Geophysical, Inc. and CompuSeis, Inc.
See Item 1. "Business - Products".
Cash flows from financing activities were $12.9 million for the year ended
May 31, 1998, compared to $16.6 million in the prior year. The $3.7 million
decrease in cash provided by financing activities is primarily due to the fact
that the Company made no bank borrowings in fiscal 1998, compared to fiscal 1997
during which the Company incurred $23.9 million in bank borrowings. This
decrease in borrowing was offset in part by an $11.0 million decrease in debt
payments, an $8.1 million increase in proceeds from the exercise of stock
options and related tax benefit, and $1.0 million of proceeds from purchases
under the Company's Employee Stock Purchase Plan.
16
In August 1996, the Company obtained a $12.5 million ten-year term mortgage
loan to finance the construction of its new electronics manufacturing facility
in Stafford, Texas. The loan is secured by the Company's land, buildings and
improvements housing its executive and research and development headquarters as
well as the adjacent manufacturing facility. The mortgage loan bears interest at
the fixed rate of 7.875% per annum and is repayable in equal monthly
installments of principal and interest of $151,439. The promissory note contains
certain prepayment penalties. As of May 31, 1998, $11.0 million in indebtedness
was outstanding under this mortgage loan. See Note 6 of Notes to Consolidated
Financial Statements.
Capital expenditures for property, plant, and equipment totaled $7.0
million for fiscal 1998 and are expected to aggregate $17.0 million for fiscal
1999 due to increased expenditures for test equipment in research and
development and updated equipment in manufacturing. The Company believes that
the combination of its existing working capital, unused credit available under
its working capital credit facility, internally generated cash flow and access
to other financing sources, will be adequate to meet its anticipated capital and
liquidity requirements for the foreseeable future.
CREDIT AGREEMENT. On February 27, 1998, the Company entered into a Credit
Agreement with certain lenders, including Bank One, Texas, N.A., as
administrative agent for the lenders. The credit facility under the Credit
Agreement replaced the Company's existing revolving working capital line of
credit. The maximum amount available for borrowings under the Credit Agreement
is $50 million. In addition, up to $15 million of credit available under the
Credit Agreement may be used, as needed, by the Company for letters of credit.
Indebtedness under the Credit Agreement will mature on February 27, 2001.
Borrowings under the Credit Agreement may be made to finance the Company's
working capital, capital expenditures, acquisitions permitted under the Credit
Agreement and for general corporate purposes. Outstanding indebtedness under the
Credit Agreement will bear interest, at the Company's option, at fluctuating
interest rates based upon a prime rate or a eurodollar rate plus a credit margin
that fluctuates depending upon the Company's ratio of funded debt to
capitalization. In addition, the Company must pay a commitment fee for unused
amounts available under the credit facility, in an amount also based upon the
Company's ratio of funded debt to capitalization.
The obligations of the Company under the Credit Agreement are unsecured,
except for a first lien pledge of the capital stock of certain wholly-owned
subsidiaries of the Company that the lenders consider to be "material
subsidiaries". Additionally, certain of these wholly-owned subsidiaries have
guaranteed the Company's obligations under the Credit Agreement.
The Credit Agreement contains certain covenants, including (i) restrictions
on liens on the assets of the Company and its subsidiaries, (ii) limitations on
acquisitions of unaffiliated businesses, (iii) limitations on mergers,
consolidations and the sale of substantially all of the assets of the Company or
its subsidiaries, and (iv) limitations on indebtedness permitted to be incurred
or assumed by the Company and its subsidiaries, and certain investments
(including investments in partnerships and joint ventures) that may be made by
the Company and its subsidiaries, if such indebtedness or investments would
result in the failure by the Company to be in compliance with its financial
ratios and other covenants.
The Credit Agreement also contains provisions restricting the amount of
capital expenditures (excluding capital expenditures in connection with
permitted acquisitions) that the
17
Company and its subsidiaries may make in any fiscal year ($30 million for any
fiscal year). Further, the Credit Agreement requires the Company to maintain
and comply with certain financial covenants and ratios, including a current
ratio, a maximum funded debt to capitalization ratio, a fixed charge coverage
ratio and a covenant requiring that the Company maintain a certain minimum
tangible net worth. As of June 30, 1998, the Company had no indebtedness
outstanding under its Credit Agreement.
YEAR 2000. Historically, most computer systems have utilized software that
process transactions using two digits to represent the year of the transaction
(i.e., 97 represents the year 1997). This software needs to be modified to
properly process dates beyond December 31, 1999 and to avoid miscalculation or
system failures (the "Year 2000 issue"). The Company is currently working to
resolve the potential impact of the Year 2000 issue on the computerized
information systems it utilizes internally, and with regard to its products and
customers.
The Company has completed a preliminary assessment of the Year 2000 issue
with respect to the systems and software internally utilized in its business
enterprise. The Company is currently in the process of bringing its internally
utilized information system software into compliance and estimates that such
software will be fully Year 2000 compliant by mid-1999. While the Company will
be unable to make a firm estimate of the projected dollar expenditures required
to bring the Company's internally utilized system into full Year 2000 compliance
until the Company's final assessment is completed, based on information
available from its preliminary assessment, the Company does not currently
believe that this amount will be material to its business, operations or
financial condition or have a material impact on its financial position, results
of operations or liquidity.
While the Company has not yet completed its overall assessment of the Year
2000 issue with respect to its products sold to customers, it has formed a
cross-functional focus team responsible for this area. The focus team is in the
process of reviewing these issues and contacting certain of the Company's
suppliers and customers to assist them in identifying and resolving Year 2000
issues. Because its assessment is not yet completed, the Company has not yet
determined whether it, its customers or its suppliers have any material Year
2000 issues, and if so, the potential impact on the Company's operations,
results of operations or financial position. See "Cautionary Statement for
Purposes of Forward-Looking Statements - Risks Related to Year 2000 Issues".
The Company expects its customer policy regarding Year 2000 issues
affecting products sold by the Company will be as follows: (i) products for
which the Company's limited warranty policy has not yet lapsed will be covered
under the Company's limited warranty policy; and (ii) customers will be offered,
on a fee basis, upgrades to those products for which the Company's limited
warranty policy has lapsed. A relatively small number of customers has accounted
for most of the Company's net sales, although the degree of sales concentration
with any one customer has varied from fiscal year to year. The loss of any of
these customers could have a material adverse impact on the Company's
operations, results of operations or financial position.
OTHER. Demand for the Company's products is dependent upon the level of
worldwide oil and gas exploration and development activity. Such activity in
turn is primarily dependent upon oil and gas prices, which have been subject to
wide fluctuation in recent years. Worldwide oil prices are currently at their
lowest levels since 1986. Continuing low prices for hydrocarbon
18
production have in certain instances resulted in lower exploration budgets by
oil companies, which may in turn result in a reduction in demand for seismic
data acquisition services and equipment, including the Company's products. It
is impossible to predict future oil and natural gas price movements with any
certainty, and no predictions can be made as to the effect, or the extent of
the effect, if any, on the demand for the Company's products resulting from
lower oil prices worldwide. In addition, to the extent that economic
conditions in the Former Soviet Union or in Asia negatively affect future
sales to the Company's customers in those regions or the collectibility of
the receivables from those sales, such conditions may adversely affect the
Company's future results of operations, liquidity and financial condition.
See "Cautionary Statement for Purposes of Forward-Looking Statements -
Uncertainty of Energy Industry Conditions" and "Risk From Significant Amount
of Foreign Sales".
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
SFAS 130 is effective for fiscal years beginning after December 15, 1997, and
will be adopted by the Company in the first quarter of fiscal 1999. As SFAS 130
establishes standards for reporting and display, the Company does not expect the
adoption of this statement to have a material impact on its financial condition
or results of operations.
CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS
Certain information contained in this Annual Report on Form 10-K (including
statements contained in Part II., Item 7. "Management's Discussion and Analysis
of Results of Operation and Financial Condition" and in Part I, Item 3. "Legal
Proceedings"), as well as other written and oral statements made or incorporated
by reference from time to time by the Company and its representatives in other
reports, filings with the Securities and Exchange Commission, press releases,
conferences, or otherwise, may be deemed to be forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934 and are
subject to the "Safe Harbor" provisions of that section. This information
includes, without limitation, statements concerning future revenues, future
earnings, future costs, future margins and future expenses; anticipated product
releases and technological advances; the future mix of business and future asset
recoveries; contingent liabilities; Year 2000 issues; the inherent
unpredictability of adversarial proceedings; and future demand for the Company's
products, future industry conditions and trends, future capital expenditures,
and future financial condition. These statements are based on current
expectations and involve a number of risks and uncertainties, including those
set forth below and elsewhere in this Annual Report. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to be
correct.
When used in this report, the words "anticipate," "estimate," "expect,"
"may," "project" and similar expressions are intended to be among the statements
that identify forward-looking statements. Important factors which could affect
the Company's actual results and cause actual results to differ materially from
those results which might be projected, forecast, estimated or budgeted by the
Company in such forward-looking statements include, but are not limited to, the
following:
19
RISKS RELATED TO PRODUCTS AND TECHNOLOGICAL CHANGE. The markets for the
Company's product lines are characterized by rapidly changing technology and
frequent product introductions. Whether the Company can develop and produce
successfully, on a timely basis, new and enhanced products that embody new
technology, meet evolving industry standards and practice, and achieve levels of
capability and price that are acceptable to its customers, will be significant
factors in the Company's ability to compete in the future. There can be no
assurance that the Company will not encounter resource constraints or technical
or other difficulties that could delay introduction of new products in the
future. If the Company is unable, for technological or other reasons, to develop
competitive products in a timely manner in response to changes in the seismic
data acquisition industry or other technological changes, its business and
operating results will be materially and adversely affected. In addition, the
Company's continuing development of new products inherently carries the risk of
inventory obsolescence with respect to its older products.
UNCERTAINTY OF ENERGY INDUSTRY CONDITIONS. Demand for the Company's
products is dependent upon the level of worldwide oil and gas exploration and
development activity. Such activity in turn is primarily dependent upon oil and
gas prices, which have been subject to wide fluctuation in recent years in
response to relatively minor changes in the supply and demand for oil and
natural gas, market uncertainty and a variety of additional factors that are
beyond the control of the Company. Worldwide oil prices are currently at their
lowest levels since 1986. Continuing low prices for hydrocarbon production
may result in lower exploration budgets by oil companies, which may in turn
result in a reduction in demand for seismic data acquisition equipment,
including the Company's products. It is impossible to predict future oil and
natural gas price movements with any certainty. No assurances can be given as
to future levels of worldwide oil and natural gas prices, the future level of
activity in the oil and gas exploration and development industry and their
relationship(s) to the demand for the Company's products.
RISKS RELATED TO TIMING OF PRODUCT SHIPMENTS. Due to the relatively high
sales price of the Company's products and relatively low unit sales volume, the
timing in the shipment of systems and the mix of products sold can produce
fluctuations in quarter-to-quarter financial performance. See Note 13 of Notes
to Consolidated Financial Statements. One of the factors which may affect the
Company's operating results from time to time is that a substantial portion of
its net sales and other revenues in any period may result from shipments during
the latter part of a period. Because the Company establishes its sales and
operating expense levels based on its operational goals, if shipments in any
period do not meet goals, revenues and net profits may be adversely affected.
The Company believes that factors which could affect such timing in shipments
include, among others, seasonality of end-user markets, availability of
purchaser financing, manufacturing lead times and shortages of system
components. In addition, because the Company typically operates, and expects to
continue to operate, without a significant backlog of orders for its products,
the Company's manufacturing plans and expenditure levels are based principally
on sales forecasts, which sometimes results in inventory excesses and imbalances
from time to time.
RISKS RELATED TO GROSS MARGIN. The Company's gross margin percentage is a
function of the product mix sold in any period. Other factors, such as unit
volumes, inventory obsolescence, heightened price competition, changes in sales
and distribution channels, shortages
20
in components due to timely supplies or ability to obtain items at reasonable
prices, and availability of skilled labor, may also continue to affect the
cost of sales and the fluctuation of gross margin percentages in future
periods.
RISKS RELATED TO YEAR 2000 ISSUES. While the Company is currently
assessing the potential impact of the Year 2000 issue, it has not yet completed
its review. The problems actually encountered by the Company in addressing its
Year 2000 issues may be more pervasive than anticipated by management, and if
so, could have adverse effects on the Company's operations, results of
operations or financial condition. See " - Liquidity and Capital Resources -
Year 2000."
CREDIT RISK FROM SALES ARRANGEMENTS. The Company sells to many customers
on extended-term arrangements. Moreover, in connection with certain sales of its
systems and equipment, the Company has guaranteed certain loans from
unaffiliated parties to purchasers of such systems and equipment. In addition,
the Company has sold contracts and leases to third-party financing sources, the
terms of which often obligate the Company to repurchase the contracts and leases
in the event of a customer default or upon certain other occurrences.
Performance of the Company's obligations under these arrangements could have a
material adverse effect on the Company's financial condition. A number of
significant payment defaults by customers could have a material adverse effect
on the Company's financial position and results of operations. See Notes 12 and
14 of Notes to Consolidated Financial Statements.
RISK FROM SIGNIFICANT AMOUNT OF FOREIGN SALES. Sales outside the United
States have historically accounted for a significant part of the Company's net
sales and other revenues. Foreign sales are subject to special risks inherent in
doing business outside of the United States, including the risk of war, civil
disturbances, embargo and government activities, which may disrupt markets and
affect operating results. Foreign sales are also generally subject to the risks
of compliance with additional laws, including tariff regulations and
import/export restrictions. The Company is, from time to time, required to
obtain export licenses and there can be no assurance that it will not experience
difficulty in obtaining such licenses as may be required in connection with
export sales. Sales to customers in the Former Soviet Union increased by $15.2
million to $31.8 million in fiscal 1998 compared to fiscal 1997. See Note 8 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. The
Company believes that these changes in demand result primarily from the
instability of economies and governments in certain developing countries,
changes in internal laws and policies affecting trade and investment, and
because those markets are only beginning to adopt new technologies and establish
purchasing practices. These risks may adversely affect the Company's future
operating results and financial position. In addition, sales to customers in
developing countries on extended terms can present heightened credit risks for
the Company, for the reasons discussed above.
RELIANCE ON SIGNIFICANT CUSTOMERS. A relatively small number of customers
has accounted for most of the Company's net sales, although the degree of sales
concentration with any one customer has varied from fiscal year to year. During
fiscal 1998, 1997 and 1996 the two largest customers in each of those years
accounted for 35%, 45% and 42%, respectively, of the
21
Company's net sales and other revenues. The loss of either of these customers
could have a material adverse effect on the Company's sales revenues.
COMPETITION. The design, manufacture and marketing of seismic data
acquisition systems is highly competitive and is characterized by continual and
rapid changes in technology. The Company's principal competitor for land seismic
equipment is Societe d'Etudes Recherches et Construction Electroniques, an
affiliate of Compagnie General de Geophysique which, unlike the Company,
possesses the advantage of being able to sell to an affiliated seismic
contractor.
Competition in the industry is expected to intensify and could adversely
affect the Company's future results. Several of the Company's competitors have
greater name recognition, more extensive engineering, manufacturing and
marketing capabilities, and greater financial, technological and personnel
resources than those available to the Company. In addition, certain companies in
the industry have expanded their product lines or technologies in recent years
as a result of acquisitions. There can be no assurance that the Company will be
able to compete successfully in the future with existing or new competitors.
Pressures from competitors offering lower-priced products could result in future
price reductions for the Company's products.
A continuing trend toward consolidation in the oil field services industry
may have the effect of adversely affecting the prices and demand for the
Company's products and services.
DISRUPTION IN VENDOR SUPPLIES. The Company's manufacturing process
requires a high volume of quality components. Certain components used by the
Company are currently provided by only one vendor. In the future, the Company
may, from time to time, experience supply or quality control problems with its
suppliers, and such problems could significantly affect its ability to meet
production and sales commitments. The Company's reliance on certain vendors, as
well as industry supply conditions generally, involve several risks, including
the possibility of a shortage or a lack of availability of key components,
increases in component costs and reduced control over delivery schedules, any of
which could adversely affect the Company's future financial results.
PROTECTION OF INTELLECTUAL PROPERTY. The Company believes that technology
is the primary basis of competition in the industry. Although the Company
currently holds certain intellectual property rights relating to its product
lines, there can be no assurance that these rights will not be challenged by
third parties or that the Company will obtain additional patents or other
intellectual property rights in the future. Additionally, there can be no
assurance that the Company's efforts to protect its trade secrets will be
successful or that others will not independently develop products similar to the
Company's or design around any of the intellectual property rights owned by the
Company.
DEPENDENCE ON PERSONNEL. The Company's success depends upon the continued
contributions of its personnel, many of whom would be difficult to replace. The
success of the Company will depend on the ability of the Company to attract and
retain skilled employees. Changes in personnel, therefore, could adversely
affect operating results.
RISKS RELATED TO GOVERNMENT REGULATIONS AND PRODUCT CERTIFICATION. The
Company's operations are also subject to laws, regulations, government policies,
and product
22
certification requirements worldwide. Changes in such laws, regulations,
policies, or requirements could affect the demand for the Company's products
or result in the need to modify products, which may involve substantial costs
or delays in sales and could have an adverse effect on the Company's future
operating results.
RISKS OF STOCK VOLATILITY AND ABSENCE OF DIVIDENDS. In recent years, the
stock market in general and the market for energy and technology stocks in
particular, including the Company's common stock, have experienced extreme price
fluctuations. There is a risk that stock price fluctuation could impact the
Company's operations. Changes in the price of the Company's common stock could
affect the Company's ability to successfully attract and retain qualified
personnel or complete desirable business combinations or other transactions in
the future. The Company has historically not paid cash dividends on its capital
stock, and there can be no assurances that the Company will do so in the future.
RISKS RELATED TO ACQUISITIONS. To implement its business plans, the
Company may make further acquisitions in the future. Acquisitions require
significant financial and management resources both at the time of the
transaction and during the process of integrating the newly acquired business
into the Company's operations. The Company's operating results could be
adversely affected if it is unable to successfully integrate such new companies
into its operations. Certain acquisitions or strategic transactions may be
subject to approval by the other party's shareholders, United States or foreign
governmental agencies, or other third parties. Accordingly, there is a risk that
important acquisitions or transactions could fail to be concluded as planned.
Future acquisitions by the Company could also result in issuances of equity
securities or the rights associated with the equity securities, which could
potentially dilute earnings per share. In addition, future acquisitions could
result in the incurrence of additional debt, taxes, or contingent liabilities,
and amortization expenses related to goodwill and other intangible assets. These
factors could adversely affect the Company's future operating results and
financial position.
OIL AND GAS OPERATIONS. The Company's oil and gas operations are subject to
the economic risks typically associated with exploration, development, and
production activities, including the necessity of significant expenditures to
drill exploratory wells. In conducting exploration and development activities,
the Company may drill unsuccessful wells and experience losses and charges to
earnings and, if oil or natural gas is discovered, there can be no assurance
that such oil or natural gas can be economically produced or satisfactorily
marketed. Historically, the markets for oil and natural gas have been volatile
and are likely to continue to be volatile in the future. The nature of the oil
and gas business involves certain operating hazards such as well blowouts,
cratering, explosions, uncontrollable flows of oil, natural gas or well fluids,
fires, formations with abnormal pressures, pollution, releases of toxic gas and
other environmental hazards and risks, any of which could result in losses to
the Company. While the Company's current practice is not to act as operator of
any drilling prospect, and while the Company does maintain insurance in
accordance with customary industry practices under the circumstances against
some, but not all, of such risks and losses, the occurrence of such an event not
fully covered by insurance could have a material adverse affect on the Company's
financial position and results of operation.
The foregoing review of factors pursuant to the Private Securities
Litigation Reform Act
23
of 1995 should not be construed as exhaustive. In addition to the foregoing,
the Company wishes to refer readers to other factors discussed elsewhere in
this report as well as the Company's other filings and reports with the
Securities and Exchange Commission, including its recent reports on Forms
10-Q, for a further discussion of risks and uncertainties which could cause
actual results to differ materially from those contained in forward-looking
statements. The Company undertakes no obligation to publicly release the
result of any revisions to any such forward-looking statements which may be
made to reflect the events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is currently not required to provide disclosures required by
Regulation S-K Item 305 pursuant to General Instruction 1. to Paragraphs 305(a),
305(b), 305(c), 305(d) and 305(e) of Item 305. The Company's sales and financial
instruments are principally denominated in U.S. dollars and the Company does not
invest or intend to invest in derivative financial instruments or derivative
commodity instruments. The Company's principal market risk is floating interest
rate risk on indebtedness under its Credit Agreement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item begin at page F-1 hereof.
Form 11-K Information. The Company, pursuant to Rule 15d-21 promulgated
under the Securities Exchange Act of 1934, as amended, will file as an amendment
to this Annual Report on Form 10-K the information, financial statements and
exhibits required by Form 11-K with respect to the Input/Output, Inc. Employee
Stock Purchase Plan.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
P A R T III
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 1998 Annual
Meeting of Stockholders under the captions "Management" and "Voting and Stock
Ownership of Management and Principal Stockholders" and is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
24
The information required by this Item is contained in the Company's
definitive Proxy Statement to be distributed in connection with its 1998
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 1998
Annual Meeting of Stockholders under the caption "Voting and Stock Ownership
of Management and Principal Stockholders" and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
P A R T IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED.
(1) Financial Statements:
The financial statements filed as part of this report are listed
in the "Index to Consolidated Financial Statements" on page F-1
hereof.
(2) Financial Statement Schedules:
The following financial statement schedule is included as part of
this Annual Report on Form 10-K:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are inapplicable or
the requested information is shown in the financial statements or
noted therein.
(3) Exhibits:
3.1 --Amended and Restated Certificate of Incorporation, filed
as Exhibit 3.1 to the Company's Annual Report on Form 10-K
for the fiscal year ended May 31, 1995 and incorporated
herein by reference.
25
3.2 --Certificate of Amendment to the Amended and Restated
Certificate of Incorporation, dated October 11, 1996, filed
as Exhibit 3.2 to the Company's Annual Report on Form 10-K
for the fiscal year ended May 31, 1997 and incorporated
herein by reference.
3.3 --Amended and Restated Bylaws, filed as Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1995 and incorporated herein by reference.
4.1 --Form of Certificate of Designation, Preferences and Rights
of Series A Preferred Stock of Input/Output, Inc., filed as
Exhibit 2 to the Company's Registration Statement on
Form 8-A dated January 27, 1997 (attached as Exhibit 1 to
the Rights Agreement referenced in Exhibit 10.24) and
incorporated herein by reference.
*10.2 --Royalty Agreement, dated November 6, 1992, between I/O
Sensors, Inc., Triton and Triton Technologies, Inc., filed
as Exhibit 10.2 to the 1993 Form 10-K and incorporated
herein by reference.
**10.3 --1990 Restricted Stock Plan, filed as Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1995 and incorporated herein by reference.
**10.4 --Amended and Restated 1990 Stock Option Plan, filed as
Exhibit 10.4 to the Company's Annual Report on Form 10-K for
the fiscal year ended May 31, 1997 and incorporated herein
by reference.
**10.5 --Input/Output, Inc. 1996 Management Incentive Program,
filed as Exhibit 10.5 to the Company's Annual Report on Form
10-K for the fiscal year ended May 31, 1997 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 --Amended Directors Retirement Plan, filed as Exhibit 10.7
to the Company's Annual Report on form 10-K for the fiscal
year ended May 31, 1997 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 --Amendment to the Amended and Restated 1991 Directors Stock
Option Plan, filed as Exhibit 10.9 to the Company's Annual
Report on Form 10-K for the fiscal year ended May 31, 1997
and incorporated herein by reference.
26
**10.10 --Supplemental Executive Retirement Plan, filed as Exhibit
10.10 to the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1997 and incorporated herein by
reference.
**10.11 --Amendment No. 1 to the Company's Supplemental Executive
Retirement Plan, effective January 17, 1997, filed as
Exhibit 10.11 to the Company's Annual Report on Form 10-K
for the fiscal year ended May 31, 1997 and incorporated
herein by reference.
**10.12 --Supplemental Executive Retirement Trust, filed as Exhibit
10.12 to the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1997 and incorporated herein by
reference.
**10.13 --Amendment No. 1 to the Company's Supplemental Executive
Retirement Trust, effective January 17, 1998, filed as
Exhibit 10.13 to the Company's Annual Report on Form 10-K
for the fiscal year ended May 31, 1997 and incorporated
herein by reference.
**10.14 --Employment Agreement, dated February 6, 1991, between the
Company and Robert P. Brindley, filed as Exhibit 10.11 to
the Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1995 and incorporated herein by reference.
**10.15 --Amendment No. 1 to Employment Agreement between the
Company and Robert P. Brindley dated March 31, 1997, filed
as Exhibit 10.15 to the Company's Annual Report on Form 10-K
for the fiscal year ended May 31, 1997 and incorporated
herein by reference.
10.17 --Product Purchase Agreement dated June 30, 1995, by and
between Input/Output, Inc., I/O Exploration Products
(U.S.A.), Inc. and Western Atlas International, Inc. filed
as Exhibit 10.2 to the Company's Form 8-K dated June 30,
1995 and incorporated herein by reference.
10.19 --Master Letter of Credit Agreement dated April 16, 1996,
between the Company and ABN AMRO Bank N.V. Houston Agency
filed as Exhibit 10.20 to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1996.
10.20 --Promissory Note dated August 29, 1996 executed by IPOP
Management, Inc. to the order of The Variable Annuity Life
Insurance Company, filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
August 31, 1996 and incorporated herein by reference.
10.21 --Master Commercial Lease Agreement dated August 29, 1996,
by and between IPOP Management, Inc. and The Variable
Annuity Life Insurance Company, filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 1996 and incorporated herein by
reference.
27
10.22 --Limited Guaranty dated August 29, 1996, executed by
Input/Output, Inc., filed as Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
August 31, 1996 and incorporated herein by reference.
**10.23 --Input/Output, Inc. 1996 Non-Employee Director Stock Option
Plan, filed as Exhibit 10.23 to the Company's Annual Report
on Form 10-K for the fiscal year ended May 31, 1997 and
incorporated herein by reference.
10.24 --Rights Agreement, dated as of January 17, 1997, by and
between Input/Output, Inc. and Harris Trust and Savings
Bank, as Rights Agent, including exhibits thereto, filed as
Exhibit 4 to the Company's Form 8-A dated January 27, 1997
and incorporated herein by reference.
10.25 --Input/Output, Inc. Employee Stock Purchase Plan, filed as
Exhibit 4.4 to the Company's Registration Statement on Form
S-8 (Registration No. 333-24125) filed with the Securities
and Exchange Commission on March 18, 1997 and incorporated
herein by reference.
**10.26 --Employment Agreement, effective as of May 16, 1997,
between the Company and Charles E. Selecman, filed as
Exhibit 10.26 to the Company's Annual Report on Form 10-K
for the fiscal year ended May 31, 1997 and incorporated
herein by reference.
**10.27 --Employment Agreement, effective as of January 1, 1998
between the Company and W. J. Zeringue, filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended February 28, 1998 and incorporated here
in by reference.
10.28 --Credit Agreement, dated as of February 27, 1998 among the
Company, certain lenders and Bank One, Texas, N.A. as agent
for the lenders filed as Exhibit 10.2 to the Company's
Quarterly Report on form 10-Q for the fiscal quarter ended
February 28, 1998 and incorporated herein by reference.
10.29 --Corporate Guaranty of the Company dated August 29, 1997
for the benefit of BTM Capital Corporation filed as Exhibit
10.1 to the Company's Quarterly Report on form 10-Q for the
fiscal quarter ended August 31, 1997 and incorporated herein
by reference.
*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. (included in EDGAR copy only)
28
99.1 --Information required by Form 11-K with respect to the
Input/Output, Inc. Employee Stock Purchase Plan will be
filed as an amendment to this Annual Report on Form 10-K
within 120 days of the end of the fiscal year of the plan
(i.e. June 30) as permitted by Rule 15d-21 under the
Securities Exchange Act of 1934, as amended.
* Filed herewith.
** Management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
May 31, 1998.
(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.
29
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 27, 1998.
Input/Output, Inc.
By /s/ W. J. ZERINGUE
------------------------------
W. J. ZERINGUE,
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints W. J. Zeringue and Robert P. Brindley and each
of them, as his or her true and lawful attorneys-in-fact and agents with full
power of substitution and resubstitution for him or her and in his or her
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, 1998,
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 or she
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/ W. J. Zeringue Chairman, President July 27, 1998
- ---------------------------- and Chief Executive Officer
W. J. ZERINGUE (Principal Executive Officer)
/s/ Robert P. Brindley Director, Executive Vice President July 27, 1998
- ---------------------------- Worldwide Sales
ROBERT P. BRINDLEY
/s/ Shelby H. Carter, Jr. Director July 27, 1998
- ----------------------------
SHELBY H. CARTER, JR.
/s/ Ernest E. Cook Director July 27, 1998
- ----------------------------
ERNEST E. COOK
/s/ Theodore H. Elliott, Jr. Director July 27, 1998
- ----------------------------
THEODORE H. ELLIOTT, JR.
/s/ G. Thomas Graves III Director July 27, 1998
- ----------------------------
G. THOMAS GRAVES III
/s/ Charles E. Selecman Director July 27, 1998
- ----------------------------
CHARLES E. SELECMAN
/s/ Gay Stanley Mayeux Vice President and Chief Financial July 27, 1998
- ---------------------------- Officer (Principal Financial Officer)
GAY STANLEY MAYEUX
/s/ Ronald A. Harris Vice President and Controller July 27, 1998
- ---------------------------- (Principal Accounting Officer)
RONALD A. HARRIS
30
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, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations
- Years Ended May 31, 1998, 1997 and 1996 . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity
- Years Ended May 31, 1998, 1997 and 1996 . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows
- Years Ended May 31, 1998, 1997 and 1996 . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . F-7
Schedule II - Valuation and Qualifying Accounts . . . . . . . . . . . F-24
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Input/Output, Inc.:
We have audited the consolidated financial statements of Input/Output, Inc.
and subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Input/Output, Inc. and subsidiaries as of May 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended May 31, 1998, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Houston, Texas
June 24, 1998
F-2
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS May 31,
--------------------
1998 1997
-------- --------
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 72,275 $ 2,573
Trade accounts receivable, less allowance for doubtful
accounts of $3,137 and $1,740 in 1998 and 1997,
respectively . . . . . . . . . . . . . . . . . . . . . 68,257 61,788
Trade notes receivable, less allowance for doubtful
notes of $3,954 and $7,078 in 1998 and 1997,
respectively (note 3). . . . . . . . . . . . . . . . . 38,987 27,800
Income taxes receivable (note 9). . . . . . . . . . . . . -- 2,403
Inventories, net (note 2) . . . . . . . . . . . . . . . . 120,206 106,337
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . 2,649 1,939
-------- --------
Total current assets . . . . . . . . . . . . . . . . . 302,374 202,840
Long-term trade notes receivable (note 3). . . . . . . . . . 32,487 27,003
Deferred income tax asset, net (note 9). . . . . . . . . . . 2,896 3,097
Property, plant and equipment, net (note 4). . . . . . . . . 69,303 78,376
Goodwill, net of accumulated amortization of $12,993 and
$8,001 in 1998 and 1997, respectively. . . . . . . . . 68,414 61,024
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 14,189 12,318
-------- --------
$489,663 $384,658
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, principally trade . . . . . . . . . . . $ 33,107 $ 13,143
Current installments of debt (note 6) . . . . . . . . . . 986 912
Accrued expenses (note 5) . . . . . . . . . . . . . . . . 20,521 18,358
Income taxes payable (note 9) . . . . . . . . . . . . . . 8,139 --
-------- --------
Total current liabilities. . . . . . . . . . . . . . . 62,753 32,413
Long-term debt (note 6). . . . . . . . . . . . . . . . . . . 10,011 11,000
Other liabilities (note 11). . . . . . . . . . . . . . . . . 1,199 2,631
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
100,000,000 shares; issued 44,584,634 shares
in 1998 and 43,280,851 shares in 1997. . . . . . . . . 446 433
Additional paid-in capital. . . . . . . . . . . . . . . . 240,746 218,973
Retained earnings . . . . . . . . . . . . . . . . . . . . 177,885 121,116
Cumulative translation adjustment . . . . . . . . . . . . (2,063) (1,673)
Unamortized restricted stock compensation . . . . . . . . (1,314) (235)
-------- --------
Total stockholders' equity. . . . . . . . . . . . . . 415,700 338,614
-------- --------
$489,663 $384,658
-------- --------
-------- --------
See accompanying notes to consolidated financial statements.
F-3
H
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Years ended May 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
Net sales and other revenues (notes 8 and 10). . . . . $385,861 $281,845 $278,283
Cost of sales. . . . . . . . . . . . . . . . . . . . . 226,514 183,438 163,811
---------- ---------- ----------
Gross profit. . . . . . . . . . . . . . . . . . 159,347 98,407 114,472
---------- ---------- ----------
Operating expenses:
Research and development. . . . . . . . . . . . . . 32,957 22,967 23,243
Marketing and sales . . . . . . . . . . . . . . . . 14,646 13,288 12,027
General and administrative. . . . . . . . . . . . . 28,295 20,592 19,096
Non-recurring items . . . . . . . . . . . . . . . . -- 15,594 --
Amortization of identified intangibles. . . . . . . 6,008 4,551 4,305
---------- ---------- ----------
Total operating expenses. . . . . . . . . . . . 81,906 76,992 58,671
---------- ---------- ----------
Earnings from operations . . . . . . . . . . . . . . . 77,441 21,415 55,801
Interest expense . . . . . . . . . . . . . . . . . . . (1,081) (793) (2,515)
Other income . . . . . . . . . . . . . . . . . . . . . 7,315 3,675 3,091
---------- ---------- ----------
Earnings before income taxes . . . . . . . . . . . . . 83,675 24,297 56,377
Income taxes (note 9). . . . . . . . . . . . . . . . . 26,776 7,700 17,700
---------- ---------- ----------
Net earnings . . . . . . . . . . . . . . . . . . . . . $56,899 $16,597 $38,677
---------- ---------- ----------
---------- ---------- ----------
Basic earnings per common share. . . . . . . . . . . . $ 1.29 $ 0.38 $ 0.98
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of common shares
outstanding. . . . . . . . . . . . . . . . . . . . . 43,962,349 43,181,486 39,631,464
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings per common share. . . . . . . . . . . $ 1.28 $ 0.38 $ 0.95
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of diluted common shares
outstanding. . . . . . . . . . . . . . . . . . . . . 44,430,109 43,819,595 40,608,605
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to consolidated financial statements.
F-4
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
Common stock Additional Cumulative Unamortized Total
------------------- paid-in Retained Translation restricted stock stockholders'
Shares Amount capital earnings Adjustment compensation equity
---------- ------ ---------- -------- ----------- ---------------- -------------
Balance at May 31, 1995. . . . . . . . . 36,275,876 $363 $83,045 $65,658 $206 $(2,560) $146,712
Amortization of restricted
Stock compensation . . . . . . . . . . -- -- -- -- -- 1,692 1,692
Exercise of stock options
And related tax benefits . . . . . . . 943,800 9 11,502 -- -- -- 11,511
Equity reduction for SERP
Plan . . . . . . . . . . . . . . . . . -- -- -- (187) -- -- (187)
Equity reduction for
Outside Directors
Retirement Plan. . . . . . . . . . . . -- -- -- (3) -- -- (3)
Translation adjustment . . . . . . . . . -- -- -- -- (968) -- (968)
Public offering. . . . . . . . . . . . . 5,750,000 58 119,712 -- -- -- 119,770
Net earnings . . . . . . . . . . . . . . -- -- -- 38,677 -- -- 38,677
---------- ------ -------- -------- ------- --------- --------
Balance at May 31, 1996. . . . . . . . . 42,969,676 430 214,259 104,145 (762) (868) 317,204
Amortization of restricted
Stock compensation . . . . . . . . . . -- -- -- -- -- 633 633
Exercise of stock options
And related tax benefits . . . . . . . 311,175 3 4,714 -- -- -- 4,717
Equity increase for SERP
Plan . . . . . . . . . . . . . . . . . -- -- -- 375 -- -- 375
Equity reduction for
Outside Directors
Retirement Plan. . . . . . . . . . . . -- -- -- (1) -- -- (1)
Translation adjustment . . . . . . . . . -- -- -- -- (911) -- (911)
Net earnings . . . . . . . . . . . . . . -- -- -- 16,597 -- -- 16,597
---------- ------ -------- -------- ------- --------- --------
Balance at May 31, 1997. . . . . . . . . 43,280,851 433 218,973 121,116 (1,673) (235) 338,614
Amortization of restricted
Stock compensation . . . . . . . . . . -- -- -- -- -- 494 494
Issuance of restricted stock . . . . . . 53,000 1 1,572 -- -- (1,573) --
Issuance of stock in
Conjunction with business
Acquisition. . . . . . . . . . . . . . 320,555 3 6,372 -- -- -- 6,375
Exercise of stock options and
Related tax benefits . . . . . . . . . 866,683 8 12,858 -- -- -- 12,866
Issuance of stock for the
Employee Stock Purchase
Plan . . . . . . . . . . . . . . . . . 63,545 1 971 -- -- -- 972
Equity reduction for Outside
Directors Retirement Plan. . . . . . . -- -- -- (130) -- -- (130)
Translation adjustment . . . . . . . . . -- -- -- -- (390) -- (390)
Net earnings . . . . . . . . . . . . . . -- -- -- 56,899 -- -- 56,899
---------- ------ -------- -------- ------- --------- --------
Balance at May 31, 1998. . . . . . . . . 44,584,634 $ 446 $240,746 $177,885 $(2,063) $ (1,314) $415,700
---------- ------ -------- -------- ------- --------- --------
---------- ------ -------- -------- ------- --------- --------
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,
-----------------------------------------
1998 1997 1996
-------- -------- ---------
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,899 $ 16,597 $ 38,677
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . 16,816 12,558 10,152
Amortization of restricted stock compensation. . . . . . . . 494 633 1,692
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 201 (2,035) (1,627)
Pension costs. . . . . . . . . . . . . . . . . . . . . . . . (648) 96 90
Non-recurring items. . . . . . . . . . . . . . . . . . . . . -- 15,594 --
-------- -------- ---------
73,762 43,443 48,984
Changes in assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . (22,151) (38,784) (47,157)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . (13,360) (13,550) (29,094)
Leased equipment . . . . . . . . . . . . . . . . . . . . . 5,679 (3,208) 1,332
Accounts payable and accrued expenses. . . . . . . . . . . 21,104 (2,866) 7,224
Income taxes payable . . . . . . . . . . . . . . . . . . . 10,696 (4,365) (555)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . (630) (614) (1,743)
-------- -------- ---------
Net cash provided by (used in) operating activities. . . 75,100 (19,944) (21,009)
-------- -------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment. . . . . . . . . . . (6,960) (26,966) (10,240)
Acquisition of net assets and business, net of cash acquired . (10,845) (595) (120,467)
Investments in other assets. . . . . . . . . . . . . . . . . . (446) (190) (2,549)
-------- -------- ---------
Net cash used in investing activities. . . . . . . . . . (18,251) (27,751) (133,256)
-------- -------- ---------
Cash flows from financing activities:
Borrowings from bank . . . . . . . . . . . . . . . . . . . . . -- 23,850 97,800
Payments on debt . . . . . . . . . . . . . . . . . . . . . . . (915) (11,938) (97,800)
Proceeds from exercise of stock options. . . . . . . . . . . . 12,866 4,717 11,511
Proceeds from Employee Stock Purchase Plan . . . . . . . . . . 972 -- --
Net proceeds from public offerings . . . . . . . . . . . . . . -- -- 119,770
-------- -------- ---------
Net cash provided by financing activities. . . . . . . . 12,923 16,629 131,281
-------- -------- ---------
Effect of foreign currency exchange rates. . . . . . . . . . . . (70) (613) (156)
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents . . . . . . 69,702 (31,679) (23,140)
Cash and cash equivalents at beginning of year . . . . . . . . . 2,573 34,252 57,392
-------- -------- ---------
Cash and cash equivalents at end of year . . . . . . . . . . . . $ 72,275 $ 2,573 $ 34,252
-------- -------- ---------
-------- -------- ---------
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. The Company's obsolescence policy is to reserve for
components that have not been used in two years.
(d) PROPERTY, PLANT AND EQUIPMENT
Plant and equipment are recorded at cost and depreciated principally on
a straight-line basis using estimated useful lives as follows: building - 25
years, machinery and equipment - five to eight years and other - three to
eight years. Repairs and maintenance are expensed as incurred. Gains and
losses on sales and retirements are recognized on disposal.
In fiscal 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of" (SFAS 121).
Recoverability of assets to be held and used is measured by comparison of the
carrying amount of an asset to future net cash flows (undiscounted and
without interest charges) expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. The adoption of SFAS 121 has not had a material
impact on the Company's financial position and results of operations.
F-7
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(e) GOODWILL
Goodwill results from business acquisitions and represents the excess of
acquisition costs over the fair value of the net assets of businesses
acquired. Goodwill is amortized on a straight-line basis over 5 to 20 years,
the expected period to be benefited. The Company assesses goodwill annually
by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash
flows of the acquired operation.
(f) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at discrete points in time based on
relevant market information. These estimates may be subjective in nature and
involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision.
The Company believes that the carrying amounts of its current assets,
current liabilities, long-term notes receivable and long-term debt
approximate the fair value of such items.
(g) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
(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.
F-8
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(j) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are 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 and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
(k) EARNINGS PER COMMON SHARE
The Company adopted the Financial Accounting Statements Board Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128)
during the third quarter of 1998. In accordance with SFAS 128, basic earnings
per share is computed by dividing net earnings available to common
stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is determined on the assumption
that outstanding dilutive stock options have been exercised and the aggregate
proceeds as defined were used to reacquire Company common stock using the
average price of such common stock for the period. Prior period earnings per
share amounts have been restated.
The following table summarizes the calculation of net earnings, weighted
average number of common shares and weighted average number of diluted common
shares outstanding for purposes of the computation of earnings per share in
accordance with SFAS 128 (in thousands, except share and per share amounts):
MAY 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
Net earnings available to common stockholders
(in thousands). . . . . . . . . . . . . . . . . . . . . . $ 56,899 $ 16,597 $ 38,677
-------- -------- --------
-------- -------- --------
Weighted average number of common
shares outstanding . . . . . . . . . . . . . . . . . . . . 43,962,349 43,181,486 39,631,464
Stock options. . . . . . . . . . . . . . . . . . . . . . . . 467,760 638,109 977,141
-------- -------- --------
Weighted average number of diluted common shares
outstanding. . . . . . . . . . . . . . . . . . . . . . . . 44,430,109 43,819,595 40,608,605
---------- ---------- ----------
---------- ---------- ----------
Basic earnings per common share. . . . . . . . . . . . . . . $ 1.29 $ 0.38 $ 0.98
-------- -------- --------
-------- -------- --------
Diluted earnings per common share. . . . . . . . . . . . . . $ 1.28 $ 0.38 $ 0.95
-------- -------- --------
-------- -------- --------
F-9
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(l) STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 allows a company to adopt a fair value based
method of accounting for its stock-based compensation plans, or to continue to
follow the intrinsic value method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to
Employees".
The Company has elected to continue to follow APB Opinion No. 25. If the
Company had adopted SFAS 123 the Company's net earnings and earnings per share
for the years ended May 31, 1998, 1997, and 1996 would have been reduced as
discussed in Note 7.
(m) FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries are translated at current
exchange rates in effect at the end of the period reported and related
translation adjustments are reported as a component of stockholders' equity.
Statements of operations are translated at the average rates during the period.
Any transaction gains or losses are included in net earnings.
(n) STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information follows (in thousands):
Cash paid during the year for: 1998 1997 1996
-------- -------- --------
Interest (net of amounts capitalized). . . . . $ 1,130 $ 752 $ 2,515
-------- -------- --------
-------- -------- --------
Income taxes . . . . . . . . . . . . . . . . . $ 9,968 $ 11,470 $ 10,692
-------- -------- --------
-------- -------- --------
Non-cash investing and financing activities:
Restricted stock issued:
Increase in common stock . . . . . . . . . . . $ 1 $ -- $ --
Increase in paid in capital. . . . . . . . . . 1,572 -- --
Increase in unamortized stock compensation . . (1,573) -- --
-------- -------- --------
$ -- $ -- $ --
-------- -------- --------
-------- -------- --------
Issuance of common stock in connection with
business acquisition (320,555 shares)
Increase in common stock . . . . . . . . . . . $ 3 $ -- $ --
Increase in paid in capital. . . . . . . . . . 6,372 -- --
Liabilities assumed in connection with
business acquisition . . . . . . . . . . . . . 320 -- 12,700
-------- -------- --------
$ 6,695 $ -- $ 12,700
-------- -------- --------
-------- -------- --------
F-10
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(o) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
(p) RECLASSIFICATION
Certain amounts previously reported in the financial statements have been
reclassified to conform to the current year presentation.
(q) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
SFAS 130 is effective for fiscal years beginning after December 15, 1997, and
will be adopted by the Company in the first quarter of fiscal 1999. As SFAS 130
establishes standards for reporting and display, the Company does not expect the
adoption of this statement to have a material impact on its financial condition
or results of operations.
(2) INVENTORIES
A summary of inventories, net of reserves, follows (in thousands):
1998 1997
------ ------
Raw Materials. . . . . . . . . . . . . . $67,432 $56,573
Work-in-process. . . . . . . . . . . . . 25,262 23,878
Finished goods . . . . . . . . . . . . . 27,512 25,886
------ ------
$120,206 $106,337
-------- --------
-------- --------
(3) TRADE NOTES RECEIVABLE
The current and long-term trade notes receivable at May 31, 1998 are
generally secured by seismic equipment sold by the Company, bearing interest at
rates ranging from 7% to 12% and are due at various dates to 2001. In assessing
the exposure to loss, management has considered the financial capabilities of
the borrowers to repay the notes and the net realizable value of the equipment
securing the notes. See Note 12.
F-11
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(4) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows (in thousands):
MAY 31,
---------------------
1998 1997
------- -------
Land. . . . . . . . . . . . . . . . . . $ 3,424 $ 3,819
Buildings . . . . . . . . . . . . . . . 26,429 28,008
Machinery and equipment . . . . . . . . 61,767 49,002
Leased equipment. . . . . . . . . . . . 4,011 12,573
Other . . . . . . . . . . . . . . . . . 7,312 12,692
------- -------
102,943 106,094
Less accumulated depreciation . . . . . 33,640 27,718
------- -------
$69,303 $78,376
------- -------
------- -------
(5) ACCRUED EXPENSES
A summary of accrued expenses follows (in thousands):
MAY 31,
---------------------
1998 1997
------- -------
Compensation, including commissions . . $10,832 $6,602
Warranty, training and installation . . 4,245 3,856
Other . . . . . . . . . . . . . . . . . 5,444 7,900
------- -------
$20,521 $18,358
------- -------
------- -------
(6) LONG-TERM DEBT
In August 1996, the Company, through one of its wholly-owned subsidiaries,
obtained a $12.5 million, ten-year term loan secured by certain of its land and
buildings located in Stafford, Texas which includes the Company's executive
offices, research and development headquarters, and electronics manufacturing
building. The term loan, which the Company has guaranteed under a Limited
Guaranty, bears interest at a fixed rate of 7.875% per annum and is repayable in
equal monthly installments of principal and interest of $151,439. The total
installment payments in each of the next five years would be $1,817,000 with a
balance thereafter of $5,883,000. The Company leases all of the property from
its subsidiary under a master lease, which lease has been collaterally assigned
to the lender as security for the term loan. The term loan provides for
penalties for pre-payment prior to maturity. The term loan also contains certain
restrictive financial covenants with which the Company was in compliance at May
31, 1998.
F-12
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company has a revolving credit facility for advances of up to $50
million. Included under this maximum $50 million facility is a subfacility for
letters of credit for the benefit of the Company of up to $15 million. As of May
31, 1998, no amounts of indebtedness were outstanding under the credit facility.
The Company had approximately $49.7 million available under the credit facility
at May 31, 1998. The Company pays commitment fees of .25% per annum on any
unused credit under the credit facility.
(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 net proceeds to the Company
were approximately $119,770,000. The proceeds were used to retire indebtedness
incurred in connection with the Company's acquisition of the Western Geophysical
Exploration Products Group and for general corporate purposes.
(b) STOCK OPTIONS AND RESTRICTED STOCK
STOCK OPTION PLANS. The Company has adopted a stock option plan for
eligible employees which provides for the granting of options to purchase a
maximum of 7,000,000 shares of common stock. Transactions under the employee
stock option plan are summarized as follows:
F-13
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, 1995 . . . . . $2.00-$16.875 1,913,400 743,400 3,859,700
--------------- ----------- ----------- -----------
Granted - 816,750. . . 17.8125-39.25 816,750 -- (816,750)
Became exercisable . . -- -- 544,600 --
Exercised. . . . . . . 2.00-11.9375 (741,300) (741,300) --
Canceled/Forfeited . . 3.50-17.8125 (6,000) -- 6,000
--------------- ----------- ----------- -----------
May 31, 1996 . . . . . 2.0313-39.25 1,982,850 546,700 3,048,950
--------------- ----------- ----------- -----------
Granted - 1,082,950. . 16.875-21.125 1,082,950 -- (1,082,950)
Became exercisable . . -- -- 586,800 --
Exercised. . . . . . . 2.0313-20.125 (242,675) (242,675) --
Canceled/Forfeited . . 3.90625-39.25 (518,600) -- 518,600
--------------- ----------- ----------- -----------
May 31, 1997 . . . . . 2.0313-21.125 2,304,525 890,825 2,484,600
--------------- ----------- ----------- -----------
Granted - 2,496,168. . 17.50-30.375 2,496,168 -- (2,496,168)
Became exercisable . . -- -- 579,929 --
Exercised. . . . . . . 2.0313-21.125 (780,175) (780,175) --
Canceled/Forfeited . . 2.0313-29.6875 (534,772) -- 534,772
--------------- ----------- ----------- -----------
May 31, 1998 . . . . . $2.0313-$30.375 3,485,746 690,579 523,204
--------------- ----------- ----------- -----------
--------------- ----------- ----------- -----------
EMPLOYEE STOCK OPTIONS OUTSTANDING
Weighted Weighted Average Weighted
Option Price Average Remaining Average
Per Share Outstanding Exercise Price Contract Life Exercisable Exercise Price
------------------ ----------- -------------- ------------- ----------- --------------
$2.0313 16,250 $2.0313 2.8 years 16,250 $2.0313
3.5-3.9063 105,475 3.7804 4.7 years 105,475 3.7804
9.375-11.9375 99,750 11.6595 6.0 years 91,000 11.7898
16.8750-24.625 2,204,271 19.9578 9.0 years 477,854 18.2470
28.8750-30.375 1,060,000 30.0737 9.4 years -- --
------------------ ----------- -------------- ------------- ----------- --------------
$2.0313-$30.375 3,485,746 $22.2237 8.9 years 690,579 $14.8050
------------------ ----------- -------------- ------------- ----------- --------------
------------------ ----------- -------------- ------------- ----------- --------------
The Company has also adopted a directors stock option plan which provides
for the granting of options to purchase a maximum of 1,414,000 shares of common
stock by the Company's non-employee directors. Transactions under the directors
stock option plan are summarized as follows:
F-14
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
DIRECTORS STOCK OPTION PLAN
OPTION PRICE AVAILABLE
PER SHARE OUTSTANDING EXERCISABLE FOR GRANT
----------------- ----------- ----------- ---------
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 . . . . . . . . . . 3.2188-19.1875 488,500 31,000 210,000
----------------- ----------- ----------- ---------
Increase in shares authorized. . -- -- -- 400,000
Granted - 350,000. . . . . . . . 29-29.625 350,000 -- (350,000)
Became exercisable . . . . . . . -- -- 207,500 --
Exercised. . . . . . . . . . . . 3.2188-19.1875 (68,500) (68,500) --
----------------- ----------- ----------- ---------
May 31, 1997 . . . . . . . . . . 3.2188-29.625 770,000 170,000 260,000
----------------- ----------- ----------- ---------
Granted - 110,000. . . . . . . . 18.125-30.000 110,000 -- (110,000)
Became exercisable . . . . . . . -- -- 338,664 --
Exercised. . . . . . . . . . . . 3.2188-19.1875 (147,500) (147,500) --
Canceled/forfeited . . . . . . . 29.000-29.625 (50,000) -- 50,000
----------------- ----------- ----------- ---------
May 31, 1998 . . . . . . . . . . $3.2188-$30.000 682,500 361,164 200,000
----------------- ----------- ----------- ---------
----------------- ----------- ----------- ---------
DIRECTOR STOCK OPTIONS OUTSTANDING
Weighted Weighted Average Weighted
Option Price Average Remaining Average
Per Share Outstanding Exercise Price Contract Life Exercisable Exercise Price
------------------ ----------- -------------- ------------- ----------- --------------
$3.2188 5,000 $3.2188 4.3 years 5,000 $3.2188
5.750 20,000 5.750 5.3 years 20,000 5.750
11.8438 105,000 11.8438 6.3 years 75,000 11.8438
18.125-19.1875 202,500 18.8727 7.8 years 94,500 19.0526
29.000-30.000 350,000 29.4643 8.5 years 166,664 29.3975
------------------ ----------- -------------- ------------- ----------- --------------
$3.2188-$30.000 682,500 $22.7237 7.8 years 361,164 $21.3735
------------------ ----------- -------------- ------------- ----------- --------------
------------------ ----------- -------------- ------------- ----------- --------------
F-15
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company has elected to continue to follow APB Opinion No. 25 to account
for its stock-based compensation plans; however, if the Company had adopted SFAS
123 the Company's net earnings and earnings per share for the years ended May
31, 1998, 1997, and 1996 would have been reduced as follows (in thousands,
except per share amounts):
1998 1997 1996
-------------------------- -------------------------- --------------------------
As Reported Proforma As Reported Proforma As Reported Proforma
Net earnings . . . . . . . . . $56,899 $50,580 $16,597 $14,323 $38,677 $37,784
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Basic earnings per share . . . $ 1.29 $ 1.15 $ 0.38 $ 0.33 $ 0.98 $ 0.95
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Diluted earnings per share . . $ 1.28 $ 1.14 $ 0.38 $ 0.33 $ 0.95 $ 0.93
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
The weighted average fair value of options granted during 1998, 1997, and
1996 was $11.58, $10.21, and $9.24, respectively. The fair value of each option
was determined using the Black-Scholes option valuation model. The key input
variables used in valuating the options were as follows: average risk-free
interest rate based on 5-year Treasury bonds, expected stock price volatility of
44% and estimated option term of 5 years. The effects of applying SFAS 123 as
calculated above may not be representative of the effects on reported net
earnings for future years.
RESTRICTED STOCK PLAN. The Company adopted a restricted stock plan which
provided for the award of up to 1,220,000 shares of common stock to key officers
and employees. Ownership of the common stock will vest over a period of four
years. The restriction is removed from 50% of the shares after two years, 25% in
the third year and 25% in the fourth year. Shares awarded may not be sold,
assigned, transferred, pledged or otherwise encumbered by the grantee during the
vesting period. Except for these restrictions, the grantee of an award of shares
has all the rights of a stockholder, including the right to receive dividends
and the right to vote such shares. As of May 31, 1998, the Company had 53,000
unvested restricted shares outstanding and 15,000 shares available for grant due
to the cancellation of unvested shares previously granted to former employees.
The market value of shares of common stock granted under the restricted
stock plan was recorded as unamortized restricted stock compensation and
reported as a separate component of stockholders' equity. The restricted stock
compensation is amortized over the four-year vesting period.
EMPLOYEE STOCK PURCHASE PLAN. The Company adopted an Employee Stock
Purchase Plan ("Plan") which commenced April 1, 1997. The Plan allows all
eligible employees to authorize payroll deductions at the rate of 1% up to 15%
of base compensation to be applied toward the purchase of the Company's common
stock. The purchase price of the common
F-16
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
stock will be the lesser of 85% of the closing price on the first day of the
applicable offering period or 85% of the closing price on the last day of the
offering period. Under the Plan, separate six-month offering periods commence on
April 1st and October 1st of each year. There were 63,545 shares purchased by
participants during 1998, which was the first year shares were available for
purchase under the Plan.
(8) EXPORT SALES AND MAJOR CUSTOMERS
A summary of net sales and other revenues from foreign customers by
geographic area follows (in thousands):
1998 1997 1996
-------- -------- --------
Europe . . . . . . . . . . . . . . . . . . . . . . $47,931 $45,191 $26,718
Former Soviet Union. . . . . . . . . . . . . . . . 31,803 16,590 17,994
Canada and Mexico. . . . . . . . . . . . . . . . . 18,433 20,688 25,324
South America. . . . . . . . . . . . . . . . . . . 11,990 17,619 6,151
Middle East. . . . . . . . . . . . . . . . . . . . 9,880 9,120 20,192
People's Republic of China . . . . . . . . . . . . 7,637 10,928 16,854
Africa . . . . . . . . . . . . . . . . . . . . . . 7,371 608 8,460
Pakistan and India . . . . . . . . . . . . . . . . 12 195 2,684
Other. . . . . . . . . . . . . . . . . . . . . . . 363 260 427
-------- -------- --------
$135,420 $121,199 $124,804
-------- -------- --------
-------- -------- --------
Net sales and other revenues from individual customers representing 10%
or more of net sales and other revenues were as follows:
Customer 1998 1997 1996
-------- ---- ---- ----
A. . . . . . . . . . . . . . . . . . . . . . . . . 28% 39% 32%
B. . . . . . . . . . . . . . . . . . . . . . . . . 7% 6% 10%
(9) INCOME TAXES
Components of income taxes follow (in thousands): 1998 1997 1996
------- ------ -------
Current:
Federal . . . . . . . . . . . . . . . . . . . . $20,963 $5,022 $14,615
Foreign . . . . . . . . . . . . . . . . . . . . 4,678 3,686 3,986
State and local . . . . . . . . . . . . . . . . 934 1,027 726
Deferred-Federal . . . . . . . . . . . . . . . . . 201 (2,035) (1,627)
------- ------ -------
$26,776 $7,700 $17,700
------- ------ -------
------- ------ -------
F-17
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
A reconciliation of the expected income tax expense on earnings before
income taxes using the statutory Federal income tax rate of 35% for the years
ended 1998, 1997 and 1996, to the income tax expense reported herein is as
follows (in thousands):
1998 1997 1996
-------- --------- ---------
Expected income tax expense . . . . . . . . . . . . . . . $29,286 $8,504 $19,732
Tax benefit from use of foreign sales corporation . . . . (2,722) (1,330) (2,032)
Foreign tax credit. . . . . . . . . . . . . . . . . . . . (33) (142) (305)
Foreign taxes . . . . . . . . . . . . . . . . . . . . . . (303) 898 118
State and local taxes . . . . . . . . . . . . . . . . . . 607 667 472
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (59) (897) (285)
-------- --------- ---------
$26,776 $7,700 $17,700
-------- --------- ---------
-------- --------- ---------
The tax effects of the cumulative temporary differences
resulting in the net deferred tax asset follow (in thousands):
MAY 31,
----------------------
1998 1997
-------- --------
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . $(1,582) $ (1,406)
Allowance accounts. . . . . . . . . . . . . . . . . . . . . . . . . (3,917) (3,417)
Unamortized restricted stock compensation . . . . . . . . . . . . . (208) (732)
Uniform capitalization. . . . . . . . . . . . . . . . . . . . . . . (967) (817)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,458) (1,219)
-------- --------
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . (8,132) (7,591)
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . -- --
-------- --------
Total deferred tax asset. . . . . . . . . . . . . . . . . . . . . (8,132) (7,591)
-------- --------
Basis in identified intangibles . . . . . . . . . . . . . . . . . . 1,785 2,102
Basis in property, plant and equipment. . . . . . . . . . . . . . . 3,451 2,392
-------- --------
Total deferred tax liabilities. . . . . . . . . . . . . . . . . . 5,236 4,494
-------- --------
Total deferred tax asset, net . . . . . . . . . . . . . . . . . . $(2,896) $(3,097)
-------- --------
-------- --------
Management believes that total deferred tax assets will more likely than
not be fully realized based on the Company's historical earnings and future
expectations of adjusted taxable income as well as reversing gross deferred tax
liabilities.
(10) LEASES
The Company is a party to several leases as described below:
AS LESSOR: The Company has leased seismic equipment to customers under
operating leases with noncancellable terms of less than one year. Rental
revenues relating to the operating leases were: $10,112,000 in 1998; $8,707,000
in 1997; and $7,386,000 in 1996. The Company entered into a Preferred Supplier
Agreement with Mitcham Industries, Inc. ("Mitcham") during June 1998. The terms
of this agreement provide that Mitcham will purchase a minimum of $90 to $100
million
F-18
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
of Company products over a five-year term ending May 31, 2003, which amounts
include a $15 million purchase by Mitcham of a substantial portion of the
Company's equipment lease pool during May 1998. As of July 1, 1998, Mitcham's
total remaining purchase obligation under this agreement ranged between $75 to
$85 million. In addition, the Company has agreed not to lease products covered
by the Preferred Supplier Agreement except in limited circumstances, and to
refer rental inquiries from the Company's customers worldwide to Mitcham during
the term of the agreement. The Company also owns a building with tenants. The
rental revenues relating to those leases were: $258,000 in 1998; $344,000 in
1997; and $257,000 in 1996.
AS LESSEE: The Company had rental expense relating to operating leases for
a secondary facility and various equipment of: $1,560,000 in 1998; $1,575,000 in
1997; and $1,801,000 in 1996. At May 31, 1998, none of the operating leases had
noncancellable lease terms in excess of one year.
(11) RETIREMENT PLANS
The Company has a 401(k) retirement savings plan which covers substantially
all employees. Employees may voluntarily contribute up to 16% of their
compensation, as defined, to the plan and the Company may contribute additional
amounts at its sole discretion. The Company's contributions to the plan were:
$1,433,000 in 1998; $2,007,000 in 1997; and $1,933,000 in 1996.
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 participants' death, retirement or total disability as set
forth in the plan. The SERP Plan is accounted for under Statement of Financial
Accounting Standards No. 87, "Employers' Accounting for Pensions". The fiscal
1998 consolidated financial statements include a reduction of pension expense of
$696,000, accrued pension costs of $393,000 and an intangible asset for
unrecognized prior service cost of $155,000.
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
Statement of Financial Accounting Standards No. 87, "Employers' Accounting for
Pensions." The fiscal 1998 consolidated financial statements include pension
expense of $48,000, accrued pension costs of $631,000 and an equity reduction of
$130,000.
(12) CREDIT RISK
The Company sells to many customers on extended-term arrangements.
Moreover, in connection with certain sales of its systems and equipment, the
Company has guaranteed certain loans from unaffiliated parties to purchasers of
such systems and equipment. In addition, the Company has sold contracts and
leases to third-party financing sources, the terms of which often obligate the
Company to repurchase the contracts and leases in the event of a
F-19
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
customer default or upon certain other occurrences. Performance of the Company's
obligations under these arrangements could have a material adverse effect on the
Company's financial condition. At May 31, 1998 and 1997, the Company had
guaranteed approximately $11,140,000 and $8,198,000, respectively, of trade
notes receivable sold with recourse and loans from unaffiliated parties to
purchasers of the Company's seismic equipment. A number of significant payment
defaults by customers could have a material adverse effect on the Company's
financial position and results of operations. All loans guaranteed are
collateralized by the seismic equipment. Due to the inherent uncertainties of
guaranty agreements, the Company cannot estimate the fair value of the
guaranties as of May 31, 1998.
Sales outside the United States have historically accounted for a
significant part of the Company's net sales and other revenues. Foreign sales
are subject to special risks inherent in doing business outside of the United
States, including the risk of war, civil disturbances, embargo and government
activities, which may disrupt markets and affect operating results.
Demand for the Company's products from customers in developing countries is
difficult to predict and can fluctuate significantly from year to year. The
Company believes that these changes in demand result primarily from the
instability of economies and governments in certain developing countries,
changes in internal laws and policies affecting trade and investment, and
because those markets are only beginning to adopt new technologies and establish
purchasing practices. These risks may adversely affect the Company's future
operating results and financial position. In addition, sales to customers in
developing countries on extended terms can present heightened credit risks for
the Company, for the reasons discussed above.
(13) SELECTED QUARTERLY INFORMATION - (UNAUDITED)
THREE MONTHS ENDED
-----------------------------------------------------
1998 AUG. 31 NOV. 30 FEB. 28 MAY 31
- ---- -------- -------- ------- -------
(in thousands, except per share amounts)
Net sales and other revenues . . . . . . . . $82,970 $103,683 $95,266 $103,942
Gross profit . . . . . . . . . . . . . . . . 33,314 41,791 40,811 43,431
Earnings from operations . . . . . . . . . . 15,787 20,185 20,329 21,140
Interest expense . . . . . . . . . . . . . . (322) (258) (262) (239)
Other income . . . . . . . . . . . . . . . . 1,119 2,253 2,204 1,739
Income taxes . . . . . . . . . . . . . . . . 5,307 7,098 7,127 7,244
Net earnings . . . . . . . . . . . . . . . . $11,277 $15,082 $15,144 $15,396
-------- -------- ------- -------
-------- -------- ------- -------
Basic earnings per share . . . . . . . . . . $0.26 $0.34 $0.34 $0.35
-------- -------- ------- -------
-------- -------- ------- -------
Diluted earnings per share . . . . . . . . . $0.26 $0.34 $0.34 $0.34
-------- -------- ------- -------
-------- -------- ------- -------
F-20
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
THREE MONTHS ENDED
-----------------------------------------------------
1997 AUG. 31 NOV. 30 FEB. 28 MAY 31
- ---- -------- -------- ------- -------
(in thousands, except per share amounts)
Net sales and other revenues . . . . . . . . $73,004 $67,044 $64,773 $77,024
Gross profit . . . . . . . . . . . . . . . . 28,634 22,212 23,886 23,675
Earnings (loss) from operations. . . . . . . 12,485 6,223 8,687 (5,980)
Interest expense . . . . . . . . . . . . . . -- (172) (296) (325)
Other income . . . . . . . . . . . . . . . . 1,723 1,004 685 263
Income tax expense (benefit) . . . . . . . . 4,547 2,258 2,904 (2,009)
Net earnings (loss). . . . . . . . . . . . . $9,661 $4,797 $6,172 $(4,033)
-------- -------- ------- -------
-------- -------- ------- -------
Basic earnings (loss) per share. . . . . . . $0.22 $0.11 $0.14 $(0.09)
-------- -------- ------- -------
-------- -------- ------- -------
Diluted earnings (loss) per share. . . . . . $0.22 $0.11 $0.14 $(0.09)
-------- -------- ------- -------
-------- -------- ------- -------
In the fourth quarter of fiscal 1997 the net loss occurred due to
non-recurring item charges of $15.6 million. See Note 14.
(14) NON-RECURRING ITEMS
There were no non-recurring charges in fiscal 1998 and fiscal 1996.
Fiscal 1997 non-recurring items were $15.6 million, consisting of losses
related to the insolvency of a customer, a write-down of capitalized exploration
costs and personnel expenses incurred in organizational changes.
(15) COMMITMENTS AND CONTINGENCIES
On September 24, 1997, a purported class action lawsuit was filed against
the Company, the former president and chief executive officer of the Company,
and an executive vice president of the Company, in the U.S. District Court for
the Southern District of Texas, Houston Division. The action, styled NORMAN TOCK
V. INPUT/OUTPUT, INC., GARY D. OWENS AND ROBERT P. BRINDLEY, alleges violations
of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and state
statutory and common law fraud provisions. The action was filed on behalf of
purchasers of common stock of the Company that purchased shares during the
period from September 17, 1996 through March 18, 1997. The complaint seeks
damages in an unspecified amount plus costs and attorney's fees. The complaint
alleges misrepresentations and omissions in public filings and announcements
concerning the Company's business, sales and products, and disputes certain
accounting methodologies employed by the Company. On October 21, 1997, a
stipulation and order was entered by the court, extending the time for responses
to the complaint by the defendants pending entry of an order appointing lead
plaintiff and lead counsel. An amended complaint was filed on April 17, 1998.
Defendants filed a
F-21
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
motion to dismiss and brief in support thereof on June 8, 1998. No hearing on
the motion to dismiss has been scheduled. The Company believes that the
plaintiff's allegations are without merit and that there are meritorious
defenses to the allegations, and intends to defend the action vigorously.
In the ordinary course of business, the Company has been named in other
various lawsuits. While the final resolution of these matters may have an
impact on the Company's consolidated financial results for a particular
reporting period, management believes, based on consultation with counsel, that
the ultimate resolution of these matters will not have a material adverse impact
on the Company's financial position, results of operations or liquidity.
YEAR 2000. Historically, most computer systems have utilized software that
process transactions using two digits to represent the year of the transaction
(i.e., 97 represents the year 1997). This software needs to be modified to
properly process dates beyond December 31, 1999 and to avoid miscalculation or
system failures (the "Year 2000 issue"). The Company is currently working to
resolve the potential impact of the Year 2000 issue on the computerized
information systems it utilizes internally, and with regard to its products and
customers.
The Company has completed a preliminary assessment of the Year 2000 issue
with respect to the systems and software internally utilized in its business
enterprise. The Company is currently in the process of bringing its internally
utilized information system software into compliance and estimates that such
software will be fully Year 2000 compliant by mid-1999. While the Company will
be unable to make a firm estimate of the projected dollar expenditures required
to bring the Company's internally utilized system into full Year 2000 compliance
until the Company's final assessment is completed, based on information
available from its preliminary assessment, the Company does not currently
believe that this amount will be material to its business, operations or
financial condition or have a material impact on its financial position, results
of operations or liquidity.
While the Company has not yet completed its overall assessment of the Year
2000 issue with respect to its products sold to customers, it has formed a
cross-functional focus team responsible for this area. The focus team is in the
process of reviewing these issues and contacting certain of the Company's
suppliers and customers to assist them in identifying and resolving Year 2000
issues. Because its assessment is not yet completed, the Company has not yet
determined whether it, its customers or its suppliers have any material Year
2000 issues, and if so, the potential impact on the Company's operations,
results of operations or financial position.
The Company's policy regarding Year 2000 compliance (with Year 2000
compliance defined by the Company) in products sold by the Company follows: (i)
products for which the
F-22
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Company's limited warranty policy has not yet lapsed will be made Year 2000
compliant under the Company's limited warranty policy; and (ii) customers will
be offered, on a fee basis, upgrades to render Year 2000 compliant those
products for which the Company's limited warranty policy has lapsed. A
relatively small number of customers has accounted for most of the Company's net
sales, although the degree of sales concentration with any one customer has
varied from fiscal year to year. The loss of any of these customers could have a
material adverse impact on the Company's operations, results of operations or
financial position.
F-23
SCHEDULE II
INPUT/OUTPUT, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
- ------------------------- ---------- ---------- ---------- -----------
BALANCE AT CHARGED TO
YEAR ENDED BEGINNING COSTS AND BALANCE AT
MAY 31, 1996 OF YEAR EXPENSES DEDUCTIONS END OF YEAR
- ------------------------- ---------- ---------- ---------- -----------
Allowance for doubtful
accounts $100 $508 $138 $470
Allowance for doubtful
notes receivable 125 603 -- 728
Reserves for excess and
obsolete inventory 856 999 44 1,811
Warranty, training and
installation 1,771 5,378 3,418 3,731
- ------------------------- ---------- ---------- ---------- -----------
BALANCE AT CHARGED TO
YEAR ENDED BEGINNING COSTS AND BALANCE AT
MAY 31, 1997 OF YEAR EXPENSES DEDUCTIONS END OF YEAR
- ------------------------- ---------- ---------- ---------- -----------
Allowance for doubtful
accounts $470 $1,508 $238 $1,740
Allowance for doubtful
notes receivable 728 7,350 1,000 7,078
Reserves for excess and
obsolete inventory 1,811 470 532 1,749
Warranty, training and
installation 3,731 4,469 4,344 3,856
- ------------------------- ---------- ---------- ---------- -----------
BALANCE AT CHARGED TO
YEAR ENDED BEGINNING COSTS AND BALANCE AT
MAY 31, 1998 OF YEAR EXPENSES DEDUCTIONS END OF YEAR
- ------------------------- ---------- ---------- ---------- -----------
Allowance for doubtful
accounts $1,740 $1,770 $373 $3,137
Allowance for doubtful
notes receivable 7,078 2,280 5,404 3,954
Reserves for excess and
obsolete inventory 1,749 4,264 1,064 4,949
Warranty, training and
installation 3,856 5,162 4,773 4,245
F-24