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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: NOVEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ___________
COMMISSION FILE NUMBER: 1-13402
INPUT/OUTPUT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 22-2286646
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11104 WEST AIRPORT BLVD., STAFFORD, TEXAS 77477
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (281) 933-3339
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
At November 30, 1996 there were 43,225,951 shares of common stock, par value
$0.01 per share, outstanding.
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 30, 1996
PART I. Financial Information.
Page
----
Item 1. Financial Statements.
Consolidated Balance Sheets
November 30, 1996 and May 31, 1996 . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Operations
Three and six months ended November 30, 1996 and 1995 . . . . . . . . . 3
Consolidated Statements of Cash Flows
Six months ended November 30, 1996 and 1995 . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition . . . . . . . . . . . . . . . . . . . . . . . 8
PART II. Other Information.
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . 15
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
NOVEMBER 30, MAY 31,
ASSETS 1996 1996
----------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents ..................................... $ 4,902 $ 34,252
Trade account receivables, net ................................ 53,008 42,989
Trade notes receivable, net ................................... 36,457 28,424
Inventories ................................................... 113,129 92,787
Income taxes receivable ....................................... 431 --
Prepaid expenses .............................................. 1,331 2,004
-------- --------
Total current assets ...................................... 209,258 200,456
Long-term trade notes receivable ................................ 25,225 16,678
Deferred income tax asset ....................................... 661 1,062
Property, plant and equipment, net .............................. 69,328 56,035
Goodwill, net ................................................... 62,540 64,200
Other assets .................................................... 18,017 17,034
-------- --------
$385,029 $355,465
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt ........................ $ 801 $ --
Accounts payable, principally trade ........................... 19,733 19,518
Accrued expenses .............................................. 13,355 13,751
Income taxes payable .......................................... -- 1,962
-------- -------
Total current liabilities ................................. 33,889 35,231
Long-term debt, excluding current installments .................. 11,540 --
Other liabilities ............................................... 3,229 3,030
Stockholders' equity:
Preferred stock, $.01 par value; authorized 5,000,000 shares,
none issued ................................................. -- --
Common stock, $.01 par value; authorized 100,000,000 shares;
issued 43,225,951 shares at November 30, 1996 and 42,969,676
shares at May 31, 1996 ...................................... 432 430
Additional paid-in capital .................................... 218,390 214,259
Retained earnings ............................................. 118,604 104,145
Cumulative translation adjustment ............................. (520) (762)
Unamortized restricted stock compensation ..................... (535) (868)
-------- --------
Total stockholders' equity ............................... 336,371 317,204
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$385,029 $355,465
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-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
2
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED NOVEMBER 30, ENDED NOVEMBER 30,
1996 1995 1996 1995
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales and other revenues................ $67,044 $70,530 $140,048 $125,288
Cost of sales............................... 44,832 42,060 89,202 74,913
------- ------- ------- -------
Gross profit.......................... 22,212 28,470 50,846 50,375
------- ------- ------- -------
Operating expenses:
Research and development................. 5,983 6,466 11,873 11,033
Marketing and sales...................... 3,559 3,193 6,866 6,295
General and administrative............... 5,333 4,258 11,177 8,396
Amortization of identified.intangibles... 1,114 911 2,222 1,605
------- ------- ------- -------
Total operating expenses.............. 15,989 14,828 32,138 27,329
------- ------- ------- -------
Earnings from operations.................... 6,223 13,642 18,708 23,046
Interest expense............................ (172) (1,647) (172) (2,515)
Other income................................ 1,004 (23) 2,727 857
------- ------- ------- -------
Earnings before income taxes................ 7,055 11,972 21,263 21,388
Income taxes................................ 2,258 3,831 6,804 6,844
------- ------- ------- -------
Net earnings................................ $ 4,797 $ 8,141 $14,459 $14,544
------- ------- ------- -------
------- ------- ------- -------
Earnings per common share................... $ 0.11 $ 0.21 $ 0.33 $ 0.38
------- ------- ------- -------
------- ------- ------- -------
Weighted average number of common shares
outstanding................................ 43,934,991 38,166,382 43,938,456 38,001,806
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
3
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
NOVEMBER 30,
------------------
1996 1995
---- ----
Cash flows from operating activities:
Net earnings......................................... $ 14,459 $ 14,544
Adjustments to reconcile net cash
used in operating activities:
Depreciation and amortization................... 5,862 4,794
Amortization of restricted stock compensation... 333 892
Deferred income taxes........................... 401 (1,764)
Pension costs................................... 218 150
Changes in assets and liabilities:
Receivables.................................. (26,677) (42,277)
Inventories.................................. (20,342) (7,288)
Leased equipment............................. (1,925) (1,676)
Accounts payable and accrued expenses........ (181) 6,984
Income taxes................................. (2,393) 3,385
Other........................................ (113) (1,361)
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Net cash used in operating activities........ (30,358) (23,617)
Cash flows from investing activities:
Purchases of property, plant, and equipment.......... (14,919) (3,352)
Acquisition of net assets and business............... -- (131,708)
Investment in other assets........................... (728) 133
-------- --------
Net cash used in investing activities................ (15,647) (134,927)
Cash flows from financing activities:
Borrowing from bank................................... 12,550 97,800
Payments on long-term debt............................ (209) (97,800)
Proceeds from stock offering, net of expenses......... -- 120,056
Exercise of stock options............................. 4,133 2,902
-------- --------
Net cash provided by financing activities..... 16,474 122,958
Effect of foreign currency fluctuations.................. 181 --
-------- --------
Net decrease in cash and cash equivalents................ (29,350) (35,586)
Cash and cash equivalents at beginning of quarter........ 34,252 57,392
-------- --------
Cash and cash equivalents at end of quarter............. $ 4,902 $ 21,806
-------- --------
-------- --------
See accompanying notes to consolidated financial statements.
4
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) GENERAL
The consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. The financial statements reflect all
adjustments (consisting of normal recurring accruals) which are, in the
opinion of management, necessary to fairly present such information. Although
the Company believes that the disclosures are adequate to make the
information presented not misleading, certain information and footnote
disclosures, including significant accounting policies, normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and
regulations. It is suggested that these financial statements be read in
conjunction with the consolidated financial statements and the notes thereto,
as well as "Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition," included in the Company's annual report
on Form 10-K for the year ended May 31, 1996, as filed with the Securities
and Exchange Commission.
(2) INVENTORIES
Inventories are stated at the lower of cost (primarily first-in,
first-out) or market. A summary of inventories follows (in thousands):
NOVEMBER 30, May 31,
1996 1996
------------ -------
Raw materials ............................. $ 53,850 $47,280
Work-in-process ........................... 35,209 29,016
Finished goods ............................ 24,070 16,491
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$113,129 $92,787
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-------- -------
(3) STATEMENTS OF CASH FLOWS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The
Company does not invest or intend to invest in derivative securities.
Similar investments with original maturities beyond three months are
considered short-term investments available for sale or carried at market.
Exchange rate fluctuations have not had a material effect on the Company's
Statements of Cash Flows.
5
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
Supplemental disclosures of cash flow information for the six months
ended November 30, 1996 and 1995 follow (in thousands):
1996 1995
---- ----
Cash paid during the periods for:
Interest (net of amount capitalized)...... $ 172 $2,423
------ ------
------ ------
Income taxes.............................. $6,944 $3,540
------ ------
------ ------
(4) LONG TERM DEBT
In August 1996, the Company, through one of its wholly-owned
subsidiaries, obtained a $12.6 million, ten-year term loan secured by certain
of its land and buildings located in Stafford, Texas which includes the
Company's executive offices, research and development headquarters, and
newly-constructed electronics manufacturing building. The term loan, which
the Company has guaranteed under a Limited Guaranty, bears interest at a
fixed rate of 7.875% per annum. The Company leases all of the property from
its subsidiary under a master lease, which lease has been collaterally
assigned to the lender as security for the term loan. The term loan provides
for penalties for prepayment prior to maturity.
(5) INCOME TAXES
Components of income tax expense for the six months ended November 30, 1996
and 1995 follow (in thousands):
1996 1995
---- ----
Current:
Federal................................... $4,287 $6,662
Foreign................................... 1,564 1,946
State and local........................... 552 --
Deferred - federal.......................... 401 (1,764)
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$6,804 $6,844
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6
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
A reconciliation of the expected income tax expense on earnings using
the statutory Federal income tax rate of 35% to the income tax reported
herein for the six months ended November 30, 1996 and 1995 follows (in
thousands):
1996 1995
---- ----
Expected income tax expenses........................ $7,442 $7,486
Tax benefit from use of foreign sales corporation... (761) (1,163)
Foreign tax credit.................................. 21 (565)
Foreign taxes....................................... (30) 1,946
State and local taxes............................... 359 --
Research and development credit..................... (168) --
Other............................................... (59) (860)
------ ------
$6,804 $6,844
------ ------
------ ------
The tax effects of the cumulative temporary differences resulting in the
net deferred income tax asset follow (in thousands):
NOVEMBER 30, May 31,
1996 1996
---- ----
Accrued expenses.................................... ($1,469) ($1,351)
Allowance accounts.................................. (763) (1,053)
Unamortized restricted stock compensation........... (1,013) (1,711)
Uniform capitalization.............................. (687) (409)
------- -------
Total deferred income tax assets.................. (3,932) (4,524)
Valuation allowance............................... -- --
------- -------
Total deferred income tax asset, net.............. (3,932) (4,524)
Basis in identified intangibles..................... 2,195 2,075
Basis in property, plant and equipment.............. 127 150
Other............................................... 949 1,237
------- -------
Total deferred income tax liabilities............. 3,271 3,462
------- -------
Total deferred income tax (asset), net.............. ($661) ($1,062)
------- -------
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7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
NET SALES AND OTHER REVENUES. The Company's second quarter net sales and
other revenues were $67.0 million, $3.5 million, or 4.9%, less than the prior
year's second quarter. The decrease in net sales and other revenues was
primarily due to unexpected delays in concluding land seismic equipment sales
late in the quarter which were partially offset by increased marine sales.
During the second quarter 12 I/O SYSTEM TWO MRX land systems were sold
compared to 23 land systems in the prior year's second quarter. Of these 23
systems, 14 were sold to geophysical contractors in the Commonwealth of
Independent States (CIS); 10 of these systems were sold to one contractor.
Marine equipment sales increased in the second quarter as three I/O
SYSTEM TWO MSX marine streamer systems were sold to domestic and
international geophysical contractors. Marine sales for the second quarter of
the prior year primarily consisted of systems components, such as marine
streamers and navigation systems.
Net sales and other revenues for the first six months of the current year
were $140.0 million, up 11.8% from $125.3 million for last year's first six
months. Sales of 18 I/O SYSTEM TWO land systems, three RSR transition zone
systems and three MSX marine systems were recorded during the first six
months of 1997 compared to 39 I/O SYSTEM TWO land systems for the prior
year's first six months; 20 of these systems were sold to geophysical
contractors in the CIS.
GROSS PROFIT MARGIN. The Company's gross profit margin for the second
quarter and year-to-date declined from 40.4% to 33.1%, and 40.2% to 36.3%
respectively, primarily due to increased sales of lower margin marine
products; reduced sales of land systems; lower margins on land system sales;
and changes in the customer mix.
OPERATING EXPENSES. Operating expenses increased $1.2 million, or 7.8%,
for the second quarter over the prior year's second quarter operating
expenses. Research and development expenses decreased $483,000, or 7.5%,
primarily due to decreased personnel and related costs compared to the prior
year's second quarter. Marketing and sales expenses increased $366,000, or
11.5%, primarily due to increased outside sales commissions. General and
administrative expenses increased $1.1 million, or 25.2%, primarily due to
increases in state and local taxes, insurance, and depreciation, which
resulted from the Western Geophysical Exploration Products group (WGEP)
acquisition in June 1995; and increased allowance for doubtful accounts.
Amortization of identified intangibles increased $203,000, or 22.3%,
primarily due to increased goodwill expense resulting from the WGEP
acquisition.
Operating expenses for the first six months of the current year were $4.8
million, or 17.6%, above the first six months of the prior year. Research and
development expense increased $840,000, or 7.6%, primarily due to increased
personnel and related costs compared to the prior year's first six months.
Marketing and sales expense increased $571,000, or 9.1%, primarily due to
increased outside sales commissions. General and administrative expenses
increased $2.8 million or, 33.1%, primarily due to increased non-recurring
professional fees; increases in state and local tax, insurance and
depreciation, which resulted from the WGEP acquisition; and increased
allowance for doubtful accounts.
INTEREST EXPENSE. As a result of the ten-year-term facilities financing
completed in August 1996, interest expense for the second quarter and the
first six months of the current year was $172,000. See "Note (4) - Long-Term
Debt" of the Notes to Consolidated Financial Statements. Interest expense for
the
8
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first quarter of the current year was nil. Interest expense of $1.6 million
for last year's second quarter and $2.5 million for last year's first six
months was primarily due to interest on the Company's $70 million term
indebtedness. This term debt was repaid in November 1995.
INCOME TAX EXPENSE. The Company's effective income tax rate was
approximately 32%, both for the second quarters and the first six months of
1997 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has traditionally financed its operations from internally
generated cash flow, its credit facilities, and funds from equity financings.
Cash flows from operating activities before changes in working capital items
were a positive $21.3 million for the six months ended November 30, 1996.
However, cash flows from operating activities after changes in working
capital items were a negative $30.4 million for the six months ended November
30, 1996, primarily due to increases in (i) trade accounts (due to increased
sales in the last month of the second quarter); (ii) notes receivable, due to
increased levels of first quarter financed sales; and (iii) inventory, due to
unexpected delays in concluding land equipment sales late in the second
quarter. As of November 30, 1996 the Company had no borrowings outstanding
under its revolving line of credit and has $43.0 million available for
borrowings under the revolver for working capital purposes.
As of November 30, 1996, total trade notes receivable had increased $16.6
million over the corresponding amount outstanding at May 31, 1996, reflecting
the increased levels of Company-financed sales during the first six months of
1997. For information concerning the Company's sales finance activities, see
"Item 1. Business - Markets and Customers" of the Company's Annual Report on
Form 10-K for the year ended May 31, 1996.
On December 6, 1996 Grant Geophysical, Inc. ("Grant"), an international
geophysical services company, filed for protection under Chapter 11 of the US
Bankruptcy Code. The Company's records reflect that on the filing date the
Company had outstanding (or was obligated to repurchase) current and
long-term notes and interest receivable of approximately $10.6 million
secured by certain seismic equipment sold by the Company to Grant. Although
the Company believes that its position with regard to these notes and
receivables are sufficiently collateralized, the Company also has
approximately $700,000 in outstanding unsecured trade receivables owed by,
and claims against, Grant. In addition the Company has guaranteed, on a
partial recourse basis, certain lease obligations owed by Grant to an
institutional lender/purchaser of Company equipment for which the Company has
certain rights to purchase the lessor's interests under certain
circumstances. While the Company believes its exposure to losses regarding
Grant's reorganization will not be material, no assurance can be made as to
the amount and timing of the Company's ultimate recovery regarding these
amounts.
Certain of the Company's international sales in developing countries,
such as the CIS, have been made on extended-term arrangements. Political and
economic instabilities in certain of these countries as well as changes in
internal laws and policies affecting trade and investment in these markets
may have the effect of increasing the Company's credit risk with regards to
the receivables resulting from these sales.
In August 1996, a subsidiary of the Company borrowed $12.6 million in
long-term financing secured by the land, buildings and improvements housing
the Company's executive offices, research and development headquarters and
new manufacturing facility in Stafford, Texas. The loan bears interest at
the rate of 7.875% per annum and is repayable in equal monthly installments
of principal and interest of
9
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$151,439. The promissory note, which matures on September 1, 2006, contains
prepayment penalties. See "Note (4) - Long-Term Debt" of the Notes to
Consolidated Financial Statements.
The Company anticipates expenditures for the current year for exploration
and development of oil and gas properties to be approximately $6 million and
expects to fund this level of expenditures through cash flows from
operations. Actual levels of exploration and development expenditures may
vary significantly due to many factors, including oil and gas prices,
industry conditions, and the success of the Company's exploration and
development projects. The Company's exploration and development projects are
operated by third parties which control the timing and amount of expenditures
required to exploit the participant's interests in these prospects. The
Company expects to participate in the drilling and completion of six wells in
1997. The Company's participation in oil and gas activities is accounted for
on a full cost basis.
Capital expenditures for property, plant, and equipment totaled $10.2
million for fiscal 1996 and $14.9 million for the first six months of 1997,
and are expected to aggregate $26.5 million for 1997. As noted above, the
Company concluded in August 1996 a long-term credit facility of $12.6 million
to assist in financing the costs of land and improvements in Stafford, Texas.
The Company believes that the combination of its existing working capital,
unused credit available under its working capital credit facility, internally
generated cash flow and access to other financing sources will be adequate to
meet its anticipated capital and liquidity requirements for the foreseeable
future.
CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS
Certain statements contained herein and elsewhere may be deemed to be
forward-looking within the meaning of The Private Securities Litigation
Reform Act of 1995 and are subject to the "safe harbor" provisions of that
act, including without limitation, statements concerning future sales,
earnings, costs, expenses, acquisitions or corporate combinations, asset
recoveries, working capital, capital expenditures, financial condition, and
other results of operations. Such statements involve risks and
uncertainties. Actual results could differ materially from the expectations
expressed in such forward-looking statements. The Company identifies the
following important risk factors which could affect the Company's actual
results and cause actual results to differ materially from any such results
which might be projected, forecast, estimated or budgeted by the Company in
such forward-looking statements:
RISK RELATED TO NEW PRODUCTS AND TECHNOLOGICAL CHANGE. The markets for
the Company's product lines are characterized by rapidly changing technology
and frequent product introductions. Whether the Company can develop and
produce successfully, on a timely basis, new and enhanced products that
embody new technology, meet evolving industry standards and practice, and
achieve levels of capability and price that are acceptable to its customers,
will be significant factors in the Company's ability to compete in the
future. There can be no assurance that the Company will not encounter
resource constraints or technical or other difficulties that could delay
introduction of new products in the future. If the Company is unable, for
technological or other reasons, to develop competitive products in a timely
manner in response to changes in the seismic data acquisition industry or
other technological changes, its business and operating results will be
materially and adversely affected. In addition, the Company's continuing
development of new products inherently carries the risk of inventory
obsolescence with respect to its older products.
10
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RISKS RELATED TO TIMING OF PRODUCT SHIPMENTS. Due to the relatively high
sales price of the Company's products and relatively low unit sales volume,
the timing in the shipment of systems and the mix of products sold can
produce fluctuations in quarter-to-quarter financial performance. One of the
factors which may affect the Company's operating results from time to time is
that a substantial portion of its net sales and other revenues in any period
may result from shipments during the latter part of a period. Because the
Company establishes its sales and operating expense levels based on its
operational goals, if shipments in any period do not meet goals, revenues and
net profits may be adversely affected. The Company believes that factors
which could affect such timing in shipments include, among others,
seasonality of end-user markets, availability of purchaser financing,
manufacturing lead times, customer purchases of leased equipment and
shortages of system components. In addition, because the Company typically
operates, and expects to continue to operate, without a significant backlog
of orders for its products, the Company's manufacturing plans and expenditure
levels are based principally on sales forecasts, which sometimes results in
inventory excesses and imbalances from time to time.
RISKS RELATED TO GROSS MARGIN. The Company's gross margin percentage is
a function of the product mix sold in any period. Other factors, such as unit
volumes, inventory obsolescence, heightened price competition, changes in
sales and distribution channels, shortages in components due to timely
supplies or ability to obtain items at reasonable prices, and availability of
skilled labor, may also continue to affect the cost of sales and the
fluctuation of gross margin percentages in future periods.
UNCERTAINTY OF ENERGY INDUSTRY CONDITIONS. Demand for the Company's
products is dependent upon the level of worldwide oil and gas exploration and
development activity. Such activity in turn is primarily dependent upon oil
and gas prices, which have been subject to wide fluctuation in recent years
in response to relatively minor changes in the supply and demand for oil and
natural gas, market uncertainty and a variety of additional factors that are
beyond the control of the Company. It is impossible to predict future oil and
natural gas price movements with any certainty. No assurances can be given as
to the future level of activity in the oil and gas exploration and
development industry and its relationship to the future demand for the
Company's products.
CREDIT RISK FROM SALES ARRANGEMENTS. The Company sells to many
customers on extended-term arrangements. Moreover, in connection with certain
sales of its systems and equipment, the Company has guaranteed certain loans
from unaffiliated parties to purchasers of such systems and equipment. In
addition, the Company has sold contracts and leases to third-party financing
sources, the terms of which often obligate the Company to repurchase the
contracts and leases in the event of a customer default or upon certain other
occurrences. Performance of the Company's obligations under these
arrangements could have a material adverse effect on the Company's financial
condition. A number of significant payment defaults by customers could have a
material adverse effect on the Company's financial position and results of
operations.
DISRUPTION IN VENDOR SUPPLIES. The Company's manufacturing process
requires a high volume of quality components. Certain components used by the
Company are currently provided by only one vendor. In the future, the Company
may, from time to time, experience supply or quality control problems with
its suppliers, and such problems could significantly affect its ability to
meet production and sales commitments. The Company's reliance on certain
vendors, as well as industry supply conditions generally, involve several
risks, including the possibility of a shortage or a lack of availability of
key components, increases in component costs and reduced control over
delivery schedules, any of which could adversely affect the Company's future
financial results.
11
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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 1994, 1995, and 1996, the two largest customers
in each of those years accounted for 27%, 26%, and 42%, respectively, of the
Company's net sales and other revenues. The loss of any of these customers
could have a material adverse effect on the Company's sales revenues.
COMPETITION. The design, manufacture and marketing of seismic data
acquisition systems is highly competitive and is characterized by continual
and rapid changes in technology. The Company's principal competitor for land
seismic equipment is Societe d'Etudes Recherches et Construction
Electroniques, an affiliate of Compagnie General de Geophysique which, unlike
the Company, possesses the advantage of being able to sell to an affiliated
seismic contractor.
Competition in the industry is expected to intensify and could adversely
affect the Company's future results. Several of the Company's competitors
have greater name recognition, more extensive engineering, manufacturing and
marketing capabilities, and greater financial, technological and personnel
resources than those available to the Company. In addition, certain companies
in the industry have expanded their product lines or technologies in recent
years as a result of acquisitions. There can be no assurance that the Company
will be able to compete successfully in the future with existing or new
competitors. Pressures from competitors offering lower-priced products could
result in future price reductions for the Company's products.
RISK FROM SIGNIFICANT AMOUNT OF FOREIGN SALES. Sales outside the United
States have historically accounted for a significant part of the Company's
net sales and other revenues. Foreign sales are subject to special risks
inherent in doing business outside of the United States, including the risk
of war, civil disturbances, embargo and government activities, which may
disrupt markets and affect operating results. Foreign sales are also
generally subject to the risks of compliance with additional laws, including
tariff regulations and import/export restrictions. The Company is, from time
to time, required to obtain export licenses and there can be no assurance
that it will not experience difficulty in obtaining such licenses as may be
required in connection with export sales.
Demand for the Company's products from customers in developing countries
is difficult to predict and can fluctuate significantly from year to year.
The Company believes that these changes in demand result primarily from the
instability of economies and governments in certain developing countries,
changes in internal laws and policies affecting trade and investment, and
because those markets are only beginning to adopt new technologies and
establish purchasing practices. These risks may adversely affect the
Company's future operating results and financial position. In addition, sales
to customers in developing countries on extended terms can present heightened
credit risks for the Company, for the reasons discussed above.
PROTECTION OF INTELLECTUAL PROPERTY. The Company believes that
technology is the primary basis of competition in the industry. Although the
Company currently holds certain intellectual property rights relating to its
product lines, there can be no assurance that these rights will not be
challenged by third parties or that the Company will obtain additional
patents or other intellectual property rights in the future. Additionally,
there can be no assurance that the Company's efforts to protect its trade
secrets will be successful or that others will not independently develop
products similar to the Company's or design around any of the intellectual
property rights owned by the Company.
12
<PAGE>
DEPENDENCE ON PERSONNEL. The Company's success depends upon the
continued contributions of its personnel, many of whom would be difficult to
replace. The success of the Company will depend on the ability of the Company
to attract and retain skilled employees. Changes in personnel, therefore,
could adversely affect operating results.
RISKS RELATED TO GOVERNMENT REGULATIONS AND PRODUCT CERTIFICATION. The
Company's operations are also subject to laws, regulations, government
policies, and product certification requirements worldwide. Changes in such
laws, regulations, policies, or requirements could affect the demand for the
Company's products or result in the need to modify products, which may
involve substantial costs or delays in sales and could have an adverse effect
on the Company's future operating results.
RISKS OF STOCK VOLATILITY AND ABSENCE OF DIVIDENDS. In recent years, the
stock market in general and the market for energy and technology stocks in
particular, including the Company's common stock, have experienced extreme
price fluctuations. There is a risk that stock price fluctuation could impact
the Company's operations. Changes in the price of the Company's common stock
could affect the Company's ability to successfully attract and retain
qualified personnel or complete desirable business combinations or other
transactions in the future. The Company has historically not paid cash
dividends on its capital stock, and there can be no assurances that the
Company will do so.
RISKS RELATED TO ACQUISITIONS. To implement its business plans, the
Company may make further acquisitions in the future. Acquisitions require
significant financial and management resources both at the time of the
transaction and during the process of integrating the newly acquired business
into the Company's operations. The Company's operating results could be
adversely affected if it is unable to successfully integrate such new
companies into its operations. Certain acquisitions or strategic transactions
may be subject to approval by the other party's board or shareholders,
domestic or foreign governmental agencies, or other third parties.
Accordingly, there is a risk that important acquisitions or transactions
could fail to be concluded as planned. 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, 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.
13
<PAGE>
The foregoing review of factors pursuant to the Private Securities
Litigation Reform Act of 1995 should not be construed as exhaustive. In
addition to the foregoing, the Company wishes to refer readers to the
Company's other filings and reports with the Securities and Exchange
Commission, including its recent reports on Forms 10-K and 10-Q, for a
further discussion of risks and uncertainties which could cause actual
results to differ materially from those contained in forward-looking
statements. The Company undertakes no obligation to publicly release the
result of any revisions to any such forward-looking statements which may be
made to reflect the events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
PART II - OTHER INFORMATION.
ITEM 2. CHANGES IN SECURITIES
During the fiscal quarter ended November 30, 1996, the Company made no
sales of its equity securities that were not registered under the Securities
Act of 1933, as amended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1996 Annual Meeting of Stockholders of the Company was held on
October 10, 1996 for the following purposes: (i) the election of four
directors, each for a three-year term expiring in 1999; (ii) the approval of
a proposed amendment to Article Fourth of the Restated Certificate of
Incorporation of the Company to increase the number of authorized shares of
Common Stock, par value $0.01 per share, of the Company from 50,000,000 to
100,000,000 shares; (iii) the adoption of the Input/Output, Inc. 1996
Management Incentive Program; (iv) the adoption of the Input/Output, Inc.
1996 Non-Employee Director Stock Option Plan; (v) the adoption of certain
amendments to the Input/Output, Inc. Amended and Restated 1990 Stock Option
Plan; and (vi) the ratification of the appointment of KPMG Peat Marwick LLP
as the Company's independent certified public accountants for the fiscal year
ending May 31, 1997.
The vote tabulation in the election for the directors was as follows:
Charles E. Selecman received 38,182,647 affirmative votes with 112,700 votes
withheld; Dr. Peter T. Flawn received 38,180,966 affirmative votes with
114,381 votes withheld; G. Thomas Graves III received 38,186,027 affirmative
votes with 109,320 votes withheld; and Michael J. Sheen received 38,187,347
affirmative votes with 108,000 votes withheld. There were no broker non-votes
with respect to the election of directors. In addition to Messrs. Selecman,
Flawn, Graves and Sheen, the following individuals continued their terms as
directors: Gary D. Owens, Robert P. Brindley, Shelby H. Carter Jr., Ernest E.
Cook, Glen H. Denison and Theodore H. Elliott.
The vote tabulation regarding the proposed amendment to Article Fourth
of the Restated Certificate of Incorporation of the Company to increase the
number of authorized shares of Common Stock, par value $0.01 per share, of
the Company from 50,000,000 to 100,000,000 shares was 35,417,778 affirmative
votes with 2,780,974 votes against and 96,595 votes abstaining. There were no
broker non-votes with respect to the proposed amendment.
14
<PAGE>
The vote tabulation regarding the adoption of the Input/Output, Inc. 1996
Management Incentive Program was 37,735,289 affirmative votes with 286,243 votes
against and 190,019 votes abstaining. There were 83,796 broker non-votes with
respect to the adoption of the Management Incentive Program.
The vote tabulation regarding the adoption of the Input/Output, Inc.
1996 Non-Employee Director Stock Option Plan was 34,025,108 affirmative votes
with 4,001,591 votes against and 184,852 votes abstaining. There were 83,796
broker non-votes with respect to the adoption of the Non-Employee Director
Stock Option Plan.
The vote tabulation regarding the adoption of certain amendments to the
Input/Output, Inc. Amended and Restated 1990 Stock Option Plan was 37,250,134
affirmative votes with 735,401 votes against and 226,016 votes abstaining.
There were 83,796 broker non-votes with respect to the Input/Output, Inc.
Amended and Restated 1990 Stock Option Plan.
The vote tabulation regarding the ratification of the appointment of
KPMG Peat Marwick LLP as the Company's independent certified public
accountants for the fiscal year ending May 31, 1997 was 38,207,337
affirmative votes with 13,712 votes against and 74,298 votes abstaining.
There were no broker non-votes with respect to the ratification of the
appointment of KPMG Peat Marwick LLP.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by Input/Output, Inc. during
the fiscal quarter ended November 30, 1996.
15
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
INPUT/OUTPUT, INC.
By: /s/ Robert P. Brindley
-------------------------------------------
Robert P. Brindley
Senior Vice President,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
Dated: December 24, 1996
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANICAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS FOR THE FISCAL QUARTER ENDED NOVEMBER
30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> NOV-30-1996
<CASH> 4,902
<SECURITIES> 0
<RECEIVABLES> 89,465
<ALLOWANCES> 0
<INVENTORY> 113,129
<CURRENT-ASSETS> 209,258
<PP&E> 69,328
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0
0
<COMMON> 432
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<SALES> 140,048
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<INCOME-PRETAX> 21,263
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