<PAGE>
============================================================================
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: FEBRUARY 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO _________
COMMISSION FILE NUMBER: 1-13402
INPUT/OUTPUT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 22-2286646
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11104 WEST AIRPORT BLVD., STAFFORD, TEXAS 77477
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (281) 933-3339
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
At February 28, 1997 there were 43,269,551 shares of common stock, par value
$0.01 per share, outstanding.
============================================================================
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 28, 1997
PART I. Financial Information.
PAGE
----
Item 1. Financial Statements.
Consolidated Balance Sheets
February 28, 1997 and May 31, 1996............................. 2
Consolidated Statements of Operations
Three and nine months ended February 28, 1997 and
February 29, 1996............................................. 3
Consolidated Statements of Cash Flows
Nine months ended February 28, 1997 and
February 29, 1996............................................. 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 6. Exhibits and Reports on Form 8-K......................... 14
1
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
FEBRUARY 28, MAY 31,
1997 1996
------------ -------
Current assets:
Cash and cash equivalents...................... $ 1,543 $ 34,252
Trade account receivables, net................. 50,259 42,989
Trade notes receivable, net.................... 34,215 28,424
Inventories.................................... 117,909 92,787
Income taxes receivable........................ 764 --
Prepaid expenses............................... 1,226 2,004
-------- --------
Total current assets........................ 205,916 200,456
Long-term trade notes receivable.................. 24,404 16,678
Deferred income tax asset......................... 633 1,062
Property, plant and equipment, net................ 77,686 56,035
Goodwill, net..................................... 61,524 64,200
Other assets...................................... 18,595 17,034
-------- --------
$388,758 $355,465
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings.......................... $ 2,700 $ --
Current installments of long-term debt......... 604 --
Accounts payable, principally trade............ 16,830 19,518
Accrued expenses............................... 11,470 13,751
Income taxes payable........................... -- 1,962
-------- --------
Total current liabilities................... 31,604 35,231
Long-term debt, excluding current installments ... 11,525 --
Other liabilities................................. 3,256 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 43,269,551 shares
at February 28, 1997 and 42,969,676 shares
at May 31, 1996.............................. 433 430
Additional paid-in capital..................... 218,883 214,259
Retained earnings.............................. 124,775 104,145
Cumulative translation adjustment.............. (1,350) (762)
Unamortized restricted stock compensation...... (368) (868)
-------- --------
Total stockholders' equity.................. 342,373 317,204
-------- --------
$388,758 $355,465
-------- --------
-------- --------
See accompanying notes to consolidated financial statements.
2
<PAGE>
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 NINE MONTHS
ENDED FEBRUARY 28, ENDED FEBRUARY 28,
------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net sales and other revenues............................... $ 64,773 $ 77,074 $ 204,821 $ 202,362
Cost of sales.............................................. 40,887 45,403 130,089 120,316
---------- ---------- ---------- ----------
Gross profit............................................. 23,886 31,671 74,732 82,046
Operating expenses:
Research and development.................................. 5,641 5,620 17,514 16,653
Marketing and sales....................................... 3,456 3,035 10,322 9,330
General and administrative................................ 4,984 5,281 16,161 13,677
Amortization of identified intangibles.................... 1,118 1,066 3,340 2,671
---------- ---------- ---------- ----------
Total operating expenses................................. 15,199 15,002 47,337 42,331
---------- ---------- ---------- ----------
Earnings from operations................................... 8,687 16,669 27,395 39,715
Interest expense........................................... (296) -- (468) (2,515)
Other income............................................... 685 724 3,412 1,581
---------- ---------- ---------- ----------
Earnings before income taxes............................... 9,076 17,393 30,339 38,781
Income taxes............................................... 2,904 5,566 9,709 12,410
---------- ---------- ---------- ----------
Net earnings............................................... $ 6,172 $ 11,827 $ 20,630 $ 26,371
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per common share.................................. $ 0.14 $ 0.27 $ 0.47 $ 0.66
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number of common shares outstanding....... 43,742,770 44,082,629 43,873,227 40,028,746
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
NINE MONTHS ENDED
FEBRUARY 28,
----------------------------
1997 1996
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings...................................................... $ 20,630 $ 26,371
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization................................ 8,976 6,457
Amortization of restricted stock compensation................ 500 1,339
Deferred income taxes........................................ 429 (1,180)
Pension costs................................................ 323 (4)
Changes in assets and liabilities:
Receivables............................................... (20,865) (57,598)
Inventories............................................... (25,122) (14,949)
Leased equipment.......................................... (2,362) (611)
Accounts payable and accrued expenses..................... (4,969) (5,702)
Income taxes.............................................. (2,726) 5,383
Other..................................................... (230) (1,460)
-------- ---------
Net cash used in operating activities..................... (25,416) (41,954)
-------- ---------
Cash flows from investing activities:
Purchases of property, plant, and equipment....................... (24,793) (7,680)
Acquisition of net assets and business............................ -- (120,467)
Investment in other assets........................................ (1,445) (1,205)
-------- ---------
Net cash used in investing activities...................... (26,238) (129,352)
-------- ---------
Cash flows from financing activities:
Borrowing from bank................................................ 20,750 97,800
Payments on debt................................................... (5,921) (97,800)
Proceeds from stock offering, net of expenses...................... -- 119,797
Exercise of stock options.......................................... 4,627 3,405
-------- ---------
Net cash provided by financing activities.................. 19,456 123,202
-------- ---------
Effect of foreign currency fluctuations............................ (511) --
-------- ---------
Net decrease in cash and cash equivalents............................. (32,709) (48,104)
--------
Cash and cash equivalents at beginning of year........................ 34,252 57,392
-------- ---------
Cash and cash equivalents at end of quarter........................... $ 1,543 $ 9,288
-------- ---------
-------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
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):
FEBRUARY 28, May 31,
1997 1996
------------ -------
Raw materials............................... $ 58,640 $47,280
Work-in-process............................. 29,746 29,016
Finished goods.............................. 29,523 16,491
-------- -------
$117,909 $92,787
-------- -------
-------- -------
(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.
Supplemental disclosures of cash flow information for the nine months ended
February 28, 1997 and February 29, 1996 follow (in thousands):
1997 1996
------ ------
Cash paid during the periods for:
Interest (net of amount capitalized)......... $ 416 $2,423
------ ------
------ ------
Income taxes................................. $9,418 $5,678
------ ------
------ ------
5
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
(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 nine months ended February 28,
1997 and February 29, 1996 follow (in thousands):
1997 1996
------ -------
Current:
Federal............................................ $5,065 $10,765
Foreign............................................ 3,433 2,825
State and local.................................... 782 --
Deferred - federal................................... 429 (1,180)
------ -------
$9,709 $12,410
------ -------
------ -------
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 nine months ended February 28, 1997 and February 29, 1996 follows (in
thousands):
1997 1996
---- ----
Expected income tax expense.......................... $10,619 $13,573
Tax benefit from use of foreign sales corporation.... (1,040) (1,652)
Foreign tax credit................................... 202 (1,037)
Foreign taxes........................................ 347 2,825
State and local taxes................................ 508 --
Research and development credit...................... (168) --
Other................................................ (759) (1,299)
------- -------
$ 9,709 $12,410
------- -------
------- -------
6
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
The tax effects of the cumulative temporary differences resulting in the
net deferred income tax asset follow (in thousands):
FEBRUARY 28, May 31,
1997 1996
------------ ---------
Accrued expenses............................... $(1,410) $(1,351)
Allowance accounts............................. (1,047) (1,053)
Unamortized restricted stock compensation...... (686) (1,711)
Uniform capitalization......................... (921) (409)
------- -------
Total deferred income tax assets........... (4,064) (4,524)
Valuation allowance........................ -- --
------- -------
Total deferred income tax asset, net....... (4,064) (4,524)
------- -------
Basis in identified intangibles................ 2,177 2,075
Basis in property, plant and equipment......... 264 150
Other.......................................... 990 1,237
------- -------
Total deferred income tax liabilities...... 3,431 3,462
------- -------
Total deferred income tax (asset), net............ $ (633) $(1,062)
------- -------
------- -------
7
<PAGE>
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 third quarter net sales and
other revenues were $64.8 million, which was $12.3 million, or 16.0%, less than
the prior year's third quarter. The decrease in net sales and other revenues was
primarily due to competitive pressures in the land seismic equipment market and
was partially offset by increased sales of new MSX marine streamer systems and
RSR radio telemetry system components.
During the third quarter, eight I/O SYSTEM TWO MRX land systems and one RSR
radio telemetry system were sold, compared to 14 land systems and one RSR radio
telemetry system in the prior year's third quarter. Marine equipment sales
increased in the third quarter as five I/O SYSTEM TWO MSX marine streamer
systems were sold to Western Geophysical. Marine sales for the third quarter of
the prior year primarily consisted of systems components, such as marine
streamers and modules, and one BCX ocean bottom cable system.
Net sales and other revenues for the first nine months of the current year
were $204.8 million, up $2.5 million, or 1.2%, from $202.4 million for last
year's first nine months. Sales of 26 I/O SYSTEM TWO land systems, four RSR
radio telemetry systems and eight MSX marine streamer systems were recorded
during the first nine months of 1997, compared to 50 land systems, four RSR
radio telemetry systems, and one BCX ocean bottom cable system for the prior
year's first nine months.
During the second and third quarters of fiscal 1997, market conditions have
revealed the competitive pressures on the Company resulting from the late stage
in the life cycle of the Company's current version of its land seismic system,
pending release of the next generation of this system. Until release of the
newer system products and marketplace acceptance of these products, increased
levels of contribution to the Company's net sales and operating profits from
land system sales (as compared to the last two fiscal quarters) should not be
expected; this condition should continue to have a negative effect on the
Company's revenues and operating profits. However, this condition is expected to
be partially offset by sales of MSX marine streamer systems and components and
anticipated increased sales of the Company's RSR radio telemetry systems and
other products.
GROSS PROFIT MARGIN. The Company's gross profit margin for the third
quarter and year-to-date declined from 41.1% to 36.9%, and 40.5% to 36.5%
respectively, primarily due to increased sales of lower margin marine
products; reduced sales of higher margin land systems; and lower margins on
land system sales than in prior periods.
OPERATING EXPENSES. Operating expenses increased $197,000, or 1.3%, for
the third quarter over the prior year's third quarter operating expenses.
Research and development expenses decreased $21,000, or 0.4%. Marketing and
sales expenses increased $421,000, or 13.9%, primarily due to increased
conventions/exhibits and advertising expense offset in part by decreased outside
sales commissions. General and administrative expenses decreased $297,000, or
5.6%, primarily due to decreases in state and local taxes and insurance expense
over the three-month period, offset in part by increased allowance for doubtful
accounts. Amortization of identified intangibles increased $52,000, or 4.9%.
Operating expenses for the first nine months of the current year increased
$5.0 million, or 11.8%, above the operating expense level for the first nine
months of the prior year. Research and development expense increased $861,000,
or 5.2%, primarily due to increased personnel and related
8
<PAGE>
costs compared to the prior year's first nine months. Marketing and sales
expense increased $992,000, or 10.6%, primarily due to increased
conventions/exhibits and advertising expense, offset in part by decreased
outside sales commissions. General and administrative expenses increased $2.5
million, or 18.2%, primarily due to increased non-recurring professional fees;
increases in state and local tax, insurance and depreciation expense; 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 third quarter and the first
nine months of the current year was $296,000 and $468,000, respectively. See
"Note (4) - Long-Term Debt" of the Notes to Consolidated Financial Statements.
Interest expense was nil for last year's third quarter, and $2.5 million for
last year's first nine months primarily due to interest on the Company's $70
million term indebtedness which was repaid in November 1995.
INCOME TAX EXPENSE. The Company's effective income tax rate was
approximately 32% for each of the third quarters and the first nine 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 $30.9 million for the nine months ended February 28, 1997.
However, cash flows from operating activities after changes in working capital
items were a negative $25.4 million for the nine months ended February 28, 1997,
primarily due to increases in (i) inventory, due to finished goods buildup
attributable to lower than anticipated sales in the second and third quarter;
(ii) trade accounts receivable (primarily due to the timing of quarter sales in
the last month of the third quarter); and (iii) notes receivable, due to
increased levels of the Company's financed sales in the first quarter. As of
February 28, 1997 the Company had $2.7 million in borrowings outstanding under
its revolving line of credit and has $40.4 million available for borrowings
under the revolver for its working capital purposes. The revolving facility
expires by its terms on May 6, 1999.
As of February 28, 1997, total trade notes receivable had increased $13.5
million over the corresponding amount outstanding at May 31, 1996. 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 current and long-term notes and accounts receivable of
approximately $10.6 million secured by certain seismic equipment sold by the
Company to Grant and an obligation to repurchase $1.1 million. 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 other 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.
9
<PAGE>
Certain of the Company's international sales in developing countries, such
as the Commonwealth of Independent States, have been made on extended-term
arrangements. Political and economic instabilities in certain of these countries
as well as changes in internal laws and policies affecting trade and investment
in these markets may have the effect of increasing the Company's credit risk
with regards to the receivables resulting from these sales.
In August 1996, a subsidiary of the Company borrowed $12.6 million in long-
term financing secured by the land, buildings and improvements housing the
Company's executive offices, research and development headquarters and new
manufacturing facility in Stafford, Texas. The loan bears interest at the rate
of 7.875% per annum and is repayable in equal monthly installments of principal
and interest of $151,439. The promissory note, which matures on September 1,
2006, contains prepayment penalties. See "Note (4) - Long-Term Debt" of the
Notes to Consolidated Financial Statements.
The Company anticipates 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 participants'
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 1996 and $24.8 million for the first nine months of 1997, and are
expected to total $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
10
<PAGE>
constraints or technical or other difficulties that could delay introduction
of new products in the future. If the Company is unable, for technological or
other reasons, to develop competitive products in a timely manner in response
to changes in the seismic data acquisition industry or other technological
changes, its business and operating results will be materially and adversely
affected. In addition, the Company's continuing development of new products
inherently carries the risk of inventory obsolescence with respect to its
older products.
RISKS RELATED TO TIMING OF PRODUCT SHIPMENTS. Due to the relatively high
sales price of the Company's products and relatively low unit sales volume, the
timing in the shipment of systems and the mix of products sold can produce
fluctuations in quarter-to-quarter financial performance. One of the factors
which may affect the Company's operating results from time to time is that a
substantial portion of its net sales and other revenues in any period may result
from shipments during the latter part of a period. Because the Company
establishes its sales and operating expense levels based on its operational
goals, if shipments in any period do not meet goals, revenues and net profits
may be adversely affected. The Company believes that factors which could affect
such timing in shipments include, among others, seasonality of end-user markets,
availability of purchaser financing, manufacturing lead times, customer
purchases of leased equipment and shortages of system components. In addition,
because the Company typically operates, and expects to continue to operate,
without a significant backlog of orders for its products, the Company's
manufacturing plans and expenditure levels are based principally on sales
forecasts, which sometimes results in inventory excesses and imbalances from
time to time.
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
11
<PAGE>
with its suppliers, and such problems could significantly affect its ability
to meet production and sales commitments. The Company's reliance on certain
vendors, as well as industry supply conditions generally, involve several
risks, including the possibility of a shortage or a lack of availability of
key components, increases in component costs and reduced control over delivery
schedules, any of which could adversely affect the Company's future financial
results.
RELIANCE ON SIGNIFICANT CUSTOMERS. A relatively small number of customers
has accounted for most of the Company's net sales, although the degree of sales
concentration with any one customer has varied from fiscal year to year. During
fiscal 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.
12
<PAGE>
Additionally, there can be no assurance that the Company's efforts to protect
its trade secrets will be successful or that others will not independently
develop products similar to the Company's or design around any of the
intellectual property rights owned by the Company.
DEPENDENCE ON PERSONNEL. The Company's success depends upon the continued
contributions of its personnel, many of whom would be difficult to replace. The
success of the Company will depend on the ability of the Company to attract and
retain skilled employees. Changes in personnel, therefore, could adversely
affect operating results.
RISKS RELATED TO GOVERNMENT REGULATIONS AND PRODUCT CERTIFICATION. The
Company's operations are also subject to laws, regulations, government policies,
and product certification requirements worldwide. Changes in such laws,
regulations, policies, or requirements could affect the demand for the Company's
products or result in the need to modify products, which may involve substantial
costs or delays in sales and could have an adverse effect on the Company's
future operating results.
RISKS OF STOCK VOLATILITY AND ABSENCE OF DIVIDENDS. In recent years, the
stock market in general and the market for energy and technology stocks in
particular, including the Company's common stock, have experienced extreme price
fluctuations. There is a risk that stock price fluctuation could impact the
Company's operations. Changes in the price of the Company's common stock could
affect the Company's ability to successfully attract and retain qualified
personnel or complete desirable business combinations or other transactions in
the future. The Company has historically not paid cash dividends on its capital
stock, and there can be no assurances that the Company will do so.
RISKS RELATED TO ACQUISITIONS. To implement its business plans, the
Company may make further acquisitions in the future. Acquisitions require
significant financial and management resources both at the time of the
transaction and during the process of integrating the newly acquired business
into the Company's operations. The Company's operating results could be
adversely affected if it is unable to successfully integrate such new companies
into its operations. Certain acquisitions or strategic transactions may be
subject to approval by the other party's board or shareholders, domestic or
foreign governmental agencies, or other third parties. Accordingly, there is a
risk that important acquisitions or transactions could fail to be concluded as
planned. 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
13
<PAGE>
occurrence of such an event not fully covered by insurance could have a material
adverse affect on the Company's financial position and results of operation.
The foregoing review of factors pursuant to the Private Securities
Litigation Reform Act of 1995 should not be construed as exhaustive. In
addition to the foregoing, the Company wishes to refer readers to the Company's
other filings and reports with the Securities and Exchange Commission, including
its recent reports on Forms 10-K and 10-Q, for a further discussion of risks and
uncertainties which could cause actual results to differ materially from those
contained in forward-looking statements. The Company undertakes no obligation to
publicly release the result of any revisions to any such forward-looking
statements which may be made to reflect the events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
PART II - OTHER INFORMATION.
ITEM 2. CHANGES IN SECURITIES
During the fiscal quarter ended February 28, 1997, the Company made no
sales of its equity securities that were not registered under the
Securities Act of 1993, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated January 17, 1997
with the Securities and Exchange Commission with respect to a Shareholder
Rights Plan its Board adopted on January 17, 1997. Items reported were
Item 5. - "Other Events" and Item 7. - "Financial Statements and Exhibits".
14
<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: March 18, 1997
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS FOR THE FISCAL QUARTER ENDED FEBRUARY
28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 1,543
<SECURITIES> 0
<RECEIVABLES> 84,474
<ALLOWANCES> 0
<INVENTORY> 117,909
<CURRENT-ASSETS> 205,916
<PP&E> 77,686
<DEPRECIATION> 0
<TOTAL-ASSETS> 388,758
<CURRENT-LIABILITIES> 31,604
<BONDS> 11,525
0
0
<COMMON> 433
<OTHER-SE> 341,940
<TOTAL-LIABILITY-AND-EQUITY> 388,758
<SALES> 204,821
<TOTAL-REVENUES> 204,821
<CGS> 130,089
<TOTAL-COSTS> 47,337
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 468
<INCOME-PRETAX> 30,339
<INCOME-TAX> 9,709
<INCOME-CONTINUING> 20,630
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,630
<EPS-PRIMARY> .47
<EPS-DILUTED> 0
</TABLE>
