Back to GetFilings.com
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
FOR THE FISCAL YEAR ENDED MAY 31, 1999
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 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
RIGHTS TO PURCHASE SERIES A PREFERRED STOCK 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, 1999 (for purposes of the
below-stated amount only, all directors, officers and 5% or more stockholders
are presumed to be affiliates):
$287,235,000
Indicate the number of shares outstanding of each 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, 1999
--------------- ----------------
COMMON STOCK, $0.01 PAR VALUE 50,663,858
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's 1999 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
P A R T I
PRELIMINARY NOTE: IN THIS ANNUAL REPORT ON FORM 10-K, WE REFER TO INPUT/OUTPUT,
INC. AND ITS SUBSIDIARIES AS "WE", "OUR", "US", THE "COMPANY" OR "INPUT/OUTPUT",
UNLESS THE CONTEXT CLEARLY INDICATES OTHERWISE.
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. We believe that our I/O SYSTEMs have been the
most technologically advanced seismic data acquisition systems and are
particularly well suited for advanced three-dimensional ("3-D") data collection
techniques. Our principal customers are seismic contractors and major,
independent and foreign oil and gas companies around the world. See "Markets and
Customers".
Over the past five to ten years, improvements in drilling success rates
through the use of advanced seismic survey techniques, particularly 3-D
techniques, substantially increased the demand for seismic data. In addition,
advances in technology 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.
During fiscal 1999, demand for our products substantially deteriorated
resulting in significantly reduced net sales, a significant operating loss for
the fiscal year and pretax charges totaling $139.0 million ($94.5 million after
giving effect to income taxes) in the third and fourth quarters of fiscal 1999.
See "- Recent Developments" and Item 7. "Management's Discussion and Analysis
of Results of Operations and Financial Condition."
We offer a broad range of seismic data acquisition systems and related
equipment. On land, we offer the I/O SYSTEM 2000-TM- as well as vibrators, a
land energy source and geophones, which are acoustical receivers whose sole
purpose is to transform vibrations from substrata within the earth into
electrical signals, which are recorded by the I/O Systems. We also offer
transition zone systems in shallow water with marine versions of our land-based
recording systems.
Our marine data acquisition systems consist primarily of marine
streamers and shipboard electronics that collect seismic data in deep-water
environments. The systems feature 24-bit digital electronics inside the streamer
module, Company-manufactured hydrophones, digital filtering and other
components, and 12,000-meter streamer length capabilities. Other marine products
manufactured and sold by us include airguns and integrated shipboard navigation,
positioning, and data telemetry quality control systems. Following our November
1998 acquisition of DigiCourse, Inc. (see "- Recent Developments"), we expanded
our marine product
1
portfolio to include the design and manufacturing of marine positioning
systems. These systems include instruments which control streamer cable
depth during towing; compasses and acoustical devices.
We believe that our future success will depend on our ability to
continue to introduce technological innovations by enhancing our existing
products and services to our customers, as well as by developing new products.
See "- Product Development" below.
RECENT DEVELOPMENTS
INDUSTRY CONDITIONS. During fiscal 1999, demand for our products
decreased significantly due to the deterioration in energy industry conditions
and, more specifically, in the seismic services sector. This deterioration
resulted from, among other things, a widespread downturn in exploration activity
due to a decline in energy prices from October 1997 through February 1999, and
consolidation among energy producers. Shipments of I/O SYSTEMs fell from 49
systems shipped in fiscal 1998 to 17 in fiscal 1999.
In particular, the following factors adversely impacted us in fiscal
1999:
- - Our principal customers, seismic service contractors, significantly
reduced their workforces and capital spending, resulting in decreased
sales opportunities for us;
- - The financial condition of certain of our customers deteriorated
significantly;
- - Many of our customers allocated their cash to fund multi-client seismic
surveys instead of proprietary seismic surveys; and
- - Destabilizing economies in developing markets forced our customers in
those areas to conserve their capital budgets.
OUR RESPONSE. We currently believe that industry conditions will
continue to adversely impact demand for our products during the next 12 months.
As a result, we began in fiscal 1999 implementing initiatives in response to the
downturn.
- - We have taken steps to lower our cost structure by closing certain
facilities and reducing our workforce. Since August 1998, when we reached
a peak of 1,435 total full-time employees, we have reduced our workforce
to 904 as of July 31, 1999, and plan to reduce the number of full-time
employees to approximately 800 by the end of August 1999.
- - We are eliminating obsolete products and ancillary parts due to reduced
demand for these older generation products and as a result of product
revisions in progress.
- - We began reorganizing into a divisional structure late in fiscal 1999.
The November 1998 acquisition of DigiCourse, Inc. expanded our marine
product line and significantly strengthened our marine equipment
manufacturing sales personnel and management. The product and personnel
added by the DigiCourse acquisition enabled us to begin reorganizing into
a marine division and a land division, with the ultimate objective of
being able to better address the special and often different needs of
marine customers and land customers.
2
In addition, in May and August 1999 we strengthened our financial
position in order to better meet the challenges of the current downturn
through the issuance of $54.4 million of preferred stock to SCF-IV, L.P. See
Item 5. "Market for Registrant's Common Equity and Related Stockholder
Matters" and Item 7. "Management's Discussion and Analysis of Results of
Operations and Financial Condition". The proceeds from this capital infusion
will be used to fund our research and development projects, provide additional
working capital and for general corporate purposes. See Notes 7 and 18 of
Notes to Consolidated Financial Statements.
TECHNOLOGY DEVELOPMENT. In fiscal 1999, we introduced the I/O SYSTEM
2000-TM-, an upgrade for the I/O System TWO-Registered Trademark-, our seismic
acquisition system for land and transition zone environments. Features of the
I/O SYSTEM 2000-TM- include a lighter, smaller central electronics unit, a
more durable telemetry system, and an improved graphical user interface to
control acquisition, quality assurance and quality control operations. We
intend that the I/O SYSTEM 2000-TM- will eventually enable integration of our
cable and radio land seismic products.
We also completed, during fiscal 1999, three field tests of our
micro-machined digital sensor, known as the VectorSeis-TM- digital sensor. The
VectorSeis-TM- digital sensor is designed to enable cost-effective acquisition
of multi-component seismic data, thereby providing shear wave information in
addition to compression wave data. Because this potential product is still in
the development stage, its commercial feasibility and degree of commercial
acceptance is not yet known and cannot be predicted with any certainty. See
"- Product Development" below, and Item 7. "Management's Discussion and Analysis
of Results of Operations and Financial Condition. - Cautionary Statement for
Purposes of Forward-Looking Statements."
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 200-500 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 standard land I/O SYSTEM typically ranges from
$800,000 to $4.5 million. Larger and more complex systems can cost up to two
times this amount.
3
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, our 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
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 2000-TM- 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-
4
mounted earth vibrators have been used more frequently as energy sources. See
"- Other Products and Components - 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
Our marine data acquisition system consists primarily of marine
streamers and shipboard electronics that collect seismic data in deep-water
environments. Marine streamers, which contain electronic modules and cabling,
may measure up to 12,000 meters in length and are towed behind a seismic
acquisition vessel. Marine electronics include seismic and data telemetry
quality control systems and related software products, as well as electronics
for shipboard recording.
The marine systems feature 24-bit digital MSX modules, each of which
contain 16 channels of seismic data. 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.
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 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. Our vibrators can be supplied with seven different
vehicles (many of which are manufactured by us) and offer a maximum of 62,000
pounds of peak force. We believe that our 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. We acquired in fiscal 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
5
a 3-D program to meet specific geophysical and economic requirements. A
second software product, Alpine-Regisetered 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. We also
acquired CompuSeis, Inc. during fiscal 1998, which we believe is an industry
leader in recording system integration. Since the acquisition, CompuSeis has
principally developed system integration software for the Company's I/O
SYSTEM 2000-TM-.
MARINE POSITIONING SYSTEMS. Following our November 1998 acquisition of
DigiCourse, Inc., we now offer marine positioning systems. These systems include
birds, which control streamer cable depth during towing, compasses, velocimeters
and acoustical devices. Marine positioning systems manufactured by DigiCourse
are located on most marine seismic vessels worldwide.
PRODUCT DEVELOPMENT
Our 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 our first I/O SYSTEM in fiscal 1989, we have targeted a significant
amount of our annual budgeted expenditures for research and development
activities. These research and development expenditures have principally related
to the continued enhancement and evolution 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.
We continued, in fiscal 1999, the evolution of our seismic system
product line, introducing improvements in functionality, increased operational
efficiencies and updated interfaces through the I/O SYSTEM 2000-TM-. Features of
the I/O SYSTEM 2000-TM- include a lighter, smaller central electronics unit, a
more durable telemetry system and an improved graphical user interface to
control acquisition, quality assurance and quality control operations. We intend
that the I/O SYSTEM 2000-TM- will eventually enable the integration of the
Company's cable and radio land seismic products.
Our primary research and development efforts are currently focused on
commercializing a land-based seismic data acquisition recording system
incorporating VectorSeis-TM- digital sensors for multi-component recording and
4-D data imaging. Historically, seismic acquisition methods recorded only one
component of seismic energy wave, the compression wave. In recent years,
advances in sensor (geophone) technology have enabled multi-component recording,
but the amount of equipment and labor necessary has prohibited this from
becoming a cost-effective method of seismic data acquisition. The VectorSeis-TM-
digital sensor uses three micro-machined accelerometers configured to measure
the complete seismic wave field, including compression
6
and shear waves. Information from compression and shear waves can be used to
create better structural images of complex geological prospects and to infer
physical properties of rock structures, such as fracture density and
orientation, rock porosity and can provide an indication of whether or not
oil or gas may be present in a specific structure. We believe the reduced
equipment size, weight and power consumption of the VectorSeis-TM- digital
sensor relative to conventional technology will allow seismic crews to
operate in a more cost-effective manner. During fiscal 1999, we completed
three field tests of the VectorSeis-TM- digital sensor.
Our other research and development efforts include:
- - Developing telecommunication tools that will permit customers real-time
access to their remote crew operations and seismic data, and allow for
remote resource management, troubleshooting and training from a central
command center; and
- - Enhancing our geophysical software to shorten the amount of time from
seismic survey planning through pre-processing of seismic data.
Because these potential products are still in the development stage,
their commercial feasibility or degree of commercial acceptance, if any, is not
yet known. 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. See Item. 7 "Management's Discussion
and Analysis of Results of Operations and Financial Condition. - Cautionary
Statement for Purposes of Forward-Looking Statements."
MARKETS AND CUSTOMERS
Our 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. Western Atlas International, Inc. ("WAII"),
a subsidiary of Baker Hughes Incorporated, and its affiliates accounted for
approximately 33% of the Company's net sales in fiscal 1999. See Note 9 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, 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.
7
During fiscal 1999, 1998 and 1997, approximately 41%, 35% and 43%,
respectively, of the Company's net sales were derived from sales to foreign
customers. See Note 9 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 US 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 15-30% of the purchase
price, normally range in length from 24 to 48 months and bear interest at rates
ranging up to 13% per annum. The Company is in the process of adopting a more
conservative and restrictive credit policy. See Note 3 of Notes to Consolidated
Financial Statements.
In addition, the Company has previously financed a portion of its sales
through third parties by assigning its installment sales contracts to the
financing sources and guaranteeing the customer's repayment obligations. During
fiscal 1999, the Company was required to fulfill its obligations under certain
of these arrangements as a result of payment defaults by certain of its
customers. For the foreseeable future, the Company expects to rely less on these
or similar third-party sales financing techniques. See Item 7.- "Management's
Discussion and Analysis of Results of Operations and Financial Condition -
Liquidity and Capital Resources" and Notes 3 and 13 of Notes to Consolidated
Financial Statements.
During fiscal 1999, the Company's Product Purchase Agreement with WAII
expired by its terms and was not renewed. The agreement had provided that it
would terminate upon WAII's purchase of a total of $350 million in Input/Output
products, which occurred during the second quarter of fiscal 1999. In addition,
the Company's Preferred Supplier Agreement it entered into with Mitcham
Industries, Inc. in June 1998 was terminated during the fourth quarter of fiscal
1999. The agreement had obligated Mitcham Industries to purchase a minimum
dollar amount of Input/Output products over a five-year term. In return, the
Company had agreed not to lease certain of its products covered by the
agreement. As a result of its termination, the Company is currently evaluating
potential opportunities for leasing its current and future products.
MANUFACTURING
Our 110,000 square foot manufacturing facility in Stafford, Texas
houses our electronics assembly process and enables us to manufacture additional
products and components assembled previously by outside vendors. Our 240,000
square foot facility in Alvin, Texas houses our 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. - "Properties". Upon completion of assembly,
our products undergo functional and environmental testing and final quality
assurance inspection.
8
SUPPLIERS
The Company purchases a substantial portion of the electronic
components used in its systems and products. Although the Company has not
experienced supply or vendor quality control problems, there can be no assurance
that these problems will not arise in the future. Such problems, if incurred,
could significantly affect the Company's ability to meet production and sales
commitments. Certain items, such as integrated circuits, printed circuit
assemblies and the 24-bit analog-to-digital converters used in the I/O SYSTEMs
and hydrophones with water depth limiting capability used with marine seismic
cables, are purchased from sole source vendors. Although the Company attempts to
maintain an adequate inventory of these single source items, the loss of ready
access to any of these items could temporarily disrupt the Company's ability to
manufacture and sell certain products. Since the Company's components are
designed for use with these single source items, replacing the single source
items with functional equivalents could require a redesign of the Company's
components 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 competitors for land
seismic equipment are, among others, Fairfield Industries; Geo-X Systems,
Limited; JGI, Incorporated; OYO Geospace Corporation; and Societe d'etudes
Recherches et Construction Electroniques ("Sercel"), an affiliate of Compagnie
General de Geophysique. Unlike the Company, Sercel possesses the advantage of
being able to sell to an affiliated seismic contractor. The Company's principal
marine seismic competitors are, among others, Bolt Technology Corporation;
GeoScience Corporation, an affiliate of Tech-Sym Corporation; Teledyne Brown
Engineering, an affiliate of Allegheny Teledyne Company; and Thomson Marconi
Sonar P/L.
We believe that technology has been the primary method 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. During fiscal
1999, the price and customer support factors took precedence over technology as
demand for new seismic instrumentation substantially decreased. See "- Recent
Developments".
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-.
9
REGULATORY MATTERS
Our operations are subject to numerous local, state and federal laws
and regulations in the United States and in foreign jurisdictions concerning the
containment and disposal of hazardous materials. We do 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 us.
Additionally, our export activities are subject to extensive and
evolving trade regulation. Certain countries in which Input/Output's products
may be utilized are subject to trade restrictions, embargoes and sanctions
imposed by the US government. These restrictions and sanctions, generally
speaking, limit the Company from participating in or approving certain business
activities in those countries.
EMPLOYEES
At July 31, 1999, we had 904 full-time employees worldwide, 705 of
which were employed in the United States. We currently estimate that our total
employee headcount worldwide will be reduced to approximately 800 by the end of
August 1999. Our U.S. employees are not subject to any collective bargaining
agreement. We have never experienced a work stoppage and consider our relations
with our employees to be satisfactory.
ITEM 2. PROPERTIES
The Company's primary manufacturing facilities are as follows:
Manufacturing Facility Square Footage
---------------------- --------------
Stafford, Texas* 110,000
Alvin, Texas* 240,000
Cork County, Ireland* 35,630 (1)
Norwich, England** 31,000 (2)
Voorschoten, The Netherlands** 30,000
-------
446,630
=======
- ----------------
* Owned
** Leased
(1) As part of its current facilities consolidation efforts, the Company is in
the process of relocating into a smaller leased facility (approximately
5,000 square feet) and intends to sell this facility.
(2) As part of its current facilities consolidation efforts, the Company is in
the process of vacating the majority of this lease space and intends to
retain approximately 5,000 square feet while attempting to sublease the
unoccupied space to third parties.
The Company's executive headquarters (utilizing approximately 55,000
square feet) are located at 11104 West Airport, Stafford, Texas and our research
and development headquarters (utilizing approximately 80,000 square feet) are
adjacent to the headquarters facility. Both
10
facilities, along with the adjacent Stafford electronics manufacturing
facility, are owned by the Company and are mortgaged to secure long-term
facility indebtedness. The Company is in the process of combining all of its
personnel currently located in its executive headquarters and research and
development headquarters into the current research and development
headquarters, after which the Company intends to lease the vacant space in
the current executive headquarters to third parties. See Item 7.-
"Management's Discussion and Analysis of Results of Operations and Financial
Condition". The Company also leases an aggregate of 200,000 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.
ITEM 3. LEGAL PROCEEDINGS
The Company, along with one of its subsidiaries and two of its
executive officers, has been named a defendant in an action filed on December
28, 1998, in State District Court in Fort Bend County, Texas styled Geoview,
Inc., Geoview Services, Inc. and Ralph E. Clements vs. Input/Output, Inc., et
al. The plaintiffs' petition alleges a number of causes of action in tort and
contract arising out of a purchase of certain assets by a subsidiary of the
Company in 1996. The plaintiffs have claimed actual damages of $60 million and
exemplary damages of $180 million. The Company believes the claims alleged by
the plaintiffs are totally without merit and plans to vigorously defend against
the plaintiffs' claims.
In the ordinary course of business, the Company has been named in
other various lawsuits or threatened actions. 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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
11
P A R T II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
COMMON STOCK PRICES AND DIVIDEND INFORMATION. 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 1999
Fourth Quarter.................... $ 8 9/16 $ 5 5/16
Third Quarter..................... 7 15/16 5 1/16
Second Quarter.................... 11 6 3/16
First Quarter..................... 21 11/16 9 3/8
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
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, if any, for use in its business, with any
future decision to pay cash dividends on Common Stock dependent upon its growth,
profitability, financial condition and other factors the Board of Directors may
deem relevant. See Item 7.- "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Liquidity and Capital Resources". The
Company is permitted to pay dividends on Common Stock as long as Series B
Preferred Stock dividends (see below) are current.
On June 30, 1999, there were 505 stockholders of record of Common Stock
and the Company believes that there were approximately 16,352 beneficial owners
of Common Stock as of such date. Except as discussed below or otherwise
disclosed in the Company's Quarterly Reports on Form 10-Q filed during fiscal
1999, the Company made no unregistered sales of its equity securities during
fiscal 1999.
ISSUANCE OF PREFERRED STOCK. On May 7, 1999, SCF-IV, L.P., a
Delaware limited partnership ("SCF-IV"), purchased, in a privately negotiated
transaction, 40,000 shares of Series B Preferred Stock, par value $0.01 per
share (the "Series B Preferred Stock"), issued by the Company. The
consideration paid by SCF-IV for this issuance was $40,000,000. The net cash
proceeds of approximately $39,452,000 will be used to fund the Company's
research and development projects, to provide additional working capital and
for general corporate purposes. The issuance of the Series B Preferred Stock
and the underlying shares of Common Stock was exempt from the registration
requirements of Section 5 of the Securities Act of 1933 in accordance with
Section 4(2) of that Act.
12
On August 3, 1999, SCF-IV notified the Company of its intent to
exercise its option to purchase an additional 15,000 shares of Series C
Preferred Stock, par value $0.01 per share (the "Series C Preferred Stock"),
under the option granted to SCF-IV by the Company in connection with the
purchase of the Series B Preferred Stock. On August 17, 1999, the Company
issued and sold the 15,000 shares of Series C Preferred Stock, resulting in
net proceeds to the Company of approximately $15.0 million; the net cash
proceeds are anticipated to be used for the same purposes as the proceeds
from the issuance of the Series B Preferred Stock. The purchase price payable
for the Series C Preferred Stock was $1,000 per share. In addition, within 18
months of the closing of the sale of the Series B Preferred Stock, the Company
may issue up to 20,000 additional shares of preferred stock ranking in parity
to the Series B and Series C Preferred Stock to other investors at a purchase
price of $1,000 per share. The Series C Preferred Stock has substantially the
same terms as the Series B Preferred Stock except that the denominated
conversion price for the Series C Preferred Stock will be $8.50 per share.
TERMS OF SERIES B PREFERRED STOCK. The holders of Series B Preferred
Stock are entitled to receive cumulative cash dividends of $10.00 per share,
per annum (1% of the liquidation preference) for each share of Series B
Preferred Stock. Each share of Series B Preferred Stock is entitled to a
liquidation preference of $1,000.00 per share, plus all accrued and unpaid
dividends.
The Series B Preferred Stock is convertible at the holder's option
after the first to occur of any of the following (the "Initial Conversion
Date"): (i) the third anniversary of the original date of issuance of such
Shares (the "Issue Date"), (ii) the approval by the Board of Directors of the
Company of an agreement relating to a Business Combination (as defined) or the
consummation of a Business Combination, (iii) a tender offer for Common Stock
is approved or recommended by the Board of Directors of the Company or (iv)
the redemption, repurchase or reacquisition by the Company of rights issued
pursuant to the Company's Stockholder Rights Plan or any waiver of the
application of the Company's Stockholder Rights Plan to any beneficial owner
other than SCF-IV or its affiliates (except as approved by SCF-IV's
representative on the Board of Directors of the Company). After the Initial
Conversion Date and prior to the Mandatory Conversion Date (defined below),
the holders of Series B Preferred Stock will be entitled to convert their
shares into a number of fully paid and nonassessable shares of Common Stock
per share equal to, at the option of the holder, one of, or if not specified
by the holder, at the greater of, the following (such amount being referred to
as the "Conversion Ratio"): (a) the quotient of $1,000.00 (plus any accrued
and unpaid dividends through the record date for determining stockholders
entitled to vote) divided by the denominated conversion price of $8.00 (as
adjusted from time to time in accordance with certain anti-dilution
provisions) or (b) the quotient of $1,000.00 increased at a rate of eight
percent per annum from the Issue Date, compounded quarterly, less the amount
of cash dividends actually paid through the applicable conversion date (the
"Adjusted Stated Value"), divided by the average market price for the Common
Stock during the ten trading day period prior to the date of conversion (the
"Conversion Ratio").
On the fifth anniversary of the Issue Date (the "Mandatory Conversion
Date"), each outstanding share of Series B Preferred Stock shall, without any
action on the part of the holder, be converted automatically into a number of
fully paid and nonassessable shares of Common Stock equal to the Conversion
Ratio, provided that a shelf registration statement to be filed with the
Securities and Exchange Commission covering those shares of Common Stock has
been declared effective.
13
In the event of a conversion of Series B Preferred Stock pursuant to
which the Conversion Ratio is determined using clause (b) above, then, provided
that full cumulative dividends have been paid or declared and set apart for
payment upon all outstanding shares of Series B Preferred Stock for all past
dividend periods, the Company may redeem for cash up to 50% (or such greater
percentage as the holders shall agree) of the shares of Series B Preferred Stock
submitted for conversion at a redemption price per share equal to the Adjusted
Stated Value , in lieu of conversion.
For financial accounting purposes, based on the terms of the Series B
Preferred Stock, dividends will be recognized as a charge to retained earnings
at the rate of 8% per annum, compounded quarterly. Such preferred dividends will
reduce net earnings available to the common stockholders accordingly.
14
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, 1999, 1998, 1997, 1996 and 1995 and with respect to the Company's
consolidated balance sheets at May 31, 1999, 1998, 1997, 1996 and 1995 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 Company's results of operations and financial
condition have been affected by acquisitions of businesses during the periods
presented below:
Year Ended May 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA: (In thousands, except per share data)
Net sales...................................... $ 197,415 $385,861 $281,845 $278,283 $134,698
Cost of sales.................................. 205,215 226,514 183,438 163,811 71,440
--------- -------- -------- -------- --------
Gross profit (loss) (1)................... (7,800) 159,347 98,407 114,472 63,258
--------- -------- -------- -------- --------
Operating expenses:
Research and development (2)................... 42,782 32,957 22,967 23,243 11,400
Marketing and sales............................ 14,193 14,646 13,288 12,027 6,789
General and administrative (3)................. 80,932 28,295 36,186 19,096 11,817
Amortization of intangibles (4)................ 16,247 6,008 4,551 4,305 1,331
--------- -------- -------- -------- --------
Total operating expenses.................. 154,154 81,906 76,992 58,671 31,337
--------- -------- -------- -------- --------
Earnings (loss) from operations................ (161,954) 77,441 21,415 55,801 31,921
Interest expense............................... (897) (1,081) (793) (2,515) (30)
Other income................................... 7,611 7,315 3,675 3,091 3,944
--------- -------- -------- -------- --------
Earnings (loss) before income taxes............ (155,240) 83,675 24,297 56,377 35,835
Income tax (benefit) expense................... (49,677) 26,776 7,700 17,700 11,335
--------- -------- -------- -------- --------
Net earnings (loss)............................ $(105,563) $ 56,899 $ 16,597 $ 38,677 $ 24,500
========== ======== ======== ======== ========
Basic earnings (loss) per common
share..................................... $ (2.17) $ 1.29 $ 0.38 $ 0.98 $ 0.68
========== ======== ======== ======== ========
Weighted average number of common
shares outstanding........................ 48,540 43,962 43,181 39,631 36,043
========== ======== ======== ======== ========
Diluted earnings (loss) per common
share..................................... $ (2.17) $ 1.28 $ 0.38 $ 0.95 $ 0.66
========== ======== ======== ======== ========
Weighted average number of diluted common
shares outstanding........................ 48,540 44,430 43,820 40,609 36,928
========== ======== ======== ======== ========
15
As of May 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
BALANCE SHEET DATA (END OF YEAR): (In thousands)
Working capital................................ $213,612 $245,870 $170,427 $165,225 $104,908
Total assets................................... 451,748 493,016 384,658 355,465 165,487
Short-term debt, including current
installments of long-term debt (5)........ 1,067 986 912 -- --
Long-term debt (5)............................. 8,947 10,011 11,000 -- --
Stockholders' equity (6)....................... 396,974 415,700 338,614 317,204 146,712
OTHER DATA:
Capital expenditures........................... $ 9,326 $ 6,960 $ 26,966 $ 10,240 $ 5,979
Depreciation and amortization.................. 20,776 16,816 12,558 10,152 3,570
- ------------------
1. Fiscal year 1999 includes charges of $77.0 million. See Note 15 of Notes to
Consolidated Financial Statements for further information with respect to
the Company's charges.
2. Fiscal year 1999 includes charges of $1.1 million. See Note 15 of Notes to
Consolidated Financial Statements for information with respect to the
Company's charges.
3. Fiscal year 1999 includes charges of $53.2 million and fiscal year 1997
includes charges of $15.6 million. See Notes 15 and 16 of Notes to
Consolidated Financial Statements for information with respect to the
Company's charges.
4. Fiscal year 1999 includes charges of $7.7 million. See Note 15 of Notes to
Consolidated Financial Statements for information with respect to the
Company's charges.
5. See Notes 6 and 17 of Notes to Consolidated Financial Statements for
information with respect to the Company's indebtedness and certain
contingent obligations.
6. See Note 7 of Notes to Consolidated Financial Statements for information
with respect to the Company's changes in capital structure.
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
INTRODUCTION. The Company's net sales are directly related to the level
of worldwide oil and gas exploration activity and the profitability and cash
flows of oil and gas companies and seismic contractors, which in turn are
affected by expectations regarding the supply and demand for oil and natural
gas, energy prices and finding and development costs. Oil and gas supply and
demand and pricing, in turn, are influenced by numerous factors including, but
not limited to those described in "Cautionary Statement for Purposes of
Forward-Looking Statements" - "Continuation in Downturn in Energy Industry and
Seismic Services Industry Conditions Will Adversely Affect Results of
Operations", "Significant Payment Defaults under Sales Arrangements Could
Adversely Affect the Company" and "Risk from Significant Amount of Foreign Sales
Could Adversely Affect Results of Operations". During fiscal 1999, our financial
16
performance was adversely impacted by the deterioration in energy industry
conditions and, more specifically, in the seismic service sector. This
deterioration resulted from, among other things, a widespread downturn in
exploration activity due to a decline in energy prices from October 1997 to
February 1999 and consolidation among energy producers. As a result, the
financial condition of certain customers weakened, capital spending by our
primary customers fell sharply and the majority of our customers idled some of
their seismic crews and equipment, or leased equipment to their competitors to
cover depreciation expenses and other costs. As a result of these conditions we
recorded significant operating losses and pre-tax charges totaling $139.0
million ($94.5 million after giving effect to income taxes, or $1.95 per share)
in the third and fourth quarters of fiscal 1999.
In response to these industry conditions, management for the Company
has concentrated on lowering its cost structure, consolidating its product
offerings and reorganizing into a divisional structure to allow increased
visibility and accountability of costs and more focused customer service and
product development. We are also revising our credit policies and implementing
other processes to better position the Company to manage through the industry
downturn and to minimize the effects of future industry volatility on our
business.
We currently believe that industry conditions will continue to
adversely impact demand for our products during the next 12 months and are
implementing initiatives in response to the downturn, described above and in
Item 1. " Business - Recent Developments". We estimate these initiatives will
result in additional charges during the first quarter of fiscal 2000 in the
range of $4-6 million. We also believe that these initiatives will better
position the Company to return to profitability once industry conditions
improve.
NET SALES
Net sales consisted primarily of seismic data acquisition system and
component sales. Net sales for fiscal 1999 were $197.4 million, a decrease of
$188.4 million, or 48.8%, compared to fiscal 1998 primarily due to the
significant decrease in demand attributable to historically low commodity
prices, energy industry consolidations, significant reductions in workforce and
capital spending by our customers, destabilizing economies in developing markets
forcing our customers in those areas to conserve their capital budgets and the
continued deterioration of the financial condition of certain customers.
Net sales 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, and sales of, land seismic data acquisition systems and related
components, compared to fiscal 1997.
GROSS PROFITS
The gross profit margin (loss) in fiscal 1999 decreased from 41.3% in
1998 to (4.0)% in fiscal 1999. The decrease is primarily due to charges totaling
$77.0 million incurred in the third and fourth quarters of fiscal 1999 for
inventory writedowns and charges for warranty reserves and other product related
contingencies. Excluding these charges, the Company's gross profit margin was
35.0% in fiscal 1999 as compared to 41.3% in fiscal 1998 due to competitive
pricing pressures as a result of the significant decrease in demand for seismic
equipment, offset in part
17
by higher margins from sales of DigiCourse, Inc. products, acquired during
fiscal 1999. See also Notes 8 and 15 of Notes to Consolidated Financial
Statements.
The gross profit margins of the Company for 1998 increased from 34.9%
in fiscal 1997 to 41.3% in fiscal 1999, primarily due to the substantial
increase in land product sales, which featured higher gross profit percentages
than many of the Company's other products.
RESEARCH AND DEVELOPMENT
Fiscal 1999 research and development expenses were $42.8 million, an
increase of $9.8 million, or 29.8%, over fiscal 1998 primarily resulting from
expenses related to recent acquisitions, increased contract labor and outside
engineering services related to advanced systems design, and charges incurred in
the fourth quarter related to prototype development costs. Due to significantly
reduced sales levels, research and development expenditures totaled 21.7% of
sales during fiscal 1999, which is substantially higher than previous years'
research and development expenditures in actual dollars and as a percentage of
sales. Excluding fiscal 1999's charges, the Company's fiscal 1999 research and
development expenses were $41.7 million. See Notes 8 and 15 of Notes to
Consolidated Financial Statements.
Fiscal 1998 research and development expenses increased $10.0 million,
or 43.5%, from fiscal 1997, to $33.0 million. As a percentage of sales, fiscal
1998 expenses were consistent with fiscal 1997's expenses.
MARKETING AND SALES
Fiscal 1999 marketing and sales expenses were $14.2 million, a decrease
of $453,000, or 3.1%, compared to fiscal 1998 primarily resulting from decreased
internal and third party commissions on sales attributable to the significant
decline in sales, offset in part by increased expenses related to recent
acquisitions. See Note 8 of Notes to Consolidated Financial Statements.
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.
GENERAL AND ADMINISTRATIVE
Fiscal 1999 general and administrative expenses were $80.9 million, an
increase of $52.6 million, or 186.0%, over fiscal 1998, primarily due to charges
of $53.2 million incurred in the third and fourth quarters of fiscal 1999 for
accounts and notes receivable allowance, impairment of long-lived assets, early
termination of a lease, restructuring costs and employee severances. Excluding
the fiscal 1999 charges, the Company's general and administrative expenditures
were $27.7 million, a decrease of $563,000, or 2.0%, compared to fiscal 1998.
See Note 15 of Notes to Consolidated Financial Statements.
18
Fiscal 1998 general and administrative expenses decreased $7.9
million, or 21.8%, from the prior year to $28.3 million, primarily due to
charges of $15.6 million incurred in fiscal 1997, offset in part by increased
compensation expense, increased bad-debt allowance due to increased sales,
increased data processing expense and increased depreciation and
amortization. See Note 16 of Notes to Consolidated Financial Statements.
AMORTIZATION OF IDENTIFIED INTANGIBLES
Fiscal 1999 amortization of identified intangibles was $16.2
million, an increase of $10.2 million, or 170.4%, over fiscal 1998 primarily
due to charges of $7.7 million incurred in the third and fourth quarters of
fiscal 1999 due to the impairment of intangibles. Excluding the fiscal 1999
charges, the Company's amortization of identified intangibles was $8.5
million, an increase of $2.5 million, or 42.3%, over fiscal 1998 due to
increased intangible amortization resulting from recent acquisitions. See
Notes 8 and 15 of Notes to Consolidated Financial Statements.
Fiscal 1998 amortization of identified intangibles increased $1.5
million, or 32.0%, over fiscal 1997 primarily due to the amortization of
additional goodwill and intangibles related to the Company's two acquisitions
during fiscal 1998.
OPERATING INCOME
Earnings (loss) from operations were ($162.0) million, a decrease of
$239.4 million, or 309.1%, compared to fiscal 1998 primarily due to $139.0
million of charges incurred in the third and fourth quarters of fiscal 1999
discussed above. Excluding the fiscal 1999 charges, the Company's earnings
(loss) from operations was ($23.0) million, a decrease of $100.4 million, or
130%, compared to fiscal 1998 earnings from operations of $77.4 million,
primarily due to decreased sales and gross profit margins attributable to the
significant decrease in demand for seismic equipment and the increased
operating expenses. See Note 15 of Notes to Consolidated Financial Statements.
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 certain charges in fiscal 1998.
INTEREST EXPENSE
Interest expense was $897,000, a decrease of $184,000, or 17%. The
interest expense is attributed to the Company's ten-year-term facilities
financing. See Note 6 of Notes to Consolidated Financial Statements.
Interest expense increased $288,000 in fiscal 1998 compared to
fiscal 1997, primarily due to 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.
19
INCOME TAX EXPENSE
The effective tax rate for fiscal 1999, 1998 and 1997 was
approximately 32.0%, 32.0%, and 31.7%, respectively. See Note 1 and Note 10
of Notes to Consolidated Financial Statements.
In assessing the realizability of deferred income tax assets,
management considers whether it is more likely than not that some portion or
all of the deferred income tax assets will be realized. The ultimate
realization of deferred income tax assets is dependent upon the generation of
future taxable income during the periods in which those deferred income tax
assets become deductible. Management considers the scheduled reversal of
deferred income tax liabilities and projected future taxable income in making
this assessment. In order to fully realize the deferred income tax assets,
the Company will need to generate future taxable income of approximately $140
million over the next 20 years. Although the Company experienced a
significant loss in fiscal 1999, the Company's taxable income for the years
1996 through 1998 aggregated approximately $128 million. Based on the level
of historical income prior to fiscal 1999 and the Company's projections of
future taxable income over the periods that the deferred income tax assets
are deductible and the expiration date of the net operating loss
carryforward, management believes it is more likely than not that the Company
will realize the benefits of the deferred income tax assets, net of the
valuation allowance at May 31, 1999. The amount of deferred income tax asset
considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. The Company has traditionally financed its operations from
internally generated cash; its working capital credit facilities, (see
"--Credit Agreement" below); and funds from equity financings. The Company's
cash and cash equivalents were $75.1 million at May 31, 1999, an increase of
$2.9 million, or 4%, as compared to fiscal 1998. The increase is primarily due
to the May 1999 sale of 40,000 shares of Series B Preferred Stock in a
privately negotiated transaction to SCF-IV L.P., for which the Company
received net proceeds of approximately $39.5 million. The increase in cash
attributable to the preferred stock offering and a reduction in accounts and
notes receivable was offset, in part by fiscal 1999 operating losses,
decreased accounts payable and accrued expenses, increased income tax payments
and increased inventory (prior to reserves).
Cash flows from operating activities before changes in working
capital items were a negative $10.9 million for the year ended May 31, 1999.
Cash flows from operating activities after changes in working capital items
were a negative $21.0 million for the year ended May 31, 1999, primarily due
to fiscal 1999 operating losses; decreases in levels of accounts payable and
accrued expenses due to the significant decline in business activity;
increased fiscal 1999 tax payments (attributable to certain foreign
subsidiaries settling prior year tax liabilities) and increases in inventory
levels (prior to reserves) due to reduced sales, offset in part by a decrease
in accounts and notes receivable attributable to the significant decline in
sales. Cash flows from operating activities in fiscal 1998 were $75.1
million. 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.
20
Cash flows used in investing activities were $15.6 million for the
year ended May 31, 1999 compared to $18.3 million in the prior year. The
decrease in cash used in investing activities is primarily due to a decrease
in cash used for business acquisitions, offset in part by an increase in
expenditures for property, plant and equipment.
Cash flows from financing activities were $39.7 million for the year
ended May 31, 1999, compared to $12.9 million in fiscal 1998. The $26.8
million increase in cash provided by financing activities is primarily due to
the $39.5 million of net proceeds the Company received from the sale of
40,000 shares of Series B Preferred Stock to SCF-IV L.P. in May 1999, offset
in part by the significant decline in proceeds from the exercise of stock
options. See Note 7 of Notes to Consolidated Financial Statements.
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, 1999, $10.0 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 $9.3
million for fiscal 1999 and are expected to aggregate $29.5 million for
fiscal 2000, which includes $23.7 million of additions to the Company's
rental equipment fleet. The Company believes that the combination of its
existing working capital, current cash in place and access to other financing
sources will be adequate to meet its anticipated capital and liquidity
requirements for the foreseeable future.
CREDIT AGREEMENT. The Company was in violation of certain covenants
under its revolving Credit Agreement due to its fiscal 1999 third quarter
results of operations and requested a waiver from its lender. On March 16,
1999, the agent for the lenders delivered to the Company a Notice of Default
due to violation of two financial covenants. As of May 31, 1999, no amounts
of indebtedness for borrowed money were outstanding under the Company's
Credit Agreement. However, at that date, the Company had standby and
commercial letters of credit issued under the Credit Agreement outstanding in
the aggregate amount of $1.4 million which the Company has since secured with
certificates of deposit each having maturities of one month. The Company has
notified the agent, of its bank syndicate, of the Company's desire to cancel
the Credit Agreement and is in the process of terminating the credit facility
with its lenders. While the Company believes that it would be able to
negotiate a credit facility or facilities with similar lenders, the Company
believes that the terms currently available would not be as advantageous as
future terms may be when the Company may require a credit facility. The
Company does not anticipate the need for a credit facility at the present
time, but anticipates securing a facility or facilities in the future at a
time when the proposed terms are more likely to be advantageous for the
Company.
21
YEAR 2000
Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date code field and cannot
distinguish 21st century dates from 20th century dates. These date code
fields will need to distinguish 21st century dates from 20th century dates
and, as a result, many companies' software and computer systems may need to
be upgraded or replaced in order to comply with such "Year 2000"
requirements. The Company is currently working to resolve the potential
impact of the Year 2000 issue on the computerized systems it utilizes
internally, and with regard to its products, suppliers and customers. The
Company has adopted the British Standards Institute "Definition of the Year
2000 Requirements." BSI DISC PD 2000-1 states the following: "Year 2000
conformity shall mean that neither performance or functionality is affected
by dates prior to, during, and after the Year 2000." The Company has
developed two levels of readiness for its equipment. The Company's "Year 2000
Compliant" products will perform as per the British Standards Guidelines. The
Company's "Year 2000 Assessed" products have been assessed in the same manner
as "Year 2000 Compliant" products and issues found and determined by the
Company to be detrimental to the function of recording seismic data have been
addressed so that the Company believes that these products will function in
Year 2000 and after. As used herein, the terms "Year 2000 Compliant" or "Year
2000 Compliance" shall mean either "Year 2000 Compliant" and/or "Year 2000
Assessed" each as defined above.
STATE OF READINESS. The Company continues to carry out its Year 2000
compliance program for the hardware and software products sold by it, the
information technology systems used in its operations ("IT Systems"), and its
non-IT Systems or embedded technology, such as building security, voice mail
and other systems. The Company's Year 2000 compliance program covers the
following phases: (i) inventory of all products, IT Systems and non-IT
Systems; (ii) assessment of repair or replacement requirements; (iii)
planning and remediation; (iv) testing; and (v) implementation. The Company
has completed the inventory and assessment phases for its products, IT
systems and non-IT systems and is in the process of remediation on the IT and
non-IT systems and on those products identified for remediation. The
Company's program calls for completion of all phases by October 1, 1999.
As a result of its planned component testing, the Company decided
that some of its older products in the field, which it no longer manufactures
or sells, will not be made Year 2000 compliant and the Company will not offer
Year 2000 support for these products. These products are no longer covered by
the Company's product warranties. Other Company products, some of which
supersede or replace the discontinued products, either manufactured or in the
field, are already Year 2000 Compliant, or will be made Year 2000 Compliant
via remedial patches. These patches will be made available at no charge for
those products under warranty coverage and for sale for those products that
are no longer under warranty. The Company is in the process of contacting its
customers to inform them of the availability of the Year 2000 remedial
patches and encouraging them to upgrade. All products manufactured for sale
by the Company since January 1, 1999 have been tested to be Year 2000
Compliant.
The Company relies, both domestically and internationally, upon
various vendors, governmental agencies, utility companies, telecommunications
service companies, delivery service companies and other service providers,
the operations of which are outside of the
22
Company's control. There is no assurance that such parties will not suffer a
Year 2000 business disruption, which could have a material adverse effect on
the Company's financial condition and results of operations.
COSTS. To date, the Company has not incurred any material
expenditures in connection with identifying, evaluating or remediating Year
2000 compliance issues. The Company has not retained an outside consultant to
assist it in its review and assessment of its Year 2000 issues. Most of its
expenditures to date have related to the opportunity cost of time spent by
employees of the Company in evaluating and remediating the Company's Year
2000 issues for its products, IT Systems and its non-IT Systems. Management
currently believes that Year 2000 expenditures will not have a material
adverse effect on the Company's operations, results of operations or
financial condition.
A portion of the Company's Year 2000 compliance expenditures
expected to be incurred relate to the Company's limited warranty coverage. As
of May 31, 1999, no specific amounts had been accrued to the warranty reserve
for such costs, as the Company had not been able to make a firm estimate of
such costs. However, the Company currently estimates that based on its
assessments to date, the Company's total estimated Year 2000
compliance-related expenses will be less than $500,000. This estimate
consists of estimated costs of bringing the Company's European IT systems
into Year 2000 Compliance, and anticipated product warranty expense.
RISKS. A survey was sent in November 1998 to customers, various
vendors, governmental agencies, utility companies, telecommunication service
companies, delivery service and other service companies concerning their Year
2000 compliance. Approximately 50% of the surveys sent have been returned and
all of the surveys received have indicated the recipient was already Year
2000 compliant or was currently carrying out a Year 2000 compliance program
and would be Year 2000 compliant by August 1999. The Company plans to send a
follow-up Year 2000 compliance survey to further verify the recipient's Year
2000 compliance status no later than the end of the first quarter of fiscal
year 2000.
CONTINGENCY PLAN. The Company is in the process of finalizing a Year
2000 contingency plan for its products, IT systems and non-IT systems. It is
anticipated the contingency plan will be completed in September 1999. In
addition, if further Year 2000 compliance issues are discovered, the Company
then will evaluate the need for one or more contingency plans relating to
those particular issues. Starting in December 1999, the Company will have a
24-hour hotline to assist in addressing Year 2000 compliance issues that the
Company's customers, vendors or personnel may encounter.
Due to the highly technical nature of the equipment manufactured and
sold by the Company, it is very subjective and difficult to predict a "worst
case" scenario if the products provided by the Company experience a pervasive
Year 2000 problem. The Company believes that if a pervasive Year 2000 product
problem did occur, it could result in a significant negative impact on the
Company's business reputation and future sales opportunities, which in turn
would have a material adverse effect on the Company's operations, results of
operations and financial position.
23
RECENT ACCOUNTING PRONOUNCEMENTS. Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133"), was issued by the Financial Accounting Standards
Board in June 1998. SFAS 133 standardizes the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts. Under the standard, entities are required to carry all derivative
instruments in the statement of financial position at fair value. The Company
will adopt SFAS 133 beginning in fiscal year 2002. The Company does not
expect the adoption of SFAS 133 will have a material effect on its financial
condition or results of operation because the Company does not enter into
derivative or other financial instruments for trading or speculative purposes
nor does the Company use or intend to use derivative financial instruments or
derivative commodity instruments.
OTHER FACTORS
MARKET CONDITIONS. Demand for the Company's products is dependent
upon the level of worldwide oil and gas exploration and development activity.
This activity in turn is primarily dependent upon oil and gas prices, which
have been subject to wide fluctuation in recent years. During fiscal 1999,
worldwide oil prices dropped to their lowest levels (inflation adjusted)
since 1986. Continuing low prices for hydrocarbon production have generally
resulted in lower exploration budgets by oil companies. Lower exploration
budgets during fiscal 1999 resulted in a severe reduction in demand for the
Company's seismic data acquisition equipment and services.
CREDIT RISK. A continuation of depressed prices for hydrocarbon
production and reduced demand for the services of the Company's customers
will further strain the revenues and cash resources of customers of the
Company, thereby resulting in a higher likelihood of defaults in the
customers' timely payment of their obligations under the Company's credit
sales arrangements. Increased levels of payment defaults with respect to the
Company's credit sales arrangements could have a material adverse effect on
the Company's results of operations.
In addition, during fiscal 1999 there was considerable turmoil and
uncertainty in foreign financial markets, prompted in a large part by the
economic and political problems experienced by a number of Asian countries.
The Russian ruble has been under significant pressure, requiring the Russian
government to raise interest rates substantially, and to seek special
assistance from the International Monetary Fund in order to defend its
currency. At the present time, it is not possible to predict whether the
Russian government will be successful in avoiding another devaluation of the
ruble, or when stability will return to its financial markets. Any further
devaluation of the ruble could exacerbate existing economic problems in
Russia. In addition, the Company sells its products to customers in Latin
America, which have also experienced economic problems and the effects of
devaluations within the last 12 months.
The Company's combined gross trade accounts receivable and trade
notes receivable balance as of May 31, 1999 from customers in Russia and
other Former Soviet Union countries was approximately $25.3 million and was
approximately $11.8 million from customers in Latin America. As of May 31,
1999 the total allowance for doubtful accounts (foreign and US) was $20.9
million and the allowance for loan loss was $28.8 million. In fiscal 1999,
$43.7 million was recorded for bad debt expense and loan losses related to
foreign and domestic receivables. All foreign receivables are denominated in
US dollars. To the extent that economic conditions in
24
the Former Soviet Union, Latin America or elsewhere negatively affect future
sales to the Company's customers in those regions or the collectibility of
the Company's existing receivables, the Company's future results of
operations, liquidity and financial condition may be adversely affected.
In January 1999, the Company paid $1,661,000 to a creditor of a
Company customer in satisfaction of the Company's obligations under a
guaranty with respect to a defaulted equipment lease between the customer and
that creditor. The $1,661,000 was billed to the customer and this amount was
fully reserved as of May 31, 1999.
See "Note 17 - Commitments and Contingencies" of Notes to
Consolidated Financial Statements and "Cautionary Statement for Purposes of
Forward-Looking Statements - Continuation in Downturn in Energy Industry and
Seismic Services Industry Conditions Will Adversely Affect Results of
Operations," "- Significant Payment Defaults Under Sales Arrangements Could
Adversely Affect the Company" and "- Risk from Significant Amount of Foreign
Sales Could Adversely Affect Results of Operations".
CONVERSION TO THE EURO CURRENCY. On January 1, 1999, certain members
of the European Union established fixed conversion rates between their
existing currencies and the European Union's common currency, the euro. The
Company owns facilities and manufactures components for its systems in two
member countries. The transition period for the introduction of the euro is
between January 1, 1999 and June 30, 2002. The Company is addressing the
issues involved with the introduction of the euro. The more important issues
facing the Company include: converting information technology systems;
reassessing currency risk and processing tax and accounting records.
Based on its progress to date in reviewing this matter, and the fact
that all Company sales to customers are denominated in US dollars, the
Company believes that the introduction of the euro will not have a
significant impact on the manner in which it conducts its business affairs
and processes its business and accounting records. Therefore, conversion to
the euro should not have a material effect on the Company's 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 Item 1. "Business", Item 3. "Legal
Proceedings" and Item 7. "Management Discussion and Analysis of Results of
Operation and Financial Condition"), 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 results of operation, future revenues, future
costs and expenses, future margins and future writedowns and special charges;
anticipated product releases and technological advances; the future mix of
business and future asset recoveries; the realization of deferred tax assets;
contingent liabilities; the Company's Year 2000 issues and their resolution;
the inherent unpredictability of adversarial proceedings; and demand for the
Company's
25
products, future capital expenditures and future financial condition of the
Company; energy industry and seismic services industry conditions; and world
economic conditions, including that in Former Soviet Union, Latin America and
Asian countries. 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 on Form 10-K. 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:
CONTINUATION IN DOWNTURN IN ENERGY INDUSTRY AND SEISMIC SERVICES
INDUSTRY CONDITIONS WILL ADVERSELY AFFECT RESULTS OF OPERATIONS. Demand for
the Company's products is dependent upon the level of worldwide oil and gas
exploration and development activity. This activity in turn is primarily
dependent upon oil and gas prices, which have been subject to wide
fluctuation in recent years in response to 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
declined from October 1997 and remained at lower levels through February
1999. Despite a recent recovery in commodity prices, oil producers fear of
low prices for hydrocarbon production resulted in lower exploration budgets
by oil companies, which has resulted in reduced demand for the Company's
seismic data acquisition equipment. Other factors which have negatively
impacted demand for Company products have been the weakened financial
condition of many of the Company's customers, consolidations among energy
producers, an over-supply of current-generation seismic equipment and the
destabilized economies in many developing countries. See Item 1. "Business".
Despite relatively higher prices for oil and natural gas in recent months, it
is expected that any turnaround for the seismic equipment market will occur
later than for other sectors of the energy services industry. It is
impossible to predict the length of the downturn for the seismic equipment
market or future oil and natural gas prices with any certainty. A further
prolonged downturn in market demand for the Company's products will have a
material adverse effect on the Company's results of operation and financial
condition. 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. Additionally, no assurances can be given that the
Company's efforts to reduce and contain costs will be sufficient to offset
the effect of the expected continued lower levels of Company net sales until
industry conditions improve.
FAILURE TO DEVELOP PRODUCTS AND KEEP PACE WITH TECHNOLOGICAL CHANGE
WILL ADVERSELY AFFECT RESULTS OF OPERATIONS. 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
26
Company's ability to compete in the future. During fiscal 1999, the Company
announced that it had completed three field tests of its new VectorSeis -TM-,
multi-component digital sensor. Further tests are planned and may
increasingly involve potential customers. There can be no assurance that the
Company will not encounter resource constraints or technical or other
difficulties that could delay introduction of this new product or other new
products in the future. No assurances can be given as to whether any products
incorporating the VectorSeis -TM- digital sensor will be commercially
feasible or accepted in the marketplace by the Company's present or future
customers. 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, which occurred in fiscal 1999 when the Company wrote down inventory
in part due to planned product revisions. Changes in the Company's product
offerings through newly introduced products and product lines, whether
internally developed or obtained through acquisitions, carry with them the
potential for customer concerns of product reliability, which may have the
effect of lessening customer demand for those changed products.
SIGNIFICANT PAYMENT DEFAULTS UNDER SALES ARRANGEMENTS COULD
ADVERSELY AFFECT THE COMPANY. The Company sells to many customers on
extended-term arrangements. Significant payment defaults by customers could
have a material adverse effect on the Company's financial position and
results of operations. See Notes 3 and 13 of Notes to Consolidated Financial
Statements.
RISK FROM SIGNIFICANT AMOUNT OF FOREIGN SALES COULD ADVERSELY AFFECT
RESULTS OF OPERATIONS. Sales outside the United States have historically
accounted for a significant part of the Company's net sales. 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 (including Russia and other Former Soviet Union countries as well
as certain Latin American and Asian 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 present heightened credit risks for the Company, for the
reasons discussed above. See, in particular above, "- Other Factors" for
further information concerning these risks in those countries.
27
LOSS OF SIGNIFICANT CUSTOMERS WILL ADVERSELY AFFECT THE COMPANY. A
relatively small number of customers have 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 1999, 1998 and 1997 the
three largest customers in each of those years accounted for 52%, 43% and
50%, respectively, of the Company's net sales. The loss of these customers or
a significant reduction in their equipment needs could have a material
adverse effect on the Company's net sales.
PRESSURE FROM COMPETITORS COULD ADVERSELY AFFECT RESULTS OF
OPERATIONS. 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 competitors for land
seismic equipment are, among others, Fairfield Industries; Geo-X Systems,
Limited; JGI, Incorporated; OYO Geospace Corporation; and Societe d'etudes
Recherches et Construction Electroniques, an affiliate of Compagnie General
de Geophysique (Sercel). Unlike the Company, Sercel possesses the advantage
of being able to sell to an affiliated seismic contractor. The Company's
principal marine seismic competitors are, among others, Bolt Technology
Corporation, GeoScience Corporation, an affiliate of Tech-Sym Corporation;
Teledyne Brown Engineering, an affiliate of Allegheny Teledyne Company; and
Thomson Marconi Sonar P/L.
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. 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 or
products employing new technologies could result in future price reductions
for the Company's products.
A continuing trend toward consolidation, concentrating buying power
in the oil field services industry, will have the effect of adversely
affecting the demand for the Company's products and services.
RISKS RELATED TO YEAR 2000 ISSUES. 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 "-
Year 2000."
FAILURE TO PROTECT INTELLECTUAL PROPERTY WILL ADVERSELY AFFECT THE
COMPANY'S OPERATIONS. 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
products or design around any of the intellectual property rights owned by
the Company, or that
28
the Company will be precluded by others' patent claims.
DISRUPTION IN VENDOR SUPPLIES WILL AFFECT FINANCIAL RESULTS. The
Company's manufacturing process requires a high volume of quality components.
Certain components used by the Company are currently provided by only one
supplier. 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 suppliers, 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.
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 TIMING OF PRODUCT SHIPMENTS COULD RESULT IN
SIGNIFICANT QUARTERLY FLUCTUATIONS. Due to the relatively high sales price of
many 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 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, net sales and net earnings may be adversely
affected. 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 result 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. Increased sales of lower
margin equipment and related components in the overall sales mix may result
in lower gross margins. Other factors, such as unit volumes, inventory
obsolescence, increased warranty costs and other product related
contingencies, heightened price competition, changes in sales and
distribution channels, shortages in components due to untimely supplies or
inability to obtain items at reasonable prices, and unavailability 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 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. Certain countries are subject to
restrictions, sanctions and embargoes imposed by the US Government. These
restrictions, sanctions and embargoes prohibit or limit the Company and its
domestic subsidiaries from participating in certain business
29
activities in those countries. These constraints may adversely affect the
Company's opportunities for business in those countries.
STOCK VOLATILITY AND ABSENCE OF DIVIDENDS MAY ADVERSELY AFFECT THE
COMPANY'S STOCK PRICE. 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. The
sales price for the Company's Common Stock has declined from $22 per share at
May 29, 1998 to $8 1/2 per share at May 28, 1999 (based on New York Stock
Exchange composite tape closing sales prices). 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, and does not intend to pay in the foreseeable future,
cash dividends on its Common Stock.
RISKS RELATED TO ACQUISITIONS. 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 these new companies into its operations.
Structural changes in the Company's internal organization, which may result
from acquisitions, may not always produce the desired financial or
operational results.
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.
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 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 most recent reports on Form 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.
30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company is exposed to market risk, which is the potential loss
arising from adverse changes in market prices and rates. The Company does not
enter into derivative or other financial instruments for trading or
speculative purposes nor does the Company use or intend to use derivative
financial instruments or derivative commodity instruments. The Company's
market risk could arise from changes in foreign currency exchange rates. The
Company's sales and financial instruments are principally denominated in US
dollars.
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
Not applicable.
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 1999
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
The information required by this Item is contained in the Company's
definitive Proxy Statement to be distributed in connection with its 1999
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 1999 Annual
Meeting of Stockholders under
31
the caption "Voting and Stock Ownership of Management and Principal
Stockholders" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is contained in the Company's
definitive proxy statement to be distributed in connection with its 1999
Annual Meeting of Stockholders under the caption "Certain Transactions" and
is incorporated herein by reference.
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.
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.
32
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.
4.2 --Form of Certificate of Designation, Preferences and
Rights of Series B Preferred Stock of Input/Output, Inc.,
filed as Exhibit 4.1 to the Company's Form 8-K dated April
21, 1999 and incorporated herein by reference.
*4.3 Certificate of Designation, Preferences and Rights of Series
C Preferred Stock of Input/Output, Inc.
*10.2 --Royalty Agreement, dated November 6, 1992, between I/O
Sensors, Inc., Triton and Triton Technologies, Inc.
**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 4.2 to the Company's Registration Statement on
Form S-8 (Registration No. 333-80299), filed with the
Securities and Exchange Commission on June 9, 1999 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.
33
**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 and
incorporated herein by reference.
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.
34
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.
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. Amended and Restated 1996
Non-Employee Director Stock Option Plan, filed as Exhibit
4.3 to the Company's Registration Statement on Form S-8
(Registration No. 333-80299), filed with the Securities
and Exchange Commission on June 9, 1999 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.
**10.27 --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.
10.30 --Agreement and Plan of Merger by and among I/O Marine,
I