-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IamL+F6kS32O+BKzPBNGmSpLYGue8UuLNvx7EGxxn8FKkMz7C5kddW5tnfgfAVB8 Yhe0ajgaq2prCcZwyQUvfQ== /in/edgar/work/20000817/0000950129-00-004266/0000950129-00-004266.txt : 20000922 0000950129-00-004266.hdr.sgml : 20000922 ACCESSION NUMBER: 0000950129-00-004266 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20000531 FILED AS OF DATE: 20000817 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INPUT OUTPUT INC CENTRAL INDEX KEY: 0000866609 STANDARD INDUSTRIAL CLASSIFICATION: [3829 ] IRS NUMBER: 222286646 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12691 FILM NUMBER: 705205 BUSINESS ADDRESS: STREET 1: 11104 W AIRPORT BLVD STREET 2: SUITE 200 CITY: STAFFORD STATE: TX ZIP: 77477 BUSINESS PHONE: 2819333339 MAIL ADDRESS: STREET 1: 11104 W AIRPORT BLVD STREET 2: SUITE 200 CITY: STAFFORD STATE: TX ZIP: 77477 10-K 1 e10-k.txt INPUT/OUTPUT, INC. - DATED MAY 31, 2000 1 ================================================================================ 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, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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.) 12300 C. E. SELECMAN DR., STAFFORD, TEXAS (FORMERLY 11104 W. 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, 2000 (for purposes of the below-stated amount only, all directors, officers and 5% or more stockholders are presumed to be affiliates): $306,503,019 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, 2000 ------------------- ---------------------------- COMMON STOCK, $0.01 PAR VALUE 50,789,080
DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the Registrant's 2000 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. 2 PART 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. THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS AS DEFINED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS SHOULD BE READ IN CONJUNCTION WITH THE CAUTIONARY STATEMENTS AND OTHER IMPORTANT FACTORS INCLUDED IN THIS FORM 10-K. SEE ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - - CAUTIONARY STATEMENT FOR PURPOSE OF FORWARD-LOOKING STATEMENTS" FOR A DESCRIPTION OF IMPORTANT FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS ABOUT PLANS, OBJECTIVES, GOALS, STRATEGIES, FUTURE EVENTS OR PERFORMANCE AND ASSUMPTIONS UNDERLYING THOSE STATEMENTS. THESE FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY WORDS SUCH AS "ANTICIPATES," "ESTIMATES," "EXPECTS," "INTENDS," "PLANS," "PREDICTS," "PROJECTS," AND SIMILAR EXPRESSIONS. OUR EXPECTATIONS, BELIEFS AND PROJECTIONS ARE EXPRESSED IN GOOD FAITH AND WE BELIEVE THEY HAVE A REASONABLE BASIS, THROUGH OUR EXAMINATION OF HISTORICAL OPERATING TRENDS, DATA CONTAINED IN OUR RECORDS AND OTHER DATA AVAILABLE FROM THIRD PARTIES, BUT THERE CAN BE NO ASSURANCE THAT OUR EXPECTATIONS, BELIEFS OR PROJECTIONS WILL RESULT OR BE ACHIEVED OR ACCOMPLISHED. ITEM 1. BUSINESS THE COMPANY Input/Output (I/O) 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 data acquisition systems are technologically superior 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". Seismic data is used extensively in the oil and gas industry as an exploration risk management tool and is also increasingly employed in field development and reservoir management activities. We are organized and report by segments consisting of Land and Marine segments. For a further description of our segments, see Note 9 of the Notes to Consolidated Financial Statements included herein. We offer a broad range of seismic data acquisition systems and related equipment. On land, we offer vibrators, a land energy source; and geophones, acoustical receivers that transform vibrations from substrata within the earth into electrical signals, that are recorded by our data acquisition 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 and record seismic data in deep-water environments. Other marine products manufactured and sold by us include hydrophones, airguns, data telemetry quality control systems and positioning systems (which control streamer cable depth during towing), compasses, acoustical devices, and velocimeters. 1 3 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 "- Recent Developments" and "- Technology and Product Development" below. RECENT DEVELOPMENTS Industry Conditions. During fiscal year 2000, consistent with overall industry trends, demand for our products decreased significantly due to the continued deterioration in energy service market conditions and, more specifically, in the seismic services sector. As a result, we recorded special charges of $50.8 million during fiscal year 2000. See Item 7. "Management's Discussion and Analysis of Results of Operations and Financial Condition." In particular, the following factors adversely impacted us in fiscal year 2000: o The financial condition of a certain number of our customers deteriorated significantly; o Our principal customers - seismic service contractors - continued to reduce their workforces and capital spending, resulting in decreased sales opportunities for us; o Consolidations and mergers among energy producers; o Considerable excess seismic equipment remaining in the field, and additional pricing pressure on our product offerings as a result of the weak demand for our new equipment; and o Unstable economies in developing markets forced local customers to reduce capital spending. 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 year 1999 and continued in fiscal year 2000 implementing initiatives in response to the downturn. o 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 full-time workforce to 736 as of June 30, 2000. o 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. o We began reorganizing into a more product-focused structure in fiscal year 2000 with the objective of being able to better address the special and often different needs of marine and land customers. LAND A new central electronic recording system, the I/O SYSTEM 2000(TM), was introduced this year and offers enhancements to aid the efficiency of seismic data acquisition. The system also incorporates embedded workflow design, planning, quality control and pre-processing tools from our established Green Mountain Geophysical (GMG) knowledgeware toolkit to improve crew productivity and reduce geometry errors during acquisition. An enhancement of the I/O SYSTEM 2000(TM) to allow seamless integration of our cable and radio-based telemetry products is undergoing field tests. To enhance our radio-based telemetry acquisition, the Transcriber 2(TM) introduced this year can organize, format and record seismic data to tape up to four times faster than its predecessor, thereby decreasing acquisition time. 2 4 Our primary land research and development efforts are focused on field testing a land-based seismic data acquisition recording system incorporating VectorSeis(TM) digital sensors for multi-component recording and 4-D time lapse imaging. The VectorSeis(TM) digital sensor uses three micro-machined accelerometers configured to measure compression 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 to reduce exploration risk. We have expanded the data structure and interface of our survey design software package, MESA(R), to accommodate multi-component data. The design and quality control (QC) capacity of MESA(R) will handle survey designs that feature mixed sources, mixed receiver types, and multiple components. Other programs such as MESA(R) GRIP (3D subsurface modeling for survey design) and Alpine(TM) (acquisition management and reporting) deal with the same types of advanced designs. See "- Products" below. MARINE The CRX FSK repeater production system was initially deployed in fiscal year 2000. This new CRX module is a diagnostic repeater allowing streamer communications for our compass birds and acoustic pods for streamer lengths up to 12,000 meters. We completed initial tests of our new marine energy source, Sleeve Gun 2000, which was designed to improve gun reliability, gun timing and time to repair. We launched our new MSX(TM) marine export recording system, which complies with U.S. Department of Commerce export regulations and has been awarded the commodity classification of 6A991. With the exception of U.S. embargoed countries, this classification will permit the export to most countries around the world with the license designation of No License Required (NLR). The MSX(TM) marine seismic recording system was revised to provide customers with more robust and improved test and quality control features. The Pro2000(TM) line of positioning equipment was initially deployed in fiscal year 2000. The system obviates the need for lithium batteries, long considered a health, safety and environmental hazard in the marine environment. See "- Products" below. E-BUSINESS We introduced our Internet e-catalog in fiscal year 2000 which interacts with certain of our customers' purchasing systems, in a secure environment. Our customers can order from our parts list covering land and marine products and have access to technical documentation and other features. 3 5 PRODUCTS LAND OPERATIONS Data Acquisition Systems. A land I/O system consists of a central electronics unit containing a number of modular components, and multiple remote ground equipment modules, including line taps and remote signal conditioners (each designated as an MRX(TM), which typically acquires six channels of analog seismic data). A typical system consists of a central electronics unit, 12 line taps, approximately 200-500 MRX(TM) and various accessories. A customer can purchase or lease additional line taps, MRX(TM) and accessory equipment to expand and modify a system to fulfill specific requirements. In addition to standard I/O system components, several optional components are available as accessory equipment. Central Electronics Unit. The central electronics unit, which acts as the control center of the I/O data acquisition system, and its components are typically mounted within a vehicle or helicopter transportable enclosure. The central electronics unit receives digitized data from the MRX(TM), stores the data on magnetic tape for subsequent processing and displays the data on optional monitoring devices. The central electronics unit also provides calibration, status and test functionality. Remote Ground Equipment. The remote ground equipment of the I/O system consists of multiple remote MRX(TM) and line taps positioned over the survey area. Seismic signals from geophones are collected by the MRX(TM), each of which collects multiple channels of analog seismic data. The MRX(TM) filters and digitizes the data, which is then transmitted by the MRX(TM) 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. Our radio telemetry system (RSR) records data across a variety of environments, including transition zones, swamps, mountain ranges, jungles and other seismic environments. Our RSR's are radio controlled, and do not require cables for data transmission, since the information is stored at the unit source and subsequently retrieved. Geophones. Geophones 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 and transition zone environments. This product line includes a geophone checking technology as well as three-component geophones that may be used in three-component 3-D seismic recording. See "- Technology and Product Development" below. Vibrators. Vibrators are controlled mechanical devices used as a source of seismic energy on land. Our vibrators offer patented features which extend the life of the vibrator and lower the distortion of the sound source. Applications Software. We offer a wide range of geophysical software used in seismic planning and execution. MESA(R) is a 3-D seismic data acquisition planning package. This product is used by energy producers and seismic contractors to design and execute a 3-D program to meet specific requirements. Alpine(TM) is used to track and manage 3-D programs 4 6 from the concept stage through data processing. Millenium(R) performs the initial data processing stages of geometry verification and refraction statics. Reservoir Products. Reservoir products and technologies are being developed and deployed to create economical data acquisition solutions for enhanced reservoir imaging. Our projects include field development and rock velocity studies, reservoir management and enhanced oil recovery analysis. MARINE OPERATIONS Data Acquisition System. Our marine data acquisition system (MSX(TM)) 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 24-bit digital MSX(TM) modules each contain 16 channels of seismic data. The utilization of fiber-optic data transmission and titanium connectors and inserts results in reduced size and power consumption, high quality and reliability of acquired marine seismic data and permits a complete MSX(TM) system to have a recording capacity of over 7,600 channels. Hydrophones. 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 marine (hydrophones) and transition zone environments, and a three-component gimbaled geophone and hydrophone unit for four-component ocean bottom surveys. 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. Additionally, we offer an airgun source synchronizing system that can control up to 128 airguns simultaneously. Marine Positioning Systems. Our positioning systems include birds (which control streamer cable depth during towing), compasses, velocimeters and acoustical devices. In addition to sales of the products described above, we offer a rental program to our customers for selected equipment. We have taken steps to expand our land and marine products rental fleet and plan to spend approximately $4.0 million on this initiative in the coming year. TECHNOLOGY AND PRODUCT DEVELOPMENT Our strategic focus for research and development is driven by our desire to improve the quality of the subsurface image and the overall acquisition economics of our customers. Our ability to compete effectively and maintain a leading market position in the manufacture and sale of seismic instruments and data acquisition systems depends upon continued technological innovation. Development cycles from initial conception through product introduction may extend over several years. Research and development expenditures have principally related to the continued enhancement and evolution of the land and marine data acquisition product line and basic research and development on other emerging technologies having potential applicability to the seismic industry. See " - Products", Item 6. "Selected Consolidated Financial 5 7 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. See "- Intellectual Property" below. We have a number of products under development. Because they are under development, 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, we market and sell our products to oil and gas companies, who may operate their own seismic crews. During fiscal year 2000, four customers accounted for approximately 51% of our net sales: Baker Hughes Incorporated and its affiliates (17%), Schlumberger Limited and its affiliates (12%), Petroleum Geo-Services ASA (12%) and China Petroleum Technology and Development Corp. (11%). The loss of any one of these customers could have a material adverse effect on our results of operation and financial condition. See Note 9 of Notes to Consolidated Financial Statements. A significant part of our 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. We sell our products through a direct sales force consisting of employees and through several international third-party sales representatives responsible for key geographic areas. Sales personnel generally have either oil and gas exploration or production expertise or experience in selling advanced technology-based systems. During fiscal years 2000, 1999 and 1998, approximately 70%, 41% and 35%, respectively, of our net sales were derived from sales to foreign customers. See Note 9 of Notes to Consolidated Financial Statements for information concerning geographic distribution of our sales. Systems sold to domestic customers are frequently deployed internationally. Our sales are predominantly denominated in US dollars. From time to time, certain foreign sales require export licenses. We normally sell our systems and products to customers on standard net 30-day terms. We have also provided financing arrangements to customers by installment sales contracts under which we typically retain 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". Our 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. See Note 3 of Notes to Consolidated Financial Statements. In addition, we have previously financed a portion of our sales through third parties by assigning our installment sales contracts to the financing sources and guaranteeing the customer's repayment obligations. During fiscal year 2000, we were required to fulfill our 6 8 obligations under certain of these arrangements as a result of payment defaults by certain of our customers. For the foreseeable future, we expect to rely less on these or similar third-party sales financing techniques. At May 31, 2000, no guarantees of trade notes receivables sold with recourse, or third-party loans to customers were outstanding. 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. 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 manufactures vibrators, sleeve guns, land and marine cable and marine streamers. Our 40,000 square foot New Orleans, Louisiana facility manufactures our positioning products. Our 30,000 square foot Voorschoten, The Netherlands facility manufactures geophone products. Our 31,000 square foot Norwich, England facility manufactures seismic cable and leader wire. See also Item 2. - "Properties". Upon completion of assembly, our products undergo functional and environmental testing and final quality assurance inspection. SUPPLIERS We purchase a substantial portion of the electronic components used in our systems and products. Although we have 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 our ability to meet production and sales commitments. Certain items, such as integrated circuits, printed circuit assemblies, the 24-bit analog-to-digital converters used in I/O systems and hydrophones having water depth limiting capabilities used with marine seismic cables, are purchased from sole source vendors. Although we attempt to maintain an adequate inventory of these single source items, the loss of ready access to any of these items could temporarily disrupt our ability to manufacture and sell certain products. Since our components are designed for use with these single source items, replacing the single source items with functional equivalents could require a redesign of our 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. Our 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 (CGG). Unlike us, Sercel possesses the advantage of being able to sell to an affiliated seismic contractor. Our principal marine seismic competitors are, among others, Bolt Technology Corporation; GeoScience Corporation (GSI), an affiliate of CGG; Sercel; Teledyne Brown Engineering, an affiliate of Allegheny Teledyne Company; and Thomson Marconi Sonar P/L. We believe that in recent years technology and product pricing have been the primary methods 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 include customer support services. During fiscal year 2000, price and customer support factors took precedence over technology as demand for new seismic instrumentation substantially decreased. See "- Recent Developments". 7 9 INTELLECTUAL PROPERTY We rely on a combination of trade secrets, patents, copyrights and technical measures to protect our proprietary hardware and software technologies. Although our patents are considered important to our operations, no one patent is considered essential to our success. Copyright and trade secret protection may be unavailable in certain foreign countries in which we sell our products. In addition, we seek to protect our trade secrets through confidentiality agreements with our employees and agents. We also own a number of trademarks. 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 our products may be utilized are subject to trade restrictions, embargoes and sanctions imposed by the US government. These restrictions and sanctions, generally speaking, limit us from participating in or approving certain business activities in those countries. EMPLOYEES At June 30, 2000, we had 736 full-time employees worldwide, 586 of which were employed in the United States. Our U.S. employees are not subject to any collective bargaining agreement. We have never experienced a work stoppage, and we consider our relations with our employees to be satisfactory. ITEM 2. PROPERTIES Our primary manufacturing facilities are as follows:
Manufacturing Facility Square Footage ---------------------- -------------- Stafford, Texas* 110,000 Alvin, Texas* 240,000 New Orleans** 40,000 Norwich, England** 31,000 Voorschoten, The Netherlands** 30,000 ------- 451,000 =======
* Owned ** Leased Our executive headquarters (utilizing approximately 25,000 square feet) are located at 12300 C.E. Selecman Drive, Stafford, Texas. We have combined personnel from our previous 8 10 headquarters facility (11104 W. Airport) into the adjacent Selecman Drive facility, which now houses the executive headquarters, research & development, sales and marketing and administrative support activities. Both facilities, along with the adjacent Stafford manufacturing facility, are owned by us and are mortgaged to secure long-term facility indebtedness. We intend to lease the vacant space in the former executive headquarters to third parties. See Item 7.- "Management's Discussion and Analysis of Results of Operations and Financial Condition". We also lease an aggregate of 101,000 square feet of additional warehouse and office space under short-term operating leases. The machinery, equipment, buildings and other facilities owned and leased by us are considered by management to be sufficiently maintained and adequate for our current operations. ITEM 3. LEGAL PROCEEDINGS We were named, along with a former employee, as defendants in an action filed on May 21, 1999, in State District Court in Harris County, Texas styled Coastline Geophysical, Inc. v. Input/Output, Inc. et al. The plaintiffs' petition alleged a number of claims arising out of a purchase of a marine seismic system manufactured by us. While believing we had meritorious defenses to this action, we settled this lawsuit in July 2000 for $5.0 million, after giving consideration to the cost and distraction of protracted litigation. As a result of the settlement, we recorded a $5.0 million charge to general and administrative expense in the fourth quarter and year ended May 31, 2000. See Item 7. "Management's Discussion and Analysis of Results of Operation and Financial Condition." In the ordinary course of business, we have been named in other various lawsuits or threatened actions. While the final resolution of these matters may have an impact on our consolidated financial results for a particular reporting period, we believe that the ultimate resolution of these matters will not have a material adverse impact on our financial position, results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 9 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS GENERAL Our 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 2000 Fourth Quarter.......................................... $ 8 1/4 $ 5 1/2 Third Quarter........................................... 6 11/16 4 1/4 Second Quarter.......................................... 8 3/8 4 15/16 First Quarter........................................... 8 15/16 7 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
We have historically not paid, and do not intend to pay in the foreseeable future, cash dividends on our Common Stock. We presently intend to retain earnings, if any, for use in our business, with any future decision to pay cash dividends on Common Stock dependent upon our growth, profitability, financial condition and other factors our 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". We are permitted to pay dividends on our Common Stock as long as all dividends on our outstanding Series B and Series C Preferred Stock (See Note 7 of Notes to Consolidated Financial Statements) are current. On June 30, 2000, there were 951 stockholders of record of Common Stock and one stockholder of 55,000 shares of Series B and Series C Preferred Stock outstanding. Except as discussed below or otherwise disclosed in our Quarterly Reports on Form 10-Q filed during fiscal year 2000, we made no unregistered sales of our equity securities during fiscal year 2000. During fiscal year 2000, we issued a total of 17,500 shares of Common Stock to Sam K. Smith, Chief Executive Officer of the Company, under the terms of his compensation agreement with the Company dated August 10, 1999. The shares were issued to him in four installments on a quarterly basis during fiscal year 2000 as provided in the compensation agreement. The closing sales prices per share of the Company's Common Stock as reported on the NYSE composite tape on the dates of issuance ranged from $5.00 to $5.94 per share. Each issuance was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) of that Act, because the shares were issued under a privately negotiated transaction and Mr. Smith agreed that he was acquiring the shares for investment purposes only and without a view to resale or distribution. REPURCHASE PROGRAMS In March 2000, we announced that we had authorized the repurchase of up to 200,000 shares of Common Stock in open market and privately negotiated transactions. The shares 10 12 repurchased were to be held as treasury stock to be available for grants under a restricted stock plan adopted in March 2000, and for other employee benefits plans. A total of 150,000 shares were repurchased by us under this fourth quarter fiscal year 2000 repurchase program. In July 2000, we announced that we had authorized the repurchase of up to an additional 1,000,000 shares of our Common Stock in open market and privately negotiated transactions, with purchases to be made from time to time through May 31, 2001. Shares repurchased will be held by us as treasury stock to be available for our stock option and other equity compensation and benefits plans. 11 13 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below with respect to our consolidated statements of operations for the five fiscal years ended May 31, 2000, 1999, 1998, 1997 and 1996 and with respect to our consolidated balance sheets at May 31, 2000, 1999, 1998, 1997 and 1996 have been derived from our 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 our consolidated financial statements and the notes thereto included elsewhere in this Form 10-K. Our results of operations and financial condition have been affected by acquisitions of businesses and special charges during certain of the periods presented which may affect the comparability of the financial information contained below.
Year Ended May 31, --------------------------------------------------------------------- 2000 1999 1998 1997 1996 --------- --------- --------- --------- --------- STATEMENT OF OPERATIONS DATA: (in thousands, except per share data) Net sales ............................................. $ 121,454 $ 197,415 $ 385,861 $ 281,845 $ 278,283 Cost of sales ......................................... 106,642 205,215 226,514 183,438 163,811 --------- --------- --------- --------- --------- Gross profit (loss) (1) .......................... 14,812 (7,800) 159,347 98,407 114,472 --------- --------- --------- --------- --------- Operating expenses: Research and development (2) .......................... 28,625 42,782 32,957 22,967 23,243 Marketing and sales ................................... 10,284 14,193 14,646 13,288 12,027 General and administrative (3) ........................ 21,885 80,932 28,295 36,186 19,096 Amortization and impairment of intangibles (4) ........ 39,488 16,247 6,008 4,551 4,305 --------- --------- --------- --------- --------- Total operating expenses ......................... 100,282 154,154 81,906 76,992 58,671 --------- --------- --------- --------- --------- Earnings (loss) from operations ....................... (85,470) (161,954) 77,441 21,415 55,801 Interest expense ...................................... (826) (897) (1,081) (793) (2,515) Interest income ....................................... 4,930 7,981 7,517 3,942 3,124 Other income (expense) ................................ 1,306 (370) (202) (267) (33) --------- --------- --------- --------- --------- Earnings (loss) before income taxes ................... (80,060) (155,240) 83,675 24,297 56,377 Income tax (benefit) expense .......................... (6,097) (49,677) 26,776 7,700 17,700 --------- --------- --------- --------- --------- Net earnings (loss) ................................... (73,963) (105,563) 56,899 16,597 38,677 Preferred dividend .................................... 4,557 -- -- -- -- --------- --------- --------- --------- --------- Net earnings (loss) applicable to common stock ........ $ (78,520) $(105,563) $ 56,899 $ 16,597 $ 38,677 ========= ========= ========= ========= ========= Basic earnings (loss) per common share ............................................ $ (1.55) $ (2.17) $ 1.29 $ 0.38 $ 0.98 ========= ========= ========= ========= ========= Weighted average number of common shares outstanding ............................... 50,716 48,540 43,962 43,181 39,631 ========= ========= ========= ========= ========= Diluted earnings (loss) per common share ............................................ $ (1.55) $ (2.17) $ 1.28 $ 0.38 $ 0.95 ========= ========= ========= ========= ========= Weighted average number of diluted common shares outstanding ............................... 50,716 48,540 44,430 43,820 40,609 ========= ========= ========= ========= =========
12 14
As of May 31, ------------------------------------------------------------ 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- BALANCE SHEET DATA (END OF YEAR): (In thousands) Working capital ............................. $183,412 $213,612 $245,870 $170,427 $165,225 Total assets ................................ 381,769 451,748 493,016 384,658 355,465 Short-term debt, including current installments of long-term debt(5) ...... 1,154 1,067 986 912 -- Long-term debt(5) ........................... 7,886 8,947 10,011 11,000 -- Stockholders' equity(6) ..................... 335,015 396,974 415,700 338,614 317,204 OTHER DATA: Capital expenditures......................... $ 3,077 $ 9,326 $ 6,960 $ 26,966 $ 10,240 Depreciation and amortization................ 22,835 20,776 16,816 12,558 10,152
- ---------- 1. Fiscal year 2000 includes charges of $12.0 million and fiscal year 1999 includes charges of $77.0 million. See Note 15 of Notes to Consolidated Financial Statements for further information with respect to these 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 these charges. 3. Fiscal year 2000 includes charges of $7.2 million, fiscal year 1999 includes charges of $53.2 million and fiscal year 1997 includes charges of $15.6 million. See Note 15 of Notes to Consolidated Financial Statements for information with respect to these charges in 2000 and 1999. 4. Fiscal year 2000 includes charges for $31.6 million and fiscal year 1999 includes charges of $7.7 million. See Note 15 of Notes to Consolidated Financial Statements for information with respect to these charges. 5. See Notes 6 and 16 of Notes to Consolidated Financial Statements for information with respect to this indebtedness and certain contingent obligations. 6. See Note 7 of Notes to Consolidated Financial Statements for information with respect to changes in capital structure. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Form 10-K. ANNUAL RESULTS OF OPERATIONS INTRODUCTION Our 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 Seismic Services Industry Will Adversely Affect Results of Operations", and "- Risk from Significant Amount of Foreign Sales Could Adversely Affect Results of Operations". During fiscal year 2000 and 1999, our financial 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 13 15 exploration activity due to a decline in energy prices from October 1997 to February 1999 and consolidation among energy producers and oilfield service firms. As a result of reduced exploration spending and a deterioration of energy service sector conditions beginning in 1998, demand for our products has continued to decline resulting in significantly reduced net sales, a significant operating loss for the fiscal year ended May 31, 2000, and pretax charges totaling $50.8 million in the first, third and fourth quarters of fiscal year 2000. Despite the recovery in commodity prices during 1999 and 2000, energy producers' continued concerns over the sustainability of higher prices for hydrocarbon production resulted in lower exploration budgets by energy companies, which primarily has resulted in continued weak demand for our seismic data acquisition equipment. Further contributing to this weak demand for new equipment has been an industry-wide oversupply of seismic equipment in the field and an excess inventory of seismic data in contractors' data libraries. This weak demand coupled with pricing pressures from competitors in fiscal year 2000 have in turn weakened our margins. INDUSTRY CONDITIONS During fiscal year 2000, consistent with overall industry trends, demand for our products decreased significantly due to the continued deterioration in energy service market conditions and, more specifically, in the seismic services sector. As a result, we recorded special charges of $50.8 million during fiscal year 2000. In particular, the following factors adversely impacted us in fiscal year 2000: o The financial condition of a certain number of our customers deteriorated significantly; o Our principal customers - seismic service contractors - continued to reduce their workforces and capital spending, resulting in decreased sales opportunities for us; o Consolidations and mergers among energy producers; o Considerable excess seismic equipment remaining in the field, and additional pricing pressure on our product offerings as a result of the weak demand for our new equipment; and o Unstable economies in developing markets forced local customers to reduce capital spending. 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 year 1999 and continued in fiscal year 2000 implementing initiatives in response to the downturn. o 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 full-time workforce to 736 as of June 30, 2000. o 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. o We began reorganizing into a more product-focused structure in fiscal year 2000 with the objective of being able to better address the special and often different needs of marine and land customers. FISCAL YEAR 2000 CHARGES During the first quarter of fiscal year 2000, we recorded pretax charges totaling $4.7 million, comprised of $3.3 million primarily related to employee severance arrangements and the closing of our Ireland facility (included in general and administrative expenses) and charges of 14 16 $1.4 million for product-related warranties (included in cost of sales). These charges resulted from continued weak customer demand for our equipment. This weak demand resulted from, among other things, a widespread downturn in exploration activity due to the decline in energy prices from October 1997 through February 1999, and consolidation among energy producers. During the third quarter of fiscal 2000, we recorded pretax charges and recoveries totaling a net charge of $0.3 million, comprised of $8.7 million of inventory charges (included in cost of sales) primarily related to our decision to commercialize VectorSeis(TM) digital sensor products having higher technical standards than the products we had previously produced. We had decided to commercialize these earlier VectorSeis(TM) products which have since proven not to be commercially feasible based on (1) data gathered from recent VectorSeis(TM) digital sensor surveys, (2) the anticipated longer-term market recovery for new seismic instrumentation and (3) current and expected market conditions. Other charges were $2.4 million of bad debt expense related to a marine customer (included in general and administrative expense); $1.3 million of charges related to a 45-employee reduction in our workforce worldwide (included in general and administrative expense); and $0.7 million of charges related to legal settlements (included in cost of sales - $0.3 million, and in general and administrative expense - $0.4 million). These charges were offset in part by $12.8 million of recoveries attributable to a more favorable than anticipated resolution of a customer's bankruptcy proceeding, consisting of a $10.2 million reduction in our allowance for loan loss, resulting in a payment received in March 2000 (recorded as a reduction to general and administrative expense) and a $2.6 million reversal of warranty reserves based on the bankruptcy settlement (recorded as a reduction to cost of sales). During the fourth quarter of fiscal year 2000, we recorded pretax charges totaling $45.8 million, comprised of $4.2 million of inventory and warranty charges (included in cost of sales) primarily related to our write-down of certain marine streamer and related products, reflecting the deterioration of the marine towed array seismic sector. Additionally, $10.0 million was charged to general and administrative expenses consisting of a $5.0 million charge for settlement of the Coastline Geophysical litigation (see Item 3. - "Legal Proceedings"); a $3.6 million loan loss expense, net of recoveries, primarily relating to two of our land customers; $0.7 million related to the sale of certain idle manufacturing capacity in Europe; and $0.7 million of charges related to employee severance and continued cost reduction efforts worldwide. Finally, $31.6 million was charged to amortization and impairment expense, reflecting the impairment of certain goodwill recorded in conjunction with our acquisition of: (1) the manufacturing assets of Western Geophysical in 1995 and (2) the acquisition of CompuSeis, Inc. in 1998. The impairment of the Western Geophysical goodwill principally reflects the diminished outlook for the marine towed array seismic sector in general, evidenced by our customers' decisions to reduce the size of their marine fleets, and changes in customers' preferences and technology for certain products within that sector. The impairment of the CompuSeis goodwill reflects the result of certain technological changes relating to our land seismic systems. The resulting impairment charges will reduce future goodwill amortization by an estimated $3.2 million annually. We believe that the severance charges we have taken during fiscal year 2000 are expected to result in the following annual savings. Severance charges in the first quarter of fiscal year 2000 are expected to result in annual savings of approximately $3.0 million beginning with the second quarter of fiscal year 2000. Severance charges in the third quarter of fiscal year 2000 are expected to result in annual savings of approximately $1.7 million beginning with the fourth quarter of fiscal year 2000. 15 17 Severance charges in the fourth quarter of fiscal year 2000 are expected to result in annual savings of approximately $0.6 million beginning with the first quarter of fiscal year 2001. FISCAL YEAR 1999 CHARGES During fiscal year 1999, we recorded pretax charges totaling $139.0 million in the third and fourth quarters of fiscal year 1999, resulting from reduced customer demand for our equipment as a result of historically low commodity prices, energy company combinations which delayed seismic data acquisition projects and due to the continued deterioration of the financial condition of certain customers. The reduced demand created excess capacity within our installed base, accelerating the obsolescence of certain of our seismic equipment. Of the $139.0 million of pretax charges, $85.7 million was recorded in the third quarter of fiscal year 1999 and included an impairment of long-lived assets totaling $2.8 million included in general and administrative expenses; an impairment of intangible assets totaling $1.4 million included in amortization and impairment of intangibles; an inventory write-down of $47.3 million due to the conditions described above and planned product revisions, included in cost of sales; charges for the early termination of a facility lease and restructuring costs totaling $2.6 million included in general and administrative expenses; an accounts and notes receivable allowance of $17.6 million related to a customer's vessel seizure followed by filing for creditor protection and our assessment of business risk relating to three North American customer trade notes receivable as a result of the depressed market environment, included in general and administrative expenses; and a charge for warranty reserves and other product related contingencies of $14.0 million, included in cost of sales. The remaining pretax charges of $53.3 million were recorded in the fourth quarter of fiscal year 1999, and included an accounts and trade notes receivable allowance of $22.3 million, primarily related to business risk resulting from the depressed market environment, and from political and currency risks in certain developing countries, included in general and administrative expenses; an inventory write-down of $9.7 million primarily due to further reduction in customer demand for products rendered excess or obsolete as a result of prevailing industry conditions and as a result of planned product revisions, included in cost of sales; a charge of $6.0 million relating to certain warranty reserves and other product-related contingencies, included in cost of sales; an impairment of long-lived assets totaling $4.0 million related to the downturn in business activity and our resizing efforts, included in general and administrative expenses; an impairment of intangibles totaling $6.3 million related to the deterioration of certain product lines, included in amortization and impairment of intangibles; a charge of $3.3 million related to employee severances and a charge of $0.6 million for other expenses, included in general and administrative expenses and a charge of $1.1 million primarily related to prototype development costs, included in research and development expenses. We believe that the pre-tax charges taken during fiscal year 1999 are expected to result in the following annual savings. Impairment charges for long-lived assets and intangible assets taken in the third quarter of fiscal year 1999 are expected to reduce annual depreciation and amortization by approximately $1.4 million beginning with the fourth quarter of fiscal year 1999. Charges for the early termination of a lease and severance taken during the third quarter of fiscal year 1999 are expected to reduce annual expenses by approximately $3.2 million beginning with the fourth quarter of fiscal year 1999. Charges related to resizing the company to lower business levels in the fourth quarter of fiscal year 1999 are expected to reduce annual expenses by approximately $0.1 million beginning with the first quarter of fiscal year 2000. Impairment 16 18 charges for intangible assets in the fourth quarter of fiscal year 1999 are expected to reduce annual depreciation and amortization by approximately $0.9 million beginning with the first quarter of fiscal year 2000. Severance charges in the fourth quarter of fiscal year 1999 are expected to result in annual savings of approximately $7.0 million beginning with the first quarter of fiscal year 2000. Our fiscal year 1999 inventory write-downs were determined by our identification of obsolete and inventory part numbers for which we had quantities in excess of a two-year supply based upon inventory usage reports and estimated product life cycles. Our fiscal year 1999 inventory write-downs included Marine and Land product inventories. Land inventory write-downs included cables, vibrator trucks and other items. Marine inventory write-downs included marine streamers, marine cables, modules, airguns and other items. SUMMARY REVIEW AND OUTLOOK In response to the prevailing industry conditions, we have concentrated on lowering our cost structure, consolidating our product offerings and reorganizing into a products-based divisional structure. During the first and second quarters of fiscal year 2000, we closed our cable manufacturing facility in Cork, Ireland and merged its operations into our U.K. and U.S. facilities, allowing us to address some of our excess capacity issues. However, due to the seismic services industry downturn being longer and more pervasive than originally anticipated in the early part of fiscal year 2000, we have begun evaluating additional restructuring and cost control solutions with the goal of returning to profitability as quickly as practicable. Implementing these solutions could result in additional charges in fiscal year 2001. For fiscal year 2001, we foresee continued equipment oversupply in the marine seismic fleets and continued weak demand in the marine seismic sector. While overall demand for new seismic work currently remains low, land seismic indicators in certain parts of the world are showing signs of recovery, which could result in increased land seismic activity in the second half of fiscal year 2001. We are continuing to seek improvements in our seismic data acquisition technology. A few of the goals we are seeking to achieve during fiscal year 2001 include commercializing our VectorSeis(TM) technology, further development in our land seismic ground electronics, and developing product offerings in hydrocarbon reservoir monitoring. We are also reviewing possible alternatives to further strengthen our balance sheet, potential corporate opportunities, and alternative applications for some of our technology. No assurances can be made that we will implement any of these potential actions, and if so, whether any of them will prove successful or the degree of that success. We presently believe that industry conditions will continue to adversely impact demand for our products during the next 9 to 12 calendar months. However, we also believe that the initiatives discussed above, both previously implemented and those proposed, will better position us to return to profitability as industry conditions improve. NET SALES Land division net sales for fiscal year 2000 decreased $23.1 million, or 24%, to $73.2 million as compared to the land division's net sales of $96.3 million for the prior year. Marine division net sales for fiscal year 2000 decreased $52.8 million, or 52%, to $48.3 million as compared to the marine division's net sales of $101.1 million for the prior year. The decline in both the land and marine division net sales for fiscal year 2000 is attributable to the deterioration 17 19 in the seismic service industry over the past 21 months, resulting in weak demand for our seismic data acquisition equipment. See "Introduction" above. Land division net sales for fiscal year 1999 decreased $219.8 million, or 70% to $96.3 million as compared to Land division's net sales of $316.1 million for the prior year. Marine division net sales for fiscal year 1999 increased $31.3 million, or 45% to $101.1 million as compared to the marine division's net sales of $69.8 million for the prior year. The decrease in Land division net sales is primarily due to the significant decrease in demand attributable to low commodity prices, energy industry consolidations, significant reductions in workforce and capital spending by our customers, destabilizing economies in developing markets and the continued deterioration of the financial condition of certain customers. The increase in Marine division net sales is attributed to the acquisition of DigiCourse, Inc. in October 1998. DigiCourse, Inc. provided $33.8 million in fiscal year 1999 net sales. GROSS PROFITS Land division gross profit and gross profit margin for fiscal year 2000 compared to fiscal year 1999 increased to a gross profit of $6.4 million, or 8.7%, from a gross loss of $4.3 million, or (4.5%) in 1999. Land division's gross margin for fiscal year 2000 was adversely affected by $8.7 million of inventory charges. Land division's gross margin for fiscal year 1999 was adversely affected by $26.0 million in domestic land inventory write-downs and charges of $3.0 million relating to certain warranty reserves and other product related contingencies. Excluding these charges, the land division's gross profit margin for fiscal years 2000 and 1999 would have been 20.6% and 25.6%, respectively. Marine division gross profit and gross profit margin for fiscal year 2000 compared to fiscal year 1999 increased to a gross profit of $8.4 million, or 17.4%, from a gross loss of $3.5 million or (3.5%). The marine division's gross profit margin for fiscal year 2000 included net warranty recoveries of $2.6 million, charges of $2.0 million for product-related warranties and $3.6 million in charges for inventory write-downs for marine streamers and related products. The marine division's gross loss for fiscal year 1999 included $31.0 million in domestic marine inventory write-downs and charges of $17.0 million relating to certain warranty reserves and other product related contingencies. Excluding these charges and recoveries, the marine division's gross profit margin for fiscal years 2000 and 1999 would have been 23.7% and 44.2%, respectively. This decline in margins from 1999 reflects both pricing pressures from competitors and a shift in the sales mix to predominantly lower margin marine products. Land division gross profit and gross profit margin for fiscal year 1999 compared to fiscal year 1998 decreased to a gross loss of $4.3 million, or (4.5%) from a gross profit of $133.1 million, or 42.1% in 1998. Land division's gross margin for fiscal year 1999 was adversely affected by charges of $26.0 million for inventory writedowns, and $3.0 million for warranty reserves and other product related contingencies. Excluding these charges, land division's gross profit would have been 25.6% for fiscal year 1999, compared to 42.1% in 1998. Marine division gross profit and gross profit margin for fiscal year 1999 compared to fiscal year 1998 decreased to a gross loss of $3.5 million, or (3.5%) from a gross profit of $26.2 million, or 37.7% in 1998. Marine division's gross margin for fiscal year 1999 was adversely affected by charges of $31.0 million for inventory writedowns, and $17.0 million for warranty reserves and other product related contingencies. Excluding these charges, marine division's gross profit would have been 44.2% for fiscal year 1999, compared to 37.7% in 1998. 18 20 The land and marine division gross profit margins were adversely affected during fiscal years 2000 and 1999 by pricing pressures attributable to weak customer demand for our products and manufacturing under-absorption due to low production volumes as a result of the prevailing industry conditions. Our gross profit margin for any particular reporting period is dependent on the product mix sold and the pricing scheme for the products sold for that period and may vary materially from period to period. RESEARCH AND DEVELOPMENT Fiscal year 2000 research and development expenses were $28.6 million, a decrease of $14.2 million, or 33%, compared to fiscal year 1999, primarily due to reduced costs and expenditures for salaries and other payroll related items, contract labor, outside services and product development. Fiscal year 1999 research and development expenses were $42.8 million, an increase of $9.8 million, or 30%, over fiscal year 1998, primarily resulting from expenses related to acquisitions, increased contract labor and outside engineering services related to advanced systems design, and prototype development costs. MARKETING AND SALES Fiscal year 2000 marketing and sales expenses were $10.3 million, a decrease of $3.9 million, or 28%, compared to fiscal year 1999 primarily due to reduced costs and expenditures for salaries, commissions and other payroll related items, travel, advertising and conventions and exhibits. This decrease was principally attributable to our cost reduction program and reduced net sales. Fiscal year 1999 marketing and sales expenses were $14.2 million, a decrease of $453,000, or 3%, compared to fiscal 1998 primarily resulting from decreased internal and third party commissions attributable to the significant decline in sales, offset in part by increased expenses related to acquisitions. GENERAL AND ADMINISTRATIVE Fiscal year 2000 general and administrative expenses were $21.9 million, a decrease of $59.0 million, or 73%, compared to fiscal year 1999. Fiscal year 1999 expenses included special charges totaling $53.2 million. In fiscal year 2000, we recorded $23.6 million of loan loss recoveries and recorded lower expenditures for salaries and other payroll related items, outside services, insurance and other taxes. This decrease was mitigated in part by fiscal year 2000 charges of $11.1 million consisting of $5.0 million for settlement of a lawsuit, $5.4 million related to employee severance arrangements, and $0.7 million related to the closing of our Ireland facility. Excluding the special charges for fiscal years 2000 and 1999, general and administrative expenditures were $14.7 million, a decrease of $13.0 million, or 47% compared to fiscal year 1999. Fiscal year 1999 general and administrative expenses were $80.9 million, an increase of $52.6 million, or 186%, over fiscal year 1998, primarily due to charges of $53.2 million incurred in fiscal year 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 year 1999 charges, the Company's general and administrative expenditures were $27.7 million, a decrease of $0.6 million, or 2%, compared to fiscal year 1998. 19 21 AMORTIZATION AND IMPAIRMENT OF IDENTIFIED INTANGIBLES Fiscal year 2000 amortization and impairment of intangibles was $39.5 million, an increase of $23.2 million, or 143%, compared to fiscal year 1999. The increase was principally the result of special charges for intangible asset impairment totaling $31.6 million. Excluding the special charges for fiscal years 2000 and 1999, amortization of identified intangibles decreased to $7.9 million, a decrease of $0.6 million or 7% from fiscal year 1999. The decrease was attributed to intangibles that were impaired in 1999. Fiscal year 1999 amortization and impairment of identified intangibles was $16.2 million, an increase of $10.2 million, or 170%, over fiscal year 1998 primarily due to charges of $7.7 million incurred in fiscal year 1999 due to impairment of intangibles. Excluding the fiscal year 1999 charges, our amortization of identified intangibles was $8.5 million, an increase of $2.5 million, or 42%, over fiscal year 1998 due to increased intangibles amortization resulting from acquisitions. OPERATING INCOME The fiscal year 2000 loss from operations was $85.5 million, an improvement of $76.5 million, or 47%, compared to the loss in fiscal year 1999 primarily due to reductions in operating expenses and reductions in special charges from $139.0 million in fiscal year 1999 to $50.8 million in fiscal year 2000. Excluding these special charges, our loss from operations in fiscal year 2000 was $34.7 million. Fiscal year 1999 loss from operations was $162.0 million, a decrease of $239.4 million, or 309%, compared to fiscal year 1998 results, primarily due to $139.0 million of charges incurred in fiscal year 1999 discussed above. Excluding fiscal year 1999 charges, our loss from operations was $23.0 million, a decrease of $100.4 million, or 130%, compared to fiscal year 1998 earnings from operations of $77.4 million, primarily due to decreased sales and gross profit margins attributable to the decrease in demand for seismic equipment and the increased operating expenses. INTEREST EXPENSE Interest expense was $826,000 in fiscal year 2000, a decrease of $71,000, or 8% from fiscal year 1999. Interest expense was $897,000 in fiscal year 1999, a decrease of $184,000, or 17% from the fiscal year 1998. The interest expense is attributed to our ten-year-term facilities financing and the decrease is a result of amortization of the principal amount of this debt. INTEREST INCOME Fiscal year 2000 interest income was $4.9 million, a decrease of $3.1 million or 38% compared to fiscal year 1999. Interest income on customer notes receivable decreased by $5.1 million compared to fiscal year 1999 to $0.3 million due to impairments and other reductions in notes receivable balances. Income from investments increased $1.8 million to $4.7 million as a result of higher average cash balances on hand during the year. Fiscal year 1999 interest income was $8.0 million, an increase of $0.5 million or 6% compared to fiscal year 1998. Interest income on customer notes receivable decreased by $1.2 million compared to fiscal year 1998 to $5.1 million due to impairments and other reductions in notes receivable balances during the year. Income from investments increased $1.7 million to $2.9 million as a result of higher average cash balances on hand during the year. 20 22 INCOME TAX EXPENSE The effective tax rate for fiscal years 2000, 1999 and 1998 was approximately 7.6%, 32.0% and 32.0%, respectively. See Note 10 of Notes to Consolidated Financial Statements. In assessing the realizability of deferred income tax assets, we consider 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. We consider 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, we will need to generate future taxable income of approximately $165 million over the next 20 years. Although we experienced significant losses in fiscal years 2000 and 1999, our taxable income for the years 1996 through 1998 aggregated approximately $128 million. Based on the level of historical income prior to fiscal year 1999 and our 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 carry-forward, we believe it is more likely than not that we will realize the benefits of the deferred income tax assets, net of the valuation allowance at May 31, 2000. The ultimate realization of the net deferred tax asset, prior to the expiration of the net operating loss carry-forward in the next 19-20 years, will require significant improvements in our results of operations from fiscal years 1999 and 2000 levels and a return to levels of profitability that existed prior to fiscal year 1999. The amount of deferred income tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry-forward period are reduced. If a reduction in the net deferred tax asset determined to be more likely than not realizable occurs in the near term, it is likely that this adjustment will have a material adverse effect on our results of operations. Finally, we do not expect to be in a position to recognize any deferred tax benefits in fiscal year 2001 if we incur losses, which may result in a negative impact when comparing quarterly results for fiscal year 2001 with fiscal year 2000. PREFERRED STOCK DIVIDENDS Preferred stock dividends for fiscal year 2000 are related to our outstanding Series B and Series C Preferred Stock. The dividends are recognized as a charge to retained earnings at the rate of 8% per annum, compounded quarterly (of which 7% is accounted for as accrued dividends and 1% is paid as a quarterly cash dividend). The preferred stock dividend charge for fiscal year 2000 was $4.6 million. There were no preferred stock dividends for fiscal year 1999. LIQUIDITY AND CAPITAL RESOURCES General. We have traditionally financed our operations from internally generated cash, working capital credit facilities and funds from equity financings. Our cash and cash equivalents were $99.2 million at May 31, 2000, an increase of $27.9 million, or 39%, as compared to fiscal year 1999. The increase is due to the August 1999 sale of 15,000 shares of Series C Preferred Stock in a privately negotiated transaction to SCF-IV L.P., for which we received net proceeds of approximately $14.8 million, and positive cash flows from operating activities for fiscal year 2000. Cash flows from operating activities before changes in working capital items were a negative $27.3 million for the year ended May 31, 2000. Cash flows from operating activities after changes in working capital items were $18.4 million for the year ended May 31, 2000, primarily due to reductions in notes receivable and inventories and collection of an income tax 21 23 refund, offset in part by fiscal year 2000 operating losses and decreases in levels of accounts payable and accrued expenses. Cash flows from operating activities in fiscal year 1999 after changes in working capital items, were a negative $24.8 million. Our various working capital accounts can vary in amount substantially from period to period depending upon our levels of sales, product mix sold, demand for our products, percentages of cash versus credit sales, collection rates, inventory levels and general economic and industry factors. Cash flows used in investing activities were $3.1 million for the year ended May 31, 2000 compared to $15.6 million in the prior year. The decrease in cash used in investing activities is due to the fact that no cash was used for business acquisitions in fiscal year 2000, and reduced expenditures for property, plant and equipment. Cash flows from financing activities were $12.7 million for the year ended May 31, 2000, compared to $39.7 million in fiscal year 1999. The decrease in cash provided by financing activities is primarily due to the $14.8 million of net proceeds we received from the sale of 15,000 shares of Series C Preferred Stock to SCF-IV L. P. in August 1999. We received $39.5 million of net proceeds from the sale of 40,000 shares of Series B Preferred Stock to SCF-IV L. P. in May 1999. Long Term Indebtedness. In 1996, we obtained a $12.5 million ten-year term mortgage loan to finance the construction of our electronics manufacturing facility in Stafford, Texas. The loan is secured by land, buildings and improvements, including our 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, 2000, $9.0 million in indebtedness was outstanding under this mortgage loan. Capital Expenditures. Capital expenditures for property, plant and equipment totaled $3.1 million for fiscal year 2000 and are expected to aggregate $8.0 million for fiscal year 2001. The planned expenditures include the purchase of advanced manufacturing machinery and additional equipment for our rental fleet. We believe that the combination of our existing working capital, current cash in place and access to other financing sources will be adequate to meet our anticipated capital and liquidity requirements for the foreseeable future. Credit Agreement. We terminated our outstanding credit agreement during the first quarter of fiscal year 2000. While we believe that we would be able to negotiate a credit facility or facilities with similar lenders, we believe that the terms currently available would not be as advantageous as future terms may be when we may then require a facility. We do not anticipate the need for a credit facility at the present time, but anticipate securing a facility or facilities in the future at a time when the proposed terms are more likely to be more advantageous for us. YEAR 2000 We experienced no operational problems as a result of the change over of the date 1999 to 2000. We have not incurred to date, and do not expect to incur in the future, any material expenditures in connection with identifying, evaluating or remediating Year 2000 compliance issues. Most of our expenditures to date have related to the opportunity cost of time spent by our employees evaluating and remediating our Year 2000 issues for the hardware and software products sold by us, the information technology systems used in our operations and our non-IT Systems or embedded technology, such as building security, voice mail and other systems. We estimate that less than $250,000 was spent in the aggregate on our Year 2000 compliance efforts. 22 24 RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), as amended by SFAS No. 137 and SFAS No. 138, 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. We will adopt SFAS 133 beginning in fiscal year 2002. We do not expect the adoption of SFAS 133 will have a material effect on our financial condition or results of operation because we historically have not entered into derivative or other financial instruments for trading or speculative purposes nor do we use or intend to use derivative financial instruments or derivative commodity instruments. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB No. 101"). SAB No. 101 summarizes the SEC staff's views in applying generally accepted accounting principles to selected revenue recognition issues. We understand that the SEC staff is preparing a document to address significant implementation issues related to SAB No. 101. To the extent that SAB No. 101 ultimately changes our revenue recognition practices, we are required to adopt SAB No. 101 no later than the quarter beginning March 1, 2001, with any cumulative effect adjustment computed as of June 1, 2000. We cannot determine the potential impact that SAB No. 101 may have on our consolidated financial position or results of operations at this time. Additionally, we have not determined if we will adopt SAB No. 101 early. In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation: an Interpretation of APB Opinion No. 25. Among other issues, Interpretation No. 44 clarifies the application of Accounting Principles Board Opinion No. 25 (APB No. 25) regarding (a) the definition of employee for purposes of applying APB No. 25, (b) the criteria for determining whether a plan qualifies as a non-compensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock options in a business combination. The provisions of Interpretation No. 44 affecting us are to be applied on a prospective basis effective July 1, 2000. OTHER FACTORS Market Conditions. Demand for our products is dependent upon the level of worldwide oil and gas exploration and development activity and the availability of seismic information in seismic libraries. Exploration and development activity is primarily dependent upon oil and gas prices, which have been subject to wide fluctuation in recent years. During fiscal years 2000 and 1999, our financial performance was adversely impacted by the deterioration in the seismic services industry. 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, consolidation among energy producers and oilfield services firms and an oversupply of speculative seismic data and current-generation seismic instrumentation in the field. Despite the recovery in commodity prices, the factors of increased competition and pricing pressures and the oversupply of seismic data and current-generation instrumentation have resulted in continued weak demand for our seismic data acquisition equipment. Credit Risk. A continuation of weak demand for the services of our customers will further strain the revenues and cash resources of our customers, thereby resulting in lower sales 23 25 levels and a higher likelihood of defaults in the customers' timely payment of their obligations under our credit sales arrangements. Increased levels of payment defaults with respect to our credit sales arrangements could have a material adverse effect on our results of operations. Our combined gross trade accounts receivable and trade notes receivable balance as of May 31, 2000 from customers in Russia and other former Soviet Union countries was approximately $15.1 million and was approximately $9.5 million from customers in Latin American countries. As of May 31, 2000 the total allowance for doubtful accounts (foreign and US) was $1.6 million and the allowance for loan losses was $13.7 million. During fiscal year 2000, there were $16.4 million of sales to customers in Russia and other former Soviet Union countries (substantially all based on cash sales backed by irrevocable letters of credit), $1.9 million of sales to customers in Latin American countries and $19.8 million of sales to customers in China. All terms of sale for these foreign receivables are denominated in US dollars. Russia and certain Latin America countries have experienced economic problems and uncertainties and devaluations of their currencies in recent years. To the extent that economic conditions in the Former Soviet Union, Latin America, China or elsewhere negatively affect future sales to our customers in those regions or the collectibility of our existing receivables, our future results of operations, liquidity and financial condition may be adversely affected. See Note 3 and Note 9 of the Notes to Consolidated Financial Statements and "- Cautionary Statement for Purposes of Forward-Looking Statements - Continuation of Downturn in Seismic Services Industry Will Adversely Affect Results of Operations and Financial Condition," "- 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. We own facilities and manufacture components for our systems in one member country. The transition period for the introduction of the Euro is between January 1, 1999 and June 30, 2002. We continue to address the issues involved with the introduction of the Euro. The more important issues facing us include: converting information technology systems; reassessing currency risk; and processing tax and accounting records. Based on our progress to date in reviewing this matter, and the fact that our sales to customers are denominated in US dollars, we believe that the introduction of the Euro has not and will not have a significant impact on the manner in which we conduct our business affairs and process our business and accounting records. Therefore, we anticipate that conversion to the Euro should not have a material effect on our 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's 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 us and our 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 24 26 and write-downs and special charges and savings and benefits therefrom; anticipated capabilities of products planned or under development; future demand for our products; anticipated product releases and technological advances; the future mix of business and future asset recoveries; the realization of deferred tax assets; the effect of changes in accounting standards on our results of operation and financial condition; the effect of the Euro's introduction; the Company's Year 2000 issues; the inherent unpredictability of adversarial proceedings and other contingent liabilities; future capital expenditures and our future financial condition; future 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 we believe that the expectations reflected in such forward-looking statements are reasonable, we 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 our actual results and cause actual results to differ materially from those results which might be projected, forecast, estimated or budgeted by us in such forward-looking statements include, but are not limited to, the following: CONTINUATION OF DOWNTURN IN SEISMIC SERVICES INDUSTRY WILL ADVERSELY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION. Demand for our 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 our control. Worldwide oil prices declined from October 1997 and remained at lower levels through February 1999. Despite the recovery in commodity prices, energy producers' continuing concerns over the sustainability of higher prices for hydrocarbon production resulted in lower exploration budgets by energy companies, which has resulted in weak demand for our seismic data acquisition equipment. Other factors which have negatively impacted demand for our products have been the weakened financial condition of many of our customers, consolidations among energy producers and oilfield service and equipment providers, an oversupply in the marketplace of current-generation seismic equipment, a current industry-wide oversupply of "spec" seismic data, pricing pressures from our competitors and customers, and the destabilized economies in many developing countries. Despite higher prices for oil and natural gas since February 1999, 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 with any certainty. A further prolonged downturn in market demand for our products will have a material adverse effect on our 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 worldwide oil and gas exploration and development and their relationship(s) to the demand for our products. Additionally, no assurances can be given that our efforts to reduce and contain costs will be sufficient to offset the effect of the expected continued lower levels of our 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 our product lines are characterized by rapidly changing technology and frequent product introductions. Whether we can develop and 25 27 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 our customers, will be significant factors in our ability to compete in the future. During the third quarter of fiscal year 2000, we recorded $8.7 million of inventory charges primarily related to our decision then to commercialize VectorSeis(TM) digital sensor products having higher technical standards than the products we had previously produced. We had previously decided to commercialize earlier-stage VectorSeis(TM) products, which subsequently were proven not to be commercially feasible based on data gathered from VectorSeis(TM) digital sensor surveys, the anticipated longer-term market recovery for new seismic instrumentation and then-current and expected market conditions. There can be no assurance that we will not encounter resource constraints or technical or other difficulties that could delay introduction of new products in the future. No assurances can be given as to whether any new products incorporating the VectorSeis(TM) digital sensor (or any other of our technology product introductions or enhancements) will be commercially feasible or accepted in the marketplace by our present or future customers. If we are 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, our business and operating results will be materially and adversely affected. In addition, our continuing development of new products inherently carries the risk of inventory obsolescence with respect to our older products. Updates and upgrades in our 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 products. 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. Our 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 (CGG). Our principal marine seismic competitors are, among others, Bolt Technology Corporation; GeoScience Corporation (GSI), an affiliate of CGG; Teledyne Brown Engineering, an affiliate of Allegheny Teledyne Company; and Thomson Marconi Sonar P/L. Unlike us, Sercel and GSI possess the advantage of being able to sell to an affiliated seismic contractor. Competition in the industry is expected to intensify and could adversely affect our future results. Several of our competitors have greater name recognition, more extensive engineering, manufacturing and marketing capabilities, and greater financial, technological and personnel resources than those available to us. In addition, certain companies in the industry have expanded and improved their product lines or technologies in recent years. There can be no assurance that we 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 and lower margins for our 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 our products and services. 26 28 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 our 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. U.S. technology export restrictions may affect the types and specifications of products we may export. We are, from time to time, required to obtain export licenses and there can be no assurance that we may not experience difficulty in obtaining such licenses as may be required in connection with export sales. Demand for our products from customers in developing countries (including Russia and other Former Soviet Union countries as well as certain Latin American and Asian countries, including China) is difficult to predict and can fluctuate significantly from year to year. We believe 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 our future operating results and financial position. In addition, sales to customers in developing countries on extended terms present heightened credit risks for us, for the reasons discussed above. See, in particular above, "- Other Considerations" for further information concerning these risks in those countries. We are also required to convert to the Euro currency at our facility located in one of the European Union member countries and although we do not currently anticipate any problems with such conversion, there can be no assurances that the problems actually encountered by us in the Euro conversion will not be more pervasive than those anticipated by management. DEPENDENCE ON KEY AND TECHNICAL PERSONNEL. Our success depends upon the continued contributions of our personnel, particularly our management personnel, many of whom would be difficult to replace. Our success will depend on our abilities to attract and retain skilled employees. Changes in personnel, particularly technical personnel, therefore, could adversely affect operating results. In addition, continued changes in management personnel could have a disruptive effect on employees which could, in turn, adversely affect operating results. LOSS OF SIGNIFICANT CUSTOMERS WILL ADVERSELY AFFECT US. A relatively small number of customers have accounted for most of our net sales, although the degree of sales concentration with any one customer has varied from fiscal year to year. During fiscal years 2000, 1999 and 1998 the three largest customers in each of those years accounted for 41%, 52% and 43%, respectively, of our net sales. The loss of these customers or a significant reduction in their equipment needs could have a material adverse effect on our net sales and results of operations. SIGNIFICANT PAYMENT DEFAULTS UNDER SALES ARRANGEMENTS COULD ADVERSELY AFFECT THE COMPANY. We sell to many customers on extended-term arrangements. Significant payment defaults by customers could have a material adverse effect on our financial position and results of operations. RISKS RELATED TO GROSS MARGIN. Our 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 heightened price competition, unit volumes, inventory obsolescence, increased warranty costs 27 29 and other product related contingencies, changes in sales and distribution channels, shortages in components due to untimely supplies or inability to obtain items at reasonable prices, unavailability of skilled labor and manufacturing under-absorption due to low production volumes, may also continue to affect the cost of sales and the fluctuation of gross margin percentages in future periods and results of operations. RISKS RELATED TO YEAR 2000 ISSUES. The problems actually encountered by us with regards to Year 2000 issues may be more pervasive than those encountered to date or anticipated by management, and if so, could have adverse effects on our operations, results of operations or financial condition. See "- Year 2000." FAILURE TO PROTECT INTELLECTUAL PROPERTY WILL ADVERSELY AFFECT OUR OPERATIONS. We believe that technology is a primary basis of competition in the industry. Although we currently hold certain intellectual property rights relating to our product lines, there can be no assurance that these rights will not be challenged by third parties or that we will obtain additional patents or other intellectual property rights in the future. Additionally, there can be no assurance that our efforts to protect our trade secrets will be successful or that others will not independently develop products similar to our products or design around any of the intellectual property rights owned by us, or that we will be precluded by others' patent claims. DISRUPTION IN VENDOR SUPPLIES WILL AFFECT FINANCIAL RESULTS. Our manufacturing process requires a high volume of quality components. Certain components used by us are currently provided by only one supplier. In the future, we may, from time to time, experience supply or quality control problems with our suppliers, and such problems could significantly affect our ability to meet production and sales commitments. Our 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, suppliers' Year 2000 non-compliance, increases in component costs and reduced control over delivery schedules, any of which could adversely affect our future financial results. RISKS RELATED TO GOVERNMENT REGULATIONS AND PRODUCT CERTIFICATION. Our 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 our 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 our 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 us and our domestic subsidiaries from participating in certain business activities in those countries. These constraints may adversely affect our opportunities for business in those countries. RISKS RELATED TO TIMING OF PRODUCT SHIPMENTS COULD RESULT IN SIGNIFICANT QUARTERLY FLUCTUATIONS. Due to the relatively high sales price of many of our 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 our operating results from time to time, is that a substantial portion of our net sales in any period may result from shipments during the latter part of a period. Because we establish our sales and operating expense levels based on our operational goals, if shipments in any period do not meet goals, net sales and net earnings may be adversely affected. STOCK VOLATILITY AND ABSENCE OF DIVIDENDS MAY ADVERSELY AFFECT OUR STOCK PRICE. In recent years, the stock market in general and the market for energy and technology stocks in 28 30 particular, including our Common Stock, have experienced extreme price fluctuations. The sales price for our Common Stock has declined from $22 per share at May 29, 1998 to $7 7/8 per share at May 31, 2000 (based on New York Stock Exchange composite tape closing sales prices). There is a risk that future stock price fluctuations could impact our operations. Continued depressed prices for our Common Stock (and further price declines) could affect our ability to successfully attract and retain qualified personnel, complete desirable business combinations or accomplish financing or similar transactions in the future. We have historically not paid, and do not intend to pay in the foreseeable future, cash dividends on our Common Stock. RISKS RELATED TO ACQUISITIONS. We 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 our operations. Our operating results could be adversely affected if we are unable to successfully integrate these new companies into our operations. Structural changes in our 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 us could also result in issuance of equity securities or the rights associated with the equity securities, which could potentially dilute our 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 our 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, WE WISH TO REFER READERS TO OTHER FACTORS DISCUSSED ELSEWHERE IN THIS REPORT AS WELL AS OUR OTHER FILINGS AND REPORTS WITH THE SECURITIES AND EXCHANGE COMMISSION FOR A FURTHER DISCUSSION OF RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN FORWARD-LOOKING STATEMENTS. WE UNDERTAKE NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH MAY BE MADE TO REFLECT THE EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We may be, from time to time, exposed to market risk, which is the potential loss arising from adverse changes in market prices and rates. We traditionally have not entered into derivative or other financial instruments for trading or speculative purposes nor do we use or intend to use derivative financial instruments or derivative commodity instruments. We are not currently a borrower under any material credit arrangements which feature fluctuating interest rates. Our market risk could arise from changes in foreign currency exchange rates. Our sales and financial instruments are principally denominated in US dollars. 29 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements required by this item begin at page F-1 hereof. Form 11-K Information. Pursuant to Rule 15d-21 promulgated under the Securities Exchange Act of 1934, as amended, we 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. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is contained in our definitive Proxy Statement to be distributed in connection with our 2000 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 our definitive Proxy Statement to be distributed in connection with our 2000 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 our definitive Proxy Statement to be distributed in connection with our 2000 Annual Meeting of Stockholders under the caption "Voting and Stock Ownership of Management and Principal Stockholders" and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is contained in our definitive proxy statement to be distributed in connection with our 2000 Annual Meeting of Stockholders under the captions "Remuneration of Directors and Officers - Employment and Consulting Agreements" and "Certain Transactions" and is incorporated herein by reference. 30 32 PART 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. 3.4 Amendment No. 1 to the Amended and Restated Bylaws of the Company, dated September 13, 1999, filed as exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1999 and incorporated herein by reference. 4.1 Form of Certificate of Designation, Preferences and Rights of Series A Preferred Stock of Input/Output, Inc., filed as Exhibit 2 to the Company's Registration Statement on Form 8-A dated January 27, 1997 (attached as Exhibit 1 to the Rights Agreement referenced in Exhibit 10.24) and incorporated herein by reference. 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. 31 33 4.3 Form of Certificate of Designation, Preferences and Rights of Series C Preferred Stock of Input/Output, Inc., filed as Exhibit 4.2 to the Company's Form 8-K dated April 21, 1999 and incorporated herein by reference. 10.2 Royalty Agreement, dated November 6, 1992, between I/O Sensors, Inc., Triton and Triton Technologies, Inc., filed as exhibit 10.2 to the Company's 10-K for fiscal year ended May 31, 1999 and incorporated herein by reference. **10.3 1990 Restricted Stock Plan, filed as Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1995 and incorporated herein by reference. **10.4 Amended and Restated 1990 Stock Option Plan, filed as Exhibit 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. **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. 32 34 **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. 10.20 Promissory Note dated August 29, 1996 executed by IPOP Management, Inc. to the order of The Variable Annuity Life Insurance Company, filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1996 and incorporated herein by reference. 10.21 Master Commercial Lease Agreement dated August 29, 1996, by and between IPOP Management, Inc. and The Variable Annuity Life Insurance Company, filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1996 and incorporated herein by reference. 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. 10.31 Purchase Agreement by and between the Company and SCF-IV, L.P. dated April 21, 1999, filed as Exhibit 10.1 to the Company's Form 8-K dated April 21, 1999 and incorporated herein by reference. 10.32 Registration Rights Agreement by and between the Company and SCF-IV, L.P. dated May 7, 1999, filed as Exhibit 10.2 to the Company's Form 8-K dated April 21, 1999 and incorporated herein by reference. 10.33 First Amendment to Rights Agreement by and between the Company and Harris Trust and Savings Bank as Rights Agent, dated April 21, 1999, filed as Exhibit 10.3 to the Company's Form 8-K dated April 21, 1999 and incorporated herein by reference. 10.35 Registration Rights Agreement by and among the Company and The Laitram Corporation, dated November 16, 1998, filed as Exhibit 99.2 to the Company's Form 8-K dated November 16, 1998 and incorporated herein by reference. 33 35 10.36 Input/Output, Inc. 1998 Restricted Stock Plan, filed as Exhibit 4.7 to the Company's Registration Statement on Form S-8 (Registration No. 333-80297), filed with the Securities and Exchange Commission on June 9, 1999 and incorporated herein by reference. 10.37 Employee Agreement by and between the Company and Axel M. Sigmar, dated August 17, 1999, filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1999, and incorporated herein by reference. 10.38 Amendment No. 3 to the Input/Output, Inc. Supplemental Executive Retirement Plan, dated August 23, 1999, filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1999, and incorporated herein by reference. 10.39 Amendment No. 2 to the Input/Output, Inc. Amended and Restated 1991 Directors Stock Plan, dated September 13, 1999, filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1999, and incorporated herein by reference. 10.40 Amendment No. 1 to the Input/Output, Inc. Amended and Restated 1996 Non-Employee Director Stock Option Plan, dated September 13, 1999, filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1999, and incorporated herein by reference. 10.41 Consulting and Collection Agreement by and between the Company and Robert P. Brindley, dated October 7, 1999, filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1999, and incorporated herein by reference. 10.42 Consulting Agreement by and between the Company and Sam K. Smith, dated August 10, 1999, filed as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1999, and incorporated herein by reference. ***10.43 Input/Output, Inc. Annual Incentive Plan, dated effective November 3, 1999. ***10.44 Employment Agreement by and between the Company and Timothy J. Probert dated effective as of March 1, 2000. ***10.45 Input/Output, Inc. 2000 Restricted Stock Plan, effective as of March 13, 2000. *21.1 Subsidiaries of the Company. *23.1 Consent of KPMG LLP. *24.1 The Power of Attorney is set forth on the signature page hereof. *27.1 Financial Data Schedule (included in EDGAR copy only). 34 36 99.1 Information required by Form 11-K with respect to the Input/Output, Inc. Employee Stock Purchase Plan will be filed as an amendment to this Annual Report on Form 10-K within 120 days of the end of the fiscal year of the plan (i.e. June 30) as permitted by Rule 15d-21 under the Securities Exchange Act of 1934, as amended. * Filed herewith. ** Management contract or compensatory plan or arrangement. *** Management contract or compensatory plan or arrangement filed herewith. (b) REPORTS ON FORM 8-K There were no Current Reports on Form 8-K filed during the fiscal year ended May 31, 2000. (c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K. Reference is made to subparagraph (a) (3) of this Item 14 which is incorporated herein by reference. (d) NOT APPLICABLE. 35 37 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF STAFFORD, STATE OF TEXAS, ON AUGUST 17, 2000. Input/Output, Inc. By /s/ Timothy J. Probert - ----------------------------------- PRESIDENT & CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Timothy J. Probert and C. Robert Bunch and each of them, as his or her true and lawful attorneys-in-fact and agents with full power of substitution and re-substitution for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all documents relating to the Annual Report on Form 10-K, including any and all amendments and supplements thereto, for the fiscal year ended May 31, 2000, and to file the same with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully as to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or their or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS ANNUAL REPORT ON FORM 10-K HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
NAME CAPACITIES DATE ---- ---------- ---- /s/ James M. Lapeyre, Jr. Director and Chairman of the Board August 17, 2000 - --------------------------------------- JAMES M. LAPEYRE, JR. /s/ Timothy J. Probert Director, President and August 17, 2000 - --------------------------------------- Chief Executive Officer TIMOTHY J. PROBERT /s/ C. Robert Bunch Vice President and August 17, 2000 - --------------------------------------- Chief Administrative Officer C. ROBERT BUNCH (Principal Financial and Accounting Officer) /s/ Robert P. Brindley Director August 17, 2000 - --------------------------------------- ROBERT P. BRINDLEY /s/ Ernest E. Cook Director August 17, 2000 - --------------------------------------- ERNEST E. COOK /s/ Theodore H. Elliott, Jr. Director August 17, 2000 - --------------------------------------- THEODORE H. ELLIOTT, JR. /s/ David C. Baldwin Director August 17, 2000 - --------------------------------------- DAVID C. BALDWIN /s/ William F. Wallace Director August 17, 2000 - --------------------------------------- WILLIAM F. WALLACE /s/ Robert Peebler Director August 17, 2000 - --------------------------------------- ROBERT P. PEEBLER /s/ Sam K. Smith Director August 17, 2000 - --------------------------------------- SAM K. SMITH
36 38 INPUT/OUTPUT, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Input/Output, Inc. and Subsidiaries: Page ---- Independent Auditors' Report..................................................... F-2 Consolidated Balance Sheets - May 31, 2000 and 1999..................................................... F-3 Consolidated Statements of Operations - Years Ended May 31, 2000, 1999 and 1998................................... F-4 Consolidated Statements of Stockholders' Equity and Comprehensive Loss - Years Ended May 31, 2000, 1999 and 1998................................... F-5 Consolidated Statements of Cash Flows - Years Ended May 31, 2000, 1999 and 1998................................... F-7 Notes to Consolidated Financial Statements....................................... F-8 Schedule II - Valuation and Qualifying Accounts.................................. F-29
F-1 39 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Input/Output, Inc.: We have audited the consolidated financial statements of Input/Output, Inc. and subsidiaries and the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Input/Output, Inc. and subsidiaries as of May 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended May 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Houston, Texas July 17, 2000 F-2 40 INPUT/OUTPUT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
May 31, ------------------------ Current assets: 2000 1999 --------- --------- Cash and cash equivalents ....................................................................... $ 99,210 $ 71,309 Restricted cash ................................................................................. 1,006 3,831 Trade accounts receivable, less allowance for doubtful accounts of $1,566 and $20,916 in 2000 and 1999, respectively ............................................. 24,944 21,617 Trade notes receivable, less allowance for loan loss of $13,379 and $25,518 in 2000 and 1999, respectively ................................................................... 12,224 21,907 Income taxes receivable ......................................................................... 705 15,000 Inventories, net ................................................................................ 69,185 95,825 Deferred income tax asset, net .................................................................. 13,459 27,568 Prepaid expenses ................................................................................ 1,274 1,495 --------- --------- Total current assets .................................................................... 222,007 258,552 Long-term trade notes receivable, less allowance for loan loss of $339 and $3,260 in 2000 and 1999, respectively ........................................................................ 6,013 17,616 Deferred income tax asset, net ..................................................................... 41,393 18,739 Property, plant and equipment, net ................................................................. 58,419 62,979 Goodwill, net of accumulated amortization of $27,531 and $21,341 in 2000 and 1999, respectively .......................................................... 49,256 87,558 Other assets, net .................................................................................. 4,681 6,304 --------- --------- Total assets ............................................................................ $ 381,769 $ 451,748 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable, principally trade ............................................................. $ 8,011 $ 10,526 Current installments of long-term debt .......................................................... 1,154 1,067 Accrued expenses ................................................................................ 29,430 33,347 --------- --------- Total current liabilities ............................................................... 38,595 44,940 Long-term debt ..................................................................................... 7,886 8,947 Other liabilities .................................................................................. 273 887 Commitments and contingencies Stockholders' equity: Cumulative convertible preferred stock, $.01 par value; authorized 5,000,000 shares; issued and outstanding 55,000 in 2000 (liquidation value of $55.0 million) and 40,000 shares in 1999 .................................................. 1 -- Common stock, $.01 par value; authorized 100,000,000 shares; outstanding 50,744,180 shares in 2000 and 50,663,358 shares in 1999 ................................ 510 507 Additional paid-in capital ......................................................................... 348,743 327,845 Retained earnings (deficit) ........................................................................ (6,065) 72,455 Accumulated other comprehensive loss ............................................................... (5,427) (3,549) Treasury stock, at cost, 232,500 shares in 2000 .................................................... (1,651) -- Unamortized restricted stock compensation .......................................................... (1,096) (284) --------- --------- Total stockholders' equity ..................................................................... 335,015 396,974 --------- --------- Total liabilities and stockholders' equity .............................................. $ 381,769 $ 451,748 ========= =========
See accompanying notes to consolidated financial statements. F-3 41 INPUT/OUTPUT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Years ended May 31, ------------------------------------------------ 2000 1999 1998 ------------ ------------ ------------ Net sales ....................................................... $ 121,454 $ 197,415 $ 385,861 Cost of sales ................................................... 106,642 205,215 226,514 ------------ ------------ ------------ Gross profit (loss) .................................... 14,812 (7,800) 159,347 ------------ ------------ ------------ Operating expenses: Research and development ..................................... 28,625 42,782 32,957 Marketing and sales .......................................... 10,284 14,193 14,646 General and administrative ................................... 21,885 80,932 28,295 Amortization and impairment of intangibles ................... 39,488 16,247 6,008 ------------ ------------ ------------ Total operating expenses ............................... 100,282 154,154 81,906 ------------ ------------ ------------ Earnings (loss) from operations ................................. (85,470) (161,954) 77,441 Interest expense ................................................ (826) (897) (1,081) Interest income ................................................. 4,930 7,981 7,517 Other income (expense) .......................................... 1,306 (370) (202) ------------ ------------ ------------ Earnings (loss) before income taxes ............................. (80,060) (155,240) 83,675 Income tax (benefit) expense .................................... (6,097) (49,677) 26,776 ------------ ------------ ------------ Net earnings (loss) ............................................. (73,963) (105,563) 56,899 Preferred dividend .............................................. 4,557 -- -- ------------ ------------ ------------ Net earnings (loss) applicable to common stock .................. $ (78,520) $ (105,563) $ 56,899 ============ ============ ============ Basic earnings (loss) per common share .......................... $ (1.55) $ (2.17) $ 1.29 ============ ============ ============ Weighted average number of common shares outstanding ............ 50,716,378 48,540,143 43,962,349 Diluted earnings (loss) per common share ........................ $ (1.55) $ (2.17) $ 1.28 ============ ============ ============ Weighted average number of diluted common shares outstanding .... 50,716,378 48,540,143 44,430,109 ============ ============ ============
See accompanying notes to consolidated financial statements. F-4 42 INPUT/OUTPUT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS YEARS ENDED MAY 31, 2000, 1999 AND 1998 (IN THOUSANDS, EXCEPT SHARE DATA)
Common Stock Preferred Stock Additional -------------------------- ------------------------ paid-in Shares Amount Shares Amount capital ----------- ----------- ----------- ----------- ----------- Balance at May 31, 1997............................. 43,280,851 $ 433 -- $ -- $ 218,973 Comprehensive earnings: Net earnings........................................ -- -- -- -- -- Other comprehensive earnings (loss): Translation adjustment............................ -- -- -- -- -- Equity reduction for Outside Directors Retirement Plan........................... -- -- -- -- -- Total comprehensive earnings........................ Amortization of restricted stock compensation....... -- -- -- -- -- Issuance of restricted stock awards................. 53,000 1 1,572 Issuance of stock in conjunction with business acquisition................................ 320,555 3 -- -- 6,372 Exercise of stock options and related tax benefits.. 866,683 8 -- -- 12,858 Issuance of stock for the Employee Stock Purchase Plan................................. 63,545 1 -- -- 971 ----------- ----------- ----------- ----------- ----------- Balance at May 31, 1998............................. 44,584,634 446 -- -- 240,746 Comprehensive loss: Net loss............................................ -- -- -- -- -- Other comprehensive loss: Translation adjustment.............................. -- -- -- -- -- Equity reduction for Outside Directors Retirement Plan........................... -- -- -- -- -- Total comprehensive loss Amortization of restricted stock compensation................................ -- -- -- -- -- Issuance of restricted stock awards................. 42,500 -- -- -- 329 Issuance of stock in conjunction with business acquisition................................ 5,794,000 58 -- -- 45,715 Preferred stock offering............................ -- -- 40,000 -- 39,452 ----------- ----------- ----------- ----------- ----------- Accumulated Unamortized other restricted Total Retained Comprehensive Treasury stock Stockholders' earnings loss Stock compensation equity ----------- ------------- ----------- ------------- ------------- Balance at May 31, 1997............................ $ 121,119 $ (1,676) $ -- $ (235) $ 338,614 Comprehensive earnings: Net earnings....................................... 56,899 -- -- -- 56,899 Other comprehensive earnings (loss): Translation adjustment........................... -- (390) -- -- (390) Equity reduction for Outside Directors Retirement Plan.......................... -- (130) -- -- (130) ----------- Total comprehensive earnings....................... 56,379 ----------- Amortization of restricted stock Compensation...... -- -- -- 494 494 Issuance of restricted stock awards................ -- -- -- (1,573) -- Issuance of stock in conjunction with business acquisition............................... -- -- -- -- 6,375 Exercise of stock options and related tax benefit.. -- -- -- -- 12,866 Issuance of stock for the Employee Stock Purchase Plan................................ -- -- -- -- 972 ----------- ----------- ----------- ----------- ----------- Balance at May 31, 1998............................ 178,018 (2,196) -- (1,314) 415,700 Comprehensive loss: Net loss........................................... (105,563) -- -- -- (105,563) Other comprehensive loss: Translation adjustment............................. -- (1,046) -- -- (1,046) Equity reduction for Outside Directors Retirement Plan.......................... -- (307) -- -- (307) ----------- Total comprehensive loss (106,916) ----------- Amortization of restricted stock compensation............................... -- -- -- 1,359 1,359 Issuance of restricted stock awards................ -- -- -- (329) -- Issuance of stock in conjunction with business acquisition............................... -- -- -- -- 45,773 Preferred stock offering........................... -- -- -- -- 39,452 ----------- ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. F-5 43 INPUT/OUTPUT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS YEARS ENDED MAY 31, 2000, 1999 AND 1998 (IN THOUSANDS, EXCEPT SHARE DATA)
Common Stock Preferred Stock Additional Retained -------------------------- ------------------------ paid-in earnings Shares Amount Shares Amount capital (deficit) ----------- ----------- ----------- ----------- ----------- ----------- Exercise of stock options and related tax benefits ................................ 64,944 1 -- -- 157 -- Issuance of stock for the Employee Stock Purchase Plan ............................... 177,280 2 -- -- 1,059 -- Stock compensation expense .................. -- -- -- -- 387 -- ----------- ----------- ----------- ----------- ----------- ----------- Balance at May 31, 1999 ..................... 50,663,358 507 40,000 -- 327,845 72,455 Comprehensive loss: Net loss .................................... -- -- -- -- -- (73,963) Other comprehensive earnings (loss): Translation adjustment ...................... -- -- -- -- -- -- Equity adjustment for Outside Directors Retirement Plan ................... -- -- -- -- -- -- Total comprehensive loss .................... Amortization of restricted stock compensation ................................ -- -- -- -- -- -- Issuance of restricted stock award .......... 133,000 1 -- -- 1,028 -- Cancelation of restricted stock awards ...... (25,000) -- -- -- (193) -- Purchase treasury stock ..................... (250,000) -- -- -- -- -- Reissue treasury stock ...................... 17,500 -- -- -- (43) -- Preferred stock offering .................... -- -- 15,000 1 14,794 -- Preferred dividend .......................... -- -- -- -- 4,011 (4,557) Exercise of stock options and related tax benefits ................................ 8,473 -- -- -- 136 -- Issuance of stock for the Employee Stock Purchase Plan ............................... 196,849 2 -- -- 972 -- Stock compensation expense .................. -- -- -- -- 193 -- ----------- ----------- ----------- ----------- ----------- ----------- Balance at May 31, 2000 ..................... 50,744,180 $ 510 55,000 $ 1 $ 348,743 $ (6,065) =========== =========== =========== =========== =========== =========== Accumulated Unamortized other restricted Total comprehensive Treasury Stock Stockholders' loss Stock compensation equity -------------- -------------- -------------- -------------- Exercise of stock options and related tax benefits ................................ -- -- -- 158 Issuance of stock for the Employee Stock Purchase Plan ............................... -- -- -- 1,061 Stock compensation expense .................. -- -- -- 387 -------------- -------------- -------------- -------------- Balance at May 31, 1999 ..................... (3,549) (284) 396,974 Comprehensive loss: Net loss .................................... -- -- -- (73,963) Other comprehensive earnings (loss): Translation adjustment ...................... (1,920) -- -- (1,920) Equity adjustment for Outside Directors Retirement Plan ................... 42 -- -- 42 -------------- -------------- -------------- -------------- Total comprehensive loss .................... (75,841) -------------- Amortization of restricted stock compensation ................................ -- -- 24 24 Issuance of restricted stock award .......... -- -- (1,029) -- Cancelation of restricted stock awards ...... -- 193 -- Purchase treasury stock ..................... -- (1,794) -- (1,794) Reissue treasury stock ...................... -- 143 -- 100 Preferred stock offering .................... -- -- -- 14,795 Preferred ................................... -- -- -- (546) dividend Exercise of stock options and related tax benefits ................................ -- -- -- 136 Issuance of stock for the Employee Stock Purchase Plan ............................... -- -- -- 974 Stock compensation expense .................. -- -- -- 193 -------------- -------------- -------------- -------------- Balance at May 31, 2000 ..................... $ (5,427) $ (1,651) $ (1,096) $ 335,015 ============== ============== ============== ==============
See accompanying notes to consolidated financial statements. F-6 44 INPUT/OUTPUT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Years ended May 31, --------------------------------------- 2000 1999 1998 --------- --------- --------- Cash flows from operating activities: Net earnings (loss) ................................................. $ (73,963) $(105,563) $ 56,899 Adjustments to reconcile net earnings (loss) to net cash (used in) provided by operating activities: Depreciation and amortization ....................................... 22,835 20,776 16,816 Amortization of restricted stock compensation ....................... 24 1,359 494 Stock compensation expense .......................................... 293 387 -- Deferred income tax (benefit) expense ............................... (8,545) (43,691) 201 Inventory obsolescence expense ...................................... 16,360 58,848 4,264 Bad debt expense and loan losses .................................... (17,106) 43,683 4,050 Loss on disposal of fixed assets .................................... 784 -- -- Impairment of fixed assets .......................................... 435 4,842 -- Impairment of intangibles and other assets .......................... 31,596 8,495 -- Changes in assets and liabilities, net of effect of acquisitions and above provisions: Accounts and notes receivable ....................................... 22,790 46,731 (26,201) Inventories ......................................................... 13,097 (20,699) (17,624) Leased equipment .................................................... -- 1,731 5,679 Accounts payable and accrued expenses ............................... (5,530) (13,684) 20,456 Income taxes payable/receivable ..................................... 14,295 (23,139) 10,696 Other ............................................................... 1,006 (4,912) (630) --------- --------- --------- Net cash (used in) provided by operating activities ........... 18,371 (24,836) 75,100 --------- --------- --------- Cash flows from investing activities: Purchase of property, plant and equipment ........................... (3,077) (9,326) (6,960) Acquisition of net assets and business, net of cash acquired ........ -- (6,310) (10,845) Net divestiture of (investments in) other assets .................... -- 7 (446) --------- --------- --------- Net cash used in investing activities ......................... (3,077) (15,629) (18,251) --------- --------- --------- Cash flows from financing activities: Payments on long-term debt .......................................... (974) (983) (915) Payments of preferred dividends ..................................... (454) -- -- Purchase of treasury stock .......................................... (1,794) -- -- Proceeds from exercise of stock options ............................. 136 158 12,866 Proceeds from issuance of common stock to Employee .................. 974 1,061 972 Stock Purchase Plan Net proceeds from preferred stock offering .......................... 14,795 39,452 -- --------- --------- --------- Net cash provided by financing activities ..................... 12,683 39,688 12,923 --------- --------- --------- Effect of change in foreign currency exchange rates on cash and cash equivalents ........................................... (76) (189) (70) --------- --------- --------- Net increase (decrease) in cash and cash equivalents ................ (27,901) (966) 69,702 Cash and cash equivalents at beginning of year ...................... 71,309 72,275 2,573 --------- --------- --------- Cash and cash equivalents at end of year ...................... $ 99,210 $ 71,309 $ 72,275 ========= ========= =========
See accompanying notes to consolidated financial statements. F-7 45 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND GENERAL. The consolidated financial statements include the accounts of Input/Output, Inc. and its wholly-owned subsidiaries (the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. We design, manufacture and market seismic data acquisition systems and peripheral seismic instruments for the oil and gas exploration and production industry worldwide. Net sales consist primarily of sales of products. CASH AND CASH EQUIVALENTS. We consider all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. As of May 31, 2000, we had approximately $1.0 million of certificates of deposit with one month original maturities that were used to secure standby and commercial letters of credit, and has been included in restricted cash on the consolidated balance sheet. INVENTORIES. Inventories are stated at the lower of cost (primarily first-in, first-out) or market. The elements of cost include labor, materials and manufacturing overhead. Our general obsolescence policy is to fully reserve for components that have not been used in two years and components that are determined to be obsolete due to current market conditions and planned product revisions. PROPERTY, PLANT AND EQUIPMENT. Plant and equipment are recorded at cost and depreciated principally on a straight-line basis using estimated useful lives as follows: building - 25 years, machinery and equipment - five to eight years and other - three to eight years. Repairs and maintenance are expensed as incurred. Gains and losses on sales and retirements are recognized on disposal. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to future net cash flows (undiscounted and without interest charges) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill and other intangible assets ("intangibles") result from business acquisitions and goodwill represents the excess of acquisition costs over the fair value of the net assets of businesses acquired. Intangibles are amortized on a straight-line basis over 5 to 20 years, the expected period to be benefited. At May 31, 2000, the weighted average useful life of intangibles is 16.9 years. We assess intangibles annually by determining whether the amortization of the intangible balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. If the intangibles are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the intangible exceeds the fair value of the asset which is calculated using the discounted future operating cash flows. FAIR VALUE OF FINANCIAL INSTRUMENTS. Fair value estimates are made at discrete points in time based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. We believe that the carrying amounts of our trade notes receivable and long-term debt approximate the fair value of such items. F-8 46 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RESEARCH AND DEVELOPMENT. Research and development costs are expensed as incurred. REVENUE RECOGNITION. We recognize revenue at the shipment date. No right of return exists regarding any product(s) sold by us. PRODUCT WARRANTIES. We warrant that all equipment manufactured by us will be free from defects in workmanship, in material and parts ranging from 90 days to three years from the date of original purchase, depending on the product. We provide operator training, as well as start-up and on-site support for customers. We provide for estimated training, installation and warranty costs as a charge to cost of sales at the time of sale. INCOME TAXES. Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. EARNINGS (LOSS) PER COMMON SHARE. Basic earnings (loss) per share is computed by dividing net earnings (loss) applicable to common stock by the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined on the assumption that outstanding dilutive stock options and other common stock equivalents have been exercised and the aggregate proceeds as defined were used to reacquire our common stock using the average price of such common stock for the period. The following table summarizes the calculation of weighted average number of common shares and weighted average number of diluted common shares outstanding for purposes of the computation of basic earnings (loss) per common share and diluted earnings (loss) per common share (in thousands, except share and per share amounts):
MAY 31, ------------------------------------------------ 2000 1999 1998 ------------ ------------ ------------ Net earnings (loss) applicable to common stock ........... $ (78,520) $ (105,563) $ 56,899 ============ ============ ============ Weighted average number of common shares outstanding ..... 50,716,378 48,540,143 43,962,349 Stock options ............................................ -- -- 467,760 ------------ ------------ ------------ Weighted average number of diluted common shares outstanding ......................................... 50,716,378 48,540,143 44,430,109 ============ ============ ============ Basic earnings (loss) per common share ................... $ (1.55) $ (2.17) $ 1.29 ============ ============ ============ Diluted earnings (loss) per common share ................. $ (1.55) $ (2.17) $ 1.28 ============ ============ ============
F-9 47 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In fiscal year 1999, no dividends on the convertible preferred stock issued in May 1999 were declared; therefore, net loss and net loss applicable to common stock are the same. At May 31, 2000, 1999 and 1998, 5,238,352, 4,550,463 and 1,480,303 respectively, of shares subject to stock options were not included in the calculation of diluted earnings (loss) per common share because to do so would have been anti-dilutive. In addition, the convertible preferred stock issued in fiscal year 2000 and 1999 has not been considered in the computation of diluted loss per common share because the effect would be anti-dilutive. See Note 7. STOCK-BASED COMPENSATION. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") allows a company to adopt a fair value based method of accounting for its stock-based compensation plans, or to continue to follow the intrinsic value method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees". We have elected to continue to follow APB Opinion No. 25. If we had adopted SFAS No. 123 our net earnings (loss), basic earnings (loss) per share and diluted earnings (loss) per share for the years ended May 31, 2000, 1999 and 1998 would have been reduced (increased) as discussed in Note 7. FOREIGN CURRENCY TRANSLATION. Assets and liabilities of foreign subsidiaries are translated at current exchange rates in effect at the end of the period reported and related translation adjustments are reported as a component of accumulated other comprehensive loss in stockholders' equity. Statements of operations are translated at the average rates during the period. Any transaction gains or losses are included in net earnings (loss). For fiscal years ended 2000, 1999, and 1998, those transaction gain and (losses) amounted to $1,086,000, $(435,000), and $(109,000) respectively. NOTES RECEIVABLE. Notes receivable ("notes") are recorded at cost, less the related allowance for loan loss. We consider current information and events regarding the borrowers' ability to repay their obligations, and consider a note to be impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the note agreement. When a note is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the note's effective interest rate, or the fair value of the note's collateral. Impairment losses (recoveries) are included in the allowance for loan loss through an increase (decrease) in loan loss expense. Cash receipts on impaired notes are applied to reduce the principal amount of such notes until the principal has been recovered and are recognized as interest income thereafter. STATEMENTS OF CASH FLOWS. Supplemental disclosure of cash flow information follows (in thousands except share amounts):
Cash paid (refund) during the year for: 2000 1999 1998 ------------- ------------- ------------- Interest ................................... $ 826 $ 897 $ 1,130 ============= ============= ============= Income taxes .............................. $ (13,396) $ 16,966 $ 9,968 ============= ============= ============= Non-cash investing and financing activities: Restricted stock issued: Increase in common stock ................. $ 1 $ -- $ 1 Increase in additional paid-in capital ... 1,028 329 1,572
F-10 48 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000 1999 1998 ----------- ----------- ----------- Increase in unamortized restricted stock compensation ........................ (1,029) (329) (1,573) ----------- ----------- ----------- $ -- $ -- $ -- =========== =========== =========== Non-cash financing activities: Dividends on preferred stocks ............................................. $ 4,011 $ -- $ -- =========== =========== =========== Repossession of equipment due to customers' defaulting on trade notes receivable and related placement of equipment fleet: Decrease in trade notes receivable ........................................ $ 4,893 $ -- $ -- Increase in property, plant and equipment ................................. $ 4,893 $ -- $ -- =========== =========== =========== Repossession of equipment due to a customer's default on a trade note receivable and related placement of equipment in inventories: Decrease in trade notes receivable ........................................ $ 3,571 $ -- $ -- Increase in inventories ................................................... $ 3,571 $ -- $ -- =========== =========== =========== Issuance of note receivable in connection with sale of other assets: Long-term trade notes receivable ............................................. $ -- $ 5,387 $ -- Other assets ................................................................. -- (5,387) -- ----------- ----------- ----------- $ -- $ -- $ -- =========== =========== =========== Issuance of common stock in connection with business acquisitions: Increase in common stock ..................................................... $ -- $ 58 $ 3 Increase in additional paid in capital ....................................... -- 45,715 6,372 Liabilities assumed in connection with business acquisition ......................................................... -- 3,613 320 ----------- ----------- ----------- $ -- $ 49,386 $ 6,695 =========== =========== =========== Common Stock shares issued ................................................... -- 5,794,000 320,555 =========== =========== ===========
USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. COMPREHENSIVE EARNINGS (LOSS). SFAS No. 130 "Reporting Comprehensive Income", establishes standards for reporting and presentation of comprehensive earnings (loss) and its components. Comprehensive earnings (loss), consisting of net earnings (loss), foreign currency translation adjustment and minimum pension liabilities is presented in the consolidated statements of stockholders' equity and comprehensive loss. SFAS No. 130 does not affect our financial position or results of operations. F-11 49 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of accumulated other comprehensive loss are as follows (in thousands):
Foreign Minimum Accumulated Other Currency Pension Comprehensive Translation Liabilities Loss --------------- --------------- ---------------- Balance at May 31, 1997 ...... $ (1,673) $ (3) $ (1,676) Fiscal 1998 change ........... (390) (130) (520) --------------- --------------- --------------- Balance at May 31, 1998 ...... (2,063) (133) (2,196) Fiscal 1999 change ........... (1,046) (307) (1,353) --------------- --------------- --------------- Balance at May 31, 1999 ...... (3,109) (440) (3,549) Fiscal 2000 change ........... (1,920) 42 (1,878) --------------- --------------- --------------- Balance at May 31, 2000 ...... $ (5,029) $ (398) $ (5,427) =============== =============== ===============
RECLASSIFICATION. Certain amounts previously reported in the consolidated financial statements have been reclassified to conform to the current year presentation. RECENT ACCOUNTING PRONOUNCEMENTS. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB No. 101"). SAB No. 101 summarizes the SEC staff's views in applying generally accepted accounting principles to selected revenue recognition issues. We understand that the SEC staff is preparing a document to address significant implementation issues related to SAB No. 101. To the extent that SAB No. 101 ultimately changes our revenue recognition practices, we are required to adopt SAB No. 101 no later than the quarter beginning March 1, 2001, with any cumulative effect adjustment computed as of June 1, 2000. We cannot determine the potential impact that SAB No. 101 may have on our consolidated financial position or results of operations at this time. Additionally, we have not determined if we will adopt SAB No. 101 early. (2) INVENTORIES A summary of inventories follows (in thousands):
May 31, ----------------------------- 2000 1999 ------------ ------------ Raw materials .............. $ 52,451 $ 58,309 Work-in-process ............ 7,979 10,366 Finished goods ............. 23,746 43,397 ------------ ------------ 84,176 112,072 Less inventory reserves .... 14,991 16,247 ------------ ------------ $ 69,185 $ 95,825 ============ ============
(3) TRADE NOTES RECEIVABLE Trade notes receivable at May 31, 2000 are generally secured by seismic equipment sold by us, bearing interest at contractual rates up to 13% and are due at various dates through 2001. The recorded investment in trade notes receivable for which an impairment has been recognized was $24.3 million at May 31, 2000. The activity in the allowance for loan loss is as follows (in thousands): F-12 50 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, ------------------------------------ 2000 1999 1998 -------- -------- -------- Balance at beginning of year ................... $ 28,778 $ 3,954 $ 7,078 Additions charged to costs and expenses ........ 7,057 25,903 2,280 Recoveries reducing costs and expenses ......... (23,558) -- -- Write-downs charged against the allowance ...... (10,799) (1,079) (5,404) Reclassification of trade account receivable ... 12,240 -- -- -------- -------- -------- Balance at end of year ......................... $ 13,718 $ 28,778 $ 3,954 ======== ======== ========
Recoveries for fiscal year 2000 include a $10.2 million reduction in the allowance for loan loss, attributable to a more favorable than anticipated resolution of a customer's bankruptcy settlement for a trade note receivable that had previously been reserved for, and $4.9 million, representing the fair value of repossessed equipment, resulting from customers' defaults on payments of trade notes receivable. The $12.2 million reclassification resulted from the reclassification of a trade account receivable balance, which had been provided for in the prior year, to trade notes receivable. (4) PROPERTY, PLANT AND EQUIPMENT A summary of property, plant and equipment follows (in thousands):
May 31, ----------------------------- 2000 1999 ------------ ------------ Land ............................ $ 2,782 $ 3,279 Buildings ....................... 26,413 27,277 Machinery and equipment ......... 65,450 68,590 Leased equipment ................ 12,219 1,707 Other ........................... 5,615 2,443 ------------ ------------ 112,479 103,296 Less accumulated depreciation ... 54,060 40,317 ------------ ------------ $ 58,419 $ 62,979 ============ ============
(5) ACCRUED EXPENSES A summary of accrued expenses follows (in thousands):
May 31, --------------------------- 2000 1999 ----------- ----------- Compensation, including commissions and severance ... $ 6,321 $ 10,779 Warranty, training and installation ................. 6,470 13,875 Accrued legal settlement ............................ 5,000 -- Accrued taxes ....................................... 4,226 976 Other ............................................... 7,413 7,717 ----------- ----------- $ 29,430 $ 33,347 =========== ===========
F-13 51 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (6) LONG-TERM DEBT In August 1996, we obtained, through one of our wholly-owned subsidiaries, a $12.5 million, ten-year term loan secured by certain of our land and buildings located in Stafford, Texas which then included our executive headquarters, research and development headquarters, and electronics manufacturing building. The term loan, which we have guaranteed under a Limited Guaranty, bears interest at a fixed rate of 7.875% per annum and is repayable in equal monthly installments of principal and interest of $151,439. The total installment payments for principal and interest in each of the next five years would be $1.8 million with a balance thereafter of $2.2 million. We lease all of the property from our subsidiary under a master lease, which lease has been collaterally assigned to the lender as security for the term loan. The term loan provides for penalties for pre-payment prior to maturity. (7) STOCKHOLDERS' EQUITY CHANGES IN CAPITAL STRUCTURE. On May 7, 1999, SCF-IV, L.P., a Delaware limited partnership ("SCF-IV"), purchased, in a privately negotiated transaction, 40,000 shares of our Series B Preferred Stock, par value $0.01 per share (the "Series B Preferred Stock"). The consideration paid by SCF-IV for this issuance was $40.0 million. The net cash proceeds of approximately $39.5 million were to be used to fund our 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. On August 17, 1999, SCF-IV, exercised its option to purchase 15,000 shares of Series C Preferred Stock, par value $0.01 per share (the "Series C Preferred Stock"), which had been granted to SCF-IV by us in connection with SCF-IV's purchase of 40,000 shares of Series B Preferred Stock in May 1999. The purchase price paid for the Series C Preferred Stock was $1,000 per share, resulting in net proceeds of approximately $14.8 million. The net cash proceeds were used to fund our research and development projects, to provide additional working capital and for general corporate purposes. The issuance of the Series C Preferred Stock and the underlying shares of Common Stock were exempt from the registration requirements of Section 5 of the Securities Act of 1933 in accordance with Section 4(2) of that Act. The Series C Preferred Stock has substantially the same terms and conditions as our Series B Preferred Stock issued in May 1999, except that the fixed conversion price for the Series C Preferred Stock is $8.50 per share, compared to $8.00 per share for the Series B Preferred Stock. The holders of Series B and C 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 and C Preferred Stock outstanding. Each share of Series B and C Preferred Stock is entitled to a liquidation preference of $1,000 per share, plus all accrued and unpaid dividends. The Series B and C Preferred Stock are convertible at the holder's option after the first to occur of any of the following (the "Initial Conversion Date"): (i) May 7, 2002, (ii) the approval by our Board of Directors 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 our Board of Directors or (iv) the redemption, repurchase or reacquisition by us of rights issued pursuant to our Stockholder Rights Plan or any waiver of the application of our Stockholder Rights Plan to any beneficial owner other than SCF-IV or its affiliates (except as approved by SCF-IV's representative on our Board of Directors). After the Initial Conversion Date and prior to the Mandatory Conversion Date F-14 52 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (defined below), the holders of Series B and C 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 Amount"): (a) the quotient of $1,000 (plus any accrued and unpaid dividends through the record date for determining stockholders entitled to vote) divided by the fixed conversion price of $8.50 (as adjusted from time to time in accordance with certain anti-dilution provisions) or (b) the quotient of $1,000 increased at a rate of eight percent per annum from August 17, 1999, 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 our Common Stock during the ten trading day period prior to the date of conversion. On May 7, 2004 (the "Mandatory Conversion Date"), each outstanding share of Series B and C Preferred Stock respectively 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 Amount, 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. In the event of a conversion of Series B and C 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 and C Preferred Stock for all past dividend periods, we may redeem for cash up to 50% (or such greater percentage as the holders shall agree) of the shares of Series B and C 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 and C Preferred Stock, dividends are recognized as a charge to retained earnings at the rate of 8% per annum, compounded quarterly. Such preferred dividends reduce net earnings applicable to common stock accordingly. We are permitted to pay dividends on Common Stock as long as the Series B and C Preferred Stock dividends are current. At May 31, 2000 there was $3,146,000 in deemed dividends provided on the Series B Preferred Stock and $865,000 in deemed dividends provided on the Series C Preferred Stock. TREASURY STOCK. In September 1999, we purchased 100,000 shares of our Common Stock from a former officer for $802,000. During April 2000 we acquired 150,000 shares of our Common Stock at a cost of $992,000. In July 2000, we announced that we had authorized the repurchase of up to an additional 1,000,000 shares of our Common Stock in open market and privately negotiated transactions, with purchases to be made from time to time through May 31, 2001. Shares repurchased will be held by us as treasury stock to be available for our stock option and other equity compensation and benefits plans. F-15 53 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STOCK OPTION PLANS. We have adopted an employee stock option plan for eligible employees which provides for the granting of options to purchase a maximum of 8,500,000 shares of Common Stock. We have also adopted a directors stock option plan which provides for the granting of options to purchase a maximum of 1,714,000 shares of Common Stock by our non-employee directors. Transactions under the stock option plans are summarized as follows:
OPTION PRICE AVAILABLE PER SHARE OUTSTANDING EXERCISABLE FOR GRANT ------------- ------------- ------------- ------------- May 31, 1997 ...................... $2.03-$29.63 3,074,525 1,060,825 2,744,600 ------------- ------------- ------------- ------------- Granted ........................... 17.50-30.38 2,606,168 -- (2,606,168) Became exercisable ................ -- -- 918,593 -- Exercised ......................... 2.03-21.13 (927,675) (927,675) -- Canceled/forfeited ................ 2.03-29.69 (584,772) -- 584,772 ------------- ------------- ------------- ------------- May 31, 1998 ...................... 2.03-30.38 4,168,246 1,051,743 723,204 ------------- ------------- ------------- ------------- Increase in shares authorized ..... -- -- -- 1,800,000 Granted ........................... 6.38-24.50 2,449,732 -- (2,449,732) Became exercisable ................ -- -- 513,563 -- Exercised ......................... 2.03-16.88 (39,700) (39,700) -- Canceled/forfeited ................ 9.38-30.38 (2,027,815) -- 2,027,815 ------------- ------------- ------------- ------------- May 31, 1999 ...................... 2.03-30.00 4,550,463 1,525,606 2,101,287 ------------- ------------- ------------- ------------- Granted ........................... 5.25-10.00 1,975,790 -- (1,975,790) Became exercisable ................ -- -- 750,707 -- Exercised ......................... 2.03-8.19 (8,200) (8,200) -- Canceled/forfeited ................ 3.50-30.00 (1,279,701) (47,165) 1,279,701 ------------- ------------- ------------- ------------- May 31, 2000 ...................... $2.03-$30.00 5,238,352 2,220,948 1,405,198 ============= ============= ============= =============
Weighted Average Weighted Average Exercise Price Weighted Average Exercise Price Option Price Of Outstanding Remaining Of Exercisable Per Share Outstanding Options Contract Life Exercisable Options - --------------------- ------------------ ------------------ ------------------ ------------------ ------------------ $2.03- $3.91 87,675 $ 3.53 2.5 years 87,675 $ 3.53 4.81-10.00 3,149,497 6.46 9.3 years 639,099 7.89 11.00-11.94 142,000 11.84 4.1 years 142,000 11.84 14.00-24.63 1,484,180 19.92 7.0 years 1,052,174 19.70 29.00-30.00 375,000 29.58 6.9 years 300,000 29.56 - --------------------- ------------------ ------------------ ------------------ ------------------ ------------------ $2.03-$30.00 5,238,352 $ 12.02 8.2 years 2,220,948 $ 16.49 ===================== ================== ================== ================== ================== ==================
F-16 54 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS We have elected to continue to follow APB Opinion No. 25 to account for our stock-based compensation plans; however, if we had adopted SFAS 123 our net earnings (loss) applicable to Common Stock, basic earnings (loss) per share and diluted earnings (loss) per share for the years ended May 31, 2000, 1999 and 1998 would have been reduced (increased) as follows (in thousands, except per share amounts):
2000 1999 1998 -------------------------- -------------------------- ------------------------- As Reported Proforma As Reported Proforma As Reported Proforma ----------- ----------- ----------- ----------- ----------- ----------- Net earnings (loss) applicable to Common Stock ................ $ (78,520) $ (74,926) $ (105,563) $ (112,186) $ 56,899 $ 50,580 =========== =========== =========== =========== =========== =========== Basic earnings (loss) per common share ............... $ (1.55) $ (1.48) $ (2.17) $ (2.31) $ 1.29 $ 1.15 =========== =========== =========== =========== =========== =========== Diluted earnings (loss) per common share ............... $ (1.55) $ (1.48) $ (2.17) $ (2.31) $ 1.28 $ 1.14 =========== =========== =========== =========== =========== ===========
The weighted average fair value of options granted during 2000, 1999 and 1998 was $3.06, $4.24,and $11.58, respectively. The fair value of each option was determined using the Black-Scholes option valuation model. The key input variables used in valuating the options were as follows: average risk-free interest rate based on 5-year Treasury bonds, expected stock price volatility of 49% in 2000, 51% in 1999, and 44% in 1998, and an estimated option term of five years. RESTRICTED STOCK PLANS. In 1990, we adopted the Input/Output, Inc. 1990 Restricted Stock Plan which provides for the award of up to 1,200,000 shares of Common Stock to key officers and employees. Ownership of the Common Stock will vest over a period of four years. The restriction is removed from 50% of the shares after two years, 25% in the third year and 25% in the fourth year. Shares awarded may not be sold, assigned, transferred, pledged or otherwise encumbered by the grantee during the vesting period. Except for these restrictions, the grantee of an award of shares has all the rights of a common stockholder, including the right to receive dividends and the right to vote such shares. As of May 31, 2000, we had no unvested restricted shares outstanding and 15,000 shares available for grant under this plan. In May 1999, a key employee with 53,000 unvested restricted shares resigned and as part of the employee's separation agreement, the Compensation Committee of our Board of Directors ("Compensation Committee") removed all restrictions and vested all 53,000 shares effective immediately. All amortization of restricted stock related to the shares vesting immediately was recognized in fiscal year 1999. Effective January 1, 1998 we adopted the Input/Output, Inc. 1998 Restricted Stock Plan which provides for the award of up to 100,000 shares of Common Stock to key officers and employees. Ownership of the Common Stock will vest over a period as determined by the Compensation Committee in its sole discretion. Shares awarded may not be sold, assigned, transferred, pledged or otherwise encumbered by the grantee during the vesting period. Except for these restrictions, the grantee of an award of shares has all the rights of a common stockholder, including the right to receive dividends and the right to vote such shares. As of May 31, 2000, we had 47,500 unvested shares outstanding, which are scheduled to vest 100% on December 11, 2001, and 52,500 shares available for grant under this plan. F-17 55 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Effective March 13, 2000 we adopted the Input/Output, Inc. 2000 Restricted Stock Plan which provides for the award of up to 200,000 shares of common stock to key employees. Ownership of the Common Stock will vest over a period as determined by the Compensation Committee in its sole discretion. Shares awarded may not be sold, assigned, transferred, pledged or otherwise encumbered by the grantee during the vesting period. Except for these restrictions, the grantee of an award of shares has all the rights of a common stockholder, including the right to receive dividends and the right to vote such shares. As of May 31, 2000, we had 123,000 unvested shares outstanding, which are scheduled to vest over a period of five years. The restriction is removed from 33% of the shares after 3 years, 33% in the fourth year, and 33% in the fifth year. At May 31, 2000 there were 77,000 shares available for grant. The market value of shares of Common Stock granted under the restricted stock plans were recorded as unamortized restricted stock compensation and reported as a separate component of stockholders' equity. The restricted stock compensation is amortized over the vesting period. EMPLOYEE STOCK PURCHASE PLAN. We adopted an Employee Stock Purchase Plan ("Plan") in which participation commenced April 1, 1997. The Plan allows all eligible employees to authorize payroll deductions at the rate of 1% up to 15% of base compensation to be applied toward the purchase of our Common Stock. The purchase price of the Common Stock will be the lesser of 85% of the closing price on the first day of the applicable offering period or most recently preceding trading day or 85% of the closing price on the last day of the offering period or most recently preceding trading day. Under the Plan, separate six-month offering periods commence on April 1st and October 1st of each year. There were 196,849, 177,280 and 63,545 shares purchased by participants during 2000, 1999 and 1998, respectively. (8) ACQUISITION Effective October 1, 1998, we entered into a definitive merger agreement with The Laitram Corporation for the acquisition of DigiCourse, Inc., a wholly-owned subsidiary of The Laitram Corporation. Under the terms of the agreement, we acquired, in exchange for 5,794,000 shares of our Common Stock and $5.6 million in cash, all of the capital stock of DigiCourse, Inc. The transaction was accounted for as a purchase business combination with the assets and liabilities allocated based on the fair value of assets purchased and liabilities assumed. The amortization life of the resulting goodwill of $32.5 million is 17 years. (9) SEGMENT AND GEOGRAPHIC INFORMATION Late in fiscal year 1999, we initiated a fundamental reorganization of our internal structure. As a part of this reorganization, our management now evaluates and reviews results based on two segments, Land and Marine, to allow for increased visibility and accountability of costs and more focused customer service and product development. Prior to such time, our management made business decisions using consolidated financial information. We determined that it was impractable to obtain all of the applicable information for fiscal years 1999 and 1998 to report our operating segments in accordance with the new internal reporting structure. Commencing in fiscal year 2000 we reported operating segment information by the Land and Marine segments, and measure the operating results of these segments based on a measure of income from operations. F-18 56 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In order to provide meaningful and reliable information available for fiscal years 1999 and 1998, we were able to disclose a measure of results of operations utilizing a gross profit (loss) measure and are able to provide assets at May 31, 1999 based on its current Land and Marine segments. The following summarizes our segment information (in thousands):
2000 1999 1998 ----------- ----------- ----------- Net Sales: Land ........................ $ 73,201 $ 96,276 $ 316,060 Marine ...................... 48,253 101,139 69,801 ----------- ----------- ----------- $ 121,454 $ 197,415 $ 385,861 =========== =========== =========== Gross profit (loss): Land ........................ $ 6,397 $ (4,308) $ 133,065 Marine ...................... 8,415 (3,492) 26,282 ----------- ----------- ----------- $ 14,812 $ (7,800) $ 159,347 =========== =========== =========== Earnings (loss) from operations Land ........................ $ (28,254) Marine ...................... (34,466) Corporate ................... (22,750) ----------- $ (85,470) =========== Depreciation and amortization Land ........................ $ 10,106 Marine ...................... 7,117 Corporate ................... 5,612 ----------- $ 22,835 =========== Capital expenditures Land ........................ $ 553 Marine ...................... 872 Corporate ................... 1,652 ----------- $ 3,077 =========== Total Assets: Land ........................ $ 106,431 $ 141,510 Marine ...................... 77,411 116,203 Corporate ................... 197,927 194,035 ----------- ----------- $ 381,769 $ 451,748 =========== ===========
F-19 57 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Intersegment sales are insignificant for all periods presented. Corporate assets include all assets specifically related to corporate personnel and operations, substantially all cash and cash equivalents, all facilities and manufacturing machinery and equipment that are jointly utilized by segments and all income taxes receivable and deferred income tax assets. The depreciation expense and facility expense related to all jointly utilized facilities and machinery and equipment is allocated based on each segment's use of those assets. A summary of net sales from foreign customers by geographic area follows (in thousands):
2000 1999 1998 ------------ ------------ ------------ Middle East ........ $ 22,156 $ 1,835 $ 9,877 China .............. 19,754 6,980 7,636 Russia ............. 16,388 10,192 32,100 Europe ............. 12,446 8,248 28,441 Canada ............. 3,731 14,446 14,767 Great Britain ...... 3,723 31,948 19,490 Other .............. 6,310 6,683 23,109 ------------ ------------ ------------ $ 84,508 $ 80,332 $ 135,420 ============ ============ ============
Net sales are attributed to individual countries on the basis of the ultimate destination of the equipment, if known; if the ultimate destination is not known, it is based on the geographical location of initial shipment. Net sales from individual customers representing 10% or more of net sales were as follows:
Customer 2000 1999 1998 ----- ----- ----- A ........ 17% 33% 28% B ........ 12% 5% 7% C ........ 12% 6% 0% D ........ 11% 2% 1% E ........ 0% 11% 4%
Revenues for customers B and C comprised 18% and 17% of Land segment net sales for fiscal year 2000. In addition, there was a single customer not listed above that accounted for 13% of Land segment net sales for fiscal year 2000. Revenues for customers A and D comprised 39% and 22%, respectively of Marine segment net sales for fiscal year 2000. (10) INCOME TAXES
Components of income taxes follow (in thousands): 2000 1999 1998 ------------ ------------ ------------ Current: Federal ................................ $ -- $ (9,279) $ 20,963 Foreign ................................ 1,583 1,769 4,678 State and local ........................ 865 1,524 934 Deferred-Federal ............................ (8,545) (43,691) 201 ------------ ------------ ------------ Total income tax (benefit) expense .......... $ (6,097) $ (49,677) $ 26,776 ============ ============ ============
A reconciliation of the expected income tax (benefit) expense on earnings (loss) before income taxes using the statutory Federal income tax rate of 35% for the years ended May 31, 2000, 1999 and 1998, to the income taxes reported herein is as follows (in thousands): F-20 58 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000 1999 1998 ------------ ------------ ------------ Expected income tax (benefit) expense ................ $ (28,022) $ (54,334) $ 29,286 Tax benefit from use of foreign sales corporation .... -- -- (2,722) Foreign tax credit ................................... (727) 46 (33) Foreign taxes ........................................ 1,412 943 (303) State and local taxes ................................ 556 991 607 Deferred tax asset valuation allowance ............... 19,632 2,421 -- Nondeductible amortization ........................... 919 1,254 446 Other ................................................ 133 (998) (505) ------------ ------------ ------------ Total income tax (benefit) expense .................. $ (6,097) $ (49,677) $ 26,776 ============ ============ ============
The tax effects of the cumulative temporary differences resulting in the net deferred income tax assets (liability) follow (in thousands):
May 31, ------------------------------ 2000 1999 ------------ ------------ Current deferred: Deferred income tax assets: Accrued expenses ............................... $ 2,115 $ 4,245 Allowance accounts ............................. 10,798 22,625 Uniform capitalization ......................... 546 698 ------------ ------------ Total current deferred income tax asset ... $ 13,459 $ 27,568 ============ ============ Noncurrent deferred: Deferred income tax assets: Accrued expenses ............................... $ 96 $ 92 Unamortized restricted stock amortization ...... 24 567 Basis in identified intangibles ................ 11,941 670 Net operating loss carryforward ................ 47,862 17,828 Foreign tax credit carryforward ................ 3,812 2,602 Alternative minimum tax credit ................. 1,336 1,335 Other .......................................... 1,154 1,154 ------------ ------------ Total deferred income tax asset ........... 66,225 24,248 Valuation allowance ....................... (22,053) (2,421) ------------ ------------ Net noncurrent deferred income tax asset .. 44,172 21,827 ------------ ------------ Deferred income tax liabilities: Basis in property, plant and equipment ......... (2,779) (3,088) Basis in identified intangibles ................ -- -- ------------ ------------ Total deferred income tax liability ....... (2,779) (3,088) ------------ ------------ Net noncurrent deferred income tax asset .. $ 41,393 $ 18,739 ============ ============
A tax valuation allowance has been established due to the uncertainty of realizing certain foreign tax credit and net operating loss carry-forwards. The valuation allowance increased $19,632,000 during fiscal year 2000 to $22,053,000 at May 31, 2000. At May 31, 2000, we had net operating loss carry-forwards of approximately $136.7 million for federal income tax purposes, which ultimately expire in fiscal year 2020 if not otherwise utilized. In addition, we have foreign tax credit carry-forwards of $3.8 million, which expire between fiscal years 2003 and 2004. In assessing the realizability of deferred income tax assets, we consider whether it is more likely than not that some portion or all of the deferred income tax assets will be realized. The ultimate F-21 59 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. We consider 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, we will need to generate future taxable income of approximately $165.0 million over the next 20 years. Although we experienced significant losses in fiscal years 2000 and 1999, our taxable income for the years 1996 through 1998 aggregated approximately $128.0 million. Based on the level of historical income prior to fiscal 1999 and our 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 carry-forward, we believe it is more likely than not that we will realize the benefits of the deferred income tax assets, net of the valuation allowance at May 31, 2000. The ultimate realization of the net deferred tax asset, prior to the expiration of the net operating loss carry-forward in the next 19-20 years, will require significant improvements in our results of operations from fiscal years 1999 and 2000 levels and a return to levels of profitability that existed prior to fiscal year 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 carry-forward period are reduced. If a reduction in the net deferred tax asset determined to be more likely than not realizable occurs in the near term, it is likely that this adjustment will have a material adverse effect on our results of operations. (11) LEASES We are a party to several leases as described below: As Lessor: We have leased seismic equipment to customers under operating leases with non-cancelable terms of less than one year. Rental revenues relating to the operating leases were: $3,184,000 in 2000, $673,000 in 1999 and $10,112,000 in 1998. We entered into a Preferred Supplier Agreement with Mitcham Industries, Inc. ("Mitcham") during 1998. The terms of this agreement provided that Mitcham would purchase a minimum of $90 to $100 million of our products over a five-year term ending May 31, 2003, which amounts included a $15.0 million purchase by Mitcham of a substantial portion of our equipment lease pool during 1998. In addition, we had agreed not to lease products covered by the Preferred Supplier Agreement except in limited circumstances, and to refer rental inquiries from our customers worldwide to Mitcham during the term of the agreement. This agreement was terminated in the fourth quarter of fiscal 1999. Due to the termination of this agreement, we are evaluating potential future equipment leasing opportunities for current and future products. We also own a building with tenants. The rental revenues relating to those building leases were: $205,000 in 2000, $187,000 in 1999 and $258,000 in 1998. As Lessee: We had rental expense relating to operating leases for warehouse and office space and various equipment of: $2,171,000 in 2000, $1,297,000 in 1999 and $1,560,000 in 1998. At May 31, 2000, none of the operating leases had non-cancelable lease terms in excess of one year. (12) BENEFIT PLANS We have a 401(k) retirement savings plan which covers substantially all employees. Employees may voluntarily contribute up to 15% of their compensation, as defined, to the plan and we may contribute additional amounts at our sole discretion. Our contributions to the plan were: $0 in 2000, $1,728,000 in 1999 and $1,433,000 in 1998. F-22 60 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS We have adopted a non-qualified, supplemental executive retirement plan (SERP Plan). The SERP Plan provides for certain compensation to become payable on the participants' death, retirement or total disability as set forth in the plan. During fiscal year 2000, the remaining participants in the plan left the Company. Assets of this plan consist of the cash surrender value of life insurance policies. We have also adopted a non-qualified, unfunded outside directors retirement plan (Directors Plan). The Directors Plan provides for certain compensation to become payable on the participants' death, retirement or total disability as set forth in the plan. Both plans are accounted for under Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions." With respect to the SERP Plan, the consolidated financial statements include pension expense (benefit) of ($460,000), $67,000, and ($696,000) in fiscal years 2000, 1999, and 1998, respectively; accrued pension costs of $0 and $460,000 in fiscal years 2000 and 1999, respectively; and an intangible asset for unrecognized prior service cost of $0 and $138,000 at May 31, 2000 and 1999, respectively. With respect to the Directors Plan, the consolidated financial statements include pension expense of $50,000, $77,000, and $48,000 in fiscal years 2000, 1999, and 1998, respectively; and accrued pension costs of $127,000 and $264,000 at May 31, 2000 and 1999, respectively. (13) CREDIT RISK We sell to many customers on extended-term arrangements. Moreover, in connection with certain sales of our systems and equipment, we have guaranteed loans from unaffiliated parties to purchasers of such systems and equipment. In addition, we have sold contracts and leases to third-party financing sources, the terms of which often obligate us to repurchase the contracts and leases in the event of a customer default or upon certain other occurrences. At May 31, 2000 and 1999, we had guaranteed approximately $0 and $948,000, respectively, of trade notes receivable sold with recourse and loans from unaffiliated parties to purchasers of our seismic equipment. All loans guaranteed were collateralized by the seismic equipment. Due to the inherent uncertainties of guaranty agreements, we could not estimate the fair value of the guaranties as of May 31, 1999. Sales outside the United States have historically accounted for a significant part of our 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. Demand for our products from customers in developing countries is difficult to predict and can fluctuate significantly from year to year. We believe 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 our future operating results and financial position. In addition, sales to customers in developing countries on extended terms can present heightened credit risks for us, for the reasons discussed above. F-23 61 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (14) SELECTED QUARTERLY INFORMATION - (UNAUDITED)
THREE MONTHS ENDED ------------------------------------------------------------------- 2000 AUG. 31* NOV. 30 FEB. 29* MAY 31* ------------- ------------- ------------ ------------ (in thousands, except per share amounts) Net sales ......................... $ 29,979 $ 24,438 $ 33,424 $ 33,613 Gross profit ...................... 5,985 5,273 (389) 3,943 Loss from operations .............. (12,938) (9,792) (9,814) (52,926) Interest expense .................. (212) (202) (197) (215) Interest and other income ......... 1,034 1,220 1,761 2,221 Income tax expense (benefit) ...... (3,877) (2,389) 168 1 Net loss .......................... $ (9,320) $ (7,528) $ (9,574) $ (52,098) ============ ============ ============ ============ Basic loss per share .............. $ (0.18) $ (0.15) $ (0.19) $ (1.03) ============ ============ ============ ============ Diluted loss per share ............ $ (0.18) $ (0.15) $ (0.19) $ (1.03) ============ ============ ============ ============
THREE MONTHS ENDED ------------------------------------------------------------------ 1999 AUG. 31 NOV. 30 FEB. 28* MAY 31* ------------ ------------ ------------ ------------ (in thousands, except per share amounts) Net sales .......................... $ 66,995 $ 73,918 $ 37,755 $ 18,747 Gross profit (loss) ................ 21,963 27,982 (45,894) (11,851) Earnings (loss) from operations .... 745 3,642 (95,368) (70,973) Interest expense ................... (242) (217) (229) (209) Interest and other income .......... 2,843 2,122 1,824 822 Income tax expense (benefit) ....... 1,071 1,775 (32,553) (19,970) Net earnings (loss) ................ $ 2,275 $ 3,772 $ (61,220) $ (50,390) ============ ============ ============ ============ Basic earnings (loss) per share .... $ 0.05 $ 0.08 $ (1.21) $ (1.00) ============ ============ ============ ============ Diluted earnings (loss) per share .. $ 0.05 $ 0.08 $ (1.21) $ (1.00) ============ ============ ============ ============
*See Note 15 concerning charges that occurred in the first, third, and fourth quarter of fiscal year 2000, and charges that occurred in the third and fourth quarter of fiscal year 1999. F-24 62 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (15) SPECIAL CHARGES AND RECOVERIES Our special charges and recoveries consist of various transactions resulting from industry downturns, cost reduction initiations and acquisitions integration. The table below summarizes the fiscal year 2000 pretax expenses and costs for special charges and the accrued amounts at May 31, 2000 for cash liabilities (in thousands):
Receivable Long-lived Personnel/ Inventory Related Asset Warranty Facility Related Charges/ Related Product And Other Charges Recoveries Charges Related Charges Total ----------- ----------- ----------- ----------- ----------- ----------- 2000 charges/recoveries to expense by business segment: Marine .................................... $ 3,607 $ 2,400 $ 25,200 $ 1,993 $ 1,700 $ 34,900 Land ...................................... $ 8,700 3,600 7,100 -- 1,400 20,800 Corporate ................................. -- -- -- -- 7,900 7,900 ----------- ----------- ----------- ----------- ----------- ----------- Total ..................................... $ 12,307 $ 6,000 $ 32,300 $ 1,993 $ 11,000 $ 63,600 Adjustments to 1999 Changes recorded in 2000............... -- (10,200) -- (2,600) -- (12,800) ----------- ----------- ----------- ----------- ----------- ----------- $ 12,307 $ (4,200) $ 32,300 $ (607) $ 11,000 $ 50,800 =========== =========== =========== =========== Balance at May 31, 1999 ................... 11,980 1,903 Settled in 2000 ........................... (8,079) (5,362) ----------- ----------- Balance at May 31, 2000 ................... $ 3,294 $ 7,541 =========== =========== 2000 charges/recoveries to expense by category: Cost of sales ............................. $ 12,307 $ -- $ -- $ (607) $ 300 $ 12,000 General and administrative expense ........ -- (4,200) 700 -- 10,700 7,200 Amortization and impairment of intangibles ............................ -- -- 31,600 -- -- 31,600 ----------- ----------- ----------- ----------- ----------- ----------- $ 12,307 $ (4,200) $ 32,300 $ (607) $ 11,000 $ 50,800 =========== =========== =========== =========== =========== ===========
During the first quarter of fiscal year 2000, we recorded pretax charges totaling $4.7 million, comprised of $3.3 million primarily related to employee severance arrangements and the closing of our Ireland facility (included in general and administrative expenses) and charges of $1.4 million for product-related warranties (included in cost of sales). These charges resulted from continued weak customer demand for our equipment. This weak demand 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. During the third quarter of fiscal 2000, we recorded pretax charges and recoveries totaling a net charge of $0.3 million, comprised of $8.7 million of inventory charges (included in cost of sales) primarily related to our decision then to commercialize VectorSeis(TM) digital sensor products having higher technical standards than the products we had previously produced. We had decided to commercialize these earlier VectorSeis(TM) products which have since proven not to be commercially feasible based on data gathered from recent VectorSeis(TM) digital sensor surveys, the anticipated longer-term market recovery for new seismic instrumentation and given current and expected market conditions. Other charges were $2.4 million of bad debt expense related to a marine customer (included in general and administrative expense); $1.3 million of charges related to a 45-employee reduction in our workforce worldwide (included in general and administrative expense); and $0.7 million of charges F-25 63 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS related to legal settlements (included in cost of sales - $0.3 million, and in general and administrative expense - $0.4 million). These charges were offset in part by $12.8 million of recoveries attributable to a more favorable than anticipated resolution of a customer's bankruptcy settlement, consisting of a $10.2 million reduction in our allowance for loan loss, resulting in a payment received in March 2000 (recorded as a reduction to general and administrative expense) and a $2.6 million reversal of warranty reserves based on the bankruptcy settlement (recorded as a reduction to cost of sales). During the fourth quarter of fiscal year 2000, we recorded pretax charges totaling $45.8 million, comprised of $4.2 million of inventory and warranty charges (included in cost of sales) primarily related to our write-down of certain marine streamer and related products, reflecting the deterioration of the marine towed array seismic sector. Additionally, $10.0 million was charged to general and administrative expenses consisting of a $5.0 million charge for settlement of the Coastline Geophysical litigation, a $3.6 million loan loss expense, primarily relating to two of our land customers, $0.7 million related to the sale of certain idle manufacturing capacity in Europe, and $0.7 million of charges related to employee severance and continued cost reduction efforts worldwide. Finally, $31.6 million was charged to amortization and impairment expense, reflecting the impairment of certain goodwill recorded in conjunction with our acquisition of: (1) the manufacturing assets of Western Geophysical in 1995 and (2) the acquisition of CompuSeis, Inc. in 1998. The impairment of the Western Geophysical goodwill principally reflects the diminished outlook for the marine towed array seismic sector in general, evidenced by our customers' decisions to reduce the size of their marine fleets, and changes in customers' preferences and technology for certain products within that sector. The impairment of the CompuSeis goodwill reflects the result of certain technological changes relating to our land seismic systems. The table below summarizes the fiscal year 1999 pretax expenses and costs for special charges and the accrued amounts at May 31, 1999 for cash liabilities (in thousands).
Long-lived Personnel/ Inventory Receivable Asset Warranty/ Facility Related Related Related Product And Other Charges Charges Charges Related Charges Total --------- ----------- --------- --------- --------- --------- 1999 charges to expense by business segment: Marine ...................................... $ 30,986 $ 18,298 $ 729 $ 17,025 $ 775 $ 67,813 Land ........................................ 25,978 21,034 12,539 2,975 2,787 65,313 Corporate ................................... 1,136 568 1,232 -- 2,938 5,874 --------- --------- --------- --------- --------- --------- Total ....................................... $ 58,100 $ 39,900 $ 14,500 20,000 6,500 $ 139,000 ========= ========= ========= ========= Settled in 1999 ............................. (8,020) (4,597) --------- --------- Balance May 31, 1999 ........................ $ 11,980 $ 1,903 ========= ========= 1999 charges to expense by category: Cost of sales ............................... $ 57,000 $ -- $ -- $ 20,000 $ -- $ 77,000 General and administrative expense .......... -- 39,900 6,800 -- 6,500 53,200 Research and development .................... 1,100 -- -- -- -- 1,100 Amortization and impairment of intangibles .. -- -- 7,700 -- -- 7,700 --------- --------- --------- --------- --------- --------- $ 58,100 $ 39,900 $ 14,500 $ 20,000 $ 6,500 $ 139,000 ========= ========= ========= ========= ========= =========
F-26 64 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS We recorded pretax charges totaling $139.0 million in the third and fourth quarters of fiscal 1999, resulting from reduced customer demand for our equipment as a result of historically low commodity prices, energy company combinations which have delayed seismic data acquisition projects and due to the continued deterioration of the financial condition of certain customers. The reduced demand has created excess capacity within our installed base, accelerating the obsolescence of certain of our seismic equipment. Of the $139.0 million of pretax charges, $85.7 million was recorded in the third quarter of fiscal 1999 and included an impairment of long-lived assets totaling $2.8 million included in general and administrative expenses; an impairment of intangible assets totaling $1.4 million included in amortization and impairment of intangibles; an inventory write-down of $47.3 million due to the conditions described above and planned product revisions, included in cost of sales; charges for the early termination of a facility lease and restructuring costs totaling $2.6 million included in general and administrative expenses; an accounts and notes receivable allowance of $17.6 million related to a customer's vessel seizure followed by filing for creditor protection and management's assessment of business risk relating to three North American customer trade notes receivable as a result of the depressed market environment, included in general and administrative expenses; and a charge for warranty reserves and other product related contingencies of $14.0 million, included in cost of sales. The remaining pretax charges of $53.3 million were recorded in the fourth quarter of fiscal year 1999, and included an accounts and trade notes receivable allowance of $22.3 million, primarily related to business risk resulting from the depressed market environment, and from political and currency risks in certain developing countries, included in general and administrative expenses; an inventory write-down of $9.7 million primarily due to further reduction in customer demand for products rendered excess or obsolete as a result of prevailing industry conditions and as a result of planned product revisions, included in cost of sales; a charge of $6.0 million relating to certain warranty reserves and other product-related contingencies, included in cost of sales; an impairment of long-lived assets totaling $4.0 million related to the recent downturn in business activity and our resizing efforts, included in general and administrative expenses; an impairment of intangibles totaling $6.3 million related to the deterioration of certain product lines, included in amortization and impairment of intangibles; a charge of $3.3 million related to employee severances and a charge of $0.6 million for other expenses, included in general and administrative expenses and a charge of $1.1 million primarily related to prototype development costs, included in research and development expenses. (16) COMMITMENTS AND CONTINGENCIES In the ordinary course of business, we have been named in various lawsuits. While the final resolution of these matters may have an impact on our consolidated financial results for a particular reporting period, we believe that the ultimate resolution of these matters will not have a material adverse impact on our financial position, results of operations or liquidity. (17) RELATED PARTIES In connection with our acquisition of DigiCourse, Inc. in November 1998, we entered into a Continued Services Agreement with The Laitram Corporation ("Laitram"), under which Laitram agreed to provide accounting, software, manufacturing and maintenance services to us. Mr. Lapeyre, our Chairman of the Board, is the chairman and principal stockholder of Laitram. Under the terms of the Service Agreement, Laitram bills us for facility lease and machine shop services rendered on a monthly F-27 65 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS basis. In the fiscal years ended May 31, 2000 and 1999, we paid Laitram an aggregate of $1.5 million and $2.7 million, respectively under the Continued Services Agreement. The facility lease portion of the Service Agreement has a term of three years expiring September 30, 2001 and the machine shop agreement had a term of one year ending on November 17, 1999. A director and former company officer has an agreement with us to assist in the collection efforts of certain accounts and notes receivable owed to us. In return, he is paid a commission on actual amounts collected. During fiscal year 2000, commissions earned amounted to $487,000. We have guaranteed $325,000 of bank indebtedness for two of our officers related to their purchases of company stock. The share purchases were made in conjunction with shares issued in May 2000 under the Input/Output, Inc. 2000 Restricted Stock Plan and further discussed in Note 7. (18) SUBSEQUENT EVENT We were named, along with a former employee, as defendants in an action filed on May 21, 1999, in State District Court in Harris County, Texas styled Coastline Geophysical, Inc. v. Input/Output, Inc. et al. The plaintiffs' petition alleged a number of claims arising out of a purchase of a marine seismic system manufactured by us. While believing we had meritorious defenses to this action, we settled the lawsuit in July 2000 for $5.0 million, after giving consideration to the cost and distraction of protracted litigation. As a result of the settlement, we have recorded a $5.0 million charge to general and administrative expense in the fourth quarter and year ended May 31, 2000. See Note 15. F-28 66 SCHEDULE II INPUT/OUTPUT, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT CHARGED TO YEAR ENDED BEGINNING COSTS AND BALANCE AT MAY 31, 1998 OF YEAR EXPENSES DEDUCTIONS END OF YEAR ------------ ------------ ------------ ------------ Allowance for doubtful accounts $ 1,740 $ 1,770 $ 373 $ 3,137 Reserves for excess and obsolete inventory 1,749 4,264 1,064 4,949 Warranty, training and installation 3,856 5,162 4,773 4,245
BALANCE AT CHARGED TO YEAR ENDED BEGINNING COSTS AND BALANCE AT MAY 31, 1999 OF YEAR EXPENSES DEDUCTIONS END OF YEAR ------------ ------------ ------------ ------------ Allowance for doubtful accounts $ 3,137 $ 17,780 $ 1 $ 20,916 Reserves for excess and obsolete inventory 4,949 58,848 47,550 16,247 Warranty, training and installation 4,245 19,280 9,650 13,875
BALANCE AT CHARGED TO YEAR ENDED BEGINNING COSTS AND BALANCE AT MAY 31, 2000 OF YEAR EXPENSES DEDUCTIONS OTHER END OF YEAR ------------ ------------ ------------ ------------ ------------ Allowance for doubtful accounts $ 20,916 $ (1,107)(1) $ 6,003 $ (12,240)(3) $ 1,566 Reserves for excess and obsolete inventory 16,247 16,360 17,616 -- 14,991 Warranty, training and installation 13,875 (1,731)(2) 5,674 -- 6,470
(1) Includes recoveries of $2.1 million. (2) Includes reversal of $2.6 million based on bankruptcy settlement of a customer. (3) Represents transfer to loan loss allowance as a result of conversion of trade receivable to a note receivable. F-29 67 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 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. 3.4 Amendment No. 1 to the Amended and Restated Bylaws of the Company, dated September 13, 1999, filed as exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1999 and incorporated herein by reference. 4.1 Form of Certificate of Designation, Preferences and Rights of Series A Preferred Stock of Input/Output, Inc., filed as Exhibit 2 to the Company's Registration Statement on Form 8-A dated January 27, 1997 (attached as Exhibit 1 to the
68
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 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 Form of Certificate of Designation, Preferences and Rights of Series C Preferred Stock of Input/Output, Inc., filed as Exhibit 4.2 to the Company's Form 8-K dated April 21, 1999 and incorporated herein by reference. 10.2 Royalty Agreement, dated November 6, 1992, between I/O Sensors, Inc., Triton and Triton Technologies, Inc., filed as exhibit 10.2 to the Company's 10-K for fiscal year ended May 31, 1999 and incorporated herein by reference. **10.3 1990 Restricted Stock Plan, filed as Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1995 and incorporated herein by reference. **10.4 Amended and Restated 1990 Stock Option Plan, filed as Exhibit 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. **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
69
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 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. 10.20 Promissory Note dated August 29, 1996 executed by IPOP Management, Inc. to the order of The Variable Annuity Life Insurance Company, filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1996 and incorporated herein by reference. 10.21 Master Commercial Lease Agreement dated August 29, 1996, by and between IPOP Management, Inc. and The Variable Annuity Life Insurance Company, filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1996 and incorporated herein by reference. 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. 10.31 Purchase Agreement by and between the Company and SCF-IV, L.P. dated April 21, 1999, filed as Exhibit 10.1 to the Company's Form 8-K dated April 21, 1999 and incorporated herein by reference. 10.32 Registration Rights Agreement by and between the Company and SCF-IV, L.P. dated May 7, 1999, filed as Exhibit 10.2 to the Company's Form 8-K dated April 21, 1999 and incorporated herein by reference. 10.33 First Amendment to Rights Agreement by and between the Company and Harris Trust and Savings Bank as Rights Agent, dated April 21, 1999, filed as Exhibit
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EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.3 to the Company's Form 8-K dated April 21, 1999 and incorporated herein by reference. 10.35 Registration Rights Agreement by and among the Company and the Laitram Corporation, dated November 16, 1998, filed as Exhibit 99.2 to the Company's Form 8-K dated November 16, 1998 and incorporated herein by reference. 10.36 Input/Output, Inc. 1998 Restricted Stock Plan, filed as Exhibit 4.7 to the Company's Registration Statement on Form S-8 (Registration No. 333-80297), filed with the Securities and Exchange Commission on June 9, 1999 and incorporated herein by reference. 10.37 Employee Agreement by and between the Company and Axel M. Sigmar, dated August 17, 1999, filed as exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1999, and incorporated herein by reference. 10.38 Amendment No. 3 to the Input/Output, Inc. Supplemental Executive Retirement Plan, dated August 23, 1999, files as exhibit 10.2 to the Company's Quarterly Report Form 10-Q for the fiscal quarter ended August 31, 1999, and incorporated herein by reference. 10.39 Amendment No. 2 to the Input/Output, Inc. Amended and Restated 1991 Directors Stock Plan, dated September 13, 1999, filed as exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1999, and incorporated herein by reference. 10.40 Amendment No. 1 to the Input/Output, Inc. Amended and Restated 1996 Non-Employee Director Stock Option Plan, dated September 13, 1999, filed as exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1999, and incorporated herein by reference. 10.41 Consulting and Collection Agreement by and between the Company and Robert P. Brindley, dated October 7, 1999, filed as exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1999, and incorporated herein by reference. 10.42 Consulting Agreement by and between the Company and Sam K. Smith, dated August 10, 1999, filed as exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 199, and incorporated herein by reference. ***10.43 Input/Output, Inc. Annual Incentive Plan, dated effective November 3, 1999. ***10.44 Employment Agreement by and between the Company and Timothy J. Probert dated effective as of March 1, 2000. ***10.45 Input/Output, Inc. 2000 Restricted Stock Plan, effective as of March 13, 2000.
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EXHIBIT NUMBER DESCRIPTION - ------ ----------- *21.1 Subsidiaries of the Company. *23.1 Consent of KPMG LLP. *24.1 The Power of Attorney is set forth on the signature page hereof. *27.1 Financial Data Schedule (included in EDGAR copy only). 99.1 Information required by Form 11-K with respect to the Input/Output, Inc. Employee Stock Purchase Plan will be filed as an amendment to this Annual Report on Form 10-K within 120 days of the end of the fiscal year of the plan (i.e. June 30) as permitted by Rule 15d-21 under the Securities Exchange Act of 1934, as amended.
* Filed herewith. ** Management contract or compensatory plan or arrangement. *** Management contract or compensatory plan or arrangement filed herewith. EX-10.43 2 ex10-43.txt INPUT/OUTPUT, INC. ANNUAL INCENTIVE PLAN 1 EXHIBIT 10.43 INPUT/OUTPUT, INC. ANNUAL INCENTIVE PLAN Effective November 3, 1999 Purpose The purpose of the Input/Output, Inc. ("I/O") Annual Incentive Plan is to advance the interests of I/O and its stockholders by providing employees with annual incentive compensation which is tied to the achievement of preestablished and objective performance goals. ARTICLE I Definitions For the purpose of this Plan, unless the context requires otherwise, the following terms shall have the meanings indicated: "Base Pay" means the gross annual base pay of a Participant (exclusive of bonuses and Incentive Amounts and any compensation under any other employee compensation or benefit plans of the Company) paid or to be paid, as the case may be, to a Participant with respect to the Incentive Year in question, according to the books and records of the Company and its Subsidiaries. "Board" means the board of directors of the Company. "Book Equity" means an amount equal to the average Company consolidated stockholders' equity for the Incentive Year, being the average of the four quarters' stockholders equity amounts (each computed as beginning stockholders' equity plus ending stockholders' equity for that quarter, divided by two), where stockholders' equity shall include the amounts attributable to common stock preferred stock, and retained earnings and shall be derived from the Company's consolidated balance sheet as of the beginning and end of each quarter during the Incentive Year, prepared in accordance with GAAP. "Committee" has the meaning assigned to it in Article II. "Company" means I/O, a Delaware corporation. "Employee" shall mean any regular full-time hourly or salaried domestic employee of the Company or one of its Subsidiaries, excluding employees covered by a collective bargaining agreement or any individuals classified as independent contractors (even if a governmental agency or other entity would classify such individuals differently). "GAAP" means those generally accepted accounting principles and practices which are recognized as such by the American Institute of Certified Public Accountants acting through the Accounting Principles Board or by the Financial Accounting Standards Board or through other appropriate boards or committees thereof and which are consistently applied for all periods so as to properly reflect the financial condition and the results of operations of the Company and its 2 Subsidiaries, except that any accounting principle or practice required to be changed by such Financial Accounting Standards Board (or other appropriate board or committee of such board) in order to continue as a generally accepted accounting principle or practice may so be changed. "Incentive Amount" means the amount payable to a Participant calculated pursuant to Article IV of the Plan. "Incentive Pool" means the amount calculated pursuant to Article IV from which the Incentive Amounts shall be paid. "Incentive Year" means the fiscal year of the Company and its Subsidiaries with respect to which an Incentive Amount is calculated. "Participant" means an Employee who is eligible for participation in the Plan and who, on the particular Payment Date, is, subject to Article V, then employed by the Company or any of its Subsidiaries. "Payment Date" means the business day selected by the Committee upon which the Committee shall make final Incentive Amount calculations in accordance with Article IV, which shall be a date approximately sixty (60) days after the end of the Incentive Year and, in any event, after the Company's independent accounting firm issues its audit report on the Company's consolidated financial statements with respect to the Incentive Year in question. "Plan" means the I/O Annual Incentive Plan, as it may be amended from time to time. "Pool Percentage" shall be twenty percent (20%), unless otherwise determined by the Committee in its sole discretion, or as otherwise provided herein. "Profits Before Taxes" or "PBT" means with respect to a Payment Date, the sum of (i) the net income, before provision for income taxes and preferred stock dividends, of the Company and its Subsidiaries for the Incentive Year in question determined by reference to the Company's audited consolidated statement of earnings for such Incentive Year prepared in accordance with GAAP, plus (ii) the total of all direct Incentive Amounts for the Participants under the Plan accrued in determining such amount for such Incentive Year. In determining the annual PBT, gains or losses from certain non-recurring or extraordinary transactions, such as sales of assets (excluding regular sales from inventory), reorganizations, acquisitions, divestitures or other capital or financial transactions (as determined by the Committee in its sole discretion), shall be excluded. "Return on Book Equity" means, unless otherwise specified herein or determined by the Committee, an amount computed by multiplying the applicable Return on Book Equity Percentage times Book Equity for the Incentive Year in question. "Return on Book Equity Percentage" shall be eight percent (8%), unless otherwise determined by the Committee in its sole discretion, or as otherwise provided herein. "Subsidiary" means any corporation, 100% of the voting stock of which is owned directly or indirectly (through other Subsidiaries) by the Company. 3 ARTICLE II ADMINISTRATION Subject to the terms of this Article II, the Plan shall be administered by the Compensation Committee (the "Committee") of the Board. Subject to the terms hereof; the Committee shall interpret the Plan, prescribe, amend, and rescind any rules and regulations necessary or appropriate for the administration of the Plan, and make such other determinations and take such other action as it deems necessary or advisable. In this regard, the Committee may consider and give appropriate weight to input from representatives of management of the Company regarding the contributions or potential contributions to the Company or a Subsidiary of certain employees, or potential employees, of the Company or any Subsidiary. The Committee shall have full authority to administer the Plan, including authority to interpret and construe any provision of the Plan and to adopt such rules and regulations for administering the Plan as it may deem necessary Except as provided below, any interpretation, determination, or other action made or taken by the Committee shall be final, binding, and conclusive on all interested parties, including the Company and all Participants. During an Incentive Year, the Committee shall have discretion to adjust Profits Before Taxes, Return on Book Equity Percentage, Pool Percentage and percentage allocations of the Incentive Pool, provided that these adjustments are made during the first six (6) months of an Incentive Year. ARTICLE III ELIGIBILITY All Employees shall be eligible to become a Participant in this Plan after the completion of six (6) months of consecutive service with the Company or a Subsidiary. Any Employee who is hired after the commencement of a Incentive Year shall participate in the Plan on a pro rata basis (based on such Employee's total days of service with the Company or a Subsidiary divided by 365), provided that such Employee has first completed six (6) consecutive months of service with the Company or Subsidiary. Employees who participate in this Plan may also participate in other incentive or benefit plans of the Company or any Subsidiary. ARTICLE IV INCENTIVE AMOUNT Subject to and in accordance with the terms of this Plan, on each Payment Date, the Committee shall compute the Incentive Pool by reference to (I) Profits Before Taxes and (ii} Return on Book Equity, for the particular Incentive Year in question. The Incentive Amounts shall be calculated as follows: (a) First, Profits Before Taxes shall be reduced by the Return on Book Equity amount 4 (b) Second, the difference between Profits Before Taxes and the Return on Book Equity amount shall be multiplied by the Pool Percentage, with the resulting product being the Incentive Pool; the Incentive Pool shall be reduced by the Company's or a Subsidiary's portion of any FICA amounts required to be paid on the total Incentive Amounts; (c) Third, provided that the Incentive Pool exceeds $500,000, each Participant shall be entitled to receive an Incentive Amount calculated as his pro rata portion of an amount equal to fifty percent (50%) of the Incentive Pool, with pro rata being computed on the basis of a Participant's Base Pay for the Incentive Year in question compared to the total Base Pay of all Participants for such Incentive Year; (d) Fourth, the Committee shall allocate the remaining fifty percent (50%) of the Incentive Pool to the Employees in such manner as determined by the Committee in its sole discretion, or if Incentive Pool does not exceed $500,000, then the Committee shall have discretion to allocate the Incentive Pool to Employees in a manner determined in its sole discretion; and (e) Notwithstanding the foregoing, with respect to the Incentive Years commencing on June 1, 1999 (Incentive Year 2000) and June 1, 2000 (Incentive Year 2001), the following adjustments shall be made for purposes of calculating the Incentive Pool: (i) for the Incentive Year commencing in 1999, Profits Before Taxes (including where Profits Before Taxes is a negative or loss amount) shall be increased by $32,000,000 and the Return on Book Equity Percentage shall be zero percent (0%); and (ii) for the Incentive Year commencing in 2000, Profits Before Taxes (including where Profits Before Taxes is a negative or loss amount) shall be increased by $16,000,000 and the Return on Book Equity Percentage shall be four percent (4%); provided however that in any case, the minimum Incentive Pool amount with respect to each of the 2000 and the 2001 Incentive Years shall be $500,000. ARTICLE V PAYMENT OF INCENTIVE AMOUNTS AND GENERAL PROVISIONS 5.1 Payment Dales. As a condition to eligibility for receipt of an Incentive Amount with respect to any particular Incentive Year, a Participant shall be required to be in the employ of the Company or one of its Subsidiaries through the applicable Payment Date, unless (i) such Participant terminated his or her employment during such period due to retirement from the Company and its Subsidiaries in accordance with the standard retirement policies of the Company and its Subsidiaries then in effect, (ii) the Participant, while in the employ of the Company or one of its Subsidiaries, became totally and permanently disabled (as that term is defined in Section 22(e) of the Internal Revenue Code of 1986, as amended) or (iii) the Participant dies while employed by the Company or a Subsidiary. In such cases, the Participant or his estate, if applicable, shall be entitled to a pro rata portion of the Incentive Amount payable with respect to that Participant and the applicable Incentive Year. 5 5.2 PARTIAL FISCAL YEARS. In the event that the Company and its Subsidiaries adopt any different fiscal year which results in a fiscal year having less than twelve months, the Committee shall, in its sole discretion, award Incentive Amounts computed as provided in Article IV (but adjusted by the Committee, based on its sole discretion, for such shortened fiscal year). 5.3 NO RIGHTS TO INCENTIVE AMOUNT. The prospective recipient of an Incentive Amount shall not have any rights with respect to any Incentive Amount, or any portion thereof, until the Payment Date and only then until such Incentive Amount is actually granted by the Committee to such Participant in accordance with the terms of the Plan. The Incentive Amounts will only be paid, if after consideration of such payment, the Company is not in default of any material provision on outstanding debt as determined by the Committee. ARTICLE VI AMENDMENT OR DISCONTINUANCE The Board may at any time and from time to time, without the consent of the Participants, alter, amend, revise, suspend, or discontinue the Plan in whole or in part; ARTICLE VII TERM The effective date of this Plan shall be November 3, 1999. Unless sooner terminated by action of the Board, the Plan will terminate on May 31, 2010. Incentive Amounts under the Plan may not be granted after that date, but Incentive Amounts granted before that date will continue to be effective in accordance with their terms and conditions. ARTICLE VIII RECAPITALIZATION, MERGER AND CONSOLIDATION The existence of this Plan and the Incentive Amounts granted hereunder shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stocks ranking prior to or otherwise affecting the Common Stock or the rights thereof (or any rights, options or warrants to purchase same), or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. ARTICLE IX MISCELLANEOUS PROVISIONS 9.1 NON-ASSIGNABILITY. Subject to Section 5.1 hereof, no interest of a Participant in any Incentive Amount awarded under the Plan may be transferred, alienated, assigned or encumbered other than by will or pursuant to the laws of descent and distribution. 6 9.2 NO RIGHT TO CONTINUE EMPLOYMENT. Nothing in the Plan confers upon any employee the right to continue in the employ of the Company or interferes with or restricts in any way the right of the Company to discharge any employee at any time (subject to any contract rights of such employee). 9.3 TAX REQUIREMENTS. The Company (and, where applicable, its Subsidiaries) shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company an amount sufficient to satisfy all applicable taxes required by law to be withheld with respect to any payment of any Incentive Amount to a Participant. 9.4 INDEMNIFICATION OF BOARD AND COMMITTEE. No member of the Board or the Committee, nor any officer, employee or agent of the Company acting on behalf of the Board or the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Board or the Committee and each and every officer, employee or agent of the Company acting on their behalf shall, to the fullest extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination or interpretation. Each member of the Board and the Committee shall, in the performance of his or her duties under the Plan, be fully protected in relying in good faith upon the audited and unaudited financial statements of the Company as contemplated by the terms of the Plan. 9.5 EFFECT ON PARTICIPATION. The grant of an Incentive Amount to a Participant shall not be deemed either to entitle the Participant to, or to disqualify the Participant from, as the case may be, participation in any other future grant of Incentive Amounts under the Plan or otherwise, or in any other compensation or benefit plan of the Company or in any of its Subsidiaries currently existing or hereafter established. 9.6 OTHER COMPENSATION AGREEMENTS. Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. 9.7 GENDER AND NUMBER. Where the context permits, words in the masculine gender shall include the feminine and neuter genders, the plural form of a word shall include the singular form, and the singular form of a word shall include the plural form. ARTICLE X UNFUNDED STATUS OF PLAN The Plan is intended to constitute an "unfunded" plan for incentive compensation. With respect to any Incentive Amounts granted but not yet paid to a Participant by the Company. nothing contained herein shall give any such Participant any rights that are greater than those of a general unsecured creditor of the Company. In its sole discretion, the Committee may authorize the creation of. trusts or other arrangements to satisfy the Plan provisions concerning payments with respect to awards of Incentive Amounts; provided, however, that the creation or existence of such trusts or other arrangements is consistent with the unfunded status of the Plan. 7 EXECUTED this day of , 1999 -------- ------------ INPUT/OUTPUT, INC By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ Attest: - ------------------------- Secretary EX-10.44 3 ex10-44.txt EMPLOYMENT AGREEMENT - MARCH 1, 2000 1 EXHIBIT 10.44 EMPLOYMENT AGREEMENT THIS AGREEMENT is made and entered into by and between INPUT/OUTPUT, INC. (the "Company"), having a business address at 11104 West Airport Boulevard, Stafford, Texas 77477-3016, and Timothy Probert (the "Executive"), having a mailing address at 14842 Bramblewood Drive, Houston, Texas 77079. WHEREAS, the Company wishes to employ the Executive and to assure itself of the services of the Executive for the period provided in this Agreement, and the Executive wishes to be employed by the Company for such period on the terms and conditions hereinafter provided. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. EMPLOYMENT. Upon the terms and subject to the conditions contained in this Agreement, the Executive agrees to provide services as provided herein for the Company during the term of this Agreement. The Executive agrees to devote his best efforts and fulltime to the business of the Company, and shall perform his duties in a diligent and business-like manner, all for the purpose of advancing the business of the Company. 2. DUTIES. The duties of the Executive shall be those duties which can reasonably be expected to be performed by a person with the title President and Chief Executive Officer of Input/Output, Inc. The Executive shall report directly to the Board of Directors of the Company. 3. EMPLOYMENT TERM. Subject to the terms and conditions hereof, the Company agrees to employ the Executive for a term commencing as of March 1, 2000 (the "Effective Date") and continuing until February 28, 2004 (the "Primary Term"), unless renewed in accordance with the terms of this Section 3. Beginning February 28, 2004, this Agreement shall be automatically renewed each February 28 for successive one-year terms, unless either the Company or the Executive provides written notice of election not to renew, at least 60 days before the applicable renewal date. The "term of this Agreement" includes the Primary Term together with any renewal periods. 4. SALARY AND BENEFITS. (a) Base Salary. The Company shall, during the Primary Term of this Agreement, pay the Executive an annual base salary of $300,000 beginning on March 1, 2000. Such salary shall be paid in bi-monthly installments, minus applicable withholding and authorized salary deductions. The base salary will be reviewed annually by the Board of Directors. The Company may not, 2 however, reduce the Executive's base salary at any time during the Primary Term. (b) Bonus. The Executive shall be eligible to participate in the Input/Output, Inc. Annual Incentive Plan (the "Plan") for the Company's fiscal year commencing June 1, 2000. For the fiscal year ending May 31, 2001, Executive shall be entitled to receive a minimum bonus under the Plan in the amount of 50% of his annual base salary reduced by the value of any restricted stock grants (valued for the purposes of this subparagraph (b) at the closing price per share on the New York Stock Exchange composite transactions tape on the date of grant) provided that Executive is still so employed on the bonus payment date, but in any case no later than July 31, 2001. (c) Stock Options. The Executive shall be granted a nonqualified stock option effective March 1, 2000, to purchase 150,000 shares of common stock of the Company under the Input/Output, Inc. 1990 Stock Option Plan (the "Option Plan") having an exercise price equal to the fair market value of the stock on the date of grant. The option grant will be evidenced by the Company's standard stock option agreement. This option will vest in equal annual installments over a four-year period beginning on the date of grant. This option will have a term of ten years and will otherwise be subject to the standard terms and conditions of the Option Plan and as follows: (i) if the Executive's employment is terminated by the Company for any reason or Executive resigns or otherwise terminates his employment for any reason prior to a "change of control" (as defined in the Option Plan as of the date hereof) the option shall be vested and exercisable in accordance with the terms of the Option Plan as of the date hereof and the option agreement to be entered into between Company and Executive; (ii) if the Executive's employment is terminated by the Company for any reason other than for "Cause," or Executive resigns for Good Reason, in either event, within eighteen (18) months after a change of control all unvested installments of option shares under such option shall thereupon automatically accelerate and become fully vested (provided, however, that if Executive resigns for a Good Reason as defined in Section 5(b)(i)(A) below and has not remained employed with the Company for a period of at least one (1) year after the change of control date any unvested installment option shares shall vest in accordance with the Option Plan and the option agreement between the Company and Executive) ; and (iii) if Executive becomes entitled to an Employment Payment as defined under Section 5(b), any unvested installments of option shares under such option shall upon such resignation of Executive automatically accelerate and become fully vested; (iv) except as provided in (iii), if the Executive's employment is not terminated within eighteen (18) months after such change of control date, the terms of the Option Plan and option agreement entered into - 2 - 3 between Company and Executive shall thereafter be controlling with respect to vesting and the exercise of option rights. (d) Stock Purchase Incentive. With respect to each share of Company stock purchased by the Executive or a family trust (in which Executive is a beneficiary or has investment control and discretion) between March 22, 2000 and April 14, 2000 on the open market or otherwise, but not pursuant to the Option Plan or any other equity compensation or benefit plan of the Company, the Company shall grant an option under the Option Plan effective April 14, 2000 pursuant to an option agreement to be entered into between the Company and the Executive to purchase three (3) shares of Company stock at an exercise price which is equivalent to the closing sales price per share of the Company's common stock on the New York Stock Exchange on April 14, 2000, as reported on the composite transactions tape for that date. The maximum number of shares to be purchased by the Executive between March 22, 2000 and April 14, 2000 that are eligible for this matching option shall be 50,000. For example, if the Executive purchases 50,000 shares on March 30, 2000, the Company will grant the Executive an option to purchase 150,000 shares of common stock and no more options will be granted under this Section 4(d). In order to receive a grant under this Section 4(d), the Executive must present written evidence to the Company of the Executive's purchases of shares no later than April 20, 2000 and the Executive must undertake to hold the shares so purchased for a period of at least six (6) months. Any such purchases shall be subject to the Executive's obtaining prior consent from the Company's appropriate compliance officer with respect to securities transactions by employees, and his compliance with all other applicable laws and regulations. Any option shares granted under this Section 4(d) shall vest in equal annual installments over a four-year period beginning on the effective date of the grant. All options to be granted in accordance with this Subsection (d) shall have identical features respecting vesting and acceleration as defined in Subsection (c) above. (e) Reimbursement of Expenses. The Company shall reimburse the Executive for all out-of-pocket expenses incurred by the Executive in the course of his duties, in accordance with normal Company policies. (f) Employee Benefits. The Executive shall be entitled to participate in all employee benefit programs generally available to employees of the Company and to receive all normal perquisites provided to senior executive officers of the Company subject to the terms and conditions of the plans or programs. Executive shall be entitled to a minimum of twenty (20) vacation days annually. - 3 - 4 5. TERMINATION OF EMPLOYMENT. The Board of Directors of the Company may terminate the employment of the Executive at any time as it deems appropriate. (a) Termination Without Cause or Good Reason. If, during the term of this Agreement, the Company terminates the Executive's employment for any reason other than for Cause (as defined in Section 5(c) of this Agreement) or Executive terminates his employment for Good Reason, in either event, prior to a "Change of Control" (as defined in Section 5(b)(ii) hereof), the Company shall pay to the Executive an amount (the "Severance Payment") equal to the sum of (i) plus (ii), where (i) is the Executive's base salary as in effect on his date of termination multiplied by two (2) and (ii) is two (2) multiplied by Executive's average annual bonus payments for the three (3) most recently completed fiscal years of the Company (or, in the event that the Executive has not been employed by the Company for at least three (3) fiscal years as of the date of his termination, the average sum of Executive's annual bonus payments during Executive's employment with the Company); in the event that the Executive is employed less than one (1) year, this annual bonus amount shall be deemed to be fifty percent (50%) of his annual base salary as in effect on his termination date. For the purposes of this Section 5(a) and Section 5(b) below, the bonus relating to any fiscal year shall be deemed to have been paid in such fiscal year even if the bonus is actually paid in a different fiscal year. If the Executive terminates his employment for Good Reason pursuant to this Section 5(a), he must notify the Board of Directors of the Company in writing of his intent to terminate his employment for Good Reason describing the Good Reason event within forty-five (45) days of the occurrence of the Good Reason event in order to receive a Severance Payment hereunder. If no such written notice is provided by Executive within forty-five (45) days of a Good Reason event, the Executive's consent to the event shall be presumed and no Severance Payment shall be payable on account of the occurrence of the Good Reason event. The amount of any such Severance Payment shall be paid in substantially equal bi-monthly amounts over a period of two (2) years following his date of termination, less any applicable withholding; provided however, that in the event that the Executive becomes employed by any employer, whether as a consultant, employee or otherwise, at any time during such two-year period following his termination of employment, whether or not such employment is comparable in duties and compensation to his position with the Company, the amount payable to the Executive under this Section 5(a) subsequent to any such employment shall be reduced by the amount of salary and bonus payable to the Executive on account of such employment on a dollar for dollar basis, but such reduction shall not exceed 50% of the amount of the Severance Payment. (b) Termination After a Change of Control. If, within eighteen (18) months following the date of a "Change of Control" of the Company (as defined - 4 - 5 below), the Company terminates the Executive's employment for any reason other than for "Cause" (as defined in Section 5(c) of this Agreement) or the Executive terminates his employment with the Company for "Good Reason" (as defined below), the Company shall pay to the Executive an amount (the "Change of Control Payment") equal to (i) plus (ii) where (i) is three (3), multiplied by the Executive's annual base salary as in effect on his termination date and where (ii) is three (3) multiplied by the average of the annual bonus payments for the three (3) most recently completed fiscal years of the Company (or, in the event that the Executive has not been employed by the Company for at least three (3) fiscal years as of the date of his termination, the average of the sum of the Executive's annual bonus payments during the Executive's employment with the Company); in the event that Executive is employed less than one (1) year, this annual bonus amount shall be deemed to be fifty (50%) percent of his base salary as in effect on his termination date. In order to receive any Change in Control Payment on account of a Good Reason resignation, Executive must provide written notice to the Board of his intent to resign for Good Reason within forty-five (45) days after the effective date of his resignation. Notwithstanding the foregoing, if the Executive terminates his employment for a Good Reason event described in Section 5(b)(i)(A) below and has not remained employed with the Company for a period of at least one (1) year from and after the Change of Control date, the number two (2) shall be substituted for the number three (3) multiplier in the preceding formula contained in this subparagraph (b) in order to calculate the Change of Control Payment that may become payable to Executive upon his termination of employment. The amount of any such Change of Control Payment shall be paid in a lump sum, less applicable withholding, as soon as practicable following such termination, and shall be paid in lieu of any Severance Payment otherwise payable under Section 5(a) above. In lieu of the Change of Control Payment in this Subsection (b) and the Severance Payment in Section 5(a) payable on account of Good Reason termination, Executive shall be entitled to an "Employment Payment" if Executive remains employed for a period of at least twelve (12) months following the date of a Change of Control and Executive resigns on account of a Good Reason which occurs anytime after the date of a Change of Control, calculated as an amount equal to (i) plus (ii) where (i) is three (3), multiplied by the Executive's annual base salary as in effect on his termination date and where (ii) is three (3) multiplied by the average of the annual bonus payments for the three (3) most recently completed fiscal years of the Company (or, in the event that the Executive has not been employed by the Company for at least three (3) fiscal years as of the date of his termination, the average of the sum of the Executive's annual bonus payments during the Executive's employment with the Company). Executive must provide written notice of his intent to resign for Good Reason to the Board within 45 days after the effective date of his - 5 - 6 resignation. The Employment Payment shall be paid in the same manner as provided for the Change of Control Payment provided herein. (i) For purposes of this Agreement, "Good Reason" shall mean: (A) Without his express written consent, the assignment to the Executive of any duties inconsistent with his positions, duties, responsibilities and status with the Company immediately prior to a Change of Control, or a change in his reporting responsibilities, titles or offices as in effect immediately prior to a Change of Control, or any removal of the Executive from or any failure to re-elect the Executive to any of such positions, except in connection with the termination of his employment for Cause, death, permanent and total disability (as such term is defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code")) or retirement in accordance with normal Company policies or by the Executive other than for Good Reason; (B) A reduction by the Company in the Executive's base salary as in effect on the date of a Change of Control or as the same may be increased from time to time thereafter; (C) The Company's requiring the Executive to be based anywhere other than either the Company's offices at which he was based immediately prior to a Change of Control or the Company's offices which are no more than 50 miles from the offices at which the Executive was based immediately prior to a Change of Control, except for required travel on the Company's business to an extent substantially consistent with his business travel obligations immediately prior to the Change of Control (excluding, however, any travel obligations prior to the Change of Control that are associated with or caused by the Change of Control events or circumstances), or, in the event the Executive consents to any relocation beyond such 50-mile radius, the failure by the Company to pay (or reimburse the Executive) for all reasonable moving expenses incurred by him relating to a change of his principal residence in connection with such relocation; or (D) Any failure of the Company to obtain the assumption of, or the agreement to perform, this Agreement by any successor as contemplated in Section 7(a). - 6 - 7 (ii) For purposes of this Section 5(b), a "Change of Control" of the Company shall mean the occurrence of any of the following events: (A) there shall be consummated any merger or consolidation pursuant to which shares of the Company's common stock would be converted into cash, securities or other property, or any sale, lease, exchange or other disposition (excluding disposition by way of mortgage, pledge or hypothecation), in one transaction or a series of related transactions, of all or substantially all of the assets of the Company (a "Business Combination"), in each case unless, following such Business Combination, the holders of the outstanding common stock immediately prior to such Business Combination beneficially own, directly or indirectly, more than 51% of the outstanding common stock or equivalent equity interests of the corporation or entity resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the outstanding common stock of the Company, (B) the stockholders of the Company approve any plan or proposal for the complete liquidation or dissolution of the Company, (C) any "person" (as such term is defined in Section 3(a)(9) or Section 13(d)(3) under the Securities Exchange Act of 1934 (the "1934 Act")) or any "group" (as such term is used in Rule 13d-5 promulgated under the 1934 Act), other than the Company, any successor of the Company or any subsidiary or any employee benefit plan of the Company or any subsidiary (including such plan's trustee), becomes a beneficial owner for purposes of Rule 13d-3 promulgated under the 1934 Act, directly or indirectly, of securities of the Company representing 40% or more of the Company's then outstanding securities having the right to vote in the election of directors, or (D) during any period of two consecutive years, individuals who, at the beginning of such period constituted the entire Board, cease for any reason (other than death) to constitute a majority of the directors, unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least a majority of the directors then still in office who were directors at the beginning of the period. (iii) Excise Taxes and Gross-Up Payments. (1) The following benefits of this Subsection 5(b)(iii) shall only apply if the aggregate payments and distributions to the Executive or for the Executive's benefit (whether paid or payable or distributed or - 7 - 8 distributable) pursuant to the terms of this Agreement (the "Payment") exceeds 2.99 multiplied by the Executive's "base amount" (as defined under Section 280G(b)(3) of the Code) by 12.5% or greater. Only if the Payment to the Executive satisfies or exceeds such threshold, then the Executive (i) shall be entitled to the benefits and payments set forth in this Subsection, and (ii) shall be referred to in this Subsection as "Tax Eligible Executive." (2) If it shall be determined that the Executive is a Tax Eligible Executive and any or all of the Payment would be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then Tax Eligible Executive shall be entitled to receive from the Company an additional payment (the "Gross-Up Payment") in an amount such that the net amount of the Payment and the Gross-Up Payment retained by Tax Eligible Executive shall be equal to the Payment after the calculation and deduction of all Excise Taxes (including any interest or penalties imposed with respect to such taxes) on the Payment and all federal, state and local income tax, employment tax and Excise Tax (including any interest or penalties imposed with respect to such taxes) on the Gross-Up Payment provided for in this Subsection, and taking into account any lost or reduced tax deductions on account of the Gross-Up Payment. (3) All determinations required to be made under this Subsection, including whether the Executive is a Tax Eligible Executive and whether and when the Gross-Up Payment is required and the amount of such Gross-Up Payment, and the assumptions to be utilized in arriving at such determinations (consistent with the provisions of this Subsection), shall be made by the Company's independent certified public accountants (the "Accountants"). The Accountants shall provide Tax Eligible Executive and the Company with detailed supporting calculations with respect to such Gross-Up Payment within fifteen (15) business days of the receipt of notice from the Executive or the Company that the Executive has - 8 - 9 received or will receive a Payment. In the event that the Accountants are also serving as accountant or auditor for the individual, entity or group effecting the Change of Control, Tax Eligible Executive shall appoint another nationally recognized public accounting firm to make the determination required hereunder (which accounting firm shall then be referred to as the Accountants hereunder). All fees and expenses of the Accountants shall be borne solely by the Company. All determinations by the Accountants shall be binding upon the Company and Tax Eligible Executive. (4) For the purposes of determining whether any of the Payments will be subject to the Excise Tax and the amount of such Excise Tax, such Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless and except to the extent that in the opinion of the Accountants such Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4) of the Code) in excess of the "base amount" or such "parachute payments" are otherwise not subject to such Excise Tax. For purposes of determining the amount of the Gross-Up Payment, Tax Eligible Executive shall be deemed to pay federal income taxes at the highest applicable marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made and to pay any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes that could be obtained from the deduction of such state or local taxes if paid in such year (determined without regard to limitations on deductions based upon the amount of Tax Eligible Executive's adjusted gross income); and to have - 9 - 10 otherwise allowable deductions for federal, state and local income tax purposes at least equal to those disallowed because of the inclusion of the Gross-Up Payment in Tax Eligible Executive's adjusted gross income. (5) To the extent practicable, any Gross-Up Payment with respect to any Payment shall be paid by the Company at the time Tax Eligible Executive is entitled to receive the Payment and in no event will any Gross-Up Payment be paid later than thirty (30) days after the receipt by Tax Eligible Executive of the Accountant's determination. As a result of uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accountants hereunder, it is possible that the Gross-Up Payment made will have been an amount less than the Corporation should have paid pursuant to this Subsection (the "Underpayment"). In the event that the Corporation exhausts its remedies pursuant to this Subsection and Tax Eligible Executive is required to make a payment of any Excise Tax, the Underpayment shall be promptly paid by the Company to or for the benefit of Tax Eligible Executive. (6) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Tax Eligible Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which Tax Eligible Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes, interest and/or penalties with respect to such claim is due). If the Company notifies Tax Eligible Executive in writing prior to the expiration - 10 - 11 of such thirty (30) day period that it desires to contest such claim, Tax Eligible Executive shall: (A) give the Company any information reasonably requested by the Company relating to such claim; (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (C) cooperate with the Company in good faith in order to effectively contest such claim; and (D) permit the Company to participate in any proceedings relating to such claims; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify Tax Eligible Executive for, advance expenses to Tax Eligible Executive for, defend Tax Eligible Executive against and hold him harmless from, on an after-tax basis, any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of all related costs and expenses. Without limiting the foregoing provisions of this Subsection, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Tax Eligible Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Tax Eligible - 11 - 12 Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Tax Eligible Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Tax Eligible Executive, on an interest-free basis, and shall indemnify Tax Eligible Executive for, advance expenses to Tax Eligible Executive for, defend Tax Eligible Executive against and hold Tax Eligible Executive harmless from, on an after-tax basis, any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance (including as a result of any forgiveness by the Company of such advance); provided, further, that any extension of the statute of limitations relating to the payment of taxes for the taxable year of Tax Eligible Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Tax Eligible Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (c) Termination for Cause; Termination by Executive. If (i) the Company shall discharge the Executive for Cause at any time, or (ii) the Executive's employment with the Company shall terminate as a result of his death or permanent and total disability (as defined in Section 5(b)(i) above) or (iii) the Executive shall terminate his employment with the Company prior to or after a Change of Control for any reason other than for Good Reason, the Executive shall be entitled to receive only the amount of base salary accrued by but unpaid to the Executive through the date of such termination of employment, plus the amount of any contractual bonus earned and unpaid, - 12 - 13 prorated through the date of his termination of employment and the Company shall have no further obligation to make any payment under this Agreement, except as may otherwise be provided under the terms of any employee benefit programs in which the Executive is then participating. For the purposes of this Agreement, the Company shall have "Cause" to terminate the Executive's employment hereunder upon (i) the willful and continued failure by the Executive to perform his duties with the Company (other than any such failure resulting from permanent and total disability as defined in Section 5(b)(i) above), after a written demand for substantial performance is delivered to the Executive by the Board which specifically identifies the manner in which the Board believes that he has not substantially performed his duties and if Executive does not cure such failure to the reasonable satisfaction of the Board within two (2) weeks after such written demand is delivered to Executive, or (ii) the willful engaging by the Executive in gross misconduct materially and demonstrably injurious to the Company. For purposes of this paragraph, no act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was not in the best interest of the Company. (d) Mitigation of Amounts Payable Hereunder. Except as specifically provided in Section 5(a), the Executive shall not be required to mitigate the amount of any payment provided for in this Section 5 by seeking other employment or otherwise nor shall the amount of any payment provided for in this Section 5 be reduced by any compensation earned by the Executive as the result of employment by another employer after the date of termination, or otherwise. 6. CONFIDENTIALITY; NON-SOLICITATION; NON-COMPETITION AND NON- DISPARAGEMENT. In consideration of the stock options granted and to be granted described in Sections 4(c) and (d), the Company's provision of knowledge and Confidential Information (as defined in Section 6.1) initially and on an ongoing basis to Executive, and the Company's provision of initial and ongoing specialized training to Executive, the Executive acknowledges and agrees to the following: 6.1 Confidential Information. Company will provide the Executive with initial and on an ongoing basis specialized training, confidential information, and knowledge regarding the Company, its affiliates and its subsidiaries (the "Companies") and their business. The Executive acknowledges that the Companies have incurred significant time and expense in developing proprietary and confidential information related to their business and operations. The Executive agrees that he will not divulge, communicate, use to the detriment of the Companies or for the benefit of any other - 13 - 14 person, firm or entity, or misappropriate in any way, any confidential information or trade secrets relating to the Companies or any of their businesses, including, without limitation, business strategies, operating plans, acquisition strategies (including the identities of and any other information concerning possible acquisition candidates), pro forma financial information, market analyses, acquisition terms and conditions, personnel information, trade processes, manufacturing methods, know-how, customer lists and relationships, supplier lists, all apparatus, products, processes, compositions, samples, formulas, computer programs, computer hardware designs, firmware designs, and servicing, marketing or manufacturing methods or techniques at any time used, developed, investigated, made or sold by the Companies, or other non-public proprietary and confidential information relating to the Companies (collectively, "Confidential Information"). None of the provisions of this Section 6.1 shall apply to disclosures of Confidential Information which (i) was publicly known at the time of its disclosure to the Executive, (ii) becomes publicly known or available thereafter other than by means in violation of this Agreement or any other duty owed to the Companies by the Executive or any other person or entity, or (iii) is lawfully disclosed to the Executive by a third party not in violation of any obligation of any confidentiality owed to any of the Companies. Notwithstanding the foregoing, the Executive shall be permitted to disclose Confidential Information (i) if required to do so to comply with any subpoena or other order issued by or in connection with any legal or administrative proceeding or (ii) to the extent required to enforce the Executive's rights hereunder in any litigation arising under, or pertaining to, this Agreement, provided the Executive shall give prior written notice to the Companies of any such disclosure so that the Companies may have an opportunity to protect the confidentiality of such Confidential Information. The Executive's obligations pursuant to this Section 6.1 are in addition to and cumulative of any other obligation of the Executive to hold in confidence Confidential Information of the Companies and their customers, suppliers or agents pursuant to contract or otherwise. 6.2 Non-solicitation. From and after the date hereof and until twenty-four (24) months after the date of the Executive's termination for any reason, including termination after a Change of Control, as defined herein, the Executive shall not, directly or indirectly, for himself or on behalf of any other person, firm or entity, solicit the employment, engagement or retention of any person who at the time of the Executive's termination was an employee of any of the Companies or at any time during the preceding three (3) month period shall have been an employee of any of the Companies. 6.3 Non-competition. If the Executive's employment with the Company is terminated by the Company for any reason, including termination after a Change of Control then until that date which is twelve (12) months after the date of the Executive's termination, the Executive shall not, as a principal, partner, joint venturer, member, manager, trustee, agent, stockholder, director, officer or employee of, or consultant or advisor to, or in any manner own, control, manage, operate, or otherwise - 14 - 15 participate, invest, or have any interest in, any person, firm or entity that engages, directly or indirectly, in the business of performing services or developing, manufacturing or selling products or services competitive with the proprietary business of the Company or the Companies (or any of them) in connection with the development and use of seismic equipment and/or technology within the United States of America and any other geographical area served by the Companies during the twelve (12) month period immediately preceding the Executive's date of termination, nor will the Executive engage, within this time period and geographical area, in the design, development, distribution, manufacture, assembly or sale of a product or service in competition with any product or service currently marketed or planned by the Companies, or any of them. The foregoing shall not pertain to the mere ownership of securities in any such enterprise and the exercise of any rights appurtenant solely to that ownership, so long as the Executive's ownership interest is less than five percent (5%) of the outstanding voting securities of such enterprise. 6.4 Non-disparagement. The Executive agrees that he will not disclose, communicate or publish any disparaging information concerning the Company or any of the Companies or any of their affiliates, subsidiaries, successors, assigns or their employees, officers or directors. 6.5 Consideration. The Executive acknowledges that his agreements contained in this Section 6 are reasonable as to time, geographical area and scope of activities to be restrained and do not impose a greater restraint than is necessary to protect the Companies' goodwill, proprietary information and other business interests and are a material inducement to the Company's entering into this Agreement. In addition, the Executive agrees that the amounts payable under Sections 4(c) and (d), Section 5, and the Companies' provision of initial and ongoing confidential information and specialized training to the Executive are sufficient consideration to support the covenants in this Section 6. The Executive shall be bound by the provisions of this Section 6 to the maximum extent permitted by law, it being the intent and spirit of the parties that the foregoing shall be fully enforceable. However, the parties further agree that, if any of the provisions hereof shall for any reason be held to be excessively broad as to duration, geographical scope, property or subject matter, such provision shall be construed by limiting and reducing it so as to be enforceable to the extent compatible with applicable law as it shall herein pertain. 6.6 Remedies. The Executive acknowledges that if he violates any of the provisions of this Section 6, the Company, in addition to any other rights and remedies available under this Agreement or otherwise, shall be entitled to an injunction to be issued or specific enforcement to be required (without the necessity of any bond) restricting the Executive from committing or continuing any such violation. - 15 - 16 6.7 Survival. The provisions of this Section 6 shall survive termination of this Agreement. 7. MISCELLANEOUS PROVISIONS. (a) Successors of the Company. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled hereunder if the Company terminated the Executive's employment without Cause, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date of Executive's termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 7(a) or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) Special Representations of Executive. The Executive may not assign his rights or delegate his duties or obligations hereunder without the written consent of the Company. The Executive represents to the Company that no previous employer has imposed any contractual restriction which would, if enforced, have a material adverse effect on the Company. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless other provided herein, shall be paid in accordance with the terms of this Agreement to his designee or, if there be no such designee, to his estate. (c) Notice. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Executive Vice President of the Company with a copy to the Secretary of the - 16 - 17 Company, or to such other person in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. (d) Amendment; Waiver. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer as may be designated by the Board of Directors of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. Except as provided in Section 6, no agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. (e) Invalid Provisions. Should any portion of this Agreement be adjudged or held to be invalid, unenforceable or void, such holding shall not have the effect of invalidating or voiding the remainder of this Agreement and the parties hereby agree that the portion so held invalid, unenforceable or void shall, if possible, be deemed amended or reduced in scope, or otherwise be stricken from this Agreement to the extent required for the purposes of validity and enforcement thereof. (f) Survival of the Parties' Obligations. The obligations of the Company and the Executive under this Agreement shall survive regardless of whether the Executive's employment by the Company is terminated, voluntarily or involuntarily, by the Company or the Executive, with or without Cause or Good Reason. (g) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. (h) Governing Law. This Agreement shall be governed by and construed under the laws of the State of Texas. (i) Captions. The use of captions and Section headings herein is for purposes of convenience only and shall not effect the interpretation or substance of any provisions contained herein. - 17 - 18 IN WITNESS WHEREOF, the parties hereto have signed this Agreement on the _____ day of February, 2000, but except as otherwise set forth in this Agreement, effective as of March 1, 2000. INPUT/OUTPUT, INC. By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- ----------------------------------------- Timothy Probert - 18 - EX-10.45 4 ex10-45.txt INPUT/OUTPUT, INC. 2000 RESTRICTED STOCK PLAN 1 EXHIBIT 10.45 INPUT/OUTPUT, INC. 2000 RESTRICTED STOCK PLAN The Input/Output, Inc. 2000 Restricted Stock Plan (hereinafter called the "Plan") was adopted by the Board of Directors of Input/Output, Inc., a Delaware corporation (hereinafter called the "Sponsoring Company"), effective as of March 13, 2000. ARTICLE 1 PURPOSE The purpose of the Plan is to attract and retain the services of key management employees of the Company and its Subsidiaries and to provide such persons with a proprietary interest in the Company through the granting of restricted stock that will (a) increase the interest of such persons in the Company's welfare; (b) furnish an incentive to such persons to continue their services for the Company; (c) provide a means through which the Company may attract able persons as employees; and (d) in instances where authorized by the Committee, provide certain key employees additional incentives to make substantial contributions to the Company's growth measured by the attainment of performance goals. ARTICLE 2 DEFINITIONS For the purpose of the Plan, unless the context requires otherwise, the following terms shall have the meanings indicated: 2.1 "Award" means a grant of Restricted Stock under the Plan. 2.2 "Award Agreement" means a written agreement between a Participant and the Company which sets out the terms of the grant of an Award. 2.3 "Board" means the board of directors of the Company. 2.4 "Change of Control" means the occurrence of any of the following events: (i) there shall be consummated any merger or consolidation pursuant to which shares of the Company's Common Stock would be converted into cash, securities or other property, or any sale, lease, exchange or other disposition (excluding disposition by way of mortgage, pledge or hypothecation), in one transaction or a series of related transactions, of all or substantially all the assets of the Company (a "Business Combination"), in each case unless, following such Business Combination, the holders of the outstanding Common Stock of the Company immediately prior to such Business Combination beneficially own, directly or indirectly, more than 51% of the outstanding common stock or equivalent equity interests of the corporation or entity resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the outstanding common stock, (ii) the stockholders of the Company approve any plan or proposal for the complete liquidation or dissolution of the Company, (iii) any "person" (as such term is defined in Section 3(a)(9) or Section 13(d)(3) under the Securities 2 Exchange Act of 1934 (the "1934 Act") or any "group" (as such term is used in Rule 13d-5 promulgated under the 1934 Act) other than an Employer or a successor of an Employer, or any employee benefit plan of an Employer (including such plan's trustee), becomes a beneficial owner for purposes of Rule 13d-3 promulgated under the 1934 Act, directly or indirectly, of securities of the Company representing 40% or more of the Company's then outstanding common securities having the right to vote in the election of directors, or (iv) during any period of two consecutive years, individuals who, at the beginning of such period constituted the entire Board, cease for any reason (other than death) to constitute a majority of the directors, unless the elections, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least a majority of the directors then still in office who were directors at the beginning of the period. For purposes of this definition, the term "Company" shall include any successor or assignee of such corporation, which successor or assignee assumes such status other than pursuant to an event or occurrence constituting a "Change of Control." 2.5 "Code" means the Internal Revenue Code of 1986, as amended. 2.6 "Committee" means the committee appointed or designated by the Board to administer the Plan in accordance with Article 3 of this Plan. 2.7 "Common Stock" means the common stock, par value $0.01 per share, which the Company is currently authorized to issue or may in the future be authorized to issue. 2.8 "Date of Grant" means the effective date on which an Award is made to a Participant as set forth in the applicable Award Agreement. 2.9 "Employee" means common law employee (as defined in accordance with the Regulations and Revenue Rulings then applicable under Section 3401(c) of the Code) of the Company or any Subsidiary of the Company. 2.10 "Employer" shall mean the Company or any affiliated company or Subsidiary of the Company that adopts the Plan. 2.11 "Fair Market Value" of a share of Common Stock is the closing sales price per share on the New York Stock Exchange Consolidated Tape, or such reporting service as the Committee may select, on the appropriate date, or in the absence of reported sales on such day, the most recent previous day for which sales were reported. 2.12 "Participant" shall mean an Employee of the Company or a Subsidiary to whom an Award is granted under this Plan. 2.13 "Plan" means this Input/Output, Inc. 2000 Restricted Stock Plan, as amended from time to time. 2.14 "Restricted Stock" means shares of Common Stock issued or transferred to a Participant pursuant to this Plan which are subject to restrictions or limitations set forth in this Plan and in a related Award Agreement. 2.15 "Restriction Period" shall have the meaning set forth in Section 6.5(a) hereof. 2.16 "Retirement" means any Termination of Service solely due to retirement after attaining age 65, or permitted early retirement as determined by the Committee. 2.17 "Subsidiary" means (i) any corporation in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing a majority of the total combined voting power of all classes of stock in one of the other corporations in the chain, (ii) any limited partnership, if the Company or any corporation described in item (i) above owns a majority of the general partner interests and a majority of the limited partners' interests entitled to vote on the removal and 3 replacement of the general partner, and (iii) any general partnership or limited liability company, if the partners or members thereof are composed only of the Company, any corporation listed in item (i) above or any limited partnership listed in item (ii) above. "Subsidiaries" means more than one of any such corporations, limited partnerships, general partnerships or limited liability companies. 2.18 "Termination of Service" occurs when a Participant who is an Employee of the Company or any Subsidiary shall cease to serve as an Employee of the Company and its Subsidiaries, for any reason. 2.19 "Total and Permanent Disability" means the Participant's total and permanent disability, as that term is described in Section 22(e) of the Code. ARTICLE 3 ADMINISTRATION The Plan shall be administered by the Compensation Committee of the Board or another committee appointed by the Board (the "Committee"). The Committee shall consist of not fewer than two persons. Any member of the Committee may be removed at any time, with or without cause, by resolution of the Board. Any vacancy occurring in the membership of the Committee may be filled by appointment by the Board. The Committee shall select one of its members to act as its Chairman. A majority of the Committee shall constitute a quorum, and the act of a majority of the members of the Committee present at a meeting at which a quorum is present shall be the act of the Committee. The Committee shall determine and designate from time to time the eligible persons to whom Awards will be granted and shall set forth in each related Award Agreement, the Date of Grant and such other terms, provisions, limitations, and performance requirements (if any), as are approved by the Committee, but not inconsistent with the Plan. The Committee, in its discretion, shall (i) interpret the Plan, (ii) prescribe, amend, and rescind any rules and regulations necessary or appropriate for the administration of the Plan, and (iii) make such other determinations and take such other action as it deems necessary or advisable in the administration of the Plan. Any interpretation, determination, or other action made or taken by the Committee shall be final, binding, and conclusive on all interested parties. ARTICLE 4 ELIGIBILITY Employees who are eligible to participate in the Plan (including an Employee who is also a director or an officer) are those Employees whom the Committee determines are key Employees. The Committee, upon its own action, may grant, but shall not be required to grant, an Award to any Employee or potential Employee of the Company or any Subsidiary. Awards may be granted by the Committee at any time and from time to time to new Participants, or to existing Participants, or to a greater or lesser number of Participants, and may include or exclude previous Participants, as the Committee shall determine. Except as required by this Plan, all Awards shall not be required to contain the same or similar provisions. The Committee's determinations under the Plan (including without limitation determinations of which Employees or potential Employees, if any, are to receive Awards, the form, amount and timing of such Awards, the terms and provisions of such Awards and the agreements evidencing same) need not be uniform and may be made by it selectively among Employees who receive, or are eligible to receive, Awards under the Plan. 4 ARTICLE 5 SHARES SUBJECT TO PLAN Subject to adjustment as provided in Articles 9 and 10, the maximum number of shares of Common Stock that may be delivered pursuant to Awards granted under the Plan is (a) Two Hundred Thousand (200,000) shares; plus (b) any shares of Common Stock previously subject to Awards which are forfeited, terminated, settled in cash in lieu of Common Stock, or exchanged for other awards that do not involve Common Stock. Shares to be issued or delivered may be made available from authorized but unissued Common Stock, Common Stock held by the Company in its treasury, or Common Stock purchased by the Company on the open market or otherwise; provided however, that shares to be delivered with regards to the initial grant of Awards under this Plan shall be made available only from Company treasury shares or Common Stock repurchased by the Company. ARTICLE 6 GRANT OF AWARDS 6.1 IN GENERAL. The grant of an Award shall be authorized by the Committee and shall be evidenced by an Award Agreement setting forth the Award being granted, the total number of shares of Common Stock subject to the Award, the Date of Grant, and such other terms, provisions, limitations, and performance objectives, as are approved by the Committee, but not inconsistent with the Plan. The Company shall execute an Award Agreement with a Participant after the Committee approves the issuance of an Award. Any Award granted pursuant to this Plan must be granted within ten (10) years of the date of adoption of this Plan. The grant of an Award to a Participant shall not be deemed either to entitle the Participant to, or to disqualify the Participant from, receipt of any other Award under the Plan. If the Committee establishes a purchase price for an Award, the Participant must accept such Award within a period of 30 days (or such shorter period as the Committee may specify) after the Date of Grant by executing the applicable Award Agreement and paying such purchase price. 6.2 MAXIMUM INDIVIDUAL GRANTS. No Participant may receive, during any fiscal year of the Company, Awards covering an aggregate of more than Fifty Thousand (50,000) shares of Common Stock. 6.3 AWARD AGREEMENT. The Committee shall set forth in the related Award Agreement: (i) the number of shares of Common Stock awarded, (ii) the price, if any, to be paid by the Participant for such Restricted Stock, (iii) the time or times within which such Award may be subject to forfeiture, (iv) specified performance goals (if applicable) of the Company, a Subsidiary, any division thereof or any group of Employees of the Company, or any other criteria, which the Committee determines must be met in order to remove any restrictions (including vesting) on such Award, and (v) all other terms, limitations, restrictions, and conditions of the Restricted Stock, which shall be consistent with this Plan. The provisions of a Restricted Stock Award need not be the same with respect to each Participant. 6.4 CUSTODY OF SHARES; LEGEND ON SHARES. Each Participant who is awarded Restricted Stock shall be issued a stock certificate or certificates in respect of such shares of Common Stock. Such certificate(s) shall be registered in the name of the Participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock, substantially as provided in Section 13.8 of the Plan. The Committee may require that the stock certificates evidencing shares of Restricted Stock be held in custody by the Company until the restrictions thereon shall have lapsed, and that the Participant deliver to the Committee a stock power or stock powers, endorsed in blank, relating to the shares of Restricted Stock. 6.5 RESTRICTIONS AND CONDITIONS. Shares of Restricted Stock shall be subject to the following restrictions and conditions: 5 (a) No Disposition During Restriction Period. Subject to the other provisions of this Plan and the terms of the particular Award Agreements, during such period as may be determined by the Committee commencing on the Date of Grant (the "Restriction Period"), the Participant shall not be permitted to sell, transfer, pledge, assign, or otherwise dispose of shares of Restricted Stock. The Restriction Period for shares of Restricted Stock shall commence on the Date of Grant of such shares and, subject to Article 10 of the Plan, shall expire upon satisfaction of the conditions set forth in the Award Agreement; such conditions may provide for vesting based on (i) length of continuous service, (ii) achievement of specific business objectives, (iii) increases in specified indices, (iv) attainment of specified growth rates, or (v) other comparable measurements of Company performance (or that of any Subsidiary or division thereof), as may be determined by the Committee in its sole discretion. If the Committee imposes conditions upon vesting, then subsequent to the Date of Grant, the Committee may, in its sole discretion, accelerate the date on which all or any portion of the Award may be vested. (b) Rights During Restriction Period. Except as provided in paragraph (a) above, the Participant shall have, with respect to his or her Restricted Stock, all of the rights of a stockholder of the Company, including the right to vote the shares, and the right to receive any dividends thereon. (c) Lapse of Restrictions. Certificates for shares of Common Stock free of restriction under this Plan shall be delivered to the Participant promptly after, and only after, the particular Restriction Period shall expire as a result of satisfaction of the conditions set forth in the Award Agreement. (d) Forfeiture. Subject to the provisions of the particular Award Agreement, upon Termination of Service for any reason other than the Participant's death, Total and Permanent Disability, or Retirement during the Restriction Period, the nonvested shares of Restricted Stock shall be forfeited by the Participant. In addition, an Award Agreement may provide for forfeiture of shares of Restricted Stock upon the occurrence of other events, including failure to achieve certain goals or objectives during a specified period of time. In the event a Participant has paid any consideration to the Company for such forfeited Restricted Stock, the Company shall, as soon as practicable after the event causing forfeiture (but in any event within five (5) business days), pay to the Participant, in cash, an amount equal to the total consideration paid by the Participant for such forfeited shares. Upon any forfeiture, all rights of a Participant with respect to the forfeited shares of the Restricted Stock shall cease and terminate, without any further obligation on the part of the Company. Certificates for the shares of Common Stock forfeited under the provisions of the Plan and the applicable Award Agreement shall be promptly returned to the Company by the forfeiting Participant. Each Award Agreement shall require that (i) each Participant, by his or her acceptance of Restricted Stock, irrevocably grants to the Company a power of attorney to transfer to the Company any shares so forfeited, and agrees to execute any documents requested by the Company in connection with such forfeiture and transfer, and (ii) such provisions regarding returns and transfers of stock certificates with respect to forfeited shares of Common Stock shall be specifically performable by the Company in a court of equity or law. ARTICLE 7 AMENDMENT OR DISCONTINUANCE Subject to the limitations set forth in this Article 7, the Board may at any time and from time to time, without the consent of the Participants, alter, amend, revise, suspend, or discontinue the Plan in whole or in part. Any such amendment shall, to the extent deemed necessary or advisable by the Committee, be applicable to any outstanding Awards theretofore granted under the Plan, notwithstanding any contrary provisions contained in any Award Agreement. In the event of any such amendment to the Plan, the holder of any Award outstanding under the Plan shall, upon request of the Committee and as a condition to the vesting thereof, execute a conforming amendment to his applicable Award Agreement in the form prescribed by the Committee. Notwithstanding anything contained in this Plan to the contrary, unless required by law, no action contemplated or permitted by this 6 Article 7 shall adversely affect any rights of Participants or obligations of the Company to Participants with respect to any Award theretofore granted under the Plan without the consent of the affected Participant. ARTICLE 8 TERM The Plan shall be effective from the date that this Plan is approved by the Board. Unless sooner terminated by action of the Board, the Plan will terminate on March 13, 2010, but Awards granted before that date will continue to be effective in accordance with their terms and conditions. ARTICLE 9 CAPITAL ADJUSTMENTS If at any time while the Plan is in effect, or Awards are outstanding, there shall be any increase or decrease in the number of issued and outstanding shares of Common Stock resulting from (a) the declaration or payment of a stock dividend, (b) any recapitalization resulting in a stock split-up, combination, or exchange of shares of Common Stock, or (c) other increase or decrease in such shares of Common Stock effected without receipt of any consideration by the Company, then and in such event: (i) An appropriate adjustment shall be made in the maximum number of shares of Common Stock then subject to being awarded under the Plan and in the maximum number of shares of Common Stock that may be awarded to a Participant to the end that the same proportion of the Company's issued and outstanding shares of Common Stock shall continue to be subject to being so awarded; and (ii) Appropriate adjustments shall be made in the number of outstanding shares of Restricted Stock with respect to which the applicable Restriction Period has not expired prior to any such change. Except as otherwise expressly provided herein, the issuance by the Company of shares of its capital stock of any class, or securities convertible into shares of capital stock of any class, either in connection with direct sale or upon the exercise of rights, options, or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of outstanding shares of Restricted Stock. Upon the occurrence of each event requiring an adjustment with respect to any Award, the Company shall mail to each affected Participant its computation of such adjustment which shall be conclusive and shall be binding upon each such Participant. ARTICLE 10 RECAPITALIZATION, MERGER AND CONSOLIDATION; CHANGE IN CONTROL 10.1 RIGHT OF THE COMPANY. The existence of this Plan and Awards granted hereunder shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations, or other changes in the Company's capital structure and its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or preference stocks ranking prior to or otherwise affecting the Common Stock or the rights thereof (or any rights, options, or warrants to purchase same), or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. 7 10.2 MERGER, CONSOLIDATION IF THE COMPANY IS SURVIVOR. Subject to any required action by the stockholders (and except as otherwise provided in Section 10.3 below), if the Company shall be the surviving or resulting corporation in any merger, consolidation or share exchange, any Award granted hereunder shall pertain to and apply to the securities or rights (including cash, property, or assets) to which a holder of the number of shares of Common Stock subject to the Award would have been entitled. 10.3 MERGER, CONSOLIDATION IF THE COMPANY IS NOT SURVIVOR. In the event of any merger, consolidation or share exchange pursuant to which the Company is not the surviving or resulting corporation, (or the Company is the surviving entity but the Common Stock of the Company is exchanged for cash, property, securities or other consideration of or from any other entity) there shall be substituted for each share of Common Stock subject to the unexercised portions of such outstanding Awards, (i) that number of shares of each class of stock or other securities or that amount of cash, property, or assets of the surviving, resulting or consolidated entity which were distributed or distributable to the stockholders of the Company in respect of each share of Common Stock held by them, or (ii) such number of shares of stock, or other securities, or such amount of cash, property or assets (or any combination thereof) as proportionate in value as reasonably practicable to the consideration distributed or distributable to the stockholders of the Company with respect to each share of Common Stock held by them. 10.4 CHANGE OF CONTROL. In the event of a Change of Control, the acceleration of vesting of nonvested shares of Restricted Stock and the expiration of the Restriction Period(s) with respect thereto shall be governed by the provisions of the applicable Award Agreement. ARTICLE 11 LIQUIDATION OR DISSOLUTION In case the Company shall, at any time while any Award under this Plan shall be in force and its Restriction Period remains unexpired, (i) sell all or substantially all of its property, or (ii) dissolve, liquidate, or wind up its affairs, then each Participant shall be thereafter entitled to receive, in lieu of each share of Common Stock of the Company which such Participant would have been entitled to receive under the Award, the same kind and amount of any securities or assets as may be issuable, distributable, or payable upon any such sale, dissolution, liquidation, or winding up with respect to each share of Common Stock of the Company. ARTICLE 12 AWARDS IN SUBSTITUTION FOR AWARDS GRANTED BY OTHER CORPORATIONS Awards may be granted under the Plan from time to time in substitution for similar instruments held by employees of a corporation who become or are about to become key Employees of the Company or any Subsidiary as a result of a merger or consolidation of the employing corporation with the Company or the acquisition by the Company of stock of the employing corporation. The terms and conditions of the substitute Awards so granted may vary from the terms and conditions set forth in this Plan to such extent as the Committee at the time of grant may deem appropriate to conform, in whole or in part, to the provisions of the Awards in substitution for which they are granted. 8 ARTICLE 13 MISCELLANEOUS PROVISIONS 13.1 INVESTMENT INTENT. The Company may require that there be presented to and filed with it by any Participant under the Plan, such evidence as it may deem necessary to establish that the Award granted or the shares of Common Stock to be transferred to the Participants are being acquired for investment and not with a view to their distribution. 13.2 NO RIGHT TO CONTINUED EMPLOYMENT. Neither the Plan nor any Award granted under the Plan shall confer upon any Participant any right with respect to continuance of employment by the Company or any Subsidiary. 13.3 INDEMNIFICATION OF BOARD AND COMMITTEE. No member of the Board or the Committee, nor any officer or Employee of the Company acting on behalf of the Board or the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Board or the Committee, and each officer or employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination, or interpretation. 13.4 EFFECT OF THE PLAN. Neither the adoption of this Plan nor any action of the Board or the Committee shall be deemed to give any person any right to be granted an Award or any other rights except as may be evidenced by an Award Agreement, or any amendment thereto, duly authorized by the Committee and executed on behalf of the Company, and then only to the extent and upon the terms and conditions expressly set forth therein. 13.5 COMPLIANCE WITH OTHER LAWS AND REGULATIONS. Notwithstanding anything contained herein to the contrary, the Company shall not be required to issue or deliver shares of Common Stock under any Award if the issuance or delivery thereof would constitute a violation by the Participant or the Company of any provisions of any law or regulation of any governmental authority or the rules of any national securities exchange or inter-dealer quotation system or other forum in which shares of Common Stock are quoted or traded; and, as a condition of any sale or issuance of shares of Common Stock under an Award, the Committee may require such agreements or undertakings, if any, as the Committee may deem necessary or advisable to assure compliance with any such law or regulation. The Plan, the grant of Awards hereunder, and the obligation of the Company to deliver shares of Common Stock, shall be subject to all applicable federal and state laws, rules and regulations and to such approvals by any government or regulatory agency as may be required. 13.6 TAX REQUIREMENTS. The Company shall have the right to deduct from all amounts hereunder paid in cash or other form, any Federal, state, or local taxes required by law to be withheld with respect to such payments. The Participant receiving shares of Common Stock issued under the Plan shall be required to pay the Company the amount of any taxes which the Company is required to withhold with respect to such shares of Common Stock. 13.7 USE OF PROCEEDS. Proceeds from any sale of shares of Common Stock pursuant to Awards granted under this Plan shall constitute general funds of the Company. 13.8 LEGEND. Each certificate representing shares of Restricted Stock issued to a Participant shall bear the following legend, or a similar legend deemed by the Company to constitute an appropriate notice of the provisions hereof (any such certificate not having such legend shall be surrendered upon demand by the Company and so endorsed): 9 On the face of the certificate: "Transfer of this stock is restricted in accordance with conditions printed on the reverse of this certificate." On the reverse: "The shares of stock evidenced by this certificate are subject to and transferrable only in accordance with the terms of the Input/Output, Inc. 2000 Restricted Stock Plan, a copy of which is on file at the principal executive offices of the Company in Stafford, Texas. No transfer or pledge of the shares evidenced hereby may be made except in accordance with and subject to the provisions of said Plan. By acceptance of this certificate, any holder, transferee or pledgee hereof agrees to be bound by all of the provisions of said Plan." The following legend shall be inserted on each certificate evidencing Common Stock issued under the Plan if the shares were not issued in a transaction registered under the applicable federal and state securities laws: "Shares of stock represented by this certificate have been acquired by the holder for investment and not for resale, transfer or distribution, have been issued pursuant to exemptions from the registration requirements of applicable state and federal securities laws, and may not be offered for sale, sold or transferred other than pursuant to effective registration under such laws, or in transactions otherwise in compliance with such laws, and upon evidence satisfactory to the Company of compliance with such laws, as to which the Company may rely upon an opinion of counsel satisfactory to the Company." A copy of this Plan shall be kept on file in the principal executive offices of the Company in Stafford, Texas. IN WITNESS WHEREOF, the Company has caused this instrument to be executed pursuant to action taken by the Board. INPUT/OUTPUT, INC. By: ---------------------------------- Name: ------------------------- Title: ------------------------ August 9, 2000 EX-21.1 5 ex21-1.txt SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY
Jurisdiction Of Organization --------------- Input/Output of Canada, Inc. Delaware I/O International, Inc. Delaware I/O Eastern, Inc. Delaware I/O Holdings, Inc.. Delaware IPOP Management, Inc. Delaware Global Charter Corporation Delaware I/O Sensors, Inc. Delaware Microflow Analytical, Inc. Delaware Tescorp Seismic Products, Inc. Delaware I/O Cable, Inc. Delaware I/O Exploration Products (U.S.A.), Inc. Delaware Sensor Nederland B.V. Netherlands INCO Gravenhage, B.V. Netherlands HGS (India) Ltd. India I/O Exploration Products (U.K.), Inc. Delaware I/O of Austin, Inc. Delaware I/O Green Mountain, Inc. Delaware Global Charter S.A. Argentina I/O Marine Systems, Inc. Louisiana I/O Marine Systems Ltd. United Kingdom
EX-23.1 6 ex23-1.txt CONSENT OF KPMG LLP 1 EXHIBIT 23.1 Independent Auditors' Consent The Board of Directors Input/Output, Inc.: We consent to incorporation by reference in the registration statements ( No. 33-54394, No. 33-46386, No. 33-50620, No. 33-85304, No. 333-14231, No. 333-24125, No. 333-80927, No. 333-80299 and No. 333-36264) on Form S-8 of Input/Output, Inc. of our report dated July 17, 2000, relating to the consolidated balance sheets of Input/Output, Inc. and subsidiaries as of May 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity and comprehensive loss, and cash flows for each of the years in the three-year period ended May 31, 2000, and the related financial statement schedule, which report appears in the May 31, 2000 annual report on Form 10-K of Input/Output, Inc. Houston, Texas August 17, 2000 EX-27.1 7 ex27-1.txt FINANCIAL DATA SCHEDULE
5 1,000 12-MOS MAY-31-2000 JUN-01-1999 MAY-31-2000 100,216 0 58,465 (15,284) 69,185 222,007 112,479 (54,060) 381,769 38,595 9,040 0 1 510 334,504 381,769 121,454 121,454 106,642 100,282 (6,236) (17,608) 826 (80,060) (6,097) (73,963) 0 0 0 (78,520) (1.55) (1.55)
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