UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No.       )

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INPUT/OUTPUT, INC.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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INPUT/OUTPUT, INC.
2101 CityWest Blvd.
Building III, Suite 400
Houston, Texas 77042
(281) 933-3339

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To Be Held May 21, 2007

 

 

 

To our Stockholders:

 

The 2007 Annual Meeting of Stockholders of Input/Output, Inc. will be held at the offices of I/O’s subsidiary company, GX Technology Corporation, located at 2101 CityWest Boulevard, Building III, Suite 900, Houston, Texas, on Monday, May 21, 2007, at 1:30 p.m., local time, for the following purposes:

 

(1) Election of three directors, each for a three-year term expiring in 2010;

 

(2) Approval of certain amendments to the Input/Output, Inc. 2004 Long-Term Incentive Plan, with the principal amendment being the proposed increase of the total number of shares of I/O’s common stock available for issuance under the plan from 4,300,000 to 6,700,000 shares;

 

(3) Ratification of the appointment of Ernst & Young LLP as I/O’s independent registered public accounting firm (independent auditors) for 2007; and

 

(4) Transaction of any other business that may properly come before the Annual Meeting or any adjournment or postponement of the meeting.

 

I/O’s Board of Directors has set March 26, 2007, as the record date for the meeting. This means that owners of common stock at the close of business on that date are entitled to receive this notice of meeting and vote at the meeting and any adjournments or postponements of the meeting.

 

I/O will make available a list of stockholders of record as of the record date for inspection during normal business hours from 9:00 a.m. to 5:00 p.m., local time, from May 10, 2007 through May 20, 2007, at I/O’s principal place of business, located at 2101 CityWest Boulevard, Building III, Suite 400, Houston, Texas 77042. This list will also be available at the meeting. For your reference, directions to the meeting location are included in this proxy statement.

 

Your vote is very important. Whether you own one share or many, your prompt cooperation in voting your proxy is greatly appreciated. Whether or not you plan to attend the meeting, please sign, date and return your enclosed proxy card as soon as possible so that your shares can be voted at the meeting.

 

By Authorization of the Board of Directors,

 

 

David L. Roland

Senior Vice President, General Counsel

and Corporate Secretary

 

April 10, 2007

Houston, Texas

 

INPUT/OUTPUT, INC.
2101 CityWest Blvd.
Building III, Suite 400
Houston, Texas 77042
(281) 933-3339

 

April 10, 2007

 

 

PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS

To Be Held May 21, 2007

 

 

Our Board of Directors is furnishing you this proxy statement to solicit proxies on its behalf to be voted at the 2007 Annual Meeting of Stockholders of Input/Output, Inc. (I/O). The meeting will be held at the offices of our subsidiary company, GX Technology Corporation, located at 2101 CityWest Boulevard, Building III, Suite 900, Houston, Texas, on May 21, 2007, at 1:30 p.m., local time. The proxies also may be voted at any adjournments or postponements of the meeting.

 

The mailing address of our principal executive offices is 2101 CityWest Boulevard, Building III, Suite 400, Houston, Texas 77042. We are mailing the proxy materials to our stockholders beginning on or about April 10, 2007.

 

All properly executed written proxies that our stockholders deliver pursuant to this solicitation will be voted at the meeting in accordance with the directions given in the proxy, unless the proxy is revoked before the meeting.

 

Only owners of record of our shares of common stock at the close of business on March 26, 2007, are entitled to vote at the meeting, or at adjournments or postponements of the meeting. Each owner of common stock on the record date is entitled to one vote for each share of common stock held. On March 26, 2007, there were 81,490,853 shares of common stock issued and outstanding.

 

ABOUT THE MEETING

 

What is a proxy?

 

A proxy is your legal designation of another person to vote the stock you own on your behalf. That other person is referred to as a “proxy.” Our Board of Directors has designated Robert P. Peebler and James M. Lapeyre, Jr. as proxies for the 2007 Annual Meeting of Stockholders. By completing and returning the enclosed proxy card, you are giving Mr. Peebler and Mr. Lapeyre the authority to vote your shares in the manner you indicate on your proxy card.

 

Who is soliciting my proxy?

 

Our Board of Directors is soliciting proxies on its behalf to be voted at the 2007 Annual Meeting. All costs of soliciting the proxies will be paid by I/O. Copies of solicitation materials will be furnished to banks, brokers, nominees and other fiduciaries and custodians to forward to beneficial owners of I/O’s common stock held by such persons. I/O will reimburse such persons for their reasonable out-of-pocket expenses in forwarding solicitation materials. In addition to solicitations by mail, some of I/O’s directors, officers and other employees, without extra compensation, might supplement this solicitation by letter, telephone or personal interview. I/O has also retained Georgeson Inc. to assist with the solicitation of proxies from banks, brokers, nominees and other holders, for a fixed fee of $8,000 plus reasonable out-of-pocket expenses, which

fees and expenses will be paid by I/O. We may also ask our proxy solicitor to solicit proxies on our behalf by telephone for a fixed fee of $5 per phone call and $5 per telephone vote, plus reasonable expenses.

 

What is a proxy statement?

 

A proxy statement is a document that the regulations of the Securities and Exchange Commission require us to give you when we ask you to sign a proxy card designating individuals as proxies to vote on your behalf.

 

What is the difference between a “stockholder of record” and a stockholder who holds stock in “street name”?

 

If your shares are registered directly in your name, you are a stockholder of record. If your shares are registered in the name of your broker or bank, you are a street name holder.

 

What different methods can I use to vote?

 

(a) In Writing:  All stockholders can vote by written proxy card.

 

(b) By Telephone and Internet:  Street name holders may vote by telephone or the internet if their bank or broker makes those methods available, in which case the bank or broker will enclose the instructions with the proxy statement. The telephone and internet voting procedures, including the use of control numbers, are designed to authenticate stockholders’ identities, to allow stockholders to vote their shares, and to confirm that their instructions have been properly recorded.

 

(c) In Person:  All stockholders may vote in person at the meeting. If you are a street name holder who wishes to vote in person, you will need to ask your broker or bank for a legal proxy. You will need to bring the legal proxy with you to the meeting.

 

Where will the Annual Meeting be held?

 

I/O’s 2007 Annual Meeting of Stockholders will be held at the offices of I/O’s subsidiary company, GX Technology Corporation, located at 2101 CityWest Boulevard, Building III, Suite 900, Houston, TX 77042. The main phone number for the GXT offices is (713) 789-7250.

 

Directions:  The GXT offices are located on CityWest Boulevard off of Beltway 8, near the intersection of Beltway 8 and Briar Forest Drive. Traveling south on the Beltway 8 feeder road after Briar Forest Drive, turn right on Del Monte Drive. Enter Garage Entrance 3 on your immediate left. Advise the guard that you are attending the Input/Output Annual Meeting. You may be required to show your driver’s license or other photo identification. The guard will then direct you where to park in the visitors section of the parking garage. The guard can also direct you to Building III, which is directly south of the garage. In Building III, check in at the security desk, where you will be directed to the elevators. Take the elevators to the GXT offices on the ninth floor.

 

Does my vote matter?

 

Yes! Corporations are required to obtain stockholder approval for the election of directors and other important matters. Stockholder participation is not a mere formality. Stockholder voting is essential for I/O to continue to function. It is also important that you vote to assure that a quorum is obtained so that corporate business can be transacted at the meeting.

 

What is the effect of not voting?

 

It depends on how ownership of your shares is registered. If you are a stockholder of record, your unvoted shares will not be represented at the meeting and will not count toward the quorum requirement. Assuming a quorum is obtained, your unvoted shares will not be treated as a vote for or against a proposal.

 

If you own your shares in street name, your broker or bank may represent your shares at the meeting for purposes of obtaining a quorum. As described in the answer to the following question, in the absence of your voting instruction, your broker may or may not vote your shares.

 

If I don’t vote, will my broker vote for me?

 

If you own your shares in street name and you don’t vote, your broker may vote your shares in its discretion on “routine matters.” With respect to non-routine matters, however, your broker may not vote your shares for you. Where a broker votes your shares on routine matters but cannot vote your shares on non-routine matters because he has not received any instructions from you regarding how to vote, the number of unvoted shares on those matters is reported as “broker non-votes.” These “broker non-vote” shares are counted toward the quorum requirement, but, generally speaking, they do not affect the determination of whether a matter is approved. See “— How are abstentions and broker non-votes counted?” below. Except for the proposal to amend the Input/Output, Inc. 2004 Long-Term Incentive Plan, we believe that the proposals set forth in this proxy statement are routine matters on which brokers will be permitted to vote your shares without instructions from you.

 

What is the record date and what does it mean?

 

The record date for the 2007 Annual Meeting of Stockholders is March 26, 2007. The record date is established by the Board of Directors as required by Delaware law. Owners of common stock at the close of business on the record date are entitled to receive notice of the meeting and vote at the meeting and any adjournments or postponements of the meeting.

 

How can I revoke a proxy?

 

A stockholder can revoke a proxy by taking any one of the following three actions before it is voted at the meeting:

 

(a) giving written notice to the Corporate Secretary of I/O,

 

(b) delivering a later-dated proxy, or

 

(c) voting in person at the meeting.

 

If you hold shares through a bank or broker, you must contact that bank or broker in order to revoke any prior voting instructions.

 

What constitutes a quorum?

 

The presence, in person or by proxy, of the holders of a majority of the outstanding shares of outstanding common stock constitutes a quorum. We need a quorum of stockholders to hold a valid Annual Meeting. If you have signed and returned your proxy card, your shares will be counted toward the quorum. If a quorum is not present, the chairman may adjourn the meeting, without notice other than by announcement at the meeting, until the required quorum is present.

 

As of the record date, 81,490,853 shares of common stock, representing the same number of votes, were outstanding. Thus, the presence of the holders of common stock representing at least 40,745,427 votes will be required to establish a quorum.

 

What are my voting choices when voting for director nominees, and what vote is needed to elect directors?

 

In voting on the election of three director nominees to serve until the 2010 Annual Meeting of Stockholders, stockholders may vote in one of the following ways:

 

(a) in favor of all nominees,

 

(b) withhold votes as to all nominees, or

 

(c) withhold votes as to a specific nominee.

 

Directors will be elected by a plurality vote of the shares of common stock present or represented by proxy at the meeting. This means that all director nominees must receive the highest number of votes cast in

order to be re-elected as directors. Stockholders are not permitted to cumulate their votes in the election of directors.

 

The Board recommends a vote “FOR” all of the nominees.

 

What are my voting choices when voting on the proposal to amend the Input/Output, Inc. 2004 Long-Term Incentive Plan and what vote is needed to approve the proposal?

 

In voting on the proposal to amend the plan, stockholders may vote in one of the following ways:

 

(a) in favor of the amendment of the plan,

 

(b) against the amendment of the plan, or

 

(c) abstain from voting on the amendment of the plan.

 

The proposal to amend the Input/Output, Inc. 2004 Long-Term Incentive Plan will require the approval of a majority of the votes cast by holders of common stock in person or represented by proxy at the meeting, so long as the total votes cast on the proposal exceed 50% of the shares of common stock outstanding.

 

The Board recommends a vote “FOR” this proposal.

 

What are my voting choices when voting on the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm (independent auditors) and what vote is needed to ratify their appointment?

 

In voting to ratify the appointment of Ernst & Young LLP as independent auditors for 2007, stockholders may vote in one of the following ways:

 

(a) in favor of ratification,

 

(b) against ratification, or

 

(c) abstain from voting on ratification.

 

The proposal to ratify the appointment of Ernst & Young LLP will require the approval of a majority of the votes cast by holders of common stock in person or represented by proxy at the meeting.

 

The Board recommends a vote “FOR” this proposal.

 

Will any other business be transacted at the meeting? If so, how will my proxy be voted?

 

We do not know of any business to be transacted at the Annual Meeting other than those matters described in this proxy statement. We believe that the periods specified in I/O’s Bylaws for submitting proposals to be considered at the meeting have passed and no proposals were submitted. However, should any other matters properly come before the meeting, and any adjournments or postponements of the meeting, shares with respect to which voting authority has been granted to the proxies will be voted by the proxies in accordance with their judgment.

 

What if a stockholder does not specify a choice for a matter when returning a proxy?

 

Stockholders should specify their choice for each matter on the enclosed form of proxy. If no instructions are given, proxies that are signed and returned will be voted “FOR” the election of all director nominees, “FOR” the approval of the amendment of the Input/Output, Inc. 2004 Long-Term Incentive Plan and “FOR” the proposal to ratify the appointment of Ernst & Young LLP as independent auditors for 2007.

 

How are abstentions and broker non-votes counted?

 

A properly executed proxy card marked “withhold” with respect to the election of one or more directors will not be voted with respect to the director or directors indicated, although it will be counted for purposes of

determining whether there is a quorum. Any shares not voted (whether by broker non-vote or otherwise) will have no effect on the election of directors.

 

An abstention will have the same legal effect as a vote against the proposal to amend the Input/Output, Inc. 2004 Long-Term Incentive Plan because it will represent a share present in person or represented by proxy at the meeting and a vote cast on the proposal, thereby increasing the number of affirmative votes required to approve the proposal. Broker non-votes will have no effect on the outcome of this proposal so long as the total votes cast on the proposal exceed 50% of our outstanding shares.

 

An abstention will have the same legal effect as a vote against the proposal to ratify the appointment of the independent auditors, because it will represent a share present in person or represented by proxy at the meeting and a vote cast on the proposal, thereby increasing the number of affirmative votes required to approve the proposal. Broker non-votes have no effect on the proposal to ratify the appointment of the independent auditors.

 

What is the deadline for submitting proposals to be considered for inclusion in the 2008 proxy statement?

 

Stockholder proposals requested to be included in I/O’s 2008 proxy statement must be received by I/O not later than December 12, 2007. Proposals should be directed to David L. Roland, Senior Vice President, General Counsel and Corporate Secretary, Input/Output, Inc., 2101 CityWest Boulevard, Building III, Suite 400, Houston, Texas 77042.

 

What is the deadline for submitting a nomination for director of I/O for consideration at the Annual Meeting of Stockholders in 2008?

 

A proper director nomination may be considered at I/O’s 2008 Annual Meeting of Stockholders only if the proposal for nomination is received by I/O not later than December 12, 2007. All nominations should be directed to David L. Roland, Senior Vice President, General Counsel and Corporate Secretary, Input/Output, Inc., 2101 CityWest Boulevard, Building III, Suite 400, Houston, Texas 77042.

 

How can I obtain a copy of I/O’s Annual Report on Form 10-K?

 

A copy of our 2006 Annual Report on Form 10-K is enclosed with our annual report to stockholders. You may obtain an additional copy of our 2006 Form 10-K by sending a written request to David L. Roland, Senior Vice President, General Counsel and Corporate Secretary, Input/Output, Inc., 2101 CityWest Boulevard, Building III, Suite 400, Houston, Texas 77042. We will furnish the Form 10-K at no charge. Our Form 10-K is also available through the Investor Relations portion of our website at www.i-o.com. Our Form 10-K is also available with exhibits on the SEC’s website at http://www.sec.gov. Please note that the contents of these and any other websites referenced in this proxy statement are not incorporated into this filing. Further, our references to the URLs for these and other websites listed in this proxy statement are intended to be inactive textual references only.

 

ITEM 1 — ELECTION OF DIRECTORS

 

Our Board of Directors consists of eight members. The Board is divided into three classes. Members of each class are elected for three-year terms and until their respective successors are duly elected and qualified, unless the director dies, resigns, retires, is disqualified or is removed. Our stockholders elect the directors in a designated class annually. Directors in Class II, which is the class of directors to be elected at this meeting, will serve on the Board until our Annual Meeting in 2010.

 

The current Class II directors are Franklin Myers, Bruce S. Appelbaum, PhD, and S. James Nelson, Jr., and their terms will expire at the 2007 Annual Meeting. At its meeting on March 13, 2007, the Board approved the recommendation of the Governance Committee that Messrs. Myers, Appelbaum and Nelson be nominated to stand for reelection at the meeting to hold office until our 2010 Annual Meeting and until their successors are elected and qualified.

 

We have no reason to believe that any of the nominees will be unable or unwilling to serve if elected. However, if any nominee should become unable or unwilling to serve for any reason, proxies may be voted for another person nominated as a substitute by the Board of Directors, or the Board of Directors may reduce the number of Directors.

 

The Board of Directors recommends a vote “FOR” the election of Franklin Myers, Bruce S. Appelbaum, PhD, and S. James Nelson, Jr.

 

Class II Director Nominees For Re-Election For Term Expiring In 2010

 

 

Franklin Myers joined our Board of Directors in 2001. He is currently the Senior Vice President and Chief Financial Officer of Cameron International Corporation (previously Cooper Cameron), an international manufacturer of oil and gas flow control equipment. Mr. Myers has been Senior Vice President at Cameron since 1995 and served as General Counsel and Corporate Secretary from 1995 to 1999, as well as President of the Cooper Energy Services Division from 1998 until 2001. Prior to joining Cameron, Mr. Myers was Senior Vice President and General Counsel of Baker Hughes Incorporated, an oilfield services and equipment provider, and an attorney and partner with the law firm of Fulbright & Jaworski L.L.P. in Houston, Texas. Mr. Myers also currently serves on the Board of Directors of Comfort Systems, inc., a NYSE-listed provider of heating, ventilation and air conditioning services. Mr. Myers is Chairman of the Compensation Committee and a member of the Governance Committee of our Board of Directors. Mr. Myers holds a Bachelor of Science in Industrial Engineering from Mississippi State University and a Juris Doctorate with Honors from the University of Mississippi.

 

 

Bruce S. Appelbaum, PhD, joined our Board of Directors in 2003. He is currently the Chairman of Mosaic Natural Resources Ltd., an oil and gas exploration and production company focusing on opportunities in the North Sea. Prior to founding Mosaic, Dr. Appelbaum was President of Worldwide Exploration and New Ventures for Texaco, Inc. and a Vice President of Texaco. Dr. Appelbaum joined Texaco in 1990 as Division Manager of Texaco U.S.A.’s offshore exploration division and was elected an officer of Texaco in 2000. Dr. Appelbaum is also a Trustee of the American Geological Institute Foundation and serves on the Advisory Board to the Department of Oceanography at Texas A&M University. He previously served on the Advisory Board of the School of Earth Sciences at Stanford University. Dr. Appelbaum also currently serves as a Director of the CQS Rig Finance Fund Limited, an AIM- and CISX-listed closed-end investment company that invests in secured bonds issued to finance the construction of offshore oil and gas exploration and production infrastructure. Dr. Appelbaum is a member of the Audit Committee of our Board of Directors. He holds a Bachelor of Science in Geology from the State University of New York — Buffalo and a Master of Science and PhD in Geological Oceanography from Texas A&M University.

 

 

S. James Nelson, Jr. joined our Board of Directors in August 2004. In 2004, Mr. Nelson retired from Cal Dive International, Inc. (now named Helix Energy Solutions Group, Inc.), a marine contractor and operator of offshore oil and gas properties and production facilities, where he was a founding shareholder, Chief Financial Officer, Vice Chairman and a Director. From 1985 to 1988, Mr. Nelson was the Senior Vice President and Chief Financial Officer of Diversified Energies, Inc., a NYSE-traded company with $1 billion in annual revenues and the former parent company of Cal Dive. From 1980 to 1985, Mr. Nelson served as Chief Financial Officer of Apache Corporation, an oil and gas exploration and production company. From 1966 to 1980, Mr. Nelson was employed with Arthur Andersen & Co. where, from 1976 to 1980, he was a partner serving on the firm’s worldwide oil and gas industry team. Mr. Nelson also currently serves on the Board of

Directors and Audit Committee of Oil States International, Inc. (a NYSE-listed diversified oilfield services company), Quintana Maritime Limited (a NASDAQ-listed company owning and operating international dry-bulk vessels) and W&T Offshore, Inc. (a NYSE-listed oil and natural gas exploration and production company). Mr. Nelson, who is also a Certified Public Accountant, is Chairman of the Audit Committee of our Board of Directors. He holds a Bachelor of Science in Accounting from Holy Cross College and a Masters in Business Administration from Harvard University.

 

 

Class III Incumbent Directors — Term Expiring In 2008

 

 

Robert P. Peebler has been our President and Chief Executive Officer since April 2003 and a member of our Board of Directors since 1999. Prior to joining I/O on a full-time basis, Mr. Peebler was the founder, President and Chief Executive Officer of Energy Virtual Partners, an asset development and management company for oil and gas properties. Prior to founding Energy Virtual Partners in April 2001, Mr. Peebler was Vice President of e-Business Strategy and Ventures of the Halliburton Company, a provider of products and services to the petroleum and energy industries. Mr. Peebler joined Halliburton in 1996 when Halliburton acquired Landmark Graphics Corporation, a provider of workstation-based software for oil and gas exploration and production, where he had served as CEO since 1992. Mr. Peebler began his career with Schlumberger, a global oilfield and information services company, in wireline operations and spent 17 years with Schlumberger in various positions, including head of U.S. wireline operations and executive in charge of strategic marketing for the corporate energy services group. He holds a Bachelor of Science in Electrical Engineering from the University of Kansas.

 

 

John N. Seitz joined our Board of Directors in 2003. Mr. Seitz is a founder and Vice Chairman of the Board of Endeavour International Corporation, an exploration and development company with a North Sea focus. From 2003 until 2006, Mr. Seitz served as co-CEO of Endeavour. From 1977 to 2003, Mr. Seitz held positions of increasing responsibility at Anadarko Petroleum Company, serving most recently as a Director and as President and Chief Executive Officer. Mr. Seitz is a Trustee of the American Geological Institute Foundation. Mr. Seitz also serves as a director of Elk Resources, Inc., a private exploration and production company with operations in the Rockies, and Constellation Energy Partners LLC, a company focused on the acquisition, development and exploitation of oil and natural gas properties and related midstream assets. He is a member of the Compensation and Governance Committees of our Board of Directors.

 

Mr. Seitz holds a Bachelor of Science in Geology form the University of Pittsburgh, a Master of Science in Geology from Rensselaer Institute and is a Certified Professional Geoscientist in Texas. He also attended the Advanced Management Program at the Wharton Graduate School of Business.

 

 

Sam K. Smith joined our Board of Directors in 1999. He also served as our interim Chief Executive Officer from 1999 until 2000. From 1989 to 1996, Mr. Smith was Chairman of the Board of Landmark Graphics Corporation. Prior to that time, Mr. Smith was a special limited partner at Sevin-Rosen Management, a Texas-based venture capital firm that has backed high technology firms, including Compaq, Lotus Development, and Silicon Graphics. Mr. Smith began his career at Texas Instruments where he held positions of increasing responsibility, such as Group Vice President for the Equipment Group, Texas Instruments’ defense business. Mr. Smith is a member of the Compensation Committee of our Board of Directors. He holds a Bachelor of Science in Electrical Engineering from the University of Oklahoma.

 

Class I Incumbent Directors — Term Expiring In 2009

 

 

Theodore H. Elliott, Jr. joined our Board of Directors in 1987. Since 1981, he has been in the venture capital business as the Chairman of Prime Capital Management Co., Inc., a Connecticut-based venture capital company, and as a private investor. Prior to Prime Capital Management, Mr. Elliott was Vice President of General Electric’s venture capital subsidiary. Prior to General Electric, Mr. Elliott was head of investment banking at Clark, Dodge & Co. Inc. He also serves on the Board of Directors and the Compensation and Audit Committees of National Interstate, a specialty property and casualty insurance company based in Ohio. Mr. Elliott is also a director of MUPAC, a subsidiary of Carlo Gavazzi Holding AG, a Swiss-based producer of automation components and computer sub-systems that is listed on the Zurich Stock Exchange. Mr. Elliott is a member of the Audit Committee of our Board of Directors. He has a Bachelor of Art and a Master of Business Administration degree from Harvard University and a Juris Doctorate degree from New York University.

 

 

James M. Lapeyre, Jr. has been Chairman of our Board of Directors since 1999 and a Director since 1998. Mr. Lapeyre has been President of Laitram L.L.C., a privately held New Orleans-based manufacturer of food processing equipment and modular conveyor belts, and its predecessors since 1989. Mr. Lapeyre joined our Board of Directors when we bought the DigiCourse marine positioning products business from Laitram. Mr. Lapeyre is Chairman of the Governance Committee and a member of the Compensation Committee of our Board of Directors. He holds a Bachelor of Art in History from the University of Texas and a Master of Business Administration and Juris Doctorate from Tulane University.

 

Ownership of Equity Securities in I/O

 

Except as otherwise set forth below, the following table sets forth information as of February 20, 2007, with respect to the number of shares of common stock owned by (i) each person known by us to be a beneficial owner of more than 5% of our common stock, (ii) each of our directors, (iii) each of our executive officers named in the 2006 Summary Compensation Table included in this proxy statement and (iv) all of our directors and executive officers as a group. Except where information was otherwise known by us, we have relied solely upon filings of Schedules 13D and 13G to determine the number of shares of our common stock owned by each person known to us to be the beneficial owner of more than 5% of our common stock.

 

 

 

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires directors and certain officers of I/O, and persons who own more than ten percent of I/O’s common stock, to file with the Securities and Exchange Commission (SEC) and the New York Stock Exchange (NYSE) initial statements of beneficial ownership on Form 3 and changes in such ownership on Forms 4 and 5. Based on our review of the copies of such reports, and written representations from certain reporting persons that no Forms 5 were required for those persons, we believe that, with one exception, during 2006 our directors, executive officers and stockholders holding greater than ten percent of our outstanding shares complied with all applicable filing requirements. A Form 5 for Mr. Lapeyre reflecting certain donations of shares of common stock of the Company was timely filed but inadvertently contained inaccurate information. This Form 5 was later corrected after the required filing date.

 

Board of Directors and Corporate Governance

 

Governance Initiatives.  We maintain a corporate governance program for the purpose of defining responsibilities, setting standards of professional and personal conduct and promoting compliance with these responsibilities and standards. We review our governance practices and update them, as appropriate, based upon Delaware law (the state in which we are incorporated), rules and listing standards of the NYSE and SEC regulations, and practices recommended by our outside advisors.

 

Some of our corporate governance initiatives include the following:

 

 

Code of Ethics.  We require all employees to adhere to our Code of Ethics in addressing legal and ethical issues encountered in conducting their work. The Code of Ethics requires that our employees avoid conflicts of interest, comply with all laws and other legal requirements, conduct business in an honest and ethical manner, promote full and accurate financial reporting, and otherwise act with integrity and in I/O’s best interest. Our Code of Ethics applies to our directors and all employees, including our Chief Executive Officer and senior financial officers (our Chief Financial Officer, Controller, Treasurer and all other financial officers and executives).

 

We have made our Code of Ethics, corporate governance guidelines, charters for the committees of our Board and other information that may be of interest to investors available on the Investor Relations section of

our website at http://www.i-o.com/Investor _ Relations/Corporate _ Governance/.  Copies of this information may also be obtained by writing to us at Input/Output, Inc., Attention: Corporate Secretary, 2101 CityWest Boulevard, Building III, Suite 400, Houston, Texas 77042.

 

Presiding Non-Management Director.  Under NYSE corporate governance listing standards, James M. Lapeyre, Jr. has been designated as the presiding non-management director to lead non-management directors meetings of the Board. Our non-management directors meet at regularly scheduled executive sessions without management, over which Mr. Lapeyre presides.

 

Communications to Board and Presiding Non-Management Director.  Stockholders and other interested parties may communicate with the Board and our presiding non-management director or non-management independent directors as a group by writing to “Chairman of the Board” (if the intended recipient is the Board) or “Presiding Non-management Director” (if the intended recipient is the presiding non-management director, or the non-management directors as a whole), c/o Corporate Secretary, Input/Output, Inc., 2101 CityWest Boulevard, Building III, Suite 400, Houston, Texas 77042. Inquiries sent by mail will be reviewed by our Corporate Secretary and, if they pertain to the functions of the Board or Board committees or if the Corporate Secretary otherwise determines that they should be brought to the intended recipient’s attention, they will be forwarded to the intended recipient. Concerns relating to accounting, internal controls, auditing or compliance matters will be brought to the attention of our Audit Committee and handled in accordance with procedures established by the Audit Committee.

 

Our Corporate Secretary’s review of these communications will be performed with a view that the integrity of this process be preserved. For example, items that are unrelated to the duties and responsibilities of the Board, such as personal employee complaints, product inquiries, new product suggestions, resumes and other forms of job inquiries, surveys, business solicitations or advertisements, will not be forwarded to those individuals. In addition, material that is considered to be hostile, threatening, illegal or similarly unsuitable will not be forwarded to them. Except for these types of items, the Corporate Secretary will promptly forward written communications to the intended recipient. Within the above guidelines, the independent directors have granted the Corporate Secretary discretion to decide what correspondence should be shared with I/O management and independent directors.

 

2006 Meetings of the Board and Stockholders.  In 2006, the Board of Directors held seven meetings and the three standing committees of the Board of Directors held a total of 21 meetings. Overall, the rate of attendance by each director at such meetings exceeded 95%. Each director attended at least 92% of the total meetings of the Board of Directors and the committees on which he served during 2006. The Board and committees held executive or private sessions without company management present on a regular basis.

 

We do not require our Board members to attend our Annual Meeting of Stockholders. Four of our directors attended our 2006 Annual Meeting held in May 2006.

 

Independence.  In determining independence, each year the Board determines whether directors have any “material relationship” with I/O. When assessing the “materiality” of a director’s relationship with I/O, the Board considers all relevant facts and circumstances, not merely from the director’s standpoint, but from that of the persons or organizations with which the director has an affiliation, and the frequency or regularity of the services, whether the services are being carried out at arm’s length in the ordinary course of business and whether the services are being provided substantially on the same terms to I/O as those prevailing at the time from unrelated parties for comparable transactions. Material relationships can include commercial, banking, industrial, consulting, legal, accounting, charitable and familial relationships. Factors that the Board may consider when determining independence for purposes of this determination include (1) not being a current employee of I/O or having been employed by I/O within the last three years; (2) not having an immediate family member who is, or who has been within the last three years, an executive officer of I/O; (3) not personally receiving or having an immediate family member who has received, during any 12-month period within the last three years, more than $100,000 per year in direct compensation from I/O other than director and committee fees; (4) not being employed or having an immediate family member employed within the last three years as an executive officer of another company where any current executive officer of I/O serves or has served, at the same time, on that company’s compensation committee; (5) not being an employee of or a

current partner of, or having an immediate family member who is a current partner of, a firm that is I/O’s internal or external auditor; (6) not having an immediate family member who is a current employee of such an audit firm who participates in the firm’s audit, assurance or tax compliance practice; (7) not being or having an immediate family member who was within the last three years a partner or employee of such a firm and who personally worked on I/O’s audit within that time; (8) not being a current employee, or having an immediate family member who is a current executive officer, of a company that has made payments to, or received payments from, I/O for property or services in an amount that, in any of the last three fiscal years, exceeds the greater of $1 million or 2% of the other company’s consolidated gross revenues; or (9) not being an executive officer of a charitable organization to which, within the preceding three years, I/O has made charitable contributions in any single fiscal year that has exceeded the greater of $1 million or 2% of such organization’s consolidated gross revenues.

 

Our Board has affirmatively determined that none of our non-employee directors — James M. Lapeyre, Jr., Bruce S. Appelbaum, Theodore H. Elliott, Jr., Franklin Myers, S. James Nelson, Jr., John N. Seitz and Sam K. Smith — has a material relationship with I/O within the meaning of the NYSE’s listing standards, and that each of them is independent from management and from our independent registered public accounting firm, as required by NYSE listing standard rules regarding director independence. See “ — Committees of the Board — Audit Committee” below.

 

Our Chairman, Mr. Lapeyre, is an executive officer and significant shareholder of Laitram, L.L.C., a company with which I/O has ongoing contractual relationships, and Mr. Lapeyre and Laitram together owned approximately 11.5% of our outstanding common stock as of February 20, 2007. Our Board has determined that these contractual relationships have not interfered with Mr. Lapeyre’s demonstrated independence from our management, and that the services performed by Laitram or its affiliates for I/O are being provided at arm’s length in the ordinary course of business and substantially on the same terms to I/O as those prevailing at the time from unrelated parties for comparable transactions. In addition, the services provided by Laitram and its affiliates to I/O resulted in payments by I/O to Laitram and its affiliates in an amount significantly less than 2% of Laitram’s 2006 consolidated gross revenues. As a result of these factors, our Board has determined that Mr. Lapeyre, along with each of our other non-management directors, is independent within the meaning of the NYSE’s director independence standards. For an explanation of the contractual relationship between Laitram and I/O, see “ — Certain Transactions and Relationships” below.

 

Committees of the Board

 

The Board of Directors has established three standing committees to facilitate and assist the Board in the execution of its responsibilities. The three standing committees are the Audit Committee, the Compensation Committee and the Governance Committee. The Governance Committee functions as the Board’s Nominating Committee. In addition, the Board establishes temporary special committees on an as-needed basis. All committees are composed entirely of non-employee directors. During 2006, the Audit Committee met 13 times, the Compensation Committee met five times and the Governance Committee met three times.

 

The current members of the standing committees of the Board of Directors are identified below. Mr. Peebler is not a member of any of these committees.

 

 

 

 

Audit Committee

 

The Audit Committee is a separately-designated standing audit committee as defined in Section 3(a)(58)(A) of the Exchange Act. The Audit Committee oversees matters relating to financial reporting, internal controls, risk management and compliance. These responsibilities include appointing, overseeing, evaluating and approving the fees of our independent auditors, reviewing financial information that is provided to our stockholders and others, reviewing with management our system of internal controls and financial reporting process, and monitoring our compliance program and system.

 

The Audit Committee operates under a written charter, which sets forth the functions and responsibilities of the committee. A copy of the charter can be viewed on our website at http://www.i-o.com/content/released/AuditComChar05.pdf.

 

The Board of Directors has determined that each member of the Audit Committee is financially literate and satisfies the definition of “independent” as established in the NYSE corporate governance listing standards. In addition, the Board of Directors has determined that Mr. Nelson, the Chairman of the Audit Committee, is qualified as an audit committee financial expert within the meaning of SEC regulations, and that he has accounting and related financial management expertise within the meaning of the listing standards of the NYSE and Rule 10A-3 under the Exchange Act.

 

I/O’s Corporate Governance Guidelines provide that no member of the Audit Committee may simultaneously serve on the audit committees of more than two other public companies unless the I/O Board determines that such simultaneous service would not impair the ability of such director to effectively serve on I/O’s Audit Committee. In addition, the listing standards of the NYSE provide that if an audit committee member simultaneously serves on the audit committees of more than three public companies, and the listed company does not limit the number of audit committees on which its audit committee members serve, then in each case, the board must determine that such simultaneous service would not impair the ability of such member to effectively serve on the listed company’s audit committee. As described above under “— Class II Director Nominees For Re-Election For Term Expiring In 2010,” Mr. Nelson serves as Chairman of the I/O Audit Committee and serves on the audit committees of three other public companies. The I/O Board considered all relevant factors, including the incremental time and responsibilities that such additional service would require of Mr. Nelson and the fact that Mr. Nelson devotes full time to making his capacity as a financial expert available to public companies, and the Board determined that Mr. Nelson’s simultaneous service would not impair his ability to effectively serve on I/O’s Audit Committee.

 

Compensation Committee

 

The Compensation Committee has responsibility for the compensation of our executive officers, including our chief executive officer, and the administration of our executive compensation and benefit plans. The Compensation Committee also has authority to retain or replace outside counsel, compensation and benefits consultants or other experts to provide it with independent advice, including the authority to approve the fees payable and any other terms of retention. All actions regarding executive officer compensation require Compensation Committee approval. The Compensation Committee completes a comprehensive review of all elements of compensation at least annually. If it is determined that any changes to any executive officer’s total compensation are necessary or appropriate, the Compensation Committee obtains such input from management as it determines to be necessary or appropriate. All compensation decisions with respect to executives other than the chief executive officer are determined in discussion with, and frequently based in part upon the recommendation of, the chief executive officer. The Compensation Committee makes all determinations with respect to the compensation of the chief executive officer, including, but not limited to, establishing performance objectives and criteria related to the payment of his compensation, and determining the extent to which such objectives have been established, obtaining such input from the Committee’s independent compensation advisors as it deems necessary or appropriate.

 

As part of its responsibility to administer our executive compensation plans and programs, the Compensation Committee, usually near the beginning of the calendar year, establishes the parameters of the annual incentive plan awards, including establishing the performance goals relative to our performance that will be

applicable to such awards and the similar awards for our other senior executives. It also reviews our performance against the objectives established for awards payable in respect of the prior calendar year, and confirms the extent, if any, to which such objectives have been obtained, and the amounts payable to each of our executive officers in respect of such achievement.

 

The Compensation Committee also determines the appropriate level and type of awards, if any, to be granted to each of our executive officers pursuant to our equity compensation plan, and approves the total annual grants to other key employees, to be granted in accordance with a delegation of authority to our corporate human resources officer.

 

The Compensation Committee also reviews, and has the authority to recommend to the Board for adoption, any new executive compensation or benefit plans that are determined to be appropriate for adoption by the Company, including those that are not otherwise subject to the approval of our stockholders. It reviews, and has the authority to approve, any contracts or other transactions with current or former elected officers of the corporation. In connection with the review of any such proposed plan or contract, the Compensation Committee may seek from its independent advisors such advice, counsel and information as it determines to be appropriate in the conduct of such review. The Compensation Committee will direct such outside advisors as to the information it requires in connection with any such review, including data regarding competitive practices among the companies with which the Company generally compares itself for compensation purposes.

 

The Compensation Committee operates pursuant to a written charter that sets forth the functions and responsibilities of the committee. A copy of the charter can be viewed on our website at http://www.i-o.com/content/released/CompComChart.pdf. The Board of Directors has determined that each member of the Compensation Committee satisfies the definition of “independent” as established in the NYSE corporate governance listing standards.

 

Compensation Committee Interlocks and Insider Participation

 

The members of the Compensation Committee are Franklin Myers (Chairman), James M. Lapeyre, Jr., John N. Seitz and Sam K. Smith. No member of the Committee is, or was during 2006, an officer or employee of I/O. Mr. Smith was formerly an officer of I/O, serving as our interim CEO from 1999 to 2000. Mr. Lapeyre is President and Chief Executive Officer and a significant equity owner of Laitram, L.L.C, which has had a business relationship with I/O since 1999 that continued into 2006. During 2006, we paid Laitram and its affiliates an aggregate total of approximately $3.57 million, which consisted of approximately $2.68 million for manufacturing services, $763,000 for rent and other pass-through third party facilities charges, and $128,000 for other services. See “— Certain Transactions and Relationships” below. During 2006, none of the following relationships existed:

 

 

Governance Committee

 

The Governance Committee functions as the Board’s nominating and corporate governance committee and advises the Board of Directors with regard to matters relating to governance practices and policies, management succession, and composition and operation of the Board and its committees, including reviewing potential candidates for membership on the Board and recommending to the Board nominees for election as directors of I/O. In addition, the Governance Committee reviews annually with the Chairman of the Board and the CEO the succession plans for senior executive officers and makes recommendations to the Board regarding the selection of individuals to occupy these positions.

 

In identifying and selecting new director candidates, the Governance Committee considers the Board’s current and anticipated strengths and needs and a candidate’s experience, knowledge, skills, expertise, integrity, diversity, ability to make independent analytical inquiries, understanding of the company’s business environment, willingness to devote adequate time and effort to Board responsibilities, and other relevant factors. The Committee has not established specific minimum age, education, years of business experience or specific types of skills for potential director candidates, but, in general, expects qualified candidates will have ample experience and a proven record of business success and leadership. The Committee also seeks an appropriate balance of experience and expertise in accounting and finance, technology, management, international business, compensation, corporate governance, strategy, industry knowledge and general business matters. The Governance Committee may rely on various sources to identify potential director nominees, including input from directors, management and others the committee feels are reliable, and professional search firms. During 2006, the Governance Committee did not engage any outside search firm to assist it in identifying or facilitating the screening and interview process of any candidates for director.

 

The Governance Committee will consider recommendations for director nominations made by a stockholder or other sources (including self-nominees) on the same basis as other candidates. For consideration by the Governance Committee, a recommendation of a candidate must be submitted in writing to the Governance Committee in care of our Corporate Secretary at our principal executive offices. The submission must include sufficient details regarding the qualifications of the potential candidate. In general, nominees for election should possess (1) the highest level of integrity and ethical character, (2) strong personal and professional reputation, (3) sound judgment, (4) financial literacy, (5) independence, (6) significant experience and proven superior performance in professional endeavors, (7) an appreciation for board and team performance, (8) the commitment to devote the time necessary, (9) skills in areas that will benefit the Board, and (10) the ability to make a long-term commitment to serve on the Board.

 

Also, our bylaws permit stockholders to nominate individuals for director for consideration at an annual stockholders’ meeting. A proper director nomination may be considered at I/O’s 2008 Annual Meeting only if the proposal or nomination is received by I/O not later than December 12, 2007. All nominations should be directed to David L. Roland, Senior Vice President, General Counsel and Corporate Secretary, Input/Output, Inc., 2101 CityWest Boulevard, Building III, Suite 400, Houston, Texas 77042.

 

The Governance Committee operates pursuant to a written charter, which sets forth the functions and responsibilities of the committee. A copy of the charter can be viewed on our website at http://www.i-o.com/content/released/ Governance _ Committee _ Charter.pdf. The Board of Directors has determined that each member of the Governance Committee satisfies the definition of “independent” as established in the NYSE corporate governance listing standards.

 

Stock Ownership Guidelines

 

The Board adopted stock ownership guidelines for I/O’s directors effective January 1, 2006. The Board adopted these guidelines in order to align the economic interests of the directors with those of our stockholders and further focus our emphasis on enhancing stockholder value. Under these guidelines, each non-employee director is expected to own shares of I/O stock equal to a minimum aggregate market value of $30,000. New directors and current directors whose holdings fall below such minimum level will have one year to increase the director’s ownership of I/O stock to satisfy the guidelines. The stock ownership guidelines are subject to modification by the Board in its discretion.

 

The Governance Committee and the Board regularly review and evaluate the I/O directors’ compensation program on the basis of current and emerging compensation practices for directors, emerging legal, regulatory and corporate compliance developments and comparisons with director compensation programs of other similarly-situated public companies.

 

Certain Transactions and Relationships

 

Mr. Lapeyre is the President and Chief Executive Officer and a significant equity owner of Laitram, L.L.C. and has served as President of Laitram and its predecessors since 1989. Laitram is a privately-owned,

New Orleans-based manufacturer of food processing equipment and modular conveyor belts. Mr. Lapeyre and Laitram together owned approximately 11.5% of our outstanding common stock as of February 20, 2007.

 

We acquired DigiCourse, Inc., our marine positioning products business, from Laitram in 1998 and renamed it I/O Marine Systems, Inc. In connection with that acquisition, we entered into a Continued Services Agreement with Laitram under which Laitram agreed to provide us with certain accounting, software, manufacturing and maintenance services. Manufacturing services consist primarily of machining of parts for our marine positioning systems. The term of this written agreement expired in September 2001 but we and Laitram continue to operate under its terms. In addition, when we have requested, the legal staff of Laitram has advised us on certain intellectual property matters with regard to our marine positioning systems. Under a Lease of Commercial Property dated February 1, 2006, between Lapeyre Properties, L.L.C. and I/O Marine Systems, Inc., we agreed to lease certain office and warehouse space from Lapeyre Properties, L.L.C. until January 2011. During 2006, we paid Laitram and Lapeyre Properties, L.L.C. an aggregate total of approximately $3.57 million, which consisted of approximately $2.68 million for manufacturing services, $763,000 for rent and other pass-through third party facilities charges, and $128,000 for other services. For the 2005 and 2004 fiscal years, we paid Laitram and Lapeyre Properties, L.L.C. an aggregate total of approximately $2.72 million and $1.82 million, respectively, for these services. In the opinion of our management, the terms of these services are fair and reasonable and as favorable to us as those that could have been obtained from unrelated third parties at the time of their performance.

 

Statement of Policy for the Review, Approval or Ratification of Transactions with Related Persons

 

The Board of Directors of I/O has established the following policy and procedure to be followed prior to any transaction, arrangement, or relationship or series of similar transactions, arrangements or relationships, including any indebtedness or guarantee of indebtedness, between I/O and a Related Party (as defined below) where the aggregate amount involved is expected to exceed $120,000 in any calendar year (“Related Party Transactions”):

 

1. Policy.  The Governance Committee of the Board should review the material facts of any Related Party Transaction and approve or ratify such transaction. In making its determination to approve or ratify, the Governance Committee should consider such factors as (i) the extent of the Related Party’s interest in the Related Party Transaction, (ii) if applicable, the availability of other sources of comparable products or services, (iii) whether the terms of the Related Party Transaction are no less favorable than terms generally available in unaffiliated transactions under like circumstances, (iv) the benefit to I/O, and (v) the aggregate value of the Related Party Transaction.

 

2. Pre-Approval.  The Governance Committee has reviewed the types of Related Party Transactions described below in “Standing Pre-Approval for Certain Related Party Transactions” and determined that each of the Related Party Transactions described therein are deemed to be pre-approved or ratified (as applicable) by the Governance Committee under the terms of this policy. In addition, the Board of Directors has delegated to the Chairman of the Governance Committee the authority to pre-approve or ratify (as applicable) any Related Party Transaction in which the aggregate amount involved is expected to be less than $1 million.

 

3. Related Party.  For purposes of this policy and procedure, “Related Party” means:

 

a. Any person who is or was an executive officer, director or nominee for election as a director (since the beginning of the last fiscal year); or

 

b. Any person or group who is a greater than 5% beneficial owner of I/O voting securities; or

 

c. Any immediate family member of any of the foregoing, which means any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, and anyone residing in such person’s home (other than a tenant or employee).

 

4. No Approval by Related Party.  No director of I/O may engage in any Board or Governance Committee approval of any Related Party Transaction in which he or she is a Related Party; provided, however, that such director must provide to the Board all material information reasonably requested concerning the Related Party Transaction.

 

5. On-Going Transactions.  If a Related Party Transaction is on-going for a significant period beyond the initial approval or ratification, the Governance Committee should periodically review and assess the Related Party Transaction to confirm that the Related Party Transaction remains appropriate.

 

6. Existing Transactions.  In conjunction with implementing this policy and procedure, the Governance Committee shall review any existing Related Party Transactions entered into during the last fiscal year and make a determination whether to ratify or rescind such transaction.

 

7. Standing Pre-Approval for Certain Related Party Transactions.  The Governance Committee has reviewed the types of Related Party Transactions described below and determined that each of the following types of Related Party Transactions shall be deemed to be pre-approved by the Committee, even if the aggregate amount involved will exceed $120,000:

 

a. Employment of executive officers.  Any employment by I/O of an executive officer of I/O.

 

b. Director compensation.  Any compensation paid to a director in his or her capacity as a director.

 

c. Certain transactions with other companies.  Any transaction with another company at which a Related Person’s only relationship is as an employee, director or beneficial owner of less than 10% of that company’s shares, if the aggregate amount involved does not exceed the greater of $1,000,000 or 2% of that company’s total annual revenues. Also, any transactions involving accounting, software, manufacturing, legal, lease, maintenance and other services with Laitram, L.L.C. or its affiliates, as provided in the Continued Services Agreement between I/O and Laitram, the Lease of Commercial Property dated February 1, 2006, between Lapeyre Properties, L.L.C. and I/O Marine Systems, Inc. or any other agreement or arrangement with Laitram or its affiliates; provided that such services are consistent with the general types of services provided by Laitram to I/O in the past and provided further that the aggregate amount involved does not exceed the greater of $1,000,000 or 2% of Laitram’s total annual revenues.

 

d. Certain I/O charitable contributions.  Any charitable contribution, grant or endowment by I/O to a charitable organization, foundation or university at which a Related Person’s only relationship is as a volunteer, an employee (other than an executive officer) or a director, regent or similar position, if the aggregate amount involved does not exceed the greater of $100,000 or 2% of the charitable organization’s total annual receipts.

 

e. Transactions where all shareholders receive proportional benefits.  Any transaction where the Related Person’s interest arises solely from the ownership of I/O’s common stock and all holders of I/O’s common stock received the same benefit on a pro rata basis (e.g. dividends).

 

f. Transactions involving competitive bids.  Any transaction involving a Related Party where the rates or charges involved are determined by competitive bids.

 

g. Regulated transactions.  Any transaction with a Related Party involving the rendering of services as a common or contract carrier, or public utility, at rates or charges fixed in conformity with law or governmental authority.

 

h. Certain banking-related services.  Any transaction with a Related Party involving services as a bank depositary of funds, transfer agent, registrar, trustee under a trust indenture, or similar services.

 

8. Code of Ethics.  No approval or ratification of a transaction hereunder shall be deemed to satisfy or supersede the requirements of I/O’s Code of Ethics applicable to any Related Person and to the extent

applicable, any transactions subject to this policy shall also be considered in light of the requirements set forth in that document.

 

EXECUTIVE OFFICERS

 

Our current executive officers are as follows:

 

 

For a description of the business background of Mr. Peebler, see “— Class III Incumbent Directors — Term Expiring In 2008” above.

 

R. Brian Hanson has been our Executive Vice President and Chief Financial Officer since May 2006. Prior to joining I/O, Mr. Hanson served as the Executive Vice President and Chief Financial Officer of Alliance Imaging, Inc., a NYSE-listed provider of diagnostic imaging services to hospitals and other healthcare providers, from July 2004 until November 2005. From 1998 to 2003, Mr. Hanson held a variety of positions at Fisher Scientific International, Inc., a NYSE-listed manufacturer and supplier of scientific and healthcare products and services, including Vice President Finance of the Healthcare group from 1998 to 2002 and Chief Operating Officer from 2002 to 2003. From 1986 until 1998, Mr. Hanson served in various positions with Culligan Water Conditioning, an international manufacturer of water treatment products and producer and retailer of bottled water products, most recently as Vice President of Finance and Chief Financial Officer. Mr. Hanson received a bachelors degree in engineering from the University of New Brunswick and an MBA degree from Concordia University in Montreal.

 

James R. Hollis has been Executive Vice President and Chief Operating Officer of I/O Solutions since the division’s formation in January 2007. Prior to leading I/O Solutions, Mr. Hollis served as Vice President, New Ventures — FireFly beginning in November 2005 and Vice President — Land Imaging Systems beginning in November 2003. Mr. Hollis joined I/O in July 2003 as Business Unit Manager — Land Surface Systems. Prior to joining I/O, Mr. Hollis served in various positions at Landmark Graphics, a provider of workstation-based software for oil and gas exploration and production, most recently as General Manager — Exploration and Development Solutions. Mr. Hollis joined Landmark Graphics when Landmark acquired Western Atlas Software in 1996. Mr. Hollis managed the Seismic Modeling Software Product line for Western Atlas. Mr. Hollis joined Western Atlas in 1993 when Western Atlas acquired Sierra Geophysics in 1993, where Mr. Hollis led the depth imaging and velocity modeling support and consulting services. Mr. Hollis holds a Bachelor of Science in Geophysics from the University of California, Santa Barbara and a Master of Science in Geophysics from the University of Utah.

 

Christopher M. Friedemann joined I/O in August 2003 as our Vice President - Commercial Development and became our Senior Vice President — Corporate Marketing in January 2007. Mr. Friedemann’s accountabilities encompass corporate marketing, strategic planning and corporate development. Before joining I/O, Mr. Friedemann served as the Managing Director of RiverBend Associates, a privately held management consulting firm based in Texas. Prior to founding RiverBend in January 2002, he served as President of Tradeum, a venture-backed software company that was sold to VerticalNet in April 2000, at which time Mr. Friedemann assumed the role of Managing Director-Europe. Before joining Tradeum in January 2000, Mr. Friedemann was Principal and Partner at the management consulting firm McKinsey & Company.

Mr. Friedemann also has experience as a Senior Reservoir Engineer with Exxon, in field operations with Unocal and in energy merchant banking with Bankers Trust. Mr. Friedemann holds a Bachelor of Science with Distinction in Petroleum Engineering from Stanford University and a Master of Business Administration from Stanford’s Graduate School of Business.

 

David L. Roland joined I/O as Vice President, General Counsel and Corporate Secretary in April 2004 and became a Senior Vice President in January 2007. Prior to joining I/O, Mr. Roland held several positions within the legal department of Enron Corp., an energy trading and pipeline company, most recently as Vice President and Assistant General Counsel. Prior to joining Enron in 1998, Mr. Roland was an attorney with Caltex Corporation, an international oil and gas marketing and refining company. Mr. Roland was an attorney with the law firm of Gardere & Wynne (now Gardere Wynne Sewell LLP) from 1988 until 1994, when he joined Caltex. Mr. Roland holds a Bachelor of Business Administration from the University of Houston and a Juris Doctorate with Distinction from St. Mary’s University.

 

Michael L. Morrison joined I/O in June 2002 as our Assistant Controller, and became our Controller and Director of Accounting in November 2002 and a Vice President and our Chief Accounting Officer in January 2007. Prior to joining I/O, Mr. Morrison held several positions at Enron Corp., an energy trading and pipeline company, most recently as Director of Transaction Support. Mr. Morrison had held a variety of positions at Deloitte & Touche, LLP, a public accounting firm, from January 1994 until he joined Enron in June 2000. Mr. Morrison holds a Bachelor of Business Administration in Accounting from Texas A&M University.

 

EXECUTIVE COMPENSATION

 

Introductory note:  The following discussion of executive compensation contains descriptions of various employee benefit plans and employment-related agreements. These descriptions are qualified in their entirety by reference to the full text or detailed descriptions of the plans and agreements, which are filed or incorporated by reference as exhibits to our annual report on Form 10-K for the year ended December 31, 2006. In this discussion, the terms “Company,” “I/O,” “we,” “our” and “us” refer to Input/Output, Inc. and its consolidated subsidiaries, except where the context otherwise requires or as otherwise indicated.

 

Compensation Discussion and Analysis

 

This Compensation Discussion and Analysis provides an overview of the Compensation Committee of our Board of Directors, a discussion of the background and objectives of our compensation programs for our senior executives, and a discussion of all material elements of the compensation of each of the executive officers identified in the following table, whom we refer to as our named executive officers:

 

 

 

 

Introduction/Corporate Governance

 

Compensation Committee

 

The Compensation Committee of our Board of Directors reviews and approves, or recommends to the Board for approval, all salary and other remuneration for our executive officers and oversees matters relating to our employee compensation and benefit programs. The Committee is composed of the following directors:

 

Franklin Myers, Chairman

James M. Lapeyre, Jr.

John N. Seitz

Sam K. Smith

 

No member of the Committee is an employee of the Company. The Board of Directors has determined that each member of the Committee satisfies the definition of “independent” as established in the New York Stock Exchange corporate governance listing standards.

 

The Committee operates pursuant to a written charter that sets forth its functions and responsibilities. A copy of the charter can be viewed on our website at http://www.i-o.com/content/released/CompComChart.pdf.  The Committee is principally responsible for:

 

 

The Chairman of the Committee is in charge of the Committee’s meeting agendas and, with the assistance of our Corporate Secretary, establishes the Committee’s meetings and calendar.

 

Compensation Consultant

 

During 2005 and 2006, the Compensation Committee retained the nationally recognized consulting firm of Towers Perrin on several occasions as its independent compensation advisor to advise the Committee on our compensation practices and to assist in developing and implementing our executive compensation program and philosophy. Towers Perrin evaluated our long-term incentive strategy and our stock plans, analyzed our outstanding stock options, restricted stock and other stock-based awards, and provided the Committee with recommendations on our overall long-term incentive strategy and the number of shares to propose to add to our stock plans for future grants to employees and directors, which the Committee and the Board of Directors later approved. In addition, the firm provided the Committee with a summary of changes to disclosure requirements related to executive officer and director compensation. At the request of the Committee, the firm also performed an analysis of competitive compensation levels for our Chief Executive Officer. During 2006, Towers Perrin also provided the Governance Committee of our Board of Directors with an analysis of prevailing industry compensation levels for our directors.

 

During 2006, Towers Perrin did not advise our management on matters outside of the above engagements by the Board or its committees.

 

Role of Management in Establishing and Awarding Compensation

 

On an annual basis, our Chief Executive Officer, with the assistance of our Human Resources department, recommends to the Compensation Committee any proposed increases in base salary, bonus payments and equity awards for our executive officers other than himself. No executive officer is involved in determining his own salary increase, bonus payment or equity award. When making officer compensation recommendations, our Chief Executive Officer takes into consideration compensation benchmarks, which include industry standards for similar sized organizations serving similar markets, as well as comparable positions, the level of inherent importance and risk associated with the position and function, and the executive’s job performance over the previous year. See “Objectives of Our Executive Compensation Programs — Benchmarking” below.

 

Our Chief Executive Officer, with the assistance of our Human Resources department and input from our executive officers and other members of senior management, also formulates and proposes to the Compensation Committee an employee bonus incentive plan for the ensuing year. For a description of our process for formulating the employee bonus incentive plan and the factors that we consider, see “Elements of Compensation — Annual Incentive Compensation” below.

 

The Committee reviews and approves all compensation and awards to executive officers and all bonus incentive plans. With respect to equity compensation awarded to employees other than executive officers, the Compensation Committee reviews and approves all grants of restricted stock and stock options above 5,000 shares, generally based upon the recommendation of the Chief Executive Officer, and has delegated option and restricted stock granting authority to the Chief Executive Officer for grants to non-executive officers of up to 5,000 shares. Our Chief Executive Officer provides a report to the Compensation Committee of all options and restricted stock awarded by him under this delegated authority.

 

On its own initiative, at least once a year, the Compensation Committee reviews the performance and compensation of our Chief Executive Officer and, following discussions with the Chief Executive Officer and other members of the Board of Directors, establishes his compensation level. Where it deems appropriate, the Compensation Committee will also consider market compensation information from Towers Perrin or other appropriate independent advisors. See “Objectives of Our Executive Compensation Programs — Benchmarking” below.

 

Certain members of our senior management generally attend each meeting of the Compensation Committee, including our Chief Executive Officer, our Vice President of Human Resources, and our General Counsel/Corporate Secretary. However, no member of management votes on items before the Compensation Committee. The Compensation Committee and Board of Directors do solicit the views of our Chief Executive Officer on compensation matters, particularly as they relate to the compensation of the other named executive officers and the other members of senior management reporting to the Chief Executive Officer. Our Chief Executive Officer, Vice President of Human Resources, and General Counsel generally prepare most of the company materials for the Committee meetings. Our General Counsel, as Corporate Secretary, acts as secretary of each Committee meeting. The Committee usually conducts an executive session during each meeting, during which members of management are not present. On a quarterly basis, the Chairman of the Compensation Committee will present a report to our Board on the activities and material actions of the Committee.

 

Compensation Committee Activity

 

During 2006, the Compensation Committee met in person five times. In three of those meetings, the Committee also met in executive session with no members of management present. Three members of the Committee attended all meetings in person and one member of the Committee attended all but one meeting in person. In addition to the five meetings in person, the Committee took action by unanimous written consent, pursuant to Delaware General Corporation Law and our Bylaws, a total of 17 times during 2006, primarily to approve individual employee grants of restricted stock, stock options and restricted stock units. We believe that each of these individual grants made by unanimous written consent of the Committee complied with the applicable grant date requirements under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“FAS 123R”).

 

During 2006 and the first quarter of 2007, the Committee took the following actions:

 

 

 

 

During 2006, the Committee approved an amendment to our 401(k) plan to implement certain non-substantive administrative efficiencies that will better enable the plan administrator to make necessary changes in the plan when required due to changes in statutory requirements.

 

In addition, during 2006 the Committee implemented two new compensation policies. First, in April 2006 the Committee granted to our Chief Executive Officer the authority to approve grants to any employee other than an executive officer of (i) up to 5,000 shares of restricted stock and (ii) stock options for not more than 5,000 shares. Compensation Committee approval is required for any grant to be made to an executive officer and any grant that exceeds 5,000 shares. Our Chief Executive Officer is also required to provide a report of all awards of options and restricted stock made by him under this authority at the next succeeding Committee meeting. We and the Committee believe that this policy will benefit the Company because it will enable smaller grants to be made more efficiently. This flexibility is particularly important with respect to attracting and hiring new employees, given the increasingly competitive market for talented and experienced technical and other personnel in locales in which our employees work. During 2006, a total of 6,000 shares of restricted stock and stock options to purchase 9,000 shares were granted to employees under this authority delegated to our Chief Executive Officer.

 

Secondly, in August 2006, the Committee approved a process for fixed quarterly grant dates for all stock-based equity awards to our employees and directors. Under this process, all grants of stock-based equity to employees or directors are granted on one of four designated dates during the year: March 1, June 1, September 1 or December 1. We chose these four dates because they are not close to any dates that would normally be anticipated to contain earnings announcements or other announcements of material events. For an award to a current employee, the grant date for the award is the first designated date that occurs after approval of the award. For an award to a newly hired employee who is not yet employed by us at the time the award is approved, the grant date for the award is the first designated date that occurs after the new employee commences work. We and the Committee believe that this process of fixed quarterly grant dates is beneficial because it serves to remove any perception that the grant date for an award could be capable of manipulation or change for the benefit of the recipient. In addition, having all grants occur on a maximum of four days during the year simplifies certain fair value accounting calculations related to the grants, thereby minimizing the administrative burden associated with tracking and calculating the fair values, vesting schedules and tax-related events upon vesting of restricted stock and also lessening the opportunity for inadvertent calculation errors.

 

Objectives of Our Executive Compensation Programs

 

General Compensation Philosophy and Policy

 

Through our compensation programs, we seek to achieve the following general goals:

 

 

In the fall of 2003, the Compensation Committee, with the assistance of Towers Perrin, undertook a comprehensive review of our total compensation philosophy to maximize achievement of our goals. Since 2003, our governing principles in establishing executive compensation have been:

 

Long-Term and At-Risk Focus.  Premium compensation opportunities should be composed of long-term, at-risk pay to focus our management on the long-term interests of our company. Base salary, annual incentives and employee benefits should be at competitive levels when compared to similarly-situated companies.

 

Equity Orientation.  Equity-based plans should comprise a major part of the at-risk portion of total compensation to instill ownership thinking and to link compensation to corporate performance and stockholder interests.

 

Competitive.  We emphasize total compensation opportunities consistent on average with our peer group of companies. Competitiveness of annual base pay and annual incentives is independent of stock performance. However, overall competitiveness of total compensation is generally contingent on long-term, stock-based compensation programs.

 

Total Compensation.  In making decisions with respect to any element of an executive officer’s compensation, we consider the total compensation that may be awarded to the executive officer, including salary, annual bonus and long-term incentive compensation. When considering total compensation, we do not generally take into account the compensation that is or may be payable upon termination under the executive’s employment agreement.

 

It has been our general policy to enter into employment agreements with certain of our executive officers. In reviewing and approving employment agreements for executive officers, we and the Compensation Committee consider the other benefits to which the executive is entitled by the applicable terms of the agreement, including compensation payable upon termination of the agreement under a variety of circumstances. Our goal is to award compensation that is reasonable when all elements of potential compensation are considered.

 

These principles apply to compensation policies for all of our executive officers and key employees. We do not follow the principles in a mechanistic fashion; rather, we apply experience and judgment in determining the appropriate mix of compensation for each individual. This judgment also involves periodic review of discernible measures to determine the progress each individual is making toward agreed-upon goals and objectives.

 

Benchmarking

 

At least once each year, generally in or around August, our Human Resources department, under the oversight of the Compensation Committee, reviews data from market surveys, independent consultants and other sources to assess our competitive position with respect to base salary, annual incentives and long-term incentive compensation.

 

When reviewing compensation data in 2006, we utilized data primarily from the Oilfield Manufacturing & Services Industry (OFMS) Executive Survey and the Radford Executive Survey. The OFMS survey compiles survey results from 17 oilfield services companies and proxy compensation data from 32 companies. The Radford survey contains executive compensation information from more than 700 participating technology companies. When reviewing compensation data in 2006 with regard to the compensation of our Chief Executive Officer, the Compensation Committee engaged Towers Perrin to perform a marketplace compensation analysis. In the study, the firm presented data to the Committee from the Towers Perrin 2005 Energy Industry Incentive Survey, the Mercer Human Resource Consulting 2005 Energy Compensation Survey and a

proxy compensation analysis for the CEO position among a group of ten industry peer companies. These industry peer companies were:

 

 

The overall results of the Towers Perrin analysis (with regard to Chief Executive Officer compensation) and the Radford and OFMS surveys (with regard to compensation for all other levels within our company) provide the starting point for our compensation analysis. Beyond the report and survey numbers, we look extensively at a number of other factors, including our estimates of the compensation at our most comparable competitors and other companies that were closest to our company in size, profitability and complexity. We also consider an individual’s current performance, the level of corporate responsibility, and the employee’s skills and experience, collectively, in making compensation decisions.

 

In the case of our Chief Executive Officer and some of our other executive officers, we also consider our company performance since the person has held his or her position, and the anticipated level of difficulty of replacing the person with someone of comparable experience and skill. When we hired a new Executive Vice President/Chief Financial Officer in May 2006, we based our total compensation ranges for the position primarily on our direct experience and observations regarding competitive compensation packages for candidates possessing requisite levels of senior executive-level financial management experience, expertise and achievement.

 

In addition to our periodic review of compensation, we also regularly monitor market conditions and will adjust compensation levels from time to time as necessary to remain competitive and retain our most valuable employees. When we experience a significant level of competition for retaining current employees or hiring new employees, we will typically reevaluate our compensation levels within that employee group in order to ensure our competitiveness.

 

Elements of Compensation

 

The primary components of our compensation are:

 

 

Below is a summary of each component:

 

Base Salary

 

The general purpose of base salary for our executive officers is to create a base of cash compensation for the officer that is consistent on average with the range of base salaries for executives in similar positions and with similar responsibilities at comparable companies. In addition to salary norms for persons in comparable positions at comparable companies, base salary amounts may also reflect the nature and scope of responsibility of the position, the expertise of the individual employee and the competitiveness of the market for the employee’s services. Base salaries of executives other than our Chief Executive Officer may also reflect our Chief Executive Officer’s evaluation of the individual executive officer’s job performance. As a result, the base salary level for each individual may be above or below the target market value for the position. In addition, minimum base salaries for certain of our executive officers are determined by employment agreements with these officers.

 

Base salary is designed to provide an income level that is comparable to the income of executives in similar positions and with similar responsibilities at comparable companies and is sufficient to minimize

day-to-day distractions of executives from their focus on long-term business growth. The base salaries for our executives reflect levels that we have concluded were appropriate based upon our general experience and market data. We do not intend for base salaries to be the vehicle for long-term capital and value accumulation for our executives.

 

Base salaries are reviewed annually and may also be adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities, performance, experience and changes in market levels. Salary increases for executive officers do not follow a preset schedule or formula but do take into account changes in the market and with individual circumstances. For 2007, base salary levels are intended to be reviewed in August.

 

Below is a summary of each named executive officer’s base salary during 2006 and an explanation of historical changes made to each officer’s base salary:

 

Robert P. Peebler

President and Chief Executive Officer

 

Mr. Peebler became our President and Chief Executive Officer in 2003 at an initial annual base salary of $400,000. The compensation arrangements for Mr. Peebler were negotiated by the Compensation Committee members (except for Mr. Peebler, who was then serving on the Compensation Committee but removed himself from all discussions and deliberations). The remaining Committee members consulted with the full Board to address the terms of Mr. Peebler’s compensation. In determining his overall compensation, the Committee considered Mr. Peebler’s unique experience, expertise, and capabilities in the energy technology sectors that we served at that time, as well as our future market opportunities. For a description of Mr. Peebler’s work history, see “Item 1 — Election of Directors” above. Mr. Peebler’s successful prior experience as a chief executive officer and his technical and industry know-how in applying advanced technologies to oil and gas prospect analysis and reservoir management techniques were viewed as positive factors in the Board’s choice of him to lead our company in bettering its competitive position.

 

In structuring Mr. Peebler’s compensation package, no guaranteed cash bonus or incentive payment was originally planned. Although it was intended that he be eligible for discretionary bonuses in the future, the Committee and Mr. Peebler decided that the majority of his compensation should be weighted toward equity compensation, and that grants of stock options should reflect an exercise price in excess of prevailing market prices for our common stock at the time our agreement was reached on his compensation terms.

 

As a result of these negotiations and deliberations, the Compensation Committee members (other than Mr. Peebler) agreed with the following three basic components of Mr. Peebler’s initial compensation arrangements:

 

 

The Committee believed that these components were consistent with the Board’s objectives of retaining a chief executive officer who could capitalize on opportunities in future technology trends affecting the oil and gas exploration and production industry. In addition, the heavy weighting of stock-based compensation was designed to ensure that Mr. Peebler’s compensation would remain directly aligned with stockholders.

 

Mr. Peebler received no cash bonus or equity compensation grants in 2004 or 2005. In September 2005, Mr. Peebler’s base salary was increased to $471,000. In 2006, the Compensation Committee awarded Mr. Peebler a discretionary bonus of $200,000, based on the Company’s achievement of critical business objectives during 2005.

 

In 2006, Towers Perrin was engaged by the Compensation Committee to perform a marketplace analysis with regard to Mr. Peebler’s compensation. In the study, the firm presented data to the Committee from the Towers Perrin 2005 Energy Industry Incentive Survey, the Mercer Human Resource Consulting 2005 Energy Compensation Survey and a proxy compensation analysis for the CEO position among a group of 10 industry peer companies. For a listing of these 10 peer companies, see “Objectives of Our Executive Compensation Programs — Benchmarking” above. Based on the results of the report, and in recognition of our performance and Mr. Peebler’s unique experience, expertise, and capabilities, the Committee approved a 6% increase in base salary for Mr. Peebler, effective August 2006, to $500,000 per year.

 

The Committee continues to believe that our Chief Executive Officer should participate in the same programs and receive compensation based upon the same criteria as our other executive officers. However, the Committee also recognizes that the Chief Executive Officer’s compensation should reflect the greater policy- and decision-making authority that he holds and the higher level of responsibility he has with respect to our strategic direction and our financial and operating results.

 

R. Brian Hanson
Executive Vice President and Chief Financial Officer

 

Mr. Hanson was hired in May 2006 at a base salary of $275,000. In September 2006, we increased Mr. Hanson’s base salary to $285,000, a 3.6% increase, in recognition of his performance and in response to an increase in the competitive market for experienced public company chief financial officers, as demonstrated by an analysis of survey results of the market.

 

Christopher M. Friedemann
Senior Vice President, Corporate Marketing

 

Mr. Friedemann joined our company in 2003. In September 2004, his base salary was increased to $206,000 per year, representing a 3% increase over his beginning base salary. A year later, in September 2005, Mr. Friedemann’s annual base salary was increased by 4.8%. An analysis of executive compensation survey results indicated that Mr. Friedemann’s base salary was below the median salary for comparable positions. As a result, in September 2006 we increased his annual base salary by 6.5% to $230,000.

 

David L. Roland
Senior Vice President, General Counsel and
Corporate Secretary

 

Mr. Roland joined us in April 2004. At the beginning of 2006, Mr. Roland’s annual base salary was $200,000. An analysis of executive compensation survey results indicated that Mr. Roland’s base salary was approximately $47,000 below the median salary for comparable positions; therefore, in September 2006 we increased Mr. Roland’s base salary by $25,000 to $225,000 per year.

 

Michael K. (Mick) Lambert
former President, GX Technology Corporation

 

Mr. Lambert became the President of GX Technology Corporation (GXT) in 1997. He continued in that position after our acquisition of GXT in June 2004. In June 2004, Mr. Lambert was paid an annual base salary of $220,000, and he continued at that same base salary level until his retirement from GXT at the end of 2006.

 

Annual Incentive Compensation

 

Our employee annual bonus incentive plan is intended to promote the achievement each year of company performance objectives and performance objectives of the employee’s particular business unit, and to recognize those employees who contributed to the company’s achievements. The plan provides cash compensation that is at-risk on an annual basis and is contingent on achievement of annual business and operating objectives and individual performance. The plan provides all participating employees the opportunity to share in the company’s performance through the achievement of established financial and individual objectives. The

financial and individual objectives within the plan are intended to measure an increase in the value of our company and, in turn, our stock.

 

In recent years, we have adopted an annual incentive plan with regard to each year. Performance under the annual incentive plan is measured with respect to the designated plan fiscal year. Payments under the plan are paid in cash in an amount reviewed and approved by the Compensation Committee and are ordinarily made in a single installment in the first quarter following the completion of a fiscal year, after the financial results for that year have been determined.

 

In late 2005, we prepared an operating budget for 2006. The budget was the compilation of the consolidated budgets from each operating unit. The budgets took into consideration market opportunities, backlog of orders, technology enhancements for new products and other operating factors. The Board of Directors analyzed the proposed budget with management extensively. After analysis and consideration, the Board approved the budget. During late 2005 and early 2006, our Chief Executive Officer worked with our Human Resources department, our executive officers and other members of senior management to formulate our 2006 incentive plan, consistent with the 2006 operating plan approved by the Board.

 

At the beginning of 2006, the Compensation Committee approved two annual incentive plans — a “Senior Leadership Bonus Plan” for designated executives and a plan for designated non-executive key employees. The computation of awards generated under either plan is required to be approved by the Compensation Committee. After the year is completed, the Committee reviews the company’s actual performance against each of the plan performance goals established at the beginning of the year and the company evaluates each individual’s performance during the preceding year. The results of operations of the company for that year and individual performance evaluations determine the appropriate payout under each annual incentive plan.

 

The Compensation Committee has discretion in circumstances it determines are appropriate to authorize discretionary incentive compensation awards that might exceed amounts that would otherwise be payable under the terms of the leadership plan. These discretionary awards can be payable in cash, stock options, restricted stock, restricted stock units or a combination thereof. Any stock options, restricted stock or restricted stock units awarded would be granted under one of our existing long-term equity incentive plans. The Committee also has the discretion, in appropriate circumstances, to grant a lesser incentive award, or no incentive award at all, under the plan.

 

During 2003 and 2004, our financial performance did not qualify for incentive compensation payable under our annual incentive plans in effect at that time, and no incentive compensation was paid to our executives or other employees under either plan. Certain of our employees did receive incentive payments in 2003 and 2004 as discretionary awards or as required under the terms of their employment contracts. During 2005, we achieved only a portion of our target financial objectives, so eligible executives and employees received only limited bonus payments under the 2005 incentive plan, although certain employees received payments as required by employment agreements or as discretionary awards granted by the Committee.

 

The Compensation Committee intends to review our annual incentive compensation program annually to ensure that the key elements of the program continue to meet the objectives described above.

 

Below is a general description of the 2006 Senior Leadership Bonus Plan and a general summary of the company performance criteria applicable to the plan.

 

2006 Senior Leadership Bonus Plan

 

The purposes of the 2006 Senior Leadership Bonus Plan were to:

 

 

Designated senior executives of the Company, including our five named executive officers, were eligible to participate in our 2006 Senior Leadership Bonus Plan. Employees who participated in the non-executive

employee bonus plan or any other cash bonus incentive plan were not eligible to participate in the leadership plan.

 

The 2006 leadership plan was designed to equate the size of the incentive award to the performance of the individual participant and the performance of the company as a whole. Every participating executive had the opportunity to earn a percentage of his or her base salary based on their performance against criteria as defined by our Chief Executive Officer, and achievement of our company’s performance against designated consolidated financial objectives. Award determinations under the leadership plan were also based on evaluations of employee performance by our Chief Executive Officer. Under the 2006 leadership plan, approximately 75% of a participating executive’s award was to be based upon achievement of corporate financial objectives and approximately 25% was to be based upon the executive’s individual performance. Awards generated under the leadership plan were required to be approved by the Compensation Committee. In the absence of an agreement by the company to the contrary, executives must be active on our payroll at the time of award in order to be eligible for an award under the leadership plan. In connection with Mr. Lambert’s retirement at the end of 2006, we agreed for Mr. Lambert to remain eligible for an award under the 2006 leadership plan even though he retired at the end of 2006.

 

As reported in the chart below, our 2006 leadership plan established a 2006 target consolidated operating income performance goal. Under the leadership plan, every participating executive other than our Chief Executive Officer had the opportunity to earn a maximum of 100% of his or her base salary depending on performance of the Company against the designated performance goal and performance of the executive against personal criteria determined at the beginning of 2006 by our Chief Executive Officer. Under separate terms approved by the Compensation Committee, our Chief Executive Officer participated in the leadership plan with potential to earn a maximum of 75% of his base salary upon achievement of the target consolidated performance goal and pre-designated personal critical success factors, and a maximum of 150% of his base salary upon achievement of the maximum consolidated performance goal and the personal critical success factors.

 

Performance Criteria

 

At the beginning of 2006, the Compensation Committee approved the following corporate consolidated operating income performance criteria for consideration of bonus awards to the named executive officers and other covered employees under the 2006 Senior Leadership Bonus Plan:

 

 

We selected consolidated operating income as the most appropriate performance goal for our incentive plan because of its direct correlation with the interests of our stockholders and our overall company performance. The target level of operating income performance criteria reflected the target goal of our 2006 operating plan approved by the Board at the beginning of 2006. We viewed all three designated levels of operating income performance criteria as reasonable indications of achievement of value for our stockholders and company performance.

 

The levels of performance criteria were also consistent with our 2006 earnings guidance. The consolidated operating income target of $33.95 million represents approximately $0.30 per diluted share in earnings, and the consolidated operating income threshold of $25.46 million represents approximately $0.20 per diluted share in earnings. At the beginning of 2006, we announced that we anticipated our 2006 earnings to range between $0.20 and $0.35 per share. As a result, our target annual incentive levels represented achievement of the higher end of our earnings guidance range and our threshold levels represented achievement of the lower level of our earnings guidance range. In addition, achievement of the 2006 target operating income level would represent an increase of 69% over our 2005 actual consolidated operating income.

 

Where an employee is primarily involved in a particular business unit, the financial performance criteria under our non-executive employee bonus plan are heavily weighted toward the operational performance of the employee’s business unit. All executives in our 2006 leadership plan have broader corporate responsibility; as

a result, their performance goals are heavily weighted toward the consolidated performance of the company as a whole.

 

For fiscal 2006, on a consolidated basis, we earned approximately $39.9 million of operating income. Our 2006 Summary Compensation Table below reflects the payments that our named executive officers received under our 2006 Senior Leadership Bonus Plan.

 

In February 2007, the Compensation Committee approved our 2007 annual incentive plan. The structure of our 2007 annual incentive plan is similar to our 2006 incentive plans, except in 2007 one plan will cover all participating employees. The Compensation Committee has approved new performance criteria based on consolidated operating income for 2007 for bonus awards to be paid to the named executive officers and other covered employees under our 2007 plan. The particular performance goals designated under our 2007 plan reflect our confidential strategic plans. We are presently unable to determine how difficult it will be for our company to meet the designated performance goals under our 2007 plan. Generally, the Committee establishes the threshold, target and maximum levels such that the relative difficulty of achieving the target level is approximately consistent from year to year.

 

Long-Term Stock-Based Incentive Compensation

 

We have structured our long-term incentive compensation to provide for an appropriate balance between rewarding performance and encouraging employee retention and stock ownership. There is no pre-established policy or target for the allocation between either cash or non-cash or short-term and long-term incentive compensation; however, long-term incentives comprise a large portion of the total compensation package for executive officers and key employees. As reflected in our 2006 Summary Compensation Table below, the long-term incentives received by each of our named executive officers as a percentage of their respective total compensation during 2006 were as follows: Mr. Peebler — 40%; Mr. Hanson (who joined us in May 2006) — 31%; Mr. Lambert — 27%; Mr. Friedemann — 38%; and Mr. Roland — 29%. Because the 2006 Summary Compensation Table reflects less than the full fiscal year salary for Mr. Hanson, and because the value of certain equity awards included in the table is based on the FAS 123R value rather than the award fair value and reflects amounts from awards granted prior to 2006, the above percentages may not be indicative of the true allocation of total executive compensation.

 

For 2006, there were three forms of long-term incentives utilized for executive officers and key employees: stock options, restricted stock and restricted stock units. For 2007, we have recommended that stock options, restricted stock and restricted stock units continue to be the only forms of long-term incentives to be utilized for executive officers and key employees. Our long-term incentive plans have provided the principal method for our executive officers to acquire equity or equity-linked interests in our company.

 

Historically, we have concentrated most of our equity compensation in the form of nonqualified stock options as the result of favorable accounting and tax treatments. However, beginning in 2006 the accounting treatment for stock options changed as a result of FAS 123R, which required option grants to be valued at their fair value at time of grant and charged to non-cash compensation expense. This rendered the accounting treatment of stock options less attractive. As a result, we assessed the desirability of granting shares of restricted stock to employees and concluded that restricted stock would provide an equally motivating form of incentive compensation and also offers the advantage of aiding in employee retention.

 

Stock Options.  Under our equity plans, stock options may be granted having exercise prices equal to either the closing price of our stock on the date of grant or the average of the high and low sale prices of our stock on the date of grant, depending on the terms of the particular stock option plan that governs the award. In any event, all awards of stock options are made at or above the market price at the time of the award. The Compensation Committee will not grant stock options having exercise prices below the market price of our stock on the date of grant, and will not reduce the exercise price of stock options (except in connection with adjustments to reflect recapitalizations, stock or extraordinary dividends, stock splits, mergers, spin-offs and similar events, as required by the relevant plan). All of our stock options vest ratably over four years, based on continued employment. Prior to the exercise of an option, the holder has no rights as a stockholder with

respect to the shares subject to such option, including voting rights and the right to receive dividends or dividend equivalents. New option grants normally have a term of ten years.

 

The purpose of stock options is to provide equity compensation with value that has been traditionally treated as entirely at-risk, based on the increase in our stock price and the creation of stockholder value. Stock options also allow our executive officers and key employees to have equity ownership and to share in the appreciation of the value of our stock, thereby aligning their compensation directly with increases in stockholder value. Stock options only have value to their holder if the stock price appreciates in value from the date options are granted.

 

Stock option award decisions are generally based on past business and individual performance. In determining the number of options to be awarded, we also consider the grant recipient’s qualitative and quantitative performance, the size of stock option and other stock based awards in the past, and expectations of the grant recipient’s future performance. Seventy employees received option awards in 2006, covering 1,246,000 shares of common stock. The named executive officers received option awards for a total of 165,000 shares in 2006, or approximately 13% of the total options awarded in 2006.

 

Restricted Stock and Restricted Stock Units.  We use restricted stock and restricted stock units to focus executives on our long-term performance and to help align their compensation more directly with stockholder value. Vesting of restricted stock and restricted stock units typically occurs ratably over three years, based solely on continued employment of the recipient-employee. During 2005 and again in 2006, however, we utilized for the first time performance requirements for the vesting of some of our long-term incentive grants awarded to executives and key employees. The performance requirements utilized during 2005 and 2006 involved achievement of a business unit’s internal financial goals or completion of a specific project. In certain cases, the performance requirements were not satisfied, causing a forfeiture of the grant. In 2006, 167 employees received restricted stock or restricted stock unit awards, covering an aggregate of 696,500 shares of restricted stock and shares underlying restricted stock units (excluding performance grants that were later forfeited, as described above). The named executive officers received awards totaling 93,000 shares of restricted stock in 2006, or approximately 13% of the total restricted stock awarded in 2006.

 

Awards of restricted stock units have been made to certain of our foreign employees in lieu of awards of restricted stock. Restricted stock units provide certain tax benefits to our foreign employees as the result of foreign law considerations, so we expect to continue to issue restricted stock units to foreign employees for the foreseeable future.

 

The Compensation Committee intends to review both the annual incentive compensation program and the long-term incentive program annually to ensure that their key elements continue to meet the objectives described above.

 

Approval and Granting Process.  As described above, the Compensation Committee reviews and approves all stock option, restricted stock and restricted stock unit awards made to executive officers, regardless of amount. With respect to equity compensation awarded to employees other than executive officers, the Committee reviews and approves all grants of restricted stock, stock options and restricted stock units above 5,000 shares, generally based upon the recommendation of our Chief Executive Officer. With the exception of significant promotions, new hires or unusual circumstances, we generally make most awards of equity compensation on September 1 of each year. This date was selected because (i) it enables us to consider individual performance nine months into the year, (ii) it is approximately six months before the date that we normally pay any annual incentive bonuses and (iii) September 1, generally speaking, is not close to any dates that would normally be anticipated to contain earnings announcements or other announcements of material events. For a further description of our approval and granting process, see “Introduction/Corporate Governance — Compensation Committee Activity” above.

 

Personal Benefits, Perquisites and Employee Benefits

 

Benefits, perquisites and any other similar personal benefits offered to executive officers are substantially the same as those offered to our general salaried employee population. These benefits include access to

medical and dental insurance, life insurance, disability insurance, vision plan, charitable gift matching (up to designated limits), 401(k) plan with company match, employee stock purchase plan that allows enrolled employees to purchase our shares of stock at a 15% discount, flexible spending accounts for healthcare and dependent care, and other customary employee benefits. Business-related relocation benefits (as in the case with Mr. Hanson during 2006) are generally reimbursed but are individually negotiated when they occur. We intend to continue applying our general policy of not providing specific personal benefits and perquisites to our executives; however, the Compensation Committee in its discretion may revise or add to any officer’s personal benefits and perquisites if it deems it advisable.

 

Indemnification of Directors and Executive Officers

 

Our bylaws require us to indemnify our directors and employees (including our executive officers) in connection with any legal action brought against them by reason of the fact that they are or were a director, officer, employee or agent of our company, to the full extent permitted by law. Our bylaws also provide, however, that no such obligation to indemnify exists as to proceedings initiated by an employee or director against us or our directors unless (a) it is a proceeding (or part thereof) initiated to enforce a right to indemnification or (b) was authorized or consented to by our board of directors.

 

In 2002, we also entered into indemnity agreements with certain of our outside directors that provide for us to indemnify the director in connection with any proceeding in which the director is involved by reason of the fact that the director is or was a director of the company. In order to be indemnified under these agreements, the director must have acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the company and, in the case of a criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful.

 

As discussed below, we have also entered into employment agreements with certain of our executive officers that provide for us to indemnify the executive to the fullest extent permitted by our certificate of incorporation and bylaws. The agreements also provide that we will provide the executive with coverage under our directors’ and officers’ liability insurance policies to the same extent as provided to our other executives.

 

Common Stock Ownership Requirements

 

We have structured our compensation programs to encourage our senior management to own equity in our company. We believe that broad-based stock ownership by our employees (including our executive officers) enhances our ability to deliver superior shareholder returns by increasing the alignment between the interests of our employees and our stockholders. However, we do not have a formal requirement for share ownership by any group of our employees.

 

Impact of Regulatory Requirements on Compensation

 

Under Section 162(m) of the Internal Revenue Code and the related federal treasury regulations, we may not deduct annual compensation in excess of $1 million paid to certain employees — generally our Chief Executive Officer and our four other most highly compensated executive officers — unless that compensation qualifies as performance-based compensation. While we intend to strive to structure performance-related awards in a way that will preserve the maximum deductibility of compensation awards, we and the Compensation Committee may in the future determine that it is in our company’s best interests to pay compensation that is not deductible. To maintain flexibility in compensating executive officers in a manner designed to promote varying corporate goals, we have not adopted a policy that all compensation must be deductible.

 

Payments to our named executive officers under our 2006 Senior Leadership Bonus Plan may not qualify as performance-based compensation under Section 162(m) because the awards are calculated and paid in a manner that may not meet the requirements under Section 162(m) and the related treasury regulations. Given the rapid changes in our business during 2006 and our net operating loss carryforwards available with respect to our net liability for U.S. federal income taxes, we believe that we were better served in implementing a plan that provided for adjustments and discretionary elements for our senior executives’ incentive

compensation for 2006, rather than ensure that we implement all of the requirements under Section 162(m) into the 2006 bonus plan.

 

For accounting purposes, we apply the guidance in FAS 123R to record compensation expense for our equity-based compensation grants. FAS 123R is used to develop the assumptions necessary and the model appropriate to value the awards as well as the timing of the expense recognition over the requisite service period, generally the vesting period, of the award.

 

Executive officers will generally recognize ordinary taxable income from stock option awards when a vested option is exercised. We generally receive a corresponding tax deduction for compensation expense in the year of exercise. The amount included in the executive officer’s wages and the amount we may deduct is equal to the common stock price when the stock options are exercised less the exercise price, multiplied by the number of stock options exercised. We do not pay or reimburse any executive officer for any taxes due upon exercise of a stock option. We have not historically issued any tax-qualified incentive stock options under Section 422 of the Internal Revenue Code.

 

Executives will generally recognize taxable ordinary income with respect to their shares of restricted stock at the time the restrictions lapse (unless the recipient elects to accelerate recognition as of the date of grant). Restricted stock unit awards are generally subject to ordinary income tax at the time of payment or issuance of unrestricted shares of stock. We are generally entitled to a corresponding federal income tax deduction at the same time the executive recognizes ordinary income.

 

COMPENSATION COMMITTEE REPORT

 

The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis disclosure with management of the Company. Based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and incorporated into the Company’s annual report on Form 10-K for the year ended December 31, 2006.

 

Franklin Myers, Chairman
James M. Lapeyre, Jr.
John N. Seitz
Sam K. Smith

 

2006 SUMMARY COMPENSATION TABLE

 

The following table summarizes the compensation paid to or earned by our Chief Executive Officer, Chief Financial Officer and three other most highly compensated executive officers at December 31, 2006, during the fiscal year ended December 31, 2006:

 

 

 

 

 

 

 

 

 

 

 

2006 GRANTS OF PLAN-BASED AWARDS

 

 

 

 

Employment Agreements

 

We have entered into employment agreements with certain of our named executive officers. Our decisions to enter into employment agreements and the terms of those agreements were based on the facts and circumstances prevailing at the time and an analysis of competitive market practice. The following discussion describes the material terms of employment agreements for our named executive officers:

 

Robert P. Peebler

 

Our employment agreement with Mr. Peebler, dated March 31, 2003, provides that Mr. Peebler will serve as President and Chief Executive Officer for a five-year term, unless sooner terminated. We amended Mr. Peebler’s employment agreement in September 2006 to extend the term until December 31, 2010, and make certain other changes. The remainder of this description reflects Mr. Peebler’s employment agreement as so amended.

 

Under the agreement, Mr. Peebler is entitled to an annual base salary of at least $500,000, and to participate in all of our employee benefit plans available to senior executives at a level commensurate with his position. Mr. Peebler was not guaranteed an annual bonus under his original 2003 employment agreement, but his 2006 amendment provides that Mr. Peebler will be eligible to participate in our annual incentive plan for 2006 and each full year thereafter, with target incentive plan bonus at 75% of his base salary and with maximum incentive plan bonus at 150% of his base salary. His annual bonus will be earned upon achievement of our consolidated operating income performance targets applicable to the senior leadership bonus plan for the relevant year, and Mr. Peebler’s critical success factors as determined in advance by the Compensation Committee.

 

Under his employment agreement, Mr. Peebler received a grant in 2003 of an option to purchase 1,325,000 shares of our common stock at $6.00 per share, which exercise price exceeded the market price of our shares on the date of grant by 60% (at March 31, 2003, the date of his grant, the closing sales price per share of our common stock on the NYSE was $3.60). Mr. Peebler’s amended employment agreement provides that he is entitled to receive (a) in 2007, an award of shares of restricted common stock based on the amount of the annual incentive plan bonus earned by him for 2006; (b) in 2007, an award of shares of restricted common stock equivalent in value to his annual base salary; and (c) in years following 2007 through the end of the term of his agreement, an award of shares of restricted common stock based on the amount of the annual incentive plan bonus, if any, earned by Mr. Peebler for the preceding year and additional stock options as may be determined by the Compensation Committee.

 

We may at any time terminate our employment agreement with Mr. Peebler for “cause” if Mr. Peebler (i) willfully and continuously fails to substantially perform his obligations, (ii) willfully engages in conduct materially and demonstrably injurious to our property or business (including fraud, misappropriation of funds or other property, other willful misconduct, gross negligence or conviction of a felony or any crime involving

moral turpitude) or (iii) commits a material breach of the agreement. In addition, we may at any time terminate the agreement if Mr. Peebler suffers permanent and total disability for a period of at least 180 consecutive days or if Mr. Peebler dies. Mr. Peebler may terminate his employment agreement for “good reason” if we breach any material provision of the agreement, we assign to Mr. Peebler any duties materially inconsistent with his position, we remove him from his current office, materially reduce his duties, functions, responsibilities or authority, or take other action that results in a diminution in his office, position, duties, functions, responsibilities or authority, or we relocate his workplace by more than 30 miles.

 

In his agreement, Mr. Peebler agrees not to compete against us, assist any competitor, attempt to solicit any of our suppliers or customers, or solicit any of our employees, in any case during his employment and for a period of two years after his employment ends. The employment agreement also contains provisions relating to protection of our confidential information and intellectual property. We also agreed to indemnify Mr. Peebler to the fullest extent permitted by our certificate of incorporation and bylaws, and to provide him coverage under our directors’ and officers’ liability insurance policies to the same extent as our other executives.

 

For a discussion of the provisions of Mr. Peebler’s employment agreement regarding compensation to Mr. Peebler in the event of our change of control or his termination without cause or for good reason, see “Potential Payments Upon Termination or Change of Control — Robert P. Peebler” below.

 

R. Brian Hanson

 

Our employment agreement with Mr. Hanson was entered into on April 26, 2006, and became effective on May 22, 2006. The agreement provides for Mr. Hanson to serve as our Executive Vice President and Chief Financial Officer for an initial term of three years. Any change of control of our company occurring after May 22, 2007, will cause the remaining term of Mr. Hanson’s employment agreement to automatically adjust to two years, commencing on the effective date of the change of control.

 

The agreement provides for Mr. Hanson to receive an initial base salary of $275,000 per year and be eligible to receive an annual performance bonus under our incentive compensation plan, with target plan incentive at 50 percent of his annual base salary and an opportunity under the plan to earn up to 100 percent of his annual base salary. In September 2006, Mr. Hanson’s annual base salary was increased to $285,000. Under the agreement, Mr. Hanson was granted 75,000 shares of restricted stock and options to purchase 75,000 shares of our common stock. In the agreement, we also agreed to indemnify Mr. Hanson to the fullest extent permitted by our certificate of incorporation and bylaws, and to provide him coverage under our directors’ and officers’ liability insurance policies to the same extent as other company executives.

 

For a discussion of the provisions of Mr. Hanson’s employment agreement regarding compensation to Mr. Hanson in the event of our change of control or his termination without cause or for good reason, see “Potential Payments Upon Termination or Change of Control — R. Brian Hanson” below.

 

Michael (Mick) K. Lambert

 

Mr. Lambert retired as the President and Chief Executive Officer of GXT on December 31, 2006. We entered into an agreement with Mr. Lambert on October 19, 2006, setting forth his separation arrangements. We also entered into a consulting services agreement with Mr. Lambert, effective on January 1, 2007, whereby Mr. Lambert agreed to provide management advisory consulting services and certain other project services to GXT for a period of 14 months commencing on January 1, 2007. The terms of Mr. Lambert’s separation arrangements principally provide that he will be eligible to receive during 2007 his bonus with regard to 2006 in accordance with the criteria and terms of our incentive bonus plan, and that he will be entitled to retain his vested stock options in accordance with the terms of our stock option plans and his existing stock option agreements.

 

Mr. Lambert’s consulting agreement provides that he will be paid a total of $311,197 for his services during the term of the agreement. The agreement obligates Mr. Lambert to maintain the confidentiality of GXT’s confidential information and to transfer to GXT all rights to any technology developed by him during his term as consultant. In addition, for the term of the agreement, Mr. Lambert agrees not to compete against

GXT or solicit or hire GXT’s employees. GXT and Mr. Lambert each have the right to terminate the agreement in the event of a breach of the agreement by the other party.

 

Christopher M. Friedemann

 

In connection with Mr. Friedemann’s joining the company as an employee in August 2003, we agreed to pay him a minimum of three months’ base salary if his employment is terminated by us without cause.

 

David L. Roland

 

Our employment agreement with Mr. Roland was entered into on June 15, 2004. The agreement provides for Mr. Roland to serve as our Vice President, General Counsel and Corporate Secretary until June 15, 2006, and thereafter for additional successive terms of one year each, unless terminated by us or Mr. Roland at the end of the initial term or any additional term. Under the agreement, Mr. Roland is entitled to a minimum annual base salary of $175,000 and is eligible to receive a bonus under the terms of our annual incentive compensation plan. Mr. Roland’s annual base salary is currently $225,000. Under the agreement, Mr. Roland was awarded an initial grant of 10,000 shares of restricted stock and stock options to purchase 25,000 shares under our 2000 Long-Term Incentive Plan. His agreement also provides that Mr. Roland is entitled to participate in all of our employee benefit plans available to senior executives at a level commensurate with his position. In his agreement, we also agreed to indemnify Mr. Roland to the fullest extent permitted by our certificate of incorporation and bylaws, and to provide him coverage under our directors’ and officers’ liability insurance policies to the same extent as our other executives.

 

For a discussion of the provisions of Mr. Roland’s employment agreement regarding compensation to Mr. Roland in the event of our change of control or his termination without cause or for good reason, see “Potential Payments Upon Termination or Change of Control — David L. Roland” below.

 

2006 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 

The following table sets forth information concerning unexercised stock options and shares of restricted stock held by our named executive officers at December 31, 2006:

 

 

 

 

2006 OPTION EXERCISES AND STOCK VESTED

 

The following table sets forth certain information with respect to option and stock exercises by the named executive officers during the year ended December 31, 2006:

 

 

 

 

Potential Payments Upon Termination or Change of Control

 

The following summaries set forth estimated potential payments payable to our named executive officers upon termination of employment or a change of control of our company under their current employment agreements and our stock plans and other compensation programs as if his employment had so terminated for these reasons, or the change of control had so occurred, on December 31, 2006. The Compensation Committee may in its discretion revise, amend or add to the benefits if it deems advisable. For purposes of the following summaries, dollar amounts are estimates based on annual base salary as of December 31, 2006, benefits paid to the named executive officer in fiscal 2006 and stock and option holdings of the named executive officer as of December 31, 2006. The summaries assume a price per share of our common stock of $13.63 per share, which was the closing price per share on December 29, 2006, the last business day of 2006, as reported on the New York Stock Exchange. The actual amounts to be paid to the named executive officers can only be determined at the time of each executive’s separation from the company.

 

Robert P. Peebler

 

Termination and Change of Control.  Mr. Peebler is entitled to certain benefits under his employment agreement upon any of the following:

 

 

In the above scenarios, Mr. Peebler would be entitled to receive the following (less applicable withholding taxes and subject to compliance with his two-year non-compete, non-solicit and no-hire obligations):

 

 

We believe the above 18-month change-of-control benefit maximizes stockholder value because it motivates Mr. Peebler to remain in his position for a lengthy period following a change of control to ensure a smoother integration and transition for the new owners. Given his unique and high levels of experience and expertise in the seismic industry, we believe Mr. Peebler’s severance structure is in our best interest because it ensures that for a two-year period after leaving our employment, Mr. Peebler will not be in a position to compete with us or otherwise adversely affect our business. Mr. Peebler’s severance provisions are more generous than those of the other named executive officers and reflect the greater interest we have in protecting against any future competition from Mr. Peebler after his employment with us and also the greater opportunity costs he would bear if we decided to change our chief executive officer.

 

Upon a “change of control” involving our company (as that term is defined in his employment agreement and the applicable stock plans), all of Mr. Peebler’s stock options and restricted stock will automatically accelerate and become fully vested. Upon any of the above events, we would not be required to provide any medical continuation or death or disability benefits for Mr. Peebler that are not also available to our other employees as required by law or the applicable benefit plan.

 

Death or Disability.  Upon his death or disability, any options or restricted stock Mr. Peebler holds under our 2004 Long-Term Incentive Plan would automatically accelerate and become fully vested. As of December 31, 2006, Mr. Peebler held no awards granted from our 2004 Long-Term Incentive Plan. Mr. Peebler’s employment agreement provides for him to receive an award of shares of restricted stock during 2007, which award would most likely be granted from our 2004 Long-Term Incentive Plan. See “Employment Agreements — Robert P. Peebler” above.

 

Termination by Us for Cause or by Mr. Peebler Other Than for Good Reason.  Upon his termination or resignation for any other reason, Mr. Peebler is not entitled to any payment or benefit other than the payment of unpaid salary and accrued and unused vacation pay.

 

Mr. Peebler’s vested stock options will remain exercisable after his termination of employment, death, disability or retirement for periods of between 180 days and one year following such event, depending on the event and the terms of the applicable stock plan and grant agreement.

 

In addition, any voluntary termination of employment on or after December 31, 2010, will be treated for all purposes under our 2004 Long-Term Incentive Plan as a termination due to the retirement of Mr. Peebler, thereby causing all of his unvested stock options and restricted stock to automatically accelerate and become fully vested. As of December 31, 2006, Mr. Peebler held no awards granted from our 2004 Long-Term Incentive Plan. Mr. Peebler’s employment agreement provides for him to receive an award of shares of restricted stock during 2007, which award would most likely be granted from our 2004 Long-Term Incentive Plan. See “Employment Agreements — Robert P. Peebler” above.

 

Assuming Mr. Peebler’s employment was terminated under each of these circumstances or a change of control occurred on December 31, 2006, his payments and benefits would have an estimated value as follows (less applicable withholding taxes):

 

 

 

 

R. Brian Hanson

 

Termination and Change of Control.  Mr. Hanson is entitled to certain benefits under his employment agreement upon any of the following:

 

 

In the above scenarios, Mr. Hanson would be entitled to receive the following (less applicable withholding taxes and subject to compliance with non-compete, non-solicit and no-hire obligations):

 

 

We believe the above 12-month change-of-control benefit maximizes stockholder value because it motivates Mr. Hanson to remain in his position for a sufficient period following a change of control to ensure a smoother integration and transition for the new owners.

 

Upon a “change of control” involving our company (as that term is defined in his employment agreement and the applicable stock plans), all of Mr. Hanson’s stock options and restricted stock will automatically

accelerate and become fully vested. In addition, any change of control of our company occurring after May 22, 2007, will cause the remaining term of Mr. Hanson’s employment agreement to automatically adjust to two years, commencing on the effective date of the change of control.

 

Death, Disability or Retirement.  Upon his death, disability or retirement, all options and restricted stock Mr. Hanson holds would automatically accelerate and become fully vested.

 

Termination by Us for Cause or by Mr. Hanson Other Than for Good Reason.  Upon any termination by us for cause or any resignation by Mr. Hanson for any reason other than “good reason” (as defined in his employment agreement), Mr. Hanson is not entitled to any payment or benefit other than the payment of unpaid salary and accrued and unused vacation pay.

 

Mr. Hanson’s vested stock options will remain exercisable after his termination of employment, death, disability or retirement for periods of between 180 days and one year following such event, depending on the event and the terms of the applicable stock plan and grant agreement. If Mr. Hanson is terminated for cause, all of his vested and unvested stock options and unvested restricted stock will expire and no longer be exercisable.

 

If any payment or benefit under his employment agreement is determined to be subject to the excise tax for “excess parachute payments” under U.S. federal income tax rules, we have agreed to pay to Mr. Hanson an additional amount to adjust for the incremental tax costs of those payments to him.

 

Assuming Mr. Hanson’s employment was terminated under each of these circumstances or a change of control occurred on December 31, 2006, his payments and benefits would have an estimated value as follows (less applicable withholding taxes):

 

 

 

 

Michael (Mick) K. Lambert

 

Mr. Lambert retired from employment with us on December 31, 2006. As a result, Mr. Lambert does not have any current or future rights to payments or other entitlements upon any future termination of employment or change of control.

 

Christopher M. Friedemann

 

Mr. Friedemann is entitled to receive a minimum of three months’ base salary (less applicable withholding taxes) if we terminate his employment without cause. Upon a change of control involving our company, all of Mr. Friedemann’s unvested stock options and restricted stock will automatically accelerate and become fully vested. Upon his retirement, all options and restricted stock Mr. Friedemann holds will automatically accelerate and become fully vested. Upon his death or disability, all options and restricted stock Mr. Friedemann holds (other than 21,250 unvested options he holds that were granted under our 2000 Long-Term Incentive Plan) will automatically accelerate and become fully vested.

 

Mr. Friedemann’s vested stock options will remain exercisable after his termination of employment, death, disability or retirement for periods of between 180 days and one year following such event, depending on the event and the terms of the applicable stock plan and grant agreement. If Mr. Friedemann is terminated for cause, all of his vested and unvested stock options and unvested restricted stock will expire and no longer be exercisable.

 

Assuming Mr. Friedemann’s employment was terminated under each of these circumstances or a change of control occurred on December 31, 2006, his payments and benefits would have an estimated value as follows (less applicable withholding taxes):

 

 

 

 

David L. Roland

 

Termination and Change of Control.  Mr. Roland is entitled to certain benefits under his employment agreement upon any of the following:

 

 

 

In the above scenarios, Mr. Roland would be entitled to receive the following (less applicable withholding taxes):

 

 

Upon a change of control involving our company, all of Mr. Roland’s stock options and restricted stock will automatically accelerate and become fully vested. Mr. Roland’s employment agreement contains no change-of-control severance payment rights.

 

Death, Disability or Retirement.  Upon his retirement, all options and restricted stock Mr. Roland holds will automatically accelerate and become fully vested. Upon his death or disability, all options and restricted stock Mr. Roland holds (other than 12,500 unvested options he holds that were granted under our 2000 Long-Term Incentive Plan) will automatically accelerate and become fully vested.

 

Termination by Us for Cause or by Mr. Roland Other Than for Good Reason.  Upon his termination or resignation for any other reason, Mr. Roland is not entitled to any payment or benefit other than the payment of unpaid salary and accrued and unused vacation pay.

 

Mr. Roland’s vested stock options will remain exercisable after his termination of employment, death, disability or retirement for periods of between 180 days and one year following such event, depending on the event and the terms of the applicable stock plan and grant agreement. If Mr. Roland is terminated for cause, all of his vested and unvested stock options and unvested restricted stock would expire and no longer be exercisable.

 

Assuming Mr. Roland’s employment was terminated under each of these circumstances or a change of control occurred on December 31, 2006, his payments and benefits would have an estimated value as follows (less applicable withholding taxes):

 

 

 

 

 

2006 PENSION BENEFITS

 

None of our named executive officers participates or has account balances in any qualified or non-qualified defined benefit plans sponsored by us.

 

2006 NONQUALIFIED DEFERRED COMPENSATION

 

None of our named executive officers participates or has account balances in non-qualified defined contribution plans or other deferred compensation plans maintained by us.

 

DIRECTOR COMPENSATION

 

General

 

I/O employees who are also directors do not receive any fee or remuneration for services as members of our Board of Directors. We currently have seven non-employee directors who qualify for compensation. In addition to being reimbursed for all reasonable out-of-pocket expenses that the director incurs attending Board meetings and functions, our outside directors receive an annual retainer fee of $30,000, which each director may elect in advance to receive either in cash or in shares of our common stock valued at their fair market value as of the date of their issuance. In addition, the Chairman of the Audit Committee is entitled to receive an annual retainer fee of $12,500, the Chairman of the Compensation Committee is entitled to receive an annual retainer fee of $10,000, and the Chairman of the Governance Committee is entitled to receive an annual retainer fee of $5,000. Each Committee Chairman may elect to receive the retainer for serving as Chairman in cash or in shares of common stock valued at their fair market value as of the date of their issuance. Shares issued in lieu of cash for retainer fees are valued at the closing price per share on the last trading date before our annual stockholders meeting each year. Outside directors also receive, in cash, $2,000 for each Board meeting and $2,000 for each committee meeting attended (unless the committee meeting is held in conjunction with a Board meeting, in which case the fee for committee meeting attendance is $1,000) and $1,000 for each Board or committee meeting held via teleconference.

 

Each outside director also receives an initial grant of options to purchase 20,000 shares of our stock upon joining the Board and follow-on grants of options to purchase 12,500 shares of our stock each year. All option awards to directors during 2006 were made from the 2004 Long-Term Incentive Plan and were granted on December 1, 2006.

 

In 1992, we adopted a Directors Retirement Plan. We discontinued this plan in 1996. Mr. Elliott is the only director entitled to receive any benefits under the Directors Retirement Plan. This plan requires us to make a lump sum payment to Mr. Elliott following his retirement from the Board, in an amount equal to the present value of $15,000 to be received annually for a period of ten years.

 

The following table summarizes the compensation paid by the company to non-employee directors in 2006:

 

 

 

 

 

 

(i) Awards during the director’s initial year of service vest in 33.33% consecutive annual installments on the first, second and third anniversary dates of the date of grant.

 

(ii) Awards during the director’s second full year of service vest in 50% consecutive annual installments on the first and second anniversary dates of the date of grant.

 

(iii) Awards during the director’s third full year of service vest on the first anniversary date of the date of grant.

 

(iv) Awards following the completion of the director’s third full year of service vest on the date of grant.

 

 

Equity Compensation Plan Information
(as of December 31, 2006)