-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ITKiaEj/BySUWYe4hH0RtXLElwkKgp83Re34yeK8QcItOuPkrNff60g1up+Jj0jN +zPBdX25vTEK8dLCW/szhQ== 0000912057-96-021780.txt : 19961003 0000912057-96-021780.hdr.sgml : 19961003 ACCESSION NUMBER: 0000912057-96-021780 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960831 FILED AS OF DATE: 19961002 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INPUT OUTPUT INC CENTRAL INDEX KEY: 0000866609 STANDARD INDUSTRIAL CLASSIFICATION: MEASURING & CONTROLLING DEVICES, NEC [3829] IRS NUMBER: 222286646 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18768 FILM NUMBER: 96638203 BUSINESS ADDRESS: STREET 1: 12300 PARC CREST DR CITY: STAFFORD STATE: TX ZIP: 77477 BUSINESS PHONE: 7132402200 MAIL ADDRESS: STREET 1: 12300 PARC CREST DR CITY: STAFFORD STATE: TX ZIP: 77477 10-Q 1 FORM 10-Q ============================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: AUGUST 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO ____________ COMMISSION FILE NUMBER: 1-13402 INPUT/OUTPUT, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) DELAWARE 22-2286646 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 11104 WEST AIRPORT BLVD., STAFFORD, TEXAS 77477 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (713) 933-3339 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] At August 31, 1996 there were 43,049,801 shares of common stock, par value $0.01 per share, outstanding. ============================================================================ INPUT/OUTPUT, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q FOR THE QUARTER ENDED AUGUST 31, 1996 PART I. Financial Information. PAGE ---- Item 1. Financial Statements. Consolidated Balance Sheets August 31, 1996 and May 31, 1996............................... 2 Consolidated Statements of Operations Three months ended August 31, 1996 and 1995................... 3 Consolidated Statements of Cash Flows Three months ended August 31, 1996 and 1995................... 4 Notes to Consolidated Financial Statements....................... 5 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition....................... 8 PART II. Other Information. Item 6. Exhibits and Reports on Form 8-K.......................... 10 1 INPUT/OUTPUT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) AUGUST 31, MAY 31, ASSETS 1996 1996 ---------- -------- Current assets: Cash and cash equivalents..................... $ 14,000 $ 34,252 Trade account receivables, net................ 45,900 42,989 Trade notes receivable, net................... 46,193 28,424 Inventories................................... 100,601 92,787 Prepaid expenses.............................. 2,210 2,004 -------- -------- Total current assets........................ 208,904 200,456 Long-term trade notes receivable................ 21,718 16,678 Deferred income tax asset....................... 327 1,062 Property, plant and equipment, net.............. 60,101 56,035 Identified intangibles, net..................... 63,417 64,200 Other assets.................................... 19,460 17,034 -------- -------- $373,927 $355,465 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of long-term debt........ $ 860 $ -- Accounts payable, principally trade........... 15,733 19,518 Accrued expenses.............................. 10,958 13,751 Income taxes payable.......................... 3,136 1,962 -------- -------- Total current liabilities................... 30,687 35,231 Long-term debt, excluding current installments.. 11,690 -- Other liabilities............................... 3,110 3,030 Stockholders' equity: Preferred stock, $.01 par value; authorized 5,000,000 shares, none issued................ -- -- Common stock, $.01 par value; authorized 50,000,000 shares; issued 43,049,801 shares at August 31, 1996 and 42,969,676 shares at May 31, 1996................................. 430 430 Additional paid-in capital.................... 215,570 214,259 Retained earnings............................. 113,806 104,145 Cumulative translation adjustment............. (665) (762) Unamortized restricted stock compensation..... (701) (868) -------- -------- Total stockholders' equity.................. 328,440 317,204 -------- -------- $373,927 $355,465 -------- -------- -------- -------- See accompanying notes to consolidated financial statements. 2 INPUT/OUTPUT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED) FOR THE THREE MONTHS ENDED AUGUST 31, ----------------------- 1996 1995 ---------- ---------- Net sales and other revenues................... $ 73,004 $ 54,758 Cost of sales.................................. 44,370 32,853 ---------- ---------- Gross profit................................. 28,634 21,905 ---------- ---------- Operating expenses: Research and development..................... 5,890 4,567 Marketing and sales.......................... 3,307 3,102 General and administrative................... 5,844 4,138 Amortization of identified intangibles....... 1,108 694 ---------- ---------- Total operating expenses................... 16,149 12,501 ---------- ---------- Earnings from operations....................... 12,485 9,404 Interest expense............................... -- (868) Other income................................... 1,723 880 ---------- ---------- Earnings before income taxes................... 14,208 9,416 Income taxes................................... 4,547 3,013 ---------- ---------- Net earnings................................... $ 9,661 $ 6,403 ---------- ---------- ---------- ---------- Earnings per common share...................... $ 0.22 $ 0.17 ---------- ---------- ---------- ---------- Weighted average number of common shares outstanding................................... 43,941,921 37,837,228 ---------- ---------- ---------- ---------- See accompanying notes to consolidated financial statements. 3 INPUT/OUTPUT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) THREE MONTHS ENDED AUGUST 31, -------------------- 1996 1995 -------- --------- Cash flows from operating activities: Net earnings....................................... $ 9,661 $ 6,403 Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation and amortization.................... 2,925 2,132 Amortization of restricted stock compensation.... 167 446 Deferred income taxes............................ 735 (1,533) Pension costs.................................... 107 75 Changes in assets and liabilities: Receivables.................................... (25,798) (23,127) Inventories.................................... (7,814) (6,481) Leased equipment............................... 557 428 Accounts payable and accrued expenses.......... (6,578) 14,313 Income taxes payable........................... 1,174 2,416 Other.......................................... (1,106) (1,276) -------- --------- Net cash used in operating activities.......... (25,970) (6,204) Cash flows from investing activities: Purchases of property, plant, and equipment........ (6,397) (2,255) Acquisition of net assets and business............. -- (121,296) Investment in other assets......................... (2,008) (248) -------- --------- Net cash used in investing activities.............. (8,405) (123,799) Cash flows from financing activities: Borrowing from bank................................ 12,550 70,000 Exercise of stock options.......................... 1,311 2,818 -------- --------- Net cash provided by financing activities...... 13,861 72,818 Effect of foreign currency fluctuations.............. 262 -- -------- --------- Net decrease in cash and cash equivalents............ (20,252) (57,185) Cash and cash equivalents at beginning of quarter.... 34,252 57,392 -------- --------- Cash and cash equivalents at end of quarter.......... $ 14,000 $ 207 -------- --------- -------- --------- See accompanying notes to consolidated financial statements. 4 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) GENERAL The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The financial statements reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to fairly present such information. Although the Company believes that the disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures, including significant accounting policies, normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. It is suggested that these financial statements be read in conjunction with the consolidated financial statements and the notes thereto, as well as Item 7. - "Management's Discussion and Analysis of Results of Operations and Financial Condition," included in the Company's annual report on Form 10-K filed for the year ended May 31, 1996. (2) INVENTORIES Inventories are stated at the lower of cost (primarily first-in, first-out) or market. A summary of inventories follows (in thousands): AUGUST 31, MAY 31, 1996 1996 ---------- ------- Raw materials........................... $ 66,406 $47,280 Work-in-process......................... 32,035 29,016 Finished goods.......................... 2,160 16,491 -------- ------- $100,601 $92,787 -------- ------- -------- ------- (3) STATEMENTS OF CASH FLOWS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company does not invest or intend to invest in derivative securities. Similar investments with original maturities beyond three months are considered short-term investments available for sale or carried at market. Exchange rate fluctuations have not had a material effect on the Company's Statements of Cash Flows. Supplemental disclosures of cash flow information for the three months ended August 31, 1996 and 1995 follow (in thousands): 1996 1995 ------ ----- Cash paid during the periods for: Interest (net of amount capitalized)......... $ -- $ -- ------ ----- Income taxes................................. $2,218 $ 399 ------ ----- ------ ----- 5 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (4) LONG TERM DEBT In August 1996, the Company, through one of its wholly-owned subsidiaries, obtained a $12.6 million, ten-year term loan secured by certain of its land and buildings located in Stafford, Texas which includes the Company's executive offices, research and development headquarters, and newly-constructed electronics manufacturing building. The term loan, which the Company has guaranteed under a Limited Guaranty, bears interest at a fixed rate of 7.875% per annum. The Company leases all of the property from its subsidiary under a master lease, which lease has been collaterally assigned to the lender as security for the term loan. The term loan provides for penalties for prepayment prior to maturity. (5) INCOME TAXES Components of income tax expense for the three months ended August 31, 1996 and 1995 follow (in thousands): 1996 1995 ------ ------- Current: Federal................................. $2,968 $ 3,408 Foreign................................. 568 956 State and local......................... 276 182 Deferred - federal........................ 735 (1,533) ------ ------- $4,547 $ 3,013 ------ ------- ------ ------- 6 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) A reconciliation of the expected income tax expense on earnings using the statutory Federal income tax rate of 35% to the income tax reported herein for the three months ended August 31, 1996 and 1995 follows (in thousands): 1996 1995 ------ ------ Expected income tax expenses......................... $4,973 $3,296 Tax benefit from use of foreign sales corporation.... (600) (432) Foreign tax credit................................... 31 58 Foreign taxes........................................ (151) 42 State and local taxes................................ 179 118 Research and development credit...................... (168) -- Other................................................ 283 (69) ------ ------ $4,547 $3,013 ------ ------ ------ ------ The tax effects of the cumulative temporary differences resulting in the net deferred income tax asset follow (in thousands): AUGUST 31, MAY 31, 1996 1996 ---------- ------- Accrued expenses.............................. $(1,545) $(1,351) Allowance accounts............................ (859) (1,053) Unamortized restricted stock compensation..... (955) (1,711) Uniform capitalization........................ (536) (409) Total deferred income tax assets........... (3,895) (4,524) Valuation allowance........................ -- -- Total deferred income tax asset, net....... (3,895) (4,524) Basis in identified intangibles............... 2,157 2,075 Basis in property, plant and equipment........ 328 150 Other......................................... 1,083 1,237 Total deferred income tax liabilities...... 3,568 3,462 -------- ------- Total deferred income tax (asset), net........ $ (327) $(1,062) -------- ------- -------- ------- 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS NET SALES AND OTHER REVENUES. The Company's first quarter net sales and other revenues increased by $18.2 million, or 33.3%, to $73.0 million compared to the prior year's first quarter. The increase in sales revenue was primarily due to the sale of six I/O SYSTEM TWO MRX and three RSR systems to geophysical contractors in Canada, Russia, Ukraine, Venezuela and the United States. In addition, there were sales of over 400 marine I/O SYSTEM TWO MSX streamers and energy sources during the first quarter. The prior year's first quarter net sales and other revenues principally consisted of six system sales to geophysical contractors in Russia and the first I/O SYSTEM TWO RSR system, as well as the contribution of $20.1 million in sales of products from the Western Exploration Products Group (WGEP) product lines acquired by the Company in June 1995 from Western Atlas, Inc. (the "WGEP Acquisition"). The Company's results for the three-month period ended August 31, 1996 reflect a full quarter's operations giving effect to the WGEP Acquisition, while the results for the quarter ended August 31, 1995 reflect only two months of such combined operations. GROSS PROFIT MARGIN. The Company's first quarter gross profit margins were adversely affected by changes in the sales mix and sales of lower margin products from product lines acquired in the WGEP Acquisition. First quarter profit margins declined from 40.0% for the prior fiscal year's first quarter to 39.2%. OPERATING EXPENSES. Operating expenses increased $3.6 million or 29.2%, for the first quarter over the prior year's first quarter operating expenses. Research and development expenses increased $1.3 million, or 29.0%, primarily due to increased personnel and related costs resulting from the WGEP Acquisition. Marketing and sales expenses increased $205,000, or 6.6% primarily due to increased personnel and related costs resulting from the WGEP Acquisition, and increased advertising expenses offset by decreased third party commissions. General and administrative expenses increased $1.7 million, or 41.2%, primarily due to increased non-recurring professional fees, increases in state and local taxes derived from increased levels of property and assets resulting from the WGEP Acquisition, increased data processing expenses, and increased depreciation expense. Amortization of identified intangibles increased $414,000 or 59.7%, primarily due to goodwill resulting from the WGEP Acquisition. INTEREST EXPENSE. Interest expense for the first quarter of fiscal 1997 was nil and $868,000 for the first quarter of fiscal 1996 primarily due to interest on the $70 million term indebtedness incurred in June 1995 in connection with the WGEP Acquisition. These borrowings were repaid in November 1995. INCOME TAX EXPENSE. The Company's effective income tax rate was approximately 32%, both for the first quarter of fiscal 1997 and the first quarter of fiscal 1996. 8 LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations from internally generated cash flow, its credit facilities, and funds from equity financings. Cash flows from operating activities before changes in working capital items were a positive $13.6 million for the three months ended August 31, 1996. However, cash flows from operating activities after changes in working capital items were a negative $26.0 million for the three months ended August 31, 1996 primarily due to increases in trade accounts, notes receivable and inventory required to support increased sales levels, along with a decrease in accounts payable. The Company believes that it has sufficient credit facilities in place to finance these increases in its working capital requirements. As of August 31, 1996 the Company has no borrowings outstanding under its revolving line of credit. As of August 31, 1996, total trade notes receivable had increased $22.8 million over the corresponding amount outstanding at May 31, 1996, reflecting the increased levels of Company-financed sales during the first three months of fiscal 1997. The Company expects that these increased levels of Company-financed sales will continue for the foreseeable future. For information concerning the Company's sales finance activities, see "Item 1. - Business-Markets and Customers" of the Company's Annual Report on Form 10-K for the year ended May 31, 1996. In August 1996, a subsidiary of the Company borrowed $12,550,000 in long-term financing secured by the land, buildings and improvements housing the Company's executive offices, research and development headquarters and new manufacturing facility in Stafford, Texas. The loan bears interest at the rate of 7.875% per annum and is repayable in equal monthly installments of principal and interest of $151,439. The promissory note, which matures on September 1, 2006, contains prepayment penalties. See Note (4) - Long-Term Debt of the Notes to Consolidated Financial Statements. The Company anticipates expenditures for the current fiscal year for exploration and development of oil and gas properties to be approximately $6 million and expects to fund this level of expenditures through cash flows from operations. Actual levels of exploration and development expenditures may vary significantly due to many factors, including oil and gas prices, industry conditions, and the success of the Company's exploration and development projects. The Company's exploration and development projects are operated by third parties which control the timing and amount of expenditures required to exploit the participant's interests in these prospects. The Company expects to participate in the drilling and completion of six wells in fiscal 1997. The Company's participation in oil and gas activities is accounted for on a full cost basis. Capital expenditures for property, plant, and equipment totaled $10.2 million for fiscal 1996 and $6.4 million for the first three months of fiscal 1997, and are expected to aggregate $26.5 million for fiscal 1997. As noted above, the Company concluded in August 1996 a long-term credit facility of $12.6 million to assist in financing the costs of land and improvements in Stafford, Texas. The Company believes that the combination of its existing working capital, unused credit available under its working capital credit facility, internally generated cash flow and access to other financing sources will be adequate to meet its anticipated capital and liquidity requirements for the foreseeable future. 9 PART II - OTHER INFORMATION. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) List of documents filed as Exhibits 10.1 - Promissory Note dated August 29, 1996 executed by IPOP Management, Inc. to the order of The Variable Annuity Life Insurance Company. 10.2 - Master Commerical Lease Agreement dated August 29, 1996, by and between IPOP Management, Inc. and The Variable Annuity Life Insurance Company. 10.3 - Limited Guaranty dated August 29, 1996, executed by Input/Output, Inc. 27 - Financial Data Schedule. (b) Reports on Form 8-K No reports on Form 8-K were filed by Input/Output, Inc. during the quarter ended August 31, 1996. 10 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. INPUT/OUTPUT, INC. By: /s/ Robert P. Brindley ---------------------------------- Robert P. Brindley Senior Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) Dated: September 27, 1996 11 EX-10.1 2 EXHIBIT 10.1 - PROMISSORY NOTE PROMISSORY NOTE $12,550,000.00 Houston, Texas August 29, 1996 1. FOR VALUE RECEIVED, the undersigned IPOP MANAGEMENT, INC., a Delaware corporation (hereinafter called "MAKER"), with offices at 11104 West Airport Boulevard, Suite 200, Stafford, Texas 77477, hereby agrees and promises to pay to the order of THE VARIABLE ANNUITY LIFE INSURANCE COMPANY, a Texas corporation, (which along with subsequent holders of this Note, and their successors or assigns, is hereinafter called "PAYEE"), at 2929 Allen Parkway, 34th Floor, Houston, Harris County, Texas 77019, Attention: Director - Mortgage Loans, or at such other place as Payee may from time to time designate in writing, the principal sum of TWELVE MILLION FIVE HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($12,550,000.00) in lawful money of the United States of America, with interest on the principal balance from time to time remaining unpaid from the date of advancement until maturity at the rate of seven and seven-eights percent (7.875%) per annum, said principal and interest being payable in the manner and form as follows: a. An installment of interest on the unpaid principal balance hereof from the date of funding through August 31, 1996, shall be due and payable at the funding of this Note. b. Thereafter, this Note shall be payable in one hundred nineteen (119) consecutive monthly installments of principal and interest in the amount of $151,439.00 each (calculated on the basis of a 360-day year and an amortization period of ten (10) years); the first installment shall be due and payable on October 1, 1996, and a like installment shall be due and payable on the first day of each of the next one hundred eighteen (118) calendar months. c. A FINAL INSTALLMENT IN THE AMOUNT OF THE ENTIRE UNPAID PRINCIPAL BALANCE HEREOF TOGETHER WITH ACCRUED AND UNPAID INTEREST THEREON SHALL BE DUE AND PAYABLE ON SEPTEMBER 1, 2006 (THE "MATURITY DATE"). 2. Each payment shall be credited first to prepayment fees or other charges hereunder (other than interest), then to accrued interest and the remainder to the unpaid principal on this Note, and interest shall thereupon cease upon the principal so credited. 3. Should default be made in payment of any of the indebtedness evidenced hereby, after the entire principal amount hereof shall have become due and payable, whether by acceleration, at maturity or otherwise, the entire unpaid principal balance and accrued, but unpaid, interest on this Note shall bear interest at the lesser of (i) the Maximum Lawful Rate (as hereinafter defined) or (ii) the rate of eighteen percent (18%) per annum. 4. In the event that any payment required hereunder or under the "SECURITY INSTRUMENTS" (as hereinafter defined) shall not be made within ten (10) days after the date due, a late charge equal to the lesser of (i) an amount which, when added to all other amounts constituting "interest" under applicable state or federal law, does not exceed the Maximum Lawful Rate or (ii) four percent (4%) of the amount of any such delinquent payment so overdue, may be charged by Payee for the purpose of defraying the expense incident to handling such delinquent payment. Such late charge represents the reasonable estimate of Payee and Maker of a fair average compensation for the loss that may be sustained by Payee due to the failure of Maker to make timely payments. Such late charge shall be paid without prejudice to the right of Payee to collect any other amounts provided to be paid or to declare a default hereunder or under the Security Instruments. Page 1 of 5 5. Prepayment of this Note shall be permitted only in accordance with the following terms and conditions: (1) Maker shall have the right to prepay the entire outstanding principal balance (but not any lesser amount) of this Note on any regular monthly installment date for the payment of principal and interest hereunder, provided that (i) Payee shall have received at least sixty (60) days' prior written notice (the "NOTICE") of such full prepayment, (ii) at the time specified in the Notice for any prepayment there shall be no default under this Note or under any of the other Security Instruments, and (iii) such prepayment is accompanied by a prepayment fee in an amount equal to the lesser of (x) an amount which, when added to all other sums received, charged, or contracted for by Payee which are interest or are deemed to be interest by applicable laws, does not exceed the maximum non-usurious rate that may be received, charged, or contracted for by Payee under applicable laws from time to time in effect (the "MAXIMUM LAWFUL RATE") or (y) the greater of an amount calculated as set forth in Paragraphs (a) or (b) (as applicable), below: (a) at the time of receipt by Payee of the Notice, the difference between (i) the then present value of all unpaid installments of principal and interest due and payable under this Note, calculated from the date of the proposed prepayment to the Maturity Date, discounted at the "Reinvestment Rate" (as hereinafter defined), and (ii) the outstanding principal balance under this Note on the date of the proposed prepayment; or (b) one percent (1%) of the then outstanding principal balance of this Note. As used in this Note, "REINVESTMENT RATE" shall be the yield to maturity on a United States treasury bond or note (the choice of which security to be used for such purposes being in the sole discretion of Payee) having maturity date of September 1, 2006 (or the maturity date closest thereto if no such bond or note has a maturity date of September 1, 2006). (2) If Payee shall at any time come into possession of proceeds resulting from an acceleration of the maturity of this Note, tender prior to foreclosure, foreclosure, or any other reason, (other than application of insurance or condemnation proceeds) such possession shall be deemed to be and shall be treated as a voluntary prepayment hereunder and consequently there shall be added to the outstanding unpaid principal sum of this Note as additional indebtedness immediately due and payable hereunder and secured by the Security Instruments, a prepayment fee calculated pursuant to Paragraph 5.(1) above. There shall be no prepayment penalty or premium in connection with the application of insurance proceeds or condemnation awards. (3) Upon receipt by Payee of the Notice, Payee shall, within thirty (30) days thereafter, give notice to Maker of the Reinvestment Rate and, if applicable, the amount of the prepayment fee payable under Paragraph 5.(1) above. Determination of the Reinvestment Rate and the amount of any such prepayment fee by Payee shall be binding on Maker absent manifest mathematical error. (4) If Maker gives Payee the Notice as herein provided and thereafter fails to prepay this Note (with payment of the applicable prepayment fee) at the time specified in the Notice, such failure shall constitute a default hereunder and, without further notice by Payee, entitle Payee, at its option, to accelerate the maturity of this Note and exercise any and all remedies available to Payee under the Security Instruments. (5) Notwithstanding any provisions to the contrary contained herein, there shall be no prepayment premium or fee payable hereunder with respect to prepayments made in accordance with the Page 2 of 5 terms hereof during the last ninety (90) days prior to the Maturity Date provided that Payee shall have timely received the Notice. 6. This Note is secured by all security interests, rights, titles, liens, assignments, claims and equities, whether expressed or implied (the "SECURITY INSTRUMENTS") executed by Maker (or any other party) in favor of Payee pertaining to and securing this Note, including those executed simultaneously herewith, those executed heretofore and those executed hereafter, and including specifically, and without limitation, that certain Deed of Trust and Security Agreement of even date herewith (the "DEED OF TRUST") executed by Maker covering approximately 15.26 acres of land in Stafford, Fort Bend County, Texas, together with all buildings and improvements now or hereafter erected thereon (hereinafter called the "MORTGAGED PROPERTY"), all as more fully set forth and described in such instrument. This Note is additionally secured by that certain Limited Guaranty of even date herewith executed by Input/Output, Inc. (the "Guarantor"). 7. It is expressly agreed that time is of the essence of this agreement, and this Note shall become immediately due and payable at the option of Payee, without presentment or demand or any notice (including, without limitation, notice of intent to accelerate or notice of acceleration) to Maker, (i) on Maker's failure to pay any installment hereon on the date such installment is due, (ii) upon an event of default under the terms of any Security Instrument, or (iii) if any event occurs or condition exists which authorizes the acceleration of maturity hereof under any agreement made by Maker in connection with the Security Instruments. Upon the occurrence of any such event, Payee shall also have the right to exercise any and all other rights, remedies and recourses now or hereafter existing under any Security Instrument, in equity or at law, by virtue of statute or otherwise, including, but not limited to, the right to foreclose any and all liens securing this Note. Failure to exercise any such option, rights or remedies shall not constitute a waiver on the part of Payee of the right to exercise said option, right or remedy at any other time. 8. If (i) Payee retains an attorney to collect, enforce or defend this Note or any of the other Security Instruments or (ii) Payee shall become a party, either as plaintiff or as defendant, in any suit or legal proceeding in relation to the Mortgaged Property or any of the other collateral securing payment of this Note (the "OTHER COLLATERAL"), or (iii) Maker or any subsequent owner of an interest in the Mortgaged Property or the Other Collateral is the subject of any bankruptcy, probate or receivership proceeding, or (iv) Maker or anyone claiming by, through, or under Maker (including without limitation any subsequent owner of an interest in the Mortgaged Property or the Other Collateral) sues Payee in connection with this Note or any of the Security Instruments and does not prevail against Payee, then in any such event Maker agrees to pay to Payee, in addition to principal and interest, all reasonable costs and expenses incurred by Payee in connection with such collection, enforcement, defense, suit or proceeding, including without limitation reasonable attorneys' fees, regardless of whether incurred in connection with any bankruptcy, probate, receivership or other court proceedings (whether at the trial or the appellate level). 9. It is the intention of the parties hereto to comply with the usury laws of the State of Texas and of the United States of America; accordingly, it is agreed that notwithstanding any provision to the contrary in this Note or in any Security Instrument, no such provision shall require the payment of or permit the collection of interest in excess of the Maximum Lawful Rate. If any excess of interest in such respect is provided for, or shall be adjudicated to be so provided for, in this Note or in any Security Instrument, whether as a result of prepayment, acceleration of maturity or otherwise, then in such event (a) the provisions of this paragraph shall govern and control, (b) neither the Maker nor its successors or assigns or any other party liable for the payment hereof shall be obligated to pay the amount of such interest to the extent that it is in excess of the Maximum Lawful Rate, and the same shall be construed as a mutual mistake of the parties and, (c) any such excess which may have been collected shall be, at the option of Payee, either applied as a credit against the then unpaid principal amount hereof or refunded to Maker. Maker hereby agrees to pay an Page 3 of 5 effective rate of interest that is the sum of the interest rate provided for herein, together with any additional rate of interest resulting from any other charges of interest or in the nature of interest paid or to be paid in connection with the loan evidenced hereby, including without limitation any commitment fee and any other fees to be paid by Maker pursuant to the provisions of the Security Instruments and any commitment relating to the loan evidenced hereby. All sums paid or agreed to be paid the Payee or holder of this Note for the use, forbearance or detention of the indebtedness evidenced hereby shall, to the extent permitted by the usury laws applicable to this loan transaction, be amortized, prorated, allocated and spread throughout the full term of this Note. 10. Maker and all sureties, endorsers, and guarantors of this Note jointly and severally (i) waive demand, presentment for payment, notice of non-payment, protest, notice of protest, notice of intent to accelerate, notices of acceleration and all other notice, filing of suit and diligence in collecting this Note or enforcing any of the security herefor, (ii) agree to any substitution, exchange or release of any party primarily or secondarily liable hereon, (iii) agree that Payee shall not be required first to institute suit or exhaust its remedies hereon against Maker or others liable or to become liable hereon or to enforce its rights against any security hereof in order to enforce payment of this Note by them, and (iv) consent to any extension or postponement of time of payment of this Note and to any other indulgence with respect hereto without notice thereof to any of them. 11. [Intentionally Deleted.] 12. By its execution of this Note, Maker warrants and represents to Payee that the loan proceeds will be utilized exclusively for commercial, investment, or business purposes, and no loan proceeds will be used for personal, family, or household purposes. 13. THIS NOTE IS EXECUTED IN THE STATE OF TEXAS AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCEPT AS PREEMPTED OR CONTROLLED BY THE LAWS OF THE UNITED STATES OF AMERICA. 14. Maker acknowledges that the Deed of Trust securing this Note contains certain provisions restricting the conveyance, transfer or further conveyance or further encumbrance of the Mortgaged Property. 15. This Note is intended to be performed in accordance with and only to the extent permitted by all applicable law. If any portion of this Note or the application thereof to any person or circumstance shall, for any reason and to any extent be invalid or unenforceable, neither the remainder of this instrument nor the application of such provisions to other persons or circumstances shall be affected thereby, but rather shall be enforced to the greatest extent permitted by law. 16. The liability of Maker for failure to perform Maker's obligations hereunder or under the Deed of Trust and the other Security Instruments is expressly limited to the security for payment of this Note, the same being all properties, rights, and estates subject to the Security Instruments, and Payee agrees not to seek any damages or money judgment against Maker for any default on the part of Maker under this Note or any of the Security Instruments. Notwithstanding anything to the contrary contained in this Note or in any of the Security Instruments, and notwithstanding any delay on the part of Payee in exercising any right, power or remedy in connection with any default under this Note, the Deed of Trust or any of the other Security Instruments, Payee shall have full recourse against Maker, and Maker shall be personally liable for and shall promptly account (by delivery of funds) to Payee for (a) all condemnation awards and proceeds and insurance proceeds received by Maker or Guarantor (to the extent same have not theretofore been applied toward Page 4 of 5 payment of the sums due under this Note or used for repair of the Mortgaged Property and, with respect to such insurance proceeds which represent proceeds paid under any rent insurance, business interruption insurance or other similar types of insurance, to the additional extent such rent, business interruption or other similar insurance proceeds have not theretofore been applied toward the payment of taxes and insurance premiums); (b) all amounts necessary to repair any damage to the Mortgaged Property, excluding normal wear and tear, caused by acts or omissions of Maker, its agents, employees, or contractors (c) all security deposits; (d) failure to pay, in accordance with the Deed of Trust, taxes, assessments or other charges which can create liens on any portion of the Mortgaged Property or the Other Collateral and are payable hereunder or under the Security Instruments (to the full extent of any such taxes, assessments or other charges); (e) failure to pay charges for labor or materials or other charges which can create liens on any portion of the Mortgaged Property or the Other Collateral (to the full extent of the amount rightfully claimed by any such claimant); (f) prepaid rent and rental or other income derived from the Mortgaged Property or the Other Collateral from and after the occurrence of a default under this Note or the Security Instruments (whether any of such condemnation awards, insurance proceeds, income or other funds derived from the Mortgaged Property are held by Payee or received by Maker); (g) any loss incurred by Payee as a result of Maker's forfeiture of the Mortgaged Property resulting from criminal activity by any person whether or not such criminal activity is conducted on or in any manner relates to the Mortgaged Property or the Other Collateral; and (h) all sums due Payee, excluding payments of principal and accrued interest due pursuant to this Note, following exercise by Payee of its right to perform Maker's obligations under the Security Instruments to preserve, protect or defend the Mortgaged Property as collateral for this Note after notice and opportunity to cure, if any, as provided in the Security Instruments. Additionally, Payee shall have the right to off-set against any funds held by Payee (including, without limitation, escrows for taxes and insurance) pursuant to this Note and any of the Security Instruments. Nothing herein contained shall be construed to prevent Payee from exercising and enforcing any other remedy allowed at law or in equity or by any statute or by the terms of this Note or the Security Instruments nor shall anything herein contained be deemed to be a release or impairment of the Deed of Trust, any of the other Security Instruments or the indebtedness evidenced by this Note or secured thereby or shall be deemed to prejudice the right of Payee as against Maker or any other entity now or hereafter liable under any guaranty, bond, or lease covering the Mortgaged Property, the Other Collateral or any portion thereof, policy of insurance or other agreement which Maker may have delivered to Payee in compliance with any of the terms, covenants, and conditions of this Note or any of the Security Instruments, or preclude the Payee from exercising its right to foreclose under the Deed of Trust or any of the other Security Instruments (either by judicial means or non-judicial means) in the event of a default under this Note or any of the Security Instruments, or except as may be limited by the foregoing provisions of this paragraph, from enforcing any of the Payee's rights under this Note or under any of the Security Instruments including, without limitation, the right to the appointment of a receiver for the Mortgaged Property or the Other Collateral, or limit the rights or remedies which Payee would otherwise be entitled to at law or in equity absent the limitation of liability provisions set forth in this paragraph against Maker for fraud perpetrated by Maker against Payee. In addition, notwithstanding any other provisions of this Note or the Security Instruments, the Maker shall be personally liable for any loss, damage or injury sustained by Payee arising from the breach of any warranty or representation contained in any affidavit made by or on behalf of Maker or in any of the Security Instruments regarding hazardous wastes or other hazardous or toxic substances, including, but not limited to, any breach of the warranties, representations, covenants or indemnities contained in Article 11 of the Deed of Trust relating to "Hazardous Materials" (as therein defined). IPOP MANAGEMENT, INC., a Delaware corporation By: /s/ Robert P. Brindley ----------------------------------- President/Secretary Page 5 of 5 EX-10.2 3 EXHIBIT 10.2 - MASTER LEASE AGMT. MASTER COMMERCIAL LEASE AGREEMENT THIS MASTER COMMERCIAL LEASE AGREEMENT (the "Lease"), made and entered into as of the 29th day of August, 1996, by and between IPOP MANAGEMENT, INC., a Delaware corporation ("Landlord") and INPUT/OUTPUT, INC., a Delaware corporation ("Tenant"). W I T N E S S E T H: Subject to the terms, provisions, and conditions of this Lease, and each in consideration of the duties, covenants, and obligations of the other hereunder, Landlord hereby leases, demises, and lets the Premises (as hereinafter defined) to Tenant and Tenant hereby leases the Premises from Landlord. ARTICLE I DEFINITIONS 1.1 DEFINITIONS. For purposes of this Lease, the following terms shall have the meanings respectively indicated: "BANKRUPTCY EVENT" means the occurrence of one or more of the following: (i) Tenant shall seek, consent to or not contest the appointment of a receiver, trustee, or liquidator for itself or for all or any substantial part of its property, (ii) Tenant shall voluntarily file a petition seeking relief under the bankruptcy or other debtor relief laws of the United States in any state or competent jurisdiction, (iii) Tenant shall make a general assignment for the benefit of its creditors, (iv) an involuntary petition is filed against Tenant seeking relief under the bankruptcy or other debtor relief laws of the United States in any state or competent jurisdiction, or a court of competent jurisdiction enters an order, judgment or decree appointing, without the consent of Tenant, a receiver, trustee or liquidator for Tenant, or for all or any substantial part of its property, and in either event, such petition, order, judgment or decree shall not be and remain dismissed within a sixty (60) day period after its filing or entry. "BUILDINGS" means collectively the Office Buildings and the New Building, together containing approximately 281,439 square feet of gross outside area of office, manufacturing, warehouse and/or commercial space and the associated parking lots and infrastructure serving same, located upon the Site. "COMMENCEMENT DATE" means August 29, 1996. "EXISTING LEASES" shall mean those certain existing Lease Agreements between Landlord and the Existing Tenants with respect to space in the Office Buildings, as more fully described on EXHIBIT B attached hereto and incorporated herein for all purposes. "EXISTING TENANTS" shall mean the tenants described in the Existing Leases. "FAIR MARKET VALUE OF THE MORTGAGED PROPERTY" has the meaning given to such term in SECTION 19.4C. "FIRST MORTGAGE" means that certain Deed of Trust and Security Agreement dated August 29, 1996, executed by Landlord for the benefit of Mortgagee, and covering the premises. "MORTGAGEE" means The Variable Annuity Life Insurance Company, and its successors and assigns, as the mortgagee under the First Mortgage. "NEW BUILDING" means that certain 110,000 square foot manufacturing office and warehouse facility being constructed and to be occupied by Tenant, situated on Tract I described in EXHIBIT A attached hereto. "PRE-FORECLOSURE DEBT" means the Indebtedness (as defined in the First Mortgage) due and owing to Mortgagee immediately prior to any foreclosure of the lien of the First Mortgage, including, but not limited to, the aggregate of the outstanding principal balance of the Note (as defined in the First Mortgage), the accrued interest and any other accrued but unpaid portion of the Indebtedness and any and all costs, fees, expenses, attorney's fees and other amounts due and owing and constituting part of the Indebtedness. "PREMISES" means the Building and the Site. OFFICE BUILDINGS" means these two (2) office buildings currently occupied by Tenant and the Existing Tenants, under the Existing Leases, situated on Tracts II and III described as EXHIBIT A attached hereto. "SITE" means that certain real property situated in Fort Bend County, Texas, more particularly described in EXHIBIT "A" attached hereto and incorporated herein for all purposes, and all right, title, and interest of the Landlord, if any, in and to any land lying in the bed of any street, road or avenue, open or proposed, in front of or adjoining said land and in and to the easements, franchises, rights, appendages and appurtenances. "TERMINATION EVENT" occurs when Mortgagee forecloses the lien of the First Mortgage and no Bankruptcy Event has occurred and is continuing. "TERMINATION FEE" means the Termination Fee determined in accordance with SECTION 19.4A OR B, as appropriate. ARTICLE II TERM 2.1 TERM. This Lease shall continue in force for a term (the "Term") of 120 months commencing on the 29th day of August, 1996, and ending on the 1st day of September, 2006, unless sooner terminated or extended as herein provided. -2- ARTICLE III RENT 3.1 RENT. The rental (the "Rent") payable by Tenant during the Term shall be TWO MILLION TWO HUNDRED THREE THOUSAND SIX HUNDRED SIXTY SEVEN AND 37/100 DOLLARS ($2,203,667.37) per year. The Rent shall be payable in advance in monthly installments of ONE HUNDRED EIGHTY-THREE THOUSAND SIX HUNDRED THIRTY- EIGHT AND 95/100 DOLLARS ($183,638.95) due on or before on the 20th day of each calendar month during the Term, beginning on the Commencement Date. Rent shall be payable at Landlord's address set forth in SECTION 23.1. 3.2 LATE CHARGE; DEFAULT RATE. In the event that Tenant shall fail to pay any installment of Rent or Additional Rent (hereinafter defined) within ten (10) days after the date on which such installment is due, Tenant shall pay to Landlord a late charge equal to Five Hundred and no/100 Dollars ($500.00), in order to compensate Landlord for the extra administrative expenses incurred. Rent or Additional Rent that is more than five (5) days past due shall bear interest at the lesser of the highest lawful rate or the prime rate in effect from time to time announced by Texas Commerce Bank, National Association, Houston, Texas, plus five percent (5%) per annum ("Default Rate"), until paid. 3.3 ADDITIONAL RENT. All sums, liabilities, obligations, and other amounts which Tenant is required to pay or discharge pursuant to this Lease in addition to the Rent, together with any interest, penalty, or other sum which may be added for late payment thereof, shall constitute additional rent hereunder ("Additional Rent"). In the event of any failure on the part of Tenant to pay or discharge any of the foregoing, Landlord shall have all rights, powers, and remedies provided for herein or by law or equity or otherwise in the case of nonpayment of rent. ARTICLE IV CONDITION OF PREMISES 4.1 CONDITION OF THE PREMISES. THE PREMISES ARE DELIVERED TO TENANT AND ARE BEING LEASED "AS IS" AND "WITH ALL FAULTS" AND TENANT ACKNOWLEDGES AND AGREES THAT IT HAS BEEN GIVEN FULL OPPORTUNITY TO INSPECT THE CONDITION OF THE PREMISES. TO THE MAXIMUM EXTENT PERMITTED BY LAW, LANDLORD HEREBY DISCLAIMS, AND TENANT WAIVES THE BENEFIT OF, ANY AND ALL IMPLIED WARRANTIES, INCLUDING IMPLIED WARRANTIES OF FITNESS OR SUITABILITY FOR PURPOSE, OR THAT THE PREMISES HAVE BEEN CONSTRUCTED OR MAINTAINED IN A GOOD AND WORKMANLIKE MANNER. BY OCCUPYING THE PREMISES AND TAKING POSSESSION THEREOF, TENANT ACCEPTS THE PREMISES AS SUITABLE FOR THE PURPOSES FOR WHICH THEY ARE LEASED AND ACCEPTS THE PREMISES AND EACH AND EVERY APPURTENANCE THEREOF, AND WAIVES ANY AND ALL DEFECTS THEREIN. NOTWITHSTANDING THE ABOVE, TENANT ACKNOWLEDGES AND AGREES THAT THE PORTION OF THE PREMISES CONSTITUTING THE NEW -3- BUILDING IS STILL UNDER CONSTRUCTION AND TENANT WILL BE GIVEN THE OPPORTUNITY TO INSPECT AND ACCEPT THE NEW BUILDING, BUT LANDLORD SHALL HAVE NO LIABILITY TO TENANT WITH RESPECT TO THE CONDITION OF THE NEW BUILDING OTHER THAN AND TO THE EXTENT OF ITEMS COVERED BY THE CONSTRUCTION CONTRACT AND ANY SUBCONTRACTS FOR THE CONSTRUCTION OF THE NEW BUILDING. ARTICLE V USE 5.1 PRESCRIBED USE. Tenant shall use the Premises solely as office, warehouse and manufacturing facilities. 5.2 LEGAL USE - VIOLATIONS OF INSURANCE COVERAGE. Tenant shall not occupy or use, nor permit any portion of the Premises to be occupied or used, for any business or purpose that is unlawful or deemed to be disreputable in any manner, or extra hazardous on account of fire, nor permit anything to be done that will increase the rate of fire insurance on the Premises, or its contents. 5.3 UPKEEP OF PREMISES AND ADJACENT AREAS. Tenant shall take good care of the Premises and keep them in good repair and free from waste. Tenant shall keep the Premises neat, clean and free from dirt, rubbish or other obstructions at all times. Tenant shall store all trash and garbage within the appropriate waste disposal areas and arrange for its regular pick-up or other regular disposal at Tenant's expense. ARTICLE VI NET LEASE 6.1 NON-TERMINABILITY. A. This Lease is an absolutely net lease and the Rent, Additional Rent and all other sums payable hereunder by Tenant shall be paid without notice (except as expressly provided herein), demand, set-off, counterclaim, abatement, suspension, deduction or defense. B. This Lease shall not terminate, nor shall Tenant have any right to terminate this Lease (except as otherwise expressly provided herein), nor shall Tenant be entitled to any abatement or reduction of Rent hereunder (except as otherwise expressly provided herein), nor shall the obligations of Tenant under this Lease be affected, by reason of (i) any damage to or destruction of all or any part of the Premises from whatever cause, (ii) the taking of the Premises or any portion thereof by condemnation, requisition or otherwise, (iii) the prohibition, limitation or restriction of Tenant's use of all or any part of the Premises, or any interference with such use, (iv) any eviction by superior title or otherwise, (v) Tenant's acquisition or ownership of all or any part of the Premises otherwise than as expressly provided herein, (vi) any default on the part of Landlord under this Lease, -4- or under any other agreement to which Landlord and Tenant may be parties, (vii) the failure of Landlord to deliver possession of the Premises on the commencement of the term hereof, or (viii) any other cause whether similar or dissimilar to the foregoing, any present or future law to the contrary notwithstanding. It is the intention of the parties hereto that the obligations of Tenant hereunder shall be separate and independent covenants and agreements, that the Rent, the Additional Rent and all other sums payable by Tenant hereunder shall continue to be payable in all events and that the obligations of Tenant hereunder shall continue unaffected unless the requirement to pay or perform the same shall have been terminated pursuant to any express provision of this Lease. C. Except as expressly provided herein, Tenant agrees that it will remain obligated under this Lease in accordance with its terms, and that it will not take any action to terminate, rescind, or avoid this Lease, notwithstanding (1) the bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution or winding-up or other like proceeding affecting Landlord or its successor in interest, or (2) any action with respect to this Lease which may be taken by any trustee or receiver of Landlord or its successor in interest or by any court in any such proceeding. D. Tenant waives all rights which may now or hereafter be conferred by law (i) to quit, terminate or surrender this Lease or the Premises or any part thereof, or (ii) to any abatement, suspension, deferment or reduction of the Rent, Additional Rent or any other sums payable under this Lease, except as otherwise expressly provided herein. ARTICLE VII TAXES, UTILITIES, MAINTENANCE 7.1 TAXES. Tenant shall pay, or at Landlord's option, reimburse Landlord for the payment by Landlord of, all taxes, assessments, and other governmental charges, whether federal, state, county or municipal, and whether they be by taxing districts or authorities presently taxing the Premises or by others, subsequently created or otherwise, and any other taxes and assessments levied or assessed against the Premises (together, "Taxes"). If Tenant pays the Taxes directly, Tenant shall pay all Taxes before the date they become delinquent and shall provide to Landlord written tax receipts evidencing payment of the Taxes at least ten (10) days prior to the date such Taxes become delinquent. If Landlord elects to pay the Taxes and have Tenant reimburse Landlord for those Taxes, Tenant shall pay to Landlord on the same day as installments of Rent are due, as Additional Rent under this Lease, one-twelfth (1/12th) of the amount of Taxes estimated by Landlord to become due with respect to the Premises for that year. On or before January 31 of each year, Landlord shall either (a) submit an statement to Tenant for the actual amount of Taxes due for the previous year, LESS amounts already paid by Tenant, and Tenant shall pay such amount within fifteen (15) days after receipt of such statement thereof, or (b) refund to Tenant the difference, if any, of the Taxes paid by Tenant and the amount of actual Taxes for that year. 7.2 UTILITIES. Tenant shall be responsible for and promptly pay all charges incurred for all utility services to the Premises, including, but not limited to, telephone -5- service, sanitary sewer, water, natural gas, and electricity arising out of Tenant's use, occupancy, and possession of the Premises. Tenant shall also provide all replacement light bulbs and tubes and pay for all maintenance upon utilities. In no event shall Landlord be liable for any interruption or failure of utility service to the Premises. 7.3 MAINTENANCE, REPAIRS. A. Subject to the provisions of ARTICLE XX below, relating to destruction of or damage to the Premises, Tenant agrees that, at its own expense, it will keep and maintain the Premises, including, without limitation, the roof, exterior, foundation, structural, and operational parts, paving, and landscaping, in a condition and repair similar to its condition and repair on the Commencement Date hereof, reasonable wear and tear excepted. Tenant shall be responsible for disposal of its trash from the Premises. Replacement and repair parts, materials, and equipment shall be of quality equivalent to those initially installed within the Premises and repair and maintenance work shall be done in accordance with the then existing federal, state, and local laws, regulations, and ordinances pertaining thereto. Upon any termination of this Lease, Tenant shall surrender the Premises in a condition and repair similar to its condition and repair on the commencement date hereof, reasonable wear and tear excepted, and shall surrender all keys for the Premises to Landlord at the place then fixed for the payment of rent. B. Tenant covenants that in case of damage to or destruction of any or all of the improvements upon the Premises by fire or any other cause, insured or uninsured, Tenant will promptly, at its sole cost and expense, restore, repair, replace or rebuild the improvements so damaged or destroyed as nearly as practicable to the condition, quality and class thereof immediately prior to such damage or destruction, or with such changes or alterations as Tenant shall elect to make in conformity with ARTICLE XX of this Lease. In performing its obligations under this paragraph, Tenant shall be entitled to insurance proceeds under the terms and conditions set forth in ARTICLE XX hereof. Landlord shall have the right to approve the plans and specifications for the work or repair, replacement or rebuilding, such approval not to be unreasonably withheld or delayed. Tenant shall diligently obtain all necessary permits for such work or repair and shall maintain builder risk insurance in amounts reasonably satisfactory to Landlord until completion of such work. Such restoration, repairs, replacement or rebuilding shall be commenced promptly and prosecuted with diligence, subject to unavoidable delays and force majeure. 7.4 TAXES ON TENANT'S PROPERTY. Tenant shall be liable for all taxes levied or assessed against personal property, furniture, fixtures or other improvements placed by Tenant in the Premises. If any such taxes for which Tenant is liable are levied or assessed against Landlord or Landlord's property and if Landlord elects to pay the same or if the assessed value of Landlord's property is increased by inclusion of personal property, furniture, fixtures, or other improvements placed by Tenant in the Premises, and Landlord elects to pay the taxes based on such increase, then Tenant shall pay to Landlord on demand that part of such taxes for which Tenant is liable under this Lease. 7.5 GOVERNMENTAL ORDERS; COVENANTS; LANDLORD CURE; PERMITTED CONTEST: -6- A. Tenant shall, at its own cost and expense, promptly comply with all applicable laws and with all applicable requirements of any legally constituted public authority having jurisdiction over the Premises, with any covenants or restrictions binding on the Premises and any contract, agreement or other instrument applicable to the Premises and in effect on the date of delivery hereof or to which Tenant is a party or has given its consent. B. If Tenant fails to perform Tenant's obligations under any paragraph of this Lease, Landlord may at its option after twenty (20) days written notice (unless in Landlord's judgment its interest in the Premises may be prejudiced by delay in which case notice shall be given to Tenant, contemporaneously with the commencement of Landlord's performance), and unless Tenant has bonded the obligations and is proceeding, diligently to perform the same, perform such obligations on Tenant's behalf and the cost thereof, together with interest thereon at the Default Rate shall become due and payable as Additional Rent to Landlord on the next date scheduled for the payment of Rent. C. Provided that Tenant first posts a bond, cash reserve or other security reasonably acceptable to Landlord in an amount equal to the amount in controversy, Tenant shall have the right to contest, by appropriate proceedings, any tax, charge, levy, assessment, lien or other encumbrance, and/or any law, rule, order, ordinance, regulation or other governmental requirement affecting the Premises, and to postpone payment of or compliance with the same during the pendency of such contest provided that in the event of such postponement or payment or noncompliance: (i) Tenant shall not postpone the payment of any such tax, charge, levy, assessment, lien or other encumbrance for such length of time as shall permit the Premises, or any lien thereon created by such item being contested, to be sold by federal, state, country or municipal authority for the non-payment thereof; (ii) Tenant shall not postpone compliance with any such law, rule, order, ordinance, regulation or other governmental requirements if Landlord will thereby be subject to civil liability or criminal prosecution, or if any municipal or other governmental authority shall commence a process according to applicable law to carry out any work to comply with the same or to foreclose or sell any lien affecting all or part of the Premises which shall have arisen by reason of such postponement or failure of compliance; and (iii) Tenant shall pay, in a timely fashion, all Rent and Additional Rent (other than any item of Additional Rent that Tenant is permitted to contest pursuant to this Lease, so long as Tenant satisfies all of the requirements of this Lease relating to such contest) which shall become due and payable under this Lease. ARTICLE VIII INDEMNIFICATION 8.1 RELEASE OF CLAIMS. Tenant waives all claims against Landlord and its agents and employees for injury to persons, damage to property or to any other interest of Tenant sustained by Tenant or any person claiming through Tenant resulting from any occurrence in or upon the Premises including, but not limited to, such claims for damages resulting from: (a) any equipment or appurtenances becoming out of repair; (b) the Premises being out of repair; (c) injury or damage done or occasioned by wind, water, flooding, -7- freezing, fire, explosion, earthquake, excessive heat or cold, vandalism, riot or disorder or other casualty; (d) any defect in or failure of plumbing, heating or air conditioning equipment, electric wiring or installation thereof, gas, water, steam pipes, stairs, railings or walls; (e) broken glass; (f) the backing up of any sewer pipe or downspout; (g) the bursting, leaking or running of any tank, tub, washstand, water closet, water pipe, drain, cooling coil or any other pipe or tank in, upon or about the Premises; (h) the escape of steam or hot water; (i) water, snow or ice being upon or coming through the roof, skylight, trapdoor, stairs, walks or any other place upon or near the Premises or otherwise; (j) the falling of any fixture, plaster or stucco; and (k) any act, omission, or negligence of occupants of adjoining or contiguous buildings or of owners of adjacent or contiguous property. Except as waived pursuant to SECTION 9.1 of this Lease, Tenant has not and does not waive any claims, actions, losses, damages, or expenses suffered by Tenant which are caused by the willful misconduct of Landlord, its agents, employees, contractors, or invitees; provided, however, that the provisions of SECTION 9.1 of this Lease shall, to the extent contrary to the provisions of this sentence, control and supersede. 8.2 INDEMNIFICATION OF LANDLORD. Tenant hereby agrees to indemnify and save Landlord harmless from and against any and all claims, actions, damages, liabilities, and expenses in connection with the loss of life, personal injury, and/or damage to property arising from or out of (a) any occurrence in, upon, or at the Premises, however caused, including occurrences caused by the sole or contributory negligence of Tenant, its agents, customers, invitees, concessionaires, contractors, servants, vendors, materialmen, or suppliers; (b) the occupancy, use, or misuse by Tenant, or Tenant's employees, of the Premises, service areas, parking areas, pedestrian areas, pedestrian walks, or driveways; (c) any occurrence on the Premises occasioned wholly or in part by any act or omission of Tenant, its agents, customers, invitees, concessionaires, contractors, servants, vendors, materialmen, or suppliers; or (d) any occurrence occasioned by the violation of any law, regulation or ordinance by Tenant or its agents, customers, invitees, concessionaires, contractors, servants, vendors, materialmen, or suppliers; provided, however, that the provisions of this indemnity shall not be applicable when such claims, actions, losses, damages, or expenses are determined to have been caused by the willful misconduct of Landlord, its agents, employees, contractors, or invitees. If Landlord is made a party to any litigation commenced by or against Tenant for any of the above reasons for which Tenant is obligated to indemnify Landlord, then Tenant shall protect and hold Landlord harmless and pay all costs, penalties, charges, damages, expenses, and reasonable attorneys' fees incurred or paid by Landlord. The foregoing indemnity shall be in addition to Tenant's obligation to supply the insurance as required by ARTICLE IX of this Lease and not in discharge of or substitution for same. ARTICLE IX INSURANCE 9.1 WAIVER OF SUBROGATION. Tenant hereby waives and releases any and all rights, claims, demands, and causes of action it may have against Landlord on account of any loss or damage occasioned to Tenant, its properties, real and personal, the Premises, or their contents, arising from any risk or peril generally covered or coverable by standard -8- fire and extended coverage insurance or covered or coverable by any insurance policy carried by or available to Tenant; and Tenant, on behalf of the insurance companies insuring the property of Tenant against any such loss, waives and releases any rights of subrogation that such companies insuring the property of Tenant against any such loss, may have against Landlord. 9.2 PUBLIC LIABILITY AND PROPERTY DAMAGE. A. Tenant, at it's own cost and expense, shall maintain during the Term general liability insurance relative to the Premises with limits as may be required by a mortgagee of the Premises and until specifically required in a lesser amount, in an amount of at least Twelve Million Five Hundred Fifty Thousand and no/100 Dollars ($12,550,000.00) per occurrence, or such other amount as may be required of Landlord under the Mortgage. Landlord and any assignee or mortgagee of Landlord identified in writing to the insurer shall be named as additional insureds and such policy shall provide that the same may not be invalidated against Landlord or any assignee or mortgagee of Landlord, including Mortgagee, by reason of any violation of a condition or a breach of warranty of the policy or in the application thereof by Tenant, that the policy may be canceled or materially altered or reduced in coverage by the insurer only after thirty (30) days prior written notice to Landlord and any assignee or mortgagee of Landlord, including Mortgagee, identified in writing to the insurer, and that the insurer will give written notice to Landlord or any assignee or mortgagee of Landlord identified in writing to the insurer in the event of non-payment of any premium by Tenant when due. Said insurance may be part of a bulk or general blanket insurance policy carried by Tenant and Tenant shall not be required to obtain a separate policy relative to the Premises. Tenant shall provide Landlord with a certificate of such insurance on an annual basis. B. Tenant, at its own cost and expense, shall maintain during the Term an all risk hazard insurance policy with limits as may be required by a mortgagee of the Premises, subject to standard exclusions but with vandalism and malicious mischief endorsements, on all improvements to the Premises, including, without limitation, the Buildings, improvements, alterations and additions which are, or may become, a part thereof. Said insurance may be part of a bulk or general blanket insurance policy covered by Tenant and Tenant shall not be required to obtain a separate policy for such insurance. Landlord and any assignee or mortgagee of Landlord, including Mortgagee, identified in writing to the insurer shall be named as an additional insured. The payment of loss relative to the Premises shall be payable as provided for in Paragraph 20.1. Such policy shall provide that the policy may not be invalidated against Landlord or any assignee or mortgagee of Landlord, including Mortgagee, identified to the insurer by reason of any violation of a condition or a breach of warranty of the policy or in the application therefore by Tenant, the use of the Premises for more hazardous purposes or change of ownership of the Premises and that the policy may be canceled or materially altered or reduced in coverage by the insurer only after thirty (30) days prior written notice to Landlord and any assignee or mortgagee of Landlord, including Mortgagee, identified in writing to the insurer, and that the insurer will give written notice to Landlord or assignee or mortgagee of Landlord, including Mortgagee, identified in writing to the insurer in the event of the non-payment of any premium by Tenant when due. Said insurance shall be in the amount of -9- the full replacement cost of the improvements on the Premises as determined by the insurance company in accordance with its normal and customary internal procedures. Landlord shall be provided with a certificate of such insurance on an annual basis. All such bodily injury liability insurance and property damage liability insurance shall specifically make reference to the indemnity agreement contained in ARTICLE VIII hereof and shall name Landlord as additional insured. 9.3 WORKER'S COMPENSATION COVERAGE. Worker's compensation coverage insurance shall be procured by Tenant in whatever amounts are necessary to comply with the requirements of the State of Texas or, to the extent permitted by state law, Tenant shall self-insure for Tenant's employees. 9.4 POLICY FORM. Insurance required hereunder shall be in companies reasonably satisfactory to Landlord licensed to operate in the State of Texas holding a rating as may be required by any lender having a lien on the Premises as set forth in the most current issue of "Best's Insurance Guide" but in any event a rating of at least A:X, it being understood that if the insurer has a rating of A:X or better, a lender may not require an insurance company with a higher rating and in any case where a change of insurers is required as a result of decline in an insurer's Best's rating, such change need not be effected until the end of the current policy year. Tenant shall deliver to Landlord certificates evidencing the existence and amounts of such insurance with loss payable clauses as required by this Paragraph. No such policy shall be cancelable or subject to reduction of coverage or other modification except after thirty (30) days prior written notice to Landlord of the expiration of such policies. Tenant shall furnish Landlord with renewals or "binders" thereof. Tenant may effect the insurance coverage required by this Lease through primary and excess lines of insurance. Tenant may have a maximum deductible not in excess of Twenty Thousand and no/100 Dollars ($20,000.00), adjusted annually for increases in the Consumer Price Index. For each Lease Year, Tenant's Maximum Deductible shall be determined by multiplying Tenant's current maximum deductible (inclusive of previous annual increases) by a fraction, the numerator of which is the Consumer Price Index for the month immediately preceding the first day of the Lease Year for which the Maximum Deductible is to be determined and the denominator of which is the Consumer Price Index for the month immediately preceding the Commencement Date. The requirements of SECTION 9.2 shall not preclude Tenant from carrying additional bodily injury liability insurance and/or property damage liability insurance in its name and at its cost. 9.5 TENANT'S FAILURE TO MAINTAIN INSURANCE. If Tenant fails to comply with the foregoing insurance requirements, then Landlord may obtain such insurance and Tenant shall pay to Landlord on demand the premium cost thereof plus interest at the Default Rate, from the date of payment by Landlord until payment by Tenant. -10- ARTICLE X ALTERATIONS AND FIXTURES 10.1 ALTERATIONS AND ADDITIONS. A. At any time during the Term of this Lease, Tenant shall have the right to make additions and alterations in and to the Premises, provided such additions and alterations do not (1) materially change the general character of the Buildings located on the Premises, (2) materially reduce the value of the Premises, (3) cause the Premises to violate any terms of this Lease, or (4) have a cost that is estimated to exceed Two Hundred and Fifty Thousand and no/100 Dollars ($250,000.00) in the aggregate, in any calendar year. Tenant agrees to provide written notice of such proposed additions or alterations to Landlord and Mortgagee for them to review, together with copies of plans for such alterations or additions, but Landlord and Mortgagee shall not have the right to approve or disapprove such proposal unless it falls within one of the exceptions set forth above. B. Prior to making any structural additions or alterations to the Premises, where the cost of such additions or alterations is estimated to exceed Two Hundred Fifty Thousand Dollars and No/100 Dollars ($250,000.00) in the aggregate, in any calendar year. Tenant shall submit to Landlord and Mortgagee a plan showing the nature and extent of such additions and alterations. Landlord shall have a period of thirty (30) days, time being of the essence, to review and provide Tenant with written notice that Landlord and Mortgagee: 1. approves the proposed structural alteration or addition; 2. approves, with modifications, the proposed structural alterations or additions; in this event, Landlord shall set out its proposed modifications in detail; or 3. disapproves the proposed structural alterations stating the basis for such disapproval, provided that Landlord's approval shall not be unreasonably withheld. In the event that Landlord does not respond to Tenant within thirty (30) days of the submission of the proposed structural alterations or additions to Landlord, such alterations or additions shall be deemed approved by Landlord. If Landlord and Mortgagee approve, or approve with modifications, such matters Tenant shall have the right to have such work performed as approved. If Landlord and Mortgagee disapprove the proposed structural alterations or additions, Tenant shall not perform the work, but may resubmit plans designed to meet the objections raised by Landlord and Mortgagee. Landlord's and Mortgagee's approval may not be unreasonably withheld, provided however, the failure of Mortgagee to approve any additions or alterations will be deemed to be a reasonable basis for Landlord's disapproval. Prior to commencing work, Tenant shall obtain, at its expense, all necessary permits and builder's risk insurance in an amount equal to construction costs. Upon completion of any structural additions or -11- alterations, Tenant shall deliver to Landlord updated plans and specifications reflecting such structural additions or alterations and a final certificate of occupancy issued subsequent to the completion of the additions or alterations. Landlord shall have title to and ownership of all structural alterations and additions, and all structural alterations and additions shall be subject to the provisions of this Lease. All such alterations or additions shall be at Tenant's expense. All such structural alterations or additions referred to in this Paragraph shall be expeditiously completed in a good and workmanlike manner and in compliance with all applicable laws, rules, regulations, ordinances and restrictions then in effect. 10.2 TRADE FIXTURES. Notwithstanding any provision in this ARTICLE X to the contrary, all normal trade fixtures, equipment, shelves, racks, machinery, office equipment, furniture and other personal property installed or placed in the Premises by Tenant or any of Tenant's subsidiaries, other than replacements for fixtures, equipment, shelves, machinery, and furniture constituting fixtures that are in the Premises on the Commencement Date ("Tenant's Trade Fixtures") may be removed by Tenant on or before the termination date of this Lease; provided (a) the removal shall be done in a workmanlike manner so as not to damage the structural integrity of the Building; and (b) Tenant, at Tenant's sole expense, shall repair all damage to the Premises resulting from the removal of Tenant's Trade Fixtures. ARTICLE XI MECHANICS' AND MATERIALMEN'S LIENS 11.1 Tenant shall not create or permit to be created or to remain, and will discharge by payment or bond, any lien (including, but not limited to, the liens of mechanics, laborers, artisans, or materialmen for work or materials alleged to be done or furnished in connection with the Premises), encumbrance, or other charge upon the Premises or any part thereof, upon Landlord's interest therein, or upon Tenant's leasehold interest; provided, that Tenant shall not be required to discharge any such liens, encumbrances, or charges as may be placed upon the Premises by the act of Landlord. ARTICLE XII SIGNS 12.1 Landlord shall have the right to approve or disapprove the number and location of, and changes in, any and all exterior signs which are installed, erected, attached, and/or maintained on the exterior of the Premises. ARTICLE XIII SUBLETTING 13.1 SUBLETTING. Tenant shall have the right at all times and from time to time during the Term to sublease all or any portion of the Premises without Landlord's consent, -12- subject, however, to the same limitations for subleasing by Landlord set forth in Section 5.6 of the First Mortgage. Tenant shall not have the right, however, to enter into any sublease agreement concerning the use or occupancy of the Premises that would extend beyond the Term of this Lease without Landlord's prior written consent. Tenant shall remain liable for all obligations under this Lease notwithstanding any sublease hereunder by Tenant that does not extend beyond the term of this Lease. 13.2 TRANSFER OF LANDLORD'S INTEREST. In the event of the transfer by Landlord of its interest in this Lease or the Premises, Landlord shall be released from any further obligations under this Lease, and Tenant agrees to look solely to Landlord's successor in interest for performance of the obligations of "Landlord" under this Lease. ARTICLE XIV QUIET ENJOYMENT 14.1 Tenant, upon its payment of all rents and sums herein provided and upon its compliance with the performance of all those provisions, terms, and conditions applicable to and performable by Tenant, shall peaceably and quietly hold occupy, and enjoy the Premises for the Term without hindrance, ejection, or interruption by Landlord, or persons lawfully or equitably claiming under or through Landlord; provided that this covenant shall be binding upon Landlord and its successors and assigns only with respect to breaches occurring during its or their respective ownership of Landlord's interest hereunder. ARTICLE XV RIGHT OF ACCESS 15.1 Landlord shall have the right, but not the obligation, to enter the Premises upon twenty-four (24) hours advance notice to Tenant and during reasonable business hours (except in an emergency) to examine the same and, if Tenant has not made such repairs within thirty (30) days after written notice thereof (or a shorter period if there is a danger to life or property), to make such repairs, alterations, improvements, or additions as Tenant has failed to make in accordance with the terms of this Lease, and Landlord shall be allowed to take all materials into and upon the Premises that may be required therefor without the same constituting an eviction of Tenant, actual or constructive, and the Rent shall in no way abate while such repairs, alterations, improvements, or additions are being made, by reason of loss or interruption of business of Tenant; provided, however, that Landlord shall not unreasonably interfere with the normal business operations of Tenant. ARTICLE XVI HOLDING OVER 16.1 Should Tenant remain in possession of the Premises, or any part thereof, after termination of this Lease (whether by the expiration of the Term or otherwise) without the execution of a new lease by Landlord and Tenant, Tenant, at the option of Landlord, shall -13- become a tenant from month-to-month of the Premises, or any part thereof, at one hundred and ten percent (110%) of the monthly Rent pro rated and effective in the last month of the Term, and under all other terms, conditions, provisions, and obligations of this Lease insofar as the same are applicable to a tenancy from month-to-month. ARTICLE XVII EVENTS OF DEFAULT, LANDLORD'S REMEDIES 17.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an Event of Default (herein so called) by Tenant under this Lease: A. Failure of Tenant to pay when due an installment of Rent, Additional Rent or any other amount payable to Landlord hereunder following the expiration of five (5) days after notice from Landlord. B. Failure of Tenant to comply with any term, condition or covenant of this Lease following the expiration of thirty (30) days after notice from Landlord, provided, however, if the failure to comply cannot reasonably be cured within such thirty (30) day period, and Tenant commences efforts to cure within the thirty (30) day period, Tenant shall have a reasonable time to cure such default. C. Insolvency of, or the making of a transfer in fraud of creditors or a general assignment for the benefit of creditors by Tenant. D. The occurrence of a Bankruptcy Event. E. Assignment of Tenant's interest in this Lease by operation of law. 17.2 LANDLORD'S REMEDIES. Upon the occurrence of any Event of Default, and the expiration of any applicable grace period, Landlord may, in addition to, and not in derogation of any remedies for any preceding breach or covenant, with or without notice of demand (except as otherwise expressly provided in this Lease) and without limiting Landlord in the exercise of any right or remedy which Landlord may have by reason of such default or breach: A. Immediately or any time thereafter while such Event of Default continues, mail a notice of termination addressed to Tenant and proceed pursuant to and with due process of law, to repossess the same as Landlord's former estate without prejudice to any remedies which might otherwise be used for arrears of rent or prior to breach of covenant, and upon such notice as aforesaid this Lease shall terminate, but Tenant shall remain liable for its default hereunder as hereinafter provided. Tenant shall have the right to cure any default until the expiration of the applicable grace period, if any, following notice by Landlord, as specified above. Where Landlord has given notice as provided for above, no further notice shall be required to effectuate a termination of this Lease, which termination shall occur automatically unless the default is cured within the time periods provided in this Lease. -14- B. Terminate Tenant's right to possession of the Premises by court order or any lawful means, in which case Tenant's right to possession under this Lease shall terminate, and Tenant shall immediately surrender possession of the Premises to Landlord. In such event, Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant's default, including, but not limited to, the cost of recovering possession of the Premises; reasonable expense of reletting, including necessary renovation and alteration of the Premises; reasonable attorney's fees and any reasonable real estate commissions actually paid; the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Tenant proves could be reasonably avoided; and that portion of any reasonable leasing commissions paid by Landlord applicable to the unexpired Term of this Lease. C. Landlord can continue this lease in full force and effect, and this Lease will continue in effect as long as Landlord does not terminate Tenant's right to possession, and Landlord shall have the right to collect Rent when due. After the occurrence of an Event of Default, Landlord can enter the Premises and relet them, or any part of them, to third parties for Tenant's account. Tenant shall be liable immediately to Landlord for all reasonable costs Landlord incurs in reletting the Premises. Reletting can be for a period shorter or longer than the remaining Term of this Lease. Tenant shall pay to Landlord the Rent on the dates the Rent is due, less the rent Landlord receives from any reletting. No act by Landlord allowed by this Paragraph shall terminate this Lease unless Landlord notifies Tenant that Landlord elects to terminate this Lease. After Tenant's default and for as long as Landlord does not terminate Tenant's right to possession of the Premises, if Tenant obtains Landlord's consent, Tenant shall have the right, subject to the limitations set forth in SECTION 5.6 of the First Mortgage, to assign or sublet its interest in this Lease, but Tenant shall not be released from liability. Landlord's consent to such a proposed assignment or subletting shall not be unreasonably withheld. If Landlord elects to relet the Premises as provided in this paragraph, rent that Landlord receives from reletting shall be applied to the payment of: FIRST, any indebtedness from Tenant to Landlord other than Rent due from Tenant; SECOND, all reasonable costs incurred by Landlord in reletting; THIRD, Rent due and unpaid under this Lease. After deducting the payments referred to in this subparagraph, any sum remaining from the rent Landlord receives from reletting shall be held by Landlord and applied in payment of future Rent as Rent becomes due under this Lease. If, on the date Rent is due under this Lease, the rent received from the reletting is less than the Rent due on that date, Tenant shall pay to Landlord, in addition to the remaining Rent due, all reasonable costs Landlord incurred in reletting that remain after applying the rent received from the reletting as provided in this subparagraph. -15- D. Pursue any other remedy now or hereafter available to Landlord under the laws or judicial decisions of the State of Texas. E. Pursuit of any of the foregoing remedies does not constitute an irrevocable election of remedies nor preclude pursuit of any other remedy provided elsewhere in this Lease or by applicable law, and none is exclusive of another unless so provided in this Lease or by applicable law. Likewise, forbearance by Landlord to enforce one or more of the remedies available to it on an Event of Default does not constitute a waiver of that default or of the right to exercise that remedy later or of any rent, damages or other amounts due to Landlord hereunder. 17.3 ATTORNEYS' FEES. In the event that Tenant defaults in the performance of any of the terms, covenants, agreements, or conditions contained in this Lease and Landlord places the enforcement of this Lease, or any part thereof, or the collection of any rent or charge due, or to become due, or the recovery of the possession of the Premises, in the hands of attorneys, or files suit upon the same, Tenant agrees to pay Landlord's reasonable attorneys' fees. ARTICLE XVIII WAIVER OF LANDLORD'S LIEN 18.1 Landlord hereby waives all of Landlord's rights to any contractual, statutory, constitutional or other lien or security interest on any of Tenant's property or the property of any assignee or subtenant that may now or at any time hereafter be situated on the Premises. ARTICLE XIX SUBORDINATION AND ATTORNMENT, TERMINATION 19.1 SUBORDINATION. Landlord shall have the right to transfer, assign, mortgage and convey in whole or in part the Premises or the Site and any and all of its rights under this Lease, and nothing herein shall be construed as a restriction upon Landlord's doing so. Tenant hereby subordinates this Lease and all rights of Tenant hereunder to any mortgage or deed of trust, and all renewals, substitutions and extensions thereof, that is now or may hereafter be placed on the Premises covered by this Lease. Tenant agrees to execute any certificate or instrument, including without limitation the Tenant estoppel letter described in SECTION 19.3 below, that may be deemed, in Landlord's sole discretion, necessary to further effect the subordination of this Lease to such mortgage or to confirm any election to continue the Lease in effect in the event of foreclosure, as provided above. Tenant hereby constitutes and appoints Landlord as Tenant's attorney-in-fact to execute any such certificate or instrument, including the Tenant estoppel letter described in SECTION 19.3 below, for and on behalf of Tenant. 19.2 ATTORNMENT ON FORECLOSURE. Landlord and Tenant agree that, if any person or entity acquires the Premises as a purchaser at any foreclosure sale or by deed in -16- lieu of foreclosure (any such mortgagee or other lienholder or purchaser by deed in lieu of foreclosure or at a foreclosure sale being each hereinafter referred to as the "Purchaser at Foreclosure"), Tenant, at Tenant's sole discretion, shall, on the written request of the Purchaser at Foreclosure, attorn to the Purchaser at Foreclosure and thereafter remain bound as if a new and identical Lease between the Purchaser at Foreclosure, as landlord, and Tenant, as tenant, had been entered into as of the date of foreclosure for the remainder of the Term, except that the Purchaser at Foreclosure shall not be liable for any act or omission of any prior landlord, subject to any offsets, claims, or defenses that Tenant might have against any prior landlord, or bound by any rent that Tenant might have paid more than one (1) month in advance or any amendment to this Lease made without its prior written consent. 19.3 ESTOPPEL LETTERS. Within ten (10) days after Landlord's request, from time to time, Tenant shall execute and deliver to Landlord or to a mortgagee or prospective purchaser, as directed by Landlord, a statement in writing, in the form attached hereto as EXHIBIT C. 19.4 TERMINATION. Notwithstanding any provision hereof or any provision of that certain Subordination, Attornment and Non-Disturbance Agreement ("SANDA") dated the same date as this Lease executed by Landlord and Tenant to the contrary, upon satisfaction of the following conditions and (i) if a Termination Event occurs under SECTION 19.4A below, the Lease will automatically terminate in accordance with such provision, or (ii) if a Termination Event occurs under SECTION 19.4B below, Tenant shall have the right to terminate this Lease in accordance with such provision, and in either event, Tenant shall have no further liability or obligation to Landlord, other than the payment of Rent, Additional Rent and other amounts due under this Lease through and including the date of termination. A. If a Termination Event occurs and the purchaser of the Mortgaged Property (as defined in the First Mortgage) at such foreclosure sale is a person or entity other than Mortgagee or any of Mortgagee's affiliates, then this Lease shall terminate effective upon the date which is fifteen (15) days after the foreclosure sale. Upon such a Termination Event, Tenant shall be unconditionally obligated to pay to Mortgagee a Termination Fee in the amount of the difference (if positive) between (1) the amount of the Pre-Foreclosure Debt on the date of the foreclosure sale, and (2) the amount of the successful final bid at such foreclosure sale for the purchase of the Mortgaged Property. The Termination Fee shall be due and payable by Tenant to Mortgagee on or before the date that is ninety (90) days after the date of the foreclosure sale, and if Tenant fails or refuses to pay the Termination Fee, Mortgagee shall have all rights and remedies available to it to collect such debt under all applicable laws. Notwithstanding any default under the Lease on the date of the foreclosure sale, Tenant shall have the right to continue to occupy the Premises for a period of up to fifteen (15) days after the foreclosure sale for the sole purpose of removing any of its property that is not part of the Mortgaged Property from the Premises in accordance with the terms of this Lease regarding removal of Tenant's property at the termination or expiration of this Lease, and this provision shall be binding on any purchaser at any foreclosure sale. -17- B. If a Termination Event occurs and the purchaser of the Mortgaged Property at such foreclosure sale is Mortgagee or any of Mortgagee's affiliates, then Tenant shall have the option, exercisable by delivering written notice to Mortgagee on or before the date that is thirty (30) days after the date of the foreclosure sale, to either (i) agree that Tenant shall continue to be bound by the terms of this Lease for the remainder of the Term and that Tenant shall have no further right to terminate this Lease, or (ii) terminate this Lease effective upon the date that is one hundred (100) days after the date of the foreclosure sale. If Tenant chooses to terminate the Lease pursuant to (ii) above, Tenant shall be unconditionally obligated to pay to Mortgagee a Termination Fee in the amount of the greater of (a) ONE MILLION EIGHT HUNDRED TWENTY-FIVE THOUSAND AND NO/100 DOLLARS ($1,825,000.00) or (b) the difference (if positive) between (1) the amount of the Pre-Foreclosure Debt on the date of the foreclosure sale, and (2) the Fair Market Value (as defined in C. below) of the Mortgaged Property. The Termination Fee shall be due and payable by Tenant to Mortgagee on or before the later of (x) the date that is sixty (60) days after the date of the termination of the Lease or (y) ten (10) days following the determination of the Fair Market Value of the Mortgaged Property in accordance with SECTION 19.4C below, and if Tenant fails or refuses to pay the Termination Fee, Mortgagee shall have all rights and remedies available to it to collect such debt under all applicable laws. Notwithstanding the termination of the Lease as set forth above, Tenant shall have the right to continue to occupy the Premises for a period of up to fifteen (15) days after the termination of the Lease for the sole purpose of removing any of its property that is not part of the Mortgaged Property from the Premises in accordance with the terms of this Lease regarding removal of Tenant's property at the termination or expiration of this Lease. C. For purposes of this SECTION 19.4, the term "FAIR MARKET VALUE OF THE MORTGAGED PROPERTY" shall be calculated in accordance with this SECTION 19.4C. Following a termination of the Lease in accordance with SECTION 19.4B, Mortgagee and Tenant shall use reasonable efforts to agree upon value for the Fair Market Value of the Mortgaged Property, and if the parties cannot agree upon the Fair Market Value of the Mortgaged Property within ten (10) days after the termination of the Lease, then each of Mortgagee and Tenant, within ten (10) days thereafter, shall choose and engage (it being agreed that Tenant shall reimburse Mortgagee or pay for the cost and expense of all appraisals) an independent MAI-certified real estate appraiser experienced in determining the fair market value of office, manufacturing and warehouse properties which are similar to the Mortgaged Property in the general area of the Mortgaged Property in order to determine the Fair Market Value of the Mortgaged Property ("QUALIFIED APPRAISER") in accordance with the assumptions and parameters set forth in this Paragraph C. If either party fails to select a Qualified Appraiser within such 10-day period, then the other party shall choose a second Qualified Appraiser. Each Qualified Appraiser shall be required to use their best efforts to complete their initial appraisal report and submit it to the party requesting same within twenty (20) days after the date of their engagement for such party's review and comment, and Mortgagee and Tenant shall each deliver to the other the final appraisal report determining the Fair Market Value of the Mortgaged Property (each a "FIRST ROUND APPRAISAL") within thirty (30) days after the engagement of the Qualified Appraisers. 1. If the difference in the values determined in each First Round Appraisal is less than or equal to ten percent (10%) of the value determined by the -18- lower of the two First Round Appraisals, then the Fair Market Value of the Mortgaged Property shall be the average between the values determined in each First Round Appraisal. 2. If the difference in the values determined in each First Round Appraisal is more than ten percent (10%) of the value determined by the lower of the two First Round Appraisals, then the two Qualified Appraisers selected by Mortgagee and Tenant shall choose a third Qualified Appraiser (the cost of which shall be borne by Tenant) to determine the Fair Market Value of the Mortgaged Property, who shall use his best efforts to complete his appraisal report (the "THIRD APPRAISAL" and submit it to Mortgagee and Tenant within twenty (20) days after the date of his engagement. Mortgagee and Tenant agree that the Fair Market Value of the Mortgaged Property shall be the average between the values determined in (a) the Third Appraisal and (b) the First Round Appraisal which determined a value that was closer to the value determined by the Third Appraisal than the value determined by the other First Round Appraisal. Mortgagee and Tenant agree that, for purposes of this SECTION 19.4 and of determining the Fair Market Value of the Mortgaged Property, all Qualified Appraisers selected by the parties may not consider and should disregard the Master Lease as a component to the Fair Market Value of the Mortgaged Property, and that the Fair Market Value of the Mortgaged Property should reflect the fair market value of only the fee interest in the Mortgaged Property and any and all easement, privileges and appurtenances thereto, assuming the Mortgaged Property is vacant. D. Any Termination Fee payable by Tenant to Mortgagee under this SECTION 19.4 shall be in the form of cash or immediately available funds or by the execution and delivery of a promissory note with a maturity date of no later than 180 days thereafter. ARTICLE XX CASUALTY AND CONDEMNATION 20.1 FIRE AND CASUALTY DAMAGE. A. In the event of a casualty, Tenant shall (i) have no right to terminate this Lease and (ii) be required to restore the improvements and will be entitled to the insurance proceeds to the extent required to restore the Premises. In the event the net proceeds on any claim are not in excess of One Hundred Thousand and No/100 Dollars ($100,000.00), such proceeds shall be payable to Tenant. In the event the net proceeds are in excess of One Hundred Thousand and No/100 Dollars ($100,000.00), such sum shall be paid to and deposited with either a bank or trust company having an office in the State of Texas and designated by Tenant, subject to the reasonable approval of Landlord. Such bank or trust company (the "Proceeds Trustee") shall hold such funds in the name of the Proceeds Trustee as trustee for Landlord and Tenant and the funds shall be disbursed in the manner hereinafter provided. Notwithstanding the above, Mortgagee may, at its option, be appointed Proceeds Trustee for so long as the First Mortgage remains outstanding. The -19- Proceeds Trustee shall deposit insurance proceeds in an interest bearing account (if available), and interest shall be distributed to Tenant upon completion of said installation, repair, replacement or rebuilding, provided no default has occurred and is continuing hereunder. All checks drawn on said account shall be co-signed by the Proceeds Trustee and Tenant. Insurance proceeds shall be disbursed to Tenant by the Proceeds Trustee upon receipt by Landlord and Proceeds Trustee of the following: 1. A certificate signed by a licensed architect or engineer selected by Tenant, subject to the approval of Landlord (such approval not to be unreasonably withheld or delayed) and also signed by Tenant, dated not more than thirty (30) days prior to the application for such disbursement, setting forth in substance the following: a. that the sum then requested to be disbursed either has been paid by Tenant or is justly due to contractors, subcontractors, materialmen, engineers, architects or other persons (whose names and addresses shall be stated) who have rendered and furnished certain labor and materials for the work; giving a brief description of such services and materials and the principal subdivisions or categories thereof and the amounts so paid or due to said persons in respect thereof, and stating the progress of the work up to the date of said certificate; b. that the sum then requested to be disbursed, plus all sums previously disbursed, does not exceed the cost of the work as actually accomplished up to the date of such certificate (less than ten percent (10%) of such cost which shall be retained by the Proceeds Trustee to be disbursed following completion of the work to be done by the named contractor); c. that except for the amounts, if any, stated in said certificate pursuant to the foregoing clause a. of this Paragraph to be due for services or materials, there is no outstanding indebtedness known to the person signing the certificate, after due inquiry, which is then due and payable for work, labor, services and materials in connection with the work, which, if unpaid, might become the basis of a vendor's, mechanic's, laborer's, or materialman's statutory or similar lien upon Tenant's leasehold estate or Tenant's or Landlord's interest in the Premises or any part thereof; and d. that the amount remaining in the possession of the Proceeds Trustee after disbursement of the sum then requested at least equals the estimate unpaid costs to complete the work (and if insufficient funds remain, Tenant shall deposit additional funds with the Proceeds Trustee sufficient to enable the architect or engineer to make the foregoing certification). -20- 2. A certificate signed by Tenant, dated not more than thirty (30) days prior to the application for such disbursement, setting forth in substance that, to the best knowledge of Tenant, after due inquiry: a. all materials and all property described in the certificate are free and clear of all liens and encumbrances, except such as may secure indebtedness due to persons (whose names and addresses and the several amounts due them shall be stated) specified in said certificate, which liens and encumbrances will be discharged upon payment of such indebtedness and encumbrances to which this Lease is subject; and b. that no Event of Default has occurred which has not been remedied. 3. Evidence reasonably satisfactory to the Proceeds Trustee and Landlord showing that there has not been filed with respect to Tenant's leasehold estate or Tenant's or Landlord's interest in the Premises or any part thereof any vendor's, mechanic's, laborer's or materialman's statutory or similar lien which has not been discharged of record, except such as will be discharged upon payment of the amount then requested to be disbursed. 4. Lien waivers from each person entitled to a mechanic's or materialman's lien against the Premises by reason of such work. 5. Upon compliance with the foregoing provisions, the Proceeds Trustee shall, out of the deposited sums, disburse to the persons named in the certificate the respective amounts stated in said certificate to be due to them and/or shall disburse to Tenant the amount stated in said certificate to have been paid by Tenant. 6. At any time after the completion in full of the work, the whole balance of the deposited sums not theretofore disbursed pursuant to the foregoing provisions of this subparagraph shall be disbursed to or upon the order of Tenant, upon receipt by the Proceeds Trustee of any of the following: a. a certificate signed by Tenant, dated not more than twenty (20) days prior to the application for such disbursement, setting forth in substance the following to the best knowledge of Tenant, after due inquiry; (1) that the work has been completed in full; (2) that all amounts which Tenant is or may be entitled to have disbursed under the foregoing provisions of this subparagraph on account of services rendered or materials furnished in connection with the work have been disbursed -21- under said provisions; (3) that all amounts for whose payment Tenant is or may become liable in respect of the work have been paid in full except to the extent, if any, of any retainage and which retainage shall be applied to the final payments of the amounts due; and (4) that no Event of Default has occurred which has not been remedied; b. a copy of the final plans and specifications of the improvements in the Premises, which plans and specifications shall be delivered to Landlord; c. an official search or a certificate of a title company reasonably satisfactory to the Proceeds Trustee showing that there has not been filed with respect to Tenant's leasehold estate or Tenant's or Landlord's interest in the Premises, or any part thereof, any vendor's mechanic's, laborer's or materialman's statutory or similar lien which has not been discharged of record; d. a certificate of completion signed by the supervising architect or engineer referred to in subparagraph (1) above; and e. a certificate of occupancy or equivalent governmental approval. Any insurance proceeds remaining after completion of the reconstruction as specified in subparagraph 6. above shall be paid to Tenant. If the conditions for the release of money to Tenant are not met after a period of one hundred eighty (180) days after the date of completion of reconstruction (such 180 day period to be extended by the length of any delay caused by reasons beyond the control of Tenant), any funds held by the Proceeds Trustee shall be disbursed to Landlord or its assignee. If the Premises shall be damaged by fire or other casualty resulting from the fault or negligence of Tenant or any of Tenant's agents, employees, or invitees, then (a) Rent shall not be diminished during the repair of such damage, and Tenant shall be liable to Landlord for the cost and expense of the repair and restoration of the Premises caused thereby to the extent that such cost and expense is not covered by insurance proceeds. 20.2 CONDEMNATION. A. TOTAL OR SUBSTANTIAL CONDEMNATION. If all or substantially all of the Premises shall be taken for public or quasi-public purposes, or if Tenant, after any taking, would be unable to restore the Buildings to substantially their condition prior to such event because it is legally impermissible or not physically or financially feasible to do so with the proceeds of the condemnation award or the portion remaining can (in Landlord's reasonable -22- judgment), with rebuilding, restoration or repair, be profitably operated for the purpose it was being used immediately prior to the taking or diminution (a "Substantial Taking") Tenant shall, not later than ninety (90) days after the date of service of an order for possession on Landlord or Tenant by the condemning agency or condemning authority, deliver to Landlord (i) notice of its intention to terminate this Lease on a date (the "Termination Date") occurring not more than one hundred eighty (180) days nor less than ninety (90) days after the date of service of such order for possession on Landlord or Tenant provided, that the determination of the Termination Date shall be subject to the authority of the condemning agency, condemning authority, or any stay or vacation of such order issued pursuant to applicable law, (ii) a certificate by Tenant describing the event giving rise to such termination and stating that such event has rendered the Premises unavailable for use or unsuitable for restoration for continued use of occupancy in Tenant's business, and (iii) an irrevocable offer to purchase the Premises, together with any condemnation award or rights thereto, on the next Rent payment date occurring more than thirty (30) days after the receipt of, by Landlord, such offer. The purchase price pursuant to any such offer to purchase the Premises shall be the sum necessary to satisfy any and all amounts due and owing, including all unpaid principal, all accrued and unpaid interest, (but not any prepayment premium on First Mortgage) (hereinafter the "Purchase Price"). Landlord shall have thirty (30) days after receipt of notice within which to reject such offer. If Landlord rejects the offer, this Lease shall terminate on the Termination Date, except with respect to obligations and liabilities of Tenant hereunder, actual or contingent, which have arisen on or prior to such date, upon payment by Tenant of all unpaid Rent, Additional Rent and other sums then due and payable hereunder to and including such date. If Landlord rejects the offer, any condemnation proceeds shall belong to Landlord or to Landlord's mortgagee, provided, however, that nothing herein contained shall prevent Tenant from pursuing its own remedies with respect to business interruption, moving expenses, fixtures and other costs to Tenant provided that such remedies do not result in a decrease in any award to Landlord. If Landlord does not reject Tenant's offer within the thirty (30) day period, the offer shall be deemed accepted and on the next Rent payment date occurring more than thirty (30) days after the receipt by Landlord of such offer, Landlord shall convey the Premises and any condemnation award and the right thereto to Tenant upon payment of the Purchase Price and all Rent and other sums due and payable hereunder to and including such date. Title to the Premises shall be subject only to encumbrances existing on the Commencement Date, this Lease, encumbrances arising after the Commencement Date not consented to or created by Landlord, and other encumbrances consented to at any time by Tenant. Tenant shall accept a special or limited warranty deed conveying such title and shall accept the Premises in their "as is" condition. Upon completion of such purchase, but not prior thereto, this Lease shall terminate, except with respect to obligations and liabilities hereunder, actual or contingent, which arose on or prior to the date of purchase. Tenant shall bear all costs associated with such conveyance. A "taking" under this Paragraph shall be deemed to have occurred at such time as the relevant governmental authority effecting the "taking" shall have taken possession of the Premises pursuant to a court order or judgment by a court of captioned jurisdiction in accordance with applicable law. B. PARTIAL CONDEMNATION. If less than the whole or substantially the whole of the Premises is taken for any public or quasi-public use under any governmental -23- law, ordinance, or regulation, or by right of eminent domain, or should be sold to a condemning authority in lieu of condemnation, and such taking is not a Substantial Taking, and no Event of Default under the First Mortgage has occurred or is continuing, then Tenant shall (1) deliver to Landlord plans and specifications for such rebuilding, restoration or repair acceptable to Landlord, and (2) thereafter commence the rebuilding, restoration or repair of the Premises in accordance with the approved plans and specifications within three (3) months after the date of the taking or diminution in value; provided, however, that Tenant's restoration and rebuilding obligations shall not exceed the scope of the work done by Tenant in originally constructing the Premises. C. DISPOSITION OF AWARDS. Except as herein otherwise provided, all awards arising from a total or partial taking of the Premises, or a taking for temporary use, shall belong to and be the property of Landlord or during the period there is a first mortgage covering the Premises of Landlord's mortgagee, without any participation by Tenant. Tenant shall not be entitled to, and expressly waives all claim to, any such compensation; provided, however, that Tenant shall be entitled to receive the proceeds of any award specifically designated by the condemning authority in Tenant's favor, for Tenant's improvements on Premises and/or relating solely to Tenant's statutory right of compensation for the loss of its leasehold. Notwithstanding the above, if Tenant has complied with the provisions of Paragraph B above, all of the condemnation award granted by the condemning authority for the taking or diminution in value of the Premises shall be paid over to Tenant by Landlord, after deducting therefrom the reasonable actual costs and expenses incurred by Landlord, including reasonable attorney's fees, in connection with such condemnation and collection of the award. D. SUBJECT TO FIRST MORTGAGE. Notwithstanding any provision in this SECTION 20, this SECTION 20 shall be subject in all respects to the provisions of the First Mortgage regarding condemnation and eminent domain. ARTICLE XXI EXISTING LEASES Landlord and Tenant hereby acknowledge and agree that the Existing Leases are still in full force and effect and that Tenant's right to possess, use and occupy those portions of the Premises described in the Existing Leases shall be subject to the Existing Leases and shall not commence unless and until the Existing Leases expire or are terminated. Notwithstanding the foregoing, however, Tenant's obligation to pay or cause to be paid the Rent shall commence on the Commencement Date, and Landlord, pursuant to that certain Assignment of Rents to Tenant, has assigned to Tenant the right to receive all rents and other amounts from the Existing Leases . Tenant shall have the right to direct Landlord regarding negotiations with Existing Tenants concerning the Existing Leases and to direct Landlord to terminate the Existing Leases on terms and conditions acceptable to Tenant without Landlord's consent. So long as an Event of Default has not occurred under this Lease, Landlord shall immediately deliver to Tenant any and all amounts that Landlord may hereafter receive from Existing Tenants with respect to the Existing Leases. Landlord shall have no right to modify, amend or terminate the Existing -24- Leases without the prior written consent of Tenant. Prior to the expiration or termination of the Existing Leases, Landlord will perform all of the duties and obligations of the Landlord under the Existing Leases; provided, however, that Tenant shall have no right to modify or amend the Existing Leases so as to increase the maintenance, repair or other duties and obligations of the Landlord under the Existing Leases without the prior written consent of Landlord. Tenant shall indemnify Landlord for any damages and liabilities that Landlord may suffer or incur as a result of Landlord being made a party to any litigation that may hereafter arise between Tenant and Existing Tenants concerning the Existing Leases except to the extent that such litigation concerns the failure of Landlord to perform any of the duties and obligations of the landlord under the Existing Leases or the negligence or misconduct of Landlord. After the termination of the Existing Leases, Tenant, at Tenant's option, shall have the right to, among other things, occupy all or any portion of the Premises for Tenant's own use or sublease all or any portion of the Premises to a third party (subject to limitations therein set forth in this Lease or in the First Mortgage); provided, however, that Tenant shall remain liable for payment of the Rent during the Term of this Lease. ARTICLE XXII ENVIRONMENTAL MATTERS A. Tenant (i) shall comply, and cause the Premises to comply, with all Environmental Laws (as hereinafter defined) applicable to the Premises, (ii) shall prohibit the use of the Premises for the generation, manufacture, refinement, production, or processing of any Hazardous Material (as hereinafter defined) or for the storage, handling, transfer or transportation of any Hazardous Materials (other than in connection with the operation, business and maintenance of the Premises and in commercially reasonable quantities as a consumer thereof and supplier of consumer products and in compliance with Environmental Laws), (iii) shall not permit to remain, install or permit the installation on the Premises of any surface impoundments, or asbestos-containing materials and (iv) shall cause any alterations of the Premises to be done in a way so as to not expose in an unsafe manner the persons working in or visiting the Premises to Hazardous Materials and in connection with any such alterations shall remove any Hazardous Materials present upon the Premises, excepting any Hazardous Material or Substance situated on or under the Premises at the time of Tenant's taking possession under this Lease, which are not in compliance with Environmental Laws or which present danger to persons working on or visiting the Premises. B. "Environmental Laws" means the Resource Conservation and Recovery Act of 1976, as amended, 42 U.S.C. section 6901, et seq. (RCRA); the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. section 9601 et seq. (CERCLA); the Toxic Substance Control Act, as amended, 15 U.S.C. section 26012 et seq.; Texas Water Code; and all applicable federal, state and local environmental laws, ordinances, rules and regulations, as any of the foregoing may have been or may be from time to time amended, supplemented or supplanted, and any other federal, state, or local -25- laws, ordinances, rules and regulations, now or hereafter existing relating to regulations or control of Hazardous Material or materials. The term "Hazardous Materials" as used in this Lease shall mean substances defined as "hazardous substances," "hazardous materials," "hazardous waste," or "toxic substances" in any applicable federal, state or local statute, rule, regulation or determinations, including but not limited to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 USC, Section 9601, et seq.; the Hazardous Materials Transpiration Act, 49 USA, Section 1801, et seq.; the Resource, Conservation and Recovery Act, 42 USC, Section 6901, et seq.; and, asbestos, PCBs, radioactive substances, methane, volatile hydrocarbons, petroleum or petroleum-derived substances or wastes, radon, industrial solvents or any other material as may be specified in applicable law or regulations. C. Except for liability resulting from or arising out of the willful misconduct of Landlord or its mortgagee or their agents on or about the Premises or their successors and assigns, and except as otherwise specifically excluded from any indemnities of Landlord contained in the First Mortgage, Tenant agrees to protect, defend, indemnify and hold harmless Landlord, its directors, officers, employees and agents, and any successors to Landlord's interest in the chain of title to the Premises, their direct or indirect partners, directors, officers, employees, and agents, from and against any and all liability, including all foreseeable and all unforeseeable damages including but not limited to attorney's and consultant's fees, fines, penalties and civil or criminal damages, directly or indirectly arising out of the use, generation, storage, treatment, release, threatened release, presence or disposal of Hazardous Materials from, on, at, to or under the Premises during the Term of this Lease, and including, without limitation, the cost of any required or necessary repair, response action, remediation, investigation, cleanup or detoxification and the preparation of any closure or other required plans, whether such action is required or necessary prior to or following transfer of title to the Premises. This agreement to indemnify and hold harmless shall be in addition to any other obligations or liabilities Tenant may have to Landlord at common law under all statutes and ordinances or otherwise, and shall survive following the date of expiration or earlier termination of this Lease. Tenant expressly agrees that the representations, warranties and covenants made and the indemnities stated in this Lease are not personal to Landlord, and the benefits under this Lease may be assigned to subsequent parties in interest in the chain of title to the Premises, which subsequent parties in interest may proceed directly against Tenant to recover pursuant to this Lease. Tenant, at its expense, may institute appropriate legal proceedings with respect to environmental matters of the type specified in this subparagraph C or lien for such environmental matters, not involving Landlord or its mortgagee as a defendant (unless Landlord or its mortgagee is the alleged cause of the damage), conducted in good faith and with due diligence, provided that such proceedings shall not in any way impair the interests of Landlord or its mortgagee under this Lease or contravene the provisions of any first mortgage. Counsel to Tenant in such proceedings shall be reasonably approved by Landlord if Landlord is a defendant in the same proceeding. Landlord shall have the right to appoint co-counsel, which co-counsel will cooperate with Tenant's counsel in such proceedings. The fees and expenses of such co-counsel shall be paid by Landlord, unless such co-counsel are appointed because the interests of Landlord and Tenant in such proceedings, in Landlord's reasonable judgment, -26- are or have become adverse, or Tenant or Tenant's counsel is not conducting such proceedings in good faith or with due diligence. D. Tenant, promptly upon the written request of Landlord or Mortgagee, from time to time, but not more than once in any calendar year unless required by a governmental order or unless an Event of Default has occurred and is continuing, shall permit such persons as Landlord or Mortgagee may designate subject to approval by Tenant (the "Site Reviewers"), which approval shall not be unreasonably withheld or delayed, to visit the Premises from time to time and perform environmental site investigations and assessments ("Site Assessments") on the Premises. Tenant's approval of the Site Reviewers shall not be required if an Event of Default has occurred and is continuing. The purpose of the Site Assessment swill be to determine whether there exists on the Premises any environmental condition which may result in any liability, cost or expense to Landlord or any other owner or occupier of the Premises relating to Hazardous Materials. During the course of any Site Assessment, the Site Reviewers shall not unreasonably interfere with the operations or business of Tenant on the Premises. The Site Assessments may include both above and below ground testing and inspection as is reasonable and necessary in the opinion of the Site Reviewers to identify environmental damage or the presence of Hazardous Material on the Premises. Tenant shall supply to the Site Reviewers such historical and operational information regarding the Premises as may be reasonably requested by the Site Reviewers to facilitate the Site Assessments and shall make available for meetings with Site Reviewers appropriate personnel having knowledge of such matters. Tenant shall not be required to make information available to the Site Reviewers where such information was previously provided to Landlord by Tenant. The cost of performing and reporting all Site Assessments shall be paid by Tenant on the same basis as Landlord is required to pay under the First Mortgage, and such costs will be paid by Tenant within thirty (30) days after demand by Landlord, with interest to accrue after the expiration of such thirty (30) day period, on the cost due, at the Default Rate. Landlord, promptly after written request by Tenant and payment by Tenant as aforesaid, shall deliver to Tenant copies of reports, summaries or other compilations of the results of such Site Assessments. Tenant's sole remedy for Landlord's breach of the preceding sentence shall be a mandatory injunction, and not a termination of this Lease or a withholding or reduction or rent. E. Tenant shall notify Landlord and Landlord shall notify Tenant in writing, promptly upon Tenant's or Landlord's learning of any: 1. notice or claim to the effect that Tenant or Landlord is or may be liable to any person as a result of the release or threatened release of any Hazardous Material on the Premises; 2. notice that Tenant is subject to investigation by any governmental authority evaluating whether any remedial action is needed to respond to the release or threatened release of any Hazardous Material on the Premises. 3. notice of the presence of any Hazardous Materials on the Premises -27- ARTICLE XXIII MISCELLANEOUS PROVISIONS 23.1 NOTICE. Any notice or request (hereinafter severally and collectively called "notice") in this Lease provided for or permitted to be given, made or accepted by either party to the other must be in writing, and may, unless otherwise in this Lease expressly provided, be given or be served by depositing the same in the United States mail, postpaid and certified and addressed to the party to be notified, with return receipt requested, or by delivering the same in person to such party (or, in the case of a corporate or partnership party, to an officer or general partner of such party, as the case may be), or by prepaid telegram, when appropriate, addressed to the party to be notified. Notice deposited in the mail in the manner hereinabove described shall be effective, unless otherwise stated in this Lease, from and after the date it is so deposited. Notice given in any other manner shall be effective only if and when received by the party to be notified. For purposes of notice, the addresses of the parties shall, until changed as herein provided, be as follows: For Landlord: IPOP Management, Inc. 11104 Airport Boulevard Suite 200 Stafford, Texas 77477 Attention: President For Tenant: Input/Output, Inc. 11104 Airport Boulevard Suite 200 Stafford, Texas 77477 Attention: Chief Financial Officer Landlord and Tenant may, from time to time and at any time, change their respective addresses by at least fifteen (15) days' written notice to the other party, delivered in compliance with SECTION 22.1. 23.2 BROKER'S COMMISSION. Tenant and Landlord hereby indemnify each other, and shall hold each other harmless from and against, all liabilities arising from any claim for a "broker's or leasing agent's" commission. 23.3 FORCE MAJEURE. If the performance by Landlord of any provision of this Lease is delayed or prevented by any act of God, strike, lockout, shortage of material or labor, restriction by any governmental authority, civil riot, flood, and any other cause not within the control of Landlord, then the period for Landlord's performance of the provision shall be automatically extended for the same amount of time that Landlord is so delayed or hindered. 23.4 USE OF LANGUAGE. Words of any gender used in this Lease include any other gender, and words in the singular include the plural, unless the context otherwise requires. -28- 23.5 CAPTIONS. The captions or headings of paragraphs in this Lease are inserted for convenience only, and shall not be considered in construing the provisions hereof if any question of intent arises. 23.6 SUCCESSORS. The terms, conditions and covenants contained in this Lease inure to the benefit of, and are binding on, the parties hereto and their respective successors in interest, assigns and legal representatives, except as otherwise herein expressly provided. All rights, powers, privileges, immunities and duties of Landlord under this Lease, including without limitation, notices required or permitted to be delivered by Landlord to Tenant hereunder, may, at Landlord's option, be exercised or performed by Landlord's agent or attorney. 23.7 SEVERABILITY. If any provision of this Lease is finally held by a court of competent jurisdiction to be invalid or unenforceable, then the invalid or unenforceable provision shall be deemed severed from this Lease and the validity and enforceability of the remaining provisions of this Lease shall be unaffected. 23.8 PERSONAL LIABILITY. Landlord's liability to Tenant for any default by Landlord under this Lease is limited to Landlord's interest in the Premises, and Tenant agrees to look solely to Landlord's interest therein for the recovery of any judgment against Landlord, it being intended that neither Landlord nor any of its partners, shareholders, agents, affiliates, officers or directors shall be personally liable for any judgment or deficiency. 23.9 DAMAGE FROM CERTAIN CAUSES. Landlord is not liable or responsible to Tenant for any loss or damage to any property or person occasioned by theft, fire, act of God, public enemy, injunction, riot, strike, insurrection, war, court order, requisition, or order of governmental body or authority, or for any damage or inconvenience that may arise through repair or alteration of any part of the Premises, or a failure to make any such repairs. 23.10 GOVERNING LAW. This Lease and the rights and obligations of the parties hereto shall be interpreted, construed, and enforced in accordance with the laws of Texas. 23.11 NO PARTNERSHIP. Notwithstanding anything else to the contrary, Landlord is not and under no circumstances shall it be considered to be a partner of Tenant or engaged in a joint venture with Tenant. 23.12 NO ORAL CHANGES. This Lease may not be changed or terminated orally, but only in writing executed by Landlord, Tenant and Mortgagee. 23.13 ENTIRETY; NO REPRESENTATIONS AND WARRANTIES. THIS LEASE EMBODIES THE ENTIRE AGREEMENT BETWEEN THE PARTIES AND SUPERSEDES ALL PRIOR AGREEMENTS AND UNDERSTANDINGS, INCLUDING ANY LETTERS OF INTENT, IF ANY, RELATING TO THE SUBJECT MATTER HEREOF. LANDLORD HAS NOT MADE, AND TENANT MAY NOT RELY ON, ANY REPRESENTATIONS OR WARRANTIES WITH REGARD TO THE PREMISES, -29- EXPRESSED OR IMPLIED, EXCEPT AS STATED IN THIS LEASE. IN PARTICULAR, LANDLORD HAS NOT AUTHORIZED ANY AGENT OR BROKER TO MAKE A REPRESENTATION OR WARRANTY IN ADDITION TO OR INCONSISTENT WITH THE TERMS OF THIS LEASE AND TENANT MAY NOT RELY ON ANY SUCH ADDITIONAL OR INCONSISTENT REPRESENTATION OR WARRANTY. 23.14 MULTIPLE COUNTERPARTS. This Lease may be executed in any number of counterparts, all of which taken together shall constitute one and the same agreement, and any of the parties to this Lease may execute this Lease by signing any of the counterparts. [THIS SPACE INTENTIONALLY LEFT BLANK] -30- SIGNATURE PAGE EXECUTED as of the 29th day of August, 1996. LANDLORD: IPOP MANAGEMENT, INC. By: /s/ Robert P. Brindley, President TENANT: INPUT/OUTPUT, INC. By: /s/ Robert P. Brindley, Senior Vice President, Chief Financial Officer and Secretary CONSENTED AND AGREED TO BY MORTGAGEE: THE VARIABLE ANNUITY LIFE INSURANCE COMPANY By:/s/ Rembert R. Owen, Jr. -31- EX-10.3 4 EXHIBIT 10.3 - LIMITED GUARANTY LIMITED GUARANTY 1. For and in consideration of the sum of TEN DOLLARS ($10.00) and other good and valuable considerations in hand paid to INPUT/OUTPUT, INC., (hereinafter called "GUARANTOR", whether one or more), a Delaware corporation, the receipt and sufficiency of which considerations are hereby acknowledged, and for the purpose of enabling IPOP MANAGEMENT, INC., a Delaware corporation (hereinafter called "DEBTOR"), to borrow certain funds from THE VARIABLE ANNUITY LIFE INSURANCE COMPANY, (hereinafter called "HOLDER") a Texas corporation, and to induce Holder to advance to Debtor the proceeds of that certain Promissory Note of even date executed by Debtor in the original principal amount of $12,550,000.00 (the "NOTE") payment of which is secured by that certain Deed of Trust and Security Agreement (the "DEED OF TRUST") covering the property therein described (the "MORTGAGED PROPERTY"), any of the other collateral securing payment of the Note (the "OTHER COLLATERAL") and all other instruments securing the payment of the Note (which together with the Deed of Trust are herein collectively referred to as the "SECURITY INSTRUMENTS"), and recognizing that but for this Guaranty (i) the loan evidenced by the Note would not be made by the Holder to the Debtor, and (ii) the funds would not be advanced thereunder, Guarantor hereby unconditionally and jointly and severally guarantees to Holder the prompt payment (or accounting to Holder by delivery of funds) for the following (hereinafter called the "OBLIGATIONS"): (a) all condemnation awards and proceeds and insurance proceeds received by Debtor or Guarantor (to the extent same have not theretofore been applied toward payment of the sums due under the Note or used for repair, restoration or replacement of the Mortgaged Property and, with respect to such insurance proceeds which represent proceeds paid under any rent insurance, business interruption insurance or other similar types of insurance, to the additional extent such rent, business interruption insurance or other similar insurance proceeds have not theretofore been applied toward the payment of taxes and insurance premiums); (b) all amounts necessary to repair any damage to the Mortgaged Property, excluding normal wear and tear, caused by acts or omissions of Debtor, its agents, employees, or contractors; (c) all security deposits; (d) failure of Debtor to pay, in accordance with the Deed of Trust, taxes, assessments or other charges which can create liens on any portion of the Mortgaged Property or the Other Collateral and are payable under the Security Instruments (to the full extent of any such taxes, assessments or other charges); (e) failure of Debtor to pay charges for labor or materials or other charges which can create liens on any portion of the Mortgaged Property or the Other Collateral (to the full extent of the amount rightfully claimed by any such claimant); (f) prepaid rent and rental or other income derived from the Mortgaged Property or the Other Collateral from and after the occurrence of a default under the Note or the Security Instruments (whether any of such condemnation awards, insurance proceeds, income or other funds derived from the Mortgaged Property are held by Holder or received by Debtor or Guarantor); (g) any loss incurred by Holder as a result of Debtor's forfeiture of the Mortgaged Property resulting from criminal activity by any person whether or not such criminal activity is conducted on or in any manner relates to the Mortgaged Property or the Other Collateral; (h) all sums due Holder, excluding payments of principal and accrued interest due pursuant to the Note, following exercise by Holder of its right to perform Debtor's obligations under the Security Instruments to preserve, protect or defend the Mortgaged Property as Collateral for the Note after notice and opportunity to cure, if any, as provided in the Security Instruments; (i) any loss, damage or injury sustained by Holder arising from the breach of any warranty or representation of Debtor contained in any affidavit made by or on behalf of Debtor or in any of the Security Instruments regarding hazardous wastes or other hazardous or toxic substances; (j) any loss, damage, or injury sustained by Holder arising from the breach of the warranties, representations, covenants and/or indemnities given by Debtor and contained in Article 11 of the Mortgage relating to "HAZARDOUS MATERIALS" (as therein defined); and (k) all reasonable costs, attorneys' fees and expenses incurred or expended by Holder in collecting any of the foregoing or due to any default in the performance of the foregoing or in enforcing any right granted hereunder. 2. Notwithstanding the provisions contained in the Note relating to the limitation on the liability of Debtor for failure to perform thereunder, the Guarantor is and shall remain liable to Holder in accordance with the terms and provisions of this Guaranty. 3. All amounts becoming payable by Guarantor to Holder under this Guaranty shall be payable at Holder's offices in Houston, Harris County, Texas, or such other place as Holder may from time to time designate. 4. In each event whenever any of the Obligations shall become due and remain unpaid (howsoever the maturity thereof may have occurred), Guarantor, will, on demand, pay the amount due thereon to Holder, without further notice of dishonor and without any notice having been given to Guarantor previous to such demand of the acceptance by Holder of this Guaranty or of the creating or incurring of such indebtedness Guarantor specifically agrees that it shall not be necessary or required in order to enforce Guarantor's obligations under this Guaranty that Holder have made demand for payment upon Debtor or any other person liable thereon or have made protest thereof or have given notice to Debtor or any other party liable thereon of maturity or nonpayment of said Obligations, or have realized upon or sought the benefits of any security for the Obligations. 5. Guarantor specifically waives any notice of acceptance of this Guaranty by Holder and of the creation, advancement, existence, extension, renewal or rearrangement of the Note or the Security Instruments, or increase or reduction of the rate of interest thereon, or any indulgence with respect thereto, or any part thereof, and of nonpayment thereof or default thereon, and waives grace, demand, protest, presentment and notice of demand, notice of intention to accelerate maturity, notice of acceleration, protest, and presentment with respect to the Note, and waives notice of the amount of the Obligations outstanding at any time, and agrees that the maturity of the Obligations, or any part thereof, may be accelerated, extended, modified, amended or renewed or any other indulgence may be granted with respect thereto by Holder at its will or as may be agreed by Debtor without notice to or further consent by Guarantor, at any time or times Guarantor acknowledges that Holder shall have the right to off-set against any funds of Debtor held by Holder (including, without limitation, escrows for taxes and insurance) pursuant to the Note and any of the Security Instruments. Guarantor also waives defenses and claims based on principles of suretyship and/or guaranty. 6. Guarantor agrees that no renewal, extension or rearrangement of or any other indulgence with respect to the Note or the Security Instruments, or any part thereof, or increase or reduction of the rate of interest thereon, no release of or substitution for any security or other guaranty now or hereafter held by Holder for payment of the Note or the Obligations, or of any part thereof, no release of Debtor, or of any other person primarily or secondarily liable on the Note or the Obligations, or any part thereof, and no delay or omission or lack of diligence or care in exercising any right or power with respect to the Note or the Obligations or any security therefor or guaranty thereof or under this Guaranty shall in any manner impair or affect the rights of Holder or the obligations and liability of Guarantor hereunder. Guarantor specifically agrees that it shall not be necessary or required, and that Guarantor shall not be entitled to require, that Holder file suit or proceed to obtain or assert a claim for personal judgment against Debtor for the Obligations or make any effort at collection of the Obligations from Debtor or foreclose against or seek to realize upon any security now or hereafter existing for the Note or the Obligations or file suit or proceed to obtain or assert a claim for personal judgment against any other party (maker, guarantor, endorser or surety) liable for the Obligations or make any effort at collection of the Obligations from any such other party or exercise or assert any other right or remedy to which Holder is or may be entitled in connection with the Note or the Obligations or any security or other guaranty therefor or assert or file any claim against the assets or estate of Debtor or any other guarantor or other person liable for the Obligations, or any part thereof, before or as -2- a condition of enforcing the liability of Guarantor under this Guaranty or requiring payment of the Obligations by Guarantor hereunder, or at any time thereafter. Guarantor expressly waives any right to the benefit of or to require or control application of any security or the proceeds of any security now existing or hereafter obtained by Holder as security for the Obligations, or any part thereof, and agrees that Holder shall have no duty insofar as Guarantor is concerned to apply upon any of the Obligations any monies, payments or other property at any time received by or paid to or in the possession of Holder, except as Holder shall determine in its sole discretion. Guarantor specifically agrees that Guarantor shall not have any recourse or action against Holder by reason of any action Holder may take or omit to take in connection with the Note, the Security Instruments or the Obligations, the collection of any sums or amounts herein mentioned, or in connection with any security or any other guaranty at any time existing therefor. 7. Guarantor agrees to the terms, provisions and conditions of the Note and of any renewal, extension, modification or rearrangement note or notes or other agreements which may have been or may hereafter be executed by Debtor evidencing or in connection with the Note or the Obligations or any part thereof, and agrees that Guarantor's liability hereunder shall in no manner be affected, impaired or released by reason of any term, provision or condition of any such note or other agreement or by failure, refusal or omission of Holder to enforce or observe any of same or any action taken or omitted to be taken by Holder pursuant thereto or in connection therewith. 8. Guarantor absolutely and unconditionally covenants and agrees that in the event that Debtor does not or is unable so to pay or perform the Obligations for any reason, including, without limitation, liquidation, dissolution, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of or other similar proceedings affecting the status, composition, identity, existence, assets or obligations of Debtor, or the disaffirmance or termination of any of the Obligations in or as a result of any such proceeding, Guarantor shall pay and perform the Obligations and that no such occurrence shall in any way affect Guarantor's obligations hereunder. 9. If the status of Debtor changes, including, but not limited to, a merger, dissolution, consolidation or reorganization, this Guaranty shall continue and also cover the indebtedness and Obligations of Debtor under the new status according to the terms hereof. 10. In the event any payment of Debtor to Holder is held to constitute a preference under the bankruptcy laws, or if for any other reason Holder is required to refund such payment or pay the amount thereof to any other party, such payment by Debtor to Holder shall not constitute a release of Guarantor from any liability hereunder, but Guarantor agrees to pay such amount to Holder upon demand and this Guaranty shall continue to be effective or shall be reinstated, as the case may be, to the extent of any such payment or payments. 11. All payments made upon the Obligations at any time shall be deemed to have been paid by Debtor unless express notice in writing is given to the Holder at the time of payment by Guarantor that Holder has been paid by him. The payment by Guarantor of any amount pursuant to this Guaranty shall not in anywise entitle Guarantor to any right, title or interest (whether by way of subrogation or otherwise) in and to any of the Obligations or any proceeds thereof, or any security therefor, unless and until the full amount owing to Holder on the Obligations has been fully paid, but when the same has been fully paid Guarantor shall be subrogated as to any payments made by it to the rights of Holder as against Debtor and/or any endorsers, sureties or other guarantors. 12. If any or all of the Obligations are now or hereafter secured in whole or in part, Guarantor agrees that Holder may, from time to time, at its discretion, and with or without valuable consideration, allow -3- substitution or withdrawal of collateral or release all or any part of such security, without notice or consent by Guarantor, and without in anywise impairing, diminishing or releasing the liability of Guarantor hereunder. 13. Guarantor agrees to pay to Holder all reasonable costs and expenses (including court costs and attorneys' fees) incurred by the Holder in the enforcement of this Guaranty. 14. No provision contained herein or in the Note or any Security Instruments executed by the Debtor or Guarantor shall require the payment or permit the collection of interest in excess of the maximum permitted by applicable usury laws. If any excess of interest in such respect is provided for herein or in the Note or any Security Instruments, the provisions of this paragraph shall govern and neither the Debtor nor Guarantor shall be obligated to pay the sum of such interest to the extent that it is in excess of the amount permitted by law; the intention of the parties being to conform strictly to usury laws now or hereafter in effect and applicable to the Obligations, and shall be held subject to reduction to the amount allowed under applicable usury laws as now or hereafter construed by the courts having jurisdiction thereof. 15. Guarantor agrees, to the full extent it may legally do so, that suit may be brought against Guarantor with or without making Debtor a party to such suit (as Holder may elect). 16. Guarantor waives all defenses given to sureties or guarantors at law or in equity other than actual payment of the Obligations. The failure by Holder to file or enforce a claim against the estate (either in administration, bankruptcy or other proceeding) of Debtor or of any other or others shall not affect the liability of Guarantor hereunder. 17. This Guaranty is intended for and shall inure to the benefit of Holder and each and every other person who shall from time to time be or become the owner or holder of the Note, and each and every reference herein to "HOLDER" shall also include and refer to each and every successor or assignee of Holder at any time holding or owning any part of or interest in any part of the Note. This contract of guaranty shall be transferable, it being understood and stipulated that upon the assignment or transfer by Holder of any of the Note (or any part thereof or interest therein thus transferred or assigned by Holder) shall also, unless provided otherwise by Holder in its assignment, have and may exercise all the rights granted to Holder under this Guaranty to the extent of the part of or interest in the Note thus assigned or transferred to said person. 18. If any of the following events occur or be continuing: (a) An event of default occurs under the terms of the Note or any of the Security Instruments and continues beyond the time provided therein, if any, for the curing of such default; or (b) If Guarantor defaults in the performance or observance of any agreement, covenant, term or condition contained herein; or (c) If Guarantor makes an assignment for the benefit of creditors; or (d) If Guarantor petitions or applies to any tribunal for the appointment of a trustee or receiver of the business, estate or assets or of any substantial part of the business, estate or assets of Guarantor or commences any proceedings relating to Guarantor under any bankruptcy, reorganization, arrangement, insolvency, readjustment of -4- debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect; or (e) If any such petition or application is filed or any such proceedings are commenced against Guarantor and Guarantor by any act indicates its approval thereof, consent thereto, or acquiescence therein, or an order is entered appointing any such trustee or receiver, or adjudicating Guarantor bankrupt or insolvent or approving the petition in any such proceedings, and such order remains in effect for more than sixty (60) days. then an event of default under this Guaranty shall have occurred and the Holder may, at its option, declare the Obligations to be, and the Obligations shall thereupon be and become forthwith due and payable together with interest accrued thereon under the terms of and with the effect provided in the Obligations, and this Guaranty. 19. Any notice or demand to Guarantor hereunder or in connection herewith may be given and shall conclusively be deemed and considered to have been given and received upon the deposit thereof, in writing, in the U.S. Mail, duly stamped and addressed to Guarantor at the address of Guarantor shown below; but actual notice, however given or received, shall always be effective. The last preceding sentence shall not be construed in anywise to affect or impair any waiver of notice or demand herein provided or to require giving of notice or demand to or upon Guarantor in any situation or for any reason. 20. Unless the context clearly indicates otherwise, "GUARANTOR" shall mean the guarantors hereunder or any of them. The obligations of the guarantor hereunder shall be joint and several. Suit may be brought against said guarantors, and against any one or more of them, less than all, without impairing the rights of Holder against the others of said guarantors; and Holder may compromise with any one of the guarantors for such sums or sum as it may see fit and release such of said guarantors from all further liability to Holder for such indebtedness without impairing the right of Holder to demand and collect the balance of such indebtedness from others of said guarantors not so released; but it is agreed among said guarantors themselves, however, that such compromising and release shall in nowise impair the rights of said guarantors as among themselves. 21. The rights of Holder are cumulative and shall not be exhausted by its exercise of any of its rights hereunder or otherwise against Guarantor or by any number of successive actions until and unless all Obligations have been paid or performed. 22. Guarantor hereby subordinates any and all indebtedness of Debtor now or hereafter owing to any Guarantor to all indebtedness of Debtor to Holder, and agrees with the Holder that Guarantor shall not demand or accept any payment of principal or interest from the Debtor if at such time Debtor is in default under the Note or the Security Instruments and shall not claim any offset or other reduction of Guarantor's liability hereunder because of any such indebtedness and shall not take any action to obtain any of the security described in and encumbered by any security in favor of Holder. 23. The rights of Holder are cumulative and shall not be exhausted by its exercise of any of its rights hereunder or otherwise against Guarantor or by any number of successive actions until and unless all indebtedness has been paid, all Obligations have been performed and each of the Obligations of Guarantor hereunder has been performed. -5- 24. This Guaranty shall be deemed to have been made under and shall be governed by the laws of the State of Texas in all respects and shall not be waived, altered, modified or mended as to any of its terms or provisions except in writing duly signed by Holder and Guarantor. 25. This Guaranty shall bind the successors and assigns of Guarantor and shall inure to the benefit of all transferees, credit participants, assignees, and/or endorsees of Holder. The use of any gender herein shall include the other genders. A determination that any provision of this Guaranty is unenforceable or invalid shall not affect the enforceability or validity of any other provision. 26. The board of directors of each guarantor that is a corporation and each general partner of each guarantor that is a partnership, has determined that this Limited Guaranty may reasonably be expected to benefit such guarantor, directly or indirectly. 27. Notwithstanding anything herein contained to the contrary, it is understood and agreed that this is a limited guaranty, and that, with the exception of the Obligations, Guarantor is not liable for payment of the Note. IN WITNESS WHEREOF, the undersigned has caused this Limited Guaranty to be executed under seal as of the 29 day of August, 1996. INPUT/OUTPUT, INC., A DELAWARE CORPORATION BY: /s/ ROBERT P. BRINDLEY SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER & SECRETARY ADDRESS: 11104 WEST AIRPORT BOULEVARD SUITE 200 STAFFORD, TEXAS 77477 -6- EX-27.1 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S UNAUDITED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED 8/31/96 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS MAY-31-1997 JUN-01-1996 AUG-31-1996 14,000 0 92,093 0 100,601 208,904 60,101 0 373,927 0 0 0 0 430 328,010 373,927 73,004 73,004 44,370 16,149 (1,723) 0 0 14,208 4,547 9,661 0 0 0 9,661 0.22 0
-----END PRIVACY-ENHANCED MESSAGE-----