-----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, Fk3JZ/trinBNXnA1Z5/4jJAv4ramVVhgv2iN9Ao+RB9OHmO+fP/L3g5IolWUCL9r oSrqzV0Trplo+ppX4onjMQ== 0000912057-97-031466.txt : 19970924 0000912057-97-031466.hdr.sgml : 19970924 ACCESSION NUMBER: 0000912057-97-031466 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970831 FILED AS OF DATE: 19970923 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: SEC FILE NUMBER: 001-12691 FILM NUMBER: 97684373 BUSINESS ADDRESS: STREET 1: 11104 WEST AIRPORT BLVD 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, 1997 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO ____________ COMMISSION FILE NUMBER: 1-13402 INPUT/OUTPUT, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) DELAWARE 22-2286646 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 11104 WEST AIRPORT BLVD., STAFFORD, TEXAS 77477 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (281) 933-3339 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, 1997 there were 43,513,326 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, 1997 PART I. Financial Information. Page ---- Item 1. Financial Statements. Consolidated Balance Sheets August 31, 1997 and May 31, 1997 2 Consolidated Statements of Operations Three months ended August 31, 1997 and 1996 3 Consolidated Statements of Cash Flows Three months ended August 31, 1997 and 1996 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 7 PART II. Other Information. Item 2. Changes in Securities 10 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 1997 1997 --------- -------- Current assets: Cash and cash equivalents $ 40,895 $ 2,573 Trade account receivables, net 29,516 61,788 Trade notes receivable, net 33,956 27,800 Income taxes receivable -- 2,403 Inventories 104,717 106,337 Prepaid expenses 2,242 1,939 -------- -------- Total current assets 211,326 202,840 Long-term trade notes receivable 34,531 27,003 Deferred income tax asset 2,402 3,097 Property, plant and equipment, net 77,874 78,376 Goodwill, net 59,994 61,024 Other assets 13,386 12,318 -------- -------- $399,513 $384,658 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ 930 $ 912 Accounts payable, principally trade 17,898 13,143 Accrued expenses 13,407 18,358 Income taxes payable 506 -- -------- -------- Total current liabilities 32,741 32,413 Long-term debt 10,761 11,000 Other liabilities 2,664 2,631 Stockholders' equity: Preferred stock, $.01 par value; authorized 5,000,000 shares, none issued -- -- Common stock, $.01 par value; authorized 100,000,000 shares; issued 43,513,326 shares at August 31, 1997 and 43,280,851 shares at May 31, 1997 435 433 Additional paid-in capital 222,516 218,973 Retained earnings 132,393 121,116 Cumulative translation adjustment (1,952) (1,673) Unamortized restricted stock compensation (45) (235) -------- -------- Total stockholders' equity 353,347 338,614 -------- -------- $399,513 $384,658 -------- -------- -------- -------- 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, -------------------------- 1997 1996 ----------- ----------- Net sales and other revenues $ 82,970 $ 73,004 Cost of sales 49,656 44,370 ----------- ----------- Gross profit 33,314 28,634 ----------- ----------- Operating expenses: Research and development 7,388 5,890 Marketing and sales 2,884 3,307 General and administrative 6,068 5,844 Amortization of identified intangibles 1,187 1,108 ----------- ----------- Total operating expenses 17,527 16,149 ----------- ----------- Earnings from operations 15,787 12,485 Interest expense (322) -- Other income 1,119 1,723 ----------- ----------- Earnings before income taxes 16,584 14,208 Income taxes 5,307 4,547 ----------- ----------- Net earnings $ 11,277 $9,661 ----------- ----------- ----------- ----------- Earnings per common share $ 0.26 $ 0.22 ----------- ----------- ----------- ----------- Weighted average number of common and common equivalent shares outstanding 43,793,884 43,941,921 ----------- ----------- ----------- ----------- 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, -------------------- 1997 1996 ------- ------- Cash flows from operating activities: Net earnings $11,277 $ 9,661 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 3,764 2,925 Amortization of restricted stock compensation 17 167 Deferred income taxes 695 735 Pension costs 91 107 Changes in assets and liabilities: Receivables 18,588 (25,798) Inventories 1,620 (7,814) Leased equipment (272) 557 Accounts payable and accrued expenses (196) (6,578) Income taxes 2,909 1,174 Other (653) (1,106) ------- ------- Net cash provided by (used in) operating activities 37,840 (25,970) Cash flows from investing activities: Purchases of property, plant, and equipment (1,764) (6,397) Investment in other assets (1,110) (2,008) ------- ------- Net cash used in investing activities (2,874) (8,405) Cash flows from financing activities: Borrowings from bank -- 12,550 Payments on debt (221) -- Proceeds from exercise of stock options and related tax benefit 3,718 1,311 ------- ------- Net cash provided by financing activities 3,497 13,861 Effect of foreign currency exchange rates (141) 262 ------- ------- Net increase (decrease) in cash and cash equivalents 38,322 (20,252) Cash and cash equivalents at beginning of quarter 2,573 34,252 ------- ------- Cash and cash equivalents at end of quarter $40,895 $14,000 ------- ------- ------- -------
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, 1997. (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, 1997 1997 ---------- -------- Raw materials................................... $ 56,152 $ 56,573 Work-in-process................................. 24,430 23,878 Finished goods.................................. 24,135 25,886 -------- -------- $104,717 $106,337 -------- -------- -------- -------- (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, 1997 and 1996 follow (in thousands): 1997 1996 ---- ------ Cash paid during the periods for: Interest (net of amount capitalized)......... $342 $ -- ---- ------ ---- ------ Income taxes................................. $140 $2,218 ---- ------ ---- ------ 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 recently-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) RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). SFAS 128 specifies the compilation, presentation and disclosure requirements for earnings per share for entities with publicly held common stock or potential common stock. The requirements of this statement will be effective for interim and annual periods ending after December 15, 1997. Management does not believe that the implementation of SFAS 128 will have a material effect on the financial statements. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130). SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The requirements of this statement will be effective for both interim and annual periods beginning after December 15, 1997. Management does not believe that the implementation of SFAS 130 will have a material effect on the financial statements. 6 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 $10.0 million, or 13.7%, to $83.0 million, compared to the prior year's first quarter net sales and other revenues. The increase in sales revenues was principally due to strong demand for the Company's systems and components across substantially all of its product lines. During the first quarter the Company sold 13 I/O SYSTEM TWO-R- MRX systems and one RSR system. The Company also sold one I/O SYSTEM TWO MSX marine system and experienced stronger demand for its seismic cables and geophone components and its land vibrators (25,574 channels for the quarter) compared to six MRX and three RSR systems (24,736 channels for the prior quarter) sold in the first quarter of the prior fiscal year. GROSS PROFIT MARGIN. The Company's first quarter fiscal 1998 gross profit margin of 40.2% was comparable to the gross profit margin of 39.2% for the first quarter of fiscal 1997. However, this year's first quarter gross profit margin represented an improvement over the gross profit margins the Company had experienced during the latter half of fiscal 1997; for the quarter ended May 31, 1997, the Company's gross profit margin was approximately 31%. The principal reasons for the improvement in gross margins were the improved environment of demand for seismic equipment and instrumentation during the spring and summer of 1997 (which had the effect of stabilizing and firming the Company's pricing scheme for substantially all of its products) and increased sales of land systems, which feature higher margins than the Company's marine and other equipment, relative to the overall sales mix. OPERATING EXPENSES. Operating expenses increased $1.4 million, or 8.5%, for the first quarter over the prior year's first quarter operating expenses. Research and development expenses increased $1.5 million, or 25.4%, primarily due to special charges for personnel expenses incurred in organizational changes, increased depreciation and increased supplies and prototype parts expense. Marketing and sales expenses decreased $423,000, or 12.8%, primarily due to decreased conventions/exhibits expense and decreased advertising expense. General and administrative expenses increased only $224,000, or 3.8%, above the prior year. Amortization of identified intangibles increased $79,000, or 7.1%, primarily due to goodwill resulting from an acquisition. INTEREST EXPENSE. Interest expense for the first quarter of fiscal 1998 was $322,000, primarily attributable to the Company's long-term building financing (see Note 4 of Notes to Consolidated Financial Statements), as compared to nil in the first quarter of fiscal 1997. INCOME TAX EXPENSE. The Company's effective income tax rate was approximately 32%, both for the first quarter of fiscal 1998 and the first quarter of fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES The Company has traditionally financed its operations from internally generated cash flow, its credit facilities and funds from equity financings. Cash flows from operating activities before changes in working capital items were a positive $15.8 million for the three months ended August 31, 1997. Cash flows from operating activities after changes in working capital items were a positive $37.8 million for the three months ended August 31, 1997 primarily due to a $32.3 million decrease in trade accounts receivable since the beginning of the current fiscal year. As of August 31, 1997 the Company had no borrowings outstanding under its revolving line of credit and has $30.0 million available for borrowings under the revolver for working capital purposes. 7 As of August 31, 1997, total trade notes receivable had increased $13.7 million over the corresponding amount outstanding at May 31, 1997, reflecting the increased levels of Company-financed sales during the first three months of fiscal 1998. 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, 1997. The Company has from time to time sold and assigned certain of its installment sales contracts and leases for its products to third-party financing sources (or sold equipment to leasing companies which equipment is then leased to customers), the terms of which often obligate the Company to (i) guarantee or repurchase all or a portion of the contracts and leases in the event of a default by the customer or upon certain other occurrences and/or (ii) assist the financing parties in remarketing the purchased equipment to satisfy the obligation. As of August 31, 1997, such third party financing sources had purchased equipment contracts and leases which, in the aggregate, obligated the Company to guarantee or repurchase up to approximately $13.5 million. Depending upon the Company's level of exposure to these contingent obligations from time to time, performance of the Company's obligations under a number of these arrangements could have a material adverse effect on the Company's financial condition and results of operations. In addition, a number of significant payment defaults by customers could have a material adverse effect on the Company's financial position and results of operations. On December 6, 1996, Grant Geophysical, Inc. ("Grant"), a geophysical services company, filed for protection under Chapter 11 of the US Bankruptcy Code. The Company's records reflect that on the filing date the Company had outstanding current and long-term notes and accounts receivable of approximately $10.6 million secured by certain seismic equipment sold by the Company to Grant and an obligation to repurchase $1.1 million in Grant debt. In addition, the Company has guaranteed, on a partial recourse basis, certain lease obligations owed by Grant to an institutional lender/purchaser of Company equipment for which the Company has rights to purchase the lessor's interest under certain circumstances. A proposed plan of reorganization has been filed in the case that provides for payment in full to holders of secured claims and the assumption of these lease obligations. This plan was confirmed on September 15, 1997. The Company currently expects that it will be repaid all or substantially all of the outstanding indebtedness owed to it by Grant. However, no assurance can be given as to the amount and timing of any recovery to the Company regarding these defaulted obligations. In August 1996, a subsidiary of the Company borrowed $12.6 million in long- term financing secured by the land, buildings and improvements housing the Company's executive offices, research and development headquarters and new manufacturing facility in Stafford, Texas. The loan bears interest at the rate of 7.875% per annum and is repayable in equal monthly installments of principal and interest of $151,439. The promissory note, which matures on September 1, 2006, contains prepayment penalties (see Note 4 of Notes to Consolidated Financial Statements). The Company anticipates expenditures for the current fiscal year for exploration and development of oil and gas properties will be approximately $2.5 million and expects to fund these expenditures from its cash flow from operations. However, the Company currently expects that its future level of participation in oil and gas drilling activities will be funded primarily by cash flows from its productive properties. The Company expects to participate in up to five wells in fiscal 1998. 8 Capital expenditures for property, plant, and equipment totaled $1.8 million for the first quarter of 1998 and are expected to aggregate approximately $10.0 million for fiscal 1998. The Company believes that the combination of its existing working capital, unused credit available under its working capital credit facility, internally generated cash flow and access to other financing sources will be adequate to meet its anticipated capital and liquidity requirements for the foreseeable future. CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS Certain information contained in this Quarterly Report on Form 10-Q (particularly that contained in this Part I., Item 2. "Management's Discussion and Analysis of Results of Operation and Financial Condition") may be deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and is subject to the "Safe Harbor" provisions of that section., This information includes, without limitation, statements concerning future revenues, future earnings, future costs, future margins and future expenses; anticipated product releases and technological advances; the future mix of business and future asset recoveries; and future demand, future industry conditions, future capital expenditures, and future financial condition. These statements are based on current expectations and involve a number of risks and uncertainties. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. When used in this report, the words "anticipate," "estimate," "expect," "may," "project" and similar expressions are intended to be among the statements that identify forward-looking statements. Important factors which could affect the Company's actual results and cause actual results to differ materially from those results which might be projected, forecast, estimated or budgeted by the Company in such forward-looking statements include, but are not limited to, the following: fluctuation of quarterly financial performance due to the timing of product shipments; the effect on gross profits margins of the product mix sold in any period; the uncertainty of conditions affecting the worldwide energy industry and oil and gas exploration; credit risks associated with extended-term sales arrangements made with certain customers; retention and financial condition of major customers; effects of future costs; collectibility of receivables; effects of governmental regulations; future levels and timing of capital expenditures; the timing and introduction of new products or technologies by the Company or its competitors; the risk of a disruption in vendor supplies; the level of competition in the seismic data acquisition industry; risks associated with foreign sales; potential challenges to the Company's intellectual property rights; and the dependence on and retention of key personnel. The foregoing review of factors should not be construed as exhaustive. Additional factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this report may be found in the Company's Annual Report on Form 10-K for the year ended May 31, 1997, under Item 7. "Management's Discussion and Analysis of Results of Operations and Financial Condition - Cautionary Statement for Purposes of Forward-Looking Statements," as filed with the Securities and Exchange Commission, which sub-section of such Form 10-K Annual Report is incorporated herein by reference in its entirety. See Part II, Item 6. "Exhibits and Reports on Form 8-K" of this Quarterly Report on Form 10-Q. The Company undertakes no obligation to publicly release the result of any revisions to any such forward-looking statements which may be made to reflect the events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 9 PART II - OTHER INFORMATION. ITEM 2. CHANGES IN SECURITIES During the fiscal quarter ended August 31, 1997, the Company made no sales of its equity securities that were not registered under the Securities Act of 1933, as amended. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) List of documents filed as Exhibits 10.1 - Corporate Guaranty of the Company for the benefit of BTM Capital Corporation, dated August 29, 1997 27.1 - Financial Data Schedule (included in EDGAR copy only) 99.1 - Relevant portions of Item 7. "Management's Discussion and Analysis of Results of Operations and Financial Condition - Cautionary Statement for Purposes of Forward Looking Statements," as contained in the Company's Annual Report on Form 10-K for its fiscal year ended May 31, 1997. (b) Reports on Form 8-K No Current Reports on Form 8-K were filed by Input/Output, Inc. during the quarter ended August 31, 1997. 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 Executive Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) Dated: September 22, 1997 11 EX-10.1 2 EXHIBIT 10.1 CORPORATE GUARANTY INPUT/OUTPUT, INC., a Delaware corporation ("Guarantor"), with its principal place of business at 1104 West Airport, Stafford, Texas 77477, in consideration of the execution and delivery of (i) an Equipment Leasing Agreement dated as of August 29, 1997 between 3-D GEOPHYSICAL, INC., a Delaware corporation, with its principal place of business at 8226 Park Meadow Drive, Littleton, Colorado 80124 ("Lessee") and BTM CAPITAL CORPORATION ("Lessor"), a Delaware corporation, with its principal place of business at 125 Summer Street, Boston, Massachusetts 02110 (as amended or supplemented from time to time in accordance with its terms and together with all Lease Supplements executed pursuant thereto, the "Lease") and (ii) the Servicing Agreement, dated as of August 27, 1997 between Lessor and Guarantor, and for other good and valuable consideration, including, without limitation, the providing of financing for Lessee as a customer of Guarantor, the receipt and sufficiency of which are hereby acknowledged, Guarantor does hereby unconditionally guarantee to Lessor, its successors and assigns, without offset or deduction, (i) the prompt payment when due, whether by acceleration or otherwise, of all Rent, Supplemental Payments and all other amounts whatsoever payable by Lessee under or pursuant to the Lease, the guaranty under this clause (i) constituting a continuing guaranty of payment and not of collection; (ii) in the event that Rent due under the Lease, notwithstanding the interest rate used in the calculation of such Rent, is at any time during the term of the Lease less than the amount of Rent that would be have been due had such Rent been calculated using an interest rate equal to the BTM Rate, the amount of such differential; (iii) if Lessor shall have determined after the date hereof that the adoption of any applicable law, rule, regulation or guideline regarding capital adequacy, or any change in any of the foregoing or in the enforcement or interpretation or administration of any of the foregoing by any court or administrative or governmental authority or central bank charged with the enforcement or interpretation or administration thereof, or compliance by Lessor or any holding company of Lessor with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on Lessor's capital or on the capital of Lessor's holding company, if any, as a consequence of its obligations under the Lease to a level below that which Lessor or Lessor's holding company could have achieved but for such applicability, adoption, change or compliance (taking into consideration Lessor's policies and the policies of its holding company with respect to capital adequacy) by an amount deemed by Lessor to be material, such additional amount or amounts as will compensate Lessor or Lessor's holding company for any such reduction suffered, together with interests on each such amount from the date demanded until payment in full thereof at the rate set forth in Section 26 of the Lease. A certificate of Lessor submitted to Guarantor as to any such additional amount or amounts (including calculations thereof in reasonable detail) shall, in the absence of manifest error, be conclusive and binding on Guarantor. In determining such amount or amounts, Lessor may use any method of averaging and attribution as it (in its sole and absolute discretion) shall deem applicable; (iv) in the event that any Regulatory Change shall: (A) change the basis of taxation of any amounts payable to Lessor under the Lease (other than taxes imposed on the overall net income of Lessor by the United States of America or the jurisdiction in which Lessor has its principal office); or (B) impose or modify any reserve, Federal Deposit Insurance Corporation premium or assessment, special deposit or similar requirements relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, Lessor or its holding company; or (C) impose any other conditions affecting the Lease (or any of such extensions of credit assets, deposits or liabilities); and the result of any event referred to in clause (A), (B) or (C) above shall be to increase Lessor's or its holding company's costs and reductions in amounts receivable are hereinafter referred to as "Additional Costs"), such additional fees or other amounts which shall be sufficient to compensate Lessor or its holding company for such increased cost or reduction in amounts receivable from the date of such change, together with interest on each such amount from the date demanded until payment in full thereof at the rate set forth in Section 26 of the Lease. Determinations by Lessor or its holding company of the effect of any regulatory Change on its or its holding company's costs of maintaining its investment in the Lease or on amounts receivable by it or its holding company in respect of any Additional Costs, shall be set forth in writing in reasonable detail and shall be presumed correct, absent manifest error. In determining such amount or amounts, Lessor may use any method of averaging and attribution as it (in its sold discretion) shall deem applicable; and (v) that Lessee will perform punctually and faithfully each and every duty, agreement, covenant and obligation of Lessee under or pursuant to the Lease. For purposes of this Guaranty, the following terms shall have the following meanings: "BTM RATE" for any Rental Period means the sum of (i) LIBOR Rate divided by (ii) 1 minus the Reserve Percentage for such Rental Period plus (iii) 1.50%. "BUSINESS DAY" means a Eurodollar Business Day which is also a day on which commercial banking institutions and foreign exchange markets settle payments by reference to the LIBOR Rate in U.S. Dollars in New York City. "BUSINESS DAY CONVENTION" means the convention for adjusting any relevant date that is not a Business Day so that date will be the first following day that is a Business Day unless that day falls in the next calendar month, in which case that date will be the first preceding day that is a Business Day. "DETERMINATION DATE" means 11:00 a.m. (London time) on the date that falls two Eurodollar Business Days prior to the first day of the Rental Period as to which the BTM Rate is being determined. "EURODOLLAR BUSINESS DAY" means a day on which commercial banking institutions and foreign exchange markets settle payments by reference to the LIBOR Rate in U.S. Dollars in London, England. "LIBOR RATE" for any Rental Period means that rate of interest per annum equal to the offered rate for United States dollar deposits having a period to maturity equal -2- to 30 days in an amount comparable to the aggregate of the then-applicable Casualty Loss Values of the Equipment then subject to this Lease quoted on Dow Jones Telerate Access Service page 3750 (or such other page as may replace page 3750 on that service for the display of such information) on a Determination Date, or if such Telerate page quotation is not available, then the average of the rates of interest per annum applicable to United States dollar deposits having a period to maturity equal to 30 days (rounded upwards, if necessary, to the nearest 1/16 of 1%) quoted on Reuters Monitor Money Rates Services at Screen page "LIBO" (or such other page as may replace it on such service for display of information is not available on either the Telerate screen or the Reuters LIBO screen, then, on the date and time of determination, Lessor will request the principal London office of each of the Reference Banks (hereinafter defined) to provide a quotation of its LIBOR Rate for U.S. dollar deposits having the maturity described above. The LIBOR Rate will then be the average of the quotations provided (rounded upwards, if necessary, to the nearest 1/16 of 1%). "REFERENCE BANKS" means four major banks selected by Lessor on the London interbank market. "REGULATORY CHANGE" means any change after the date of this Lease in United States federal, state or foreign laws or regulations (including Regulation D and the laws or regulations that designate any assessment rate relating to certificates of deposit or otherwise) or the adoption or making after such date of any interpretations, directives or requests applying to a class of banks or lenders, of or under any United States federal, state or foreign laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "RESERVE PERCENTAGE" means, for any Rental Period, the percentage rate (expressed as a decimal) prescribed by the Board of Governors of the Federal Reserve System or any successor (the "Board of Governors") that is in effect on the Determination Date with respect to such Rental Period, for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City having deposits exceeding $5,000,000,000.00 against Eurocurrency liabilities (as defined in Regulation D of the Board of Governors) or in respect of any other category of liabilities that includes deposits by reference to which the LIBOR Rate is calculated or any category of extensions of credit or other assets that includes loans by a non-United States office of Lessor to United States residents. The Reserve Requirement shall reflect any other reserves required to be maintained by such member banks by reason of any Regulatory Change against any category of liabilities which includes deposits by which the LIBOR Rate is to be determined. Guarantor does hereby agree that upon the occurrence of an Event of Default under the Lease, Guarantor will promptly pay the Rent, all Supplemental Payments and all other amounts whatsoever due under or pursuant to the Lease, and will perform, or will otherwise provide for and bring about promptly the performance of, such duties, agreements, covenants and obligations of Lessee thereunder and will, upon demand by Lessor, promptly pay all other amounts to be paid by Guarantor under clauses (ii) through (iv) above. The obligations -3- of Lessee hereby guaranteed, and the obligations of Guarantor set forth above, are hereinafter referred to as the "Obligations." Without limiting the generality of clause (i) of this paragraph, Guarantor specifically agrees that it shall not be necessary or required, and the Guarantor shall not be entitled to require, that the Lessor, or any successor or assignee of the Lessor, file suit or proceed to obtain or assert a claim for personal judgment against Lessee for the Obligations or make any effort at collection of the Obligations from Lessee or foreclose against or seek to realize upon any security now or hereafter existing for the personal judgment against any other party liable for the Obligations or make any effort at collection of the lbs from any such other party or any security or other guaranty therefor or assert or file any claim against the assets of Lessee or other person liable for the Obligations, or any part thereof, before or as 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 agrees, upon demand of Lessor to either, at Lessor's option, pay directly, or reimburse Lessor for the payment of, all costs, fees and expenses, including, without limitation, reasonable attorneys' fees, incurred by Lessor in the enforcement or attempted enforcement of any of its rights hereunder. Guarantor shall have no right of subrogation, reimbursement or indemnity whatsoever (except with respect to payments received by Guarantor as Servicer under the Servicing Agreement) against Lessee as a result of any payment or performance by Guarantor hereunder until all Obligations have been paid and performed in full and Lessor has released all of its right, title and interest in the Lease and the Equipment. Any right of subrogation, reimbursement or indemnity Guarantor obtains against Lessee shall be junior and subordinate to Lessor's rights against Lessee and the Equipment. Guarantor specifically agrees that it shall not be necessary or required in order to enforce the liability of Guarantor hereunder that there be, and Guarantor specifically waives: notice of the acceptance of this Guaranty and of the performance or nonperformance of the Lease; demand of payment from Lessee except to the extent required by the Lease; presentment for payment upon Lessee or the making of any protest; notice of the amount of the Obligations outstanding at any time; and notice of nonpayment or failure to perform on the part of Lessee. Guarantor further waives all defenses, offsets and counterclaims whatsoever which Guarantor may at any time have to the payment or performance of any of the Obligations. Guarantor agrees that Guarantor's liability under this Guaranty shall be absolute and unconditional and shall remain in full force and effect until Lessee shall have fully and satisfactorily discharged all of the Obligations and shall not be affected by reason of: (i) any waiver by Lessor, or its successors or assigns, of the performance or observance by Lessee of any of the agreements, covenants, terms or conditions contained in the Lease, or of any Event of Default; (ii) the extension of the time for payment by Lessee of any Rent, supplemental Payments or other sums or any part thereof owing or payable under or pursuant to the Lease, or of the time for performance by Lessee of any other obligations under or pursuant to the Lease, or the extension or renewal of the Lease; (iii) any failure, omission or delay of the Lessor, or of its successors or assigns, to enforce, assert or exercise any right, power or remedy conferred on Lessor under or pursuant to the Lease, or any action on the part of Lessor, or its successors or assigns, granting any extension or indulgence in any form to Lessee; (iv) any sublease or other use of any Item of the Equipment, or any transfer or assignment by Lee of any of its interest, rights or obligations, in, to and under the Lease, or with respect to any Item of the Equipment; (v) any assignment by Lessor, or its successors or assigns, in whole or in part, of the Lease and/or any of its rights, title, interests -4- or obligations thereunder, and any granting by Lessor, or its successors or assigns, of any granting by Lessor, or its successors or assigns, of the Equipment or any Item thereof; (vii) any compromise, settlement, renewal, extension, indulgence, change in or waiver or modification of any of the Obligations or the release or discharge of Lessee from the performance or observance of any of the Obligations by operation of law; (viii) any change in, waiver or modification of, or amendment to, any of the terms or provisions of the Lease; (ix) any assignment or mortgaging or the purported assignment or mortgaging of all or any part of the interest of Lessee in the Lease or in any of the Equipment; (x) any consolidation or merger of Lessee, or any leveraged buy-out or other form of corporate reorganization that Lessee may become the subject of or become engaged in, whether or not permitted under the terms of the Lease, or the sale, transfer or other disposition by Lessee of all or substantially all of the assets and/or liabilities of Lessee; (xi) any change in the ownership of any shares of capital stock of Lessee; (xii) the voluntary or involuntary liquidation, dissolution, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of Lessee, or any other similar proceeding affecting the status, existence, assets or obligations of Lessee, or the limitation of damages for the breach of, or the disaffirmation of, the Lease in any such proceeding; (xiii) any invalidity or unenforceability, for any reason, of the Lease, or of any provision thereof, or of any of the Obligations, or any defect in Lessor's title to the Equipment or any Item thereof; or (xiv) any other circumstance that might otherwise constitute a legal or equitable discharge of Lessee (including a discharge in bankruptcy) or of Guarantor, PROVIDED, HOWEVER, that with respect to subsections (ii), (vii) and (viii) above, Lessor shall not change, wive, modify or amend any term or provision of the Lease which change, waiver, modification or amendment would materially adversely effect Guarantor, without the prior written consent of Guarantor. Guarantor hereby represents and warrants to Lessor and its successors and assigns that: (a) Guarantor is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation as recited above, and will take such steps as may be necessary to preserve its corporate existence; Guarantor has the power and authority to execute and perform this Guaranty, and has duly authorized the execution, delivery and performance of this Guaranty; (b) no approval is required from any regulatory body, board, authority or commission, nor from any other administrative or governmental agency, nor from any other person, firm or corporation, with respect to the execution of this Guaranty by Guarantor and the payment and performance by Guarantor of all of Guarantor's obligations hereunder; (c) this Guaranty constitutes the legal, valid and binding obligations of Guarantor, enforceable in accordance with its terms, and the execution, delivery and performance of the same by Guarantor will not violate Guarantor's Certificate of Incorporation, By-Laws, or any provision of law, any order of any court or other agency of government, or any indenture, agreement or other instrument to which Guarantor is a party, or by or under which Guarantor or any of Guarantor's property is bound, or be in conflict with, result in a breach of, or constitute (with due notice and/or lapse of time) a default under any such indenture, agreement or other instrument, or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of Guarantor's property or assets; -5- (d) all balance sheets, statements of profit and loss and other financial data that have been delivered to Lessor with respect to Guarantor (i) are complete and correct in all material respects, (ii) accurately present the consolidated financial condition of Guarantor on the dates for which, and the results of its operations for the periods for which, the same have been furnished, and (iii) have been certified by Guarantor's independent certified public accountants, in the case of the audited financial statements, and by Guarantor's chief financial officer, in the case of any unaudited financial statements, and have been prepared in accordance with generally accepted accounting principles consistently followed throughout the period covered thereby; all balance sheets disclose all known material liabilities, direct and contingent, as of their respective dates; and there has been no change in the condition of Guarantor, financial or otherwise, since May 31, 1997, the date of the most recent financial statements delivered to Lessor with respect to Guarantor, other than changes in the ordinary course of business, none of which changes has been materially adverse; (e) there are no suits or proceedings pending or to the knowledge of Guarantor threatened, in any court or before any regulatory commission, board or other administrative governmental agency against or affecting Guarantor, which will have a material adverse effect on the consolidated financial condition or business of Guarantor; (f) Guarantor will furnish Lessor and any assignee of Lessor (i) as soon as available, and in any event within 120 days after the last day of each fiscal year of Guarantor, a copy of the consolidated balance sheet of Guarantor and its consolidated subsidiaries as of the end of each such fiscal year, and related consolidated statements of income and retained earnings of Guarantor and its consolidated subsidiaries for such fiscal year, certified by an independent certified public accounting firm of recognized standing, each on a comparative basis with correspondence statements for the prior fiscal year, and a copy of Guarantor's form 10-K, if applicable, filed with the Securities and Exchange Commission for such fiscal year, (ii) within 45 days after the last day of each fiscal quarter of Guarantor, (except the last such fiscal quarter), a copy of the balance sheet as of the end of such quarter, and statement of income and retained earnings of Guarantor and its consolidated subsidiaries covering the fiscal year to date, each on a comparative basis with the corresponding period of the prior year, all in reasonable detail and certified by the treasurer or principal financial officer of Guarantor, together with a copy of Guarantor's Form 10-Q, if applicable, filed with the Securities and Exchange Commission for such quarterly period, (iii) contemporaneously with its transmittal to each stockholder of Guarantor and to the Securities and Exchange Commission, all such other financial statements and reports as Guarantor shall send to its stockholders and to the Securities and Exchange Commission, (iv) as soon as available to Guarantor, the notice of any adjustment resulting from any audit of the books and/or records of the Guarantor by any taxing authority having jurisdiction over Guarantor, and (v) such additional financial information as Lessor may reasonably request concerning Guarantor; (g) Guarantor and its consolidated subsidiaries have filed all United States income tax returns which are required to be filed, and have paid, or made provisions for the payment of, all taxes which have or may have become due pursuant to said returns or pursuant to any assessment received by Guarantor or such consolidated subsidiaries, except such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided; -6- (h) to the best of Guarantor's knowledge, no event has occurred and no condition exists which does or would constitute an Event of Default under the Lease; and (i) Guarantor has obtained any licenses, permits, franchises or other governmental authorizations necessary to the ownership of its property or to the conduct of its business the existence or violation or failure of which, individually or in the aggregate, materially adversely affects or might in the future (so far as Guarantor now believes) materially adversely affect the business, operations, affairs, properties or condition of Guarantor and its subsidiaries on a consolidated basis. Guarantor hereby covenants that Guarantor: (a) shall at all times keep and maintain tangible net worth at an amount not less than $180,000,000; (b) shall at all times keep and maintain maximum Funded Debt to Capitalization of thirty percent (30%), where "Funded Debt" means current portion long term debt, plus long term debt, plus short term bank debt and "Capitalization" means current portion long term debt, plus long term debt, plus short term debt, plus shareholder's equity; and (c) shall at all times keep and maintain maximum Liabilities to net worth of not more than 0.5 to 1, where "Liabilities" means total liabilities plus contingent liabilities; in each case, determined in accordance with generally accepted accounting principles, consistently applied. Guarantor further agrees that in the event that Guarantor executes a new revolving or other principal credit agreement with any party (a "New Financing") while this Guaranty remains in effect, Guarantor shall notify Lessor of such New Financing and Guarantor and Lessor shall amend this Guaranty to conform the financial covenants in subsections (a), (b) and (c) above to any financial covenants contained in the documents related to such New Financing. This Guaranty (a) may not be assigned by Guarantor; (b) may be assigned by Lessor and by its successors or assigns, in whole or in part, without the consent of Guarantor, and in the event of any such assignment each of Lessors successors or assigns shall have and may enforce against Guarantor all of the rights of Lessor hereunder with respect to the guaranty of the payment and performance of such of the obligations as are covered by such assignment; (c) may be executed in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument; (d) shall inure to the benefit of Lessor and its successors and assigns, and shall be binding upon the successors and, subject to the restriction of clause (a) of this paragraph, assigns of Guarantor; (e) may be amended or modified only by an instrument in writing, signed by a duly authorized officer of Lessor; and (f) shall in all respects be governed by, and construed in accordance with, the laws of the Commonwealth of Massachusetts. Any provision of this Guaranty which is prohibited or unenforceable in any jurisdiction (including, without limitation, by reason of any change in the Obligations or any event described in the second paragraph hereof) shall, as to such jurisdiction, be ineffective to the extent of such unenforceability without invalidating or diminishing Lessor's rights under the remaining provisions hereof or Lessor's rights hereunder before giving effect to such change in the -7- Obligations or such event, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. All references herein to any "successor" or "assignee" of Lessor or to Lessor's "successors" or "assigns" shall, without limitation, include each Assignee and Lender. All capitalized terms used herein and not otherwise defined shall have the respective meanings given to such terms in the Lease. IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be executed and attested by its duly authorized officers and its corporate seal to be affixed hereto as of the 29th day of August, 1997. INPUT/OUTPUT, INC. By: -------------------------------- Name: -------------------------------- Title: -------------------------------- -8- EX-27 3 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S UNAUDITED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED 8/31/97 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS MAY-31-1998 JUN-01-1997 AUG-31-1997 40,895 0 63,472 0 104,717 211,326 77,874 0 399,513 32,741 0 0 0 435 352,912 399,513 82,970 82,970 49,656 17,527 (1,119) 0 322 16,584 5,307 11,277 0 0 0 11,277 0.26 0
EX-99.1 4 EXHIBIT 99.1 EXHIBIT 99.1 CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS The Company identifies the following important risk factors which could affect the Company's actual results and cause actual results to differ materially from any such results which might be projected, forecast, estimated or budgeted by the Company in such forward-looking statements: RISK RELATED TO NEW PRODUCTS AND TECHNOLOGICAL CHANGE. The markets for the Company's product lines are characterized by rapidly changing technology and frequent product introductions. Whether the Company can develop and produce successfully, on a timely basis, new and enhanced products that embody new technology, meet evolving industry standards and practice, and achieve levels of capability and price that are acceptable to its customers, will be significant factors in the Company's ability to compete in the future. There can be no assurance that the Company will not encounter resource constraints or technical or other difficulties that could delay introduction of new products in the future. If the Company is unable, for technological or other reasons, to develop competitive products in a timely manner in response to changes in the seismic data acquisition industry or other technological changes, its business and operating results will be materially and adversely affected. In addition, the Company's continuing development of new products inherently carries the risk of inventory obsolescence with respect to its older products. RISKS RELATED TO TIMING OF PRODUCT SHIPMENTS. Due to the relatively high sales price of the Company's products and relatively low unit sales volume, the timing in the shipment of systems and the mix of products sold can produce fluctuations in quarter-to-quarter financial performance. See Note 13 of Notes to Consolidated Financial Statements. One of the factors which may affect the Company's operating results from time to time is that a substantial portion of its net sales and other revenues in any period may result from shipments during the latter part of a period. Because the Company establishes its sales and operating expense levels based on its operational goals, if shipments in any period do not meet goals, revenues and net profits may be adversely affected. The Company believes that factors which could affect such timing in shipments include, among others, seasonality of end-user markets, availability of purchaser financing, manufacturing lead times, customer purchases of leased equipment and shortages of system components. In addition, because the Company typically operates, and expects to continue to operate, without a significant backlog of orders for its products, the Company's manufacturing plans and expenditure levels are based principally on sales forecasts, which sometimes results in inventory excesses and imbalances from time to time. RISKS RELATED TO GROSS MARGIN. The Company's gross margin percentage is a function of the product mix sold in any period. Other factors, such as unit volumes, inventory obsolescence, heightened price competition, changes in sales and distribution channels, shortages in components due to timely supplies or ability to obtain items at reasonable prices, and availability of skilled labor, may also continue to affect the cost of sales and the fluctuation of gross margin percentages in future periods. UNCERTAINTY OF ENERGY INDUSTRY CONDITIONS. Demand for the Company's products is dependent upon the level of worldwide oil and gas exploration and development activity. Such activity in turn is primarily dependent upon oil and gas prices, which have been subject to wide fluctuation in recent years in response to relatively minor changes in the supply and demand for oil and natural gas, market uncertainty and a variety of additional factors that are beyond the control of the Company. It is impossible to predict future oil and natural gas price movements with any certainty. No assurances can be given as to the future level of activity in the oil and gas exploration and development industry and its relationship to the future demand for the Company's products. CREDIT RISK FROM SALES ARRANGEMENTS. The Company sells to many customers on extended-term arrangements. Moreover, in connection with certain sales of its systems and equipment, the Company has guaranteed certain loans from unaffiliated parties to purchasers of such systems and equipment. In addition, the Company has sold contracts and leases to third-party financing sources, the terms of which often obligate the Company to repurchase the contracts and leases in the event of a customer default or upon certain other occurrences. Performance of the Company's obligations under these arrangements could have a material adverse effect on the Company's financial condition. A number of significant payment defaults by customers could have a material adverse effect on the Company's financial position and results of operations. DISRUPTION IN VENDOR SUPPLIES. The Company's manufacturing process requires a high volume of quality components. Certain components used by the Company are currently provided by only one vendor. In the future, the Company may, from time to time, experience supply or quality control problems with its suppliers, and such problems could significantly affect its ability to meet production and sales commitments. The Company's reliance on certain vendors, as well as industry supply conditions generally, involve several risks, including the possibility of a shortage or a lack of availability of key components, increases in component costs and reduced control over delivery schedules, any of which could adversely affect the Company's future financial results. RELIANCE ON SIGNIFICANT CUSTOMERS. A relatively small number of customers has accounted for most of the Company's net sales, although the degree of sales concentration with any one customer has varied from fiscal year to year. During fiscal 1995, 1996 and 1997 the two largest customers in each of those years accounted for 26%, 42% and 45%, respectively, of the Company's net sales and other revenues. The loss of any of these customers could have a material adverse effect on the Company's sales revenues. COMPETITION. The design, manufacture and marketing of seismic data acquisition systems is highly competitive and is characterized by continual and rapid changes in technology. The Company's principal competitor for land seismic equipment is Societe d'Etudes Recherches et Construction Electroniques, an affiliate of Compagnie General de Geophysique which, unlike the Company, possesses the advantage of being able to sell to an affiliated seismic contractor. Competition in the industry is expected to intensify and could adversely affect the Company's future results. Several of the Company's competitors have greater name recognition, more extensive engineering, manufacturing and marketing capabilities, and greater financial, technological and personnel resources than those available to the Company. In addition, certain companies in the industry have expanded their product lines or technologies in recent years as a result of acquisitions. There can be no assurance that the Company will be able to compete successfully in the future with existing or new competitors. Pressures from competitors offering lower-priced products could result in future price reductions for the Company's products. RISK FROM SIGNIFICANT AMOUNT OF FOREIGN SALES. Sales outside the United States have historically accounted for a significant part of the Company's net sales and other revenues. Foreign sales are subject to special risks inherent in doing business outside of the United States, including the risk of war, civil disturbances, embargo and government activities, which may disrupt markets and affect operating results. Foreign sales are also generally subject to the risks of compliance with additional laws, including tariff regulations and import/export restrictions. The Company is, from time to time, required to obtain export licenses and there can be no assurance that it will not experience difficulty in obtaining such licenses as may be required in connection with export sales. Demand for the Company's products from customers in developing countries is difficult to predict and can fluctuate significantly from year to year. See Note 8 of Notes to Consolidated Financial Statements. The Company believes that these changes in demand result primarily from the instability of economies and governments in certain developing countries, changes in internal laws and policies affecting trade and investment, and because those markets are only beginning to adopt new technologies and establish purchasing practices. These risks may adversely affect the Company's future operating results and financial position. In addition, sales to customers in developing countries on extended terms can present heightened credit risks for the Company, for the reasons discussed above. PROTECTION OF INTELLECTUAL PROPERTY. The Company believes that technology is the primary basis of competition in the industry. Although the Company currently holds certain intellectual property rights relating to its product lines, there can be no assurance that these rights will not be challenged by third parties or that the Company will obtain additional patents or other intellectual property rights in the future. Additionally, there can be no assurance that the Company's efforts to protect its trade secrets will be successful or that others will not independently develop products similar to the Company's or design around any of the intellectual property rights owned by the Company. DEPENDENCE ON PERSONNEL. The Company's success depends upon the continued contributions of its personnel, many of whom would be difficult to replace. The success of the Company will depend on the ability of the Company to attract and retain skilled employees. Changes in personnel, therefore, could adversely affect operating results. RISKS RELATED TO GOVERNMENT REGULATIONS AND PRODUCT CERTIFICATION. The Company's operations are also subject to laws, regulations, government policies, and product certification requirements worldwide. Changes in such laws, regulations, policies, or requirements could affect the demand for the Company's products or result in the need to modify products, which may involve substantial costs or delays in sales and could have an adverse effect on the Company's future operating results. RISKS OF STOCK VOLATILITY AND ABSENCE OF DIVIDENDS. In recent years, the stock market in general and the market for energy and technology stocks in particular, including the Company's common stock, have experienced extreme price fluctuations. There is a risk that stock price fluctuation could impact the Company's operations. Changes in the price of the Company's common stock could affect the Company's ability to successfully attract and retain qualified personnel or complete desirable business combinations or other transactions in the future. The Company has historically not paid cash dividends on its capital stock, and there can be no assurances that the Company will do so. RISKS RELATED TO ACQUISITIONS. To implement its business plans, the Company may make further acquisitions in the future. Acquisitions require significant financial and management resources both at the time of the transaction and during the process of integrating the newly acquired business into the Company's operations. The Company's operating results could be adversely affected if it is unable to successfully integrate such new companies into its operations. Certain acquisitions or strategic transactions may be subject to approval by the other party's board or shareholders, domestic or foreign governmental agencies, or other third parties. Accordingly, there is a risk that important acquisitions or transactions could fail to be concluded as planned. Future acquisitions by the Company could also result in issuances of equity securities or the rights associated with the equity securities, which could potentially dilute earnings per share. In addition, future acquisitions could result in the incurrence of additional debt, taxes, or contingent liabilities, and amortization expenses related to goodwill and other intangible assets. These factors could adversely affect the Company's future operating results and financial position. OIL AND GAS OPERATIONS. The Company's oil and gas operations are subject to the economic risks typically associated with exploration, development, and production activities, including the necessity of significant expenditures to drill exploratory wells. In conducting exploration and development activities, the Company may drill unsuccessful wells and experience losses and changes to earnings and, if oil or natural gas is discovered, there can be no assurance that such oil or natural gas can be economically produced or satisfactorily marketed. Historically, the markets for oil and natural gas have been volatile and are likely to continue to be volatile in the future. The nature of the oil and gas business involves certain operating hazards such as well blowouts, cratering, explosions, uncontrollable flows of oil, natural gas or well fluids, fires, formations with abnormal pressures, pollution, releases of toxic gas and other environmental hazards and risks, any of which could result in losses to the Company. While the Company's current practice is not to act as operator of any drilling prospect, and while the Company does maintain insurance in accordance with customary industry practices under the circumstances against some, but not all, of such risks and losses, the occurrence of such an event not fully covered by insurance could have a material adverse affect on the Company's financial position and results of operation. The foregoing review of factors pursuant to the Private Securities Litigation Reform Act of 1995 should not be construed as exhaustive. In addition to the foregoing, the Company wishes to refer readers to the Company's other filings and reports with the Securities and Exchange Commission for a further discussion of risks and uncertainties which could cause actual results to differ materially from those contained in forward-looking statements. The Company undertakes no obligation to publicly release the result of any revisions to any such forward-looking statements which may be made to reflect the events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. -----END PRIVACY-ENHANCED MESSAGE-----