-----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, FxdZqWv8SW+IIf/KpcP54ZvcdAM+WHs5X3t3AiDNG0uGbLccWVW+CFVnHq+E4OL+ i1QYdyPSxNHLWN2Hw+249w== /in/edgar/work/0000950129-00-004986/0000950129-00-004986.txt : 20001017 0000950129-00-004986.hdr.sgml : 20001017 ACCESSION NUMBER: 0000950129-00-004986 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000831 FILED AS OF DATE: 20001016 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INPUT OUTPUT INC CENTRAL INDEX KEY: 0000866609 STANDARD INDUSTRIAL CLASSIFICATION: [3829 ] IRS NUMBER: 222286646 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12691 FILM NUMBER: 740503 BUSINESS ADDRESS: STREET 1: 11104 W AIRPORT BLVD STREET 2: SUITE 200 CITY: STAFFORD STATE: TX ZIP: 77477 BUSINESS PHONE: 2819333339 MAIL ADDRESS: STREET 1: 11104 W AIRPORT BLVD STREET 2: SUITE 200 CITY: STAFFORD STATE: TX ZIP: 77477 10-Q 1 h80944e10-q.txt INPUT/OUTPUT, INC. - DATED AUGUST 31, 2000 1 ================================================================================ FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2000 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-13402 INPUT/OUTPUT, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 22-2286646 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 12300 C. E. SELECMAN DR., STAFFORD, TEXAS 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, 2000 there were 50,898,095 shares of common stock, par value $0.01 per share, outstanding. 2 INPUT/OUTPUT, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q FOR THE QUARTER ENDED AUGUST 31, 2000
PART I. Financial Information. Page ---- Item 1. Financial Statements. Consolidated Balance Sheets August 31, 2000 and May 31, 2000 ............................................ 2 Consolidated Statements of Operations Three months ended August 31, 2000 and August 31, 1999 ...................... 3 Consolidated Statements of Cash Flows Three month ended August 31, 2000 and August 31, 1999 ....................... 4 Notes to Consolidated Financial Statements .................................... 5 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition ............................................................ 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk ...................... 21 PART II. Other Information. Item 1. Legal Proceedings ............................................................... 21 Item 6. Exhibits and Reports on Form 8-K ................................................ 22
1 3 INPUT/OUTPUT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
ASSETS AUGUST 31, May 31, Current assets: 2000 2000 ---------- --------- Cash and cash equivalents .................................................................. $ 84,842 $ 99,210 Restricted cash ............................................................................ 1,006 1,006 Trade accounts receivable, net ............................................................. 30,875 24,944 Trade notes receivable, net ................................................................ 13,445 12,224 Inventories, net ........................................................................... 70,457 69,185 Deferred income tax asset, net ............................................................. 12,479 13,459 Prepaid expenses ........................................................................... 1,214 1,274 --------- --------- Total current assets ............................................................... 214,318 221,302 Long-term trade notes receivable, net ......................................................... 6,108 6,013 Deferred income tax asset, net ................................................................ 42,373 41,393 Property, plant and equipment, net ............................................................ 55,592 58,419 Goodwill, net ................................................................................. 48,331 49,256 Other assets, net ............................................................................. 4,427 4,681 --------- --------- Total assets ....................................................................... $ 371,149 $ 381,064 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable, principally trade ........................................................ $ 10,212 $ 8,011 Current installments of long-term debt ..................................................... 1,176 1,154 Income tax payable ......................................................................... 2,898 1,464 Accrued expenses ........................................................................... 20,365 27,261 --------- --------- Total current liabilities .......................................................... 34,651 37,890 Long-term debt ................................................................................ 7,491 7,886 Other liabilities ............................................................................. 274 273 Commitments and contingencies Stockholders' equity: Cumulative convertible preferred stock, $.01 par value; authorized 5,000,000 shares; issued and outstanding 55,000 shares at the end of both periods (liquidation value of $55.0 million) ............................................................................. 1 1 Common stock, $.01 par value; authorized 100,000,000 shares; outstanding 50,898,095 shares and 50,744,180 shares respectively ....................................... 512 510 Additional paid-in capital .................................................................... 350,485 348,743 Retained deficit .............................................................................. (13,539) (6,065) Accumulated other comprehensive loss .......................................................... (6,079) (5,427) Treasury stock, at cost, 232,500 shares at the end of both periods ........................... (1,651) (1,651) Unamortized restricted stock compensation ..................................................... (996) (1,096) --------- --------- Total stockholders' equity .............................................................. 328,733 335,015 --------- --------- Total liabilities and stockholders' equity ......................................... $ 371,149 $ 381,064 ========= =========
See accompanying notes to consolidated financial statements. 2 4 INPUT/OUTPUT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
Three months ended August 31, ------------------------------ 2000 1999 ------------ ------------ Net sales ............................................. $ 27,141 $ 29,979 Cost of sales ......................................... 20,780 23,994 ------------ ------------ Gross profit ................................. 6,361 5,985 ------------ ------------ Operating expenses: Research and development ........................... 6,463 7,203 Marketing and sales ................................ 2,453 2,881 General and administrative ......................... 3,094 6,914 Amortization and impairment of intangibles ......... 1,153 1,925 ------------ ------------ Total operating expenses ..................... 13,163 18,923 ------------ ------------ Loss from operations .................................. (6,802) (12,938) Interest income ....................................... 1,602 1,092 Interest expense ...................................... (261) (212) Other expense ......................................... (131) (58) ------------ ------------ Loss before income taxes .............................. (5,592) (12,116) Income tax expense (benefit) .......................... 667 (3,877) ------------ ------------ Net loss .............................................. (6,259) (8,239) Preferred dividend .................................... 1,215 1,081 ------------ ------------ Net loss applicable to common stock ................... $ (7,474) $ (9,320) ============ ============ Basic loss per common share ........................... $ (0.15) $ (0.18) ============ ============ Weighted average number of common shares outstanding ........................................ 50,845,070 50,667,007 Diluted loss per common share ......................... $ (0.15) $ (0.18) ============ ============ Weighted average number of diluted common shares outstanding ........................................ 50,845,070 50,667,007 ============ ============
See accompanying notes to consolidated financial statements. 3 5 INPUT/OUTPUT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (UNAUDITED)
Three months ended August 31, ------------------------------ 2000 1999 -------- -------- Cash flows from operating activities: Net loss ................................................. $ (6,259) $ (8,239) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ............................ 4,971 5,332 Amortization of restricted stock compensation ............ 100 28 Loss on disposal of fixed assets ......................... 28 -- Bad debt expense and loan losses ......................... 14 -- Inventory obsolescence expense ........................... -- 340 Deferred income benefit .................................. -- (2,808) Changes in assets and liabilities, net of above provisions: Accounts and notes receivable ............................ (7,331) 6,946 Inventories .............................................. (1,387) 4,903 Accounts payable and accrued expenses .................... (4,744) (10,998) Income taxes payable/receivable .......................... 1,403 3,777 Other .................................................... 69 273 -------- -------- Net cash used in operating activities ............. (13,136) (446) -------- -------- Cash flows from investing activities: Purchase of property, plant and equipment ................ (1,006) (3,046) -------- -------- Net cash used in investing activities .............. (1,006) (3,046) -------- -------- Cash flows from financing activities: Payments on long-term debt ............................... (373) (259) Payments of preferred dividends .......................... (138) (60) Proceeds from exercise of stock options .................. 240 101 Proceeds from issuance of common stock to Employee Stock Purchase Plan ................................... 427 -- Net proceeds from preferred stock offering ............... -- 14,804 -------- -------- Net cash provided by financing activities .......... 156 14,586 -------- -------- Effect of change in foreign currency exchange rates on cash and cash equivalents ............................. (382) 6 -------- -------- Net increase (decrease) in cash and cash equivalents ..... (14,368) 11,100 Cash and cash equivalents at beginning of period ......... 99,210 75,140 -------- -------- Cash and cash equivalents at end of period ......... $ 84,842 $ 86,240 ======== ========
See accompanying notes to consolidated financial statements. 4 6 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) GENERAL The accompanying unaudited consolidated financial statements were prepared using generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and applicable rules of Regulation S-X. Accordingly, these financial statements do not include all information or footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with our 2000 Annual Report on Form 10-K. The financial statements reflect all adjustments which are, in the opinion of management, necessary to fairly present such information. Certain amounts previously reported in the consolidated financial statements have been reclassified to conform to current year presentation. (2) SEGMENT INFORMATION Commencing in fiscal year 2000 we began reporting operating segment information by two segments: Land and Marine. During the quarter ended August 31, 2000, we added another segment called Reservoir. The Marine and Land segments are defined by the environment in which customers use our equipment and services. Our Reservoir products and technologies are used for enhanced reservoir imaging. All segments provide products and services that are used in the exploration for, and development and related production of oil and gas reserves. Customers include major, independent and national oil companies as well as seismic survey operators. Our Land segment products include vibrators, geophones, vehicles, data acquisition systems, and applications software. We also offer transition zone systems in shallow water with marine versions of our land-based recording systems. Our Marine segment provides data acquisition systems, hydrophones, airguns and marine positioning systems. Our Reservoir segment principally provides services (along with related products), including studies, analysis and management to enhance hydrocarbon recovery. We measure segment operating results based on income (loss) from operations. The following summarizes our segment information (in thousands):
Three months ended August 31, ------------------------------ 2000 1999 ------------ ------------ Net sales: Land ................ $ 20,157 $ 22,692 Marine .............. 6,963 7,287 Reservoir ........... 21 -- ------------ ------------ $ 27,141 $ 29,979 ============ ============ Gross profit: Land ................ $ 5,514 $ 4,996 Marine .............. 839 989 Reservoir ........... 8 -- ------------ ------------ $ 6,361 $ 5,985 ============ ============ Loss from operations: Land ................ $ (203) $ (2,683) Marine .............. (2,824) (4,515) Reservoir ........... (106) -- Corporate ........... (3,669) (5,740) ------------ ------------ $ (6,802) $ (12,938) ============ ============
5 7 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three months ended August 31, ----------------------------- 2000 1999 ------------ ------------ Depreciation and amortization: Land .......................... $ 1,820 $ 2,141 Marine ........................ 1,060 1,943 Reservoir ..................... -- -- Corporate ..................... 2,091 1,248 ------------ ------------ $ 4,971 $ 5,332 ============ ============ Capital expenditures: Land .......................... $ 766 $ 553 Marine ........................ 193 872 Reservoir ..................... -- -- Corporate ..................... 47 1,621 ------------ ------------ $ 1,006 $ 3,046 ============ ============ AUGUST 31, May 31, Total assets: 2000 2000 ------------ ------------ Land .......................... $ 110,607 $ 106,431 Marine ........................ 73,789 77,411 Reservoir ..................... -- -- Corporate ..................... 186,753 197,222 ------------ ------------ $ 371,149 $ 381,064 ============ ============
Intersegment sales are insignificant for all periods presented. Corporate assets include all assets specifically related to corporate personnel and operations, substantially all cash and cash equivalents, all facilities and manufacturing machinery and equipment that are jointly utilized by segments and all income taxes receivable and deferred income tax assets. The depreciation expense and facility expense related to all jointly utilized facilities and machinery and equipment is allocated based on each segment's use of those assets. Revenues from two significant customers comprised 27% and 17%, respectively of Land segment net sales for the quarter ended August 31, 2000. Revenues from one customer comprised 50% of Marine segment net sales for the quarter ended August 31, 2000. (3) INVENTORIES A summary of inventories follows (in thousands):
AUGUST 31, May 31, 2000 2000 ---------- ------- Raw materials ................. $51,928 $52,451 Work-in-process ............... 7,266 7,979 Finished goods ................ 25,863 23,746 ------- ------- 85,057 84,176 Less inventory reserves ....... 14,600 14,991 ------- ------- $70,457 $69,185 ======= =======
6 8 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (4) TRADE NOTES RECEIVABLE Trade notes receivable at August 31, 2000 are generally secured by seismic equipment sold by us, bearing interest at contractual rates of up to 13% per annum and are due at various dates through 2001. The recorded investment in trade notes receivable for which an impairment has been recognized was $17.7 million at August 31, 2000. The activity in the allowance for loan loss is as follows (in thousands):
AUGUST 31, 2000 ---------------- Balance at beginning of period ................... $ 13,718 Additions charged to costs and expenses .......... 814 Recoveries reducing costs and expenses ........... (1,558) Write-downs charged against the allowance ........ (796) ---------------- Balance at end of period ......................... $ 12,178 ================
(5) LOSS PER SHARE Basic loss per share is computed by dividing net loss applicable to common stock by the weighted average number of common shares outstanding during the period. Diluted earnings per share is typically determined on the assumption that outstanding dilutive stock options and other common stock equivalents have been exercised and the aggregate proceeds as defined were used to reacquire our common stock using the average price of such common stock for the period. Because inclusion of these shares would reduce the loss per share amount, we have not included the effects of these dilutive equity items in our calculation of diluted loss per share. At August 31, 2000 and August 31, 1999 there were 4,588,112 and 4,588,813, respectively of common stock shares subject to stock options that were not included in the calculation of diluted loss per common share. In addition, the cumulative convertible preferred stock has also not been considered in the computation of diluted loss per common share. (6) STATEMENTS OF CASH FLOWS We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. We do not use or intend to use derivative instruments. Exchange rate fluctuations have not had a material effect on our cash balances. At August 31 and May 31, 2000 we had approximately $1.0 million of certificates of deposits that were used to secure standby and commercial letters of credits. Supplemental disclosure of cash flow information follows (in thousands):
Three months ended August 31, ----------------------------- Cash paid (refund) during the period for: 2000 1999 ---------- ---------- Interest .......................... $ 261 $ 212 ========== ========== Income taxes ...................... $ (862) $ (3,352) ========== ========== Non-cash financing activities Dividends on preferred stocks ..... $ 1,077 $ 1,021 ========== ==========
7 9 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (7) LONG TERM DEBT In August 1996, we obtained, through one of our wholly-owned subsidiaries, a $12.5 million, ten-year term loan secured by certain of our land and buildings located in Stafford, Texas which then included our executive headquarters, research and development headquarters, and electronics manufacturing building. The term loan, which we have guaranteed under a limited guaranty, bears interest at a fixed rate of 7.875% per annum and is repayable in equal monthly installments of principal and interest of $151,439. We lease all of the property from our subsidiary under a master lease, which lease has been collaterally assigned to the lender as security for the term loan. The term loan provides for penalties for pre-payment prior to maturity. (8) COMPREHENSIVE LOSS Comprehensive loss includes all changes in a company's equity (except those resulting from investments by and distributions to owners). The components of total comprehensive loss are as follows:
Three months ended August 31, ------------------------------ 2000 1999 ------------ ------------ Net loss .................................... $ (6,259) $ (8,239) Foreign currency translation adjustment ..... (652) 222 ------------ ------------ $ (6,911) $ (8,017) ============ ============
(9) STOCKHOLDERS' EQUITY In July 2000, we announced that our Board of Directors had authorized the repurchase of up to an additional 1,000,000 shares of our common stock in open market and privately negotiated transactions, with purchases to be made from time to time through May 31, 2001. Shares repurchased will be held by us as treasury stock to be available for our stock option and other equity compensation and benefits plans. As of September 30, 2000, we had not yet repurchased any shares under this program. (10) COMMITMENTS AND CONTINGENCIES In the ordinary course of our business, we have been named from time to time in various lawsuits. While the final resolution of these matters may have an impact on our consolidated financial results for a particular reporting period, we believe that the ultimate resolution of these matters will not have a material adverse impact on our financial position, results of operations or liquidity. We sell to many customers on extended-term arrangements. Moreover, in connection with certain sales of our systems and equipment, we have previously guaranteed loans from unaffiliated parties to purchasers of such systems and equipment. In addition, we have sold contracts and leases to third-party financing sources, the terms of which often obligate us to repurchase the contracts and leases in the event of a customer default or upon certain other occurrences. At August 31, 2000 and May 31, 2000, no guaranties were outstanding with regards to any of our trade notes receivable or loans from unaffiliated parties to purchasers of our seismic equipment. 8 10 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Sales outside the United States have historically accounted for a significant part of our net sales. Foreign sales are subject to special risks inherent in doing business outside of the United States, including fluctuations in currency exchange rates, and the risk of war, civil disturbances, embargo and government activities, which may disrupt markets and affect operating results. Demand for our products from customers in developing countries is difficult to predict and can fluctuate significantly from year to year. We believe that these changes in demand result primarily from the instability of economies and governments in certain developing countries, changes in internal laws and policies affecting trade and investment, and because those markets are only beginning to adopt new technologies and establish purchasing practices. These risks may adversely affect our future operating results and financial position. In addition, sales to customers in developing countries on extended terms can present heightened credit risks for us, for the reasons discussed above. (11) SPECIAL CHARGES AND RECOVERIES Our special charges and recoveries have consisted of various transactions resulting from industry downturns and cost reduction initiatives. The table below summarizes the fiscal year 2000 pretax expenses and costs for special charges and the accrued amounts at August 31, 2000 for cash liabilities (in thousands):
Receivable Long-lived Personnel/ Inventory Related Asset Warranty Facility Related Charges/ Related Product And Other Charges Recoveries Charges Related Charges Total --------- ---------- ---------- --------- ---------- -------- Fiscal 2000 charges/recoveries to expense by business segment: Marine .............................. $ 3,607 $ 2,400 $ 25,200 $ 1,993 $ 1,700 $ 34,900 Land ................................ 8,700 3,600 7,100 -- 1,400 20,800 Corporate ........................... -- -- -- -- 7,900 7,900 -------- -------- -------- -------- -------- -------- Total .................................. 12,307 6,000 32,300 1,993 11,000 63,600 Adjustments to 1999 Charges recorded in Fiscal 2000 ..... -- (10,200) -- (2,600) -- (12,800) -------- -------- -------- -------- -------- -------- $ 12,307 $ (4,200) $ 32,300 $ (607) $ 11,000 $ 50,800 ======== ======== ======== ======== Balance at May 31, 1999 ................ 11,980 1,903 Settled in Fiscal 2000 ................. (8,079) (5,362) -------- -------- Balance at May 31, 2000 ................ $ 3,294 $ 7,541 Settled in first quarter ............... (330) (5,676) -------- -------- Balance at August 31, 2000 ............. $ 2,964 $ 1,865 ======== ========
During the first quarter of fiscal year 2000, we recorded pretax charges totaling $4.7 million, comprised of $3.3 million primarily related to employee severance arrangements and the closing of our Ireland facility (included in general and administrative expenses) and charges of $1.4 million for product-related warranties (included in cost of sales). These charges resulted from continued weak customer demand for our equipment. This weak demand resulted from, among other things, a widespread downturn in exploration activity due to a decline in energy prices from October 1997 through February 1999, and consolidation among energy producers. There were no special charges or recoveries recorded during the quarter ended August 31, 2000. 9 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS INTRODUCTION Our net sales are directly related to the level of worldwide oil and gas exploration activity and the profitability and cash flows of oil and gas companies and seismic contractors, which in turn are affected by expectations regarding the supply and demand for oil and natural gas, energy prices and finding and development costs. Oil and gas supply and demand and pricing, in turn, are influenced by numerous factors including, but not limited to, those described in "Cautionary Statement for Purposes of Forward-Looking Statements" - "Continuation in Downturn in Seismic Services Industry Will Adversely Affect Results of Operations", and "- Risk from Significant Amount of Foreign Sales Could Adversely Affect Results of Operations". During fiscal years 2000 and 1999, our financial performance was adversely impacted by the deterioration in energy industry conditions and, more specifically, in the seismic service sector. This deterioration resulted from, among other things, a widespread downturn in exploration activity due to a decline in energy prices from October 1997 to February 1999 and consolidation among energy producers and oilfield service firms. As a result of reduced exploration spending and a deterioration of energy service sector conditions beginning in 1998, demand for our products has continued to decline. Despite the recovery in commodity prices during 1999 and 2000, energy producers' continued concerns over the sustainability of higher prices for hydrocarbon production resulted in lower exploration budgets by energy companies, which primarily has resulted in continued weak demand for our seismic data acquisition equipment. Further contributing to this weak demand for new equipment has been an industry-wide oversupply of seismic equipment in the field and an excess inventory of seismic data in contractors' data libraries. This weak demand coupled with pricing pressures from competitors have in turn weakened our margins. SUMMARY REVIEW AND OUTLOOK In response to the prevailing industry conditions, we have concentrated on lowering our cost structure, consolidating our product offerings and reorganizing into a products-based divisional structure. During the first and second quarters of fiscal year 2000, we closed our cable manufacturing facility in Cork, Ireland and merged its operations into our U.K. and U.S. facilities, allowing us to address some of our excess capacity issues. We are evaluating additional restructuring and cost control solutions with the goal of returning to profitability as quickly as practicable. Implementing these solutions could result in additional charges in the near term. For the next nine months, we foresee continued equipment oversupply in the marine seismic fleets and continued weak demand in the marine seismic sector. While overall demand for new seismic work currently remains low by historical standards, demand for land seismic equipment is showing signs of improvement, which we believe will be reflected in our results of operations after January 1, 2001. We are continuing to invest resources and seek improvements in our seismic data acquisition technology. A few of the goals we are seeking to achieve during the next nine months include commercializing our VectorSeis(TM) technology in our sensor product line, further development in our land seismic ground electronics, and developing new product offerings in hydrocarbon reservoir monitoring. We recently completed a field test 10 12 for a VectorSeis(TM) system in Canada and are currently manufacturing a pilot system which we believe should be ready by May 31, 2001. Our goal is to complete as many field tests as possible by then. We continue to explore opportunities on how the product will be marketed. We are also reviewing possible alternatives to further strengthen our balance sheet, potential corporate opportunities, and alternative applications for some of our technology. No assurances can be made that we will implement any of these potential actions, and if so, whether any of them will prove successful or the degree of that success. We presently believe that industry conditions will continue to adversely impact demand for our products during the next 9 to 12 calendar months. However, we also believe that the initiatives discussed above will better position us to return to profitability as industry conditions improve. CHANGE IN FISCAL YEAR END On September 25, 2000, our Board of Directors adopted a resolution providing for the change of our fiscal year end from May 31 to December 31. We intend to file a Transition Report on Form 10-K covering the transition period from June 1, 2000 to December 31, 2000 on or before March 31, 2001. FISCAL YEAR 2000 FIRST QUARTER SPECIAL CHARGES During the first quarter of fiscal year 2000, we recorded pretax charges totaling $4.7 million, comprised of $3.3 million primarily related to employee severance arrangements and the closing of our Ireland facility (included in general and administrative expenses) and charges of $1.4 million for product-related warranties (included in cost of sales). These charges resulted from continued weak customer demand for our equipment. This weak demand resulted from, among other things, a widespread downturn in exploration activity due to the decline in energy prices from October 1997 through February 1999, and consolidation among energy producers. No special charges were recorded during the quarter ended August 31, 2000. NET SALES Land division net sales for the quarter ended August 31, 2000 decreased $2.5 million, or 11%, to $20.2 million as compared to the land division's net sales of $22.7 million for the prior year's first quarter. Marine division net sales for the quarter ended August 31, 2000 decreased $324,000, or 4%, to $7.0 million as compared to the marine division's net sales of $7.3 million for the prior year's first quarter. The decline in both the land and marine division net sales for the quarter ended August 31, 2000 is attributable to the deterioration in the seismic service industry over the past two years, resulting in continued weak demand for our seismic data acquisition equipment. See "Introduction" above. Reservoir services and products did not contribute significant net sales during the current quarter. GROSS PROFITS Land division gross profit and gross profit margin for the quarter ended August 31, 2000 compared to the first quarter of fiscal year 2000 increased to a gross profit of $5.5 million, or 27.3% of land net sales, from a gross profit of $5.0 million, or 22.0% of land net sales. The increase in margins reflects primarily changes in product mix. 11 13 Marine division gross profit and gross profit margin for the quarter ended August 31, 2000 compared to the first quarter in fiscal year 2000 decreased to a gross profit of $839,000, or 12.0% of marine net sales, from a gross profit of $989,000 or 13.6% of marine net sales. The marine division's gross profit margin for the first quarter in fiscal year 2000 included charges of $1.4 million for product-related warranties. Excluding these charges, the marine division's gross profit margin for the first quarter in fiscal year 2000 would have been 33.2%. This decrease in current year margin is principally the result of a $900,000 warranty charge recorded in the quarter ended August 31, 2000, partially offset by reduced manufacturing overheads. The land and marine division gross profit margins continue to be affected by pricing pressures attributable to our competitors, the weak customer demand for our products, and manufacturing under-absorption due to low production volumes as a result of the prevailing industry conditions. Our gross profit margin for any particular reporting period is dependent on the product mix sold and the pricing scheme for the products sold for that period and may vary materially from period to period. RESEARCH AND DEVELOPMENT Research and development expenses for the quarter ended August 31, 2000 were $6.5 million, a decrease of $740,000, or 10%, compared to the first quarter in fiscal year 2000, primarily due to reduced costs and expenditures for salaries and other payroll related items, contract labor, and outside services, offset in part by an increase in depreciation and amortization. MARKETING AND SALES Marketing and sales expenses for the quarter ended August 31, 2000 were $2.5 million, a decrease of $428,000, or 15%, compared to the first quarter in fiscal year 2000 primarily due to reduced costs and expenditures for salaries, commissions and other payroll related items. This decrease was principally attributable to our cost reduction program and reduced net sales. GENERAL AND ADMINISTRATIVE General and administrative expenses for the quarter ended August 31, 2000 were $3.1 million, a decrease of $3.8 million, or 55%, compared to the first quarter in fiscal year 2000. In the first quarter of fiscal year 2000, we recorded $3.3 million of charges related to employee severance arrangements and the closing of our Ireland facility. Excluding these charges for the first quarter in fiscal year 2000, general and administrative expenses for the quarter ended August 31, 2000 decreased approximately $500,000, or 14% compared to the first quarter in fiscal year 2000. The decrease was attributed to the cost reduction initiatives put in place during the past two fiscal years. AMORTIZATION AND IMPAIRMENT OF IDENTIFIED INTANGIBLES Amortization of intangibles for the quarter ended August 31, 2000 was $1.2 million, a decrease of $772,000, or 40%, compared to the first quarter in fiscal year 2000. The decrease was attributable to the intangibles that were impaired in fiscal year 2000. 12 14 OPERATING INCOME The loss from operations for the quarter ended August 31, 2000 was $6.8 million, an improvement of $6.1 million, or 47%, compared to the $12.9 million loss in the first quarter in fiscal year 2000. Excluding special charges, our loss from operations in the first quarter in fiscal year 2000 was $8.2 million. The improvement was primarily the result of improvements in gross margins and reductions in operating expenses. INTEREST EXPENSE Interest expense was $261,000 in the quarter ended August 31, 2000, an increase of $49,000, or 23% from the first quarter in fiscal year 2000. Our principal interest expense is attributed to our ten-year-term facilities financing. INTEREST INCOME Interest income for the quarter ended August 31, 2000 was $1.6 million, an increase of $510,000 or 47% compared to the first quarter in fiscal year 2000. Income from investments increased $504,000 to $1.4 million as a result of higher excess cash balances invested during the year and increases in the rates earned on invested balances. INCOME TAX EXPENSE The effective tax rate for the quarter ended August 31, 2000 was 12%, compared to (32%) for the first quarter of fiscal year 2000. Our effective tax rate for the quarter ended August 31, 2000 is reflective of current U.S. losses for which we have recorded no income tax benefit. In assessing the realizability of deferred income tax assets, we consider whether it is more likely than not that some portion or all of the deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those deferred income tax assets become deductible. We consider the scheduled reversal of deferred income tax liabilities and projected future taxable income in making this assessment. In order to fully realize the deferred income tax assets, we will need to generate future taxable income of approximately $165 million over the next 20 years. Although we experienced significant losses in fiscal years 2000 and 1999, our taxable income for the years 1996 through 1998 aggregated approximately $128 million. Based on the level of historical income prior to fiscal year 1999 and our projections of future taxable income over the periods that the deferred income tax assets are deductible and the expiration date of the net operating loss carry-forward, we believe it is more likely than not that we will realize the benefits of the deferred income tax assets, net of the valuation allowance at August 31, 2000. The ultimate realization of the net deferred tax assets, prior to the expiration of the net operating loss carry-forward in the next 19-20 years, will require significant improvements in our results of operations from fiscal years 1999 and 2000 levels and a return to levels of profitability that existed prior to fiscal year 1999. The amount of deferred income tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry-forward period are reduced. If a reduction in the net deferred tax assets determined to be more likely than not realizable occurs in the near term, it is likely that this adjustment will have a material adverse effect on our results of operations. Finally, we do not expect to be in a position to recognize any deferred tax benefits in the near term if we incur losses, which may result in a negative impact when comparing quarterly results for these periods. 13 15 PREFERRED STOCK DIVIDENDS Preferred stock dividends for the quarter ended August 31, 2000 are related to our outstanding Series B and Series C Preferred Stock. The dividends are recognized as a charge to retained earnings at the rate of 8% per annum, compounded quarterly (of which 7% is accounted for as accrued dividends and 1% is paid as a quarterly cash dividend). The preferred stock dividend charge for the quarter ended August 31, 2000 was $1.2 million, an increase of $134,000 over the quarter ended August 31, 2000. The increase was attributed to the compounding of interest on the accrued and unpaid dividends. LIQUIDITY AND CAPITAL RESOURCES General. In recent years we have financed our operations from internally generated cash and funds from equity financings. Our cash and cash equivalents were $84.8 million at August 31, 2000, a decrease of $14.4 million, or 14%, as compared to May 31, 2000. The decrease is due to negative cash flows from operating activities for the quarter ended August 31, 2000. Cash flow from operating activities before changes in working capital items was a negative $1.1 million for the quarter ended August 31, 2000. Cash flow from operating activities after changes in working capital items was a negative $13.1 million for the quarter ended August 31, 2000, primarily due to the operating loss, increases in accounts and notes receivables, and decreases in levels of accounts payable and accrued expenses (primarily in connection with the $5.0 million payment for the Coastline Geophysical, Inc. litigation settlement). Our various working capital accounts can vary in amount substantially from period to period depending upon our levels of sales, product mix sold, demand for our products, percentages of cash versus credit sales, collection rates, inventory levels and general economic and industry factors. Cash flow used in investing activities was $1.0 million for the quarter ended August 31, 2000. The principal investing activities were capital expenditure projects. Cash flow from financing activities was $156,000 for the quarter ended August 31, 2000. Long Term Indebtedness. In 1996, we obtained a $12.5 million ten-year term mortgage loan to finance the construction of our electronics manufacturing facility in Stafford, Texas. The loan is secured by land, buildings and improvements, including our executive and research and development headquarters as well as the adjacent manufacturing facility. The mortgage loan bears interest at the fixed rate of 7.875% per annum and is repayable in equal monthly installments of principal and interest of $151,439. The promissory note contains certain prepayment penalties. As of August 31, 2000, $8.7 million in indebtedness was outstanding under this mortgage loan. Capital Expenditures. Capital expenditures for property, plant and equipment totaled $1.0 million for the quarter ended August 31, 2000 and are expected to aggregate $8.0 million for the twelve months ending May 31, 2001. Planned expenditures include the purchase of advanced manufacturing machinery and additional equipment for our rental fleet. We believe that the combination of our existing working capital, current cash in place and access to other financing sources will be adequate to meet our anticipated capital and liquidity requirements for the foreseeable future. Credit Agreement. We terminated our outstanding credit agreement during the first quarter of fiscal year 2000. While we believe that we would be able to negotiate a credit facility 14 16 or facilities with similar lenders, we believe that the terms currently available would not be as advantageous as future terms may be when we may then require a facility. We do not anticipate the need for a credit facility at the present time, but anticipate securing a facility or facilities in the future at a time when the proposed terms are more likely to be more advantageous for us. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), as amended by SFAS No. 137 and SFAS No. 138, was issued by the Financial Accounting Standards Board in June 1998. SFAS 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the statement of financial position at fair value. Based on our announced change in year end to December 31, we will adopt SFAS 133 beginning January 1, 2001. We do not expect the adoption of SFAS 133 will have a material effect on our financial condition or results of operation because we historically have not entered into derivative or other financial instruments for trading or speculative purposes nor do we use or intend to use derivative financial instruments or derivative commodity instruments. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB No. 101"). SAB No. 101 summarizes the SEC staff's views in applying generally accepted accounting principles to selected revenue recognition issues. We understand that the SEC staff is preparing a document to address significant implementation issues related to SAB No. 101. To the extent that SAB No. 101 ultimately changes our revenue recognition practices, we are required to adopt SAB No. 101 in our Transition Report on Form 10-K for the seven-month period ended December 31, 2000, with any cumulative effect adjustment computed as of June 1, 2000. We cannot determine the potential impact that SAB No. 101 may have on our consolidated financial position or results of operations at this time. OTHER FACTORS Market Conditions. Demand for our products is dependent upon the level of worldwide oil and gas exploration and development activity and the availability of seismic information in seismic libraries. Exploration and development activity is primarily dependent upon oil and gas prices, which have been subject to wide fluctuation in recent years. During fiscal years 2000 and 1999, our financial performance was adversely impacted by the deterioration in the seismic services industry. This deterioration resulted from, among other things, a widespread downturn in exploration activity due to a decline in energy prices from October 1997 to February 1999, consolidation among energy producers and oilfield services firms and an oversupply of speculative seismic data and current-generation seismic instrumentation in the field. Despite the recovery in commodity prices, the factors of increased competition and pricing pressures and the oversupply of seismic data and current-generation instrumentation have resulted in continued weak demand for our seismic data acquisition equipment. Credit Risk. A continuation of weak demand for the services of our customers will further strain the revenues and cash resources of our customers, thereby resulting in lower sales levels and a higher likelihood of defaults in the customers' timely payment of their obligations under our credit sales arrangements. Increased levels of payment defaults with respect to our credit sales arrangements could have a material adverse effect on our results of operations. 15 17 Our combined gross trade accounts receivable and trade notes receivable balance as of August 31, 2000 from customers in Russia and other former Soviet Union countries was approximately $15.1 million, from customers in Latin American countries was approximately $9.3 million, and from customers in China was approximately $9.4 million. As of August 31, 2000 the total allowance for doubtful accounts (foreign and US) was $1.8 million and the allowance for loan losses was $12.2 million. During the quarter ended August 31, 2000, there were approximately $2.8 million of sales to customers in Russia and other former Soviet Union countries, approximately $600,000 of sales to customers in Latin American countries and $1.2 million of sales to customers in China. All terms of sale for these foreign receivables are denominated in US dollars. Russia and certain Latin American countries have experienced economic problems and uncertainties and devaluations of their currencies in recent years. To the extent that economic conditions in the former Soviet Union, Latin America, China or elsewhere negatively affect future sales to our customers in those regions or the collectibility of our existing receivables, our future results of operations, liquidity and financial condition may be adversely affected. See Note 4 and Note 10 of the Notes to Consolidated Financial Statements and "- Cautionary Statement for Purposes of Forward-Looking Statements - Continuation of Downturn in Seismic Services Industry Will Adversely Affect Results of Operations and Financial Condition," "- Significant Payment Defaults Under Sales Arrangements Could Adversely Affect the Company" and "- Risk from Significant Amount of Foreign Sales Could Adversely Affect Results of Operations". Conversion to the Euro Currency. On January 1, 1999, certain members of the European Union established fixed conversion rates between their existing currencies and the European Union's common currency, the Euro. We own facilities and manufacture components for our systems in one member country. The transition period for the introduction of the Euro is between January 1, 1999 and June 30, 2002. We continue to address the issues involved with the introduction of the Euro. The more important issues facing us include: converting information technology systems; reassessing currency risk; and processing tax and accounting records. Based on our progress to date in reviewing this matter, and the fact that our sales to customers are denominated in US dollars, we believe that the introduction of the Euro has not had and will not have a significant impact on the manner in which we conduct our business affairs and process our business and accounting records. Therefore, we anticipate that conversion to the Euro should not have a material effect on our financial condition or results of operations. CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS Certain information contained in this Quarterly Report on Form 10-Q (including statements contained in Part I -Item #2. "Management's Discussion and Analysis of Results of Operations and Financial Condition"), as well as other written and oral statements made or incorporated by reference from time to time by us and our representatives in other reports, filings with the Securities and Exchange Commission, press releases, conferences, or otherwise, may be deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and are subject to the "Safe Harbor" provisions of that section. This information includes, without limitation, statements concerning future results of operation, future revenues, future costs and expenses, future margins and write-downs and special charges and savings and benefits therefrom; anticipated timing of commercialization of and capabilities of products planned or under development, including products incorporating VectorSeis(TM) technology; future demand for our products; anticipated product releases and technological 16 18 advances; the future mix of business and future asset recoveries; the realization of deferred tax assets; the effect of changes in accounting standards on our results of operation and financial condition; the effect of the Euro's introduction; the Company's Year 2000 issues; the inherent unpredictability of adversarial proceedings and other contingent liabilities; future capital expenditures and our future financial condition; future energy industry and seismic services industry conditions; and world economic conditions, including that in former Soviet Union, Latin American and Asian countries. These statements are based on current expectations and involve a number of risks and uncertainties, including those set forth below and elsewhere in this Form 10-Q. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. When used in this report, the words "anticipate," "estimate," "expect," "may," "project" and similar expressions are intended to be among the statements that identify forward-looking statements. Important factors which could affect our actual results and cause actual results to differ materially from those results which might be projected, forecast, estimated or budgeted by us in these forward-looking statements include, but are not limited to, the following: CONTINUATION OF DOWNTURN IN SEISMIC SERVICES INDUSTRY WILL ADVERSELY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION. Demand for our products is dependent upon the level of worldwide oil and gas exploration and development activity. This activity in turn is primarily dependent upon oil and gas prices, which have been subject to wide fluctuation in recent years in response to changes in the supply and demand for oil and natural gas, market uncertainty and a variety of additional factors that are beyond our control. Worldwide oil prices declined from October 1997 and remained at lower levels through February 1999. Despite the recovery in commodity prices since 1999, energy producers' continuing concerns over the sustainability of higher prices for hydrocarbon production resulted in lower exploration budgets by energy companies, which resulted in weak demand for our seismic data acquisition equipment. Other factors which have negatively impacted demand for our products have been the weakened financial condition of many of our customers, consolidations among energy producers and oilfield service and equipment providers, an oversupply in the marketplace of current-generation seismic equipment, a current industry-wide oversupply of "spec" seismic data, pricing pressures from our competitors and customers, and the destabilized economies in many developing countries. Despite higher prices for oil and natural gas since February 1999, it is expected that any turnaround for the seismic equipment market will occur later than for other sectors of the energy services industry. It is impossible to predict the length of the downturn for the seismic equipment market with any certainty. A further prolonged downturn in market demand for our products will have a material adverse effect on our results of operation and financial condition. No assurances can be given as to future levels of worldwide oil and natural gas prices, the future level of activity in worldwide oil and gas exploration and development and their relationship(s) to the demand for our products. Additionally, no assurances can be given that our efforts to reduce and contain costs will be sufficient to offset the effect of continued lower levels of our net sales until industry conditions improve. FAILURE TO DEVELOP PRODUCTS AND KEEP PACE WITH TECHNOLOGICAL CHANGE WILL ADVERSELY AFFECT RESULTS OF OPERATIONS. The markets for our product lines are characterized by rapidly changing technology and frequent product introductions. Whether we can develop and produce successfully, on a timely basis, new and enhanced products that embody new technology, meet evolving industry standards and practice, and achieve levels of capability and price that are acceptable to our customers, will be significant factors in our ability to compete in 17 19 the future. During the third quarter of fiscal year 2000, we recorded $8.7 million of inventory charges primarily related to our decision then to commercialize VectorSeis(TM) digital sensor products having higher technical standards than the products we had previously produced. We had previously decided to commercialize earlier-stage VectorSeis(TM) products, which subsequently were proven not to be commercially feasible based on data gathered from VectorSeis(TM) digital sensor surveys, the anticipated longer-term market recovery for new seismic instrumentation and then current and expected market conditions. There can be no assurance that we will not encounter resource constraints or technical or other difficulties that could delay introduction of new products in the future. No assurances can be given as to whether any new products incorporating the VectorSeis(TM) digital sensor (or any other of our technology product introductions or enhancements) will be commercially feasible or accepted in the marketplace by our present or future customers. If we are unable, for technological or other reasons, to develop competitive products in a timely manner in response to changes in the seismic data acquisition industry or other technological changes, our business and operating results will be materially and adversely affected. In addition, our continuing development of new products inherently carries the risk of inventory obsolescence with respect to our older products. Updates and upgrades in our product offerings through newly introduced products and product lines, whether internally developed or obtained through acquisitions, carry with them the potential for customer concerns of product reliability, which may have the effect of lessening customer demand for those products. PRESSURE FROM COMPETITORS COULD ADVERSELY AFFECT RESULTS OF OPERATIONS. The market for seismic data acquisition systems and seismic instrumentation is highly competitive and is characterized by continual and rapid changes in technology. Our principal competitors for land seismic equipment are, among others: Fairfield Industries; Geo-X Systems, Limited; JGI Incorporated; OYO Geospace Corporation; and Societe d'Etudes Recherches et Construction Electroniques (Sercel), an affiliate of Compagnie General de Geophysique (CGG). Our principal marine seismic competitors are, among others, Bolt Technology Corporation; GeoScience Corporation (GSI), an affiliate of CGG; Teledyne Brown Engineering, an affiliate of Allegheny Teledyne Company; and Thomson Marconi Sonar P/L. Unlike us, Sercel and GSI possess the advantage of being able to sell to an affiliated seismic contractor. Competition in the industry is expected to intensify and could adversely affect our future results. Several of our competitors have greater name recognition, more extensive engineering, manufacturing and marketing capabilities, and greater financial, technological and personnel resources than those available to us. In addition, certain companies in the industry have expanded and improved their product lines or technologies in recent years. There can be no assurance that we will be able to compete successfully in the future with existing or new competitors. Pressures from competitors offering lower-priced products or products employing new technologies could result in future price reductions and lower margins for our products. A continuing trend toward consolidation, concentrating buying power in the oil field services industry, will have the effect of adversely affecting the demand for our products and services. RISK FROM SIGNIFICANT AMOUNT OF FOREIGN SALES COULD ADVERSELY AFFECT RESULTS OF OPERATIONS. Sales outside the United States have historically accounted for a significant part of our net sales. Foreign sales are subject to special risks inherent in doing business outside of the United States, including the risk of war, civil disturbances, embargo, and government activities, 18 20 which may disrupt markets and affect operating results. Foreign sales are also generally subject to the risks of compliance with additional laws, including tariff regulations and import/export restrictions. U.S. technology export restrictions may affect the types and specifications of products we may export. We are, from time to time, required to obtain export licenses and there can be no assurance that we may not experience difficulty in obtaining such licenses as may be required in connection with export sales. Demand for our products from customers in developing countries (including Russia and other Former Soviet Union countries as well as certain Latin American and Asian countries, including China) is difficult to predict and can fluctuate significantly from year to year. We believe that these changes in demand result primarily from the instability of economies and governments in certain developing countries, changes in internal laws and policies affecting trade and investment, and because those markets are only beginning to adopt new technologies and establish purchasing practices. These risks may adversely affect our future operating results and financial position. In addition, sales to customers in developing countries on extended terms present heightened credit risks for us, for the reasons discussed above. See, in particular above, "- Other Factors" for further information concerning these risks in those countries. We are also required to convert to the Euro currency at our facility located in one of the European Union member countries and although we do not currently anticipate any problems with such conversion, there can be no assurances that the problems actually encountered by us in the Euro conversion will not be more pervasive than those anticipated by management. SIGNIFICANT PAYMENT DEFAULTS UNDER SALES ARRANGEMENTS COULD ADVERSELY AFFECT THE COMPANY. We sell to many customers on extended-term arrangements. Significant payment defaults by customers could have a material adverse effect on our financial position and results of operations. A significant portion of our trade notes and trade accounts receivable balance as of August 31, 2000 was attributable to sales made in former Soviet Union, Latin American and Asian countries. DEPENDENCE ON KEY AND TECHNICAL PERSONNEL. Our success depends upon the continued contributions of our personnel, particularly our management personnel, many of whom would be difficult to replace. Our success will depend on our abilities to attract and retain skilled employees. Changes in personnel, particularly technical personnel, therefore, could adversely affect operating results. In addition, continued changes in management personnel could have a disruptive effect on employees which could, in turn, adversely affect operating results. LOSS OF SIGNIFICANT CUSTOMERS WILL ADVERSELY AFFECT US. A relatively small number of customers have accounted for most of our net sales, although the degree of sales concentration with any one customer has varied from fiscal year to year. During fiscal years 2000, 1999 and 1998 the three largest customers in each of those years accounted for 41%, 52% and 43%, respectively, of our net sales. The loss of these customers or a significant reduction in their equipment needs could have a material adverse effect on our net sales and results of operations. RISKS RELATED TO GROSS MARGIN. Our gross margin percentage is a function of pricing pressures from our customers and our competitors and the product mix sold in any period. Increased sales of lower margin equipment and related components in the overall sales mix may result in lower gross margins. Other factors, such as heightened price competition, unit volumes, inventory obsolescence, increased warranty costs and other product related contingencies, changes in sales and distribution channels, shortages in components due to untimely supplies or 19 21 inability to obtain items at reasonable prices, unavailability of skilled labor and manufacturing under-absorption due to low production volumes, may also continue to affect the cost of sales and the fluctuation of gross margin percentages in future periods and results of operations. FAILURE TO PROTECT INTELLECTUAL PROPERTY WILL ADVERSELY AFFECT OUR OPERATIONS. We believe that technology is a primary basis of competition in the industry. Although we currently hold certain intellectual property rights relating to our product lines, there can be no assurance that these rights will not be challenged by third parties or that we will obtain additional patents or other intellectual property rights in the future. Additionally, there can be no assurance that our efforts to protect our trade secrets will be successful or that others will not independently develop products similar to our products or design around any of the intellectual property rights owned by us, or that we will be precluded by others' patent claims. DISRUPTION IN VENDOR SUPPLIES WILL AFFECT FINANCIAL RESULTS. Our manufacturing process requires a high volume of quality components. Certain components used by us are currently provided by only one supplier. In the future, we may, from time to time, experience supply or quality control problems with our suppliers, and such problems could significantly affect our ability to meet production and sales commitments. Our reliance on certain suppliers, as well as industry supply conditions generally, involve several risks, including the possibility of a shortage or a lack of availability of key components, suppliers' Year 2000 non-compliance, increases in component costs and reduced control over delivery schedules, any of which could adversely affect our future financial results. RISKS RELATED TO GOVERNMENT REGULATIONS AND PRODUCT CERTIFICATION. Our operations are also subject to laws, regulations, government policies, and product certification requirements worldwide. Changes in such laws, regulations, policies, or requirements could affect the demand for our products or result in the need to modify products, which may involve substantial costs or delays in sales and could have an adverse effect on our future operating results. Certain countries are subject to restrictions, sanctions and embargoes imposed by the US Government. These restrictions, sanctions and embargoes prohibit or limit us and our domestic subsidiaries from participating in certain business activities in those countries. These constraints may adversely affect our opportunities for business in those countries. RISKS RELATED TO TIMING OF PRODUCT SHIPMENTS COULD RESULT IN SIGNIFICANT QUARTERLY FLUCTUATIONS. Due to the relatively high sales price of many of our products and relatively low unit sales volume, the timing in the shipment of systems and the mix of products sold can produce fluctuations in quarter-to-quarter financial performance. One of the factors, which may affect our operating results from time to time, is that a substantial portion of our net sales in any period may result from shipments during the latter part of a period. Because we establish our sales and operating expense levels based on our operational goals, if shipments in any period do not meet goals, net sales and net earnings may be adversely affected. STOCK VOLATILITY AND ABSENCE OF DIVIDENDS MAY ADVERSELY AFFECT OUR STOCK PRICE. In recent years, the stock market in general and the market for energy and technology stocks in particular, including our common stock, have experienced extreme price fluctuations. There is a risk that future stock price fluctuations could impact our operations. Continued depressed prices for our common stock (and further price declines) could affect our ability to successfully attract and retain qualified personnel, complete desirable business combinations or accomplish financing or similar transactions in the future. We have historically not paid, and do not intend to pay in the foreseeable future, cash dividends on our common stock. 20 22 RISKS RELATED TO ACQUISITIONS. We may make further acquisitions in the future. Acquisitions require significant financial and management resources both at the time of the transaction and during the process of integrating the newly acquired business into our operations. Our operating results could be adversely affected if we are unable to successfully integrate these new companies into our operations. Structural changes in our internal organization, which may result from acquisitions, may not always produce the desired financial or operational results. Certain acquisitions or strategic transactions may be subject to approval by the other party's shareholders, United States or foreign governmental agencies, or other third parties. Accordingly, there is a risk that important acquisitions or transactions could fail to be concluded as planned. Future acquisitions by us could also result in issuance of equity securities or the rights associated with the equity securities, which could potentially dilute our earnings per share. In addition, future acquisitions could result in the incurrence of additional debt, taxes, or contingent liabilities, and amortization expenses related to goodwill and other intangible assets. These factors could adversely affect our future operating results and financial position. THE FOREGOING REVIEW OF FACTORS PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SHOULD NOT BE CONSTRUED AS EXHAUSTIVE. IN ADDITION TO THE FOREGOING, WE WISH TO REFER READERS TO OTHER FACTORS DISCUSSED ELSEWHERE IN THIS REPORT AS WELL AS OUR OTHER FILINGS AND REPORTS WITH THE SECURITIES AND EXCHANGE COMMISSION FOR A FURTHER DISCUSSION OF RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN FORWARD-LOOKING STATEMENTS. WE UNDERTAKE NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH MAY BE MADE TO REFLECT THE EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We may be, from time to time, exposed to market risk, which is the potential loss arising from adverse changes in market prices and rates. We traditionally have not entered into derivative or other financial instruments for trading or speculative purposes nor do we use or intend to use derivative financial instruments or derivative commodity instruments. We are not currently a borrower under any material credit arrangements which feature fluctuating interest rates. Our market risk could arise from changes in foreign currency exchange rates. Our sales and financial instruments are principally denominated in US dollars. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We were named, along with a former employee, as defendants in an action filed on May 21, 1999, in State District Court in Harris County, Texas styled Coastline Geophysical, Inc. v. Input/Output, Inc. et al. The plaintiffs' petition alleged a number of claims arising out of a purchase of a marine seismic system manufactured by us. While believing we had meritorious defenses to this action, we settled this lawsuit in July 2000 for $5.0 million, after giving consideration to the cost and distraction of protracted litigation. As a result of the settlement, we recorded a $5.0 million charge to general and administrative expense in the fourth quarter and year ended May 31, 2000. See Part I - Item 2. "Management's Discussion and Analysis of Results of Operations and Financial Condition - Liquidity and Capital Resources." 21 23 In the ordinary course of business, we have been named in other various lawsuits or threatened actions. While the final resolution of these matters may have an impact on our consolidated financial results for a particular reporting period, we believe that the ultimate resolution of these matters will not have a material adverse impact on our financial position, results of operations or liquidity. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) List of Documents Filed. 3.1 Bylaws of the Company, as amended as of September 25, 2000 27.1 Financial Data Schedule (included in EDGAR copy only) (b) Reports on Form 8-K No Current Reports on Form 8-K were filed during the quarter ended August 31, 2000 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF STAFFORD, STATE OF TEXAS, ON OCTOBER 16, 2000. Input/Output, Inc. By /s/ C. Robert Bunch ------------------------------------------------------ C. ROBERT BUNCH VICE PRESIDENT AND CHIEF ADMINISTRATIVE OFFICER 22 EX-3.1 2 h80944ex3-1.txt BYLAWS OF THE COMPANY 1 AMENDED AND RESTATED BYLAWS OF INPUT/OUTPUT, INC. AS AMENDED THRU SEPTEMBER 25, 2000 2 TABLE OF CONTENTS
Page ---- ARTICLE I Offices............................................................1 Section 1. Registered Office............................................1 Section 2. Other Offices................................................1 ARTICLE II Meetings of Stockholders..........................................1 Section 1. Time and Place of Meetings...................................1 Section 2. Annual Meetings..............................................1 Section 3. Notice of Annual Meetings....................................1 Section 4. Special Meetings.............................................1 Section 5. Notice of Special Meetings...................................1 Section 6. Quorum.......................................................1 Section 7. Order of Business............................................2 Section 8. New Business.................................................2 Section 9. Voting.......................................................3 Section 10. List of Stockholders.........................................3 Section 11. Stockholder Action by Written Consent Without a Meeting......4 Section 12. Inspectors of Votes..........................................4 ARTICLE III Board of Directors...............................................4 Section 1. Powers.......................................................4 Section 2. Number and Qualification.....................................4 Section 3. Election and Term of Office..................................4 Section 4. Resignations.................................................5 Section 5. Nominations..................................................5 Section 6. Vacancies....................................................6 Section 7. Time and Place of Meetings...................................6 Section 8. Annual Meetings..............................................6 Section 9. Regular Meetings - Notice....................................7 Section 10. Special Meetings - Notice....................................7 Section 11. Quorum and Manner of Acting..................................7 Section 12. Remuneration.................................................7 Section 13. Committees - How Constituted and Powers......................7 Section 14. Minutes of Committees........................................8 Section 15. Actions Without a Meeting....................................8 Section 16. Presence at Meetings by Means of Communications Equipment....8 ARTICLE IV Notices...........................................................8 Section 1. Type of Notice...............................................8 Section 2. Waiver of Notice.............................................8 Section 3. Authorized Notices...........................................9 ARTICLE V Officers...........................................................9 Section 1. Description..................................................9 Section 2. Election.....................................................9
-i- 3 Section 3. Salaries.....................................................9 Section 4. Term.........................................................9 Section 5. Duties of the Chairman.......................................9 Section 6. Duties of the President and Chief Executive Officer..........9 Section 7. Duties of the Vice President-Finance........................10 Section 8. Duties of Vice Presidents and Assistant Vice Presidents.....10 Section 9. Duties of Secretary and Assistant Secretaries...............10 Section 10. Duties of Treasurer and Assistant Treasurers................11 Section 11. Duties of Controller and Assistant Controllers..............11 ARTICLE VI Indemnification..................................................12 Section 1. Damages and Expenses........................................12 Section 2. Prepaid Expenses............................................13 Section 3. Insurance...................................................13 Section 4. Mergers.....................................................13 ARTICLE VII Certificates Representing Stock.................................13 Section 1. Rights to Certificate.......................................13 Section 2. Facsimile Signatures........................................14 Section 3. New Certificates............................................14 Section 4. Transfers...................................................14 Section 5. Record Date.................................................14 Section 6. Registered Stockholders.....................................15 ARTICLE VIII General Provisions.............................................15 Section 1. Dividends...................................................15 Section 2. Reserves....................................................15 Section 3. Annual Statement............................................15 Section 4. Checks......................................................15 Section 5. Corporate Contracts and Instruments.........................15 Section 6. Fiscal Year.................................................15 Section 7. Corporate Seal..............................................15 Section 8. Certificate of Incorporation................................16 ARTICLE IX Amendments.......................................................16 Section 1. Amendment by Directors......................................16 Section 2. Amendment by Stockholders...................................16
-ii- 4 ARTICLE I Offices Section 1. Registered Office. The registered office of the corporation shall be in the city of Dover, County of Kent, State of Delaware. Section 2. Other Offices. The corporation may also have offices at such other place or places, both within and without the State of Delaware, as the board of directors may from time to time determine or the business of the corporation may require. ARTICLE II Meetings of Stockholders Section 1. Time and Place of Meetings. All meetings of the stockholders shall be held at such time and place, either within or without the State of Delaware, as the board of directors shall designate and as shall be stated in the notice of the meeting. Section 2. Annual Meetings. The annual meeting of the stockholders shall be held on the second Tuesday of November of each year commencing in 1991, if not a legal holiday, and if a legal holiday, then the next secular day following, or at such other date as the board of directors of the corporation may determine and commencing at such time as the board of directors shall determine; at the annual meeting, the stockholders shall elect by a plurality vote by written ballot a board of directors and transact such other business as may properly be brought before the meeting. Section 3. Notice of Annual Meetings. Written notice of the annual meeting, stating the place, date and hour of the meeting, shall be given to each stockholder of record entitled to vote at such meeting not less than 10 nor more than 60 days before the date of the meeting. Section 4. Special Meetings. Special meetings of the stockholders for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, may be called at any time by the board of directors, and shall be called by the chairman of the board, the chief executive officer or the secretary at the request in writing of the majority of the board of directors. Special meetings of stockholders of the corporation may not be called by any other person or persons. Such request shall state the purpose or purposes of the proposed special meeting. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 5. Notice of Special Meetings. Written notice of a special meeting, stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given to each stockholder of record entitled to vote at such meeting not less than 10 nor more than 60 days before the meeting. Section 6. Quorum. The holders of stock having a majority of the voting power of the stock entitled to be voted thereat, present in person or represented by proxy, shall 5 constitute a quorum for the transaction of business at all meetings of the stockholders. If, however, such quorum shall not be present in person or represented by proxy at any meeting of stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time without notice (other than announcement at the meeting at which the adjournment is taken of the time and place of the adjourned meeting) until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted that might have been transacted at the meeting as originally notified. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 7. Order of Business. The order of business at annual meetings of stockholders and, so far as practicable, at other meetings of stockholders shall be determined by the chief executive officer. Section 8. New Business. At an annual meeting of stockholders, only such new business shall be conducted, and only such proposals shall be acted upon, as shall have been properly brought before the annual meeting. For any new business proposed by the board of directors to be properly brought before the annual meeting, such new business shall be approved by the board of directors and shall be stated in writing and filed with the secretary of the corporation at least five days before the date of the annual meeting, and all business so approved, stated and filed shall be considered at the annual meeting. Any stockholder may make any other proposal at the annual meeting, but unless properly brought before the annual meeting such proposal shall not be acted upon at the annual meeting. For a proposal to be properly brought before an annual meeting by a stockholder, the stockholder must have given proper and timely notice thereof in writing to the secretary of the corporation as specified herein. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not later than the date that corresponds to 120 days prior to the date the corporation's proxy statement was released to stockholders in connection with the previous year's annual meeting of stockholders. A stockholder's notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a description of the proposal desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the corporation's books, of the stockholder proposing such business and any other stockholders known by such stockholder to be supporting such proposal, (c) the class and number of shares of the stock that are held of record, beneficially owned and represented by proxy on the date of such stockholder notice and on the record date of the meeting (if such date shall have been made publicly available) by the stockholder and by any other stockholders known by such stockholder to be supporting such proposal on such dates, (d) any financial interest of the stockholders in such proposal, and (e) all other information that would be required to be filed with the Securities and Exchange Commission if, with respect to any such item of business, such stockholder or stockholders were a participant in a solicitation subject to Section 14 of the Securities Exchange Act of 1934, as amended. -2- 6 The board of directors may reject any stockholder proposal not made strictly in accordance with the terms of this Section 8. Alternatively, if the board of directors fails to consider the validity of any stockholder proposal, the presiding officer of the annual meeting shall, if the facts warrant, determine and declare at the annual meeting that the stockholder proposal was not made in strict accordance with the terms of this section and, if he should so determine, he shall so declare at the annual meeting and any such business or proposal not properly brought before the annual meeting shall not be acted upon at the annual meeting. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors and committees of the board of directors, but, in connection with such reports, no new business shall be acted upon at such annual meeting unless stated, filed and received as herein provided. Section 9. Voting. Except as otherwise provided in the certificate of incorporation, each stockholder shall, at each meeting of the stockholders, be entitled to one vote in person or by proxy for each share of stock of the corporation held by him and registered in his name on the books of the corporation on the date fixed pursuant to the provisions of Section 5 of Article VII of these bylaws as the record date for the determination of stockholders who shall be entitled to notice of and to vote at such meeting. Shares of its own stock belonging to the corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held directly or indirectly by the corporation, shall not be entitled to vote. Any vote by the stockholders of the corporation may be given at any meeting of stockholders by the stockholder entitled thereto, in person or by his proxy appointed by an instrument in writing subscribed by such stockholder or by his attorney thereunto duly authorized and delivered to the secretary of the corporation or to the secretary of the meeting; provided, however, that no proxy shall be voted or acted upon after three years from its date, unless said proxy shall provide for a longer period. Each proxy shall be revocable unless expressly provided therein to be irrevocable and unless otherwise made irrevocable by law. At all meetings of the stockholders, all matters, except where other provision is made by law, the certificate of incorporation, or these bylaws, shall be decided by the vote of a majority of the votes cast by the stockholders present in person or by proxy and entitled to vote, a quorum being present. Unless demanded by a stockholder of the corporation present in person or by proxy at any meeting of the stockholders and entitled to vote thereat, or so directed by the chairman of the meeting, the vote thereat on any question other than the election or removal of directors need not be by written ballot. Upon a demand of any such stockholder for a vote by written ballot on any question or at the direction of such chairman that a vote by written ballot be taken on any question, such vote shall be taken by written ballot. On a vote by written ballot, each ballot shall be signed by the stockholder voting, or by his proxy, if there be such proxy, and shall state the number of shares voted. Section 10. List of Stockholders. It shall be the duty of the secretary or other officers of the corporation who shall have charge of its stock ledger, either directly or through another officer of the corporation designated by him or through a transfer agent appointed by the board of directors, to prepare and make, at least ten days before every meeting of the stockholders, a complete list of the stockholders entitled to vote thereat, arranged in alphabetical order, and showing the address of each stockholder and the -3- 7 number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten days before said meeting, either at a place within the city where said meeting is to be held, which place shall be specified in the notice of said meeting, or, if not so specified, at the place where said meeting is to be held. The list shall also be produced and kept at the time and place of said meeting during the whole time thereof, and may be inspected by any stockholder of record who shall be present thereat. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, such list or the books of the corporation, or to vote in person or by proxy at any meeting of stockholders. Section 11. Stockholder Action by Written Consent Without a Meeting. No action shall be taken by stockholders except at an annual or special meeting of stockholders, and stockholders may not act by written consent. Section 12. Inspectors of Votes. The chairman shall appoint one or more inspectors to act at each meeting of the stockholders, unless the board of directors shall have theretofore made such appointments. Each inspector of votes shall first subscribe an oath or affirmation faithfully to execute the duties of an inspector of votes at the meeting with strict impartiality and according to the best of his ability. Such inspectors of votes shall (1) ascertain the number of shares outstanding and the voting power of each; (2) determine the shares represented at the meeting and the validity of proxies and ballots; (3) count all votes and ballots; (4) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors; and (5) certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots. An inspector of votes need not be a stockholder of the corporation, and any officer of the corporation may be an inspector of votes on any question other than a vote for or against his election to any position with the corporation or on any other question in which he may be directly interested. ARTICLE III Board of Directors Section 1. Powers. The business and affairs of the corporation shall be managed by its board of directors, which shall have and may exercise all powers of the corporation and take all lawful acts as are not by statute, the certificate of incorporation or these bylaws directed or required to be exercised or taken by the stockholders. Section 2. Number and Qualification. The number of directors that shall constitute the whole board of directors shall be determined, from time to time, only by resolution of the board of directors but shall be no fewer than three (3) nor more than fifteen (15). Section 3. Election and Term of Office. The board of directors shall be divided into three classes, Class I, Class II and Class III. The number of directors in each class shall be the whole number contained in the quotient arrived at by dividing the authorized number of directors by three, and if a fraction is also contained in such quotient then if -4- 8 such fraction is one-third (1/3), the extra director shall be a member of Class III, and if the fraction is two-thirds (2/3), one of the extra directors shall be a member of Class III and the other a member of Class II. Each director shall serve for a term ending on the date of the third annual meeting following the annual meeting at which such director was elected; provided, however, that the directors initially appointed to Class I shall serve for a term ending on the date of the first annual meeting next following May 31, 1991, the directors initially appointed to Class II shall serve for a term ending on the date of the second annual meeting next following May 31, 1991, and the directors initially appointed to Class III shall serve for a term ending on the date of the third annual meeting next following May 31, 1991. One class of the directors shall be elected at each annual meeting of the stockholders. If any such annual meeting is not held or the directors are not elected thereat, the directors may be elected at any special meeting of stockholders held for that purpose. All directors shall hold office until their respective successors are elected and qualified or until their earlier death, resignation or removal. Section 4. Resignations. Any director may resign at any time by giving written notice of his resignation to the corporation, effective at the time specified therein or, if not specified, immediately upon its receipt by the corporation. Unless otherwise specified in the notice, acceptance of a resignation shall not be necessary to make it effective. Section 5. Nominations. Notwithstanding anything in these bylaws to the contrary, only persons who are nominated in accordance with the procedures hereinafter set forth in this Section 5 shall be eligible for election as directors of the corporation. Nominations of persons for election to the board of directors of the corporation may be made at a meeting of stockholders only (1) by or at the direction of the board of directors or (2) by any stockholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 5. Such nominations, other than those made by or at the direction of the board of directors, shall be made pursuant to timely notice in writing to the secretary of the corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than 30 days nor more than 60 days prior to the meeting; provided, however, that in the event that less than 40 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Any adjournment(s) or postponement(s) of the original meeting whereby the meeting will reconvene within 30 days from the original date shall be deemed for purposes of notice to be a continuation of the original meeting and no nominations by a shareholder of persons to be elected directors of the corporation may be made at any such reconvened meeting other than pursuant to a notice that was timely for the meeting on the date originally scheduled. Such stockholder's notice shall set forth: (i) as to each person whom the stockholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, or any successor regulation thereto (including such person's written consent to being named in the proxy statement -5- 9 as a nominee and to serving as a director if elected); and (ii) as to the stockholder giving the notice (A) the name and address, as they appear on the corporation's books, of such stockholder, and (B) the class and number of shares of the corporation which are beneficially owned by such stockholder. At the request of the board of directors any person nominated by the board of directors for election as a director shall furnish to the secretary of the corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by this Section 5, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Section 6. Vacancies. Except as otherwise provided by statute or the certificate of incorporation, in the case of any increase in the number of directors, such additional director or directors shall be proposed for election to terms of office that will most nearly result in each class of directors containing one-third of the entire number of members of the whole board, and, unless such position is to be filled by a vote of the stockholders at an annual or special meeting, shall be elected by a majority vote of the directors in such class or classes, voting separately by class. In the case of any vacancy in the board of directors, however created, the vacancy or vacancies shall be filled by majority vote of the directors remaining in the class in which the vacancy occurs or, if only one such director remains, by such director. In the event one or more directors shall resign, effective at a future date, such vacancy or vacancies shall be filled as provided herein. Directors so chosen or elected shall hold office for the remaining term of the directorship to which appointed. Any director elected or chosen as provided herein shall serve for the unexpired term of office or until his successor is elected and qualified or until his earlier death, resignation or removal. In the event of any decrease in the authorized number of directors, (a) each director then serving as such shall nevertheless continue as a director of the class of which he is a member until the expiration of his current term, or his prior death, resignation or removal, and (b) the newly eliminated directorships resulting from such decrease shall be apportioned by the board of directors to such class or classes as shall, so far as possible, bring the number of directors in the respective classes into conformity with the formula in Section 3 hereof as applied to the new authorized number of directors. Meetings of the Board of Directors Section 7. Time and Place of Meetings. The board of directors of the corporation may hold meetings, both regular and special, at such time and places as it determines. Section 8. Annual Meetings. The first meeting of each newly elected board of directors shall be held immediately following the annual meeting of stockholders, and no notice of such meeting to the newly elected directors shall be necessary in order legally to constitute the meeting, provided a quorum shall be present. If such meeting is not held immediately following the annual meeting of stockholders, the meeting may be held -6- 10 at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. Section 9. Regular Meetings - Notice. Regular meetings of the board of directors may be held without notice. Section 10. Special Meetings - Notice. Special meetings of the board of directors may be called by the chairman of the board, chief executive officer or two directors on not less than 15 hours' notice to each director, either personally or by telephone or by mail, telegraph, telex, cable, wireless or other form of recorded communication; special meetings shall be called by the secretary in like manner and on like notice on the written request of the chairman of the board, chief executive officer or two directors. Notice of any such meeting need not be given to any director, however, if waived by him in writing or by telegraph, telex, cable, wireless or other form of recorded communication, or if he shall be present at the meeting. Section 11. Quorum and Manner of Acting. At all meetings of the board of directors, fifty percent (50%) of the directors at the time in office (but not less than one-third of the whole board of directors) shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum shall not be present at any meeting of the board of directors, the directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 12. Remuneration. Unless otherwise expressly provided by resolution adopted by the board of directors, none of the directors shall, as such, receive any stated remuneration for his services; but the board of directors may at any time and from time to time by resolution provide that a specified sum shall be paid to any director of the corporation, either as his annual remuneration as such director or member of any committee of the board of directors or as remuneration for his attendance at each meeting of the board of directors or any such committee. The board of directors may also likewise provide that the corporation shall reimburse each director for any expenses paid by him on account of his attendance at any meeting. Nothing in this section shall be construed to preclude any director from serving the corporation in any other capacity and receiving remuneration therefor. Committees of Directors Section 13. Committees - How Constituted and Powers. The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any committee, to the extent provided in the resolution of the board of directors and not prohibited by law, shall have and may exercise all the powers and authority of the board -7- 11 of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it. At any meeting of a committee, a majority of the members of the committee shall constitute a quorum for the transaction of business, and the act of a majority of the members present at any meeting at which a quorum is present shall be the act of the committee. Section 14. Minutes of Committees. Each committee shall keep regular minutes of its meetings and proceedings and report the same to the board of directors at the next meeting thereof. General Section 15. Actions Without a Meeting. Any action required or permitted to be taken at any meeting of the board of directors or any committee thereof may be taken without a meeting, if all members of the board of directors or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board of directors or the committee. Section 16. Presence at Meetings by Means of Communications Equipment. Members of the board of directors, or of any committee designated by the board of directors, may participate in a meeting of the board of directors or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear one another. Participation in a meeting conducted pursuant to this section shall constitute presence in person at the meeting. ARTICLE IV Notices Section 1. Type of Notice. Whenever, under the provisions of the statutes, the certificate of incorporation or these bylaws, notice is required to be given to any director, it shall not be construed to require personal notice, but such notice may be given in writing, by mail, addressed to such director, at his address as it appears on the records of the corporation (unless prior to the mailing of such notice he shall have filed with the secretary a written request that notices intended for him be mailed to some other address designated in the request) with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail; provided, however, that, in the case of notice of a special meeting of the board of directors, if such meeting is to be held within seven calendar days after the date of such notice, notice shall be deemed given as of the date such notice shall be accepted for delivery by a courier service that provides "opening of business next day" delivery, so long as at least one attempt shall have been made, on or before the date such notice is accepted for delivery by such courier service, to provide notice by telephone to each director at his principal place of business and at his principal residence. Notice to directors may also be given by telegram, by personal delivery or telephone. Section 2. Waiver of Notice. Whenever any notice is required to be given under the provisions of any applicable statute, the certificate of incorporation or these bylaws, a -8- 12 waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto, and transmission of waiver of notice by a director or stockholder by mail, telegraph, telex, cable, wireless or other form of recorded communication may constitute such a waiver. Section 3. Authorized Notices. Unless otherwise specified herein, the secretary or such other person or persons as the chief executive officer designates shall be authorized to give notices for the corporation. ARTICLE V Officers Section 1. Description. The elected officers of the corporation shall be a president (who shall be a director), one or more vice presidents, with or without such descriptive titles as the board of directors shall deem appropriate, a secretary, a treasurer, and a controller and, if the board of directors so elects, a chairman of the board (who shall be a director). The board of directors by resolution shall also appoint one or more assistant secretaries, assistant treasurers, assistant controllers and such other officers and agents as from time to time may appear to be necessary or advisable in the conduct of the affairs of the corporation. Any two or more offices may be held by the same person. Section 2. Election. The board of directors at its first meeting after each annual meeting of stockholders shall elect and appoint the officers to fill the positions designated in Section 1 of this Article V. Section 3. Salaries. The board of directors shall fix all salaries of all elected officers of the corporation. Section 4. Term. An officer of the corporation shall hold office until he resigns or his successor is chosen and qualified. Any officer elected or appointed by the board of directors may be removed at any time by the affirmative vote of a majority of the whole board of directors. The board of directors shall fill any vacancy occurring in any office of the corporation by death, resignation, removal or otherwise. Section 5. Duties of the Chairman. The chairman of the board shall preside when present at all meetings of the board of directors. He shall advise and counsel the president and other officers of the corporation, and shall exercise such powers and perform such duties as shall be assigned to or required of him from time to time by the board of directors. Section 6. Duties of the President and Chief Executive Officer. The president shall be the chief executive officer of the corporation, and, subject to the provisions of these bylaws, shall have general supervision of the affairs of the corporation and shall have general and active control of all its business . He shall preside, when present, at all meetings of stockholders, except as may otherwise be provided by statute and the executive committee. He shall have general authority to execute bonds, deeds and -9- 13 contracts in the name of the corporation and to affix the corporate seal thereto; to sign stock certificates; to cause the employment or appointment of such employees and agents of the corporation as the proper conduct of operations may require, and to fix their compensation, subject to the provisions of these bylaws; to remove or to suspend any employee or agent who shall have been employed or appointed under his authority or under authority of an officer subordinate to him; to suspend for cause, pending final action by the authority that shall have elected or appointed him, any officer subordinate to the president, and, in general, to exercise all the powers usually appertaining to the office of president of a corporation, except as otherwise provided in these bylaws. In the absence of the president, his duties shall be performed and his powers may be exercised by such other officer as he shall designate in writing or (failing such designation) by the executive committee (if any has been appointed) or such officer as it shall designate in writing, subject, in either case, to review and superseding action by the board of directors. Section 7. Duties of the Vice President-Finance. There may be designated a vice president finance, who, if so designated, shall be the chief financial and accounting officer of the corporation. He shall have active control of and responsibility for all matters pertaining to the financial affairs of the corporation and its subsidiaries. His authority shall include the authorities of the treasurer and controller. He shall be responsible for approval of all filings with governmental agencies. He shall have the authority to execute and deliver bonds, deeds, contracts and stock certificates of and for the corporation, and to affix the corporate seal thereto by handwritten or facsimile signature and all other powers customarily appertaining to his office, except to the extent otherwise limited or enlarged. He shall report to the president and to the executive committee and the board of directors of the corporation at their request on all financial matters of the corporation. Section 8. Duties of Vice Presidents and Assistant Vice Presidents. In the absence of the president or in the event of his inability or refusal to act, the vice president (or in the event there be more than one vice president, the vice presidents in the order designated by the board, or in the absence of any designation, in the order of their election) shall perform the duties of the president and, when so acting, shall have all the powers of and be subject to all the restrictions upon the president. The vice presidents shall perform such other duties and have such other powers as the board of directors or the president may from time to time prescribe. Section 9. Duties of Secretary and Assistant Secretaries. The secretary or an assistant secretary shall attend all meetings of the board of directors and all meetings of the stockholders and record all proceedings of the meetings of the stockholders of the corporation and of the board of directors in a book to be kept for that purpose, and shall perform like duties for the standing committees when required. The secretary shall be under the supervision of the president and shall perform such other duties as may be prescribed by the president. The secretary shall have charge of the seal of the corporation and have authority to affix the seal to any instrument requiring it. When so affixed, the seal shall be attested by the signature of the secretary or treasurer or an assistant secretary or assistant treasurer, which may be a facsimile. The secretary shall keep and account for all books, documents, papers and records of the corporation except those for which some other officer or agent is properly accountable. The secretary shall -10- 14 have authority to sign stock certificates, and shall generally perform all the duties appertaining to the office of the secretary of a corporation. Assistant secretaries in the order of their seniority, unless otherwise determined by the board of directors, shall assist the secretary, and in the absence or disability of the secretary, perform the duties and exercise the powers of the secretary. They shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. Section 10. Duties of Treasurer and Assistant Treasurers. The treasurer shall have the responsibility for and custody over all assets of the corporation, and the responsibility for handling of the liabilities of the corporation. He shall cause proper entries of all receipts and disbursements of the corporation to be recorded in its books of account. He shall have the responsibility for all matters pertaining to taxation and insurance. He shall have the authority to endorse for deposit or collection, or otherwise, all commercial paper payable to the corporation, and to give proper receipts or discharges for all payments to the corporation. He shall be responsible for all terms of credit granted by the corporation and for the collection of all its accounts. He shall have the authority to execute and deliver bonds, deeds, contracts and stock certificates of and for the corporation, and to affix the corporate seal thereto by handwritten or facsimile signature and all other powers customarily appertaining to his office, except to the extent otherwise limited or enlarged. The treasurer shall be under the supervision of the vice president-finance and he shall perform such other duties as may be prescribed to him by the vice president-finance, if one be designated. Assistant treasurers, in the order of their seniority, shall assist the treasurer, and in the absence or disability of the treasurer, perform the duties and exercise the powers of the treasurer. Section 11. Duties of Controller and Assistant Controllers. The controller shall be responsible for all matters pertaining to the accounts of the corporation, its subsidiaries and divisions, with the supervision of the books of account, their installation, arrangement and classification. The controller shall maintain adequate records of all assets, liabilities and transactions; see that an adequate system of internal audit thereof is currently and regularly maintained; coordinate the efforts of the corporation's independent public accountants in its external audit program; receive, review and consolidate all operating and financial statements of the corporation and its various departments and subsidiaries; and prepare financial statements, reports and analyses. The controller shall have supervision of the accounting practices of the corporation and of each subsidiary and division of the corporation, and shall prescribe the duties and powers of the chief accounting personnel of the subsidiaries and divisions. The controller shall cause to be maintained an adequate system of financial control through a program of budgets, financial planning and interpretive reports. The controller shall initiate and enforce accounting measures and procedures whereby the business of the corporation and its subsidiaries and divisions shall be conducted with the maximum efficiency and economy. The controller shall have all other powers customarily appertaining to the office of controller, except to the extent otherwise limited -11- 15 or enlarged. The controller shall be under the supervision of the vice president-finance, if one be designated. The assistant controllers, in the order of their seniority, shall assist the controller, and if the controller is unavailable, perform the duties and exercise the powers of the controller. ARTICLE VI Indemnification Section 1. Damages and Expenses. (a) The corporation shall indemnify every person who is or was a party or is or was threatened to be made a party to any action, suit, or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director, officer, employee or agent of the corporation or any of its direct or indirect wholly-owned subsidiaries or, while a director, officer, employee or agent of the corporation or any of its direct or indirect wholly-owned subsidiaries, is or was serving at the request of the corporation or any of its direct or indirect wholly-owned subsidiaries, as a director, officer, employee, agent or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including counsel fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, to the full extent permitted by applicable laws, provided that the corporation shall not be obligated to indemnify any such person against any such action, suit or proceeding which is brought by such person against the corporation or any of its direct or indirect wholly-owned subsidiaries or the directors of the corporation or any of its direct or indirect wholly-owned subsidiaries, other than an action brought by such person to enforce his rights to indemnification hereunder, unless a majority of the board of directors of the corporation shall have previously approved the bringing of such action, suit or proceeding. The corporation shall indemnify every person who is or was a party or is or was threatened to be made a party to any action, suit, or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was licensed to practice law and an employee (including an employee who is or was an officer) of the corporation or any of its direct or indirect wholly-owned subsidiaries and, while acting in the course of such employment committed or is alleged to have committed any negligent acts, errors or omissions in rendering professional legal services at the request of the corporation or pursuant to his employment (including, without limitation, rendering written or oral legal opinions to third parties) against expenses (including counsel fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, to the full extent permitted by applicable law; provided that the corporation shall not be obligated to indemnify any such person against any action, suit or proceeding arising out of any adjudicated criminal, dishonest or fraudulent acts, errors or omissions of such person or any adjudicated willful, intentional or malicious acts, errors or omissions of such person. (b) Expenses incurred by an officer or director of the corporation or any of its direct or indirect wholly-owned subsidiaries in defending a civil or criminal action, suit or -12- 16 proceeding shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this Section 1. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. (c) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 1 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any provision of law, the corporation's certificate of incorporation, the certificate of incorporation or bylaws or other governing documents of any direct or indirect wholly-owned subsidiary of the corporation, or any agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding any of the positions or having any of the relationships referred to in this Section 1. Section 2. Prepaid Expenses. Subject in all respects to Section 1(b) above of this Article VI, expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding, as authorized by the board of directors in the specific case. Section 3. Insurance. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article VI. Section 4. Mergers. For purposes of this Article VI, references to "the corporation" shall include, in addition to the resulting or surviving corporation, constituent corporations (including any constituent of a constituent) absorbed in a consolidation or merger that, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise shall stand in the same position under the provisions of this Article VI with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. ARTICLE VII Certificates Representing Stock Section 1. Rights to Certificate. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, the -13- 17 chairman of the board, the president or a vice president and by the secretary or an assistant secretary of the corporation, certifying the number of shares owned by him in the corporation. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, option or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, that, except as otherwise provided in Section 202 of the General Corporation Law of the State of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences or rights. Section 2. Facsimile Signatures. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Section 3. New Certificates. The board of directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation and alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed or the issuance of such new certificate. Section 4. Transfers. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation, subject to any proper restrictions on transfer, to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 5. Record Date. The board of directors may fix, in advance, a record date for stockholders' meetings or for any other lawful purpose, which shall be no fewer than 10 nor more than 60 days before the date of the meeting or other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. -14- 18 Section 6. Registered Stockholders. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not provided by the laws of the State of Delaware. ARTICLE VIII General Provisions Section 1. Dividends. Dividends upon the capital stock of the corporation, if any, may be declared by the board of directors pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock or other securities. Section 2. Reserves. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the board of directors from time to time, in their absolute discretion, thinks proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the board of directors shall think conducive to the interest of the corporation, and the board of directors may modify or abolish any such reserve in the manner in which it was created. Section 3. Annual Statement. The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. Section 4. Checks. All checks or demands for money and promissory notes of the corporation shall be signed by such officer or officers or such other person or persons as the board of directors may from time to time prescribe. Section 5. Corporate Contracts and Instruments. The president, any vice president, the secretary or the treasurer may enter into contracts and execute instruments on behalf of the corporation. The board of directors, the president or any vice president may authorize any officer or officers, and any employee or employees or agent or agents of the corporate or any of its subsidiaries, to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances. Section 6. Fiscal Year. The fiscal year of the corporation shall end December 31 of each year, unless subsequently redetermined by the board of directors. Section 7. Corporate Seal. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization, and the word "Delaware." The seal may be used by causing it or a facsimile thereof to be impressed, affixed, reproduced or otherwise. -15- 19 Section 8. Certificate of Incorporation. These bylaws are subject to the terms of the certificate of incorporation of the corporation. ARTICLE IX Amendments Section 1. Amendment by Directors. Except any amendment to this Article IX and to Article II, Section 4, Article II, Section 11, Article III, Section 3, Article III, Section 6, Article VI, Section 1 and Article IV, Section 1 of these bylaws, or any of such provisions, which shall require approval by the affirmative vote of directors representing at least 75% of the number of directors provided for in accordance with Article III, Section 2, and except as otherwise expressly provided in a bylaw adopted by the stockholders as hereinafter provided, the directors, by the affirmative vote of a majority of the whole board and without the assent or vote of the stockholders, may at any meeting, make, repeal, alter, amend or rescind any of these bylaws, provided the substance of the proposed amendment or other action shall have been stated in a notice of the meeting. Section 2. Amendment by Stockholders. These bylaws may not be altered, amended or rescinded, and new bylaws may not be adopted, by the stockholders of the corporation except by the vote of the holders of not less than 75% of the total voting power of all shares of stock of the corporation entitled to vote in the election of directors, considered for such purpose as one class. -16- EX-27.1 3 h80944ex27-1.txt FINANCIAL DATA SCHEDULE
5 3-MOS MAY-31-2001 JUN-01-2000 AUG-31-2000 85,848 0 64,428 14,000 70,457 214,318 112,718 (57,126) 371,149 34,651 8,667 0 1 512 328,220 371,149 27,141 27,141 20,780 13,163 (1,471) 14 261 (5,592) 667 (6,259) 0 0 0 (7,474) (0.15) (0.15)
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