-----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, JZnOwjKzLt1n3SyAbZe+o9xxMRf9Uu3IY1BU9XJ8UtsVsR/C/hhdC2PrDAVkb60H 9om4C/qMEK5NxwZLOahW9A== 0000950129-01-502593.txt : 20010815 0000950129-01-502593.hdr.sgml : 20010815 ACCESSION NUMBER: 0000950129-01-502593 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INPUT OUTPUT INC CENTRAL INDEX KEY: 0000866609 STANDARD INDUSTRIAL CLASSIFICATION: MEASURING & CONTROLLING DEVICES, NEC [3829] IRS NUMBER: 222286646 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12691 FILM NUMBER: 1711219 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 h89797e10-q.txt INPUT/OUTPUT, INC. - 6/30/01 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 JUNE 30, 2001 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 June 30, 2001 there were 51,266,173 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 JUNE 30, 2001 PART I. Financial Information. Page Item 1. Financial Statements. Consolidated Balance Sheets June 30, 2001 (unaudited) and December 31, 2000.............. 3 Consolidated Statements of Operations Three and six months ended June 30, 2001 (unaudited) and June 30, 2000 (unaudited)................................ 4 Consolidated Statements of Cash Flows Six months ended June 30, 2001 (unaudited) and June 30, 2000 (unaudited).................................................. 5 Notes to Unaudited Consolidated Financial Statements........... 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition........................... 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 18 PART II. Other Information. Item 6. Exhibits and Reports on Form 8-K............................... 19 3 INPUT/OUTPUT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED) ASSETS JUNE 30, DECEMBER 31, 2001 2000 ------------ ------------ Current assets: Cash and cash equivalents......................................... $ 81,637 $ 92,376 Restricted cash................................................ 1,387 1,115 Accounts receivable, net....................................... 45,520 30,920 Current portion notes receivable, net.......................... 4,115 7,889 Inventories.................................................... 79,087 67,646 Deferred income tax asset...................................... 12,519 12,081 Prepaid expenses............................................... 2,757 2,217 --------- --------- Total current assets................................... 227,022 214,244 Long-term notes receivable........................................ 6,166 6,150 Deferred income tax asset......................................... 42,333 42,771 Property, plant and equipment, net................................ 44,734 51,267 Goodwill, net..................................................... 46,724 47,098 Other assets, net................................................. 6,332 4,103 --------- --------- Total assets........................................... $ 373,311 $ 365,633 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt........................... $ 3,006 $ 1,207 Accounts payable............................................... 14,069 8,283 Accrued expenses............................................... 21,416 23,388 --------- --------- Total current liabilities.............................. 38,491 32,878 Long-term debt, net of current maturities......................... 7,312 7,077 Other long-term liabilities....................................... 233 275 Stockholders' equity: Cumulative convertible preferred stock, $0.01 par value; authorized 5,000,000 shares; issued and outstanding 55,000 shares at the end of both periods (liquidation value of $55 million)..................................................... 1 1 Common stock, $0.01 par value; authorized 100,000,000 shares; outstanding 51,266,173 shares and 50,936,420 shares, respectively................................................. 515 512 Additional paid-in capital..................................... 356,927 352,294 Retained deficit............................................... (19,033) (19,422) Accumulated other comprehensive loss........................... (8,238) (5,353) Treasury stock, at cost, 281,398 shares and 243,500 shares, respectively................................................. (2,162) (1,737) Unamortized restricted stock compensation...................... (735) (892) --------- --------- Total stockholders' equity.................................. 327,275 325,403 --------- --------- Total liabilities and stockholders' equity............. $ 373,311 $ 365,633 ========= =========
See accompanying notes to unaudited consolidated financial statements and accompanying independent accountants' review report. 3 4 INPUT/OUTPUT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------------------------------------------- 2001 2000 2001 2000 ----------- ------------ ----------- ----------- Net sales.................................. $ 59,868 $ 26,624 $ 102,277 $ 66,665 Cost of sales.............................. 38,858 22,874 64,557 64,476 ----------- ------------ ----------- ----------- Gross profit...................... 21,010 3,750 37,720 2,189 ----------- ------------ ----------- ----------- Operating expenses: Research and development................ 7,659 7,072 15,196 14,332 Marketing and sales..................... 3,500 2,656 6,819 5,340 General and administrative.............. 4,717 13,411 9,610 10,674 Amortization and impairment of intangibles......................... 1,185 33,598 2,321 35,656 ----------- ----------- ----------- ----------- Total operating expenses......... 17,061 56,737 33,946 66,002 ----------- ----------- ----------- ----------- Earnings (loss) from operations............ 3,949 (52,987) 3,774 (63,813) Interest expense........................... (383) (212) (590) (407) Interest income............................ 1,195 549 2,486 2,465 Other income (expense)..................... (407) 1,553 (100) 1,493 ----------- ----------- ----------- ----------- Income (loss) before income taxes.......... 4,354 (51,097) 5,570 (60,262) Income tax expense......................... 1,370 2,032 2,396 2,156 ----------- ----------- ----------- ----------- Net earnings (loss)........................ 2,984 (53,129) 3,174 (62,418) Preferred dividend......................... 1,395 1,180 2,785 2,338 ----------- ----------- ----------- ----------- Net earnings (loss) applicable to common shares........................... $ 1,589 $ (54,309) $ 389 $ (64,756) =========== =========== =========== =========== Basic earnings (loss) per common share..... $ 0.03 $ (1.07) $ 0.01 $ (1.28) =========== =========== =========== =========== Weighted average number of common shares outstanding............... 50,891,153 50,765,728 50,909,476 50,775,626 =========== =========== =========== =========== Diluted earnings (loss) per common share... $ 0.03 $ (1.07) $ 0.01 (1.28) =========== =========== =========== =========== Weighted average number of diluted common shares outstanding............... 52,178,755 50,765,728 52,176,499 50,775,626 =========== =========== =========== ===========
See accompanying notes to unaudited consolidated financial statements and accompanying independent accountants' review report. 4 5 INPUT/OUTPUT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------- 2001 2000 --------- -------- Cash flows from operating activities: Net earnings (loss)...................................... $ 3,174 $ (62,418) Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Depreciation and amortization............................ 8,894 12,260 Amortization of restricted stock and other stock compensation....................................... 207 (686) Impairment or loss (gain) on disposal of fixed assets.... (64) 4,227 Bad debt collections and loan losses..................... (85) (5,269) Inventory obsolescence................................... -- 8,700 Impairment of intangibles and other assets............... -- 31,596 Changes in assets and liabilities, net of above provisions: Accounts and notes receivable............................ (10,019) 5,438 Inventories.............................................. (11,092) 18,434 Leased equipment......................................... 4,276 Accounts payable and accrued expenses.................... 3,583 199 Income taxes payable/receivable.......................... (1,405) 2,214 Other assets and liabilities............................. (2,519) (1,711) ----------- ----------- Net cash (used in) provided by operating activities...... (5,050) 12,984 ----------- ----------- Cash flows from investing activities: Purchase of property, plant and equipment................ (2,830) (2,157) Cash paid for acquisitions............................... (4,151) -- ----------- ----------- Net cash used in investing activities.................... (6,981) (2,157) ----------- ----------- Cash flows from financing activities: Payments on long-term debt............................... (966) (547) Payments of preferred dividends.......................... (275) (275) Proceeds from exercise of stock options.................. 1,736 280 Proceeds from issuance of common stock to employee Stock Purchase Plan........................... 371 -- Purchase of treasury stock............................... (456) 403 ----------- ----------- Net cash provided by (used in) financing activities...... 410 (139) ----------- ----------- Effect of change in foreign currency exchange rates on cash and cash equivalents............................. 882 531 ----------- ----------- Net increase (decrease) in cash and cash equivalents..... (10,739) 11,219 Cash and cash equivalents at beginning of period......... 92,376 82,749 ----------- ----------- Cash and cash equivalents at end of period............... $ 81,637 $ 93,968 =========== ===========
See accompanying notes to unaudited consolidated financial statements and accompanying independent accountants' review report. 5 6 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION The consolidated balance sheet of Input/Output, Inc. and its subsidiaries (collectively referred to as the "Company" or "I/O") at December 31, 2000 has been derived from the Company's audited consolidated financial statements at that date. The consolidated balance sheet at June 30, 2001, and the consolidated statements of operations for the three and six months ended June 30, 2001 and 2000, and the consolidated statements of cash flows for the six months ended June 30, 2001 and 2000, have been prepared by the Company without audit. In the opinion of management, all adjustments, consisting of normal and recurring adjustments, which are necessary to present fairly the consolidated financial position, results of operations and cash flows have been made. The results of operations for the three and six months ended June 30, 2001 are not necessarily indicative of the operating results for a full year or of future operations. These consolidated financial statements have been prepared using generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and applicable rules of Regulation S-X. Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying consolidated financial statements should be read in conjunction with the Company's Transition Report on Form 10-K for the seven months ended December 31, 2000. Certain amounts previously reported in the consolidated financial statements have been reclassified to conform to the current period's presentation. (2) SEGMENT INFORMATION The Company evaluates and reviews results based on two segments, Land and Marine, to allow for increased visibility and accountability of costs and more focused customer service and product development. The Company measures segment operating results based on earnings (loss) from operations. A summary of segment information for the three and six months ended June 30, 2001 and 2000 is as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------- 2001 2000 2001 2000 --------- --------- -------- -------- Net sales: $ 44,228 $ 18,930 $ 72,041 $ 36,583 Land........................... Marine......................... 15,640 7,694 30,236 30,082 -------- --------- --------- --------- Total.......................... $ 59,868 $ 26,624 $ 102,277 $ 66,665 ======== ========= ========= ========= Depreciation and amortization: Land........................... $ 1,822 $ 9,042 $ 4,107 $ 11,723 Marine......................... 839 26,878 1,752 28,638 Corporate...................... 1,468 1,963 3,035 3,495 -------- --------- -------- --------- Total.......................... $ 4,129 $ 37,883 $ 8,894 $ 43,856 ======== ========= ======== ========== Earnings (loss) from Operations: Land........................... $ 5,652 $ (11,082) $ 5,981 $ (15,642) Marine......................... 2,897 (36,974) 6,984 (27,797) Corporate...................... (4,600) (4,931) (9,191) (20,374) -------- ---------- Total.......................... $ 3,949 $ (52,987) $ 3,774 $ (63,813) ======== ========== ======== =========
JUNE 30, DECEMBER 31, Total assets: 2001 2000 ------------ ------------ Land....................... $142,114 $ 116,554 Marine..................... 72,789 69,897 Corporate.................. 158,408 179,182 -------- ---------- Total...................... $373,311 $ 65,633 ======== ==========
6 7 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. Depreciation and amortization expense is allocated to segments based upon use of the underlying assets. (3) INVENTORIES A summary of inventories is as follows (in thousands):
JUNE 30, DECEMBER 31, 2001 2000 ------------ ------------- Raw materials...................................... $ 46,007 $ 39,988 Work-in-process.................................... 9,709 6,774 Finished goods ................................... 23,371 20,884 ---------- --------- $ 79,087 $ 67,646 ========== =========
(4) NOTES RECEIVABLE The recorded investment in notes receivable for which an allowance for loan loss has been recognized was $12.2 million at June 30, 2001. A summary of notes receivable and allowance for loan loss is as follows (in thousands):
JUNE 30, DECEMBER 31, 2001 2000 ------------ ------------- Notes receivable................................... $ 21,156 $ 24,986 Allowance for loan loss ......................... (10,875) (10,947) ------------ --------- Notes receivable, net ............................. 10,281 14,039 Current portion notes receivable, net ............. 4,115 7,889 ------------ --------- Long-term notes receivable ........................ $ 6,166 $ 6,150 ============ =========
The activity in the allowance for loan loss is as follows (in thousands):
SIX MONTHS ENDED JUNE 30, ---------------------------- 2001 2000 -------- --------- Balance at beginning of period ................. $ 10,947 $ 30,006 Additions charged to costs and expenses......... 568 7,454 Recoveries reducing costs and expenses.......... (440) (16,811) Write-downs charged against the allowance....... (200) (7,042) -------- --------- Balance at end of period ....................... $ 10,875 $ 13,607 ======== =========
(5) EARNINGS (LOSS) PER COMMON SHARE Basic earnings (loss) per share is computed by dividing net earnings (loss) applicable to common stock by the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined on the assumption that outstanding dilutive stock options have been exercised and the aggregate proceeds were used to reacquire common stock using the average price of such common stock for the period. The following table summarizes the calculation of weighted average number of common shares and weighted average number of diluted common shares outstanding for purposes of the computation of basic earnings (loss) per common share and diluted earnings (loss) per common share (in thousands, except share and per share amounts): 7 8
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------------- ------------------------------- 2001 2000 2001 2000 ------------- ------------- ------------ ------------ Net earnings (loss) applicable to common shares........ $ 1,589 $ (54,309) $ 389 $ (64,756) Weighted average number of common shares outstanding.......................................... 50,891,153 50,765,728 50,909,476 50,775,626 Effect of dilutive stock options and other common stock equivalents.................................... 1,287,602 -- 1,267,023 -- ------------- ------------ ------------ ------------- Weighted average number of diluted common shares outstanding.......................................... 52,178,755 50,765,728 52,176,499 50,775,626 ============= ============ ============ ============= Basic earnings (loss) per common share................. $ 0.03 $ (1.07) $ 0.01 $ (1.28) ============= ============= ============ ============== Diluted earnings (loss) per common share............... $ 0.03 $ (1.07) $ 0.01 $ (1.28) ============= ============= ============ ==============
At June 30, 2001 and 2000, 4,996,173 and 5,001,875 shares subject to stock options were considered anti-dilutive and not included in the calculation of diluted earnings (loss) per common share. In addition, the outstanding convertible preferred stock is considered anti-dilutive for all periods shown and is not included in the calculation of diluted earnings (loss) per common share. (6) LONG TERM DEBT In August 1996, the Company obtained a $12.5 million, ten-year term loan secured by certain of its land and buildings. The term loan bears interest at a fixed rate of 7.875% per annum and is repayable in equal monthly installments of principal and interest of $151,439. The total installment payments for principal and interest in each of the next five years will be $1.8 million, with a balance thereafter of $1.2 million. The term loan provides for penalties for pre-payment prior to maturity (see Note 12). In January 2001, in connection with the acquisition of Pelton Company, Inc. ("Pelton") (see Note 9), the Company entered into a $3 million two-year unsecured promissory note payable to the former shareholder of Pelton, bearing interest at 8.5% per year. Principal is payable in quarterly payments of $0.4 million plus interest, with final payment due in February 2003. (7) COMPREHENSIVE EARNINGS (LOSS) The Statement of Financial Accounting Standards ("SFAS") No. 130 Reporting Comprehensive Income, establishes standards for reporting and presentation of comprehensive earnings (loss) and its components. Comprehensive earnings (loss) primarily consists of net earnings (loss) and foreign currency translation adjustment. SFAS No. 130 does not significantly affect the financial position or results of operations of the Company. The components of total comprehensive earnings (loss) are as follows (in thousands):
THREE MONTHS END SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------- -------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Net earnings (loss).................................... $ 2,984 $ (53,129) $ 3,174 $ (62,418) Foreign currency translation adjustment................ (1,425) (1,368) (2,885) (1,821) ----------- ----------- ----------- ----------- Comprehensive earnings (loss).......................... $ 1,559 $ (54,497) $ 289 $ (64,239) =========== =========== =========== ===========
8 9 (8) COMMITMENTS AND CONTINGENCIES In the ordinary course of business, the Company has been named in various lawsuits or threatened actions. While the final resolution of these matters may have an impact on its consolidated financial results for a particular reporting period, the Company believes that the ultimate resolution of these matters will not have a material adverse impact on its financial position, results of operations or liquidity. A significant part of the Company's marketing efforts are focused on areas outside the United States. Foreign sales are subject to special risks inherent in doing business outside of the United States, including the risk of war, civil disturbances, exchange rate fluctuations, embargo and government activities, as well as risks of compliance with U.S. and foreign laws, including tariff regulations and import/export restrictions, which may disrupt markets and affect operating results. Demand for products from customers in developing countries is difficult to predict and can fluctuate significantly from year to year. 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 the adoption of new technologies and purchasing practices. These risks may adversely affect the future operating results and financial position of the Company. In addition, sales to customers in developing countries on extended terms can present heightened credit risks. (9) ACQUISITION On January 3, 2001, the Company acquired all of the outstanding capital stock of Pelton for approximately $6 million cash and a $3 million two-year unsecured promissory note. Pelton is based in Ponca City, Oklahoma and designs, manufactures and sells seismic vibrator control systems, vibrator positioning systems and explosive energy control systems. The acquisition was accounted for by the purchase method, with the purchase price allocated to the fair value of assets purchased and liabilities assumed. The preliminary allocation of the purchase price as of June 30, 2001, including related direct costs, for the acquisition of Pelton was as follows (in thousands): Fair values of assets and liabilities Net current assets .............................. $ 4,688 Property, plant and equipment ................... 373 Intangible assets................................ 4,122 ------- Total allocated purchase price .............. 9,183 Less non-cash consideration - note payable............ 3,000 Less cash of acquired business........................ 2,032 ------- Cash used for business acquisition, net of cash acquired............................................ $ 4,151 =======
The consolidated results of operations of the Company include the results of Pelton from the date of acquisition. The revenues and net income of Pelton prior to the acquisition dates were not material to the Company's consolidated results of operations. (10) SIGNIFICANT AND UNUSUAL CHARGES AND RECOVERIES Significant and unusual pre-tax charges of $4.5 million, net, were recorded during the three months ending March 31, 2000 and included $8.7 million of inventory charges (included in cost of sales) related to the Company's decision to commercialize VectorSeis(TM) digital sensor products having higher technical standards than the products that were previously produced. The Company had decided to commercialize these earlier VectorSeis(TM) products which were since 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 current and expected market conditions. Other charges were $4.2 million of an inventory write-down in the Marine Division (included in cost of sales); $2.4 million of bad debt expense (included in general and administrative expense); $1.3 million of charges related to the employee reduction in workforce worldwide (included in general and administrative expense); and $0.7 million of charges related to legal settlements (included in cost of sales -- $0.3 million, and in general and administrative expense -- $0.4 million). These charges were offset in part by $12.8 million of recoveries attributable to a more favorable than anticipated resolution of a customer's bankruptcy settlement, consisting of a $10.2 million reduction in allowance for loan loss (recorded as a reduction to general and administrative expense) and a $2.6 million reversal of warranty reserves based on this bankruptcy settlement (recorded as a reduction to cost of sales). 9 10 Significant and unusual pre-tax charges of $41.9 million were recorded during the three months ending June 30, 2000 and included a charge of $31.9 million to amortization and impairment of intangibles, reflecting the impairment of certain goodwill recorded in conjunction with the acquisition of manufacturing assets of Western Geophysical in 1995 and the acquisition of CompuSeis, Inc. in 1998. The impairment of the Western Geophysical goodwill principally reflected the then-diminished outlook for the marine towed array seismic sector in general, evidenced by customers' decisions to reduce the size of their marine fleets, and changes in customers' preferences and technology for certain products within that sector. The impairment of the CompuSeis goodwill reflects the result of certain technological changes relating to land seismic systems. Additionally, $10.0 million was charged to general and administrative expense consisting of a $5.0 million charge for settlement of litigation, a $3.6 million loan loss expense, $0.7 million related to the sale of certain idle manufacturing capacity in Europe, and $0.7 million of charges related to employee severance and continued cost reduction efforts worldwide No material special charges were recorded in the three and six months ending June 30, 2001. In response to prevailing seismic industry conditions, the Company, during 2000, began concentrating on lowering its cost structure, consolidating product offerings and reorganizing into a products-based operating structure. The Company continues to evaluate additional restructuring and cost control solutions. Implementing these solutions could result in additional charges against future earnings. (11) CHANGE IN FISCAL YEAR During 2000, the Company changed its fiscal year end from May 31 to a fiscal year ending December 31 of each year. The Company filed a Transition Report on Form 10-K for the transition period ended December 31, 2000. The Company commenced reporting on a calendar year basis with the filing of the Form 10-Q for the quarter ended March 31, 2001. (12) SALE OF REAL PROPERTY Effective June 19, 2001, IPOP Management, Inc., a wholly-owned subsidiary of the Company, entered into an agreement to sell the Company's real property and buildings in Stafford, Texas for $21 million. Closing of the transaction requires satisfaction of certain conditions, including negotiating an acceptable lease with the buyer for the continued use and occupancy of the real property and buildings to be conveyed. Although the Company expects to close the transaction in the quarter ending September 30, 2001, there can be no assurance that all of the conditions to closing will be satisfied prior to that time or at all. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Net sales have traditionally been 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. These factors are affected by expectations regarding the supply and demand for oil and natural gas, energy prices, and discovery and development costs. However, the seismic industry has been adversely affected by surplus seismic data, principally marine "spec" data, used to generate exploration prospects. Other factors which may limit the demand for the Company's products may include, but are not limited to, those described below in Cautionary Statement for Purposes of Forward-Looking Statements -- Continuation of Downturn in Seismic Services Industry Will Adversely Affect Results of Operations and Financial Condition and -- Risk From Significant Amount of Foreign Sales Could Adversely Affect Results of Operations. Results of operations and financial condition have been affected by acquisitions of businesses and significant charges during certain prior periods, which may affect the comparability of the financial information. The following discussion and analysis of results of operations and financial condition should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Form 10-Q and the Company's Transition Report on Form 10-K for the seven months ended December 31, 2000. SUMMARY REVIEW AND OUTLOOK The seismic industry continues to show signs of a broadening recovery from the depressed levels of activity over the past several years. Demand for certain of the Company's land products is expected to remain strong through 2001. However, continued equipment oversupply in the marine seismic fleets should result in only a modest recovery in the marine seismic sector before the end of the year. Total revenue growth for fiscal 2001 is currently anticipated to be 35% to 40% higher than total revenues for calendar 2000. The Company believes its results of operations will reflect a minimal profit for fiscal 2001. 10 11 The Company's key strategies involve optimizing the performance of its core business, bringing key technology initiatives to fruition that support identifiable industry trends, monetizing underutilized assets and growing the business through acquisitions and alliances. The Company is continuing to invest resources and seek improvements in seismic data acquisition technology. The Company's goals for 2001 include commercializing its VectorSeis(TM) technology, further development in land seismic ground electronics, formalization of an alliance with Thomson Marconi P/L to develop a next generation marine seismic data acquisition system, and developing new product offerings in hydrocarbon reservoir monitoring and characterization. The Company finished production of the previously-announced 1,500 VectorSeis(TM) stations and has completed nine surveys with VectorSeis(TM) stations in Canada and the United States. The equipment has operated favorably and the Company expects to make a determination in the third quarter regarding full commercialization of the VectorSeis(TM) platform in its commercial packaging. The Company expects to begin field testing a next generation land data acquisition system by the end of 2001, enabling the Company to include a lightweight land system in its product portfolio. The Company announced an agreement in principle to form an alliance with Thomson Marconi P/L to develop a next generation marine seismic data acquisition system. The parties are working to complete due diligence and formalize the alliance, while at the same time working with several customers to finalize the design specifications of the new system. The Company has created a new business unit for its MEMS (micro-electromechanical systems) facility in Stafford, Texas during 2001 to provide for the production of MEMS components for VectorSeis(TM) products and also to seek additional applications and revenue sources for its MEMS facility's capacity and technology. With regards to the proposed activities described above, no assurances can be made that the Company will implement any of these potential actions, and if so, whether any of them will prove successful or the degree of that success. FISCAL YEAR CHANGE During 2000, the Company changed its fiscal year end from May 31 to a fiscal year ending December 31 of each year. The Company filed a Transition Report on Form 10-K for the transition period ended December 31, 2000. The Company commenced reporting on a calendar year basis with the filing of the Form 10-Q for the quarter ended March 31, 2001. RESULTS OF OPERATIONS Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000 Net Sales: Net sales of $59.9 million for the three months ended June 30, 2001 increased $33.2 million, or 125%, compared to the corresponding period one year prior. The increase is primarily due to increased demand for products produced by the Land and Marine Divisions. Net sales of $44.2 million in the Land Division increased $25.3 million, or 134%, as a result of improving industry conditions and the acquisition of Pelton. Net sales of $15.6 million in the Marine Division increased $7.9 million, or 103%, compared to the corresponding period one year prior. The increase in net sales of the Marine Division was primarily due to the completion of a large sale in the current quarter. Cost of Sales: Cost of sales of $38.9 million for the three months ended June 30, 2001 increased $16.0 million, or 70%, compared to the corresponding period one year prior due to the increased net sales. Cost of sales of the Land Division was $29.4 million and cost of sales of the Marine Division was $9.5 million. Gross Profit. Gross profit of $21.0 million for the three months ended June 30, 2001 increased $17.3 million compared to the corresponding period one year prior. Gross profit percentage for the three months ended June 30, 2001 was 35% compared to 14% during the corresponding period one year prior. Contributing to the higher 2001 gross profit percentage was the return to a more normal pricing regime, success in reducing costs and improving absorption of fixed and semi-fixed overhead, as well as the continued elimination from the sales mix of products that had been highly discounted during recent periods of weaker demand. Research and Development: Research and development expense of $7.7 million for the three months ended June 30, 2001 increased $0.6 million, or 8%, compared to the corresponding period one year prior. Research and development expense has remained relatively constant due to the increase in VectorSeis(TM) development costs partially offset by a significantly narrowed focus on a 11 12 smaller number of technology developments for land, marine and reservoir applications. All costs for the 1,500-station prototype VectorSeis(TM) fleet were expensed in the period incurred. Marketing and Sales: Marketing and sales expense of $3.5 million for the three months ended June 30, 2001 increased $0.8 million, or 32%, compared to the corresponding period one year prior. The increase is primarily related to increased net sales and higher gross profit percentage on current period net sales, which has, in turn, led to higher commission costs. General and Administrative: General and administrative expense of $4.7 million for the three months ended June 30, 2001 decreased $8.7 million, or 65%, compared to the corresponding period one year prior. Results for the three months ended June 30, 2000 included significant and unusual charges of $10.0 million due to an unfavorable legal settlement, loan loss expense, work-force reductions and loss on the sale of idle facilities. Excluding the effect of these significant and unusual charges in 2000, general and administrative expense increased $1.3 million in 2001. This increase in general and administrative expense is primarily attributable to increased compensation expense, reflecting estimated accruals for profit-based bonuses this year, and the inclusion of Pelton in the current quarter's results. Amortization and Impairment of Intangibles: Amortization and impairment of intangibles of $1.2 million for the three months ended June 30, 2001 decreased $32.4 million, or 96%, compared to the corresponding period one year prior. The decrease is primarily due to the impairment of $31.9 million of goodwill recorded during the three months ended June 30, 2000. Total Net Interest and Other Income: Total net interest and other income of $0.4 million for the three months ended June 30, 2001 decreased $1.5 million, or 79%, compared to the corresponding period one year prior primarily as a result of decreasing interest rates on lower cash balances and lower interest-bearing note receivable balances. Income Tax Expense: Income tax expense of $1.4 million for the three months ended June 30, 2001 decreased $0.7 million, compared to the corresponding period one year prior. Income tax expense decreased from the prior period despite higher income before taxes because: (i) the Company returned to profitability and is currently recording an income tax provision reflective of the anticipated year-end effective tax rate, and (ii) during the prior period the Company was profitable in certain foreign tax jurisdictions but recognized no offsetting benefit from domestic net operating losses. Income tax expense reflects an estimated 43% effective rate for the year. In assessing the realizability of its deferred income tax assets, the Company considered 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. The Company considered 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, the Company will need to generate future taxable income of approximately $155 million over the next 19-20 years. Although the Company has experienced significant losses in recent fiscal years, taxable income for the years 1996 through 1998 aggregated approximately $128 million. Regardless, 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 a return to levels of profitability that existed prior to the Company's fiscal year ended May 31, 1999. Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000 Net Sales: Net sales of $102.3 million for the six months ended June 30, 2001 increased $35.6 million, or 53%, compared to the corresponding period one year prior. The increase is primarily due to increased demand for products produced by the Land Division. Net sales of $72.0 million in the Land Division increased $35.5 million, or 97%, as a result of improving industry conditions and the acquisition of Pelton. Net sales of $30.2 million in the Marine Division increased $0.2 million, or 1%, compared to the corresponding period one year prior. Cost of Sales: Cost of sales of $64.6 million for the six months ended June 30, 2001 increased $0.1 million, or 0.1%, compared to the corresponding period one year prior. Cost of sales of the Land Division was $47.9 million and cost of sales of the Marine Division was $16.7 million. Results for the six months ended June 30, 2000 included $10.6 million, net, in significant and unusual charges for inventory write-downs partially offset by favorable legal settlements. Excluding the effect of these significant and unusual net charges, cost of sales increased $10.7 million, or 20%, compared to the corresponding period one year prior, due to higher levels of net sales. 12 13 Gross Profit. Gross profit for the six months ended June 30, 2001 increased $35.5 million compared to the corresponding period one year prior. Gross profit percentage for the six months ended June 30, 2001 was 37%. Excluding the effect of significant and unusual charges in the prior period, gross profits for the six months ended June 30, 2001 increased $24.9 million compared to the corresponding period one year prior. Excluding the effect of these significant and unusual charges, gross profit percentage for the six months ended June 30, 2000 was 19%. Contributing to the higher 2001 gross profit percentage was the return to a more normal pricing regime, success in reducing costs and improving absorption of fixed and semi-fixed overhead, as well as the continued elimination from the sales mix of products that had been highly discounted during recent periods of weaker demand. Research and Development: Research and development expense of $15.2 million for the six months ended June 30, 2001 increased $0.9 million, or 6%, compared to the corresponding period one year prior. Research and development expense has remained relatively constant due to increased VectorSeis(TM) development costs partially offset by a significantly narrowed focus on a smaller number of technology developments for land, marine and reservoir applications. All costs for the 1,500-station prototype VectorSeis(TM) fleet were expensed in the period incurred. Marketing and Sales: Marketing and sales expense of $6.8 million for the six months ended June 30, 2001 increased $1.5 million, or 28%, compared to the corresponding period one year prior. The increase is primarily related to increased net sales and higher gross profit percentage on current period net sales, which has, in turn, led to higher commission costs. General and Administrative: General and administrative expense of $9.6 million for the six months ended June 30, 2001 decreased $1.1 million, or 10%, compared to the corresponding period one year prior. Results for the six months ended June 30, 2000 included significant and unusual net charges of $3.9 million due to bad debt expense, work-force reductions, unfavorable legal settlements, loan loss expense and loss on the sale of idle facilities, offset by favorable legal settlements. Excluding the effect of these significant net charges in the prior period, general and administrative expense increased $2.8 million in 2001. This increase in general and administrative expense is partially attributable to increased compensation expense, reflecting estimated accruals for profit-based bonuses this year, and the inclusion of Pelton in the current quarter's results. Amortization and Impairment of Intangibles: Amortization and impairment of intangibles of $2.3 million for the six months ended June 30, 2001 decreased $33.3 million, or 93%, compared to the corresponding period one year prior. The decrease is primarily due to the impairment of $31.9 million of goodwill recorded during the six months ended June 30, 2000. Total Net Interest and Other Income: Total net interest and other income of $1.8 million for the six months ended June 30, 2001 decreased $1.8 million, or 49%, compared to the corresponding period one year prior primarily as a result of decreasing interest rates on lower cash balances and lower interest bearing note receivable balances. Income Tax Expense: Income tax expense of $2.4 million for the six months ended June 30, 2001 increased $0.2 million, compared to the corresponding period one year prior. Income tax expense did not differ materially from the prior period despite higher income before taxes because: (i) the Company returned to profitability and is currently recording an income tax provision reflective of the anticipated year-end effective tax rate, and (ii) during the prior period the Company was profitable in certain foreign tax jurisdictions but recognized no offsetting benefit from domestic net operating losses. Income tax expense reflects an estimated 43% effective rate for the year. In assessing the realizability of its deferred income tax assets, the Company considered 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. The Company considered 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, the Company will need to generate future taxable income of approximately $155 million over the next 19-20 years. Although the Company has experienced significant losses in recent fiscal years, taxable income for the years 1996 through 1998 aggregated approximately $128 million. Regardless, 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 a return to levels of profitability that existed prior to the Company's fiscal year ended May 31, 1999. Preferred Stock Dividends: Preferred stock dividends for the three and six months ended June 30, 2001 and 2000 are related to outstanding Series B and Series C Preferred Stock. The dividends are recognized as a charge to retained earnings at the rate of 8% per 13 14 year, 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 three months ended June 30, 2001 was $1.4 million, compared to $1.2 million for the corresponding period one year prior. The preferred stock dividend charge for the six months ended June 30, 2001 was $2.8 million, compared to $2.3 million for the corresponding period one year prior. Liquidity and Capital Resources The Company has typically financed operations from internally generated cash and funds from equity financings. Cash and cash equivalents were $81.6 million at June 30, 2001, a decrease of $10.7 million, or 12%, compared to December 31, 2000. The decrease is due to negative cash flows from operating activities and investing activities for the six months ended June 30, 2001. Net cash used in operating activities was $5.1 million for the six months ended June 30, 2001 compared to the net cash provided by operating activities of $13.0 million for the corresponding period one year prior. The changes in working capital items for the six months ended June 30, 2001 represented a $17.2 million use of cash, due primarily to increases in receivables and inventories as a result of increased net sales and anticipated higher sales levels in succeeding quarters. The various working capital accounts can vary in amount substantially from period to period, depending upon levels of sales, product mix sold, demand for products, percentages of cash versus credit sales, collection rates, inventory levels, and general economic and industry factors. Excluding changes in working capital items, operating cash flow was a positive $12.1 million. Net cash flow used in investing activities was $7.0 million for the six months ended June 30, 2001, an increase of $4.8 million, or 224%, compared to the corresponding period one year prior. The principal investing activities were capital expenditure projects and the purchase of all the capital stock of Pelton. Planned capital expenditures for entire fiscal year of 2001 of approximately $8.0 million include the purchase of advanced manufacturing machinery and additional equipment for the rental equipment fleet. Cash flow provided by financing activities was a positive $0.4 million for the six months ended June 30, 2001, an increase of $0.5 million compared to the corresponding period one year prior. The Company believes the combination of existing working capital, current cash on hand and access to other financing sources will be adequate to meet anticipated capital and liquidity requirements for the foreseeable future. RECENT ACCOUNTING PRONOUNCEMENTS SFAS No. 141 entitled "Business Combinations" was issued in June 2001 and becomes effective July 1, 2001. SFAS No. 141 requires that all business combinations be accounted for using the purchase method of accounting, which requires that acquisitions be recorded at fair value as of the date of acquisition. The pooling-of -interests method of accounting allowed under prior standards, which reflected business combinations using historical financial information, is now prohibited. SFAS No. 142 entitled "Goodwill and Other Intangible Assets" was also issued in June 2001, in concert with SFAS No. 141. SFAS No. 142 becomes effective for the Company on January 1, 2002. On that date, goodwill will no longer be amortized, but will be tested for impairment using a fail value approach. Currently existing goodwill ($46.7 million at June 30, 2001) will continue to be amortized through December 31, 2001. Any goodwill recorded by the Company from an acquisition during the remainder of 2001 will not be subject to amortization. SFAS No. 142 requires goodwill to be tested for impairment at a level referred to as a reporting unit, generally one level lower than the Company's reportable segments. SFAS No. 142 requires the Company to perform the first goodwill impairment test on all reporting units within six months of adoption. The first step is to compare the fair value with the book value of a reporting unit. If the fair value of the reporting unit is less than its book value, the second step will be to calculate the impairment loss, if any. Any impairment loss from the initial adoption of SFAS No. 142 will be recognized as a change in accounting principle. After the initial adoption, goodwill of a reporting unit shall be tested for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company is still reviewing SFAS No. 142 to determine the effect, if any, of the initial goodwill impairment testing. During the year ended December 31, 2000 and the six months ended June 30, 2001, the Company recorded goodwill amortization of $4.5 million and $2.2 million, respectively. These amounts, less related income tax effects, would not have been recorded under SFAS No. 142. 14 15 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. The Company owns facilities and manufactures components for systems in one member country. The transition period for the introduction of the Euro is between January 1, 1999 and June 30, 2002. The Company continues to address the issues involved with the introduction of the Euro. The more important issues include: converting information technology systems; reassessing currency risk; and processing tax and accounting records. Based on progress to date in reviewing this matter, the Company believes that the introduction of the Euro has not and will not have a significant impact on its business affairs and its processing of business and accounting records. CREDIT RISK A continuation of weak demand for the services of certain customers of the Company will further strain their revenues and cash resources, thereby resulting in lower sales levels and a higher likelihood of defaults in their timely payment of their obligations under credit sales arrangements. Increased levels of payment defaults with respect to credit sales arrangements could have a material adverse effect on the Company's results of operations. The combined gross trade accounts receivable and trade notes receivable balance as of June 30, 2001, from customers in Russia and other former Soviet Union countries was approximately $12.6 million and was approximately $9.0 million from customers in Latin American countries. As of June 30, 2001 the total allowance for doubtful accounts (foreign and US) was $1.6 million and the allowance for loan losses was $10.9 million. During the six months ended June 30, 2001, there were $10.8 million of sales to customers in Russia and other former Soviet Union countries (substantially all in the form of cash sales backed by irrevocable letters of credit), $1.8 million of sales to customers in Latin American countries and $4.1 million of sales to customers in China. All terms of sale for these foreign receivables are denominated in US dollars. Russia and certain Asian and Latin America countries have experienced economic problems and uncertainties and devaluations of their currencies in recent years. To the extent that economic conditions in the Former Soviet Union, Latin America, China or elsewhere negatively affect future sales to customers in those regions or the collectibility of existing receivables, future results of operations, liquidity and financial condition may be adversely affected. 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 the Company and its representatives in other reports, filings with the Securities and Exchange Commission, press releases, conferences, conference calls, 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 expected revenues and profitability for fiscal 2001, other statements concerning future expected results of operation, including 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 lightweight land seismic systems, products incorporating the Company's VectorSeis(TM) technology, marine seismic data acquisition system through a proposed alliance with Thomson Marconi P/L, further applications and revenue sources for the Company's MEMS technology and facility capacity; future demand for I/O products; anticipated product releases and technological advances; the future mix of business and future asset recoveries; the realization of deferred tax assets; the effects of and expected benefits from acquisitions and strategic alliances; the effect of changes in accounting standards on the results of operations and financial condition; the effect of the Euro's introduction; the inherent unpredictability of adversarial proceedings and other contingent liabilities; future capital expenditures and I/O's future financial condition; future energy industry and seismic services industry conditions; and world economic conditions, including those in the Former Soviet Union, Latin America and Asian countries. These statements are based on current expectations and involve a number of risks and uncertainties, including those set forth below and elsewhere in this Quarterly Report on Form 10-Q. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove 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 actual results and cause actual results to differ materially from those results which might be projected, forecast, estimated or budgeted in such forward-looking statements include, but are not limited to, the following: 15 16 Failure to Develop Products and Keep Pace with Technological Change Will Adversely Affect Results of Operations. The markets for the Company's products are characterized by rapidly changing technology and frequent product introductions. Whether the Company can develop and produce successfully, on a timely basis, new and enhanced products that embody new technology, meet evolving industry standards and practices, and achieve levels of capability and price that are acceptable to customers, will be significant factors in the ability to compete in the future. There can be no assurance that the Company will not encounter resource constraints or technical or other difficulties that could delay introduction of new products in the future. No assurances can be given as to whether any new products incorporating the VectorSeis(TM) digital sensor (or any other product introductions or enhancements) will be commercially feasible or accepted in the marketplace by present or future customers. If the Company is unable, for technological or other reasons, to develop competitive products in a timely manner in response to changes in the seismic data acquisition industry or other technological changes, business and operating results will be materially and adversely affected. In addition, continuing development of new products inherently carries the risk of inventory obsolescence with respect to older products. Updates and upgrades in 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 consolidation, as well as continual and rapid changes in technology. Competitors for land and marine seismic equipment include, among others, Fairfield Industries; Geo-X Systems, Limited; JGI Incorporated; OYO Geospace Corporation; Bolt Technology Corporation; Teledyne Brown Engineering, an affiliate of Allegheny Teledyne Company; Thomson Marconi Sonar P/L ("TMS"); Geoscience Corp. and Societe d'etudes Recherches et Construction Electroniques ("Sercel"), both affiliates of Compagnie General de Geophysique (CGG). Unlike I/O, companies such as Sercel and Geoscience Corp. possess the advantage of selling to an affiliated seismic contractor. Competition in the industry is expected to intensify and could adversely affect future results. Several competitors have greater name recognition, more extensive engineering, manufacturing and marketing capabilities, and greater financial, technological and personnel resources. In addition, certain companies in the industry have expanded and improved their product lines or technologies in recent years. Specifically, the recent introduction by one competitor of a lightweight land seismic system has had an adverse effect on the Company's net sales in recent periods. In addition, one of the Company's competitors has introduced a marine solid streamer product, and the Company believes another competitor is developing or has developed a similar product. Currently, the Company does not have a competitive solid streamer product offering and does not intend to develop or produce one. The Company is currently negotiating a strategic alliance with TMS to jointly market and develop marine seismic data acquisition systems incorporating solid streamers. There can be no assurance that an agreement with TMS can be finalized, or if so, whether the alliance's objectives can be realized. Therefore, the Company cannot predict whether it will be able to market a solid streamer in the near future. The Company's net sales of marine streamers have been, and will continue to be, adversely affected to the extent customers prefer solid streamers over the Company's liquid filled product. There can be no assurance that the Company will be able to compete successfully in the future with existing or new competitors. Pressures from competitors offering lower-priced products or products employing new technologies could result in future price reductions and lower margins. A continuation of the trend toward consolidation and concentrated buying power in the oil field services industry could also have an adverse effect on the demand for the Company's products and services. Continuation of Downturn in Seismic Services Industry Will Adversely Affect Results of Operations and Financial Condition. Demand for the Company's products is dependent upon the level of worldwide oil and gas exploration and development activity and the available inventory of seismic data used to generate exploration prospects. 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 the Company's control. Despite the recovery in commodity prices since February 1999, energy producers' continuing concerns over the sustainability of higher prices for hydrocarbon production has resulted in weak demand for seismic data acquisition equipment. Other factors which have negatively impacted demand for products have been the weakened financial condition of many 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 competitors and customers, and the destabilized economies in many developing countries. The Company therefore expects that any turnaround for the seismic equipment market will occur later than for other sectors of the energy services industry. 16 17 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 products will have a material adverse effect on results of operations and financial condition. No assurances can be given as to future levels of worldwide oil and natural gas prices, the extent of the oversupply in "spec" seismic data , the future level of activity in worldwide oil and gas exploration and development and their relationship(s) to the demand for the Company's products. Additionally, no assurances can be given that efforts to reduce and contain costs will be sufficient to offset the effect of the expected continued lower levels of net sales until industry conditions improve. 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 the Company's 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, exchange rate fluctuations, embargo, and government activities, as well as 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 exported. The Company may, from time to time, require export licenses and there can be no assurance that the Company will not experience difficulty in obtaining such licenses required in connection with export sales. Demand for the Company's 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. 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 the slow rate of adoption of new technologies and regular, transparent purchasing practices. These risks may adversely affect future operating results and the Company's financial position. In addition, sales to customers in developing countries on extended terms present heightened credit risks for the reasons discussed above. The Company is required to convert to the Euro currency at its facility located in one of the European Union member countries, and although the Company does not currently anticipate any problems with such conversion, there can be no assurance that the problems actually encountered in the Euro conversion will not be more pervasive than those currently anticipated by management. Dependence on Key and Technical Personnel. Future success depends upon the continued contributions of personnel, particularly management personnel, many of whom would be difficult to replace. Success will also depend on the Company's ability to attract and retain skilled employees. Changes in personnel, particularly technical personnel, could adversely affect operating results and 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 the Company. A relatively small number of customers have accounted for a large portion of net sales, although the degree of sales concentration with any one customer has varied from fiscal year to year. During the six months ended June 30, 2001, four customers (Western Geco, Veritas DGC, Schlumberger, and PGS) accounted for approximately 53% of net sales. The loss of any one of these customers could have a material adverse effect on net sales, the results of operation and financial condition of the Company. Significant Payment Defaults under Sales Arrangements Could Adversely Affect the Company. The Company often sells to customers on extended-term arrangements. Significant payment defaults by customers could have a material adverse effect on the Company's financial position and results of operations. A significant portion of trade notes and accounts receivable balance as of June 30, 2001 was attributable to sales made in the former Soviet Union, Latin American and Asian countries. Risks Related to Gross Profit. Gross profit percentage is a function of pricing pressures from Company customers and 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 profit. 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 inability to obtain items at reasonable prices, as well as unavailability of skilled labor and manufacturing under-absorption due to low production volumes, may also continue to affect the cost of sales and result in fluctuations of gross profit percentages in future periods. Risks Related to Acquisitions. The Company may make further acquisitions or strategic partnerships in the future. Acquisitions and alliances require significant financial and management resources both at the time of the transaction and during the process of integrating the newly acquired business into current operations. Operating results could be adversely affected if the Company is 17 18 unable to successfully integrate newly acquired companies into operations. Structural changes in 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 conclude as planned. Future acquisitions could also result in issuance of equity securities or the rights associated with the equity securities, which could potentially dilute earnings per share. In addition, future acquisitions could result in the incurrence of additional debt, taxes, or contingent liabilities, and amortization expenses related to goodwill and other intangible assets. These factors could adversely affect future operating results and the Company's financial position. Risks Related to Government Regulations and Product Certification. The Company's operations are subject to laws, regulations, government policies and product certification requirements worldwide. Changes in such laws, regulations, policies, or requirements could affect the demand for 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 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 the Company from participating in certain business activities in those countries. These constraints may adversely affect opportunities for business in those countries. Failure to Protect Intellectual Property Will Adversely Affect Operations. The Company believes that technology is a primary basis of competition in the industry. Although the Company currently holds certain intellectual property rights relating to its product lines, there can be no assurance that these rights will not be challenged by third parties or that the Company will obtain additional patents or other intellectual property rights in the future. Additionally, there can be no assurance that efforts to protect its trade secrets will be successful or that others will not independently develop similar products or design around any of the intellectual property rights owned by the Company or that the Company will be precluded by others' patent claims. Disruption in Vendor Supplies Will Affect Financial Results. The Company's manufacturing process requires a high volume of quality components. Certain components used by the Company are currently provided by only one supplier. The Company may, from time to time, experience supply or quality control problems with suppliers, and such problems could significantly affect the Company's ability to meet production and sales commitments. 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 and increases in component costs and reduced control over delivery schedules; any of which could adversely affect future financial results. Risks Related to Timing of Product Shipments Could Result in Significant Quarterly Fluctuations. Due to the relatively high sales price of many 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. A substantial portion of the Company's net sales in any period may result from shipments during the latter part of a period. Because the Company establishes its sales and operating expense levels based on 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 Stock Price. In recent years, the stock market in general, and the market for energy and technology stocks in particular, including the Company's common stock, have experienced extreme price fluctuations. There is a risk that future stock price fluctuations could impact Company operations. Stock price declines could affect the Company's ability to successfully attract and retain qualified personnel, complete desirable business combinations or accomplish financing or similar transactions in the future. The Company has historically not paid, and does not intend to pay in the foreseeable future, cash dividends on common stock. NOTE: THE FOREGOING REVIEW OF FACTORS PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SHOULD NOT BE CONSTRUED AS EXHAUSTIVE. IN ADDITION TO THE FOREGOING, THE COMPANY WISHES TO REFER READERS TO OTHER FACTORS DISCUSSED ELSEWHERE IN THIS REPORT AS WELL AS OTHER FILINGS AND REPORTS WITH THE SEC FOR A FURTHER DISCUSSION OF RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH MAY BE MADE TO REFLECT THE EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company may, from time to time, be exposed to market risk, which is the potential loss arising from adverse changes in market prices and rates. The Company traditionally has not entered into significant derivative or other financial instruments. The 18 19 Company is not currently a borrower under any material credit arrangements which feature fluctuating interest rates. Market risk could arise from changes in foreign currency exchange rates. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) List of Documents Filed. 3.3 Amended and Restated Bylaws. 10.27 Sale and Purchase Agreement by and between IPOP Management, Inc. as Seller and N.L. Ventures III Stafford, L.P. and Assigns, as Purchaser, effective as of June 19, 2001. 15.1 Acknowledgement Letter Regarding Unaudited Interim Financial Information from KPMG LLP. 99.1 Independent Accountants' Review Report. (b) Reports on Form 8-K. None. 19 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Stafford, State of Texas, on August 14, 2001. INPUT/OUTPUT, INC. August 14, 2001 By /s/ MARTIN DECAMP - --------------- ----------------------------------- (Date) Chief Accounting Officer (principal executive officer) 20 21 EXHIBIT NUMBER DESCRIPTION - ------ ----------- 3.3 Amended and Restated Bylaws. 10.27 Sale and Purchase Agreement by and between IPOP Management, Inc. as Seller and N.L. Ventures III Stafford, L.P. and Assigns, as Purchaser, effective as of June 19, 2001. 15.1 Acknowledgement Letter Regarding Unaudited Interim Financial Information from KPMG LLP. 99.1 Independent Accountants' Review Report. EX-3.3 3 h89797ex3-3.txt AMENDED BYLAWS 1 EXHIBIT 3.3 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-10.27 4 h89797ex10-27.txt SALE AND PURCHASE AGREEMENT - IPOP MANAGEMENT, INC 1 SALE AND PURCHASE AGREEMENT BY AND BETWEEN IPOP MANAGEMENT, INC. AS SELLER AND N.L. VENTURES III STAFFORD, L.P. AND ASSIGNS, AS PURCHASER FOR THE PROJECT KNOWN AS THE INPUT/OUTPUT FACILITIES 11104 WEST AIRPORT BOULEVARD 12300 CHARLES E. SELECMAN DRIVE 12400 CHARLES E. SELECMAN DRIVE STAFFORD, FORT BEND COUNTY, TEXAS 2 TABLE OF CONTENTS RECITALS...................................................................................... -1- ARTICLE 1 DEFINITIONS................................................................. -1- ARTICLE 2 PROPERTY.................................................................... -2- 2.1 Realty.............................................................. -2- 2.2 Personalty.......................................................... -2- 2.3 Incidental Rights................................................... -2- 2.4 Plans and Reports................................................... -3- 2.5 The Project......................................................... -3- ARTICLE 3 EARNEST MONEY AND INDEPENDENT CONTRACT CONSIDERATION........................ -3- 3.1 Earnest Money....................................................... -3- 3.2 Independent Contract Consideration.................................. -4- ARTICLE 4 PURCHASE PRICE.............................................................. -4- 4. Total Purchase Price................................................ -4- 4.2 Deduction from Purchase Price....................................... -4- ARTICLE 5 SURVEY...................................................................... -4- 5.1 Survey.............................................................. -4- 5.2 Remedies for Failure to Deliver Survey.............................. -5- ARTICLE 6 TITLE COMMITMENT AND CONDITION OF TITLE..................................... -6- 6.1 Title Commitment.................................................... -6- 6.2 UCC Report.......................................................... -6- 6.3 Disclosure of Exceptions by Title Commitment, Survey and UCC Report. -6- ARTICLE 7 ENVIRONMENTAL STUDIES AND REMEDIATION ACTIVITIES............................ -7- 7.1 Studies............................................................. -7- 7.2 Remediation......................................................... -7- ARTICLE 8 COVENANTS AND CONDITIONS PRECEDENT.......................................... -8- 8.1 Covenants........................................................... -8- 8.3 Purchaser's Rights if Conditions Not Satisfied...................... -11-
-i- 3 ARTICLE 9 REPRESENTATIONS, WARRANTIES, COVENANT AND AGREEMENTS OF SELLER............... -11- ARTICLE 10 REPRESENTATIONS AND WARRANTIES OF PURCHASER.................................. -16- ARTICLE 11 CLOSING...................................................................... -17- 11.1 Closing Date........................................................ -17- 11.2 Items to be Delivered by Seller on Closing Date..................... -17- 11.3 Items Delivered By Purchaser on Closing Date........................ -19- 11.4 Closing Costs and Attorneys' Fees................................... -20- 11.5 Prorations.......................................................... -20- ARTICLE 12 DESTRUCTION, DAMAGE OR CONDEMNATION.......................................... -21- ARTICLE 13 REAL ESTATE COMMISSIONS...................................................... -21- ARTICLE 14 NOTICES...................................................................... -22- ARTICLE 15 DEFAULTS AND REMEDIES........................................................ -23- 15.1 Seller's Remedies on Purchaser's Default............................ -23- 15.2 Purchaser's Remedies on Seller's Default............................ -24- ARTICLE 16 INDEMNITY Intentionally Deleted........................................................ -24- ARTICLE 17 SPECIAL PROVISIONS........................................................... -24- 17.1 Financing........................................................... -24- 17.2 Master Lease........................................................ -25- ARTICLE 18 REVIEW PERIOD................................................................ -25- ARTICLE 19 MISCELLANEOUS................................................................ -26- 19.1 Disclosures......................................................... -26- 19.2 Cooperation; Further Documents...................................... -26- 19.3 No Partnership...................................................... -26- 19.4 Savings Clause...................................................... -27- 19.5 Survival............................................................ -27- 19.6 Governing Law....................................................... -27- 19.7 Cumulative Rights................................................... -27- 19.8 No Waiver By Conduct................................................ -27- 19.9 Entire Agreement.................................................... -27- 19.10 Assignment.......................................................... -28- 19.11 Counterparts........................................................ -28- 19.12 Binding Effect...................................................... -28-
-ii- 4 19.13 Time................................................................ -28- 19.14 Captions............................................................ -28- 19.15 Pronouns............................................................ -28- 19.16 Construction of Agreement........................................... -28- 19.17 Third Party Beneficiaries........................................... -28- 19.18 Recordation......................................................... -29- 19.19 Limitation on Damages............................................... -29- 19.20 Contingent Offers................................................... -29- ANNEX A General Definitional Provisions.............................................. Annex A-1 EXHIBIT A LAND DESCRIPTION...................................................................... Exhibit A-1 EXHIBIT B SURVEYOR'S CERTIFICATE............................................................... Exhibit B-1 EXHIBIT C ESTOPPEL CERTIFICATE.................................................................. Exhibit C-1 EXHIBIT D SPECIAL WARRANTY DEED................................................................. Exhibit D-1 EXHIBIT E BILL OF SALE AND ASSIGNMENT........................................................... Exhibit E-1 SCHEDULE 2.2 Personalty................................................................... Schedule 2.2-1 SCHEDULE 2.3(a) Property Agreements.......................................................... Schedule 2.3(a)-1 SCHEDULE 2.3(b) Permits...................................................................... Schedule 2.3(b)-1
-iii- 5 SALE AND PURCHASE AGREEMENT THIS SALE AND PURCHASE AGREEMENT (this "Agreement") is made and entered into by and between IPOP MANAGEMENT, INC., a Delaware corporation (herein referred to as "Seller") and N.L. VENTURES III STAFFORD, L.P., a Texas limited partnership, and assigns (herein referred to as "Purchaser"), to be effective as of the date a fully executed original counterpart of this Agreement is delivered to and received by the Title Company (the "Effective Date"). RECITALS A. Seller is the owner of certain real property and improvements located at 11104 West Airport Boulevard, 12300 Charles E. Selecman Drive and 12400 Charles E. Selecman Drive in the City of Stafford, Fort Bend County, Texas, which are more particularly described in this Agreement as the "Project." B. The Project is currently master leased and predominantly occupied by Input/Output, Inc. ("I/O") pursuant to that certain Master Commercial Lease Agreement ("I/O Master Lease") dated August 29, 1996, between Seller and I/O; however, the portion not occupied by I/O is currently subleased by I/O to those certain tenants (collectively, the "Tenants") pursuant to those certain leases more particularly described and set forth in Schedule 2.3(c) (collectively, the "Leases"). C. Seller desires to sell to Purchaser, and Purchaser desires to purchase from Seller, the Project, upon and subject to the terms and conditions hereinafter set forth, including without limitation, the condition that at Closing Seller and I/O shall terminate the I/O Master Lease and Purchaser and I/O shall enter into a long term "absolute net" lease of the Project with Purchaser as landlord and I/O as tenant (the "Master Lease") without termination of the Leases. AGREEMENTS For and in consideration of the premises, the respective covenants and agreements herein set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confessed, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS For purposes of this Agreement, unless otherwise defined herein or the context otherwise requires, capitalized terms used in this Agreement shall have the respective meanings assigned to them in Annex A attached hereto and made a part hereof for all purposes. 6 ARTICLE 2 PROPERTY Subject to the terms and provisions hereof, and for the consideration herein set forth, Seller agrees to sell, and Purchaser agrees to purchase, all of the following: 2.1 Realty. All those certain tracts, pieces or parcels of land described in Exhibit A attached hereto and made a part hereof for all purposes (herein referred to as the "Land"), together with the buildings, structures, fixtures, including all gas and electric fixtures; appliances and wiring; engines; boilers; elevators; escalators; incinerators; motors; dynamos; heating, ventilation and air conditioning equipment (including, but not limited to, all air handles, compressors, chillers, lines, valves, and ducts serving the Property); sinks, commodes, urinals, pipes, valves, drains, other plumbing fixtures and equipment; water closets; basins; pipes; electrical systems; faucets; fire prevention and extinguishing apparatus; central music and public address systems; security locks, alarms, systems and equipment; dock levelers; and all spare parts, materials and supplies for all of the foregoing (except for I/O's equipment, personal property, furnishings and trade fixtures), paving, curbing, trees, shrubs, plants, and other improvements and landscaping of every kind and nature presently situated on, in, or under, or hereafter erected or installed or used in, on, or about the Land (herein collectively referred to as the "Improvements"), and all rights and appurtenances pertaining thereto, including, but not limited to, all right, title and interest, if any, of Seller in and to the following: (i) any land in the bed of any street, road or avenue open or proposed in front of or adjoining the Land; (ii) any rights-of-way, rights of ingress or egress or other interests in, on, or to, any land, highway, street, road, or avenue, open or proposed, in, on, or across, in front of, abutting or adjoining the Land, and any awards made, or to be made in lieu thereof, and in and to any unpaid awards for damage thereto by reason of a change of grade of any such highway, street, road, or avenue; (iii) any easement across, adjacent to or benefitting the Land, existing or abandoned; (iv) all sewage treatment capacity and water capacity and other utility capacity to serve the Land and Improvements; (v) all oil, gas, and other minerals in, on, or under, and that may be produced from the Land; (vi) any land adjacent or contiguous to, or a part of the Land, whether those lands are owned or claimed by deed, limitations, or otherwise, and whether or not they are located inside or outside the description given herein, or whether or not they are held under fence by Seller, or whether or not they are located on the Survey referred to in Article 5 hereof, but expressly excluding the 17.034 acre tract owned by Seller and located adjacent to and across Charles E. Selecman Drive from the Land; (vii) any reversionary rights attributable to the Land; (viii) all water rights appurtenant to the Land; and (ix) all development rights, zoning classifications (including, without limitation, variances), rights as to non-conforming uses and/or structures, vested or "grand-fathered rights" and other entitlements pertaining to the Land (the Land, Improvements and all of the other properties, rights and interests mentioned above are herein collectively referred to as the "Realty"); 2.2 Personalty. None; 2.3 Incidental Rights. All of Seller's right, title and interest in and to the following (herein collectively referred to as the "Incidental Rights"): (i) to the extent assignable, all guaranties warranties or other similar agreements for the benefit of Seller (but containing no obligations on the -2- 7 part of Seller thereunder remaining to be performed) relating to the Realty,(ii) all contracts or agreements, such as maintenance, service, management, leasing or utility contracts relating, in any way, to the ownership, use, leasing, service, management, operation, maintenance and repair of the Realty (herein collectively referred to as the "Property Agreements"), a list of which is attached hereto as Schedule 2.3(a) and made a part hereof for all purposes, and (iii) all governmental permits, approvals, licenses, consents or entitlements heretofore granted (or granted prior to Closing) with respect to the ownership, construction, use, occupancy and operation of the Realty, other than those, if any, issued in the name of I/O or Tenants and with respect to which neither Seller nor the Project has any liability (collectively, the "Permits"), a list of which is attached hereto as Schedule 2.3(b) and made a part hereof; provided, however, that the Incidental Rights shall not include (A) any Property Agreements that Purchaser requests that Seller terminate in accordance with the provisions of Section 8.1(5) hereof, or (B) any Permits which are not transferable under applicable Governmental Requirements; 2.4 Plans and Reports. Copies of all plans, drawings, specifications, surveys, engineering, environmental, inspection or similar reports and other technical descriptions relating to the Realty (herein collectively referred to as the "Plans"); and 2.5 The Project. The Realty, the Incidental Rights, the Plans, and all other property and interests that are subject to this Agreement are sometimes herein referred to collectively as the "Project". ARTICLE 3 EARNEST MONEY AND INDEPENDENT CONTRACT CONSIDERATION 3.1 Earnest Money. Purchaser shall deposit, as earnest money, with the Title Company, to bind this Agreement with Seller, the sum of Fifty Thousand and No/100 Dollars ($50,000.00) (herein referred to as the "Earnest Money") in the form of cash, cashier's check or other readily available funds, which deposit is to be made within three (3) business days from and after receipt by Purchaser of notice from the Title Company of the Title Company's receipt of a fully executed copy of this Agreement. The Title Company shall place the Earnest Money in a fully federally insured interest bearing account, and all interest earned thereon shall become a part of the Earnest Money as it accrues. If the transaction contemplated hereby closes, then on the Closing Date (as herein defined), the Earnest Money shall be paid over to Seller and applied to the Total Purchase Price; provided, however, that where Purchaser has the option to terminate this Agreement, in the event of such termination, then the Earnest Money shall be immediately returned by the Title Company to Purchaser. In the event the transaction contemplated hereby does not close for any other reason, the Earnest Money shall be disbursed in accordance with the terms hereof. In the event that Purchaser fails to deposit the Earnest Money with the Title Company as provided in this Article 3, then this Agreement shall become null and void for all purposes, and the parties hereto shall have no further obligations hereunder except as expressly set forth herein. 3.2 Independent Contract Consideration. Within three (3) business days from and after -3- 8 receipt by Purchaser of notice from the Title Company of the Title Company's receipt of a fully executed copy of this Agreement, Purchaser shall deliver the sum of One Hundred and No/100 Dollars ($100.00) directly to Seller in the form of cash, cashier's check or other readily available funds as Independent Contract Consideration, which amount the parties bargained for and agreed to as consideration for Purchaser's exclusive right to inspect and purchase the Project pursuant to this Agreement and for Seller's execution, delivery and performance of this Agreement. The Independent Contract Consideration is in addition to and independent of any other consideration or payment provided in this Agreement, is non-refundable, and it is fully earned and shall be retained by Seller notwithstanding any other provisions of this Agreement and shall be credited against the Total Purchase Price at Closing. ARTICLE 4 PURCHASE PRICE 4.1 Total Purchase Price. The total purchase price (the "Total Purchase Price") for the sale and purchase of the Project is Twenty-One Million and No/100 Dollars ($21,000,000.00). At Closing, subject to the provisions of Section 4.2 hereof, Purchaser shall pay the Total Purchase Price, less proration credits, in cash, by bank cashier's check or wire transfer, through the account of the Title Company, to Seller. 4.2 Deduction from Purchase Price. If Seller is a "foreign person" (as defined in Internal Revenue Code Section 1445(f)(3) and regulations issued thereunder) or if Seller fails or refuses to deliver the non-foreign affidavit required in Section 11.2(12) hereof, or if Purchaser receives notice from any seller-transferor's agent or purchaser-transferee's agent (each as defined in Internal Revenue Code Section 1445(d) and the regulations issued thereunder) that, or Purchaser has actual Knowledge that, such affidavit is false, Purchaser shall deduct and withhold from the Total Purchase Price a tax equal to ten percent (10%) thereof, as required by Internal Revenue Code Section 1445. In the event of any such withholding, Seller's obligation to deliver title hereunder and to otherwise perform all of its obligations hereunder shall not be excused or otherwise affected. Purchaser shall remit such withheld amount to and file the required form with the Internal Revenue Service, and in the event of any claimed over-withholding, Seller shall be limited solely to an action against the Internal Revenue Service for refund (under Regulation Section 1.1464-1(a)), and hereby waives any right of action against Purchaser on account of such withholding. The provisions of this Section 4.2 shall survive the Closing Date hereunder without limit as to time. ARTICLE 5 SURVEY 5.1 Survey. Within fifteen (15) days from and after the Effective Date, Seller agrees, at Seller's sole cost and expense, (i) to cause a registered, licensed state surveyor approved by the Title Company to prepare a new and updated on the ground survey (the "Survey") of the Realty, and (ii) to deliver to Purchaser at least three (3) copies, to Purchaser's counsel at least one (1) copy, and to the Title Company at least one (1) copy of the Survey plat and a certificate under the seal of the surveyor, which Survey shall: (a) fix all exterior corners and exterior boundary lines (courses and -4- 9 distances) of the Realty with all such corners monumented with iron pipes or rods; (b) contain a metes and bounds field note description or other appropriate legal description of the Realty, which shall include a reference to the recorded plat, if any, of the Realty, and any easements or rights-of-way thereupon; (c) reflect the actual dimensions of the area within the Realty and all easements, roads, or rights-of-way thereupon, in terms of total acreage and total net acreage (rounded to the nearest one one-thousandth [1/1000] of an acre) and total square footage and total net square footage; (d) reflect all fences, encumbrances, encroachments, easements, and rights-of-way visible on the ground or of record in Fort Bend County, Texas, building set-back lines, streets, public and private roads, alleys (and the location of any access to same), railroads, ditches, creeks, rivers, or other water courses, and water flood zones, on or adjacent to the Realty, showing the width and location thereof, and, where applicable, reference thereto by recording data; (e) reflect the location of power, telephone, water, sewer and gas facilities serving the Realty and, to the extent such information is readily available to the surveyor, the size of such water and sewer lines; (f) reflect any encroachments or overlaps on the Realty or adjacent to the Realty, the outside boundary lines of all improvements and any pipelines adjacent to or abutting the Realty; (g) reflect on the Survey plat all available parking (specifically identifying all handicapped parking spaces) on the Realty and all structures or improvements specifying the square footage of the footprint of all such structures and improvements and certify that no structure or improvement encroaches upon any adjoining property or easement, or violates any restrictive covenant, set-back requirement, or zoning or other ordinance or requirement, or specifying any such encroachment or violation that exists; (h) reflect all other natural monuments, improvements or other objects on the Realty; (i) reflect that the Realty has access by way of ingress and egress to one or more publicly dedicated streets located contiguous to its boundary and indicate the name and width of such streets; and (j) include the surveyor's registered number and seal, the date of the Survey (which shall be no earlier than the Effective Date), and a narrative certificate in the form attached hereto as Exhibit B and made a part hereof for all purposes. In addition, provided the surveyor is willing to do so, the foregoing certification shall also specify the zoning classification for the Project. Without limiting the foregoing, the Survey shall be in form and substance acceptable to the Title Company as a basis for deleting, to the maximum extent permitted by applicable title insurance regulations, the standard printed exceptions relating to survey matters in the Owner Policy of Title Insurance to be delivered by Seller as hereinafter provided. Without limiting the foregoing, the Survey shall also be in form and substance acceptable to the Purchaser's Lender. For purposes of the property description to be included in the Deed, the field notes prepared by the surveyor shall control any conflicts or inconsistencies with the description herein. 5.2 Remedies for Failure to Deliver Survey. In the event Seller does not deliver the Survey within such fifteen (15) day period, then and thereafter, Purchaser shall have the option to: (i) cancel this Agreement and have the Earnest Money returned to it, in which event the parties hereto shall have no further obligations hereunder except as set forth herein, or (ii) procure the Survey, and Seller shall reimburse Purchaser immediately upon demand for all reasonable fees charged by the surveyor for the preparation of same, and in the event Seller does not so reimburse -5- 10 Purchaser, Purchaser may deduct its costs for procuring the Survey from the Total Purchase Price on the Closing Date, or (iii) waive the Survey requirement and proceed to close the sale contemplated by this Agreement. ARTICLE 6 TITLE COMMITMENT AND CONDITION OF TITLE 6.1 Title Commitment. Within three (3) days from and after the Effective Date, at Seller's sole cost and expense, Seller agrees to cause the Title Company to furnish Purchaser and its counsel a Commitment for Owner Policy of Title Insurance (the "Title Commitment") prepared and issued by the Title Company describing and covering the Realty, listing Purchaser as the prospective name insured and showing as the policy amount the Total Purchase Price, which Title Commitment shall constitute the commitment of the Title Company to insure, by title insurance in the standard form of an Owner Policy of Title Insurance in use in the State of Texas (including such endorsements as Purchaser may request in accordance herewith), Purchaser's title to the Realty to be good and indefeasible, subject only to such exceptions as may be approved by Purchaser as hereinafter provided (herein referred to as "Permitted Exceptions") and to the standard printed exceptions contained in the standard form of Owner Policy of Title Insurance, except that, to the maximum extent permitted by applicable title insurance regulations and at Purchaser's expense, such standard exceptions shall be modified as follows: (i) the standard printed form survey exception shall be amended to read only "shortages in area", (ii) the standard exception as to the lien for taxes shall be limited to the year of Closing, and shall be endorsed "Not Yet Due and Payable.", (iii) there shall be no exception for "visible and apparent easements" or for "public or private roads" or the like, and (iv) there shall be no exception for "rights of parties in possession," except for I/O, as tenant, under the Master Lease. 6.2 UCC Report. Seller, at its sole cost and expense, has obtained or shall obtain a report (the "UCC Report") of searches made of the Uniform Commercial Code Records of Fort Bend County, Texas, the Official Public Records of Realty of Fort Bend County, Texas, and the Office of the Secretary of State, State of Texas, indicating whether the Project is subject to any liens or security interests (other than liens and security interests, if any, which are to be released at the Closing). An update of the searches (dated no more than two (2) days prior to the Closing Date, but delivered prior to the Closing Date) shall be provided by Seller to Purchaser at Seller's sole cost and expense, unless waived by Purchaser in writing. 6.3 Disclosure of Exceptions by Title Commitment, Survey and UCC Report. Purchaser and its counsel shall have twenty (20) business days after the date of receipt by Purchaser and its counsel of the last to be received of the Title Commitment (including legible copies of all documents referenced therein as constituting exceptions to Seller's title), the Survey and the UCC Report within which to object in writing to any matters set forth therein which, in Purchaser's sole and absolute discretion, constitute unacceptable exceptions to the title to the Project. Seller shall have a reasonable time, not to exceed fifteen (15) days from the date such objections are made known in writing to Seller, to cure such objections, but Seller shall have no obligation to cure any such objections. Any curative material shall be filed by Seller, at its sole cost and expense, within such -6- 11 fifteen (15) day period. If Seller does not or cannot cure the objections within such fifteen (15) day period, Purchaser shall have the option to: (i) cancel this Agreement, in which event the Title Company shall promptly return the Earnest Money to Purchaser and the parties shall have no further obligations hereunder except as set forth herein, (ii) have an additional fifteen (15) days within which to remove the objections, and any sums reasonably expended by Purchaser up to $35,000.00 in removing such objections (said $35,000.00 to include the curing of any Environmental Conditions pursuant to Section 7.2 hereof and any out-of-pocket expenses pursuant to Section 15.2 hereof) shall be credited against the Total Purchase Price, or (iii) waive the objections in writing, and proceed to close the transaction contemplated hereby in which event such objections shall constitute Permitted Exceptions. In the event, however, that a lien indebtedness against Seller's interest in the Project (including past due taxes) is disclosed by the Title Commitment or UCC Report obtained by or for Purchaser, then Seller shall: (i) discharge, bond around or otherwise obtain the release of such lien indebtedness prior to the Closing, or (ii) authorize the Title Company to discharge such lien indebtedness at the Closing out of the Total Purchase Price. ARTICLE 7 ENVIRONMENTAL STUDIES AND REMEDIATION ACTIVITIES 7.1 Studies. Without in any way limiting any other duties of Seller hereunder to provide information to Purchaser, upon the Effective Date, Seller shall provide to Purchaser copies of all environmental studies, reports and information in Seller's possession, including, without limitation, correspondence from a Governmental Authority, concerning the environmental condition of the Realty (all of the foregoing being hereinafter referred to as "Seller's Environmental Information"). In addition, subject to the provisions of Article 18 hereof, during the Review Period Purchaser and its contractors and representatives, at Purchaser's expense, shall have the right to conduct any and all environmental studies and tests of the Realty (including, without limitation, Phase I and Phase II Environmental Site Assessments and asbestos and lead paint studies) which Purchaser, in Purchaser's sole discretion, deems necessary to determine whether the Project is suitable for Purchaser's intended use. To the extent Purchaser's Lender does not object, promptly following receipt thereof, Purchaser shall provide copies of all such written reports, studies and tests promptly following Purchaser's receipt thereof. To the extent that Purchaser's Lender objects, if at all, Purchaser shall disclose to Seller orally any items of concern disclosed by such written reports, studies and tests. 7.2 Remediation. In the event that either Seller's Environmental Information or any studies or tests performed or commissioned by Purchaser indicate the existence of any Environmental Conditions on the Realty, then Seller shall have a period of fifteen (15) days after notification thereof by Purchaser in which to remediate or otherwise cure the same in accordance with all applicable Governmental Requirements (and the Closing Date shall be extended, if necessary, to afford Seller such fifteen (15) day period), but Seller shall be under no obligation to Purchaser to remediate or cure such Environmental Condition. In the event that an Environmental Condition exists or is discovered on the Realty and Seller fails or refuses to remediate or otherwise cure such Environmental Condition within the required fifteen (15) day period, or in the event such Environmental Condition is not capable of being remediated or otherwise cured within such fifteen -7- 12 (15) day period, then Purchaser shall have the following options: (i) cancel this Agreement by written notice thereof given to Seller prior to the Closing Date, in which event the Title Company shall promptly return the Earnest Money to Purchaser and the parties hereto shall have no further obligations hereunder, (ii) if the Environmental Condition can be remediated or cured for $35,000.00 or less (said $35,000.00 to include the curing of any objections revealed by the Survey, the Title Commitment and/or the UCC Report pursuant to Section 6.3 and any out-of-pocket expenses pursuant to Section 15.2 hereof), to remediate or cure and deduct the cost thereof from the Total Purchase Price (in which event Purchaser shall have the right to extend the Closing Date for a period not to exceed thirty (30) days in order to accomplish such remediation or cure), or (iii) waive in writing the remediation or cure of such Environmental Condition and proceed to close the sale contemplated by this Agreement. ARTICLE 8 COVENANTS AND CONDITIONS PRECEDENT 8.1 Covenants. Without in any way limiting the provisions of Article 18 hereof, Seller covenants and agrees to perform and undertake the following matters at or within the time periods specified, but in all events prior to the expiration of the Review Period, and agrees that the liabilities and obligations of Purchaser hereunder to consummate this transaction contemplated hereby are subject to the satisfaction of each of the following covenants (any of which may be waived in whole or in part by Purchaser on or prior to Closing): (1) Seller shall furnish, or cause to be furnished, to Purchaser, within ten (10) business days following the Effective Date, true, complete and legible copies of the I/O Master Lease and the Leases, including, without limitation, all amendments thereto, if any, all guaranties of I/O's or Tenants' obligations thereunder, all collateral agreements and all tenant financial statements in the possession of or available to Seller or I/O. In addition, Seller shall furnish, or cause to be furnished, to Purchaser with a certified rent roll showing the amounts of all monthly rentals, annual rents, percentage rentals, rent escalations, prepaid rentals, if any, deposits paid to Seller or I/O in connection with the I/O Master Lease or Leases and any other sums paid or to be paid under or in connection with the I/O Master Lease or Leases, including, but not limited to, common area maintenance charges, if any, the amount of any unpaid rental discounts, rebates rental concessions, brokerage commissions and other items payable in connection with the I/O Master Lease or the Leases, any tenant finish-out allowance per square foot which is provided for under the I/O Master Lease or the Leases or otherwise and which has not yet been paid or incurred, all renewal, expansion and similar rights in favor of I/O or Tenants that are not set forth in the I/O Master Lease or Leases, and the tenant improvement work, if any, Seller or I/O is obligated to complete.. (2) Seller shall furnish, or cause to be furnished, to Purchaser, within ten (10) business days following the Effective Date, a copy of all insurance carried on the Project (whether the responsibility of Seller, I/O or Tenants) setting forth the name of the carrier, the type of policy, the policy number, the policy term and the annual premium along with copies of all insurance policies set forth on such schedule. -8- 13 (3) Seller shall furnish or make available to Purchaser, within ten (10) business days following the Effective Date, to the extent in Seller's possession or otherwise available to Seller, copies of all pending or current contracts for construction on the Project in excess of $5,000.00, or, where copies of such contracts are not available, such information as Seller may possess or have access to as to the names and addresses of the contractors who are or would be performing the work thereunder. (4) Seller shall furnish or make available to Purchaser, within ten (10) business days following the Effective Date, copies of all guaranties and warranties relating to the Project in Seller's possession or reasonably obtainable by Seller, if any, along with copies of all such guaranties and warranties. (5) Seller shall furnish, or caused to be furnished, to Purchaser, within ten (10) business days following the Effective Date, copies of all Property Agreements (including any and all amendments thereto). Upon review of such Property Agreements, Purchaser may, in its sole discretion, require that Seller terminate any of the same effective not later than Closing, and if Seller is unable or unwilling for any reason to do so, Seller must notify Purchaser of such fact in writing prior to the expiration of the Review Period. (6) Seller shall furnish or make available to Purchaser, within ten (10) business days following the Effective Date, to the extent in Seller's possession or reasonably obtainable by Seller, copies of all Permits (including, without limitation, all licenses, permits or similar documents authorizing or relating to the use, storage or disposal of Hazardous Materials on, at or from the Project). (7) Seller shall furnish or make available to Purchaser, within ten (10) business days following the Effective Date, to the extent in Seller's possession or reasonably obtainable by Seller, copies of the certificate(s) of occupancy issued by any appropriate Governmental Authority for the Improvements (including all completed tenant space). (8) Seller shall furnish to Purchaser, within ten (10) business days following the Effective Date, copies of all real and personal property tax statements relating to the Project and receipts evidencing payment of the taxes for the one (1) tax year immediately prior to the current year. (9) Seller shall furnish to Purchaser, within ten (10) business days following the Effective Date, a schedule of all capital improvement work in process or scheduled for the Project, if any, as of the Effective Date. (10) Not later than ten (10) business days following the Effective Date, Seller shall use its best efforts to obtain the agreement of I/O and Tenants, if required by Purchaser's Lender, to each execute not more than five (5) days prior to Closing an Estoppel Certificate in substantially the form attached hereto as Exhibit C (such obligation being in addition to Seller's covenant hereinafter set forth to assist in securing such other and additional estoppel certificates, -9- 14 subordination, non-disturbance and attornment agreements, and other documents and agreements as Purchaser's Lender may request in connection with the Financing). (11) Seller shall furnish to Purchaser, within ten (10) business days following the Effective Date, copies of all termite and other pest reports on the Project in Seller's possession or reasonably available to Seller. (12) Seller or I/O shall furnish to Purchaser, within ten (10) business days following the Effective Date, copies of the utility bills for the Project for the prior twelve (12) months (other than bills for utilities billed directly to Tenants pursuant to the terms of the Leases). (13) If any Person has issued a valid general contractor's or other warranty with respect to the Project that is not, on its face, transferable to Purchaser, Seller shall use its best efforts to cause such Person to execute an instrument in favor of Purchaser that acknowledges and consents to the assignment of such warranty to Purchaser. 8.2 Conditions Precedent. Without in any way limiting the provisions of Article 18 hereof, Purchaser and Seller agree that the liabilities and obligations of Purchaser hereunder to consummate this transaction contemplated hereby are subject to the satisfaction of each of the following conditions (any of which may be waived in whole or in part by Purchaser on or prior to the expiration of the Review Period: (1) Purchaser, at Purchaser's sole cost and expense, shall have received an appraisal ("Appraisal") of the Project satisfactory in all respects to Purchaser, in Purchaser's sole and absolute discretion. (2) Purchaser, at Purchaser's sole cost and expense, shall have received confirmation from a licensed professional engineer acceptable to Purchaser and Purchaser's Lender that the roof, foundation and other structural elements of the Project have a remaining useful life extending at least ten (10) years beyond the Closing Date, without the anticipated need during such period to perform any major repairs or alterations thereto. (3) Seller shall have obtained the Financing. 8.3 Purchaser's Rights if Conditions Not Satisfied. Purchaser's obligations under this Agreement are specifically contingent upon the satisfaction of each of the covenants and conditions described in Section 8.1 and Section 8.2 hereof and, where appropriate, the receipt, inspection and/or approval of the Project and the materials and information described herein, within the time limits herein specified. If any of such conditions are not satisfied or if Purchaser, in its sole and absolute discretion, finds any of such material or information unacceptable for whatever reason, then Purchaser may: (i) terminate the Agreement by giving Seller written notice thereof in which event the Title Company shall return all Earnest Money to Purchaser and neither party hereto shall have any further rights, liabilities or obligations hereunder except as set forth herein; (ii) extend the Closing Date for an additional period of time deemed reasonable by Purchaser to permit the -10- 15 satisfaction of such covenants and/or conditions, such additional period of time not to exceed thirty (30) days; or (iii) waive in writing its objection to such material or information, or lack thereof, and consummate the transaction contemplated hereby. To the extent that any of the covenants or conditions set forth in Article 8 are satisfied or are waived by Purchaser in writing, such satisfaction or waiver shall not constitute a waiver or discharge of any of the representations, warranties, covenants or agreements of Seller set forth elsewhere in this Agreement or a waiver by Purchaser of any rights it has to terminate this Agreement pursuant to other provisions of this Agreement. ARTICLE 9 REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS OF SELLER To induce Purchaser to enter into this Agreement and to purchase the Project, Seller hereby represents and warrants to, and covenants and agrees with Purchaser, the following, with the understanding and intention that Purchaser is relying upon the accuracy of such representations and warranties, and the agreement of Seller to comply with and perform such covenants and agreements, which representations, warranties, covenants and agreements shall be deemed to be made by Seller to Purchaser as of the Effective Date and as of the Closing Date and thereafter (it being understood that such representations, warranties, covenants and agreements shall not be merged into the documents to be executed on the Closing Date but rather shall survive for the period set forth in Section 19.5 of this Agreement), and this Agreement is contingent upon and subject to the truth and accuracy of such representations and warranties, and the full and complete satisfaction of such covenants and agreements, and in the event such representations and warranties are not true and accurate as of Closing and any such covenants and agreements are not satisfied prior to Closing, Purchaser shall have the option of terminating this Agreement at any time prior to Closing, whereupon the Title Company shall promptly return the Earnest Money to Purchaser and all parties hereto shall be released from any and all liability hereunder except as set forth herein, or Purchaser may, at its sole option and discretion, waive in writing Seller's satisfaction of any such representations, warranties, covenants or agreements and consummate the transaction contemplated hereby (it being understood and agreed by Seller and Purchaser that Seller shall remain liable during the survival period provided for in Section 19.5 hereof for all representations, warranties, covenants and agreements made by Seller in this Agreement and not expressly waived in writing by Purchaser as hereinabove provided): (1) Seller has delivered to Purchaser complete, true, and correct copies of the I/O Master Lease and the Leases and all amendments and modifications thereto, and there are no other leases, licenses or similar agreements affecting the Project. (2) With respect to the I/O Master Lease: (i) there are no other promises, amendments, agreements or commitments between Tenants, I/O, Seller, a predecessor in title to the Project, or any one acting by or on behalf of Seller, or any combination thereof, nor are there any commitments binding upon Seller relating to the Project which are described in the I/O Master Lease other than as expressly set forth therein; (ii) the I/O Master Lease is in full force and effect; (iii) there is no uncured breach or default under the I/O Master Lease, and no offset, defense, abatement, or -11- 16 claim is presently available to, or has been asserted by I/O under the I/O Master Lease, nor does any state of fact exist which would with the passage of time or the giving of notice, or both, constitute a breach or default under the I/O Master Lease or would permit a defense, offset, abatement, or claim under the I/O Master Lease; (iv) I/O has not prepaid any rent other than rent due for the current month; (v) except as may be expressly otherwise provided in the I/O Master Lease or the schedule furnished to Purchaser pursuant to Section 8.1 hereof, I/O is not entitled to any rent concession, rent-free occupancy, or reduction or abatement of rent for any reason whatsoever, including, without limitation, for any work (not yet performed) or other consideration (not yet given) in connection with I/O's occupancy pursuant to the I/O Master Lease; (vi) I/O has accepted possession of all space leased to it under the Master Lease; (vii) all decorating, installation, alteration and tenant finish work which the Seller may be obligated to perform on or prior to the Closing Date for I/O will be performed prior to the Closing Date at the cost of Seller; and (viii) all commissions due or to come due with respect to the I/O Master Lease, or for any renewal, substitution, extension, or expansion thereunder shall be paid, assumed or otherwise satisfied by Seller at or on the Closing Date, and the Project shall be conveyed to Purchaser free and clear of all commissions and brokerage fees with respect to the I/O Master Lease, and any renewals, substitutions, extensions, or expansions thereof, and Seller shall indemnify and agree to defend and hold Purchaser harmless from and against any loss, cost, expense (including, without limitation, attorneys' fees and court costs), or claim in connection with any claim for commissions or like fees in connection with the I/O Master Lease. (3) From the Effective Date until the Closing, Seller shall (i) maintain the Project in its present condition, subject to reasonable wear and tear, damage, casualty and condemnation, (ii) continue to operate the Project in a good, businesslike manner, (iii) make no change or modification in the I/O Master Lease, the building rules or any presently existing rental policies or rental agreements without, in each instance, the prior written approval of Purchaser, (iv) comply with and fully perform, keep and observe each and every material term, provision, condition, undertaking, covenant and obligation under the I/O Master Lease, and agrees not to modify or amend any of same in any respect without the prior written approval of Purchaser. (4) Seller or I/O has delivered to Purchaser copies of all insurance policies relating to the Project. Seller or I/O shall maintain all such insurance policies in full force and effect through the Closing Date, and neither Seller nor I/O shall cancel nor amend (nor allow the cancellation or amendment, as applicable) any of the same without Purchaser's prior written consent. (5) Seller has not received, and has no Knowledge of, any written notices or written requests from any mortgagee, insurance company or Board of Fire Underwriters, or any organization exercising functions similar thereto, requesting the performance of any work or alterations in respect to the Project, and has not received and has no Knowledge of any such non-written notices or requests. (6) Except as may be set forth on Schedule 2.3(a) or Schedule 2.3(b), as applicable, all of the Permits and Property Agreements are in full force and effect and are freely transferable to Purchaser without cost (or, if there is a cost, it is set forth in on Schedule 2.3(a) or Schedule 2.3(b), as applicable). Except as set forth on Schedule 2.3(a), there are no Property -12- 17 Agreements which are not cancelable by Purchaser on thirty (30) days or less notice without payment of any cancellation consideration. From the Effective Date through the Closing Date, Seller shall not enter into, nor allow others to enter into, any new Permits or Property Agreements without the prior written consent of Purchaser. The copies of the Permits and Property Agreements delivered to Purchaser hereunder are true, accurate and complete, and Seller has received no notice and has no Knowledge of any material, uncured breach or default by Seller or by any other party under the Permits or Property Agreements. Prior to the Closing Date, Seller shall comply with each and every material undertaking, covenant and obligation under the Permits and Property Agreements and the same shall not be modified, amended, terminated, renewed or otherwise altered without the prior written consent of Purchaser, and Seller shall not modify or alter any repair or maintenance programs or policies now in effect with respect to the Project. At Closing, the Permits and Property Agreements shall be in full force and effect and Seller's interests therein shall be transferred to Purchaser free and clear of any liens, claims or encumbrances. (7) Through the time of Closing, Seller shall fully perform and observe all material requirements of all other contracts and agreements affecting the Project, including, without limitation, any deed of trust or mortgage encumbering the Project or any portion thereof. (8) On the Closing Date, Seller shall have good and indefeasible title in fee simple to the Project, free and clear of all restrictions, liens, leases, encumbrances, rights of entry or reverter, rights-of-way, easements, encroachments, exceptions, and other matters affecting title, except for the Permitted Exceptions. (9) No Person, other than Purchaser, I/O under the I/O Master Lease and Tenants under the Leases, has any rights in or right to acquire the Project or any part thereof, and as long as this Agreement remains in force, Seller will not, without Purchaser's prior written consent, lease, transfer, mortgage, pledge, or convey its interest in the Project or any portion thereof nor any right therein, nor shall Seller enter into, or negotiate for the purpose of entering into, any agreement or amendment to agreement granting to any Person any right with respect to the Project or any part thereof. (10) Other than the Permitted Exceptions, the I/O Master Lease (which shall be terminated at Closing), the Leases, the Property Agreements, and this Agreement, there are no leases, subleases, tenancy arrangements, service contracts, management agreements, or other agreements or instruments which will be in force or effect on the Closing Date that grant to any Person, any right, title, interest, or benefit in or to all or any part of the Project or any right relating to the use, operation, management, maintenance, or repair of all or any part of the Project. (11) There are no parties in possession of any portion of the Project as lessees, tenants at sufferance, trespassers or otherwise, except for I/O under the I/O Master Lease and Tenants under the Leases. (12) There are no outstanding mechanic's and materialmen's liens or claims of creditors against the Project that have not been disclosed to Purchaser and will not be removed by -13- 18 Seller on or before the Closing Date. (13) There are no taxes, assessments or levies of any type whatsoever that can be imposed upon and collected from the Project arising out of or in connection with the ownership and operation of the Project, or any public improvements in the general vicinity of the Project, other than rent taxes, income taxes, business taxes, franchise taxes, and ad valorem taxes on the Realty for the calendar year in which the Closing Date occurs payable to the State of Texas, County of Fort Bend, the school district in which the Project is situated, and the City of Stafford, and levies and assessments, if any, provided for in the Permitted Exceptions. Without in any way limiting the foregoing, no portion of the Project has, during Seller's ownership of the same, been subject to assessments by any municipal utility district or any other or similar district authorized to impose taxes, charges, liens or assessments on the Project, except as set forth in the Permitted Exceptions. (14) All utilities and other services required to be furnished to the Project, if any, under the I/O Master Lease or the Leases will be furnished prior to and as of the Closing Date. (15) All utilities, including, without limitation, sanitary and storm sewer, electrical, gas, telephone, and water lines have been connected to or installed upon the Project, and enter the Project from adjoining public rights-of-way or through private easements benefitting the Project, and the Project has access to a publicly dedicated and accepted thoroughfare. (16) To Seller's Knowledge, the Improvements, including, but not limited to, the roof, foundation, walls, superstructure, plumbing, air conditioning and heating equipment, electrical wiring, boilers, and hot water heaters are structurally sound, in good working order, and in a state of good repair, and suffer no damage from pest or termite infestation. (17) There is no actual, pending or threatened action, suit, claim, litigation, or proceeding by any entity, individual or governmental agency affecting Seller or the Project which would in any way constitute a lien, claim or obligation of any kind against the Project, and to Seller's Knowledge, there is no such action, suit, claim, litigation or proceeding contemplated. (18) To Seller's Knowledge, there are no pending or threatened condemnation or similar proceedings or assessments affecting the Project or any part thereof, nor to the best Knowledge of Seller, are any such assessments or proceedings contemplated by any Governmental Authority. (19) To Seller's Knowledge, no restrictive covenant or zoning (or its equivalent) classification (or, other Governmental Requirements) is materially violated by the present use and maintenance of the Project and appurtenant uses (including, without limitation, parking uses associated with the Project), and, there are no proceedings to change such zoning (or its equivalent) classification, and Seller shall not itself apply for or acquiesce in any such change. (20) Seller has not received any notice of any breach of any Governmental Requirements or restrictive covenant, and is not under any order of any Governmental Authority, -14- 19 with respect to the Project or the Seller's, I/O's or Tenant's present use and operation of the Project. (21) The execution of this Agreement, the consummation of the transactions herein contemplated, and the performance and observance of the obligations of Seller hereunder and under any and all other agreements and instruments herein mentioned to which Seller is a party will not conflict with or result in the breach of any Governmental Requirements or of any agreement or instrument to which Seller is now a party or to which it is subject, or constitute a default thereunder, and does not require Seller to obtain any consents or approvals from, or the taking of any other actions with respect to any third parties. (22) Seller is a corporation, duly organized under the laws of the State of Delaware, and has all requisite power and authority to carry on Seller's business as it is now being conducted and to enter into and perform this Agreement. The execution of this Agreement, the consummation of the transactions herein contemplated, and the performance or observance of the obligations of Seller hereunder and under any and all other agreements and instruments herein mentioned to which Seller is a party have been duly authorized by all requisite action and are enforceable against Seller in accordance with their respective terms. The individual executing this Agreement on behalf of Seller is authorized to act for and on behalf of and to bind Seller in connection with this Agreement and in so doing to bind Seller to all of the terms and provisions hereof. (23) The financial statements, reports, and other data relative to Seller heretofore furnished by Seller to Purchaser are (and all such statements, reports, information, and other data hereafter furnished by Seller to Purchaser will be) true and correct in all material respects, and fairly reflect the financial condition, the financial results or other subject matter thereof as of the dates thereof. (24) A certificate or certificates of occupancy or the local equivalent, if any have been obtained for the Improvements and all rentable space within the Improvements, if required or issued by any governmental authorities. (25) Seller or I/O pursuant to the I/O Master Lease have maintained and do presently maintain in full force and effect all Environmental Permits, if any, necessary or required for the ownership and operation of the Project, and Seller has provided copies of all such Environmental Permits to Purchaser for its review. (26) To Seller's Knowledge, there will not as of the Closing Date exist any Environmental Condition on or at the Realty or any other matter on or connected with the Project that would cause the imposition on Purchaser of Environmental Liabilities if such Environmental Condition or other matter were disclosed to Governmental Authorities. (27) To Seller's Knowledge, as of the Effective Date and as of the Closing Date neither Seller nor I/O is currently operating nor is required to be operating the Project under any compliance order, decree or agreement; any consent decree, order or agreement; and/or any corrective action decree, order or agreement issued by or entered into with any Governmental -15- 20 Authority under any Environmental Law. (28) To Seller's Knowledge, no Hazardous Materials have been dumped, landfilled, stored, located or disposed of on the Realty in violation of applicable Environmental Laws during the time Seller has owned the Realty. (29) To Seller's Knowledge, there has not been, in respect to the Project any emission (other than steam or water vapor) into the atmosphere or any discharge, direct or indirect, of any pollutants into the waters of the State of Texas or the United States of America in violation of applicable Environmental Laws during the time Seller has owned the Realty. (30) From the Effective Date through the Closing Date, Seller shall promptly notify Purchaser of any material change with respect to the Project or any information heretofore or hereafter furnished to the Purchaser with respect to the Project, and of any such change which would make any portion of this Agreement, including, but not limited to, the representations, warranties, covenants, and agreements contained in this Article 9 untrue or materially misleading. (31) To Seller's Knowledge, the Project meets all applicable zoning, if any, and other similar or equivalent Governmental Requirements (and that all other governmental and private restrictions such as density, parking area ratio, floor area ratio, light and air limitations and deed and easement restrictions have been complied with) so as to permit the operation thereon of the types of businesses contemplated in the I/O Master Lease and the Leases. ARTICLE 10 REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser hereby warrants and represents to Seller as follows: 10.1 Purchaser is a Texas limited partnership duly organized under the laws of the State of Texas, and has full power to execute, deliver and perform this Agreement. 10.2 The execution of this Agreement, the consummation of the transactions herein contemplated, and the performance or observance of the obligations of Purchaser hereunder have been duly authorized by requisite action and are enforceable against Purchaser in accordance with their respective terms. The individuals executing this Agreement on behalf of Purchaser are authorized to act for and on behalf of and to bind Purchaser in connection with this Agreement. 10.3 The execution of this Agreement, the consummation of the transactions herein contemplated, and the performance and observance of the obligations of Purchaser hereunder and under any and all other agreements and instruments herein mentioned to which Purchaser is a party will not conflict with or result in the breach of any Governmental Requirement or of any agreement or instrument to which Purchaser is now a party or to which it is subject, or constitute a default -16- 21 thereunder, and does not require Purchaser to obtain any consents or approvals from, or the taking of any other actions with respect to any third parties. ARTICLE 11 CLOSING 11.1 Closing Date. Unless extended as provided in this Agreement, and provided all conditions described in Articles 5, 6, 7, 8, 9 and 17 hereof are satisfied or waived by Purchaser, Purchaser and Seller shall consummate and close the transactions contemplated hereby on or before five (5) days following the expiration of the Review Period, unless Purchaser and Seller agree to an earlier date (the actual date of Closing hereunder being herein referred to as the "Closing Date"), during regular business hours in the office of the Title Company, or such other location as may be mutually agreed to by the parties. For the purposes of this Agreement, the actual consummation and closing of the purchase and sale contemplated by this Agreement is herein referred to sometimes as the "Closing". 11.2 Items to be Delivered by Seller on Closing Date. On the Closing Date, Seller shall deliver for the benefit of Purchaser the following (all of which shall be duly executed, witnessed and notarized where appropriate and, where appropriate, be in recordable form): (1) Special Warranty Deed (the "Deed") in substantially the form attached hereto as Exhibit D, duly executed and acknowledged by Seller, which Deed shall convey to Purchaser good and indefeasible fee simple title to the Realty, free and clear of all liens, encumbrances, covenants, restrictions and other matters, except for the Permitted Exceptions. (2) A Bill of Sale and Assignment in substantially the form attached hereto and incorporated herein as Exhibit E, duly executed and acknowledged by Seller. (3) To the extent in Seller's possession or reasonably available to Seller, the Plans, true and correct copies of all licenses and permits, certificates of occupancy, certificates of compliance, tenant files, and studies with respect to the functional aspects of the Project, including, without limitation, soil and compaction tests, flooding studies and environmental studies; copies of all other books and records relating to the ownership and operation of the Project; and copies of any construction contracts for the Improvements and all amendments relating thereto. (4) A "Bills Paid Affidavit" verifying that there are no unpaid bills or claims for labor performed or materials furnished to the Project by or at the instance of Seller prior to the Closing Date. (5) Copies of all insurance policies required to be provided by I/O under the Master Lease and certificates or other proof acceptable to Purchaser that all insurance required under the Master Lease to be provided to Purchaser (as landlord under the Master Lease) and Purchaser's Lender (as the mortgagee of the landlord) has been obtained and that Purchaser and Purchaser's Lender have been named as additional named insureds on the policies therefor, as their interests may -17- 22 appear. (6) An Owner Policy of Title Insurance in the face amount of the Total Purchase Price, in the standard form currently in use in the State of Texas, insuring in Purchaser fee simple, good and indefeasible title to the Realty, subject only to the Permitted Exceptions, and with, at Purchaser's cost (i) the standard exception concerning shortages in area or discrepancies or conflicts in boundary lines, or any encroachments, or any overlapping of Improvements deleted to the maximum extent permitted by applicable title insurance regulation; (ii) the exception concerning restrictions endorsed "None of Record" except as may be included in the Permitted Exceptions; (iii) the exception as to taxes limited to the year of Closing and subsequent years and endorsed "Not Yet Due and Payable"; (iv) the exception concerning parties in possession limited to I/O and Tenants, and (v) the endorsements described in Section 6.1 hereof, if any. (7) A certificate, executed and sworn to by Seller, confirming that (i) as of the Closing Date, all of the warranties and representations set forth in Article 9 hereof are true and correct, and all covenants and agreements set forth in Article 8 and Article 9 hereof have been satisfied, and (ii) that no material adverse changes have occurred with respect to any part of the Project. (8) If Seller is not a "foreign person" (as defined in the Internal Revenue Code Section 1445 and the regulations issued thereunder), a non-foreign affidavit containing such information as shall be required by Internal Revenue Code Section 1445 and regulations issued thereunder. (9) Possession of the Project in substantially the same condition as it exists on the Effective Date, subject to the rights of I/O under the Master Lease. (10) Original executed counterparts of the resolutions of Seller, and any other documents as Purchaser shall reasonably request at least five (5) days prior to the Closing Date, to evidence and confirm the power and authority of Seller to close the transaction contemplated herein. (11) If required by Purchaser's Lender, a separate Estoppel Certificate signed by I/O and/or each Tenant in substantially the form attached hereto as Exhibit C, signed by I/O and/or each respective Tenant, as applicable, and dated no earlier than thirty (30) days prior to Closing; provided that Seller shall be required only to use its reasonable and good faith efforts to obtain such Estoppel Certificate from the Tenants other than I/O (12) Such other documents, instruments and certificates as are contemplated herein to effect and complete the Closing including, without limitation, such ordinary and customary instruments as may be requested by the Title Company and Purchaser's Lender (including, without limitation, any subordination, non-disturbance and attornment agreements or similar agreements that Purchaser's Lender may reasonably require from I/O, in a form and substance reasonably satisfactory to I/O). -18- 23 (13) If not already delivered to Purchaser, all other documentation required under Article 17 hereof to be delivered to Purchaser as a condition precedent to Closing. (14) The Master Lease executed and acknowledged by I/O. 11.3 Items Delivered By Purchaser on Closing Date. On the Closing Date, provided all conditions set forth in Articles 5, 6, 7, 8 and 9 and Article 17 have been fully satisfied and/or complied with, Purchaser shall deliver for the benefit of Seller the following (all of which shall be duly executed, witnessed, and notarized, where appropriate, and, where appropriate, be in recordable form): (1) The Total Purchase Price. (2) Original executed counterparts of the resolutions of Purchaser and any other documents as Seller shall reasonably request at least five (5) days prior to the Closing Date, to evidence and confirm the power and authority of Purchaser to close the transaction contemplated herein. (3) The Master Lease executed and acknowledged by the Purchaser. (4) A subordination, non-disturbance and attornment agreement in a form reasonably acceptable to I/O and Purchaser's Lender, executed by Purchaser's Lender. (5) The Bill of Sale and Assignment in the form attached hereto as Exhibit E, duly executed and acknowledged by Purchaser. (6) Such other documents, instruments and certificates as are contemplated herein to effect and complete the Closing including, without limitation, such ordinary and customary instruments as may be requested by the Title Company. 11.4 Closing Costs and Attorneys' Fees. On the Closing Date, and except as otherwise provided for herein: (i) Purchaser shall pay Purchaser's attorneys' fees; all mortgage or similar taxes and recording fees associated with the Financing and the liens securing the same; the costs of recording the Deed and any other costs incurred by Purchaser and all other costs which Purchaser has specifically agreed to bear in other parts of this Agreement, and (ii) Seller shall pay the costs of recording all conveyancing documents other than the Deed; all fees, expenses and penalties relating to the payoff of any existing notes secured by the Project or any part thereof, and the release of any deed of trust liens and other liens associated therewith; the cost of examining and insuring title to the Project, as provided for herein (including the cost of the premium of the Owner Policy of Title Insurance, except that Purchaser shall pay the simultaneous issue premium for any Mortgagee Policy of Title Insurance (including any endorsements thereto) required by Purchaser's Lender and the costs of all endorsements and revisions to standard printed exceptions); the cost of the Survey; Seller's attorneys' fees; any other costs incurred by Seller; and all other costs which Seller has specifically agreed to bear in other parts of this Agreement. Seller and Purchaser shall share equally all escrow -19- 24 fees charged by the Title Company. In the event no agreement is contained herein respecting the payment of a particular cost or expense required to be incurred by Seller in connection with this Agreement, such cost or expense shall be paid by Seller. In the event no agreement is contained herein respecting the payment of a particular cost or expense required to be incurred by Purchaser in connection with this Agreement, such cost or expense shall be paid by Purchaser. None of Seller's closing costs and no other costs and expenses of Seller in complying with its covenants and agreements under this Agreement shall be deducted from or charged against gross income for the Project. 11.5 Prorations. Seller shall be responsible for all ad valorem taxes and assessments on the Project up to the Closing Date including, but not limited to, all special assessments assessed prior to the Closing Date even if such assessments are payable in installments that extend beyond the Closing Date, and all special assessments assessed subsequent to the Closing Date that relate to periods of time prior to the Closing Date. Seller shall be responsible for the payment of Project operating expenses for all periods prior to the Closing Date. Notwithstanding the foregoing, there shall be no prorations, credits or offsets at Closing for such expenses. Both Seller and Purchaser agree that I/O or Tenants are responsible for payment of such expenses under the I/O Master Lease, the Master Lease or the Leases. Nevertheless, to the extent I/O or Tenants fail to pay such expenses for any reason then Seller and Purchaser shall be responsible for satisfaction of such expenses as set forth above. ARTICLE 12 DESTRUCTION, DAMAGE OR CONDEMNATION Prior to the Closing Date, risk of loss with regard to the Realty and the construction, ownership, operation, management or maintenance thereof shall be borne by Seller. If, prior to the Closing Date, all or a part of the Realty is subjected to a bona fide threat of condemnation by a body having the power of eminent domain, or included in whole or in part in a governmental plan or proposal which may result in the taking of all or a part of the Realty, or is taken by eminent domain or condemnation (or a sale in lieu thereof), or all or a significant (by which term is meant damage or destruction where the estimated costs of restoration exceed $25,000.00) part of the Realty is damaged or destroyed by fire or other casualty, Purchaser may, by written notice to Seller, given within thirty (30) days after Purchaser's receiving actual notice of such plan or proposal, threat of condemnation, condemnation, damage, destruction, or sale, elect to rescind and cancel this Agreement, and upon such rescission and cancellation, the Title Company shall return the Earnest Money to Purchaser and none of the parties shall have any rights, obligations or liabilities hereunder, except those by which their express terms survive the termination hereof. The Closing Date shall be postponed, if necessary, to grant Purchaser such thirty (30) day period. If Purchaser does not elect so to rescind, or if less than a significant part of the Realty is damaged or destroyed by fire or other casualty, this Agreement shall remain in full force and effect, and the purchase contemplated herein, less any Realty destroyed by fire or other casualty or taken by eminent domain or condemnation, or sold in lieu thereof, shall be effected with no further adjustments, and on the Closing Date, Seller shall assign, transfer and set over to Purchaser (subject to the rights of I/O under the I/O Master Lease) all of Seller's right, title and interest in and to any insurance proceeds paid or to be paid with -20- 25 respect to such casualty and any awards or proceeds paid or to be paid, in connection with such taking or sale, and Purchaser shall receive a credit against the Total Purchase Price for any insurance deductible amount required to be paid by Purchaser in connection therewith. At such time as all or part of the Realty is subject to a bona fide threat of condemnation as hereinabove provided, Purchaser shall be permitted to participate in the proceedings as if Purchaser were a party to the action. ARTICLE 13 REAL ESTATE COMMISSIONS Seller has agreed to pay a brokerage commission in the amount of four percent (4%) of the Total Purchase Price to Grubb & Ellis Company, located at 1330 Post Oak Boulevard, Suite 1400, Houston, Texas 77056 at Closing in connection with the sale and purchase contemplated herein. Grubb & Ellis shall pay at Closing a referral fee in the amount of one percent (1%) of the Total Purchase Price to be divided evenly between Dan Boyles of NAI Partners Commercial and Meredith Hardy of Infincon Advisory Services. In addition, Seller shall be solely responsible for and does hereby agree to pay any and all other brokerage fees, commissions, or other remuneration of any kind arising from the execution of this Agreement or the Closing of the purchase and sale contemplated hereby which are payable to Seller's brokers or any other Person claiming on the basis of any arrangement or agreements made or alleged to be made by or on behalf of Seller in respect to the transactions herein contemplated. Seller shall forever indemnify and hold harmless Purchaser against and in respect of any and all claims, losses, liabilities and expenses, including, without limitation, attorney's fees and court costs, which Purchaser may incur on account of any claim by any broker or agent or other Person (including, without limitation, Grubb & Ellis Company, and any individual broker associated therewith) on the basis of any arrangements or agreements made or alleged to have been made by or on behalf of Seller in respect to the transactions herein contemplated. Similarly, Purchaser shall forever indemnify and hold harmless Seller against and in respect of any and all claims, losses, liabilities and expenses, including, without limitation, attorney's fees and court costs, which Seller may incur on account of any claim by any broker or agent or other Person on the basis of any arrangements or agreements made or alleged to have been made by or on behalf of Purchaser in respect to the transactions herein contemplated. The provisions of this Article 13 shall survive the Closing or the termination of this Agreement. ARTICLE 14 NOTICES All notices, requests, demands and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered personally, transmitted by confirmed facsimile, or by Federal Express or other recognized delivery service, or mailed first class, postage prepaid, certified United States mail, return receipt requested, as follows: -21- 26 If to Seller, to: IPOP Management, Inc. c/o Input/Output, Inc. 12300 Charles E. Selecman Drive Stafford, Texas 77477 Attn: C. Robert Bunch Telephone: (281) 879-3614 Facsimile: (281) 879-3632 with copy to: Haynes and Boone, LLP 1000 Louisiana, Suite 4300 Houston, Texas 77002 Attn: Robert S. Ladd, Esq. Telephone:(713) 547-2023 Facsimile:(713) 236-5534 If to Purchaser, to: N.L. Ventures III Stafford, L.P. 301 Congress Ave., Ste. 320 Austin, Texas 78701 Attn: Mr. Paul Robshaw Telephone: (512) 476-5009 Facsimile: (512) 476-7779 with a copy to: Heath D. Esterak Fulbright & Jaworski L.L.P. 300 Convent Street, Suite 2200 San Antonio, Texas 78205 Telephone: (210) 270-7161 Facsimile: (210) 270-7205 provided that any party may change its address for notice by giving to the other party written notice of such change. Any notice request, demand or other communication given under this Section shall be effective upon the earlier of (i) personal delivery to the party to receive such notice, request, demand or communication, (ii) receipt (including, without limitation, by way of a facsimile transmittal confirmation) at the address for notice as provided for herein for the party to receive such notice, request, demand or communication, or (iii) the expiration of seventy-two (72) hours from and after the date such notice, request, demand or other communication was sent in accordance herewith. Telephone numbers herein are given for convenience only; no communication made solely by telephone shall be considered a valid form of communication hereunder. -22- 27 ARTICLE 15 DEFAULTS AND REMEDIES 15.1 Seller's Remedies on Purchaser's Default. In the event that Purchaser shall fail to consummate the purchase of the Project on or before the Closing Date for any reason other than termination hereof pursuant to a right granted to Purchaser to do so, failure of any condition set forth herein, or breach by Seller of its representations, warranties, covenants or agreements hereunder, then, as its sole and exclusive remedy hereunder, Seller may terminate this Agreement and receive the Earnest Money from the Title Company, whereupon neither party shall have any further obligations hereunder except as set forth herein. Seller agrees to accept such sum as its total liquidated damages and relief and as its sole remedy, at law or in equity, for Purchaser's default hereunder, the parties having agreed that in the event of a default hereunder by Purchaser, the actual harm to Seller will be extremely difficult and impracticable to determine, and Seller and Purchaser agree that said liquidated damages are not intended as a penalty. 15.2 Purchaser's Remedies on Seller's Default. In the event Seller shall fail or refuse to fully and timely perform any of its obligations hereunder and such failure continues for five (5) days after written notice thereof, or shall fail or refuse to consummate the sale of the Project for any reason not set forth in this Agreement, except where caused solely by Purchaser's default, then as its sole and exclusive remedies hereunder, Purchaser may: (i) terminate this Agreement and recover (a) from the Title Company, the Earnest Money, and (b) from Seller, Purchaser's actual out-of- pocket expenses incurred in connection with the transaction herein contemplated, up to a maximum of $35,000.00 (including such amounts as contemplated by Sections 6.3 and 7.2 hereof), and thereafter neither party shall have any further obligations hereunder except as set forth herein, or (ii) enforce specific performance of this Agreement (and should Purchaser be successful in enforcing specific performance, Seller shall be responsible for all of Purchaser's court costs and attorneys' fees incurred in connection therewith). In the event Seller fails or refuses to perform any covenant or agreement herein undertaken or fails or refuses to furnish any item or thing or permit any inspection, then Purchaser may, at its election, either waive such compliance or performance by Seller and proceed to Closing, or extend the Closing Date for such period of time (not to exceed thirty (30) days) deemed appropriate by Purchaser in which event the substituted Closing Date shall thereafter be and constitute the Closing Date hereunder. ARTICLE 16 INDEMNITY Intentionally Deleted ARTICLE 17 SPECIAL PROVISIONS Notwithstanding anything to the contrary herein, satisfaction of all of the provisions of this Article 17 shall be a further express condition precedent to the obligations of Purchaser to close the -23- 28 transaction contemplated hereby. 17.1 Financing. Purchaser shall seek to obtain financing (the "Financing") for the acquisition of the Project from a lender ("Purchaser's Lender") on terms and conditions satisfactory to Purchaser in its sole discretion on or before the expiration of the Review Period. If Purchaser is unable to obtain such financing, then Purchaser shall have the absolute and unfettered right, at any time prior to expiration of the Review Period, to terminate this Agreement by sending written notice of such termination to Seller and the Title Company, whereupon the Title Company shall return the Earnest Money to Purchaser and the parties hereto shall have no further obligations under this Agreement, except as may otherwise be provided herein. Seller agrees to cooperate with Purchaser in seeking to cause I/O and Tenants to execute, such estoppel certificates, subordination, nondisturbance and attornment agreements, and other instruments as Purchaser's Lender may reasonably require in connection with such financing, and Seller further agrees to cooperate with Purchaser's Lender and to allow such lender and its contractors, appraisers and representatives reasonable access to the Project to inspect same and to perform such other due diligence in connection with the loan as they may reasonably deem necessary; subject, however, to the provisions set forth in Article 18 hereof. In addition, Seller agrees that Purchaser may share all studies, tests, reports, financial data and other information regarding the Project provided by Seller to Purchaser with Purchaser's Lender and prospective lenders. 17.2 Master Lease. At Closing, I/O and Purchaser shall enter into a Master Lease to be negotiated by Purchaser and I/O during the Review Period (as such term is defined below). ARTICLE 18 REVIEW PERIOD For the purposes of this Agreement, the term "Review Period" shall mean the period of time commencing on the Effective Date and expiring on the sixtieth (60th) day following the Effective Date. During the Review Period, Purchaser, at Purchaser's expense, may review all of the documents, items, information and materials identified in Section 8.1 hereof, and may conduct soil tests, structural tests, and such other engineering and economic feasibility tests and studies and such other inspections or investigations with respect to the Project, as Purchaser may desire or deem appropriate. Seller agrees to reasonably cooperate with and reasonably assist Purchaser in the physical inspection of the Project and the inspection of such documents, items, information and materials, provided that such inspection shall be conducted during normal business hours or at such other time as is reasonable and necessary to conduct the inspection, and shall not unreasonably interfere with the normal business of Seller, I/O or Tenants. If, within the Review Period, Purchaser shall, for any reason, in Purchaser's sole and absolute discretion, be dissatisfied with any aspect of the Project, then Purchaser shall have the absolute and unfettered right to terminate this Agreement by sending written notice of such termination to Seller at any time prior to the expiration of the Review Period. In the event that Purchaser terminates this Agreement, as provided above, the Title Company shall return the Earnest Money to Purchaser and the parties hereto shall have no further obligations under this Agreement, except as may otherwise be provided herein. Purchaser agrees to indemnify, defend and hold harmless Seller from, against and with respect to any and all losses, -24- 29 costs, expenses, claims, demands and causes of action (collectively, "Losses") caused by Purchaser's or any of its agents', employees' or representatives' activities at the Property pursuant to this Article 18; provided, however, the foregoing indemnity shall not extend to any Losses attributable to the acts, omissions or negligence of Seller or any of its agents, employees or representatives, or to any defects or dangerous conditions existing at the Project. Purchaser shall have the right to extend the Review Period for up to forty-five (45) additional days by delivering written notice of such extension to Seller not less than three (3) days prior to the expiration of the original Review Period if Purchaser has identified a proposed lender and Purchaser reasonably believes that it requires such additional forty-five (45) day period in order to finalize the financing described in Article 17 hereof. ARTICLE 19 MISCELLANEOUS 19.1 Disclosures. (1) Each of the parties to this Agreement shall keep confidential and shall not without the consent of the other disclose the terms of, or provide a copy of, this Agreement to any Person prior to the Closing Date, except that each party may, to the extent reasonably necessary in connection with the exercise of such party's rights and obligations hereunder or in connection with any litigation arising in connection herewith, disclose material terms hereof to the party's accountants, brokers, engineers, attorneys, lenders and other similar professionals involved in the transaction contemplated hereby. (2) Each of the parties to this Agreement shall not, without consulting the other, make any public announcements in respect of this Agreement or the transactions contemplated herein prior to the Closing Date, except as may be required to comply with Governmental Requirements in the reasonable judgment of counsel for the party making any such announcement. 19.2 Cooperation; Further Documents. (1) Each of the parties hereto agrees to use its reasonable good faith efforts to take or cause to be taken all action, and to do or cause to be done all things necessary, proper or advisable under applicable Governmental Requirements, regulations or otherwise, to consummate and to make effective the transactions contemplated by this Agreement, including, without limitation, the timely performance of all actions and things contemplated by this Agreement to be taken or done by each of the parties hereto. (2) Each party shall cooperate with the other party in such other party's discharge of the obligations hereunder, which shall include making reasonably available to the other party (but if after the Closing Date, at the other party's direct out-of-pocket expense), such of its personnel as have relevant information with respect thereto. (3) Seller shall from time to time, at the reasonable request of Purchaser, execute and deliver such instruments of transfer, conveyance and assignment in addition to those delivered -25- 30 contemporaneously herewith and at the Closing, and take such other action as Purchaser may reasonably require to more effectively transfer, convey and assign to and vest in Purchaser, and to put Purchaser in possession of, any assets being transferred, conveyed, assigned and delivered by Seller pursuant to this Agreement. 19.3 No Partnership. This Agreement is a contract of purchase and sale only and is not intended and shall not be construed to create any association, trust, partnership, joint venture, agency or any other relationship between Purchaser and Seller. 19.4 Savings Clause. Should any provision of this Agreement be held unenforceable or invalid under the laws of the United States of America or the State of Texas, or under any other applicable laws of any other jurisdiction, then the parties hereto agree that such provision shall be deemed modified for purposes of performance of this Agreement in such jurisdiction to the extent necessary to render it lawful and enforceable, or if such a modification is not possible without materially altering the intention of the parties hereto, then such provision shall be severed herefrom for purposes of performance of this Agreement in such jurisdiction. The validity of the remaining provisions of this Agreement shall not be affected by any such modification or severance, except that if any severance materially alters the intentions of the parties hereto as expressed herein (a modification being permitted only if there is no material alteration), then the parties hereto shall use commercially reasonable efforts to agree to appropriate equitable amendments to this Agreement in light of such severance. 19.5 Survival. Except as may otherwise be expressly set forth herein, each and every indemnification obligation, warranty, representation, covenant and agreement of Seller and Purchaser contained herein shall survive the execution, delivery and Closing (if any) of this Agreement for a period of one (1) year from and after the Closing Date or, if no Closing shall occur, for a period of two (2) years from and after the date of termination of this Agreement, and shall not be merged into the Deed (if any) or any other document executed and delivered prior to or at the Closing, but shall expressly survive and be binding thereafter on Seller and Purchaser, respectively. No inspections or examinations of the Project or the books, records, or information relative thereto by Purchaser shall diminish or otherwise affect Seller's indemnification obligations, representations, warranties, covenants and agreements relative thereto, and Purchaser may continue to rely thereon. 19.6 Governing Law. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of Texas. 19.7 Cumulative Rights. Except as may otherwise be set forth herein, all rights, powers and privileges conferred hereunder upon the parties shall be cumulative and not restrictive of those given by law. 19.8 No Waiver By Conduct. The failure of either party to exercise any power given such party hereunder or to insist upon strict compliance by the other party with its obligations hereunder shall not, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver of such parties rights to demand exact compliance with the terms hereof. -26- 31 19.9 Entire Agreement. This Agreement, including the exhibits, annexes and schedules attached hereto, constitutes the entire agreement and understanding between the parties hereto relating to the sale and purchase of the Project, and supersedes all prior and contemporaneous agreements and undertakings of the parties in connection therewith, including without limitation that certain Letter of Intent dated March 6, 2001, entered into between Purchaser and Seller. No statements, agreements, covenants, understandings, representations, warranties or conditions not expressed in this Agreement shall be binding upon the parties hereto, or shall be effective to interpret, change, or restrict provisions of this Agreement, unless such is in writing, signed by both parties hereto and by reference made a part hereof. This Agreement may not be modified or amended except by a subsequent agreement in writing signed by Seller and Purchaser. 19.10 Assignment. Seller shall not assign, transfer, or mortgage Seller's interest in this Agreement. Seller expressly agrees that Purchaser shall have the absolute right to assign and transfer Purchaser's interest in the Project and in this Agreement to any Affiliate without the need to obtain the consent of Seller, and in the event of any such assignment, such assignee shall succeed to all the interests and rights so assigned as though such assignee had originally executed this Agreement instead of Purchaser, and Purchaser shall thereafter be relieved of all liabilities and obligations hereunder or related hereto. 19.11 Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original, and all such counterparts together shall constitute one and the same instrument. 19.12 Binding Effect. Subject to the restrictions set forth in Section 19.10 hereof, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. 19.13 Time. Time is of the essence with respect to this Agreement, and the respective time periods set forth herein. 19.14 Captions. The captions in this Agreement are inserted for convenience and reference only, and shall in no way affect, define, limit or describe the scope, intent or construction of any provision hereof. 19.15 Pronouns. Pronouns, wherever used herein, and of whatever gender, shall include natural persons and corporations and associations of every kind and character, and the singular shall include the plural wherever and as often as may be appropriate. 19.16 Construction of Agreement. The terms and provisions of this Agreement represent the results of negotiations between Seller and Purchaser, each of which has been represented by counsel of its own choosing, and neither of which has acted under duress or compulsion, whether legal, economic or otherwise. Accordingly, the terms and provisions of this Agreement shall be interpreted and construed in accordance with their usual and customary meanings, and Seller and Purchaser hereby waive the application in connection with the interpretation and construction of this -27- 32 Agreement of any rule of law to the effect that ambiguous or conflicting terms or provisions contained in this Agreement shall be interpreted or construed against the party whose attorney prepared the executed draft or any earlier draft of this Agreement. 19.17 Third Party Beneficiaries. Except as expressly set forth herein, nothing in this Agreement is intended or shall operate to create any rights of any nature in favor of any Person not a party to this Agreement. 19.18 Recordation. Neither Seller nor Purchaser shall record this Agreement in the Real Property Records without the prior written consent of the other party. 19.19 Limitation on Damages. Notwithstanding any other provision to the contrary set forth in this Agreement, but without in any way limiting any party's indemnification obligations hereunder, no party hereto shall be liable to any other party hereto for any incidental, consequential, special, exemplary or punitive damages arising out of or in connection with this Agreement, regardless of whether the breaching or defaulting party knew or should have known of the possibility of such damages, and without regard to the nature of the claim or the underlying theory or cause of action, and each party hereby waives its right to all such remedies and damages. 19.20 Contingent Offers. Seller shall not accept, review, entertain or solicit any backup or contingent offers on the Project, or any part thereof, from any Person during the pendency of this Agreement. [Signatures of the Parties on Next Page] -28- 33 IN WITNESS WHEREOF, the parties hereto have entered into this Agreement effective as of the date first set forth on page S-3. SELLER: IPOP MANAGEMENT, INC., a Delaware corporation By: /s/ C. ROBERT BUNCH -------------------------------------- Name: C. Robert Bunch ------------------------------------ Title: Vice President ----------------------------------- S-1- 34 IN WITNESS WHEREOF, the parties hereto have entered into this Agreement effective as of the date first set forth on page S-3. PURCHASER: N.L. VENTURES III STAFFORD, L.P., a Texas limited partnership N. L. VENTURES III STAFFORD MANAGEMENT, L.L.C., a Texas limited liability corporation, its General Partner By: /s/ PETER S. CARLSEN ---------------------------------------- Name: Peter S. Carlsen Title: Manager S-2- 35 Receipt of a fully executed copy of this Agreement is hereby acknowledged, and the undersigned Title Company agrees to perform the duties of the Title Company set forth in the foregoing Agreement as and when called upon to do so. TITLE COMPANY: ALAMO TITLE COMPANY By: /s/ TOM HAMILTON ---------------------------------------------------- Name: Office of Tom Hamilton -------------------------------------------------- Title: ------------------------------------------------- "Effective Date": 6/19/01 -------------------------------------- S-3- 36 ANNEX A General Definitional Provisions (1) All terms defined in this Agreement shall have their defined meanings when used in each certificate, exhibit, schedule, annex or other instrument related thereto, unless in any case the context states or implies otherwise; and when required by the context, each term shall include the plural as well as the singular, and vice versa. (2) Definitions of each Person specifically defined herein, unless otherwise expressly provided to the contrary, include the successors, assigns, heirs and legal representatives of each such Person. (3) Unless the context otherwise requires or unless otherwise expressly provided, references to this Agreement shall include all amendments, modifications, supplements and restatements thereof or thereto, as applicable, and as in effect from time to time. Defined Terms The terms defined in this Annex A shall, for all purposes of this Agreement, have the meanings herein specified. "Affiliate" shall mean when used with respect to a Person, any Person (i) which directly or indirectly (through one or more intermediaries) controls, or is controlled by, or is under common control with, such first mentioned person or entity, or (ii) which beneficially owns, holds, or controls five percent (5%) or more of the interest of such first mentioned person or entity. The term "control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly, or as trustee or executor, of the power to direct or cause the direction of the management policies of a person or entity, whether through the ownership of stock, as trustee or executor, by contract or credit arrangement or otherwise. "Appraisal" shall have the meaning ascribed to such term in Section 8.1 hereof. "Closing" shall have the meaning ascribed to such term in Section 11.1 hereof. "Closing Date" shall have the meaning ascribed to such term in Section 11.1 hereof. "Commencement Date" shall have the meaning ascribed to such term in Article 18 hereof. "Deed" shall have the meaning ascribed to such term in Section 11.2(1) hereof. "Effective Date" shall have the meaning ascribed to such term in the introductory paragraph of this Agreement. Annex A-1 37 "Environmental Conditions" means any and all acts, omissions, events, circumstances, and conditions on or in connection with the Realty or the Project that constitute a violation of, or require remediation under, any Environmental Laws, including any pollution, contamination, degradation, damage, or injury caused by, related to, or arising from or in connection with the generation, use, handling, treatment, storage, disposal, discharge, emission or release of Hazardous Materials. "Environmental Laws" means all applicable federal, state, local or municipal laws, rules, regulations, statutes, ordinances or orders of any Governmental Authority, relating to (a) the control of any potential pollutant, or protection of health or the air, water or land, (b) solid, gaseous or liquid waste generation, handling, treatment, storage, disposal, discharge, release, emission or transportation, (c) exposure to hazardous, toxic or other substances alleged to be harmful, (d) the protection of any endangered or at-risk plant or animal life, or (e) the emission, control or abatement of noise. "Environmental Laws" shall include, but not be limited to, all of the following, together with all amendments thereto and any replacement or successor statutes: the Clean Air Act, 42 U.S.C. Section 7401 et seq., the Clean Water Act, 33 U.S.C. Section 1251 et seq., the Resource Conservation Recovery Act ("RCRA"), 42 U.S.C. Section 6901 et seq., the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., the Endangered Species Act, 16 U.S.C. Section 1531 et seq., the Safe Drinking Water Act, 42 U.S.C. Section 300f et seq., the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. Section 9601 et seq., including the Superfund Amendments and Reauthorization Act, 42 U.S.C. Section 11001, et seq., the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Section 136 et seq., and the Federal Water Pollution Control Act, 33 U.S.C. Section 1251 et seq. The term "Environmental Laws" shall also include all applicable state, local and municipal laws, rules, regulations, statutes, ordinances and orders dealing with the subject matter of the above listed federal statutes or promulgated by any Governmental Authority in order to carry out the purposes of any federal, state, local or municipal law. "Environmental Liabilities" means any and all liabilities, responsibilities, claims, suits, losses, costs (including remedial, removal, response, abatement, clean-up, investigative and/or monitoring costs and any other related costs and expenses), other causes of action recognized now or at any later time, damages, settlements, expenses, charges, assessments, liens, penalties, fines, pre-judgment and post-judgment interest, attorneys' fees and other legal costs incurred or imposed (a) pursuant to any agreement, order, notice of responsibility, directive (including directives embodied in Environmental Laws), injunction, judgment or similar documents (including settlements) arising out of, in connection with, or under Environmental Laws, (b) pursuant to any claim by a Governmental Authority or any other Person for personal injury, property damage, damage to natural resources, remediation, or payment or reimbursement of response costs incurred or expended by such Governmental Authority, Person pursuant to common law or statute and related to the use or release of Hazardous Materials, or (c) as a result of Environmental Conditions. "Environmental Permits" means any permits, licenses, approvals, consents, registrations, identification numbers or other authorizations with respect to the Project or the ownership or operation thereof required under any applicable Environmental Law. "Excluded Property" means the property described on Schedule ___ attached hereto. Annex A-2 38 "Governmental Authority" means any and all foreign, federal, state or local governments, governmental institutions, public authorities and governmental entities of any nature whatsoever, and any subdivisions or instrumentalities thereof, including, but not limited to, departments, boards, bureaus, commissions, agencies, courts, administrations and panels, and any divisions or instrumentalities thereof, whether permanent or ad hoc and whether now or hereafter constituted or existing. "Governmental Requirements" means any and all laws (including, but not limited to, applicable common law principles), statutes, ordinances, codes, rules, regulations, interpretations, guidelines, directions, orders, judgments, writs, injunctions, decrees, decisions or similar items or pronouncements, promulgated, issued, passed or set forth by any Governmental Authority. "Hazardous Materials" means any (a) petroleum or petroleum products, (b) asbestos or asbestos containing materials, (c) hazardous substances as defined by Section 101(14) of CERCLA and (d) any other chemical, substance or waste that is regulated by any Governmental Authority under any Environmental Law. "Incidental Rights" shall have the meaning ascribed to such term in Section 2.3 hereof. "Improvements" shall have the meaning ascribed to such term in Section 2.1 hereof. "Knowledge" of shall mean the current actual knowledge of Glenn Weissinger and Bob Bunch. "Land" shall have the meaning ascribed to such term in Section 2.1 hereof. "Leases" shall have the meaning ascribed to such term in the recitals hereof. "Permits" shall have the meaning ascribed to such term in Section 2.3 hereof. "Permitted Exceptions" shall have the meaning ascribed to such term in Section 6.1 hereof. "Person" shall mean any natural person, Governmental Authority, corporation, partnership, limited liability company, joint venture, association or other entity of any kind. "Personalty" shall have the meaning ascribed to such term in Section 2.2 hereof. "Plans" shall have the meaning ascribed to such term in Section 2.4 hereof. "Project" shall have the meaning ascribed to such term in Section 2.6 hereof. "Property Agreements" shall have the meaning ascribed to such term in Section 2.3 hereof. "Purchaser's Lender" shall have the meaning ascribed to such term in Section 17.1 hereof. Annex A-3 39 "Purchaser Liabilities" shall have the meaning ascribed to such term in Section 16.2 hereof. "Realty" shall have the meaning ascribed to such term in Section 2.1 hereof. "Review Period" shall have the meaning ascribed to such term in Article 18 hereof. "Seller Liabilities" shall have the meaning ascribed to such term in Section 16.1 hereof. "Survey" shall have the meaning ascribed to such term in Section 5.1 hereof. "Tenants" shall have the meaning ascribed to such term in the recitals hereof. "Title Commitment" shall have the meaning ascribed to such term in Section 6.1 hereof. "Title Company" shall mean Alamo Title Company located at 5251 Westheimer, Suite 200, Houston, Texas 77056, Attention: Tom Hamilton. "Total Purchase Price" shall have the meaning ascribed to such term in Section 4.1 hereof. Annex A-4 40 EXHIBIT A LAND DESCRIPTION TRACT 1: All of that certain tract or parcel of land containing 6.2903 acres (274,006 square feet), more or less, being all of Reserve "A-3", of Replat of Reserve "A" Parc Plaza Business Park, an addition in Fort Bend County, Texas according to the map or plat thereof recorded under Slide No. 687/B, of the Plat Records of Fort Bend County, Texas. TRACT 2: All of that certain tract or parcel of land containing 4.8017 acres (209,162 square feet), more or less, being all of Reserve "A-1", of Replat of Reserve "A" Parc Plaza Business Park, an addition in Fort Bend County, Texas according to the map or plat thereof recorded under Slide No. 687/B, of the Plat Records of Fort Bend County, Texas. TRACT 3: All of that certain tract or parcel of land containing 4.1667 acres (181,500 square feet), more or less, being all of Reserve "A-2", of Replat of Parc Plaza Business Park, an addition in Fort Bend County, Texas according to the map or plat thereof recorded under Slide No. 687/B, of the Plat Records of Fort Bend County, Texas. Exhibit A-1 41 EXHIBIT B SURVEYOR'S CERTIFICATE To: [Name of Purchaser]; Input Output, Inc., Alamo Title Insurance Company; and [Name of Lender], its successors and assigns I hereby certify that: (a) this survey was prepared by me or under my supervision in accordance with the minimum detail standards for a Category 1A Condition II Survey (Texas Minimum Detail Standards), as defined in the Texas Society of Professional Surveyors' Manual of Practice for Land Surveying in the State of Texas; (b) this survey which was established by a transit-tape (instrument) field survey actually made on the ground pursuant to the record description is true, correct and accurate as to the boundaries and areas of the subject property and the location and number of parking spaces, size, location and type of buildings and improvements thereon (if any), and as to the other matters shown hereon, it shows the location of all improvements, rights-of-way, easements and any other matters affecting the subject property; (c) there are no party walls or encroachments on adjoining premises, streets or alleys by any buildings, structures, or other improvement located on the property and there are no encroachments on the property by buildings, structures or other improvements situated on adjoining property, except as shown on the survey and set forth as a note on the survey; (d) adequate ingress to and egress from the subject property is provided by [name of streets], the same being paved, dedicated public right(s)-of-way maintained by [name of maintaining authority]; (e) the subject property does not serve any adjoining property for drainage, ingress and egress or any other purpose except as shown on the survey and set forth as a note on the survey; (f) all required building setback lines on the subject property are located as shown hereon; (g) I have received and examined a copy of a Commitment for Title Insurance Commitment No. _______________, issued by ______________________, Agent for ________ Title Insurance Company, and of each instrument listed therein; the location of each such easement, right-of-way, servitude and other matter affecting title, to the extent it can be located, has been shown on the survey with appropriate recording reference; and all matters that cannot be located have been listed as a note on the survey; and Exhibit B-1 42 (h) I have consulted the U.S. Department of Housing and Urban Development, Federal Insurance Administration Flood Hazard Boundary Map, Community Number __________, Sheet Number __________ revised __________, and found that the subject property is not located in a special flood hazard area according to the map [or if it is in a flood hazard area, please describe]. (Signature of Surveyor) (Surveyor's Seal) Registered Surveyor, State of ______________ Registered No._________ Exhibit B-2 43 EXHIBIT C ESTOPPEL CERTIFICATE THIS ESTOPPEL CERTIFICATE ("Certificate"), dated as of ________________, 2001, is executed by_________________________________, a ___________________ ("Tenant") in favor of ________________________________, a Texas _______________, and its lenders and assigns ("Purchaser"). R E C I T A L S A. Purchaser and _________________________, a ______________________ ("Landlord"), have entered into that certain Sale and Purchase Agreement, dated as of _______________________, ________ (the "Contract"), whereby Purchaser has agreed to purchase, among other things, the real property more particularly described in Exhibit A attached hereto and made a part hereof for all purposes (the "Land"), together with all improvements thereon and all rights and interests appurtenant thereto, said Land and improvements being located at __________________________ ,in the City of ____________________________, ___________________ County, _____________, and being commonly known as "________________________" (the Land, the improvements thereon, and all rights and interests appurtenant thereto are herein collectively referred to as the "Property"). B. Tenant and Landlord have entered into that certain _________________________ dated _______________________ (the "Lease"), covering portions of the Property. C. Pursuant to the Lease, Tenant has agreed that upon the request of Landlord, Tenant would execute and deliver an estoppel certificate certifying the status of the Lease. D. In connection with the Contract, Landlord has requested that Tenant execute this Certificate. NOW, THEREFORE, Tenant certifies, warrants, and represents to Purchaser and Landlord as follows: A G R E E M E N T Section 1. Lease. A true, correct and complete copy of the Lease is attached hereto as Exhibit B. Section 2. Leased Premises. Pursuant to the Lease, Tenant leases the Land and the building(s) thereon containing approximately ____________ square feet of space (the "Leased Premises"), as more particularly described in the Lease. Exhibit C-1 44 Section 3. Full Force of Lease. As of the date of this Certificate, the Lease is in full force and effect, has not been terminated, and is enforceable in accordance with its terms. Section 4. Complete Agreement. The Lease constitutes the complete agreement between Landlord and Tenant for the Leased Premises and the Property, and no amendments, modifications or extensions of the Lease, either written or oral, currently exist, other than the following, copies of which are attached hereto as part of Exhibit B (if none, please state "None"): ____________________ ________________________________________________________________________________ Section 5. Acceptance of Leased Premises. Tenant has accepted and is currently occupying the Leased Premises. Section 6. Lease Term. The term of the Lease commenced on ___________________, _______, with the first installment of rent payable under the Lease due on ___________________, _______ , and the term of the Lease ends on ____________________, 20___. Tenant has no right to renew or extend the term of the Lease except as follows (if none, please state "None"): _________________ ________________________________________________________________________________ Section 7. Purchase Rights or Similar Rights. Tenant has no option, right of first refusal, right of first offer, or other right to purchase all or any portion of the Leased Premises or all or any portion of the Property, except as follows (if none, please state "None"): _____________________________________ ________________________________________________________________________________ Section 8. Rights of Tenant. Except as expressly stated in this Certificate or the Lease, Tenant has no right, title, or interest in the Leased Premises, other than as Tenant under the Lease. Section 9. Rent. (a) The rent under the Lease is current through ______________, 20___, and Tenant is not in default in the performance of any of its obligations under the Lease. (b) Tenant is currently paying base rent under the Lease in the amount of______________________________________________ Dollars ($___________) per month. Tenant is not receiving and, to its knowledge, is not entitled to, any abatement, refunds, rebates, concessions or forgiveness of rent or other charges, free rent, partial rent, or credits, offsets or reductions in rent, except as follows (if none, please state "None"): (c) Tenant's proportionate share of maintenance expenses, insurance, real estate taxes, assessments, utilities, and other operating, administrative and overhead expenses for the Property (exclusive of utilities and other charges billed directly to Tenant and for which Tenant is solely responsible) is ______% and is currently being paid at the rate of $___________ per ____________________. All such expense payments are made by Tenant directly to Landlord, except as follows (please describe any exceptions): ________________________________________________________________. Annual Exhibit C-2 45 reconciliations of such expense payments are made on or before _______________ of each calendar year. No payments are currently due from Tenant to Landlord or from Landlord to Tenant in connection with any past reconciliations, including the last such reconciliation, made on ____________________, ______, and the next reconciliation is to be made on or before _________________________, _______ covering the period from _________________, _______ to _____________________, _______. (d) To Tenant's knowledge, there are no existing defenses or offsets against rent or other payments due or to become due under the terms of the Lease, and there has been no default or other wrongful act or omission by Landlord under the Lease or otherwise in connection with Tenant's occupancy of the Leased Premises, except as follows (if none, please state "None"): _____________________________ _____________________________________________________________________ Section 10. Security Deposit. The amount of Tenant's security deposit held by Landlord under the Lease is (if none, please state "None"): $_________________ Section 11. Prepaid Rent. The amount of prepaid rent, separate from the security deposit, is $__________, covering the period from ____________________ to ____________________. Section 12. Insurance. All insurance, if any, required to be maintained by Tenant under the Lease is presently in effect. Section 13. Pending Actions. To Tenant's knowledge, there are no actions, whether voluntary or otherwise, pending against Tenant (or any guarantor of the Tenant's obligations under the Lease) pursuant to the bankruptcy or insolvency laws of the United States or any state thereof. Section 14. Tenant Improvements. All construction of buildings, site improvements, interior tenant improvements and other requirements respecting the initial construction or any repair or remodeling of the Leased Premises that Landlord was to have performed in accordance with the terms of the Lease have been performed, completed and paid for in all respects and accepted by Tenant. All tenant allowances, reimbursements and construction and repair costs and other, similar sums agreed to be paid by Landlord respecting the Leased Premises have been paid, except as follows (if there are no further obligations on the part of Landlord to be paid or performed, please state "None"): ________________ ________________________________________________________________________________ Section 15. Guaranty. Tenant's obligations under the Lease are guaranteed by _________________________________________ ("Guarantor") (if there is no guarantor of Tenant's obligations, please state "None"). A true, correct and complete copy of such guaranty (if any) is attached hereto as Exhibit C and made a part hereof for all purposes. Section 16. Landlord's Obligations. As of the date of this Certificate, to Tenant's knowledge, (i) Landlord has performed all obligations required by Landlord pursuant to the Lease Exhibit C-3 46 subject to Landlord's maintenance and other obligations under the Lease with respect to matters arising after the date hereof; (ii) no offsets, counterclaims, or defenses of Tenant under the Lease exist against Landlord; and (iii) no events have occurred that, with the passage of time or the giving of notice, would constitute a basis for offsets, counterclaims, or defenses against Landlord, except as follows (if none, please state "None"): ____________________ ________________________________________________________________________________ Section 17. Assignments by Tenant. Tenant has not sublet or assigned the Leased Premises or the Lease or any portion thereof to any sublessee or assignee except as follows (if there are no subleases or assignments, please state "None"): ____ ________________________________________________________________________________ The address for notices to be sent to Tenant is as set forth in the Lease. Section 18. Environmental Matters. (a) To Tenant's knowledge, the use maintenance and operation of the Leased Premises complies with all applicable federal, state, county and local statutes, laws, rules and regulations of any governmental authorities relating to environmental, health or safety matters (collectively, "Environmental Laws"). (b) To Tenant's knowledge, Tenant has not used, generated, released, discharged, stored or disposed of any Hazardous Materials (as hereinafter defined) on, under, in or about the Leased Premises, or transported any Hazardous Materials to or from the Leased Premises, other than Hazardous Materials used in the ordinary and commercially reasonable course of Tenant's business in compliance with all Environmental Laws. As used herein the term "Hazardous Materials" shall mean (a) any "hazardous substance" as such term is presently defined in Section 101(14) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section 9601 et seq.) and any regulations promulgated thereunder ("CERCLA"), and any additional substances or materials which are now defined as "hazardous substances," "hazardous waste," "toxic substances" or "toxic waste" under any other Environmental law or other law applicable to the Leased Premises or under regulations promulgated pursuant thereto. (c) Tenant has not received any written notice, of any violation of any Environmental Law or of any allegation which, if true, would contradict anything contained herein and there are no writs, injunctions, decrees, orders or judgments outstanding, no lawsuits, claims, proceedings or investigations pending, relating to the use, maintenance or operation of the Leased Premises. Tenant makes this Certificate with the knowledge that it will be relied upon by Purchaser in agreeing to purchase the Property, by Landlord, and by Purchaser's lender. Further, Tenant acknowledges and agrees that this Certificate may be relied upon by any person or entity to whom Purchaser assigns its right, title and interest in and to the Contract. Exhibit C-4 47 Tenant has executed this Certificate as of the date first written above by the persons named below, who are duly authorized to do so. This Estoppel Certificate is being delivered on the express condition that the only use or purpose of this Estoppel Certificate will be to prevent Tenant from making any statement or claim contrary to any factual matters set forth herein. Tenant shall have no obligation to update this Certificate or advise of changes in circumstances that would make any statement in this Estoppel Certificate not true or complete after a date subsequent to the date hereof. [Signature of Tenant on Next Page] Exhibit C-5 48 EXECUTED as of the date first set forth above. TENANT: , a --------------------------------------- By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ Exhibit C-6 49 EXHIBIT D SPECIAL WARRANTY DEED THE STATE OF TEXAS Section Section KNOW ALL MEN BY THESE PRESENTS: COUNTY OF HARRIS Section THAT IPOP Management, Inc., a Delaware corporation ( herein called "Grantor"), for TEN AND NO/100 DOLLARS ($10.00) and other good and valuable consideration paid to Grantor by _________________________________(herein called "Grantee"), the receipt and sufficiency of which consideration are hereby acknowledged and confessed by Grantor, has GRANTED, BARGAINED, SOLD, and CONVEYED, and by these presents does GRANT, BARGAIN, SELL, and CONVEY, unto Grantee, the real property described in the attached Exhibit "A" incorporated herein for all purposes, together with all improvements situated thereon and all rights and appurtenances belonging or appertaining thereto, including, without limitation, all of Grantor's right, title and interest, if any, in and to (i) any land in the bed of any street, road or avenue open or proposed in front of or adjoining the Such real property; (ii) any rights-of-way, rights of ingress or egress or other interests in, on, or to, any land, highway, street, road, or avenue, open or proposed, in, on, or across, in front of, abutting or adjoining such real property, and any awards made, or to be made in lieu thereof, and in and to any unpaid awards for damage thereto by reason of a change of grade of any such highway, street, road, or avenue; (iii) any easement across, adjacent to or benefitting such real property, existing or abandoned; (iv) all sewage treatment capacity and water capacity and other utility capacity to serve such real property; (v) all oil, gas, and other minerals in, on, or under, and that may be produced from such real property; (vi) any land adjacent or contiguous to, or a part of such real property, whether those lands are owned or claimed by deed, limitations, or otherwise, and whether or not they are located inside or outside the description given herein, or whether or not they are held under fence by Grantor, but expressly excluding the 17.034 acre tract owned by Grantor and located adjacent to and across Charles E. Selecman Drive from such real property; (vii) any reversionary rights attributable to such real property; (viii) all water rights appurtenant to such real property; and (ix) all development rights, zoning classifications (including, without limitation, variances), rights as to non-conforming uses and/or structures, vested or "grand- fathered rights" and other entitlements pertaining to such real property (collectively referred to as the "Property"). This Special Warranty Deed is expressly made subject to the matters described in the attached Exhibit "B" incorporated herein for all purposes, to the extent the same are valid and subsisting and affect all or any part of the Property (collectively herein called the "Permitted Exceptions"). TO HAVE AND TO HOLD the Property, together with all and singular the rights and appurtenances thereunto in anywise belonging, unto Grantee and Grantee's successors and assigns, forever; and Grantor does hereby bind Grantor and Grantor's successors and assigns to WARRANT and FOREVER DEFEND all and singular the Property unto Grantee and Grantee's successors and Exhibit D-1 50 assigns, against every person whomsoever lawfully claiming or to claim the same or any part thereof, by, through, or under Grantor, but not otherwise; subject, however, to the matters set forth herein. EXECUTED as of the date set forth in Grantor's acknowledgment below, to be effective, however, as of ___________________________, 2001. IPOP MANAGEMENT, INC. a Delaware Corporation By:__________________________________________ Name:________________________________________ Title:_______________________________________ STATE OF TEXAS Section Section COUNTY OF HARRIS Section I, the undersigned, a notary public in and for said county in said state, hereby certify that _______________, who is the __________ of IPOP MANAGEMENT, INC., a Delaware corporation, has signed the foregoing instrument, and who is known to me, acknowledged before me on this day that, being informed of the contents of said instrument, he, as and with full authority, executed the same voluntarily for and as the act of said ________________________. Given under my hand and official seal this _____ day of ______________, 2001. ___________________________________________ Notary Public in and for the State of Texas ___________________________________________ Printed Name of Notary My commission expires:_____________________ Grantee's Address: __________________ c/o AIC Ventures 301 Congress Avenue Suite 320 Austin, Texas 78701 Prepared By and After Recording, Return To: Exhibit D-2 51 Fulbright & Jaworski L.L.P. 300 Convent Street, Suite 2200 San Antonio, Texas 78205 Attn: Heath Esterak Exhibit D-3 52 EXHIBIT "A" Exhibit D-4 53 EXHIBIT "B" PERMITTED EXCEPTIONS 1. Exhibit D-5 54 EXHIBIT E BILL OF SALE AND ASSIGNMENT THIS BILL OF SALE AND ASSIGNMENT is made and entered into by and between_______________________________, a _________________________ ("Assignor"), and _______________________________, a Texas limited partnership ("Assignee"). RECITALS: A. Concurrently herewith and pursuant to the terms and provisions of that certain Sale and Purchase Agreement between Assignor and _____________________________ dated _________________________ (the "Agreement"), of which all of _______________________'s rights, titles and interests in and to and under were subsequently assigned to Assignee by Assignment of Sale and Purchase Agreement and other Rights dated ____________________________, Assignor is transferring to Assignee by [Special Warranty Deed] (the "Deed") certain land situated in ___________ County, __________________, being more particularly described in Exhibit A attached hereto and made a part hereof for all purposes (the "Land"), together with all improvements thereon and all appurtenances thereto (the Land, together with all improvements thereon and all appurtenances thereto are herein collectively referred to as the "Property"). B. Pursuant to the terms of the Purchase Agreement, Assignor wishes to assign, transfer and convey to Assignee certain miscellaneous real property interests, personal property, contracts, agreements, guaranties, warranties, plans and specifications, tradename rights, and other properties, rights and interests related to the Property which Assignor has agreed to convey to Assignee under the Purchase Agreement. AGREEMENTS NOW THEREFORE, for and in consideration of the foregoing, Ten and No/100 Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confessed, Assignor and Assignee hereby agree as follows: 1. The foregoing recitals are incorporated herein for all purposes. Unless otherwise required by context, capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Agreement. 2. MISCELLANEOUS REAL PROPERTY INTERESTS To the extent the same have not been transferred by the Deed, Assignor hereby GRANTS, BARGAINS, SELLS, CONVEYS, ASSIGNS, TRANSFERS, SETS OVER, and DELIVERS unto Assignee, its successors and assigns forever, all of Assignor's right, title and interest, if any, in and to the following (herein collectively referred to as the "Miscellaneous Real Property Interests"): (i) any land in the bed of any street, road or avenue open or proposed in front of or adjoining the Land; (ii) any rights-of-way, rights of ingress or egress or other interests in, on, or to, any land, highway, street, road, or avenue, open or proposed, in, on, or across, in front of, abutting or adjoining the Land, and any awards made, or to be made in lieu thereof, and in and to any unpaid awards for damage thereto by reason of a change of grade of any such highway, street, road, or avenue; (iii) any easement across or adjacent to the Land, existing or abandoned; (iv) all sewage treatment capacity and water capacity and other utility capacity to serve the Land and Improvements; (v) all oil, gas, and other minerals in, on, or under, and that may be produced from the Land; (vi) any land adjacent Exhibit E-1 55 or contiguous to, or a part of the Land, whether those lands are owned or claimed by deed, limitations, or otherwise, and whether or not they are located inside or outside the description given herein, or whether or not they are held under fence by Seller, or whether or not they are located on the Survey referred to in Article 5 hereof; and (vii) any reversionary rights attributable to the Land. TO HAVE AND TO HOLD all of Assignor's right, title and interest in and to the Miscellaneous Real Property Interests, together with all and singular the rights and appurtenances thereto in anywise belonging, unto Assignee, and Assignee's successors and assigns forever, such that neither Assignor nor any of its successors or assigns shall have, claim or demand any rights or titles to the same or any part thereof. 3. INCIDENTAL RIGHTS Assignor hereby TRANSFERS, ASSIGNS and SETS OVER unto Assignee, its successors and assigns forever, all of Assignor's right, title and interest in and to and under the following (herein collectively referred to as the "Incidental Rights"): (a) to the extent assignable, all guaranties warranties or other similar agreements for the benefit of Assignor (but containing no obligations on the part of Seller thereunder remaining to be performed) relating to the Realty,(b) all contracts or agreements, such as maintenance, service, management, leasing or utility contracts relating, in any way, to the ownership, use, leasing, service, management, operation, maintenance and repair of the Realty (herein collectively referred to as the "Property Agreements"), a list of which is attached hereto as Exhibit B and made a part hereof for all purposes, and (c) all governmental permits, approvals, licenses, consents or entitlements heretofore granted (or granted prior to Closing) with respect to the ownership, construction, use, occupancy and operation of the Realty, other than those, if any, issued in the name of I/O or Tenants and with respect to which neither Seller nor the Project has any liability (collectively, the "Permits"), a list of which is attached hereto as Exhibit C and made a part hereof; provided, however, that the Incidental Rights shall not include (A) any Property Agreements that Assignee requests that Assignor terminate in accordance with the provisions of Section 8.1(5) of the Agreement, or (B) any Permits which are not transferable under applicable Governmental Requirements. TO HAVE AND TO HOLD all of Assignor's right, title and interest in and to the Incidental Rights, together with all and singular the rights and appurtenances thereto in anywise belonging, unto Assignee, and Assignee's successors and assigns forever, such that neither Assignor nor any of its successors or assigns shall have, claim or demand any rights or titles to the same or any part thereof. 4. Assignee hereby assumes the obligations and duties of Assignor under the Property Agreements, Permits and other guaranties, warranties, contracts, agreements, permits, and licenses hereby transferred from Assignor to Assignee, arising and accruing from and after the later of the date hereof or the date on which any required third party approvals to the assignment thereof are obtained. 5. Assignor hereby agrees to indemnify, defend and hold Assignee and its partners and their respective officers, directors, managers, shareholders, agents, employees and representatives harmless from and against all losses, costs, expenses, damages, and claims (including, without limitation, attorney's fees and court costs) arising by reason of Assignor's or any of its employees', agents' or representatives' breach, default, negligence or other malfeasance under or in connection with any of the Property Agreements or Permits or any other guaranties, warranties, contracts, agreements, permits or licenses in any way relating to the Property, whether or not the same are being hereby transferred from Assignor to Assignee. Exhibit E-2 56 6. Assignee hereby agrees to indemnify, defend and hold Assignor and its partners and their respective officers, directors, managers, shareholders, agents, employees and representatives harmless from and against all losses, costs, expenses, damages, and claims (including, without limitation, attorney's fees and court costs) arising under all Property Agreements, Permits and other guaranties, warranties, contracts, agreements, permits and licenses hereby assigned to and assumed by Assignor, to the extent such losses, costs, expenses, damages or claims arise and accrue from and after the date of Assignor's assumption thereof and are not attributable to the breach, default, negligence or other malfeasance of Assignor or any of its officers, employees, agents or representatives. 7. Assignor agrees to perform, execute and/or deliver or cause to be performed, executed and/or delivered any and all such further acts and assurances as Assignee may reasonably require to perfect Assignee's interest in and to the Miscellaneous Real Property Interests and Incidental Rights. 8. This Bill of Sale and Assignment may be executed in several counterparts, each of which shall be deemed an original, and all such counterparts together shall constitute one and the same instrument. [Signatures of Assignor and Assignee on Next Page] Exhibit E-3 57 EXECUTED on the dates of the acknowledgments set forth below, to be effective, however, for all purposes as of the date of the Deed. ASSIGNOR: , a ----------------------------------------------------- By: -------------------------------------------------- Name: ------------------------------------------------ Title: ----------------------------------------------- ASSIGNEE: , a ----------------------------------------------------- Texas limited partnership By: ____________________ MANAGEMENT, L.L.C., a Texas limited liability company, its General Partner By: -------------------------------------------- Name: ------------------------------------------ Title: ----------------------------------------- INSERT APPROPRIATE FORMS OF ACKNOWLEDGMENT AND CORPORATE SEALS, IF SEALS ARE REQUIRED UNDER APPLICABLE LAW Exhibit E-4 58 EXHIBIT A Attach legal description of the Land Exhibit E-5 59 EXHIBIT B Property Agreements Exhibit E-6 60 EXHIBIT C Permits Exhibit E-7 61 SCHEDULE 2.2 Personalty NONE Schedule 2.2-1 62 SCHEDULE 2.3(a) Property Agreements (i) Guaranties and Warranties - Air conditioning units (11) on Building 1 & 2 Five year compressor warranty - Lepco - Roof on Building 2 repaired 02/00, carries 2 year labor warranty - Brawn Roofing - Floor in Building 3, installed in 1996, carries a 10 year warranty - Creteseal Services (ii) Contracts & Agreements - Facilities Maintenance Agreement - Lepco - Enron - Janitorial Agreement - Pritchard Industries - Pest Control Agreement - A-Best Choice Pest Control - Lawn and Plant Agreement - Green Pro - Plant Magic - Electronic Security - ESS - Elevator Maintenance Agreement - VTM Schedule 2.3(a)-1 63 SCHEDULE 2.3(b) Permits - - Fort Bend Water Control - Industrial User Permit - - City of Stafford-- Alarm Permit - - Boiler Certificate of Operation - - Elevator Certificate of Compliance - - Occupancy Permits Schedule 2.3(b)-1 EX-15.1 5 h89797ex15-1.txt ACKNOWLEDGEMENT LETTER FROM KPMG LLP 1 EXHIBIT 15.1 LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION The Board of Directors and Stockholders Input/Output, Inc. Registration Statement No's. 33-54394, 33-46386, 33-50620, 33-85304, 333-14231, 333-24125, 333-80297, 333-80299, 333-36264, 333-49382, 333-60950. With respect to the subject registration statements, we acknowledge our awareness of the incorporation by reference therein of our report dated July 26, 2001 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933 (the "Act"), such report is not considered part of a registration statement prepared or certified by an accountant within the meanings of Sections 7 and 11 of the Act. /s/ KPMG LLP Houston, Texas August 14, 2001 EX-99.1 6 h89797ex99-1.txt INDEPENDENT ACCOUNTANTS' REVIEW REPORT 1 EXHIBIT 99.1 INDEPENDENT ACCOUNTANTS' REVIEW REPORT The Board of Directors and Stockholders Of Input/Output, Inc. and subsidiaries We have reviewed the accompanying consolidated balance sheet of Input/Output, Inc. and subsidiaries as of June 30, 2001, the related consolidated statements of operations for the three-month and six-month periods ended June 30, 2001 and 2000 and the related statements of cash flows for the six-month periods ended June 30, 2001 and 2000. These consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is an expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Input/Output, Inc. and subsidiaries as of December 31, 2000, and the related consolidated statements of operations, stockholders' equity and comprehensive loss and cash flows for the seven-month period ended December 31, 2000 (not presented herein); and in our report dated February 1, 2001, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2000 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ KPMG LLP Houston, Texas July 26, 2001 -----END PRIVACY-ENHANCED MESSAGE-----