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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: AUGUST 31, 1997
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ____________
COMMISSION FILE NUMBER: 1-13402
INPUT/OUTPUT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 22-2286646
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11104 WEST AIRPORT BLVD., STAFFORD, TEXAS 77477
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (281) 933-3339
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ X ] No [ ]
At August 31, 1997 there were 43,513,326 shares of common stock, par value
$0.01 per share, outstanding.
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED AUGUST 31, 1997
PART I. Financial Information.
Page
----
Item 1. Financial Statements.
Consolidated Balance Sheets
August 31, 1997 and May 31, 1997 2
Consolidated Statements of Operations
Three months ended August 31, 1997 and 1996 3
Consolidated Statements of Cash Flows
Three months ended August 31, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 7
PART II. Other Information.
Item 2. Changes in Securities 10
Item 6. Exhibits and Reports on Form 8-K 10
1
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
AUGUST 31, MAY 31,
ASSETS 1997 1997
--------- --------
Current assets:
Cash and cash equivalents $ 40,895 $ 2,573
Trade account receivables, net 29,516 61,788
Trade notes receivable, net 33,956 27,800
Income taxes receivable -- 2,403
Inventories 104,717 106,337
Prepaid expenses 2,242 1,939
-------- --------
Total current assets 211,326 202,840
Long-term trade notes receivable 34,531 27,003
Deferred income tax asset 2,402 3,097
Property, plant and equipment, net 77,874 78,376
Goodwill, net 59,994 61,024
Other assets 13,386 12,318
-------- --------
$399,513 $384,658
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 930 $ 912
Accounts payable, principally trade 17,898 13,143
Accrued expenses 13,407 18,358
Income taxes payable 506 --
-------- --------
Total current liabilities 32,741 32,413
Long-term debt 10,761 11,000
Other liabilities 2,664 2,631
Stockholders' equity:
Preferred stock, $.01 par value; authorized
5,000,000 shares, none issued -- --
Common stock, $.01 par value; authorized 100,000,000
shares; issued 43,513,326 shares at August 31, 1997
and 43,280,851 shares at May 31, 1997 435 433
Additional paid-in capital 222,516 218,973
Retained earnings 132,393 121,116
Cumulative translation adjustment (1,952) (1,673)
Unamortized restricted stock compensation (45) (235)
-------- --------
Total stockholders' equity 353,347 338,614
-------- --------
$399,513 $384,658
-------- --------
-------- --------
See accompanying notes to consolidated financial statements.
2
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS
ENDED
AUGUST 31,
--------------------------
1997 1996
----------- -----------
Net sales and other revenues $ 82,970 $ 73,004
Cost of sales 49,656 44,370
----------- -----------
Gross profit 33,314 28,634
----------- -----------
Operating expenses:
Research and development 7,388 5,890
Marketing and sales 2,884 3,307
General and administrative 6,068 5,844
Amortization of identified intangibles 1,187 1,108
----------- -----------
Total operating expenses 17,527 16,149
----------- -----------
Earnings from operations 15,787 12,485
Interest expense (322) --
Other income 1,119 1,723
----------- -----------
Earnings before income taxes 16,584 14,208
Income taxes 5,307 4,547
----------- -----------
Net earnings $ 11,277 $9,661
----------- -----------
----------- -----------
Earnings per common share $ 0.26 $ 0.22
----------- -----------
----------- -----------
Weighted average number of common and common
equivalent shares outstanding 43,793,884 43,941,921
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
3
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED
AUGUST 31,
--------------------
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $11,277 $ 9,661
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,764 2,925
Amortization of restricted stock compensation 17 167
Deferred income taxes 695 735
Pension costs 91 107
Changes in assets and liabilities:
Receivables 18,588 (25,798)
Inventories 1,620 (7,814)
Leased equipment (272) 557
Accounts payable and accrued expenses (196) (6,578)
Income taxes 2,909 1,174
Other (653) (1,106)
------- -------
Net cash provided by (used in) operating activities 37,840 (25,970)
Cash flows from investing activities:
Purchases of property, plant, and equipment (1,764) (6,397)
Investment in other assets (1,110) (2,008)
------- -------
Net cash used in investing activities (2,874) (8,405)
Cash flows from financing activities:
Borrowings from bank -- 12,550
Payments on debt (221) --
Proceeds from exercise of stock options and
related tax benefit 3,718 1,311
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Net cash provided by financing activities 3,497 13,861
Effect of foreign currency exchange rates (141) 262
------- -------
Net increase (decrease) in cash and cash equivalents 38,322 (20,252)
Cash and cash equivalents at beginning of quarter 2,573 34,252
------- -------
Cash and cash equivalents at end of quarter $40,895 $14,000
------- -------
------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
4
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) GENERAL
The consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. The financial statements reflect all
adjustments (consisting of normal recurring accruals) which are, in the opinion
of management, necessary to fairly present such information. Although the
Company believes that the disclosures are adequate to make the information
presented not misleading, certain information and footnote disclosures,
including significant accounting policies, normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. It is suggested that
these financial statements be read in conjunction with the consolidated
financial statements and the notes thereto, as well as Item 7. - "Management's
Discussion and Analysis of Results of Operations and Financial Condition,"
included in the Company's Annual Report on Form 10-K filed for the year ended
May 31, 1997.
(2) INVENTORIES
Inventories are stated at the lower of cost (primarily first-in, first-
out) or market. A summary of inventories follows (in thousands):
AUGUST 31, May 31,
1997 1997
---------- --------
Raw materials................................... $ 56,152 $ 56,573
Work-in-process................................. 24,430 23,878
Finished goods.................................. 24,135 25,886
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$104,717 $106,337
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(3) STATEMENTS OF CASH FLOWS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
does not invest or intend to invest in derivative securities. Similar
investments with original maturities beyond three months are considered short-
term investments available for sale or carried at market. Exchange rate
fluctuations have not had a material effect on the Company's Statements of Cash
Flows.
Supplemental disclosures of cash flow information for the three months
ended August 31, 1997 and 1996 follow (in thousands):
1997 1996
---- ------
Cash paid during the periods for:
Interest (net of amount capitalized)......... $342 $ --
---- ------
---- ------
Income taxes................................. $140 $2,218
---- ------
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5
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
(4) LONG-TERM DEBT
In August 1996, the Company, through one of its wholly-owned subsidiaries,
obtained a $12.6 million, ten-year term loan secured by certain of its land and
buildings located in Stafford, Texas which includes the Company's executive
offices, research and development headquarters, and recently-constructed
electronics manufacturing building. The term loan, which the Company has
guaranteed under a Limited Guaranty, bears interest at a fixed rate of 7.875%
per annum. The Company leases all of the property from its subsidiary under a
master lease, which lease has been collaterally assigned to the lender as
security for the term loan. The term loan provides for penalties for prepayment
prior to maturity.
(5) RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). SFAS
128 specifies the compilation, presentation and disclosure requirements for
earnings per share for entities with publicly held common stock or potential
common stock. The requirements of this statement will be effective for interim
and annual periods ending after December 15, 1997. Management does not believe
that the implementation of SFAS 128 will have a material effect on the
financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130). SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. The requirements of this statement will be effective for both
interim and annual periods beginning after December 15, 1997. Management does
not believe that the implementation of SFAS 130 will have a material effect on
the financial statements.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
NET SALES AND OTHER REVENUES. The Company's first quarter net sales and
other revenues increased $10.0 million, or 13.7%, to $83.0 million, compared to
the prior year's first quarter net sales and other revenues. The increase in
sales revenues was principally due to strong demand for the Company's systems
and components across substantially all of its product lines. During the first
quarter the Company sold 13 I/O SYSTEM TWO-R- MRX systems and one RSR system.
The Company also sold one I/O SYSTEM TWO MSX marine system and experienced
stronger demand for its seismic cables and geophone components and its land
vibrators (25,574 channels for the quarter) compared to six MRX and three RSR
systems (24,736 channels for the prior quarter) sold in the first quarter of
the prior fiscal year.
GROSS PROFIT MARGIN. The Company's first quarter fiscal 1998 gross profit
margin of 40.2% was comparable to the gross profit margin of 39.2% for the
first quarter of fiscal 1997. However, this year's first quarter gross profit
margin represented an improvement over the gross profit margins the Company had
experienced during the latter half of fiscal 1997; for the quarter ended May
31, 1997, the Company's gross profit margin was approximately 31%. The
principal reasons for the improvement in gross margins were the improved
environment of demand for seismic equipment and instrumentation during the
spring and summer of 1997 (which had the effect of stabilizing and firming the
Company's pricing scheme for substantially all of its products) and increased
sales of land systems, which feature higher margins than the Company's marine
and other equipment, relative to the overall sales mix.
OPERATING EXPENSES. Operating expenses increased $1.4 million, or 8.5%,
for the first quarter over the prior year's first quarter operating expenses.
Research and development expenses increased $1.5 million, or 25.4%, primarily
due to special charges for personnel expenses incurred in organizational
changes, increased depreciation and increased supplies and prototype parts
expense. Marketing and sales expenses decreased $423,000, or 12.8%, primarily
due to decreased conventions/exhibits expense and decreased advertising
expense. General and administrative expenses increased only $224,000, or 3.8%,
above the prior year. Amortization of identified intangibles increased $79,000,
or 7.1%, primarily due to goodwill resulting from an acquisition.
INTEREST EXPENSE. Interest expense for the first quarter of fiscal 1998
was $322,000, primarily attributable to the Company's long-term building
financing (see Note 4 of Notes to Consolidated Financial Statements), as
compared to nil in the first quarter of fiscal 1997.
INCOME TAX EXPENSE. The Company's effective income tax rate was
approximately 32%, both for the first quarter of fiscal 1998 and the first
quarter of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has traditionally financed its operations from internally
generated cash flow, its credit facilities and funds from equity financings.
Cash flows from operating activities before changes in working capital items
were a positive $15.8 million for the three months ended August 31, 1997. Cash
flows from operating activities after changes in working capital items were a
positive $37.8 million for the three months ended August 31, 1997 primarily due
to a $32.3 million decrease in trade accounts receivable since the beginning of
the current fiscal year. As of August 31, 1997 the Company had no borrowings
outstanding under its revolving line of credit and has $30.0 million available
for borrowings under the revolver for working capital purposes.
7
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As of August 31, 1997, total trade notes receivable had increased $13.7
million over the corresponding amount outstanding at May 31, 1997, reflecting
the increased levels of Company-financed sales during the first three months of
fiscal 1998. The Company expects that these increased levels of Company-
financed sales will continue for the foreseeable future. For information
concerning the Company's sales finance activities, see "Item 1. - BUSINESS-
Markets and Customers" of the Company's Annual Report on Form 10-K for the year
ended May 31, 1997.
The Company has from time to time sold and assigned certain of its
installment sales contracts and leases for its products to third-party
financing sources (or sold equipment to leasing companies which equipment is
then leased to customers), the terms of which often obligate the Company to (i)
guarantee or repurchase all or a portion of the contracts and leases in the
event of a default by the customer or upon certain other occurrences and/or
(ii) assist the financing parties in remarketing the purchased equipment to
satisfy the obligation. As of August 31, 1997, such third party financing
sources had purchased equipment contracts and leases which, in the aggregate,
obligated the Company to guarantee or repurchase up to approximately $13.5
million. Depending upon the Company's level of exposure to these contingent
obligations from time to time, performance of the Company's obligations under a
number of these arrangements could have a material adverse effect on the
Company's financial condition and results of operations. In addition, a number
of significant payment defaults by customers could have a material adverse
effect on the Company's financial position and results of operations.
On December 6, 1996, Grant Geophysical, Inc. ("Grant"), a geophysical
services company, filed for protection under Chapter 11 of the US Bankruptcy
Code. The Company's records reflect that on the filing date the Company had
outstanding current and long-term notes and accounts receivable of
approximately $10.6 million secured by certain seismic equipment sold by the
Company to Grant and an obligation to repurchase $1.1 million in Grant debt. In
addition, the Company has guaranteed, on a partial recourse basis, certain
lease obligations owed by Grant to an institutional lender/purchaser of Company
equipment for which the Company has rights to purchase the lessor's interest
under certain circumstances. A proposed plan of reorganization has been filed
in the case that provides for payment in full to holders of secured claims and
the assumption of these lease obligations. This plan was confirmed on September
15, 1997. The Company currently expects that it will be repaid all or
substantially all of the outstanding indebtedness owed to it by Grant. However,
no assurance can be given as to the amount and timing of any recovery to the
Company regarding these defaulted obligations.
In August 1996, a subsidiary of the Company borrowed $12.6 million in long-
term financing secured by the land, buildings and improvements housing the
Company's executive offices, research and development headquarters and new
manufacturing facility in Stafford, Texas. The loan bears interest at the rate
of 7.875% per annum and is repayable in equal monthly installments of principal
and interest of $151,439. The promissory note, which matures on September 1,
2006, contains prepayment penalties (see Note 4 of Notes to Consolidated
Financial Statements).
The Company anticipates expenditures for the current fiscal year for
exploration and development of oil and gas properties will be approximately
$2.5 million and expects to fund these expenditures from its cash flow from
operations. However, the Company currently expects that its future level of
participation in oil and gas drilling activities will be funded primarily by
cash flows from its productive properties. The Company expects to participate
in up to five wells in fiscal 1998.
8
<PAGE>
Capital expenditures for property, plant, and equipment totaled $1.8
million for the first quarter of 1998 and are expected to aggregate
approximately $10.0 million for fiscal 1998. The Company believes that the
combination of its existing working capital, unused credit available under its
working capital credit facility, internally generated cash flow and access to
other financing sources will be adequate to meet its anticipated capital and
liquidity requirements for the foreseeable future.
CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS
Certain information contained in this Quarterly Report on Form 10-Q
(particularly that contained in this Part I., Item 2. "Management's Discussion
and Analysis of Results of Operation and Financial Condition") may be deemed to
be forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934 and is subject to the "Safe Harbor" provisions
of that section., This information includes, without limitation, statements
concerning future revenues, future earnings, future costs, future margins and
future expenses; anticipated product releases and technological advances; the
future mix of business and future asset recoveries; and future demand, future
industry conditions, future capital expenditures, and future financial
condition. These statements are based on current expectations and involve a
number of risks and uncertainties. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to be correct.
When used in this report, the words "anticipate," "estimate," "expect,"
"may," "project" and similar expressions are intended to be among the
statements that identify forward-looking statements. Important factors which
could affect the Company's actual results and cause actual results to differ
materially from those results which might be projected, forecast, estimated or
budgeted by the Company in such forward-looking statements include, but are not
limited to, the following: fluctuation of quarterly financial performance due
to the timing of product shipments; the effect on gross profits margins of the
product mix sold in any period; the uncertainty of conditions affecting the
worldwide energy industry and oil and gas exploration; credit risks associated
with extended-term sales arrangements made with certain customers; retention
and financial condition of major customers; effects of future costs;
collectibility of receivables; effects of governmental regulations; future
levels and timing of capital expenditures; the timing and introduction of new
products or technologies by the Company or its competitors; the risk of a
disruption in vendor supplies; the level of competition in the seismic data
acquisition industry; risks associated with foreign sales; potential challenges
to the Company's intellectual property rights; and the dependence on and
retention of key personnel.
The foregoing review of factors should not be construed as exhaustive.
Additional factors that could cause actual results to differ materially from
those contemplated by the forward-looking statements contained in this report
may be found in the Company's Annual Report on Form 10-K for the year ended May
31, 1997, under Item 7. "Management's Discussion and Analysis of Results of
Operations and Financial Condition - Cautionary Statement for Purposes of
Forward-Looking Statements," as filed with the Securities and Exchange
Commission, which sub-section of such Form 10-K Annual Report is incorporated
herein by reference in its entirety. See Part II, Item 6. "Exhibits and Reports
on Form 8-K" of this Quarterly Report on Form 10-Q.
The Company undertakes no obligation to publicly release the result of any
revisions to any such forward-looking statements which may be made to reflect
the events or circumstances after the date hereof or to reflect the occurrence
of unanticipated events.
9
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PART II - OTHER INFORMATION.
ITEM 2. CHANGES IN SECURITIES
During the fiscal quarter ended August 31, 1997, the Company made
no sales of its equity securities that were not registered under the
Securities Act of 1933, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of documents filed as Exhibits
10.1 - Corporate Guaranty of the Company for the
benefit of BTM Capital Corporation, dated August 29, 1997
27.1 - Financial Data Schedule (included in EDGAR copy only)
99.1 - Relevant portions of Item 7. "Management's Discussion and
Analysis of Results of Operations and Financial Condition -
Cautionary Statement for Purposes of Forward Looking
Statements," as contained in the Company's Annual Report
on Form 10-K for its fiscal year ended May 31, 1997.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed by Input/Output, Inc.
during the quarter ended August 31, 1997.
10
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
INPUT/OUTPUT, INC.
By: /s/ Robert P. Brindley
---------------------------------------------
Robert P. Brindley
Executive Vice President,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
Dated: September 22, 1997
11
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CORPORATE GUARANTY
INPUT/OUTPUT, INC., a Delaware corporation ("Guarantor"), with its
principal place of business at 1104 West Airport, Stafford, Texas 77477, in
consideration of the execution and delivery of (i) an Equipment Leasing
Agreement dated as of August 29, 1997 between 3-D GEOPHYSICAL, INC., a
Delaware corporation, with its principal place of business at 8226 Park
Meadow Drive, Littleton, Colorado 80124 ("Lessee") and BTM CAPITAL
CORPORATION ("Lessor"), a Delaware corporation, with its principal place of
business at 125 Summer Street, Boston, Massachusetts 02110 (as amended or
supplemented from time to time in accordance with its terms and together with
all Lease Supplements executed pursuant thereto, the "Lease") and (ii) the
Servicing Agreement, dated as of August 27, 1997 between Lessor and
Guarantor, and for other good and valuable consideration, including, without
limitation, the providing of financing for Lessee as a customer of Guarantor,
the receipt and sufficiency of which are hereby acknowledged, Guarantor does
hereby unconditionally guarantee to Lessor, its successors and assigns,
without offset or deduction,
(i) the prompt payment when due, whether by acceleration or otherwise,
of all Rent, Supplemental Payments and all other amounts whatsoever payable
by Lessee under or pursuant to the Lease, the guaranty under this clause (i)
constituting a continuing guaranty of payment and not of collection;
(ii) in the event that Rent due under the Lease, notwithstanding the
interest rate used in the calculation of such Rent, is at any time during the
term of the Lease less than the amount of Rent that would be have been due
had such Rent been calculated using an interest rate equal to the BTM Rate,
the amount of such differential;
(iii) if Lessor shall have determined after the date hereof that the
adoption of any applicable law, rule, regulation or guideline regarding
capital adequacy, or any change in any of the foregoing or in the enforcement
or interpretation or administration of any of the foregoing by any court or
administrative or governmental authority or central bank charged with the
enforcement or interpretation or administration thereof, or compliance by
Lessor or any holding company of Lessor with any request or directive
regarding capital adequacy (whether or not having the force of law) of any
such authority, central bank or comparable agency, has or would have the
effect of reducing the rate of return on Lessor's capital or on the capital
of Lessor's holding company, if any, as a consequence of its obligations
under the Lease to a level below that which Lessor or Lessor's holding
company could have achieved but for such applicability, adoption, change or
compliance (taking into consideration Lessor's policies and the policies of
its holding company with respect to capital adequacy) by an amount deemed by
Lessor to be material, such additional amount or amounts as will compensate
Lessor or Lessor's holding company for any such reduction suffered, together
with interests on each such amount from the date demanded until payment in
full thereof at the rate set forth in Section 26 of the Lease. A certificate
of Lessor submitted to Guarantor as to any such additional amount or amounts
(including calculations thereof in reasonable detail) shall, in the absence
of manifest error, be conclusive and binding on Guarantor. In determining
such amount or amounts, Lessor may use any method of averaging and
attribution as it (in its sole and absolute discretion) shall deem applicable;
<PAGE>
(iv) in the event that any Regulatory Change shall: (A) change the basis of
taxation of any amounts payable to Lessor under the Lease (other than taxes
imposed on the overall net income of Lessor by the United States of America or
the jurisdiction in which Lessor has its principal office); or (B) impose or
modify any reserve, Federal Deposit Insurance Corporation premium or assessment,
special deposit or similar requirements relating to any extensions of credit or
other assets of, or any deposits with or other liabilities of, Lessor or its
holding company; or (C) impose any other conditions affecting the Lease (or any
of such extensions of credit assets, deposits or liabilities); and the result of
any event referred to in clause (A), (B) or (C) above shall be to increase
Lessor's or its holding company's costs and reductions in amounts receivable are
hereinafter referred to as "Additional Costs"), such additional fees or other
amounts which shall be sufficient to compensate Lessor or its holding company
for such increased cost or reduction in amounts receivable from the date of such
change, together with interest on each such amount from the date demanded until
payment in full thereof at the rate set forth in Section 26 of the Lease.
Determinations by Lessor or its holding company of the effect of any regulatory
Change on its or its holding company's costs of maintaining its investment in
the Lease or on amounts receivable by it or its holding company in respect of
any Additional Costs, shall be set forth in writing in reasonable detail and
shall be presumed correct, absent manifest error. In determining such amount or
amounts, Lessor may use any method of averaging and attribution as it (in its
sold discretion) shall deem applicable; and
(v) that Lessee will perform punctually and faithfully each and every
duty, agreement, covenant and obligation of Lessee under or pursuant to the
Lease.
For purposes of this Guaranty, the following terms shall have the following
meanings:
"BTM RATE" for any Rental Period means the sum of (i) LIBOR Rate divided by
(ii) 1 minus the Reserve Percentage for such Rental Period plus (iii)
1.50%.
"BUSINESS DAY" means a Eurodollar Business Day which is also a day on which
commercial banking institutions and foreign exchange markets settle
payments by reference to the LIBOR Rate in U.S. Dollars in New York City.
"BUSINESS DAY CONVENTION" means the convention for adjusting any relevant
date that is not a Business Day so that date will be the first following
day that is a Business Day unless that day falls in the next calendar
month, in which case that date will be the first preceding day that is a
Business Day.
"DETERMINATION DATE" means 11:00 a.m. (London time) on the date that falls
two Eurodollar Business Days prior to the first day of the Rental Period as
to which the BTM Rate is being determined.
"EURODOLLAR BUSINESS DAY" means a day on which commercial banking
institutions and foreign exchange markets settle payments by reference to
the LIBOR Rate in U.S. Dollars in London, England.
"LIBOR RATE" for any Rental Period means that rate of interest per annum
equal to the offered rate for United States dollar deposits having a period
to maturity equal
-2-
<PAGE>
to 30 days in an amount comparable to the aggregate of the then-applicable
Casualty Loss Values of the Equipment then subject to this Lease quoted
on Dow Jones Telerate Access Service page 3750 (or such other page as
may replace page 3750 on that service for the display of such information)
on a Determination Date, or if such Telerate page quotation is not
available, then the average of the rates of interest per annum
applicable to United States dollar deposits having a period to maturity
equal to 30 days (rounded upwards, if necessary, to the nearest 1/16 of 1%)
quoted on Reuters Monitor Money Rates Services at Screen page "LIBO" (or
such other page as may replace it on such service for display of
information is not available on either the Telerate screen or the Reuters
LIBO screen, then, on the date and time of determination, Lessor will
request the principal London office of each of the Reference Banks
(hereinafter defined) to provide a quotation of its LIBOR Rate for U.S.
dollar deposits having the maturity described above. The LIBOR Rate will
then be the average of the quotations provided (rounded upwards, if
necessary, to the nearest 1/16 of 1%).
"REFERENCE BANKS" means four major banks selected by Lessor on the London
interbank market.
"REGULATORY CHANGE" means any change after the date of this Lease in United
States federal, state or foreign laws or regulations (including Regulation
D and the laws or regulations that designate any assessment rate relating
to certificates of deposit or otherwise) or the adoption or making after
such date of any interpretations, directives or requests applying to a
class of banks or lenders, of or under any United States federal, state or
foreign laws or regulations (whether or not having the force of law) by any
court or governmental or monetary authority charged with the interpretation
or administration thereof.
"RESERVE PERCENTAGE" means, for any Rental Period, the percentage rate
(expressed as a decimal) prescribed by the Board of Governors of the
Federal Reserve System or any successor (the "Board of Governors") that is
in effect on the Determination Date with respect to such Rental Period, for
determining the maximum reserve requirement for a member bank of the
Federal Reserve System in New York City having deposits exceeding
$5,000,000,000.00 against Eurocurrency liabilities (as defined in
Regulation D of the Board of Governors) or in respect of any other category
of liabilities that includes deposits by reference to which the LIBOR Rate
is calculated or any category of extensions of credit or other assets that
includes loans by a non-United States office of Lessor to United States
residents. The Reserve Requirement shall reflect any other reserves
required to be maintained by such member banks by reason of any Regulatory
Change against any category of liabilities which includes deposits by which
the LIBOR Rate is to be determined.
Guarantor does hereby agree that upon the occurrence of an Event of Default
under the Lease, Guarantor will promptly pay the Rent, all Supplemental Payments
and all other amounts whatsoever due under or pursuant to the Lease, and will
perform, or will otherwise provide for and bring about promptly the performance
of, such duties, agreements, covenants and obligations of Lessee thereunder and
will, upon demand by Lessor, promptly pay all other amounts to be paid by
Guarantor under clauses (ii) through (iv) above. The obligations
-3-
<PAGE>
of Lessee hereby guaranteed, and the obligations of Guarantor set forth
above, are hereinafter referred to as the "Obligations." Without limiting
the generality of clause (i) of this paragraph, Guarantor specifically agrees
that it shall not be necessary or required, and the Guarantor shall not be
entitled to require, that the Lessor, or any successor or assignee of the
Lessor, file suit or proceed to obtain or assert a claim for personal
judgment against Lessee for the Obligations or make any effort at collection
of the Obligations from Lessee or foreclose against or seek to realize upon
any security now or hereafter existing for the personal judgment against any
other party liable for the Obligations or make any effort at collection of
the lbs from any such other party or any security or other guaranty therefor
or assert or file any claim against the assets of Lessee or other person
liable for the Obligations, or any part thereof, before or as a condition of
enforcing the liability of Guarantor under this Guaranty or requiring payment
of the Obligations by Guarantor hereunder, or at any time thereafter.
Guarantor agrees, upon demand of Lessor to either, at Lessor's option, pay
directly, or reimburse Lessor for the payment of, all costs, fees and
expenses, including, without limitation, reasonable attorneys' fees, incurred
by Lessor in the enforcement or attempted enforcement of any of its rights
hereunder. Guarantor shall have no right of subrogation, reimbursement or
indemnity whatsoever (except with respect to payments received by Guarantor
as Servicer under the Servicing Agreement) against Lessee as a result of any
payment or performance by Guarantor hereunder until all Obligations have been
paid and performed in full and Lessor has released all of its right, title
and interest in the Lease and the Equipment. Any right of subrogation,
reimbursement or indemnity Guarantor obtains against Lessee shall be junior
and subordinate to Lessor's rights against Lessee and the Equipment.
Guarantor specifically agrees that it shall not be necessary or required in
order to enforce the liability of Guarantor hereunder that there be, and
Guarantor specifically waives: notice of the acceptance of this Guaranty and of
the performance or nonperformance of the Lease; demand of payment from Lessee
except to the extent required by the Lease; presentment for payment upon Lessee
or the making of any protest; notice of the amount of the Obligations
outstanding at any time; and notice of nonpayment or failure to perform on the
part of Lessee. Guarantor further waives all defenses, offsets and
counterclaims whatsoever which Guarantor may at any time have to the payment or
performance of any of the Obligations. Guarantor agrees that Guarantor's
liability under this Guaranty shall be absolute and unconditional and shall
remain in full force and effect until Lessee shall have fully and satisfactorily
discharged all of the Obligations and shall not be affected by reason of: (i)
any waiver by Lessor, or its successors or assigns, of the performance or
observance by Lessee of any of the agreements, covenants, terms or conditions
contained in the Lease, or of any Event of Default; (ii) the extension of the
time for payment by Lessee of any Rent, supplemental Payments or other sums or
any part thereof owing or payable under or pursuant to the Lease, or of the time
for performance by Lessee of any other obligations under or pursuant to the
Lease, or the extension or renewal of the Lease; (iii) any failure, omission or
delay of the Lessor, or of its successors or assigns, to enforce, assert or
exercise any right, power or remedy conferred on Lessor under or pursuant to the
Lease, or any action on the part of Lessor, or its successors or assigns,
granting any extension or indulgence in any form to Lessee; (iv) any sublease or
other use of any Item of the Equipment, or any transfer or assignment by Lee of
any of its interest, rights or obligations, in, to and under the Lease, or with
respect to any Item of the Equipment; (v) any assignment by Lessor, or its
successors or assigns, in whole or in part, of the Lease and/or any of its
rights, title, interests
-4-
<PAGE>
or obligations thereunder, and any granting by Lessor, or its successors or
assigns, of any granting by Lessor, or its successors or assigns, of the
Equipment or any Item thereof; (vii) any compromise, settlement, renewal,
extension, indulgence, change in or waiver or modification of any of the
Obligations or the release or discharge of Lessee from the performance or
observance of any of the Obligations by operation of law; (viii) any change
in, waiver or modification of, or amendment to, any of the terms or
provisions of the Lease; (ix) any assignment or mortgaging or the purported
assignment or mortgaging of all or any part of the interest of Lessee in the
Lease or in any of the Equipment; (x) any consolidation or merger of Lessee,
or any leveraged buy-out or other form of corporate reorganization that
Lessee may become the subject of or become engaged in, whether or not
permitted under the terms of the Lease, or the sale, transfer or other
disposition by Lessee of all or substantially all of the assets and/or
liabilities of Lessee; (xi) any change in the ownership of any shares of
capital stock of Lessee; (xii) the voluntary or involuntary liquidation,
dissolution, receivership, insolvency, bankruptcy, assignment for the benefit
of creditors, reorganization, arrangement, composition or readjustment of
Lessee, or any other similar proceeding affecting the status, existence,
assets or obligations of Lessee, or the limitation of damages for the breach
of, or the disaffirmation of, the Lease in any such proceeding; (xiii) any
invalidity or unenforceability, for any reason, of the Lease, or of any
provision thereof, or of any of the Obligations, or any defect in Lessor's
title to the Equipment or any Item thereof; or (xiv) any other circumstance
that might otherwise constitute a legal or equitable discharge of Lessee
(including a discharge in bankruptcy) or of Guarantor, PROVIDED, HOWEVER,
that with respect to subsections (ii), (vii) and (viii) above, Lessor shall
not change, wive, modify or amend any term or provision of the Lease which
change, waiver, modification or amendment would materially adversely effect
Guarantor, without the prior written consent of Guarantor.
Guarantor hereby represents and warrants to Lessor and its successors and
assigns that:
(a) Guarantor is a corporation duly organized, validly existing and in
good standing under the laws of its state of incorporation as recited above, and
will take such steps as may be necessary to preserve its corporate existence;
Guarantor has the power and authority to execute and perform this Guaranty, and
has duly authorized the execution, delivery and performance of this Guaranty;
(b) no approval is required from any regulatory body, board, authority or
commission, nor from any other administrative or governmental agency, nor from
any other person, firm or corporation, with respect to the execution of this
Guaranty by Guarantor and the payment and performance by Guarantor of all of
Guarantor's obligations hereunder;
(c) this Guaranty constitutes the legal, valid and binding obligations
of Guarantor, enforceable in accordance with its terms, and the execution,
delivery and performance of the same by Guarantor will not violate
Guarantor's Certificate of Incorporation, By-Laws, or any provision of law,
any order of any court or other agency of government, or any indenture,
agreement or other instrument to which Guarantor is a party, or by or under
which Guarantor or any of Guarantor's property is bound, or be in conflict
with, result in a breach of, or constitute (with due notice and/or lapse of
time) a default under any such indenture, agreement or other instrument, or
result in the creation or imposition of any lien, charge or encumbrance of
any nature whatsoever upon any of Guarantor's property or assets;
-5-
<PAGE>
(d) all balance sheets, statements of profit and loss and other
financial data that have been delivered to Lessor with respect to Guarantor
(i) are complete and correct in all material respects, (ii) accurately
present the consolidated financial condition of Guarantor on the dates for
which, and the results of its operations for the periods for which, the same
have been furnished, and (iii) have been certified by Guarantor's independent
certified public accountants, in the case of the audited financial
statements, and by Guarantor's chief financial officer, in the case of any
unaudited financial statements, and have been prepared in accordance with
generally accepted accounting principles consistently followed throughout the
period covered thereby; all balance sheets disclose all known material
liabilities, direct and contingent, as of their respective dates; and there
has been no change in the condition of Guarantor, financial or otherwise,
since May 31, 1997, the date of the most recent financial statements
delivered to Lessor with respect to Guarantor, other than changes in the
ordinary course of business, none of which changes has been materially
adverse;
(e) there are no suits or proceedings pending or to the knowledge of
Guarantor threatened, in any court or before any regulatory commission, board
or other administrative governmental agency against or affecting Guarantor,
which will have a material adverse effect on the consolidated financial
condition or business of Guarantor;
(f) Guarantor will furnish Lessor and any assignee of Lessor (i) as soon
as available, and in any event within 120 days after the last day of each
fiscal year of Guarantor, a copy of the consolidated balance sheet of
Guarantor and its consolidated subsidiaries as of the end of each such fiscal
year, and related consolidated statements of income and retained earnings of
Guarantor and its consolidated subsidiaries for such fiscal year, certified
by an independent certified public accounting firm of recognized standing,
each on a comparative basis with correspondence statements for the prior
fiscal year, and a copy of Guarantor's form 10-K, if applicable, filed with
the Securities and Exchange Commission for such fiscal year, (ii) within 45
days after the last day of each fiscal quarter of Guarantor, (except the last
such fiscal quarter), a copy of the balance sheet as of the end of such
quarter, and statement of income and retained earnings of Guarantor and its
consolidated subsidiaries covering the fiscal year to date, each on a
comparative basis with the corresponding period of the prior year, all in
reasonable detail and certified by the treasurer or principal financial
officer of Guarantor, together with a copy of Guarantor's Form 10-Q, if
applicable, filed with the Securities and Exchange Commission for such
quarterly period, (iii) contemporaneously with its transmittal to each
stockholder of Guarantor and to the Securities and Exchange Commission, all
such other financial statements and reports as Guarantor shall send to its
stockholders and to the Securities and Exchange Commission, (iv) as soon as
available to Guarantor, the notice of any adjustment resulting from any audit
of the books and/or records of the Guarantor by any taxing authority having
jurisdiction over Guarantor, and (v) such additional financial information as
Lessor may reasonably request concerning Guarantor;
(g) Guarantor and its consolidated subsidiaries have filed all United
States income tax returns which are required to be filed, and have paid, or
made provisions for the payment of, all taxes which have or may have become
due pursuant to said returns or pursuant to any assessment received by
Guarantor or such consolidated subsidiaries, except such taxes, if any, as
are being contested in good faith and as to which adequate reserves have been
provided;
-6-
<PAGE>
(h) to the best of Guarantor's knowledge, no event has occurred and no
condition exists which does or would constitute an Event of Default under the
Lease; and
(i) Guarantor has obtained any licenses, permits, franchises or other
governmental authorizations necessary to the ownership of its property or to
the conduct of its business the existence or violation or failure of which,
individually or in the aggregate, materially adversely affects or might in the
future (so far as Guarantor now believes) materially adversely affect the
business, operations, affairs, properties or condition of Guarantor and its
subsidiaries on a consolidated basis.
Guarantor hereby covenants that Guarantor:
(a) shall at all times keep and maintain tangible net worth at an amount
not less than $180,000,000;
(b) shall at all times keep and maintain maximum Funded Debt to
Capitalization of thirty percent (30%), where "Funded Debt" means current
portion long term debt, plus long term debt, plus short term bank debt and
"Capitalization" means current portion long term debt, plus long term debt, plus
short term debt, plus shareholder's equity; and
(c) shall at all times keep and maintain maximum Liabilities to net worth
of not more than 0.5 to 1, where "Liabilities" means total liabilities plus
contingent liabilities;
in each case, determined in accordance with generally accepted accounting
principles, consistently applied. Guarantor further agrees that in the event
that Guarantor executes a new revolving or other principal credit agreement with
any party (a "New Financing") while this Guaranty remains in effect, Guarantor
shall notify Lessor of such New Financing and Guarantor and Lessor shall amend
this Guaranty to conform the financial covenants in subsections (a), (b) and (c)
above to any financial covenants contained in the documents related to such New
Financing.
This Guaranty (a) may not be assigned by Guarantor; (b) may be assigned
by Lessor and by its successors or assigns, in whole or in part, without the
consent of Guarantor, and in the event of any such assignment each of Lessors
successors or assigns shall have and may enforce against Guarantor all of the
rights of Lessor hereunder with respect to the guaranty of the payment and
performance of such of the obligations as are covered by such assignment;
(c) may be executed in several counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument; (d) shall inure to the benefit of Lessor and its successors and
assigns, and shall be binding upon the successors and, subject to the
restriction of clause (a) of this paragraph, assigns of Guarantor; (e) may be
amended or modified only by an instrument in writing, signed by a duly
authorized officer of Lessor; and (f) shall in all respects be governed by,
and construed in accordance with, the laws of the Commonwealth of
Massachusetts. Any provision of this Guaranty which is prohibited or
unenforceable in any jurisdiction (including, without limitation, by reason
of any change in the Obligations or any event described in the second
paragraph hereof) shall, as to such jurisdiction, be ineffective to the
extent of such unenforceability without invalidating or diminishing Lessor's
rights under the remaining provisions hereof or Lessor's rights hereunder
before giving effect to such change in the
-7-
<PAGE>
Obligations or such event, and any such prohibition or unenforceability in
any jurisdiction shall not invalidate or render unenforceable such provision
in any other jurisdiction. All references herein to any "successor" or
"assignee" of Lessor or to Lessor's "successors" or "assigns" shall, without
limitation, include each Assignee and Lender. All capitalized terms used
herein and not otherwise defined shall have the respective meanings given to
such terms in the Lease.
IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be executed and
attested by its duly authorized officers and its corporate seal to be affixed
hereto as of the 29th day of August, 1997.
INPUT/OUTPUT, INC.
By:
--------------------------------
Name:
--------------------------------
Title:
--------------------------------
-8-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED 8/31/97 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> AUG-31-1997
<CASH> 40,895
<SECURITIES> 0
<RECEIVABLES> 63,472
<ALLOWANCES> 0
<INVENTORY> 104,717
<CURRENT-ASSETS> 211,326
<PP&E> 77,874
<DEPRECIATION> 0
<TOTAL-ASSETS> 399,513
<CURRENT-LIABILITIES> 32,741
<BONDS> 0
0
0
<COMMON> 435
<OTHER-SE> 352,912
<TOTAL-LIABILITY-AND-EQUITY> 399,513
<SALES> 82,970
<TOTAL-REVENUES> 82,970
<CGS> 49,656
<TOTAL-COSTS> 17,527
<OTHER-EXPENSES> (1,119)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 322
<INCOME-PRETAX> 16,584
<INCOME-TAX> 5,307
<INCOME-CONTINUING> 11,277
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,277
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0
</TABLE>
<PAGE>
EXHIBIT 99.1
CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS
The Company identifies the following important risk factors which could
affect the Company's actual results and cause actual results to differ
materially from any such results which might be projected, forecast, estimated
or budgeted by the Company in such forward-looking statements:
RISK RELATED TO NEW PRODUCTS AND TECHNOLOGICAL CHANGE. The markets for the
Company's product lines are characterized by rapidly changing technology and
frequent product introductions. Whether the Company can develop and produce
successfully, on a timely basis, new and enhanced products that embody new
technology, meet evolving industry standards and practice, and achieve levels
of capability and price that are acceptable to its customers, will be
significant factors in the Company's ability to compete in the future. There
can be no assurance that the Company will not encounter resource constraints or
technical or other difficulties that could delay introduction of new products
in the future. If the Company is unable, for technological or other reasons, to
develop competitive products in a timely manner in response to changes in the
seismic data acquisition industry or other technological changes, its business
and operating results will be materially and adversely affected. In addition,
the Company's continuing development of new products inherently carries the
risk of inventory obsolescence with respect to its older products.
RISKS RELATED TO TIMING OF PRODUCT SHIPMENTS. Due to the relatively high
sales price of the Company's products and relatively low unit sales volume, the
timing in the shipment of systems and the mix of products sold can produce
fluctuations in quarter-to-quarter financial performance. See Note 13 of Notes
to Consolidated Financial Statements. One of the factors which may affect the
Company's operating results from time to time is that a substantial portion of
its net sales and other revenues in any period may result from shipments during
the latter part of a period. Because the Company establishes its sales and
operating expense levels based on its operational goals, if shipments in any
period do not meet goals, revenues and net profits may be adversely affected.
The Company believes that factors which could affect such timing in shipments
include, among others, seasonality of end-user markets, availability of
purchaser financing, manufacturing lead times, customer purchases of leased
equipment and shortages of system components. In addition, because the Company
typically operates, and expects to continue to operate, without a significant
backlog of orders for its products, the Company's manufacturing plans and
expenditure levels are based principally on sales forecasts, which sometimes
results in inventory excesses and imbalances from time to time.
RISKS RELATED TO GROSS MARGIN. The Company's gross margin percentage is a
function of the product mix sold in any period. Other factors, such as unit
volumes, inventory obsolescence, heightened price competition, changes in sales
and distribution channels, shortages in components due to timely supplies or
ability to obtain items at reasonable prices, and availability of skilled
labor, may also continue to affect the cost of sales and the fluctuation of
gross margin percentages in future periods.
UNCERTAINTY OF ENERGY INDUSTRY CONDITIONS. Demand for the Company's
products is dependent upon the level of worldwide oil and gas exploration and
development activity. Such activity in turn is primarily dependent upon oil and
gas prices, which have been subject to wide fluctuation in recent years in
response to relatively minor changes in the supply and demand for oil and
natural gas, market uncertainty and a variety of additional factors that are
beyond the control of the Company. It is impossible to predict future oil and
natural gas price movements with any certainty. No assurances can be given as
to
<PAGE>
the future level of activity in the oil and gas exploration and development
industry and its relationship to the future demand for the Company's products.
CREDIT RISK FROM SALES ARRANGEMENTS. The Company sells to many customers
on extended-term arrangements. Moreover, in connection with certain sales of
its systems and equipment, the Company has guaranteed certain loans from
unaffiliated parties to purchasers of such systems and equipment. In addition,
the Company has sold contracts and leases to third-party financing sources, the
terms of which often obligate the Company to repurchase the contracts and
leases in the event of a customer default or upon certain other occurrences.
Performance of the Company's obligations under these arrangements could have a
material adverse effect on the Company's financial condition. A number of
significant payment defaults by customers could have a material adverse effect
on the Company's financial position and results of operations.
DISRUPTION IN VENDOR SUPPLIES. The Company's manufacturing process
requires a high volume of quality components. Certain components used by the
Company are currently provided by only one vendor. In the future, the Company
may, from time to time, experience supply or quality control problems with its
suppliers, and such problems could significantly affect its ability to meet
production and sales commitments. The Company's reliance on certain vendors, as
well as industry supply conditions generally, involve several risks, including
the possibility of a shortage or a lack of availability of key components,
increases in component costs and reduced control over delivery schedules, any
of which could adversely affect the Company's future financial results.
RELIANCE ON SIGNIFICANT CUSTOMERS. A relatively small number of customers
has accounted for most of the Company's net sales, although the degree of sales
concentration with any one customer has varied from fiscal year to year.
During fiscal 1995, 1996 and 1997 the two largest customers in each of those
years accounted for 26%, 42% and 45%, respectively, of the Company's net sales
and other revenues. The loss of any of these customers could have a material
adverse effect on the Company's sales revenues.
COMPETITION. The design, manufacture and marketing of seismic data
acquisition systems is highly competitive and is characterized by continual and
rapid changes in technology. The Company's principal competitor for land
seismic equipment is Societe d'Etudes Recherches et Construction Electroniques,
an affiliate of Compagnie General de Geophysique which, unlike the Company,
possesses the advantage of being able to sell to an affiliated seismic
contractor.
Competition in the industry is expected to intensify and could adversely
affect the Company's future results. Several of the Company's competitors have
greater name recognition, more extensive engineering, manufacturing and
marketing capabilities, and greater financial, technological and personnel
resources than those available to the Company. In addition, certain companies
in the industry have expanded their product lines or technologies in recent
years as a result of acquisitions. There can be no assurance that the Company
will be able to compete successfully in the future with existing or new
competitors. Pressures from competitors offering lower-priced products could
result in future price reductions for the Company's products.
RISK FROM SIGNIFICANT AMOUNT OF FOREIGN SALES. Sales outside the United
States have historically accounted for a significant part of the Company's net
sales and other revenues. Foreign sales are subject to special risks inherent
in doing business outside of the United States, including the risk of war,
civil disturbances, embargo and government activities, which may disrupt
markets and affect
<PAGE>
operating results. Foreign sales are also generally subject to the risks of
compliance with additional laws, including tariff regulations and import/export
restrictions. The Company is, from time to time, required to obtain export
licenses and there can be no assurance that it will not experience difficulty
in obtaining such licenses as may be required in connection with export sales.
Demand for the Company's products from customers in developing countries
is difficult to predict and can fluctuate significantly from year to year. See
Note 8 of Notes to Consolidated Financial Statements. The Company believes that
these changes in demand result primarily from the instability of economies and
governments in certain developing countries, changes in internal laws and
policies affecting trade and investment, and because those markets are only
beginning to adopt new technologies and establish purchasing practices. These
risks may adversely affect the Company's future operating results and financial
position. In addition, sales to customers in developing countries on extended
terms can present heightened credit risks for the Company, for the reasons
discussed above.
PROTECTION OF INTELLECTUAL PROPERTY. The Company believes that technology
is the primary basis of competition in the industry. Although the Company
currently holds certain intellectual property rights relating to its product
lines, there can be no assurance that these rights will not be challenged by
third parties or that the Company will obtain additional patents or other
intellectual property rights in the future. Additionally, there can be no
assurance that the Company's efforts to protect its trade secrets will be
successful or that others will not independently develop products similar to
the Company's or design around any of the intellectual property rights owned by
the Company.
DEPENDENCE ON PERSONNEL. The Company's success depends upon the continued
contributions of its personnel, many of whom would be difficult to replace. The
success of the Company will depend on the ability of the Company to attract and
retain skilled employees. Changes in personnel, therefore, could adversely
affect operating results.
RISKS RELATED TO GOVERNMENT REGULATIONS AND PRODUCT CERTIFICATION. The
Company's operations are also subject to laws, regulations, government
policies, and product certification requirements worldwide. Changes in such
laws, regulations, policies, or requirements could affect the demand for the
Company's products or result in the need to modify products, which may involve
substantial costs or delays in sales and could have an adverse effect on the
Company's future operating results.
RISKS OF STOCK VOLATILITY AND ABSENCE OF DIVIDENDS. In recent years, the
stock market in general and the market for energy and technology stocks in
particular, including the Company's common stock, have experienced extreme
price fluctuations. There is a risk that stock price fluctuation could impact
the Company's operations. Changes in the price of the Company's common stock
could affect the Company's ability to successfully attract and retain qualified
personnel or complete desirable business combinations or other transactions in
the future. The Company has historically not paid cash dividends on its capital
stock, and there can be no assurances that the Company will do so.
RISKS RELATED TO ACQUISITIONS. To implement its business plans, the
Company may make further acquisitions in the future. Acquisitions require
significant financial and management resources both at the time of the
transaction and during the process of integrating the newly acquired business
into the Company's operations. The Company's operating results could be
adversely affected if it is unable to successfully integrate such new companies
into its operations. Certain acquisitions or strategic transactions may be
subject to approval by the other party's board or shareholders, domestic or
foreign governmental agencies, or other third parties. Accordingly, there is a
risk that important acquisitions or
<PAGE>
transactions could fail to be concluded as planned.
Future acquisitions by the Company could also result in issuances of
equity securities or the rights associated with the equity securities, which
could potentially dilute earnings per share. In addition, future acquisitions
could result in the incurrence of additional debt, taxes, or contingent
liabilities, and amortization expenses related to goodwill and other intangible
assets. These factors could adversely affect the Company's future operating
results and financial position.
OIL AND GAS OPERATIONS. The Company's oil and gas operations are subject
to the economic risks typically associated with exploration, development, and
production activities, including the necessity of significant expenditures to
drill exploratory wells. In conducting exploration and development activities,
the Company may drill unsuccessful wells and experience losses and changes to
earnings and, if oil or natural gas is discovered, there can be no assurance
that such oil or natural gas can be economically produced or satisfactorily
marketed. Historically, the markets for oil and natural gas have been volatile
and are likely to continue to be volatile in the future. The nature of the oil
and gas business involves certain operating hazards such as well blowouts,
cratering, explosions, uncontrollable flows of oil, natural gas or well fluids,
fires, formations with abnormal pressures, pollution, releases of toxic gas and
other environmental hazards and risks, any of which could result in losses to
the Company. While the Company's current practice is not to act as operator of
any drilling prospect, and while the Company does maintain insurance in
accordance with customary industry practices under the circumstances against
some, but not all, of such risks and losses, the occurrence of such an event
not fully covered by insurance could have a material adverse affect on the
Company's financial position and results of operation.
The foregoing review of factors pursuant to the Private Securities
Litigation Reform Act of 1995 should not be construed as exhaustive. In
addition to the foregoing, the Company wishes to refer readers to the Company's
other filings and reports with the Securities and Exchange Commission for a
further discussion of risks and uncertainties which could cause actual results
to differ materially from those contained in forward-looking statements. The
Company undertakes no obligation to publicly release the result of any
revisions to any such forward-looking statements which may be made to reflect
the events or circumstances after the date hereof or to reflect the occurrence
of unanticipated events.
