<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1999
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 ITS CHARTER)
DELAWARE 22-2286646
(STATE OR OTHER JURISDICTION OF (IRS 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, 1999 there were 50,669,031 shares of common stock, par value $0.01
per share, outstanding.
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<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED AUGUST 31, 1999
<TABLE>
<CAPTION>
<S> <C>
PART I. Financial Information. PAGE
----
Item 1. Financial Statements.
Consolidated Balance Sheets
August 31, 1999 and May 31, 1999................................................................. 2
Consolidated Statements of Operations
Three months ended August 31, 1999 and 1998..................................................... 3
Consolidated Statements of Cash Flows
Three months ended August 31, 1999 and 1998..................................................... 4
Notes to Consolidated Financial Statements......................................................... 5
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition..................................................................... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................. 22
PART II. Other Information.
Item 2. Changes in Securities and Use of Proceeds................................................... 22
Item 6. Exhibits and Reports on Form 8-K............................................................ 24
</TABLE>
1
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS AUGUST 31, MAY 31,
1999 1999
---------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................. $ 86,240 $ 75,140
Trade accounts receivable, net............................................ 19,247 21,617
Trade notes receivable, net............................................... 20,882 21,907
Income taxes receivable................................................... 11,223 15,000
Inventories, net.......................................................... 90,582 95,825
Deferred income tax asset, net............................................ 25,751 27,568
Prepaid expenses.......................................................... 1,993 1,495
-------- --------
Total current assets.............................................. 255,918 258,552
Long-term trade notes receivable, net..................................... 14,065 17,616
Deferred income tax asset, net............................................ 23,364 18,739
Property, plant and equipment, net........................................ 62,347 62,979
Goodwill, net............................................................. 85,878 87,558
Other assets.............................................................. 5,901 6,304
-------- --------
Total assets...................................................... $447,473 $451,748
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, principally trade.......................................... $ 6,702 $ 10,526
Current installments of long-term debt....................................... 1,088 1,067
Accrued expenses ............................................................ 26,247 33,347
-------- --------
Total current liabilities........................................... 34,037 44,940
Long-term debt............................................................... 8,667 8,947
Other liabilities............................................................ 1,013 887
Commitments and contingencies
Stockholders' equity:
Cumulative convertible preferred stock, $.01 par value; authorized
5,000,000 shares, issued and outstanding 55,000 shares at August 31,
1999 and 40,000 shares at May 31, 1999 (liquidation value of
$55.1 million)......................................................... 1 --
Common stock, $.01 par value; authorized 100,000,000 shares;
issued 50,669,031 shares at August 31, 1999 and 50,663,358
shares at May 31, 1999................................................... 507 507
Additional paid-in capital................................................... 343,697 327,845
Retained earnings............................................................ 63,134 72,455
Accumulated other comprehensive loss......................................... (3,327) (3,549)
Unamortized restricted stock compensation.................................... (256) (284)
-------- --------
Total stockholders' equity........................................ 403,756 396,974
-------- --------
Total liabilities and stockholders' equity........................ $447,473 $451,748
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Net sales.......................................................................... $ 29,979 $ 66,995
Cost of sales 23,994 44,716
----------- -----------
Gross profit............................................................. 5,985 22,279
----------- -----------
Operating expenses:
Research and development........................................................ 7,203 9,242
Marketing and sales............................................................. 2,881 4,013
General and administrative...................................................... 6,914 6,419
Amortization of intangibles..................................................... 1,925 1,860
----------- -----------
Total operating expenses................................................. 18,923 21,534
----------- -----------
Earnings (loss) from operations.................................................... (12,938) 745
Interest expense................................................................... (212) (242)
Other income ...................................................................... 1,034 2,843
----------- -----------
Earnings (loss) before income taxes................................................ (12,116) 3,346
Income tax (benefit) expense....................................................... (3,877) 1,071
----------- -----------
Net (loss) earnings................................................................ (8,239) 2,275
----------- -----------
Preferred stock dividend........................................................... 1,081 --
----------- -----------
Net (loss) earnings applicable to common
stockholders....................................................................... $ (9,320) $ 2,275
=========== ===========
Basic (loss) earnings per common share............................................. $ (0.18) $ 0.05
=========== ===========
Weighted average number of common
shares outstanding................................................................. 50,667,007 44,585,501
=========== ===========
Diluted (loss) earnings per common share........................................... $ (0.18) $ 0.05
=========== ===========
Weighted average number of diluted
common shares outstanding.......................................................... 50,667,007 44,702,268
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
---------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) earnings ..................................................................... $ (8,239) $ 2,275
Adjustments to reconcile net (loss) earnings to net cash used in operating
activities:
Depreciation and amortization ........................................................ 5,332 4,706
Amortization of restricted stock compensation ........................................ 28 156
Deferred income tax benefit .......................................................... (2,808) (823)
Inventory obsolescense expense ....................................................... 340 415
Bad debt expense and loan losses ..................................................... -- 800
Changes in assets and liabilities, net of effect of above provisions:
Accounts and notes receivable ........................................................ 6,946 10,022
Inventories .......................................................................... 4,903 (5,597)
Leased equipment ..................................................................... -- 335
Accounts payable and accrued expenses ................................................ (10,998) (15,216)
Income taxes payable/receivable ...................................................... 3,777 (3,454)
Other ................................................................................ 273 (645)
-------- --------
Net cash used in operating activities .......................................... (446) (7,026)
Cash flows from investing activities:
Purchases of property, plant and equipment ........................................... (3,046) (5,145)
Recovery of other assets ............................................................. -- 146
-------- --------
Net cash used in investing activities .......................................... (3,046) (4,999)
Cash flows from financing activities:
Payments on long-term debt ........................................................... (259) (237)
Proceeds from exercise of stock options .............................................. 101 19
Preferred stock dividends ............................................................ (60) --
Net proceeds from preferred stock offering ........................................... 14,804 --
-------- --------
Net cash provided by (used in) financing activities ............................ 14,586 (218)
Effect of change in foreign currency exchange rates on
cash and cash equivalents ............................................................ 6 (33)
-------- --------
Net increase (decrease) in cash and cash equivalents ................................. 11,100 (12,276)
Cash and cash equivalents at beginning of period ..................................... 75,140 72,275
-------- --------
Cash and cash equivalents at end of period ..................................... $ 86,240 $ 59,999
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
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 and the charges
described in Note 2) which are, in the opinion of management, necessary to
fairly present such information. Certain amounts previously reported in the
consolidated financial statements have been reclassified to conform to the
current year presentation. 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 for the year ended May 31, 1999, as filed with the
Securities and Exchange Commission.
(2) FIRST QUARTER CHARGES
During the first quarter of fiscal 2000, the Company recorded pretax
charges totaling $4.7 million ($3.2 million after giving effect to income
taxes, or $0.06 per share), comprised of $3.3 million primarily related to
employee severance arrangements and the closing of the Company's Ireland
facility (included in general and administrative expenses) and charges of
$1.4 million for product-related warranties (included in cost of sales).
These charges resulted from continued reduced customer demand for the
Company's equipment due to the deterioration in energy industry conditions
over the past 12 months and, more specifically, in the seismic services
sector. This deterioration resulted from, among other things, a widespread
downturn in exploration activity due to a decline in energy prices from
October 1997 through February 1999, and consolidation among energy producers.
Despite a recent recovery in commodity prices, energy producers' concerns
over the sustainability of higher prices for hydrocarbon production resulted
in lower exploration budgets by energy companies, which has resulted in
reduced demand for the Company's seismic data acquisition equipment. As of
August 31, 1999 there was approximately $1.1 million of accrued severance
costs, all of which will be paid by the end of December 2000.
(3) INVENTORIES
Inventories are stated at the lower of cost (primarily first-in,
first-out) or market. A summary of inventories follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 31, May 31,
1999 1999
---------- -------
<S> <C> <C>
Raw materials.................................. $53,442 $54,731
Work-in-process................................ 12,252 8,717
Finished goods................................. 39,329 48,624
------ ------
105,023 112,072
Less inventory reserves........................ 14,441 16,247
------ -------
$90,582 $95,825
======= =======
</TABLE>
5
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- CONTINUED -
(4) EARNINGS PER SHARE
Basic (loss) earnings per common share is computed by dividing net
(loss) earnings applicable to common stockholders by the weighted average
number of common shares outstanding during the period. Diluted (loss)
earnings per common share is determined on the assumption that outstanding
dilutive stock options and other common stock equivalents have been exercised
and the aggregate proceeds as defined were used to reacquire Company common
stock using the average price of such common stock for the period.
The following table summarizes the calculation of net (loss) earnings
applicable to common stockholders, weighted average number of common shares
outstanding and weighted average number of diluted common shares outstanding
for purposes of the computation of basic (loss) earnings per common share and
diluted (loss) earnings per common share (in thousands, except share and per
share amounts):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
AUGUST 31,
--------------------------
<S> <C> <C>
1999 1998
---- ----
Net (loss) earnings........................................... $(8,239) $2,275
Preferred stock dividend...................................... 1,081 --
------- ------
Net (loss) earnings applicable to common stockholders......... $(9,320) $2,275
======= ======
Weighted average number of common shares outstanding.......... 50,667,007 44,585,501
Stock options................................................. -- 116,767
Weighted average number of diluted
common shares outstanding..................................... 50,667,007 44,702,268
========== ==========
Basic (loss) earnings per common share........................ $(0.18) $0.05
======= =====
Diluted (loss) earnings per common share...................... $(0.18) $0.05
======= =====
</TABLE>
At August 31, 1999 and 1998, there were 4,588,813 and 3,558,393,
respectively, of shares subject to stock options that were not included in the
calculation of diluted (loss) earnings per common share, because to do so would
have been antidilutive. In addition, the cumulative convertible preferred stock
has not been considered in the computation of diluted (loss) earnings per common
share because the effect would be antidilutive.
6
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- CONTINUED -
(5) 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 use or intend to use derivative instruments. Exchange rate fluctuations
have not had a material effect on the Company's Consolidated Statements of Cash
Flows. As of August 31, 1999 and May 31, 1999, the Company had approximately
$8.2 million and $2.3 million, respectively, of certificates of deposit with one
month original maturities that were used to secure standby and commercial
letters of credit.
Supplemental disclosures of cash flow information for the three months
ended August 31, 1999 and 1998 follow (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash paid (received) during the periods for:
Interest..................................... $ 212 $ 242
========= ======
Income taxes................................. $ (3,352) $5,313
========= ======
Non-cash financing activities:
Dividends on preferred stock................. $ 1,021 $ --
========= ======
</TABLE>
(6) LONG TERM DEBT
A Company subsidiary has a $12.6 million original principal amount,
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 electronics manufacturing facility. 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.
(7) COMPREHENSIVE EARNINGS
Comprehensive (loss) earnings includes all changes in a company's
equity (except those resulting from investments by and distributions to owners).
With respect to the Company, comprehensive (loss) earnings includes net (loss)
earnings, foreign currency translation adjustments and minimum pension
liabilities. Total comprehensive (loss) earnings for the three months ended
August 31, 1999 and 1998 follow (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net (loss) earnings................................ $(8,239) $2,275
Foreign currency translation adjustments........... 222 (118)
------- ------
Total comprehensive (loss) earnings................ $(8,017) $2,157
======= ======
</TABLE>
7
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
-CONTINUED-
(8) SEGMENT AND GEOGRAPHIC INFORMATION
Late in fiscal 1999, the Company initiated a fundamental reorganization
of its internal structure. As a result of this reorganization, the Company's
management now evaluates and reviews results based on two segments, Land and
Marine. This segment structure permits increased visibility and accountability
of costs and more focused customer service and product development. Prior to
such time, the Company's management made business decisions using consolidated
financial information. The Company has determined that it is impracticable to
obtain all of the applicable information for the first quarter of fiscal year
1999 to report its operating segments for that period in accordance with the new
internal reporting structure. However, in order to provide meaningful
information available for the first quarter of fiscal 1999, the Company is able
to disclose a measure of results of operations utilizing a gross profit measure
based on its current land and marine segments. Commencing in the first quarter
of fiscal year 2000, the Company is reporting operating segment information by
the Land and Marine segments, and is measuring the operating results of these
segments based on a measure of earnings (loss) from operations excluding
unallocated corporate expenses and is able to provide asset information at
August 31, 1999 and May 31, 1999 based on the current land and marine segments.
The following summarizes this information (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
----------------------------
1999 1998
--------- ----------
<S> <C> <C>
Net sales:
Land................................................................. $ 22,692 $ 41,203
Marine............................................................... 7,287 25,792
--------- ----------
$ 29,979 $ 66,995
========= ==========
Gross profit:
Land................................................................. $ 4,996 $ 15,428
Marine............................................................... 989 6,851
--------- ----------
$ 5,985 $ 22,279
========= ==========
Loss from operations:
Land................................................................. $ (2,683)
Marine............................................................... (4,515)
Corporate expenses................................................... (5,740)
---------
$ (12,938)
=========
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31, May 31,
1999 1999
---------- --------
<S> <C> <C>
Total assets:
Land................................................................. $ 133,131 $141,510
Marine............................................................... 115,822 116,203
Corporate............................................................ 198,520 194,035
---------- --------
$ 447,473 $451,748
========== ========
</TABLE>
8
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
-CONTINUED-
Intersegment revenues are insignificant for all periods presented.
Corporate expenses not allocated to the operating segments include costs
related to corporate general and administrative personnel and activities and
costs related to certain research and development personnel and activities
not specifically identified with land or marine products. Corporate assets
include all assets specifically related to corporate personnel and
operations, substantially all cash and cash equivalents, all facilities and
manufacturing machinery and equipment that are jointly utilized by segments
and all income taxes receivable and deferred income tax assets. The
depreciation expense and facility expense related to all jointly utilized
facilities and machinery and equipment are allocated based on each segment's
use of those assets.
(9) CHANGES IN CAPITAL STRUCTURE
On August 17, 1999, SCF-IV, L.P., a Delaware limited partnership
("SCF-IV"), exercised its option to purchase 15,000 shares of Series C Preferred
Stock, par value $0.01 per share (the "Series C Preferred Stock"), under the
option granted to SCF-IV by the Company in connection with SCF-IV's purchase of
40,000 shares of Series B Preferred Stock in a privately negotiated transaction
in May 1999. The purchase price paid for the Series C Preferred Stock was $1,000
per share, resulting in net proceeds of approximately $14.8 million. The net
cash proceeds are to be used to fund the Company's research and development
projects, to provide additional working capital and for general corporate
purposes. The issuance of the Series C Preferred Stock and the underlying shares
of Common Stock were exempt from the registration requirements of Section 5 of
the Securities Act of 1933 in accordance with Section 4(2) of that Act. The
Series C Preferred Stock has substantially the same terms and conditions as the
Series B Preferred Stock, except that the fixed conversion price for the Series
C Preferred Stock is $8.50 per share, compared to $8.00 per share for the Series
B Preferred Stock.
The holders of Series C Preferred Stock are entitled to receive
cumulative cash dividends of $10.00 per share, per annum (1% of the liquidation
preference) for each share of Series C Preferred Stock. Each share of Series C
Preferred Stock is entitled to a liquidation preference of $1,000 per share,
plus all accrued and unpaid dividends.
The Series C Preferred Stock is convertible at the holder's option after
the first to occur of any of the following (the "Initial Conversion Date"): (i)
May 7, 2002, (ii) the approval by the Board of Directors of the Company of an
agreement relating to a Business Combination (as defined) or the consummation of
a Business Combination, (iii) a tender offer for Common Stock is approved or
recommended by the Board of Directors of the Company or (iv) the redemption,
repurchase or reacquisition by the Company of rights issued pursuant to the
Company's Stockholder Rights Plan or any waiver of the application of the
Company's Stockholder Rights Plan to any beneficial owner other than SCF-IV or
its affiliates (except as approved by SCF-IV's representative on the Board of
Directors of the Company). After the Initial Conversion Date and prior to the
Mandatory Conversion Date (defined below), the holders of Series C Preferred
Stock will be entitled to convert their shares into a number of fully paid and
nonassessable shares of Common Stock per share equal to, at the option of the
holder, one of, or if not specified by the holder, at the greater of, the
following (such amount being referred to as the "Conversion Ratio Amount"): (a)
the quotient of $1,000 (plus any accrued and unpaid dividends through the record
date for determining stockholders entitled to vote) divided by the fixed
conversion price of $8.50 (as adjusted from time to time in accordance with
certain anti-dilution provisions) or (b) the quotient of $1,000 increased at a
rate of eight percent per annum from August 17, 1999, compounded quarterly, less
the amount of cash dividends
9
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
-CONTINUED-
actually paid through the applicable conversion date (the "Adjusted Stated
Value"), divided by the average market price for the Common Stock during the
ten trading day period prior to the date of conversion.
On May 7, 2004 (the "Mandatory Conversion Date"), each outstanding
share of Series C Preferred Stock shall, without any action on the part of the
holder, be converted automatically into a number of fully paid and nonassessable
shares of Common Stock equal to the Conversion Ratio Amount, provided that a
shelf registration statement to be filed with the Securities and Exchange
Commission ("SEC") covering those shares of Common Stock has been declared
effective.
In the event of a conversion of Series C Preferred Stock pursuant to
which the Conversion Ratio Amount is determined using clause (b) above, then,
provided that full cumulative dividends have been paid or declared and set apart
for payment upon all outstanding shares of Series C Preferred Stock for all past
dividend periods, the Company may redeem for cash up to 50% (or such greater
percentage as the holders shall agree) of the shares of Series C Preferred Stock
surrendered for conversion at a redemption price per share equal to the Adjusted
Stated Value , in lieu of conversion.
For financial accounting purposes, based on the terms of the Series C
Preferred Stock, dividends will be recognized as a charge to retained earnings
at the rate of 8% per annum, compounded quarterly. Such preferred dividends will
reduce net earnings applicable to common stockholders accordingly. The Company
is permitted to pay dividends on Common Stock as long as the Series B and C
Preferred Stock dividends are current.
(10) COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS. The Company, along with one of its subsidiaries, a
current executive officer and a former executive officer, has been named a
defendant in an action filed on December 28, 1998, in State District Court in
Fort Bend County, Texas styled Geoview, Inc., Geoview Services, Inc. and Ralph
E. Clements vs. Input/Output, Inc., et al. The plaintiffs' petition alleges a
number of causes of action in tort and contract arising out of a purchase of
certain assets by a subsidiary of the Company in 1996. The plaintiffs have
claimed actual damages of $60 million and exemplary damages of $180 million. The
Company plans to vigorously defend against the plaintiffs' claims.
In the ordinary course of business, the Company has been named in
other various lawsuits. While the final resolution of these matters may have an
impact on the Company's consolidated financial results for a particular
reporting period, management believes that the ultimate resolution of these
matters will not have a material adverse impact on the Company's financial
position, results of operations or liquidity.
CREDIT RISK. The Company sells to many customers on extended-term
arrangements. In connection with certain sales of its systems and equipment, the
Company has also guaranteed 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. At August 31, 1999 and May 31, 1999,
the Company had guaranteed approximately $813,000 and $948,000, respectively, of
trade notes receivable sold with recourse and loans from unaffiliated parties to
purchasers of the Company's seismic equipment. Continued depressed seismic
market demand could accelerate the
10
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
-CONTINUED-
deterioration of the financial condition of certain customers. A number of
significant payment defaults by customers could have an adverse effect on the
Company's financial position and results of operations. All loans guaranteed
are collateralized by the seismic equipment. Due to the inherent
uncertainties of guaranty agreements, the Company cannot estimate the fair
value of the guaranties as of August 31, 1999.
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, embargo, and government activities, which
may disrupt markets and affect operating results.
Demand for the Company's products from customers in developing
countries is difficult to predict and can fluctuate significantly from year to
year. 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.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
INTRODUCTION. The Company's net sales are directly related to the level
of worldwide oil and gas exploration activity and the profitability and cash
flows of oil and gas companies and seismic contractors, which in turn are
affected by expectations regarding the supply and demand for oil and natural
gas, energy prices and finding and development costs. Oil and gas supply and
demand and pricing are influenced by numerous factors including, but not limited
to those described in "Cautionary Statement for Purposes of Forward-Looking
Statements" - "Continuation in Downturn in Energy Industry and Seismic Services
Industry Conditions Will Adversely Affect Results of Operations and Financial
Condition", "Significant Payment Defaults under Sales Arrangements Could
Adversely Affect the Company" and "Risk from Significant Amount of Foreign Sales
Could Adversely Affect Results of Operations". During fiscal 1999 and the first
quarter of fiscal 2000, our financial performance was adversely impacted by the
deterioration in energy industry conditions over the past 12 months and, more
specifically, in the seismic services sector. This deterioration resulted from,
among other things, a widespread downturn in exploration activity due to a
decline in energy prices from October 1997 to February 1999 and consolidation
among energy producers. Despite a recent recovery in commodity prices, energy
producers' continued concerns over the sustainability of higher prices for
hydrocarbon production resulted in lower exploration budgets by energy
companies, which has resulted in reduced demand for the Company's seismic data
acquisition equipment. As a result of these continuing prevailing conditions, we
recorded operating losses and pre-tax charges totaling $4.7 million ($3.2
million after giving effect to income taxes, or $0.06 per share) during the
first quarter of fiscal 2000.
In response to these industry conditions, we have concentrated on
lowering our cost structure, consolidating our product offerings and
reorganizing into a divisional structure to allow increased visibility and
accountability of costs and more focused customer service and product
development. We have also revised our credit policies and are implementing other
processes to better position the Company to manage through the downturn and
minimize the effects of future industry volatility on our business.
We currently believe that industry conditions will continue to
adversely impact demand for our products during the next 12 months. However, we
also believe that the initiatives discussed above will better position the
Company to return to profitability once industry conditions improve.
NET SALES. The Company's first quarter fiscal 2000 land division net
sales decreased $18.5 million, or 44.9%, to $22.7 million as compared to the
prior year's first quarter land division net sales of $41.2 million. The
Company's first quarter fiscal 2000 marine division net sales decreased $18.5
million, or 71.7%, to $7.3 million as compared to the prior year's first
quarter marine division net sales of $25.8 million. The decline in both the
land and marine division net sales is primarily attributable to the
deterioration in the seismic service industry over the past 12 months,
resulting in reduced demand for the Company's seismic data acquisition
equipment. See "Introduction" above.
GROSS PROFIT MARGIN. The Company's land division gross profit margin
decreased for the first quarter of fiscal 2000 compared to the prior year's
first quarter, from 37.4% in 1999 to 22.0% in 2000. The Company's marine
division gross profit margin decreased for the first quarter of fiscal 2000
compared to the prior year's first quarter, from 26.6% in 1999 to 13.6% in
2000. The decrease in both the land and marine division gross profit margin
was primarily due to reduced customer demand for the Company's products as a
result of prevailing industry conditions; the marine division gross profit
margin decrease also reflected charges of $1.4 million for product-related
warranties incurred during the first quarter of fiscal 2000. The marine
division gross profit margin for the first quarter of fiscal 2000 excluding
these special
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charges would have been 33.2% as compared to 26.6% in the prior year; this
increase is due to higher margins from sales of products manufactured by
DigiCourse, Inc., which was acquired during the second quarter of fiscal
1999. The Company's gross profit margin for any particular reporting period
is dependent on the product mix sold and the pricing scheme for the products
sold for that period, and may vary materially from period to period.
OPERATING EXPENSES. Operating expenses decreased $2.6 million, or
12.1%, for the first quarter of fiscal 2000 over the prior year's first quarter
operating expenses. Research and development expenses decreased $2.0 million, or
22.1%, compared to the prior year's first quarter, primarily due to reduced
salaries and other payroll related expenses, reduced contract labor and reduced
product development expenses attributable to the Company's efforts to lower its
cost structure. Marketing and sales expenses decreased $1.1 million, or 28.2%,
compared to the prior year's first quarter, primarily due to reduced salaries,
employee commissions and other payroll related expenses; reduced advertising
expenditures; and reduced convention and exhibit expenses. General and
administrative expenses increased $495,000, or 7.7%, compared to the prior
year's first quarter, primarily due to $3.3 million of charges related to
employee severance arrangements and the closing of the Company's Ireland
facility; these charges were offset in part by reduced bad debt expense and loan
losses, reduced insurance costs and reduced state and local taxes. Amortization
of intangibles increased $65,000, or 3.5%, compared to the prior year's first
quarter.
INTEREST EXPENSE. Interest expense for the first quarter of fiscal 2000
(related to the ten-year term facilities financing) was $212,000. See "Note (6)
- - Long Term Debt" of the Notes to Consolidated Financial Statements. Interest
expense for the prior year's first quarter was $242,000, also representing
interest on this facility.
INCOME TAXES. The Company's effective income tax rate was approximately
32%, for both the first quarter of fiscal 2000 and fiscal 1999.
In assessing the realizability of deferred income tax assets,
management considers 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. Management considers 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 $153 million over the next 20
years. Although the Company experienced a significant loss in fiscal 1999 and
the first quarter of fiscal 2000, the Company's taxable income for the fiscal
years 1996 through 1998 aggregated approximately $128 million. Based on the
level of historical income prior to fiscal 1999 and the Company's projections of
future taxable income over the periods that the deferred income tax assets are
deductible and the expiration date of the net operating loss carryforward,
management believes it is more likely than not that the Company will realize the
benefits of the deferred income tax assets, net of the valuation allowance at
August 31, 1999. The amount of deferred income tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income
during the carryforward period are reduced.
PREFERRED STOCK DIVIDENDS. Preferred stock dividends for the first
quarter of fiscal 2000 are related to the Series B and C Preferred Stock. Based
on the terms of the Series B and C Preferred Stock, the dividends are recognized
as a charge to retained earnings at the rate of 8% per annum, compounded
quarterly. The preferred stock dividend charge for the first quarter of fiscal
2000 was $1.1 million. There were no preferred stock dividends for fiscal 1999.
See "Note (9) - Changes in Capital Structure" of the Notes to Consolidated
Financial Statements.
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LIQUIDITY AND CAPITAL RESOURCES
GENERAL. The Company has traditionally financed its operations from
internally generated cash flows, funds from equity financings and its credit
facilities. The Company's cash and cash equivalents were $86.2 million at
August 31, 1999, an increase of $11.1 million, or 14.8%, as compared to May
31, 1999. The increase is primarily due to the August 1999 sale of 15,000
shares of Series C Preferred Stock in a privately negotiated transaction to
SCF-IV LP, for which the Company received net proceeds of approximately $14.8
million. The increase in cash attributable to the preferred stock offering
was offset in part by the purchase of property, plant and equipment and the
first quarter 2000 operating losses.
Cash flows used in operating activities were $446,000 for the first
quarter ended August 31, 1999, primarily due to decreases in accounts payable
and accrued expenses and first quarter 2000 operating losses, offset in part
by decreased accounts and notes receivable, decreased inventories and income
tax refunds.
The Company had outstanding indebtedness of $9.8 million as of
August 31, 1999 under a mortgage loan secured by the land, buildings and
improvements housing the Company's executive offices, research and
development headquarters and electronics 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 (6) -Long-term Debt" of the Notes to
Consolidated Financial Statements.
Capital expenditures for property, plant and equipment totaled $3.0
million for the first quarter of fiscal 2000. Total capital expenditures are
currently expected to aggregate $29.5 million for fiscal 2000, which includes
an estimated $23.7 million of additions to the Company's rental equipment
fleet, a portion of which will come from on-hand inventories. The Company
believes that the combination of its existing working capital, current cash
balances and access to other financing sources will be adequate to meet its
anticipated capital and liquidity requirements for the foreseeable future.
See however "-Cautionary Statement for Purposes of Forward-Looking
Statements" - "Continuation in Downturn in Energy Industry and Seismic
Services Industry Conditions Will Adversely Affect Results of Operations and
Financial Condition".
CREDIT AGREEMENT. The Company terminated its credit facility during
the first quarter of fiscal 2000. While the Company believes that it would be
able to negotiate a credit facility or facilities with similar lenders, the
Company believes that the terms currently available would not be as
advantageous as future terms may be when the Company may require a credit
facility. The Company does not anticipate the need for a credit facility at
the present time, but anticipates securing a facility or facilities in the
future at a time when the proposed terms are more likely to be more
advantageous for the Company.
YEAR 2000
Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date code field and cannot
distinguish 21st century dates from 20th century dates. These date code
fields will need to distinguish 21st century dates from 20th century dates
and, as a result, many companies' software and computer systems may need to
be upgraded or replaced in order to comply with such "Year 2000"
requirements. The Company is currently working to resolve the potential
impact of the Year 2000 issue on the computerized systems it utilizes
internally, and with regard to its products, suppliers and customers. The
Company has adopted the British Standards Institute "Definition of the Year
2000 Requirements." BSI DISC PD 2000-1 states the following: "Year 2000
conformity shall mean that neither performance or functionality is affected
by dates prior to, during, and after the Year 2000." The Company
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has developed two levels of readiness for its equipment. The Company's "Year
2000 Compliant" products will perform as per the British Standards
Guidelines. The Company's "Year 2000 Assessed" products have been assessed in
the same manner as "Year 2000 Compliant" products and issues found and
determined by the Company to be detrimental to the function of recording
seismic data have been addressed so that the Company believes that these
products will function in Year 2000 and after. As used herein, the terms
"Year 2000 Compliant" or "Year 2000 Compliance" shall mean either "Year 2000
Compliant" and/or "Year 2000 Assessed", each as defined above.
STATE OF READINESS. The Company continues to carry out its Year 2000
compliance program for the hardware and software products sold by it, the
information technology systems used in its operations ("IT Systems"), and its
non-IT Systems or embedded technology, such as building security, voice mail
and other systems. The Company's Year 2000 compliance program covers the
following phases: (i) inventory of all products, IT Systems and non-IT
Systems; (ii) assessment of repair or replacement requirements; (iii)
planning and remediation; (iv) testing; and (v) implementation. The Company
has completed the inventory and assessment phases for its products, IT
systems and non-IT systems and is in the final stages of remediation, testing
and implementation on the IT and non-IT systems and on those products
identified for remediation. The Company's program calls for completion of all
phases by the end of October 1999.
As a result of its planned component testing, the Company decided
that some of its older products in the field, which it no longer manufactures
or sells, will not be made Year 2000 compliant and the Company will not offer
Year 2000 support for these products. These products are no longer covered by
the Company's product warranties. Other Company products in the field, some
of which supersede or replace the discontinued products, are already Year
2000 Compliant, or will be made Year 2000 Compliant via remedial patches.
These patches will be made available at no charge for those products under
warranty coverage and for sale for those products that are no longer under
warranty. The Company is in the process of contacting its customers to inform
them of the availability of the Year 2000 remedial patches and encouraging
them to upgrade. All products manufactured for sale by the Company since
January 1, 1999 has been tested to be Year 2000 Compliant.
The Company relies, both domestically and internationally, upon
various vendors, governmental agencies, utility companies, telecommunications
service companies, delivery service companies and other service providers,
the operations of which are outside of the Company's control. There is no
assurance that such parties will not suffer a Year 2000 business disruption,
which could have a material adverse effect on the Company's financial
condition and results of operations.
COSTS. To date, the Company has not incurred any material
expenditures in connection with identifying, evaluating or remediating Year
2000 compliance issues. The Company has not retained an outside consultant to
assist it in its review and assessment of its Year 2000 issues. Most of its
expenditures to date have related to the opportunity cost of time spent by
employees of the Company in evaluating and remediating the Company's Year
2000 issues for its products, IT Systems and its non-IT Systems. Management
currently believes that Year 2000 expenditures will not have a material
adverse effect on the Company's operations, results of operations or
financial condition.
A portion of the Company's Year 2000 compliance expenditures that
may ultimately be incurred relate to the Company's limited warranty coverage.
As of August 31, 1999, no specific amounts had been accrued to the warranty
reserve for such costs, as the Company had not been able to make a firm
estimate of such costs. However, the Company currently estimates that based
on its assessments to date, the Company's total estimated Year 2000
compliance-related expenses will be less than $500,000. This estimate
consists of estimated costs of bringing the Company's European IT systems
into Year 2000 Compliance, and possible product warranty expense.
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RISKS. A survey was sent in November 1998 to customers, various
vendors, governmental agencies, utility companies, telecommunication service
companies, delivery service and other service companies concerning their Year
2000 compliance. Approximately 50% of the surveys sent were returned and all
of the surveys received indicated the recipient was already Year 2000
compliant or was currently carrying out a Year 2000 compliance program and
would be Year 2000 compliant by August 1999. In August 1999 a survey was sent
to the parties that had not responded to the previous survey sent in November
1998. Approximately 30% of the surveys sent in August 1999 have been returned
and all of the surveys received have indicated the recipient was already Year
2000 compliant or was currently carrying out a Year 2000 compliance program
and would be Year 2000 compliant by October 1999.
CONTINGENCY PLAN. The Company has completed its Year 2000
contingency plan for its products, IT systems and non-IT systems. The
Company's contingency plan consists of policies and procedures for addressing
any higher-risk compliance issues discovered and written communication
instructions if compliance problems are actually encountered. Also, starting
in December 1999 the Company will have a 24-hour hotline to assist in
addressing Year 2000 compliance issues that the Company's customers, vendors
or personnel may encounter. In addition, if further Year 2000 compliance
issues are discovered, the Company then will evaluate the need for one or
more contingency plans relating to those particular issues.
Due to the highly technical nature of the equipment manufactured and
sold by the Company, it is difficult to predict a "worst case" scenario if
the products provided by the Company experience a pervasive Year 2000
problem. The Company believes that if a pervasive Year 2000 product problem
did occur, it could result in a significant negative impact on the Company's
business reputation and future sales opportunities, which in turn would have
a material adverse effect on the Company's operations, results of operations
and financial position.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"), was issued by the
Financial Accounting Standards Board in June 1998. SFAS 133 standardizes the
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts. Under the standard, entities are
required to carry all derivative instruments in the statement of financial
position at fair value. The Company will adopt SFAS 133 beginning in fiscal
year 2002. The Company does not expect the adoption of SFAS 133 to have a
material effect on its financial condition or results of operation because
the Company does not enter into derivative or other financial instruments for
trading or speculative purposes nor does the Company use or intend to use
derivative financial instruments or derivative commodity instruments.
OTHER CONSIDERATIONS
Demand for the Company's products is dependent upon the level of
worldwide oil and gas exploration and development activity. This activity in
turn is primarily dependent upon oil and gas prices, which have been subject
to wide fluctuation in recent years. During the first quarter of fiscal 2000,
our financial performance was adversely impacted by the deterioration in
energy industry conditions over the past 12 months and, more specifically, in
the seismic services sector. This deterioration resulted from, among other
things, a widespread downturn in exploration activity due to a decline in
energy prices from October 1997 to February 1999 and consolidation among
energy producers. Despite a recent recovery in commodity prices, energy
producers' continuing concerns over the sustainability of higher prices for
hydrocarbon production resulted in lower exploration budgets by energy
companies, which has resulted in reduced demand for the Company's seismic
data acquisition equipment.
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CREDIT RISK. A continuation of reduced demand for the services of
the Company's customers will further strain the revenues and cash resources
of customers of the Company, thereby resulting in a higher likelihood of
defaults in the customers' timely payment of their obligations under the
Company's credit sales arrangements. Increased levels of payment defaults
with respect to the Company's credit sales arrangements could have a material
adverse effect on the Company's results of operations.
During fiscal 1999 and the first quarter of fiscal 2000 there was
considerable turmoil and uncertainty in foreign financial markets. The
Russian ruble has been under significant pressure, requiring the Russian
government to raise interest rates substantially, and to seek special
assistance from the International Monetary Fund in order to defend its
currency. At the present time, it is not possible to predict whether the
Russian government will be successful in avoiding another devaluation of the
ruble, or when stability will return to its financial markets. Any further
devaluation of the ruble could exacerbate existing economic problems in
Russia. In addition, the Company sells its products to customers in Latin
American countries, which have also experienced economic problems and the
effects of devaluations.
The Company's combined gross trade accounts receivable and trade
notes receivable balance as of August 31, 1999 from customers in Russia and
other Former Soviet Union countries was approximately $22.7 million and was
approximately $10.3 million from customers in Latin American countries. As of
August 31, 1999 the total allowance for doubtful accounts (foreign and US)
was $7.8 million and the allowance for loan loss was $41.3 million. During
the first quarter of fiscal 2000, there were $9.3 million of sales to
customers in Russia and other Former Soviet Union countries (essentially all
based on cash sales backed by letters of credit) and $39,000 of sales to
customers in Latin American countries. All terms of sale for these foreign
receivables are denominated in US dollars. To the extent that economic
conditions in the Former Soviet Union, Latin America or elsewhere negatively
affect future sales to the Company's customers in those regions or the
collectibility of the Company's existing receivables, the Company's future
results of operations, liquidity and financial condition may be adversely
affected.
See "Note 10 - Commitments and Contingencies" of Notes to
Consolidated Financial Statements and "- Cautionary Statement for Purposes of
Forward-Looking Statements - Continuation in Downturn in Energy Industry and
Seismic Services Industry Conditions Will Adversely Affect Results of
Operations and Financial Condition," "- Significant Payment Defaults Under
Sales Arrangements Could Adversely Affect the Company" and "- Risk from
Significant Amount of Foreign Sales Could Adversely Affect Results of
Operations".
CONVERSION TO THE EURO CURRENCY. On January 1, 1999, certain members
of the European Union established fixed conversion rates between their
existing currencies and the European Union's common currency, the euro. The
Company owns facilities and manufactures components for its systems in two
member countries. The transition period for the introduction of the euro is
between January 1, 1999 and June 30, 2002. The Company is addressing the
issues involved with the introduction of the euro. The more important issues
facing the Company include: converting information technology systems;
reassessing currency risk and processing tax and accounting records.
Based on its progress to date in reviewing this matter, the Company
believes that the introduction of the euro will not have a significant impact
on the manner in which it conducts its business affairs and processes its
business and accounting records. Therefore, conversion to the euro should not
have a material effect on the Company's financial condition or results of
operations.
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CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS
Certain information contained in this Quarterly Report on Form 10-Q
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, or otherwise, may be deemed to be forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934 and
are subject to the "Safe Harbor" provisions of that section. This information
includes, without limitation, statements concerning future results of
operation, future revenues, future costs and expenses, future margins and
future writedowns and special charges; the length of the period of the
downturn in demand for the Company's products; anticipated product releases
and technological advances; the future mix of business and future asset
recoveries; the realization of deferred tax assets; the resolution of
contingent liabilities; the Company's Year 2000 issues and their resolution;
the inherent unpredictability of adversarial proceedings; demand for the
Company's products; future capital expenditures and future financial
condition of the Company; energy industry and seismic services industry
conditions; and world economic conditions, including that in Former Soviet
Union, Latin American and Asian countries. These statements are based on
current expectations and involve a number of risks and uncertainties,
including those set forth below and elsewhere in this Quarterly Report on
Form 10-Q. 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:
CONTINUATION IN DOWNTURN IN ENERGY INDUSTRY AND SEISMIC SERVICES
INDUSTRY CONDITIONS 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. 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 control of the Company. Worldwide oil
prices declined from October 1997 and remained at lower levels through
February 1999. Despite a recent recovery in commodity prices, energy
producers' continuing concerns over the sustainability of higher prices for
hydrocarbon production resulted in lower exploration budgets by energy
companies, which has resulted in reduced demand for the Company's seismic
data acquisition equipment. Other factors which have negatively impacted
demand for Company products have been the weakened financial condition of
many of the Company's customers, consolidations among energy producers, an
over-supply of current-generation seismic equipment and the destabilized
economies in many developing countries. Despite relatively higher prices for
oil and natural gas in recent months, it is expected that any turnaround for
the seismic equipment market will occur later than for other sectors of the
energy services industry. It is impossible to predict the length of the
downturn for the seismic equipment market or future oil and natural gas
prices with any certainty. A further prolonged downturn in market demand for
the Company's products will have a material adverse effect on the Company's
results of operation and financial condition. No assurances can be given as
to future levels of worldwide oil and natural gas prices, the future level of
activity in the oil and gas exploration and development industry and their
relationship(s) to the demand for the Company's products. Additionally, no
assurances can be given that the Company's efforts to reduce and contain
costs will be sufficient to offset the effect of the expected continued lower
levels of Company net sales until industry conditions improve.
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FAILURE TO DEVELOP PRODUCTS AND KEEP PACE WITH TECHNOLOGICAL CHANGE
WILL ADVERSELY AFFECT RESULTS OF OPERATIONS. 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. The
Company has completed six field tests of its new VectorSeis-TM-,
multi-component digital sensor. Further tests are planned and may
increasingly involve potential customers. There can be no assurance that the
Company will not encounter resource constraints or technical or other
difficulties that could delay introduction of this new product or other new
products in the future. No assurances can be given as to whether any products
incorporating the VectorSeis-TM- digital sensor will be commercially feasible
or accepted in the marketplace by the Company's 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, 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. Changes in the
Company's 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 changed products.
SIGNIFICANT PAYMENT DEFAULTS UNDER SALES ARRANGEMENTS COULD
ADVERSELY AFFECT THE COMPANY. The Company sells to many 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.
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, embargo, and
government activities, which may disrupt markets and affect operating
results. Foreign sales are also generally subject to the risks of compliance
with additional laws, including tariff regulations and import/export
restrictions. The Company is, from time to time, required to obtain export
licenses and there can be no assurance that it may 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 (including Russia and other Former Soviet Union countries as well
as certain Latin American and Asian countries) is difficult to predict and
can fluctuate significantly from year to year. 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 present heightened credit risks for the Company, for the
reasons discussed above. See, in particular above, "Other Factors" for
further information concerning these risks in those countries.
LOSS OF SIGNIFICANT CUSTOMERS WILL ADVERSELY AFFECT THE COMPANY. A
relatively small number of customers have 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 1999, 1998 and 1997 the
three largest customers in each of those years accounted for 52%, 43% and
50%, respectively, of
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the Company's net sales. The loss of these customers or a significant
reduction in their equipment needs could have a material adverse effect on
the Company's net sales.
PRESSURE FROM COMPETITORS COULD ADVERSELY AFFECT RESULTS OF
OPERATIONS. The market for seismic data acquisition systems and seismic
instrumentation is highly competitive and is characterized by continual and
rapid changes in technology. The Company's principal competitors for land
seismic equipment are, among others, Fairfield Industries; Geo-X Systems,
Limited; JGI, Incorporated; OYO Geospace Corporation; and Societe d'etudes
Recherches et Construction Electroniques, an affiliate of Compagnie General
de Geophysique (Sercel). Unlike the Company, Sercel possesses the advantage
of being able to sell to an affiliated seismic contractor. The Company's
principal marine seismic competitors are, among others, Bolt Technology
Corporation, GeoScience Corporation, an affiliate of Tech-Sym Corporation;
Teledyne Brown Engineering, an affiliate of Allegheny Teledyne Company; and
Thomson Marconi Sonar P/L.
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. 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
for the Company's products.
A continuing trend toward consolidation, concentrating buying power
in the oil field services industry, will have the effect of adversely
affecting the demand for the Company's products and services.
RISKS RELATED TO YEAR 2000 ISSUES. The problems actually encountered
by the Company in addressing its Year 2000 issues may be more pervasive than
anticipated by management, and if so, could have adverse effects on the
Company's operations, results of operations or financial condition. See "-
Year 2000."
FAILURE TO PROTECT INTELLECTUAL PROPERTY WILL ADVERSELY AFFECT THE
COMPANY's Operations. 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
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. 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 suppliers, as well as industry
supply conditions generally, involve several risks, including the possibility
of a shortage or a lack of availability of key components, suppliers' Year
2000 non-compliance, increases in component costs and reduced control over
delivery schedules, any of which could adversely affect the Company's future
financial results.
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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 GROSS MARGIN. The Company's gross margin percentage
is a function of the product mix sold in any period. Increased sales of lower
margin equipment and related components in the overall sales mix may result
in lower gross margins. Other factors, such as unit volumes, inventory
obsolescence, increased warranty costs and other product related
contingencies, heightened price competition, changes in sales and
distribution channels, shortages in components due to untimely supplies or
inability to obtain items at reasonable prices, and unavailability of skilled
labor, may also continue to affect the cost of sales and the fluctuation of
gross margin percentages in future periods.
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. Certain countries are subject to
restrictions, sanctions and embargoes imposed by the US Government. These
restrictions, sanctions and embargoes prohibit or limit the Company and its
domestic subsidiaries from participating in certain business activities in
those countries. These constraints may adversely affect the Company's
opportunities for business in those countries.
RISKS RELATED TO TIMING OF PRODUCT SHIPMENTS COULD RESULT IN
SIGNIFICANT QUARTERLY FLUCTUATIONS. Due to the relatively high sales price of
many of 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. 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 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, net sales and net earnings may be adversely
affected. 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 result in inventory excesses and
imbalances from time to time.
STOCK VOLATILITY AND ABSENCE OF DIVIDENDS MAY ADVERSELY AFFECT THE
COMPANY's 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. The
sales price for the Company's Common Stock has declined from $22 per share at
May 29, 1998 to $7 3/8 per share at August 31, 1999 (based on New York Stock
Exchange composite tape closing sales prices). 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, 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 its Common Stock.
RISKS RELATED TO ACQUISITIONS. 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 these new
21
<PAGE>
companies into its operations. Structural changes in the Company's internal
organization, which may result from acquisitions, may not always produce the
desired financial or operational results.
Certain acquisitions or strategic transactions may be subject to
approval by the other party's shareholders, United States or foreign
governmental agencies, or other third parties. Accordingly, there is a risk
that important acquisitions or transactions could fail to be concluded as
planned. Future acquisitions by 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.
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 the Company's other
filings and reports with the Securities and Exchange Commission, including
its most recent annual report on Form 10-K, 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 is exposed to market risk, which is the potential loss
arising from adverse changes in market prices and rates. The Company does not
enter into derivative or other financial instruments for trading or
speculative purposes nor does the Company use or intend to use derivative
financial instruments or derivative commodity instruments. The Company's
market risk could arise from changes in foreign currency exchange rates. The
Company's sales and financial instruments are principally denominated in US
dollars.
PART II - OTHER INFORMATION.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ISSUANCE OF PREFERRED STOCK. On August 17, 1999, SCF-IV, L.P., a
Delaware limited partnership ("SCF-IV), exercised its option to purchase
15,000 shares of Series C Preferred Stock, par value $0.01 per share (the
"Series C Preferred Stock"), under the option granted to SCF-IV by the
Company in connection with SCF-IV's purchase of 40,000 shares of Series B
Preferred Stock in a privately negotiated transaction in May 1999. The
purchase price paid for the Series C Preferred Stock was $1,000 per share,
resulting in net proceeds of approximately $14.8 million. The net cash
proceeds are to be used to fund the Company's research and development
projects, to provide additional working capital and for general corporate
purposes. On or before November 7, 2000, the Company may issue up to 20,000
additional shares of preferred stock ranking in parity to the Series B and
Series C Preferred Stock to other investors at a purchase price of $1,000 per
share ("Permitted Parity Securities"). The Series C Preferred Stock has
substantially the same terms and conditions as the Series B Preferred Stock,
except that the fixed conversion price for the Series C Preferred Stock is
$8.50 per share, compared to $8.00 per share for the Series B Preferred
Stock. The issuance of the Series C Preferred Stock and the underlying shares
of Common Stock were exempt from the registration requirements of Section 5
of the Securities Act of 1933 in accordance with Section 4(2) of that Act.
22
<PAGE>
VOTING OF PREFERRED STOCK. Holders of the Series B Preferred Stock
and the Series C Preferred Stock, voting together with any Permitted Parity
Securities, are entitled to elect one member to the Company's Board of
Directors, and have elected David C. Baldwin as their designee. In addition,
the holders of the Series B Preferred Stock and the Series C Preferred Stock
are entitled to vote upon all matters upon which the holders of Common Stock
are entitled to vote. The holders of Series B and Series C Preferred Stock,
when voting together with the holders of Common Stock as a single class, are
entitled to cast a number of votes equal to $1,000 (plus any accrued and
unpaid dividends through the record date for determining shareholders
entitled to vote) divided by the fixed conversion price of $8.00 for the
Series B Preferred Stock and $8.50 for the Series C Preferred Stock (as
adjusted from time to time in accordance with the Certificate of Designation).
Accordingly, SCF-IV may be deemed to beneficially own 6,764,705
shares of Common Stock based on its ownership of 40,000 shares of Series B
Preferred Stock and 15,000 shares of Series C Preferred Stock. The 6,764,705
shares of Common Stock represent shares issuable to SCF-IV upon conversion of
(i) the Series B Preferred Stock based on an $8.00 fixed conversion price and
(ii) the Series C Preferred Stock based on an $8.50 fixed conversion price.
Such 6,764,705 shares of Common Stock would constitute approximately 11.8% of
the issued and outstanding Common Stock of the Company. This amount excludes
an indeterminate number of additional shares of Common Stock that may be
acquired by SCF-IV upon conversion of the Shares pursuant to market price
based conversions, or in respect of accrued and unpaid dividends.
TERMS OF SERIES C PREFERRED STOCK. The holders of Series C Preferred
Stock are entitled to receive cumulative cash dividends of $10.00 per share,
per annum (1% of the liquidation preference) for each share of Series C
Preferred Stock. Each share of Series C Preferred Stock is entitled to a
liquidation preference of $1,000 per share, plus all accrued and unpaid
dividends.
The Series C Preferred Stock is convertible at the holder's option
after the first to occur of any of the following (the "Initial Conversion
Date"): (i) May 7, 2002, (ii) the approval by the Board of Directors of the
Company of an agreement relating to a Business Combination (as defined) or
the consummation of a Business Combination, (iii) a tender offer for Common
Stock is approved or recommended by the Board of Directors of the Company or
(iv) the redemption, repurchase or reacquisition by the Company of rights
issued pursuant to the Company's Stockholder Rights Plan or any waiver of the
application of the Company's Stockholder Rights Plan to any beneficial owner
other than SCF-IV or its affiliates (except as approved by SCF-IV's
representative on the Board of Directors of the Company). After the Initial
Conversion Date and prior to the Mandatory Conversion Date (defined below),
the holders of Series C Preferred Stock will be entitled to convert their
shares into a number of fully paid and nonassessable shares of Common Stock
per share equal to, at the option of the holder, one of, or if not specified
by the holder, at the greater of, the following (such amount being referred
to as the "Conversion Ratio Amount"): (a) the quotient of $1,000 (plus any
accrued and unpaid dividends through the record date for determining
stockholders entitled to vote) divided by the fixed conversion price of $8.50
(as adjusted from time to time in accordance with certain anti-dilution
provisions) or (b) the quotient of $1,000 increased at a rate of eight
percent per annum from August 17, 1999, compounded quarterly, less the amount
of cash dividends actually paid through the applicable conversion date (the
"Adjusted Stated Value"), divided by the average market price for the Common
Stock during the ten trading day period prior to the date of conversion.
On May 7, 2004 (the "Mandatory Conversion Date"), each outstanding
share of Series C Preferred Stock shall, without any action on the part of
the holder, be converted automatically into a number of fully paid and
nonassessable shares of Common Stock equal to the Conversion Ratio Amount,
provided that a
23
<PAGE>
shelf registration statement to be filed with the SEC covering those shares
of Common Stock has been declared effective.
In the event of a conversion of Series C Preferred Stock pursuant to
which the Conversion Ratio Amount is determined using clause (b) above, then,
provided that full cumulative dividends have been paid or declared and set
apart for payment upon all outstanding shares of Series C Preferred Stock for
all past dividend periods, the Company may redeem for cash up to 50% (or such
greater percentage as the holders shall agree) of the shares of Series C
Preferred Stock surrendered for conversion at a redemption price per share
equal to the Adjusted Stated Value , in lieu of conversion.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) List of documents filed as Exhibits.
3.1 - Amendment No. 1 to the Amended and Restated Bylaws
of the Company, dated September 13, 1999.
10.1 - Employee Agreement by and between the Company and
Axel M. Sigmar, dated August 17, 1999.
10.2 - Amendment No. 3 to the Input/Output, Inc.
Supplemental Executive Retirement Plan, dated
August 23, 1999.
10.3 - Amendment No. 2 to the Input/Output, Inc. Amended
and Restated 1991 Directors Stock Option Plan,
dated September 13, 1999.
10.4 - Amendment No. 1 to the Input/Output, Inc. Amended
and Restated 1996 Non-Employee Director Stock
Option Plan, dated September 13, 1999.
10.5 - Consulting and Collection Agreement by and
between the Company and Robert P. Brindley, dated
October 7, 1999.
10.6 - Consulting Agreement by and between the Company
and Sam K. Smith, dated August 10, 1999.
27.1 - Financial Data Schedule (included in EDGAR copy
only)
(b) Reports on Form 8-K
</TABLE>
No Current Reports on Form 8-K were filed during the
three-month period ended August 31, 1999.
24
<PAGE>
SIGNATURE
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/ Sam K. Smith
------------------------------------
Sam K. Smith
Director and Chief Executive Officer
Dated: October 14, 1999
25
<PAGE>
EXHIBIT 3.1
AMENDMENT NO. 1 TO AMENDED AND RESTATED BYLAWS
OF INPUT/OUTPUT, INC.
The following amendments to the Amended and Restated Bylaws of
Input/Output, Inc. (the "Bylaws") were duly adopted at a meeting of the Board
of Directors of Input/Output, Inc. held on September 13, 1999:
1. Article VI, Section 1(b) is amended by adding the following sentence
immediately following the first sentence of Section 1(b):
"It is intended that this Section 1(b) of Article VI mandate
and require that the corporation advance potentially
indemnifiable expenses to officers and directors of the
corporation."
2. Article VI, Section 2 is amended by adding the following language
immediately prior to the first sentence of such Section 2:
"In addition to and without limiting the obligation concerning
the advancement of expenses mandated by Section 1(b) of this
Article VI,"
so that, after giving effect to such amendment, Article VI, Section 2
of the Bylaws reads in its entirety as follows:
"Section 2. PREPAID EXPENSES. In addition to and without
limiting the obligation concerning the advancement of expenses
mandated by Section 1(b) 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."
Except as modified and amended by the foregoing amendments, the Bylaws
remain in full force and effect with no further amendment or modification and,
as so amended, were expressly ratified, confirmed and adopted by the Board of
Directors of Input/Output, Inc. as of September 13, 1999.
/s/ Greg Rosenstein
---------------------------
Greg Rosenstein, Secretary
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into effective as of
August 17, 1999 ("Effective Date") by and between Input/Output, Inc., a Delaware
corporation ("Company"), and Axel M. Sigmar ("Employee").
WHEREAS, the Company employs Employee and in recognition of Employee's
significant past and future services, the Company desires to provide certain
benefits to Employee;
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties, and agreements contained herein, and for other
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties agree as follows:
1. POSITION. Employee shall serve as the Executive Vice
President and Chief Technology Officer of the Company, with such customary
duties and responsibilities as may from time to time be assigned to him by
the Chief Executive Officer of the Company or the Board of Directors of the
Company (the "Board"), provided that such duties are consistent with the past
duties and responsibilities of such position. Employee agrees to devote his
full attention and time during normal business hours to the business and
affairs of the Company and to use reasonable best efforts to perform
faithfully and efficiently such duties and responsibilities. Notwithstanding
the foregoing, Employee may engage in the following activities so long as
they do not interfere in any material respect with the performance of
Employee's duties and responsibilities hereunder: (i) serve on corporate,
civic or charitable boards or committees, (ii) deliver lectures, fulfill
speaking engagements or teach on a part-time basis at educational
institutions, and (iii) manage his personal investments; provided, however,
in no event shall the conduct of any of such activities by Employee be deemed
to materially interfere with Employee's duties hereunder until Employee has
been notified in writing thereof by the Board and given a reasonable period
in which to cure such violation.
In addition, the Company shall use its reasonable best efforts
to cause Employee to be elected or reelected to the Board during the six year
period following the Effective Date.
2. COMPENSATION AND BENEFITS.
(a) For services rendered by Employee under this Agreement, the
Company shall pay to Employee a base salary ("Base Compensation") of $300,000
per annum payable in accordance with the Company's customary payroll practice
for its executive officers. The amount of Base Compensation shall be reviewed
periodically by the Board and may be increased from time to time as the Board
may deem appropriate.
(b) In addition to the Base Compensation, Employee shall be
eligible to receive each year a cash incentive payment under the Company's
Management Incentive Plan (or any successor) in
<PAGE>
an amount determined by the Compensation Committee of the Board based on
Employee's individual performance and the performance by the Company.
(c) Effective with the Effective Date Employee shall be 100%
vested under the Company's Supplemental Executive Retirement Plan ("SERP").
(d) Employee shall be entitled to participate in such incentive
compensation plans and to receive such fringe benefits and perquisites as
determined from time to time by the Board, including, without limitation,
participation in the various employee benefit plans or programs provided to
the employees of the Company in general, subject to the regular eligibility
requirements with respect to each of such benefit plans or programs;
provided, however, the aggregate value of the Base Compensation, bonus and
other benefits provided to Employee shall be at least as favorable to
Employee as the aggregate value of the base compensation, bonus and other
benefits provided to any other comparable-level executive officer of the
Company.
(e) On the Effective Date, the Company shall (i) grant to
Employee a nonqualified stock option under the Company's Amended and Restated
1990 Stock Option Plan to acquire 100,000 shares of the Company's common
stock, $.01 par value ("Company Stock"), which option (the "Current Grant")
shall have an exercise price per share of $8.02, a 10-year term and shall
become vested and exercisable as to 25% of the shares of Company Stock on
each anniversary of the Effective Date, (ii) vest one-half of the stock
options granted to Employee on March 14, 1999 (the "March >99 Option"), being
200,000 of such 400,000 option shares, and (iii) purchase from Employee (and
the Board shall approve such purchase in advance) 100,000 shares of
Employee's Company Stock at $8.02 per share.
(f) The Company shall provide Employee, without cost to
Employee, executive development courses as reasonably requested by Employee.
(g) The Company shall assign Terrie Pruitt to be Employee's
assistant, for as long as she remains an employee of the Company; provided,
however, nothing herein shall alter her status as an "at will" employee of
the Company. The Company shall provide Ms. Pruitt with compensation and
benefits that are reasonably competitive for such position as determined by
the Company in its good faith judgment.
3. TERMINATION BY EMPLOYEE PRIOR TO THIRD ANNIVERSARY OF
EFFECTIVE DATE. If Employee's employment with the Company is terminated by
Employee prior to the third anniversary of the Effective Date for any reason,
including, without limitation, his death or Disability (as defined in Section
7), the Company shall pay to Employee (or his estate as the case may be) by
certified or bank cashier's check or wire transfer the amounts specified
below and shall provide Employee (or his surviving spouse) the continued
benefits as provided below:
(A) within ten days after the date of termination, a lump
sum amount equal to 100% of the Base Compensation and cash
bonuses paid Employee during the 24
-2-
<PAGE>
month period preceding his termination date (the "Cash
Compensation"); provided, however, notwithstanding the
foregoing, if Employee terminates his employment within
eighteen (18) months of the Effective Date for any reason
other than a Good Reason (as defined below), death or
Disability, Employee shall instead be paid within ten days
after his date of termination of employment a lump sum
amount equal to 50% of such Cash Compensation and the
remaining 50% of such Cash Compensation amount (the
"Escrow Amount") shall be immediately paid by the Company
to an escrow agent, as provided in Section 25;
(B) within ten days after the date of termination, an amount
equal to that portion of Employee's Base Compensation earned
but unpaid, and accrued vacation pay, to the date of
termination, and as soon as reasonably practical after such
termination all other amounts previously deferred by Employee
or earned but not paid as of such date under all Company
bonus, incentive or pay plans or programs for performance
periods that have ended; provided, further, for any incentive
compensation performance period not completed as of the date
of Employee's termination, Employee shall be deemed to have
remained employed until the end of such performance period,
and to the extent bonuses are paid to comparable-level
executives in general with respect to such performance period,
Employee shall be paid a comparable bonus pro rated based on
his days of employment during such performance period over the
number of days in such performance period;
(C) for 24 months following Employee's termination (the
"Continuation Period") Employee and his dependents shall be
eligible to continue their participation in the Company's
group health plan(s) that includes comparable-level
executives, provided that Employee's continued participation
is possible under the general terms and provisions of such
plan(s), and provided further that Employee pays the regular
active employee contribution, if any, required by such plan(s)
for comparable-level executives. However, nothing herein shall
prevent the Company from amending or terminating such group
health plan(s). In the event that participation by Employee in
any such plan(s) after the date of termination is barred
pursuant to the terms thereof, the Company shall obtain
comparable coverage under individual insurance policies with
Employee paying an amount of the premium not greater than that
which he would have been required to pay under the Company's
group program. At the end of the Continuation Period, the
Company shall arrange to make available to Employee and his
dependents comparable insurance coverage by taking all action
necessary to enable Employee to convert his coverage under the
group plans or programs to an individual insurance policy for
the benefit of Employee and his dependents, or to assume any
individual insurance policies, with Employee paying the full
premiums after the end of the Continuation Period; provided,
however, in the event Employee becomes covered by another
employer's group plan or programs during the Continuation
Period, the Company's plans or programs shall be liable for
-3-
<PAGE>
benefits only to the extent such benefits are not covered
by the subsequent employer's plans or programs;
(D) within ten days after the date of termination the
Company shall pay Employee a lump sum amount equal to the
present value of Employee's Vested Deferred Benefit
accrued as of the date of termination under the SERP. For
this purpose, "present value" shall be calculated pursuant
to the provision of Section 417(e)(3)(A) of the Internal
Revenue Code of 1986, as amended (or any successor
thereto) (the "Code"), with the applicable interest rate
being the rate in effect under said section for the
calendar month that is two months prior to the termination
of employment date;
(E) on the date of termination all outstanding Company stock
options of Employee (other than the Current Grant and grants
made after the Effective Date ("New Grants")) to the extent
vested and exercisable on such date shall remain exercisable
for the longer of five years from the Effective Date or three
years from the termination of employment date (but not beyond
their 10-year term) (the "Extended Period");
(F) The Current Grant and any New Grants shall be governed
by their respective terms; and
(G) the Company shall provide Employee outplacement services
by a nationally recognized firm, with the cost to the Company
of such services utilized by Employee not to exceed $15,000.
4. TERMINATION BY EMPLOYEE ON AND AFTER THIRD ANNIVERSARY. If
Employee's employment with the Company is terminated by Employee on or after the
third anniversary of the Effective Date for a Good Reason (as defined below),
Disability or death, Employee (or his surviving spouse or estate, as the case
may be) shall be entitled to receive the payments and benefits provided by
Section 3 (except that Employee shall be paid on termination of employment only
75% of the Cash Compensation amount in Section 3(A)) plus (i) the remainder of
the March >99 Option shall be immediately vested and exercisable in full and
shall remain exercisable for the Extended Period and (ii) Employee shall be paid
a lump sum amount equal to 25% of such Section 3(A) Cash Compensation amount
(determined as of his termination of employment date) on the first anniversary
of his date of termination if Employee has not commenced full-time employment
with another employer during such one-year period (such that the total of lump
sum payments will equal 100% of the Cash Compensation).
"Good Reason" shall mean (1) the breach of any of the
Company's or the Board's obligations under this Agreement without Employee's
express written consent or (2) the occurrence of any of the following
circumstances without Employee's express written consent:
-4-
<PAGE>
(i) the assignment to Employee of any duties that are
inconsistent with the position in the Company that Employee
held immediately prior thereto, or an adverse alteration (as
determined in good faith by Employee) in the nature or status
of Employee's office, title, responsibilities, including
reporting responsibilities, or the conditions of Employee's
employment from those in effect immediately prior thereto;
(ii) the failure by the Company to pay to Employee
any portion of Employee's current compensation or to pay to
Employee any portion of an installment of deferred
compensation under any deferred compensation program of the
Company within seven days of the date such compensation is
due;
(iii) the failure by the Company to continue in
effect an incentive compensation plan or plans, which in the
aggregate, provide Employee with substantially the same level
of incentive compensation opportunities as those provided as
of the Effective Date, or the failure by the Company to
continue Employee's participation therein on a basis not
materially less favorable, both in terms of the amount of
benefits provided and the level of Employee's participation
relative, on an aggregate basis, to other comparable-level
participants;
(iv) the failure by the Company to continue to
provide Employee with benefits that in the aggregate are
substantially comparable to those enjoyed by Employee under
the Company's life insurance, health and accident, and
disability plans in which Employee is participating on the
Effective Date, the SERP, and other plans in which Employee is
participating, including any material fringe benefit then
enjoyed by Employee (provided, however, nothing herein shall
prevent the Company from amending or terminating the SERP); or
the taking of any action by the Company which would directly
or indirectly materially reduce, in the aggregate, such
benefits or the failure by the Company to provide Employee
with the number of paid vacation days to which Employee is
entitled on the basis of years of service with the Company
(and its predecessors) in accordance with the Company's normal
vacation policy in effect at the time of this Agreement;
(v) the failure of the Company to obtain a
satisfactory agreement from any successor to assume and agree
to perform this Agreement, as contemplated in Section 18
hereof;
(vi) the relocation of the Company's principal
executive offices to a location outside the greater Houston,
Texas metropolitan area, or the Company's requiring Employee
to relocate anywhere other than the location of the Company's
principal executive offices, except for required travel on the
Company's business to an extent substantially consistent with
Employee's past business travel obligations; or
-5-
<PAGE>
(vii) any breach of a Company obligation under this
Agreement.
However, Employee may not terminate his employment for a Good
Reason unless he has given written notice of such circumstance to the Company
and the Company has failed to cure such circumstance within thirty (30) days of
such notice. During the thirty (30) day period following such notice, the
Company may not terminate Employee's employment. Employee's continued employment
following any event, act or omission, regardless of the length of such continued
employment shall not constitute Employee's consent to, or a waiver of Employee's
rights with respect to, such event, act or omission constituting a Good Reason
circumstance hereunder, until that date which is twelve (12) months following
such event, act or omission.
5. TERMINATION BY THE COMPANY DURING THE CURRENT PERIOD. If
Employee's employment is terminated by the Company for any reason prior to
the earlier of the date the Company selects a Chief Executive Officer to
replace Sam K. Smith (other than with a current member of the Board as of the
Effective Date) or (ii) nine months from the Effective Date (the "Current
Period"), Employee shall be entitled to receive the payments and benefits
provided in Section 3.
6. TERMINATION BY THE COMPANY ON OR AFTER THE END OF THE CURRENT
PERIOD. If Employee's employment is terminated by the Company on or after the
end of the Current Period, Employee shall be entitled to receive the payments
and benefits provided by Section 3, plus the remainder of the March >99 Options
shall be immediately vested and exercisable and shall remain exercisable for the
Extended Period.
7. DISABILITY. For purposes of this Agreement, Employee shall
be under a "Disability" if he is "permanently and totally disabled", within
the meaning of Section 22(e)(3) of the Code, as determined by Employee's
physician. If Employee's employment is terminated and it is determined by
Employee's physician that he is under a Disability on such date, or he is
determined by his physician at a later date within six (6) months of his
termination of employment date to be under a Disability as a consequence of a
mental or physical condition that existed on such termination of employment
date, then for purposes of this Agreement Employee shall be deemed to have
terminated due to such Disability.
8. NO MITIGATION. Employee shall not be required to mitigate
the amount of any payment or benefit provided for in this Agreement by
seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation or
benefit earned by Employee as a result of employment by another employer,
self-employment earnings, by retirement benefits, except as provided in
Section 25, by offset against any amount claimed to be owing by Employee to
the Company, or otherwise.
-6-
<PAGE>
9. GROSS-UP OF PARACHUTE PAYMENTS. If any payment, including
without limitation any imputed income, made or benefit provided to or on
behalf of Employee in connection with a "change in control" of the Company,
as defined in Section 280G of the Code, whether or not made or provided
pursuant to this Agreement, results in Employee being subject to the excise
tax imposed by Section 4999 of the Code, the Company shall pay Employee an
additional amount of cash (the "Additional Amount") such that the net amount
of all payments and benefits received by Employee after paying all applicable
taxes thereon and on such Additional Amount shall be equal to the net
after-tax amount of payments and benefits that Employee would have received
had Section 4999 not been applicable.
10. CONFIDENTIALITY. Employee understands and acknowledges that
during Employee's employment with the Company Employee has had access to and
has learned, and that during Employee's employment by the Company Employee
will have access to and will learn (i) information proprietary to the Company
that concerns the operation and methodology of the businesses conducted by
the Company and as the same are hereafter conducted by the Company (the
"Business") or (ii) other information proprietary to the Company, including,
without limitation, trade secrets, processes, patent and trademark
applications, product development, price, customer and supply lists, pricing
and marketing plans, policies and strategies, details of client and
consultant contracts, operations methods, product development techniques,
business acquisition plans, new personnel acquisition plans and all other
confidential information with respect to the Business (collectively,
"Proprietary Information"); provided, however, Proprietary Information shall
not include any such information, methods, etc. that is common knowledge to
others outside of the Company who are engaged in the Business. Employee
agrees that Employee will keep confidential and will not disclose directly or
indirectly any such Proprietary Information to any third party, except as
required to fulfill Employee's duties as an employee of the Company, and will
not misuse, misappropriate or exploit such Proprietary Information in any
way. The restrictions contained herein shall not apply to any information
which (a) was already available to the public at the time of disclosure, or
subsequently becomes available to the public, otherwise than by breach of
this Agreement, or (b) was disclosed due to a requirement of law, provided
that Employee shall have given prompt notice of such requirement to the
Company to enable the Company to seek an appropriate protective order with
respect to such disclosure. Upon termination of the employment Employee shall
return to the Company all documents, computer disks, records, notebooks and
similar repositories of any Proprietary Information in Employee's possession,
including copies thereof.
11. RESTRICTIONS ON COMPETITIVE EMPLOYMENT AND SOLICITATION. If
Employee voluntarily terminates his employment within three years of the
Effective Date for other than a Good Reason, death or disability, then during
the two-year period following such termination of Employee's employment (the
"Restricted Period"), Employee shall not (as principal, agent, employee,
consultant or otherwise) engage in activities for, or render services to
(including, without limitation, sales or product development), any firm or
business engaged in direct competition with the Company in the Business.
Notwithstanding the foregoing, (i) Employee may have an interest consisting of
securities
-7-
<PAGE>
constituting less than two percent of any class of securities of any public
company engaged in the Business so long as Employee is not employed by and
does not consult with, or become a director of or otherwise engage in any
activities for, such company and (ii) Employee may, at any time on or after
termination of employment, waive his right to further payments and benefits
under this Agreement, including any then remaining amounts held in escrow
pursuant to Section 25, if applicable, and upon such waiver Employee shall
cease to be subject to the foregoing noncompetition restrictions.
Employee agrees that Employee shall not, at any time during
the Restricted Period (x) deliberately take any action which would interfere
with (A) any contractual or customer relationships of the Company in respect of
the Business, or (B) any relationship with the employees of, or vendors or
contractors to, the Company in respect of the Business, (y) deliberately take
any action which would result in a diminution of business to the Company in
respect of the Business or (z) directly or indirectly solicit any person who is
an employee of the Company engaged in the Business to terminate such employee's
relationship with the Company.
12. CONSULTING. Employee agrees that during the two (2) year
period following his termination of employment he shall perform such
consulting services as may be reasonably requested by the Board from time to
time, subject to the following:
(a) The consulting services to be performed by Employee shall
not require skills which are inconsistent with Employee's qualifications and
experience. Employee shall use his best skills and judgment to accomplish the
assigned tasks, and under no circumstances shall the Board or the Company
exercise any control over the manner in which, or location where Employee
performs his services hereunder.
(b) The Company understands and agrees that Employee may have
other obligations to perform services, including other employment
obligations, and Employee shall not be required to provide the requested
consulting services if, in Employee's good faith determination, providing
those services would significantly interfere with Employee's other service or
employment obligations.
(c) Employee shall not be obligated to render any consulting
services during any period of Disability.
(d) The parties understand and agree that Employee shall report
directly and only to the Chief Executive Officer of the Company.
(e) During any of the first twelve (12) months following
Employee's termination, Employee shall not be required to provide more than
ten (10) hours of consulting services during any such month ("unused" hours
shall not carryover to the next month) and in the second twelve (12) month
period, Employee shall not be required to provide more than five (5) hours of
consulting services during any such month. However, if requested by the
Company, Employee agrees to
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<PAGE>
reasonably consider such request and may agree to provide additional services
on a basis mutually agreed upon by the parties.
(f) If the Company breaches any obligations of this Agreement
during the consulting period, Employee shall no longer be obligated to render
consulting services.
13. REMEDIES. Employee acknowledges and agrees that damages for a
breach or threatened breach of any of the covenants set forth in Section 10, 11
or 12 will be difficult to determine and will not afford a full and adequate
remedy, and therefore agrees that the Company, in addition to seeking actual
damages in connection therewith, may seek specific enforcement of any such
covenant in any court of competent jurisdiction, including, without limitation,
by the issuance of a temporary or permanent injunction.
14. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall
prevent or limit Employee's continuing or future participation in any
benefit, bonus, incentive or other plan or program provided by the Company or
any of its affiliated companies and for which Employee may qualify, nor shall
anything herein limit or otherwise adversely affect such rights as Employee
may have under any stock option or other agreements with the Company or any
of its affiliated companies.
15. ASSIGNABILITY. The obligations of Employee hereunder are
personal and may not be assigned or delegated by him or transferred in any
manner whatsoever, nor are such obligations subject to involuntary
alienation, assignment or transfer. The Company shall have the right to
assign this Agreement and to delegate all rights, duties and obligations
hereunder, either in whole or in part, to any parent, affiliate, successor or
subsidiary organization or company of the Company, in a form reasonably
satisfactory to Employee, so long as the Company also continues to remain
liable for the obligations under this Agreement.
16. NOTICE. For the purpose of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by United
States registered mail, return receipt requested, postage prepaid, addressed
to the Company at its principal office address, directed to the attention of
the Board with a copy to the Secretary of the Company, and to Employee at
Employee's residence address on the records of the Company or to such other
address as either party may have furnished to the other in writing in
accordance herewith except that notice of change of address shall be
effective only upon receipt.
17. VALIDITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force
and effect.
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<PAGE>
18. SUCCESSORS; BINDING AGREEMENT.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used herein, the term "Company" shall include any
successor to its business and assets as aforesaid which executes and delivers
the Agreement provided for in this Section or which otherwise becomes bound
by all terms and provisions of this Agreement by operation of law.
(b) This Agreement and all rights of Employee hereunder shall
inure to the benefit of and be enforceable by Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees.
19. INDEMNIFICATION. During Employee's employment with the
Company and for a period of six years thereafter, the Company shall cause
Employee to be covered by and named as an insured under any policy or
contract of insurance obtained by it to insure its directors and officers
against personal liability for acts or omissions in connection with service
as an officer or director of the Company or service in other capacities at
the request of the Company. The coverage provided to Employee pursuant to
this Section shall be of a scope and on terms and conditions at least as
favorable as the coverage provided to any other officer or director of the
Company.
In addition, to the maximum extent permitted under applicable
law, during such period, the Company shall indemnify Employee against and hold
Employee harmless from any costs, liabilities, losses and exposures to the
fullest extent and on the most favorable terms and conditions that similar
indemnification is provided to any director or officer of the Company.
20. MISCELLANEOUS. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by Employee and such officer as may be specifically
authorized by the Board. No waiver by either party hereto at any time of any
breach by the other party hereto of, or in compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. This Agreement is an integration of the parties
agreement; no agreement or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not set forth expressly in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Texas.
21. ATTORNEYS' FEES. The Company shall pay the reasonable
attorneys' fees and expenses Employee has incurred in the negotiation of this
Agreement.
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<PAGE>
22. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
23. ARBITRATION. Employee shall be permitted (but not required) to
elect that any dispute or controversy arising under or in connection with this
Agreement be settled by arbitration in Houston, Texas in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction. The Company
shall be solely responsible for all legal fees and costs incurred by the Company
in connection with the resolution of any dispute or controversy under or in
connection with this Agreement and the Company shall promptly pay the legal fees
and costs incurred by Employee in such dispute or controversy, to the extent
awarded by the arbitrator.
24. PRIOR AGREEMENTS. This Agreement supersedes and replaces in
full any previously existing employment agreement (written or oral) between
the parties.
25. ESCROW. The Escrow Amount, net of any taxes thereon that the
Company is required to withhold by applicable law, shall be placed in escrow by
the Company with a person mutually acceptable to the parties. If the parties
cannot agree upon the person to serve as the escrow agent, such person shall be
selected by an arbitrator pursuant to Section 23. The terms of the escrow
agreement shall provide, inter alia, (i) that Employee shall be the owner of the
escrowed assets, i.e., they shall not be subject to the creditors of the
Company, (ii) Employee shall have the authority to direct the escrow agent as to
the investment of the escrowed assets, (iii) the Company shall pay the fees and
expenses of the escrow agent (other than investment related expenses), and (iv)
beginning with the first monthly anniversary of the date of Employee's
termination of employment and continuing on each monthly anniversary thereafter,
the escrow agent shall pay directly to Employee 1/12th, 1/11th, 1/10th, and so
on of the amount then held in escrow until such escrow account has been paid in
full to Employee on the first anniversary of his termination of employment date.
In addition, it is recognized by the parties that Employee will recognize
taxable income immediately on the Escrow Amount when it is placed in escrow and
on the earnings and income of the escrowed assets. Promptly upon receipt from
Employee of reasonable evidence as to Employee's federal, state or other tax
liability with respect to the Escrow Amount (net of any taxes withheld thereon
by the Company) and any earnings or income on the escrowed funds during the
escrow period, the escrow agent shall pay Employee a lump sum amount equal to
his tax liability. For this purpose, such tax liability shall be at the highest
individual marginal tax rate applicable to Employee. Employee shall be solely
responsible for any losses, and shall be solely entitled to all gains and
earnings, due to the investment of the escrowed property.
If during the escrow period, the parties have a dispute as to whether
Employee has violated the noncompetition provisions of Section 11, no further
payments shall be made to Employee from the escrow (except for taxes as provided
above) until such dispute is resolved by an arbitrator pursuant to Section 23.
It is agreed that the Company shall have the burden of proving such breach.
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<PAGE>
Upon resolution of such dispute, payment shall be made and/or recommence in
accordance with the arbitrator's award.
26. BOARD APPROVAL. This Agreement is subject to the approval
of the Board. The Chairman shall recommend approval of this Agreement to the
Board and shall use his reasonable best efforts to have such approval
obtained as soon as reasonably practical following the date this Agreement is
executed by the parties.
27. SURVIVABILITY. Sections 10, 11, 12, 13, 19, 23 and 25
shall survive the termination of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the Effective Date upon approval by the Board.
INPUT/OUTPUT, INC.
By: /S/ J. M. Lapeyre, Jr.
--------------------------------
Name: J. M. Lapeyre, Jr.
------------------------------
Title: Chairman of the Board
-----------------------------
Dated: 20 - Aug. - 99
-----------------------------
EMPLOYEE
/s/ Axel M. Sigmar
----------------------------------
Axel M. Sigmar
Dated: 20 August, 1999
-----------------------------
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<PAGE>
AMENDMENT NO. 3 TO INPUT/OUTPUT, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
WHEREAS, the Input/Output, Inc. Supplemental Executive Retirement Plan
(as amended to the date hereof, the "Supplemental Retirement Plan" or the
"Plan") has been established by Input/Output, Inc. (the "Company") to provide
for the payment of certain pension and pension-related benefits to a select
group of management and highly compensated employees who contribute materially
to the growth, development and further business success of the Company; and
WHEREAS, the Company has retained the power to amend the Supplemental
Retirement Plan pursuant to Section 10.1 of the Plan; and
WHEREAS, the Company desires to further amend the Supplemental
Retirement Plan;
NOW; THEREFORE, in consideration of the premises and pursuant to the
amendment authority reserved thereunder, effective as of August 23, 1999, the
Plan is amended as hereinafter set forth:
1. Section 1.1(u) shall be amended to add the following after the last sentence
thereof:
"Notwithstanding the foregoing, Axel M. Sigmar shall be 100% vested
in his benefits under the Plan from and after August 17, 1999."
2. Section 4.6 of the Plan shall be amended to add the following after
the last sentence thereof:
"Notwithstanding the foregoing, pursuant to Section 3.D of the
Employment Agreement between the Company and Axel M. Sigmar dated
effective as of August 17, 1999, if Axel M. Sigmar is terminated
pursuant to the applicable provisions of the Employment Agreement,
which terms and conditions shall be controlling with respect to such
termination, Axel M. Sigmar's Vested Deferred Benefit accrued as of his
termination date shall be payable in a lump sum pursuant to the terms
of the Employment Agreement. For the purposes of such payment the
"present value" shall be calculated pursuant to Section 417(e)(3)(A) of
the Internal Revenue Code of 1986, as amended, with the applicable
interest rate being the rate in effect under said Section for the
calendar month that is two months prior to the termination of
employment date."
<PAGE>
3. Section 10.1 of the Plan shall be amended to add the following after
the last sentence thereof:
"In addition, no amendment to the Employment Agreement effected
subsequent to the date of this Amendment 3 and affecting the Company's
or Mr. Sigmar's rights or obligations under this Plan shall be
effective unless a corresponding amendment is made to the terms of this
Plan."
Except as expressly amended by the terms of this Amendment No. 3, the remaining
terms of the Plan shall remain in full force and effect.
Executed this 23 day of August, 1999, effective as of August 17, 1999.
INPUT/OUTPUT, INC.
By: /s/ DAVID BALDWIN
--------------------------
Name: David Baldwin
------------------------
Title: Chief Financial Officer
-----------------------
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<PAGE>
AMENDMENT NO. 2 TO
INPUT/OUTPUT, INC.
AMENDED AND RESTATED
1991 OUTSIDE DIRECTORS STOCK OPTION PLAN
This Amendment No. 2 (the "Second Amendment") to the Input/Output,
Inc. Amended and Restated 1991 Outside Directors Stock Option Plan (the
"Plan"), as amended by Amendment No. 1 to the Plan, dated January 17, 1997,
is effective as of the 13 day of September, 1999, and except as modified
herein, the terms of the Plan remain in full force and effect. Any terms not
otherwise defined herein have the meanings ascribed to them as set forth in
the Plan.
AMENDMENT
The Plan is hereby amended by adding the following sentence to the
end of Section 6(e):
"The Board (or the Compensation Committee of the Board), in its sole
discretion, may extend the period during which a stock option may be
exercised; provided, however, that no stock option shall be exercisable for a
period of longer than ten (10) years."
IN WITNESS WHEREOF, the Board of Directors of Input/Output, Inc. has
caused this Second Amendment to the Plan to be adopted as of the date first
written above and has instructed the officer indicated below to sign same for
and on behalf of such corporation.
INPUT/OUTPUT, INC.
By: /s/ JAY LAPEYRE
----------------------------------
Name: Jay Lapeyre
----------------------------------
Title: Chairman
----------------------------------
<PAGE>
AMENDMENT NO. 1 TO
INPUT/OUTPUT, INC.
AMENDED AND RESTATED
1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
This Amendment No. 1 (the "Amendment") to the Input/Output, Inc.
Amended and Restated 1996 Non-Employee Director Stock Option Plan (the "Plan")
is effective as of the 13 day of September, 1999, and except as modified herein,
the terms of the Plan remain in full force and effect. Any terms not otherwise
defined herein have the meanings ascribed to them as set forth in the Plan.
AMENDMENT
The Plan is hereby amended by adding the following sentence to the end
of Section 4.6:
"The Board (or the Compensation Committee of the Board), in its sole
discretion, may extend the period during which a Stock Option may be exercised;
provided, however, that no Nonqualified Stock Option shall be exercisable for a
period of longer than ten (10) years."
IN WITNESS WHEREOF, the Board of Directors of Input/Output, Inc. has
caused this Amendment to the Plan to be adopted as of the date first written
above and has instructed the officer indicated below to sign same for and on
behalf of such corporation.
INPUT/OUTPUT, INC.
By: /s/ JAY LAPEYRE
-----------------------
Name: Jay Lapeyre
---------------------
Title: Chairman
--------------------
<PAGE>
CONSULTING AND COLLECTION AGREEMENT
This Consulting and Collection Agreement (the "Agreement") is entered
into effective this 7th day of October, 1999 ("Effective Date"), by and between
INPUT/OUTPUT, INC., a Delaware corporation ("Company") and Robert P. Brindley
("Consultant").
RECITALS
Consultant has previously served as an officer of Company; and,
The parties, having terminated the employment relationship between
Consultant and Company pursuant to the terms of that certain Separation
Agreement and General Release which became effective on August 31, 1999 (the
"Separation Agreement"), now wish to engage Consultant to serve as a consultant
to Company commencing as of the Effective Date hereof upon and subject to the
terms and conditions set forth in this Agreement.
AGREEMENT
NOW THEREFORE, for and in consideration of the mutual benefits to be
derived and the representations, conditions and promises that follow, and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, intending to be legally bound, Company and Consultant agree as
follows:
1. DEFINITIONS. The following terms shall have the meanings ascribed to
them below, the following definitions to be equally applicable to both the
singular and plural form of the terms:
1.1. "Affiliate" shall mean when used with reference to a
specified Person (defined below): (i) any Person that directly or
indirectly through one or more intermediaries controls or is
controlled by or is under common control with the specified Person;
and (ii) any Person that is an officer of, partner in, or serves in a
similar capacity to, the specified Person or of which the specified
Person serves in a similar capacity; and (iii) any Person owning or
controlling ten percent (10%) or more of the outstanding voting
securities of such other entity; and (iv) any member of the immediate
family of the specified Person or any legal representative or trustee
for the benefit of such member.
1.2. "Person" shall mean an individual, partnership,
corporation, trust or other entity.
1.3. "Term" shall mean the term of this Agreement, commencing
on September 01, 1999 and continuing for the lesser of one (1) year;
or, Consultant has ceased to demonstrate reasonable diligence in
collection efforts, unless earlier terminated pursuant to Section 6
hereof.
2. ENGAGEMENT. Notwithstanding any provision contained herein to the
contrary, this Agreement is subject to the execution, delivery and effectiveness
of the Separation Agreement and its terms and conditions. Company shall appoint
and engage the Consultant as consultant and advisor as of the Effective Date
hereof with respect to the matters specified in, subject to the terms and
conditions of, and
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<PAGE>
for the compensation provided in, this Agreement. The Consultant accepts this
appointment and engagement effective as of such date as a consultant and
advisor to Company, subject to the terms and conditions of this Agreement.
3. DUTIES OF CONSULTANT.
3.1. During the Term, the Consultant will pursue collections
for designated accounts (see attached list) as a Director of the
Company. The presumption is that the Consultant shall make three or
four trips to CIS to conduct the business.
3.2. Consultant will assist in transitioning sales activity
for CIS market to those designated as responsible, assist the Company
in clarifying any open issues and strategies with respect to Russian
business, and shall perform such other duties as may be reasonably
requested by the Company upon reasonable advance notice to the
Consultant by the Company.
3.3. The Consultant will report directly to the Chief
Financial Officer of Company, or his designee, on all collection
efforts. Any negotiated alterations to the existing contractual terms
of the Notes or receivables must be approved by the Company's Chief
Financial Officer. The Company will provide the assistance of Lilia
Khakimova as reasonably requested for collection purposes. Unless
otherwise agreed, Consultant's undertakings shall be only of a type,
nature and dignity consistent with the duties of the Consultant in the
service of Company as described herein.
3.4. The Consultant agrees that he will truthfully and
accurately make, maintain and preserve all records and reports that
Company may, from time to time, request or require in connection with
his consulting services hereunder, and will account for all money,
records or other property belonging to Company of which he may have
custody and will pay over and deliver the same promptly whenever and
however he may be directed to do so.
3.5. The Consultant agrees that he will serve the Company to
the best of his ability, projecting a positive and professional image
on behalf of Company and its Affiliates.
4. NON-DISCLOSURE. Consultant acknowledges, understands and agrees that he
will be furnished confidential information concerning the business of Company
and its subsidiaries, including information relating to its customers and to the
design, construction and operation of Company's products and services
("Confidential Information"). Consultant further acknowledges that all
Confidential Information, whether developed by Consultant, Company, their
Affiliates or other Persons while carrying out the terms and provisions of this
Agreement (or previously developed by Consultant, Company, their Affiliates or
other Persons, either during the term of Consultant's employment with Company or
its Affiliates, or prior thereto), shall be the exclusive and confidential
property of Company or its Affiliates, as the case may be, and shall be
regarded, treated and protected as such. Consultant shall not use, in any way,
or disclose any of the Confidential Information, directly or indirectly, or
permit any other person, firm or entity to avail himself or itself of the
benefit or use of the Confidential Information, or any aspect thereof, either
during the term of his employment with Company hereunder or otherwise, or at any
time thereafter, except as may be necessary to perform his obligations with
respect to his consulting services hereunder.
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<PAGE>
4.1. All files, records, documents, information, data and
similar items and documentation relating to the business of Company
and its subsidiaries and that of Company's and its subsidiaries'
customers, whether prepared by Consultant or otherwise coming into his
possession, shall remain the exclusive property of Company and its
subsidiaries, as the case may be, and Consultant agrees to return all
such files, records, documents, information, data and similar items
and documentation to Company immediately upon the termination of this
Agreement for any reason.
4.2. The parties hereto stipulate that as between them, the
Confidential Information is important, material and confidential, and
gravely affects the effective and successful conduct of the business
of Company and its subsidiaries and their goodwill, and that Company
would suffer irreparable injury if this information were divulged to
any Person in competition with Company or any of its subsidiaries.
Consultant agrees to disclose, fully and promptly, and only to
Company, all ideas, methods, plans, improvements or patentable
inventions of any kind, which are (i) made or discovered, in whole or
in part, by Consultant during the performance of Consultant's job
duties, (ii) the result of any aid, support or assistance by Company
or its subsidiaries, or (iii) created during his work time with
Company or its subsidiaries.
4.3. The obligations of Consultant set forth in this Section 4
are continuous and shall survive the termination, for any reason
whatsoever, of this Agreement.
4.4. When used or referred to in this Agreement, Confidential
Information shall not include information which is in the public
domain or information generally known in the oil and gas exploration
and production services industry or the seismic detection, data
acquisition, or information processing or interpretation equipment
industries.
5. COVENANT NOT TO SOLICIT. Consultant acknowledges that the Company's
employees are valuable to the Company's business and that information regarding
the Company's employees, including without limitation information as to their
background, training and compensation, is Confidential Information. Consultant
agrees that for a period of twelve (12) months from the Effective Date of this
Agreement (whether or not this Agreement is terminated sooner than the 12 month
period), he will not directly or indirectly solicit or otherwise induce or
encourage any person in the employment of the Company or any consultant to the
Company to terminate such employment or consulting arrangement or to accept
employment or enter into any consulting agreement with anyone other than the
Company.
6. EARLY TERMINATION. Notwithstanding any other provision of this
Agreement, at any time during the Term, Consultant's engagement hereunder shall
terminate upon his death or Disability, or by Company upon Consultant's material
breach or material violation of any of his agreements contained herein or in the
Separation Agreement. As used herein, "Disability" shall mean a physical or
mental impairment that renders Consultant unable to perform the essential
functions of his position with or without reasonable accommodation. Notification
of failure to demonstrate reasonable diligence in collection efforts shall be
given Consultant in writing and Consultant shall have 45 days to cure issue.
7. INJUNCTIVE RELIEF. Because of the unique nature of the Confidential
Information, Consultant acknowledges, understands and agrees that Company will
suffer immediate and irreparable harm if Consultant fails to comply with any of
his obligations under Sections 4 and 5 of this Agreement, and that monetary
damages will be inadequate to compensate Company for such breach. Accordingly,
Consultant
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<PAGE>
agrees that Company shall, in addition to any other remedies available to
them at law or in equity, be entitled to temporary, preliminary, and
permanent injunctive relief to enforce the terms of Sections 4 and 5 without
the necessity of proving inadequacy of legal remedies or irreparable harm.
8. COMPENSATION. Subject to the terms and conditions hereof, in
consideration of the consulting services to be rendered by Consultant to Company
hereunder, and in consideration of the covenants of Consultant set forth in
Sections 4 and 5 herein,
8.1. Company and Consultant agree that compensation for
collection efforts from Companies listed on Attachment I, is earned by
commissions on any and all collections (interest, notes receivable and
accounts receivable - except as noted) during the effective term of
this Agreement, based on the following schedule:
<TABLE>
<CAPTION>
AREA COMMISSION
---- ----------
<S> <C>
CIS Group (Interest & Notes Receivable only) 4.4%
South America Group 3.0%
Uzbekistan Group 2.0%
</TABLE>
8.2. Payments for collected amounts received within the term of
this Agreement, will be paid monthly based on prior month receipts net
of third-party expense.
8.3. Consulting Services not incurred with consultant's
collection trips, associated with consultant's Board responsibilities,
or provided as incidental accommodations (less than one hour of work)
will be billed and compensated if authorized by an officer of the
Company. For each day worked away from home at the request of the
Company, a rate of $750.00 per day will be paid, with pro-rata hourly
billing for work done by phone from a location chosen by Consultant.
8.4. Reasonable expenses for travel, meals, and other business
purposes will be paid by the Company up to $25,000.00 for the term of
this Agreement. Expenses beyond this amount will require prior
approval of an officer of the Company. Expenses must be reported on
standard Company Expense Report forms and submitted to the Chief
Financial Officer.
8.5. Consultant will have use of Company AT&T Calling Card
during the term of this Agreement.
9. INDEPENDENT CONTRACTOR. While serving as Consultant, the Consultant
shall at all times be an independent contractor rather than a co-venturer,
agent, employee or representative of Company or its Affiliates. It is understood
and agreed that Contractor shall pay all taxes, licenses, and fees levied or
assessed on Contractor in connection with or incident to the performance of this
Agreement by any governmental agency, including, without limitation,
unemployment compensation insurance, old age benefits, social security, or any
other taxes upon wages of Contractor, its agents, employees, and
representatives. Contractor agrees to require the same agreements of its
subcontractors and to be liable for any breach of any such agreements by any of
its subcontractors. Contractor agrees to reimburse Company on demand for all
such taxes or governmental charges, state or federal, which the Company may be
required or deem it necessary to pay on account of employees of the Contractor
or its subcontractors. Contractor agrees to furnish the Company with the
information required to enable it to
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<PAGE>
make the necessary reports and pay such taxes or charges. If statutorily
required, the Company is authorized to deduct all sums required to be paid
for such taxes and governmental charges from any amounts that may be or
become due to Contractor.
10. GOVERNING LAW. This Agreement shall be governed by the internal laws
(without giving effect to principles of conflict of laws) of the State of Texas
and the internal laws (without giving effect to principles of conflict of laws)
of the United States of America.
11. NOTICE. Any notice provided or permitted to be given under this
Agreement must be in writing, but may be served by deposit in the mail,
addressed to the party to be notified, postage prepaid, and registered or
certified, with a return receipt requested. Notice given by registered mail
shall be deemed delivered and effective on the date of delivery shown on the
return receipt. Notice may be served in any other manner, including telex,
telecopy, telegram, etc., but shall be deemed delivered and effective as of the
time of actual delivery. For purposes of notice the addresses of the parties
shall be as follows:
If to Company:
Input/Output, Inc.
11104 W. Airport Blvd.
Stafford, TX 77477
Attn: Chief Executive Officer
If to Consultant:
Robert P. Brindley
4014 Bountiful Crest
Sugar Land, Texas 77479
Each party may change its address for notice by giving written notice of such
address to the other party.
12. ENTIRE AGREEMENT. Except as specifically contemplated under Section 2
hereof, this Agreement, which incorporates all prior understandings relating to
its subject matter, contains the entire agreement of the parties with respect to
its subject matter and shall not be modified except by written instrument
executed by each party.
13. WAIVER. The failure of a party to insist upon strict performance of any
provision of this Agreement shall not constitute a waiver of, or estoppel
against asserting, the right to require performance in the future. A waiver or
estoppel in any one instance shall not constitute a waiver or estoppel with
respect to a later breach.
14. SEVERABILITY. If any of the terms and conditions of this Agreement are
held by any court of competent jurisdiction to contravene, or to be invalid
under, the laws of any political body having jurisdiction over this subject
matter, that contravention or invalidity shall not invalidate the entire
Agreement. Instead, this Agreement shall be construed as it if did not contain
the particular provision or provisions held to be invalid, the rights and
obligations of the parties shall be construed and enforced accordingly, and this
Agreement shall remain in full force and effect.
-5-
<PAGE>
15. CONSTRUCTION. The headings in this Agreement are inserted for
convenience and identification only and are not intended to describe, interpret,
define, or limit the scope, extent, or intent of this Agreement or any other
provisions hereof. Whenever the context requires, the gender of all words used
in this Agreement shall include the masculine, feminine, and neuter, and the
number of all words shall include the singular and the plural. In the event of a
conflict among this Agreement and any Exhibit, this Agreement shall control.
16. COUNTERPART EXECUTION. This Agreement may be executed in any number of
counterparts with the same effect as if all the parties had signed the same
document. All counterparts shall be construed together and shall constitute one
and the same instrument.
17. SUCCESSORS AND ASSIGNS. Except as otherwise provided, this Agreement
shall apply to, and shall be binding upon, the parties hereto, their respective
successors and assigns, and all persons claiming by, through or under any of
these persons. This Agreement is personal to Consultant and cannot be assigned
or delegated by Consultant.
18. CUMULATIVE RIGHTS. The rights and remedies provided by this Agreement
are cumulative, and the use of any right or remedy by any party shall not
preclude or waive its right to use any or all other remedies. These rights and
remedies are given in addition to any other rights a party may have by law,
statute, in equity or otherwise.
19. NO THIRD PARTY BENEFICIARY. Except as expressly provided pursuant to
Section 8 hereof concerning payments to Consultant's estate, heirs or
descendants, any agreement to pay an amount or any assumption of liability
herein contained, express or implied, shall be only for the benefit of the
undersigned parties and their permitted successors and assigns, and such
agreements and assumption shall not inure to the benefit of the obligees of any
other party whomsoever, it being the intention of the undersigned that, except
as otherwise expressly contemplated herein, no one shall be deemed to be a third
party beneficiary of this Agreement.
20. DRAFTING PARTY. This Agreement expresses the mutual intent of the
parties to this Agreement. Accordingly, regardless of the party preparing any
document, the rule of construction against the drafting party shall have no
application to this Agreement.
21. RELIANCE. All covenants, agreements, representations and warranties
made in this Agreement shall be conclusively considered to have been relied upon
by the parties in entering into this Agreement.
22. DISPUTE RESOLUTION. Subject to Company `s right to seek legal or
equitable relief in court as provided in Section 7 of this Agreement, any
dispute, controversy or claim arising out of or in relation to or connection to
this Agreement, including without limitation any dispute as to the construction,
validity, interpretation, enforceability or breach of this Agreement, shall be
exclusively and finally settled by arbitration, and either party may submit such
dispute, controversy or claim, including a claim for indemnification under this
Section 22, to arbitration.
22.1. ARBITRATORS. The arbitration shall be heard and
determined by one arbitrator, who shall be impartial and who shall be
selected by mutual agreement of the parties; PROVIDED, however, that if
the dispute involves more than $ 25,000, then the arbitration shall be
heard and determined by three (3) arbitrators. If three (3) arbitrators
are necessary as provided above, then
-6-
<PAGE>
(i) each side shall appoint an arbitrator of its choice within thirty
(30) days of the submission of a notice of arbitration and (ii) the
party-appointed arbitrators shall in turn appoint a presiding
arbitrator of the tribunal within thirty (30) days following the
appointment of the last party-appointed arbitrator. If (x) the parties
cannot agree on the sole arbitrator, (y) one party refuses to appoint
its party-appointed arbitrator within said thirty (30) day period or
(z) the party-appointed arbitrators cannot reach agreement on a
presiding arbitrator of the tribunal, then the appointing authority
for the implementation of such procedure shall be the Senior United
States District Judge for the Southern District of Texas, who shall
appoint an independent arbitrator who does not have any financial
interest in the dispute, controversy or claim. If the Senior United
States District Judge for the Southern District of Texas refuses or
fails to act as the appointing authority within ninety (90) days after
being requested to do so, then the appointing authority shall be the
Chief Executive Officer of the American Arbitration Association, who
shall appoint an independent arbitrator who does not have any
financial interest in the dispute, controversy or claim. All decisions
and awards by the arbitration tribunal shall be made by majority vote.
22.2. PROCEEDINGS. Unless otherwise expressly agreed in
writing by the parties to the arbitration proceedings:
i. The arbitration proceedings shall be held in Houston,
Texas, or Stafford, Texas, at a site chosen by mutual agreement of the
parties, or if the parties cannot reach agreement on a location within
thirty (30) days of the appointment of the last arbitrator, then at a
site chosen by the arbitrators;
ii. The arbitrators shall be and remain at all times wholly
independent and impartial;
iii. The arbitration proceedings shall be conducted in
accordance with the Commercial Arbitration Rules of the American
Arbitration Association, as amended from time to time;
iv. Any procedural issues not determined under the arbitral
rules selected pursuant to item (iii) above shall be determined by the
law of the place of arbitration, other than those laws which would
refer the matter to another jurisdiction;
v. The costs of the arbitration proceedings (including
attorneys' fees and costs) shall be borne in the manner determined by
the arbitrators;
vi. The decision of the arbitrators shall be reduced to
writing; final and binding without the right of appeal; the sole and
exclusive remedy regarding any claims, counterclaims, issues or
accounting presented to the arbitrators; made and promptly paid in
United States dollars free of any deduction or offset; and any costs or
fees incident to enforcing the award shall, to the maximum extent
permitted by law, be charged against the party resisting such
enforcement;
vii. The award shall include interest from the date of any
breach or violation of this Agreement, as determined by the arbitral
award, and from the date of the award until paid in full, at 6% per
annum; and
-7-
<PAGE>
viii. Judgment upon the award may be entered in any court
having jurisdiction over the person or the assets of the party owing
the judgment or application may be made to such court for a judicial
acceptance of the award and an order of enforcement, as the case may
be.
23. ACKNOWLEDGMENT OF PARTIES. Each party acknowledges that he or she or it has
voluntarily and knowingly entered into an agreement to arbitration under this
Section by executing this Agreement.
EXECUTED effective as of the date written above.
COMPANY:
INPUT/OUTPUT, INC.
By: /s/ David C. Baldwin
---------------------------------------
Name: David C. Baldwin
Title: Vice President and Chief Financial
Officer
CONSULTANT:
/s/ ROBERT P. BRINDLEY
------------------------------------------
Robert P. Brindley
-8-
<PAGE>
ATTACHMENT I
CONSULTING AND COLLECTION AGREEMENT
LIST OF CUSTOMER ACCOUNTS
CIS GROUP
Azimut
Bashneftgeofizika
Centrgeo/Spetzgerfizika
CGE
Dank
Geotex
Hantymansiyskgeofisika
LARGE
Petroaliance
Samaraneftgeofisika
Sevmorneftgeofisika
Sibneftegeofizika
Tatneftgeofisika
Tyumengeofisika
Ukrazarub/Enerforgeofisika
Ukrzarubizhnaftagaz
Yeniseygeofizika
UZBEKISTAN GROUP
Uzbekneftagaz
SOUTH AMERICAN GROUP
GAPS
Suelopetrol
-9-
<PAGE>
CONSULTING AGREEMENT
This is a Consulting Agreement ("AGREEMENT") between INPUT/OUTPUT,
Inc., a Delaware corporation with corporate offices at 11104 W. Airport
Blvd., Suite 143, Stafford, Texas 77477, referred to in this Agreement as
"COMPANY", and SAM K. SMITH, residing at 6811 Midcrest, Dallas, Texas 75240,
referred to in this Agreement as "CONSULTANT".
1. SERVICES. Consultant agrees to provide services to the Company as
interim Chief Executive Officer as directed by the Board of Directors, or as
otherwise authorized and funded by the Company (the "WORK"). Company agrees
to retain Consultant's services under the terms and conditions of this
Agreement. Consultant shall use his best efforts to preserve the business of
Company and the goodwill of all employees, contractors, customers, suppliers,
and other persons having business relations with Company. Consultant further
agrees to render services under this Agreement in a professional and
business-like manner and in full accordance with the standards and practices
recognized in the industry.
2. TERM. JAMES M. LAPEYRE, Chairman of the Board, shall act as the
COMPANY REPRESENTATIVE for all purposes of this Agreement unless and until
the identity of the Company Representative is changed by written notice. THIS
AGREEMENT GOVERNS ALL WORK PERFORMED BY CONSULTANT FOR THE COMPANY FROM JUNE
01, 1999 THROUGH MAY 30, 2000. Either party may terminate this Agreement in
the event that the other party materially breaches or fails to comply with
any provision of this Agreement and such breach or failure is not cured
within 10 days after written notice of such breach or failure. Otherwise,
either party upon 30 day written notice may terminate this Agreement. This
Agreement may be renewed upon written agreement of the parties.
3. PAYMENT. Company agrees to pay Consultant for the Work as
agreed in ATTACHMENT A.
4. CONFIDENTIALITY. Consultant, during the term of this Agreement,
shall have access to and become familiar with various trade secrets and
confidential information of Company including, but not limited to, hardware,
software, firmware, design data, customer lists, invoices, customer
requirements, sales procedures, research data, marketing and pricing
information and data, marketing plans, financial information of Company
and/or its customers, and other technical, marketing and/or business
information. This information shall collectively be referred to as the
"CONFIDENTIAL INFORMATION" of Company, and Consultant recognizes and
acknowledges that this confidential Information gives Company a competitive
advantage in the industry. Consultant agrees to not use in any way or
disclose to any person or entity any of the Company's Confidential
Information, either directly or indirectly, either during the term of this
agreement and at any time thereafter, except as required in the course of
performing services under this Agreement. Consultant shall further take
reasonable precautions and act in such a manner as to ensure against
unauthorized disclosure or use of the Confidential Information.
5. ASSIGNMENT OF RIGHTS. All patents, formulae, inventions,
processes, copyrights, proprietary information, trademarks or trade names, or
future improvements to patents, formulae, inventions, processes, copyrights,
proprietary information, trademarks or trade names, developed or completed by
the Consultant during the term of this Agreement in connection with the Work
(collectively, the "ITEMS") shall be promptly disclosed to Company, and the
Consultant shall execute
Page 1 of 5
<PAGE>
such instruments of assignment of the Items to Company as Company shall
request. Consultant agrees that all copyrightable works created by Consultant
or under Consultant's direction in connection with the Work are "works made
for hire" and shall be the sole and complete property of Company and that any
and all copyrights to such works shall belong to Company. To the extent such
works are not deemed to be "works made for hire," Consultant hereby assigns
all proprietary rights, including copyright, in these works to Company
without further compensation. Company hereby acknowledges and agrees,
however, that the Items shall not include any Consultant owned proprietary
program, or any part thereof, or the ideas, concepts, know-how or techniques
employed by Consultant in rendering services and delivering the Items to
Company, or to any modifications of or enhancements to such Consultant owned
proprietary information or material of Consultant is embodied in any Item,
Consultant hereby grants Company a perpetual, irrevocable license to use such
proprietary information or material in conjunction with the Item.
6. PRE-EXISTING INTELLECTUAL PROPERTY. "PRE-EXISTING INTELLECTUAL
PROPERTY" means any trade secret, invention, idea, concept, know-how,
technique, work of authorship, source code or protectable design that has
already been conceived or developed by anyone other than Company before
Consultant renders any services under this Agreement. Consultant will not use
any Pre-Existing Intellectual Property in connection with this Agreement
unless the Consultant has the right to use it for Company's benefit. If
Consultant is not the owner of such Pre-Existing Intellectual Property,
Consultant will obtain from the owner any rights necessary to enable
Consultant to comply with this Agreement.
7. RETURN OF MATERIALS. Any and all files, records, documents,
information, data, and similar items relating to the business of Company or
any of Company's customers or suppliers, whether prepared by Consultant or
otherwise, coming into Consultant's possession as a result of performing
services for Company, shall remain the exclusive property of Company and
shall not be removed from the premises of Company under any circumstances
without the prior written consent of Company (except in the ordinary course
of business during Consultant's active service under this Agreement), and in
any event shall be promptly delivered to Company (without Consultant
retaining any copies) upon termination of this Agreement.
8. CONSULTANT WARRANTIES. Consultant warrants that: (a) the
performance of the Work pursuant to this agreement does not violate any
agreement or obligation between Consultant and a third party, including but
not limited to, any disclosure obligation that Consultant may have to a third
party employer; (b) the Work, as delivered to Company, will not infringe on
any copyright, patent, trade secret, or other proprietary right held by any
third party; and (c) the services provided by Consultant shall be performed
in a professional manner, shall be of a high grade, nature, and quality and
shall conform to any specifications provided by Company.
9. RELATIONSHIP OF PARTIES. Consultant is an independent contractor
for Company. Nothing in this Agreement shall be construed as creating an
employer-employee relationship, as a guarantee of future employment, or as a
limitation upon Company's rights to terminate this Agreement in accordance
with its terms. Consultant further agrees to be responsible for all of
Consultant's federal and state taxes, withholding, social security,
insurance, and other benefits and shall indemnify and hold harmless Company
from any such claims.
10. OTHER ACTIVITIES. During the term of this Agreement, Consultant
is free to engage in other independent contracting activities, provided that
Consultant does not engage in any such activities which are inconsistent with
or in conflict with any provisions hereof, or that so occupy Consultant's
attention as to interfere with the proper and efficient performance of
Consultant's services hereunder.
Page 2 of 5
<PAGE>
Consultant may not provide similar independent consulting services to a
direct competitor of Company, unless Company provides a written waiver of
this conflict.
11. ASSIGNMENT AND SUBCONTRACTORS. Consultant shall not assign this
Agreement or subcontract or any work required to be performed by it without
the prior written consent of Company.
12. PARTIAL INVALIDITY. If any provision of this Agreement is held
to be unenforceable, such provision shall be fully severable and this
Agreement shall be construed and enforced as if such unenforceable provision
never compromised part of this Agreement. The remaining provisions of this
Agreement shall remain in full force and effect.
13. NOTICE. This Agreement supersedes any and all other agreements,
either oral or written, between Company and Consultant with respect to the
subject matter hereof, and contains all of the covenants and agreements
between the parties relating in any way to Consultant's services for Company.
No change or modification of this Agreement shall be valid or binding upon
the parties hereto unless such change or modification shall be in writing and
signed by Company and Consultant. No course of dealing between Company and
Consultant, or any waiver by Company of a breach of any provision of this
Agreement, or delay in exercising any right under this Agreement, shall
operate or be construed as a waiver of any subsequent breach by Consultant.
15. INJUNCTIVE RELIEF. The parties recognize that a remedy at law
for a breach of the provisions of this Agreement relating to Confidential
Information, use of Company's trademark, copyright, an other intellectual
property rights will not be adequate for Company's protection, and
accordingly Company shall have the right to obtain, in addition to any other
relief and remedies available to it, injunctive relief to enforce the
provisions of this Agreement.
16. GOVERING LAW. THIS AGREEMENT, AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES HERETO, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF TEXAS.
17. SURVIVAL. Sections 4, 5, 6, and 7 shall survive the
termination or expiration of this Agreement.
18. NO THIRD PARTY BENEFICIARY. Any agreement to pay an amount or
any assumption of liability herein contained, expressed or implied, shall be
only for the benefit of the undersigned parties and their permitted
successors and assigns, and such agreements and assumption shall not inure to
the benefit of the obligee of any other party, whomsoever, it being the
intention of the undersigned that to one shall be deemed to be a third party
beneficiary of this Agreement.
19. DRAFTING PARTY. This Agreement expresses the mutual intent of
the parties to this Agreement. Accordingly, the rule of construction against
the drafting party shall have no application to this Agreement.
20. GOOD FAITH DISPUTE RESOLUTION PROCEDURES. Any dispute or
controversy arising or in connection with this Agreement shall be settled
exclusively by arbitration in Houston, Texas (in accordance with the rules of
the American Arbitration Association then in effect). Notwithstanding the
pendency of any such dispute or controversy, the Company will continue to pay
Employee his full compensation in effect when the notice giving rise to the
dispute was given and continue Employee as a participant in all compensation,
benefit and insurance plans in which he was participating when the notice
giving rise to the dispute was given, until the dispute is finally resolved.
Amounts paid under this
Page 3 of 5
<PAGE>
paragraph are in addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts due under this
Agreement. Judgement may be entered on the arbitrator's award in any court
having jurisdiction; provided, however, that Employee shall be entitled to
seek specific performance of his right to be paid until the Date of
Termination during the pendency or any dispute or controversy arising under
or in connection with this Agreement.
IN WITNESS WHEREOF the undersigned authorized representatives of the
parties have executed this Agreement as of the day and year last stated below
(the "EFFECTIVE DATE").
INPUT/OUTPUT, INC.: CONSULTANT:
Signature: /s/ Jay Lapeyre Signature: /s/ Sam K. Smith
---------------------------- ------------------------
Printed Name: Jay Lapeyre Printed Name: Sam K. Smith
Title: Chairman of the Board
Date: August 10, 1999 Date: August 7, 1999
Address: 11104 W. Airport Blvd Address: 6811 Midcrest
Stafford, Texas 77477 Dallas, Texas 75240
Page 4 of 5
<PAGE>
ATTACHMENT A
SAM SMITH COMPENSATION PACKAGE
1. Monthly salary - $20,000.00
- One-third of compensation ($6,667.00) to be paid monthly - all diverted
to IRS.
- Two-thirds of compensation to be paid in I/O stock as follows:
- Stock to be issued quarterly
- Current market price - $7.75 per share.
- Two-thirds monthly compensation - $13,333.00 * 12 months =
$159,996.00
- Yearly total ($159,996.00)/Current share price ($7.75) = 20,645
shares. Round to 21,000 shares = 1750 shares per month.
- Buy off the market the number of shares needed for one year
projected allocation at today's price.
- Hold shares in treasury and issue quarterly. Subject to Rule 144.
- Simplifies accounting and disclosure verbiage.
- If assignment ends prior to the month end, partial monthly
allocation will be issued based on number of days worked.
2. Stock Options
- Non-employee Director Stock Options - 20,000 shares with three year
vesting based on market close price on the day elected to the Board.
- Additional grant - 30,000 shares at $10.00 with one year vesting.
- Grant will be issued under 1990 Stock Option Plan using Consulting
Agreement.
- Language will be added to Agreement for acceleration id removed
from the Board, but not if Sam elects to leave.
3. Provide a company vehicle
4. Miscellaneous Expenses
- Per Diem - $50/day for days in Stafford Office for meals, laundry,
etc
- Additional company expenses covered by receipt and expense report.
Page 5 of 5
<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 8/31/99 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-31-2000
<PERIOD-START> JUN-01-1999
<PERIOD-END> AUG-31-1999
<CASH> 86,240
<SECURITIES> 0
<RECEIVABLES> 40,129
<ALLOWANCES> 0
<INVENTORY> 90,582
<CURRENT-ASSETS> 255,918
<PP&E> 62,347
<DEPRECIATION> 0
<TOTAL-ASSETS> 447,473
<CURRENT-LIABILITIES> 34,037
<BONDS> 0
0
1
<COMMON> 507
<OTHER-SE> 403,248
<TOTAL-LIABILITY-AND-EQUITY> 447,473
<SALES> 29,979
<TOTAL-REVENUES> 29,979
<CGS> 23,994
<TOTAL-COSTS> 18,923
<OTHER-EXPENSES> (1,034)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 212
<INCOME-PRETAX> (12,116)
<INCOME-TAX> (3,877)
<INCOME-CONTINUING> (8,239)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,239)
<EPS-BASIC> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
