- --------------------------------------------------------------------------------
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, 1998
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, 1998 there were 44,586,434 shares of common stock, par value
$0.01 per share, outstanding.
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED AUGUST 31, 1998
PART I. Financial Information.
Page
----
Item 1. Financial Statements.
Consolidated Balance Sheets
August 31, 1998 and May 31, 1998 2
Consolidated Statements of Operations
Three months ended August 31, 1998 and 1997 3
Consolidated Statements of Cash Flows
Three months ended August 31, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 9
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 19
PART II. Other Information.
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 6. Exhibits and Reports on Form 8-K 20
1
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS AUGUST 31, May 31,
1998 1998
--------- -------
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 59,999 $ 72,275
Trade accounts receivable, net. . . . . . . . . 75,466 68,257
Trade notes receivable, net . . . . . . . . . . 37,123 38,987
Inventories . . . . . . . . . . . . . . . . . . 125,388 120,206
Prepaid expenses. . . . . . . . . . . . . . . . 3,126 2,649
-------- --------
Total current assets . . . . . . . . . . . . 301,102 302,374
Long-term trade notes receivable . . . . . . . . . . 16,320 32,487
Deferred income tax asset, net . . . . . . . . . . . 3,719 2,896
Property, plant and equipment, net . . . . . . . . . 71,297 69,303
Goodwill, net. . . . . . . . . . . . . . . . . . . . 66,909 68,414
Other assets . . . . . . . . . . . . . . . . . . . . 13,844 14,189
-------- --------
$473,191 $489,663
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, principally trade . . . . . . $ 22,430 $ 33,107
Current installments of debt. . . . . . . . . . 1,006 986
Accrued expenses. . . . . . . . . . . . . . . . 15,982 20,521
Income taxes payable. . . . . . . . . . . . . . 4,685 8,139
-------- --------
Total current liabilities. . . . . . . . . . 44,103 62,753
Long-term debt . . . . . . . . . . . . . . . . . . . 9,754 10,011
Other liabilities. . . . . . . . . . . . . . . . . . 1,302 1,199
Stockholders' equity:
Preferred stock, $.01 par value; authorized
5,000,000 shares, none issued . . . . . . . -- --
Common stock, $.01 par value; authorized
100,000,000 shares; issued 44,586,434
shares at August 31, 1998 and 44,584,634
shares at May 31, 1998. . . . . . . . . . . 446 446
Additional paid-in capital. . . . . . . . . . . 240,765 240,746
Retained earnings . . . . . . . . . . . . . . . 180,160 177,885
Cumulative translation adjustment . . . . . . . (2,181) (2,063)
Unamortized restricted stock compensation . . . (1,158) (1,314)
-------- --------
Total stockholders' equity . . . . . . . . 418,032 415,700
-------- --------
$473,191 $489,663
-------- --------
-------- --------
See accompanying notes to consolidated financial statements.
2
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS
ENDED
AUGUST 31,
---------------------
1998 1997
-------- --------
Net sales. . . . . . . . . . . . . . . . . . . . . . $ 66,995 $ 82,970
Cost of sales. . . . . . . . . . . . . . . . . . . . 45,032 49,656
-------- --------
Gross profit. . . . . . . . . . . . . . . . . . 21,963 33,314
-------- --------
Operating expenses:
Research and development. . . . . . . . . . . . . 9,061 7,388
Marketing and sales . . . . . . . . . . . . . . . 3,962 2,884
General and administrative. . . . . . . . . . . . 6,335 6,068
Amortization of intangibles . . . . . . . . . . . 1,860 1,187
-------- --------
Total operating expenses. . . . . . . . . . . . 21,218 17,527
-------- --------
Earnings from operations . . . . . . . . . . . . . . 745 15,787
Interest expense . . . . . . . . . . . . . . . . . . (242) (322)
Other income . . . . . . . . . . . . . . . . . . . . 2,843 1,119
-------- --------
Earnings before income taxes . . . . . . . . . . . . 3,346 16,584
Income taxes . . . . . . . . . . . . . . . . . . . . 1,071 5,307
-------- --------
Net earnings . . . . . . . . . . . . . . . . . . . . $ 2,275 $ 11,277
-------- --------
-------- --------
Basic earnings per common share. . . . . . . . . . . $ 0.05 $ 0.26
-------- --------
-------- --------
Weighted average number of common
shares outstanding . . . . . . . . . . . . . . . . . 44,585,501 43,383,059
---------- ----------
---------- ----------
Diluted earnings per common share. . . . . . . . . . $ 0.05 $ 0.26
-------- --------
-------- --------
Weighted average number of diluted
common shares outstanding. . . . . . . . . . . . . . 44,702,268 43,793,884
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
3
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
AUGUST 31,
--------------------
1998 1997
------ ------
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . $ 2,275 $11,277
Adjustments to reconcile net earnings to net cash
(used in) provided by operating activities:
Depreciation and amortization . . . . . . . . 4,706 3,764
Amortization of restricted stock
compensation . . . . . . . . . . . . . . . . 156 17
Deferred income taxes . . . . . . . . . . . . (823) 695
Pension costs . . . . . . . . . . . . . . . . 108 91
-------- -------
6,422 15,844
Changes in assets and liabilities:
Receivables. . . . . . . . . . . . . . . . 10,822 18,588
Inventories. . . . . . . . . . . . . . . . (5,182) 1,620
Leased equipment . . . . . . . . . . . . . 335 (272)
Accounts payable and accrued expenses. . . (15,216) (196)
Income taxes payable . . . . . . . . . . . (3,454) 2,909
Other. . . . . . . . . . . . . . . . . . . (753) (653)
-------- -------
Net cash (used in) provided by
operating activities . . . . . . . . . . (7,026) 37,840
Cash flows from investing activities:
Purchases of property, plant and equipment . . . . (5,145) (1,764)
Recovery of (investment in) other assets . . . . . 146 (1,110)
-------- -------
Net cash used in investing activities . . . . . (4,999) (2,874)
Cash flows from financing activities:
Payments on debt. . . . . . . . . . . . . . . . . . (237) (221)
Proceeds from exercise of stock options and
related tax benefit . . . . . . . . . . . . . . . 19 3,718
-------- -------
Net cash (used in) provided by financing
activities . . . . . . . . . . . . . . . . . . (218) 3,497
Effect of foreign currency exchange rates . . . . . (33) (141)
-------- -------
Net (decrease) increase in cash and cash
equivalents. . . . . . . . . . . . . . . . . . . . (12,276) 38,322
Cash and cash equivalents at beginning of period . . 72,275 2,573
-------- -------
Cash and cash equivalents at end of period . . . . . $ 59,999 $40,895
-------- -------
-------- -------
See accompanying notes to consolidated financial statements.
4
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) GENERAL
The consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. The financial statements reflect all
adjustments (consisting of normal recurring accruals) which are, in the
opinion of management, necessary to fairly present such information. Although
the Company believes that the disclosures are adequate to make the
information presented not misleading, certain information and footnote
disclosures, including significant accounting policies, normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and
regulations. It is suggested that these financial statements be read in
conjunction with the consolidated financial statements and the notes thereto,
as well as Item 7. "Management's Discussion and Analysis of Results of
Operations and Financial Condition," included in the Company's Annual Report
on Form 10-K for the year ended May 31, 1998, as filed with the Securities
and Exchange Commission.
(2) INVENTORIES
Inventories are stated at the lower of cost (primarily first-in,
first-out) or market. A summary of inventories follows (in thousands):
AUGUST 31 MAY 31,
1998 1998
--------- --------
Raw materials $ 67,075 $ 67,432
Work-in-process 14,610 25,262
Finished goods 43,703 27,512
-------- --------
$125,388 $120,206
-------- --------
-------- --------
EARNINGS PER SHARE
The Company has adopted the Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 128, "Earnings per Share". In
accordance with this new pronouncement, basic earnings per share is computed
by dividing net earnings available to common stock holders by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share is determined on the assumption that outstanding dilutive
stock options have been exercised and the aggregate proceeds as defined were
used to reacquire Company common stock using the average price of such common
stock for the period. Prior period earnings per share amounts have been
restated in accordance with the requirements of the pronouncement.
5
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
The following table summarizes the calculation of net earnings, weighted
average number of common shares outstanding and weighted average number of
diluted common shares outstanding for purposes of the computation of earnings
per share.
FOR THE THREE MONTHS ENDED
AUGUST 31,
--------------------------
1998 1997
------ ------
Net earnings available to common stockholders
(in thousands) . . . . . . . . . . . . . . . . . . $ 2,275 $11,277
------- -------
------- -------
Weighted average number of common
shares outstanding . . . . . . . . . . . . . . . . 44,585,501 43,383,059
Stock options. . . . . . . . . . . . . . . . . . . 116,767 410,825
------- -------
Weighted average number of diluted
common shares outstanding. . . . . . . . . . . . . 44,702,268 43,793,884
---------- ----------
---------- ----------
Basic earnings per common share. . . . . . . . . . $ 0.05 $ 0.26
------- -------
------- -------
Diluted earnings per common share. . . . . . . . . $ 0.05 $ 0.26
------- -------
------- -------
At August 31, 1998 and 1997, there were 3,558,393 and 1,000,500,
respectively, of stock options that were not included in the calculation of
diluted earnings per common share because to do so would have been
antidilutive.
(4) 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 derivatives. Exchange rate fluctuations have
not had a material effect on the Company's Statements of Cash Flows.
Supplemental disclosures of cash flow information for the three months
ended August 31, 1998 and 1997 follow (in thousands):
1998 1997
-------- -------
Cash paid during the periods for:
Interest (net of amount capitalized). . . . . $ 242 $ 342
------- ------
Income taxes. . . . . . . . . . . . . . . . . $ 5,313 $ 140
------- ------
------- ------
6
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
(5) LONG TERM DEBT
A Company subsidiary has a $12.6 million, ten-year term loan secured by
certain of its land and buildings located in Stafford, Texas which includes
the Company's executive offices, research and development headquarters, and
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. The term loan also contains certain restrictive
financial covenants with which the Company was in compliance at August 31,
1998.
(6) COMPREHENSIVE EARNINGS
Effective June 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and display of comprehensive income
and its components in a full set of financial statements. Comprehensive
income includes all changes in a company's equity (except those resulting
from investments by and distributions to owner's), including, among other
things, foreign currency translations adjustments, and unrealized gains
(losses) on marketable securities classified as available-for-sale. Total
comprehensive earnings for the three months ended August 31, 1998 and 1997
follow (in thousands):
1998 1997
------ -------
Net earnings $2,275 $11,277
Foreign currency translation adjustments (118) (279)
------ -------
Total comprehensive earnings $2,157 $10,998
------ -------
------ -------
(7) NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the AICPA issued Statement of Position 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use"(SOP 98-1), establishing accounting standards for such costs, as defined
therein. Accordingly, certain costs of computer software developed or
obtained for internal use will be capitalized and amortized over the
estimated useful life of the software. Effective June 1, 1998, the Company
adopted SOP 98-1.
7
(8) COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS. On September 24, 1997, a purported class action
lawsuit was filed against the Company and the former president and chief
executive officer, and an executive vice president, of the Company, in the
U.S. District Court for the Southern District of Texas, Houston Division. The
action, styled NORMAN TOCK V. INPUT/OUTPUT, INC., GARY D. OWENS AND ROBERT P.
BRINDLEY, alleges violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, and state statutory and common law fraud provisions.
The action was filed on behalf of purchasers of common stock of the Company
that purchased shares during the period from September 17, 1996 through March
18, 1997. The complaint seeks damages in an unspecified amount plus costs and
attorney's fees. The complaint alleges misrepresentations and omissions in
public filings and announcements concerning the Company's business, sales and
products, and disputes certain accounting methodologies employed by the
Company. On October 21, 1997, a stipulation and order was entered by the
court, extending the time for responses to the complaint by the defendants
pending entry of an order appointing lead plaintiff and lead counsel. An
amended complaint was filed on April 17, 1998. Defendants filed a motion to
dismiss and brief in support thereof on June 8, 1998. Plaintiff has filed
papers in opposition to that motion. Defendants have filed a reply to
Plaintiff's opposition. No hearing on the motion to dismiss has been
scheduled. The Company believes that the plaintiff's allegations are without
merit and that there are meritorious defenses to the allegations and intends
to defend the action vigorously.
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.
YEAR 2000. -PRODUCTS- With regard to the hardware and software
products sold by it ("Products"), the Company is continuing its testing and
verification procedures to determine the nature and extent of their Year 2000
compliance. The Company has formed a cross-functional focus team to review
these issues and to assist its customers and suppliers in identifying and
resolving Year 2000 issues. The overall assessment of the operational status
of the Company's Products will depend, in large part, on the Year 2000
compliance of the Products' components, many of which are supplied by parties
other than the Company. Prior to the end of calendar year 1998, the Company
intends to (i) complete its internal review of the Year 2000 compliance of
its Products and (ii) circulate and assimilate information from a
questionnaire to vendors and customers in order to obtain information
regarding their Year 2000 compliance. Until additional information is
obtained, the Company will not be able to effectively evaluate whether
further remediation efforts will be required with respect to its Products.
A portion of the Company's Year 2000 compliance expenditures expected to
be incurred relate to the Company's limited warranty coverage. As of August
31, 1998, no specific amounts have been accrued to the warranty reserve for
such costs, as the Company has not yet been able to make an estimate of such
costs based on its current level of assessment. For instances in which the
limited warranty has expired or there was no warranty coverage, the Company
would offer,
8
on a fee basis, upgrades (if technically achievable) to those Products to
render them Year 2000 compliant.
The Company does not yet possess the information necessary to estimate
the potential impact of Year 2000 compliance issues relating to its Products
or vendors if such Products or vendors were not Year 2000 compliant. In
addition, a relatively small number of customers have traditionally accounted
for most of the Company's net sales from fiscal year to fiscal year, although
the degree of sales concentration with any one customer has varied. The loss
of any significant customer due to reasons related to Year 2000
non-compliance of the Company's Products could have a material adverse impact
on the Company's operations, results of operations or financial position.
CREDIT RISK. The Company sells to many customers on extended-term
arrangements. Moreover, in connection with certain sales of its systems and
equipment, the Company has guaranteed certain loans from unaffiliated parties
to purchasers of such systems and equipment. In addition, the Company has
sold contracts and leases to third-party financing sources, the terms of
which often obligate the Company to repurchase the contracts and leases in
the event of a customer default or upon certain other occurrences.
Performance of the Company's obligations under these arrangements could have
a material adverse effect on the Company's financial condition. At August 31,
1998 and May 31, 1998, the Company had guaranteed approximately $8,078,000
and $11,140,000, respectively, of trade notes receivable sold with recourse
and loans from unaffiliated parties to purchasers of the Company's seismic
equipment. A number of significant payment defaults by customers could have a
material 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, 1998.
SUBSEQUENT EVENT
On September 30, 1998, the Company and DigiCOURSE, Inc., a New
Orleans-based subsidiary of privately-owned The Laitram Corporation, signed a
definitive merger agreement. Under the terms of the agreement, the Company
will acquire, for 5,794,000 shares of Company common stock, all of the
capital stock of DigiCOURSE, Inc. The transaction is subject to certain
closing conditions, including additional due diligence, regulatory approvals
and negotiation of certain ancillary documents. The Company anticipates that
the transaction will close by the end of the Company's second fiscal quarter
and will be accounted for as a purchase business combination.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
NET SALES. The Company's first quarter net sales decreased $16.0
million, or 19.3%, to $67.0 million as compared to the prior year's first
quarter net sales of $83.0 million. The
9
decrease in sales revenues was primarily due to lower sales levels of the
Company's land systems and components. The decline in sales of land systems
and components is attributable to the decrease in oil prices resulting in
delayed or reduced exploration spending by oil and gas companies during the
quarter, which caused several projects to be postponed or canceled. During
fiscal 1999's first quarter, two I/O SYSTEM TWO-Registered Trademark- land
systems and one MSX marine system were sold, along with other seismic data
acquisition recording equipment and components for expanding existing systems
(representing a total channel count of 5,142 land and 2,448 marine channels);
the prior year's first quarter sales consisted of 14 I/O SYSTEM TWO land
systems and one MSX marine system and other recording equipment and
components (for a total channel count of 23,796 land and 1,778 marine
channels).
GROSS PROFIT MARGIN. The Company's gross profit margin decreased for
the first quarter of fiscal 1999 compared to the prior year's first quarter,
from 40.2% to 32.8%. Reduced demand for land seismic equipment and
instrumentation and a higher percentage of lower-margin marine streamers,
cables and auxiliary equipment in the sales mix were major contributing
factors to the decreased gross profit margins. 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 increased $3.7 million, or
21.1%, for fiscal 1999's first quarter over the prior year's first quarter
operating expenses. Research and development expenses increased $1.7 million,
or 22.6%, compared to the prior year's first quarter, primarily resulting
from development of new products and expenses related to recent acquisitions.
Marketing and sales expenses increased $1.1 million, or 37.4%, compared to
the prior year's first quarter primarily due to expenses related to recent
acquisitions and higher convention and exhibit expenses. General and
administrative expenses increased $267,000, or 4.4%. Amortization of
intangibles increased $673,000, or 56.7%, primarily due to increased goodwill
expense resulting from acquisitions.
INTEREST EXPENSE. Interest expense for the first quarter (related to the
ten-year term facilities financing) was $242,000. See "Note (5) - Long-Term
Debt" of the Notes to Consolidated Financial Statements. Interest expense for
last year's first quarter was $322,000, also representing interest on this
facility.
INCOME TAX EXPENSE. The Company's effective income tax rate was
approximately 32%, both for the first quarters of fiscal 1999 and of fiscal
1998.
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. Cash flows from operating activities before changes in working
capital items were $6.4 million for the three months ended August 31, 1998.
Cash flows from operating activities after changes in working capital items
were a negative $7.0 million for the three months ended August 31, 1998,
primarily due to
10
decreases in accounts payable and accrued expenses (which represented a use
of cash). As of August 31, 1998 no amounts of indebtedness were outstanding
under the Company's Credit Agreement. The Company had approximately $49.8
million available for borrowings under the Credit Agreement as of August 31,
1998.
The Company had outstanding long-term indebtedness of $9.8 million as of
August 31, 1998 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
(5) - Long-Term Debt" of the Notes to Consolidated Financial Statements.
Capital expenditures totaled $5.1 million for the first quarter. Total
capital expenditures are currently expected to aggregate $17.0 million for
fiscal 1999. The Company believes that the combination of its existing
working capital, unused credit available under its revolving credit facility,
internally generated cash flows and access to other financing sources will be
adequate to meet its anticipated capital and liquidity requirements for the
foreseeable future.
CREDIT AGREEMENT. On February 27, 1998, the Company entered into a
Credit Agreement with certain lenders, including Bank One, Texas, N.A., as
administrative agent for the lenders, replacing the Company's former
revolving working capital line of credit. The maximum amount available for
borrowings under the Credit Agreement is $50 million. In addition, up to $15
million of credit available under the Credit Agreement may be used, as
needed, by the Company for letters of credit. Indebtedness under the Credit
Agreement will mature on February 27, 2001. Borrowings under the Credit
Agreement may be made to finance the Company's working capital, capital
expenditures, acquisitions permitted under the Credit Agreement and for
general corporate purposes. Outstanding indebtedness under the Credit
Agreement will bear interest, at the Company's option, at fluctuating
interest rates based upon a prime rate or a eurodollar rate plus a credit
margin that fluctuates depending upon the Company's ratio of funded debt to
capitalization. In addition, the Company must pay a commitment fee for unused
amounts available under the credit facility, in an amount also based upon the
Company's ratio of funded debt to capitalization.
The obligations of the Company under the Credit Agreement are unsecured,
except for a first lien pledge of the capital stock of certain wholly-owned
subsidiaries of the Company that the lenders consider to be "material
subsidiaries". Additionally, certain of these wholly-owned subsidiaries have
guaranteed the Company's obligations under the Credit Agreement.
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
11
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 and customers.
STATE OF READINESS. The Company is in the process of evaluating the Year
2000 readiness of the hardware and software products sold by it ("Products"),
the information technology systems used in its operations ("IT Systems"), and
its non-IT Systems, such as building security, voice mail and other systems.
The Company has substantially completed its assessment of its IT Systems used
in the United States, which have been verified and tested to be Year 2000
compliant. Beginning in calendar 1996, the Company commenced replacement of
its then-current U.S. IT System with a new system. This replacement, which
was substantially completed in fiscal 1998, was required in order to meet
current and future needs of the Company's business as well as to make more
efficient various administrative and operating functions. Because the Company
did not undertake this replacement for reasons of Year 2000 compliance (the
Company understands that its previous IT system was also Year 2000
compliant), the costs of this conversion have not been identified as Year
2000 compliance costs. The Company has not yet, however, completed its
assessment of its IT Systems at its European locations. It is currently
planned that these systems will be replaced with a version of the Company's
current U.S. IT System by late calendar 1999. The Company's Year 2000
compliance program is expected to cover the following phases: (i) inventory
of all non-tested IT Systems and non-IT Systems; (ii) assessment of repair or
replacement requirements; (iii) planning and remediation; (iv) testing; and
(v) implementation.
With regard to its Products, the Company is continuing its testing and
verification procedures to determine the nature and extent of their Year 2000
compliance. The Company has formed a cross-functional focus team to review
these issues and to assist its customers and suppliers in identifying and
resolving Year 2000 issues. The Company believes that its Products will be
Year 2000 compliant by mid-1999. The overall assessment of the operational
status of the Company's Products will depend, in large part, on the Year 2000
compliance of the Products' components, many of which are supplied by parties
other than the Company. Prior to the end of calendar year 1998, the Company
intends to (i) complete its internal review of the Year 2000 compliance of
its Products and (ii) circulate and assimilate information from a
questionnaire to vendors and customers in order to obtain information
regarding their Year 2000 compliance. Until additional information is
obtained, the Company will not be able to effectively evaluate whether
further remediation efforts will be required with respect to its Products.
Further, the Company relies, both domestically and internationally, upon
various vendors, governmental agencies, utility companies, telecommunications
service companies, delivery service companies and other service providers,
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.
12
Most of its expenditures have related to the opportunity cost of time spent
by employees of the Company evaluating the Company's Year 2000 issues for its
IT Systems, its non-IT Systems and its Products. While the Company has not
yet completed its evaluation of the estimated costs to remediate the Year
2000 issues concerning its Products and internal systems (primarily expected
to be costs in connection with replacing systems and modifying software),
management currently believes that these expenditures will not have a
material adverse effect on its operations, results of operations or financial
condition. However, no assurances can be given that until the Company fully
completes its cost evaluation, the economic effects of these remediation
efforts will not have a material adverse effect on its operations, results of
operations or financial condition.
A portion of the Company's Year 2000 compliance expenditures expected to
be incurred relate to the Company's limited warranty coverage. As of August
31, 1998, no specific amounts have been accrued to the warranty reserve for
such costs, as the Company has not been able to make an estimate of such
costs based on its current level of assessment. For instances in which the
limited warranty has expired or there was no warranty coverage, the Company
would offer, on a fee basis, upgrades to those Products to render them Year
2000 compliant. The Company believes that internally generated funds or
available cash will be sufficient to cover the projected costs associated
with its Year 2000 remediation requirements.
RISKS. The Company does not yet possess the information necessary to
estimate the potential impact of Year 2000 compliance issues relating to its
Products or vendors if such Products or vendors were not Year 2000 compliant.
In addition, a relatively small number of customers have traditionally
accounted for most of the Company's net sales from fiscal year to fiscal
year, although the degree of sales concentration with any one customer has
varied. The loss of any significant customer due to reasons related to Year
2000 non-compliance of the Company's Products could have a material adverse
impact on the Company's operations, results of operations or financial
position.
Failure to timely reprogram or replace the Company's European financial
and accounting software could, in a worse case scenario, result in the
Company's inability to process accounting and financial data, which could
have a material adverse effect on the Company. At this time, the Company does
not possess all of the information necessary to estimate the potential impact
of Year 2000 compliance issues relating to its European IT Systems, its
non-IT Systems, its Products, its vendors and its customers. Such impact,
including the effect of a Year 2000 business disruption, could have a
material adverse effect on the Company's financial condition and results of
operations.
CONTINGENCY PLAN. The Company has not yet developed a Year 2000 specific
contingency plan. The Company intends to prepare a contingency plan with
respect to its financial and accounting software and its Products no later
than mid-calendar 1999. 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.
OTHER. Demand for the Company's products is dependent upon the level of
worldwide oil and gas exploration and development activity. Such activity in
turn is primarily dependent
13
upon oil and gas prices, which have been subject to wide fluctuation in
recent years. Since the spring of fiscal 1999, worldwide oil prices have been
at their lowest levels since 1986. Continuing low prices for hydrocarbon
production have in certain instances resulted in lower exploration budgets by
oil companies, which situation during the first quarter of fiscal 1999
resulted in a reduction in demand for the Company's seismic data acquisition
services and equipment.
In addition, in recent months there has been considerable turmoil and
uncertainty in the Russian financial markets, prompted in large part by the
crisis in the Asian financial market which is still continuing, and the
economic and political problems being experienced by a number of Asian
countries. 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
devaluation of the ruble could exacerbate existing economic problems in
Russia. Historically, customers in Russia and other Former Soviet Union
countries have accounted for approximately 5-9% of the Company sales. The
Company's combined trade accounts receivable and trade notes receivable
balance from customers in Russia and other Former Soviet Union countries as
of August 31, 1998 was approximately $26.6 million, these receivables are
denominated in US dollars. To the extent that economic conditions in the
Former Soviet Union or in Asia negatively affect future sales to the
Company's customers in those regions or the collectibility of the Company's
existing receivables, such conditions may adversely affect the Company's
future results of operations, liquidity and financial condition.
See "Cautionary Statement for Purposes of Forward-Looking Statements
- -Uncertainty of Energy Industry Conditions" and "Risk from Significant Amount
of Foreign Sales".
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 operations, future
revenues, future earnings, future costs, future margins and future expenses;
anticipated product releases and technological advances; the future mix of
business and future asset recoveries; contingent liabilities; Year 2000
issues; the inherent unpredictability of adversarial proceedings; and future
demand for the Company's products, future capital expenditures and future
financial condition of the Company; future energy industry conditions; and
economic conditions in Asia and Former Soviet Union 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
14
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:
RISKS RELATED TO PRODUCTS AND TECHNOLOGICAL CHANGE. The markets for the
Company's product lines are characterized by rapidly changing technology and
frequent product introductions. Whether the Company can develop and produce
successfully, on a timely basis, new and enhanced products that embody new
technology, meet evolving industry standards and practice, and achieve levels of
capability and price that are acceptable to its customers, will be significant
factors in the Company's ability to compete in the future. There can be no
assurance that the Company will not encounter resource constraints or technical
or other difficulties that could delay introduction of new products in the
future. If the Company is unable, for technological or other reasons, to develop
competitive products in a timely manner in response to changes in the seismic
data acquisition industry or other technological changes, its business and
operating results will be materially and adversely affected. In addition, the
Company's continuing development of new products inherently carries the risk of
inventory obsolescence with respect to its older products.
UNCERTAINTY OF ENERGY INDUSTRY CONDITIONS. Demand for the Company's
products is dependent upon the level of worldwide oil and gas exploration and
development activity. Such activity in turn is primarily dependent upon oil and
gas prices, which have been subject to wide fluctuation in recent years in
response to relatively minor changes in the supply and demand for oil and
natural gas, market uncertainty and a variety of additional factors that are
beyond the control of the Company. Recent worldwide oil prices have been at
their lowest levels since 1986. Continuing low prices for hydrocarbon production
have resulted in lower exploration budgets by oil companies, which has resulted
in reduced demand for the Company's seismic data acquisition equipment. It is
impossible to predict future oil and natural gas price movements or the duration
of the current environment of lower oil and natural gas prices with any
certainty. 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.
RISK FROM SIGNIFICANT AMOUNT OF FOREIGN SALES. Sales outside the United
States have historically accounted for a significant part of the Company's net
sales and other revenues. Foreign sales are subject to special risks inherent in
doing business outside of the United States, including the risk of war, civil
disturbances, embargo and government activities, which may disrupt markets and
affect operating results. Foreign sales are also generally subject to the risks
of compliance with additional laws, including tariff regulations and
import/export restrictions. The Company is, from time to time, required to
obtain export licenses and there can be no
15
assurance that it will not experience difficulty in obtaining such licenses
as may be required in connection with export sales.
Demand for the Company's products from customers in developing countries
(including Russia and other Former Soviet Union countries as well as certain
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 can present heightened credit risks
for the Company, for the reasons discussed above. See, in particular above,
"Liquidity and Capital Resources - Other" for further information concerning
these risks in those countries.
RISKS RELATED TO TIMING OF PRODUCT SHIPMENTS. Due to the relatively high
sales price of the Company's products and relatively low unit sales volume, the
timing in the shipment of systems and the mix of products sold can produce
fluctuations in quarter-to-quarter financial performance. One of the factors
which may affect the Company's operating results from time to time is that a
substantial portion of its net sales and other revenues in any period may result
from shipments during the latter part of a period. Because the Company
establishes its sales and operating expense levels based on its operational
goals, if shipments in any period do not meet goals, revenues and net profits
may be adversely affected. The Company believes that factors which could affect
such timing in shipments include, among others, seasonality of end-user markets,
availability of purchaser financing, manufacturing lead times and shortages of
system components. In addition, because the Company typically operates, and
expects to continue to operate, without a significant backlog of orders for its
products, the Company's manufacturing plans and expenditure levels are based
principally on sales forecasts, which could result in inventory excesses and
imbalances from time to time.
RISKS RELATED TO GROSS MARGIN. The Company's gross margin percentage is a
function of the product mix sold in any period. Continuing increased percentages
of lower margin marine seismic equipment and related components in the overall
sales mix may result in margins remaining below their historically higher
levels. Other factors, such as unit volumes, inventory obsolescence, 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 YEAR 2000 ISSUES. While the Company is currently
assessing aspects of the potential impact of the Year 2000 issue, it has not yet
completed its review. 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 " - Liquidity and Capital
Resources - Year 2000."
16
CREDIT RISK FROM SALES ARRANGEMENTS. The Company sells to many customers
on extended-term arrangements. Moreover, in connection with certain sales of its
systems and equipment, the Company has guaranteed certain loans from
unaffiliated parties to purchasers of such systems and equipment. In addition,
the Company has sold contracts and leases to third-party financing sources, the
terms of which often obligate the Company to repurchase the contracts and leases
in the event of a customer default or upon certain other occurrences.
Performance of the Company's obligations under these arrangements could have a
material adverse effect on the Company's financial condition. A number of
significant payment defaults by customers could have a material adverse effect
on the Company's financial position and results of operations.
RELIANCE ON SIGNIFICANT CUSTOMERS. A relatively small number of customers
has accounted for most of the Company's net sales, although the degree of sales
concentration with any one customer has varied from fiscal year to year. During
fiscal 1998, 1997 and 1996 the two largest customers in each of those years
accounted for 35%, 45% and 42%, respectively, of the Company's net sales and
other revenues. The loss of either of these customers could have a material
adverse effect on the Company's sales revenues.
COMPETITION. The design, manufacture and marketing of seismic data
acquisition systems are highly competitive and are characterized by continual
and rapid changes in technology. The Company's current principal competitor for
land seismic equipment is Societe d'Etudes Recherches et Construction
Electroniques, an affiliate of Compagnie General de Geophysique which, unlike
the Company, possesses the advantage of being able to sell to an affiliated
seismic contractor.
Competition in the industry is expected to intensify and could adversely
affect the Company's future results. Several of the Company's competitors have
greater name recognition, more extensive engineering, manufacturing and
marketing capabilities, and greater financial, technological and personnel
resources than those available to the Company. In addition, certain companies in
the industry have expanded their product lines or technologies in recent years
as a result of acquisitions. There can be no assurance that the Company will be
able to compete successfully in the future with existing or new competitors.
Pressures from competitors offering lower-priced products 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 may have the effect of adversely affecting the
prices and demand for the Company's products and services.
DISRUPTION IN VENDOR SUPPLIES. The Company's manufacturing process
requires a high volume of quality components. Certain components used by the
Company are currently provided by only one vendor. In the future, the Company
may, from time to time, experience supply or quality control problems with its
suppliers, and such problems could significantly affect its ability to meet
production and sales commitments. The Company's reliance on certain vendors, as
well as industry supply conditions generally, involve several risks, including
the possibility of a
17
shortage or a lack of availability of key components, increases in component
costs and reduced control over delivery schedules, any of which could
adversely affect the Company's future financial results.
PROTECTION OF INTELLECTUAL PROPERTY. The Company believes that technology
is the primary basis of competition in the industry. Although the Company
currently holds certain intellectual property rights relating to its product
lines, there can be no assurance that these rights will not be challenged by
third parties or that the Company will obtain additional patents or other
intellectual property rights in the future. Additionally, there can be no
assurance that the Company's efforts to protect its trade secrets will be
successful or that others will not independently develop products similar to the
Company's or design around any of the intellectual property rights owned by the
Company.
DEPENDENCE ON PERSONNEL. The Company's success depends upon the continued
contributions of its personnel, many of whom would be difficult to replace. The
success of the Company will depend on the ability of the Company to attract and
retain skilled employees. Changes in personnel, therefore, could adversely
affect operating results.
RISKS RELATED TO GOVERNMENT REGULATIONS AND PRODUCT CERTIFICATION. The
Company's operations are also subject to laws, regulations, government policies,
and product certification requirements worldwide. Changes in such laws,
regulations, policies, or requirements could affect the demand for the Company's
products or result in the need to modify products, which may involve substantial
costs or delays in sales and could have an adverse effect on the Company's
future operating results.
RISKS OF STOCK VOLATILITY AND ABSENCE OF DIVIDENDS. In recent years, the
stock market in general and the market for energy and technology stocks in
particular, including the Company's common stock, have experienced extreme price
fluctuations. There is a risk that stock price fluctuation could impact the
Company's operations. Changes in the price of the Company's common stock could
affect the Company's ability to successfully attract and retain qualified
personnel or complete desirable business combinations or other transactions in
the future. The Company has historically not paid cash dividends on its capital
stock, and there can be no assurances that the Company will do so in the future.
RISKS RELATED TO ACQUISITIONS. To implement its business plans, the
Company may make further acquisitions in the future. Acquisitions require
significant financial and management resources both at the time of the
transaction and during the process of integrating the newly acquired business
into the Company's operations. The Company's operating results could be
adversely affected if it is unable to successfully integrate such new companies
into its operations. Certain acquisitions or strategic transactions may be
subject to approval by the other party's 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
18
contingent liabilities, and amortization expenses related to goodwill and
other intangible assets. These factors could adversely affect the Company's
future operating results and financial position.
OIL AND GAS OPERATIONS. The Company's oil and gas operations are subject to
the economic risks typically associated with exploration, development, and
production activities, including the necessity of significant expenditures to
drill exploratory wells. In conducting exploration and development activities,
the Company may drill unsuccessful wells and experience losses and charges to
earnings and, if oil or natural gas is discovered, there can be no assurance
that such oil or natural gas can be economically produced or satisfactorily
marketed. Historically, the markets for oil and natural gas have been volatile
and are likely to continue to be volatile in the future. The nature of the oil
and gas business involves certain operating hazards such as well blowouts,
cratering, explosions, uncontrollable flows of oil, natural gas or well fluids,
fires, formations with abnormal pressures, pollution, releases of toxic gas and
other environmental hazards and risks, any of which could result in losses to
the Company. While the Company's current practice is not to act as operator of
any drilling prospect, and while the Company does maintain insurance in
accordance with customary industry practices under the circumstances against
some, but not all, of such risks and losses, the occurrence of such an event not
fully covered by insurance could have a material adverse affect on the Company's
financial position and results of operation.
The foregoing review of factors pursuant to the Private Securities
Litigation Reform Act of 1995 should not be construed as exhaustive. In
addition to the foregoing, the Company wishes to refer readers to 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 not yet required to provide the disclosures required by
Regulation S-K Item 305 pursuant to General Instruction 1. to Paragraphs 305(a),
305(b), 305(c), 305(d), and 305(e) of Item 305. The Company's sales and
financial instruments are principally denominated in U.S. dollars and the
Company does not invest or intend to invest in derivative financial instruments
or derivative commodity instruments. The Company's principal market risk is
floating interest rate risk on indebtedness under its Credit Agreement.
19
PART II - OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS
On September 24, 1997, a purported class action lawsuit was filed against
the Company and the former president and chief executive officer, and an
executive vice president, of the Company, in the U.S. District Court for the
Southern District of Texas, Houston Division. The action, styled NORMAN TOCK V.
INPUT/OUTPUT, INC., GARY D. OWENS AND ROBERT P. BRINDLEY, alleges violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and state
statutory and common law fraud provisions. The action was filed on behalf of
purchasers of common stock of the Company that purchased shares during the
period from September 17, 1996 through March 18, 1997. The complaint seeks
damages in an unspecified amount plus costs and attorney's fees. The complaint
alleges misrepresentations and omissions in public filings and announcements
concerning the Company's business, sales and products, and disputes certain
accounting methodologies employed by the Company. On October 21, 1997, a
stipulation and order was entered by the court, extending the time for responses
to the complaint by the defendants pending entry of an order appointing lead
plaintiff and lead counsel. An amended complaint was filed on April 17, 1998.
Defendants filed a motion to dismiss and brief in support thereof on June 8,
1998. Plaintiff has filed papers in opposition to that motion. Defendants have
filed a reply to Plaintiff's opposition. No hearing on the motion to dismiss has
been scheduled. The Company believes that the plaintiff's allegations are
without merit and that there are meritorious defenses to the allegations and
intends to defend the action vigorously.
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.
ITEM 2. CHANGES IN SECURITIES
During the fiscal quarter ended August 31, 1998, the Company made no sales
of its equity securities that were not registered under the Securities Act of
1993, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of documents filed as Exhibits.
10.1 - Agreement and Plan of Merger between I/O Marine, Inc.,
Input/Output, Inc., DigiCourse, Inc. and The Laitram
Corporation as of September 30, 1998.
27.1 - Financial Data Schedule (included in EDGAR copy only)
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(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended August 31, 1998.
21
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/ Ronald A. Harris
-----------------------------
Ronald A. Harris
Vice President and Controller
(Chief Accounting Officer)
Dated: October 14, 1998
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