| A Risk Factors An investment in our common stock involves various risks |
| When considering an investment in our common stock, you should consider carefully all of the risk factors described below, as well as other information included and incorporated by reference in this report |
| The risks described below could materially and adversely affect our business, financial condition and results of operations and the actual outcome of matters as to which forward-looking statements are made in this report |
| The risk factors described below are not the only ones we face |
| Our business, financial condition and results of operations may also be affected by additional factors that are not currently known to us or that we currently consider immaterial or that are not specific to us, such as general economic conditions |
| You should refer to the explanation of the qualifications and limitations on forward-looking statements beginning on page 2 of this report |
| All forward-looking statements made by us are qualified by the risk factors described below |
| Industry Related Risks Technological change in the seismic industry requires us to make substantial research and development expenditures and may render our technology obsolete |
| The market for our geophysical equipment products is characterized by changing technology and new product introductions |
| Our air gun technology may become obsolete due to the introduction of a superior technology |
| We must invest substantial capital to develop and produce successfully and timely new and enhanced geophysical equipment products to stay abreast of technological change |
| We have no assurance that we will receive an adequate rate of return on such investment |
| If we are unable to stay abreast of technological change, we will be unable to compete in the future |
| If we are not competitive, our business, our results of operations and financial condition will be materially and adversely affected |
| Volatility of oil and natural gas prices, which is affected by factors outside of our control, affects demand for our geophysical equipment products |
| Sales of our geophysical equipment products correlate highly with oil and natural gas price trends, which are typically cyclical |
| If oil and natural gas prices are high, as is currently the case, marine seismic activity increases |
| This increases demand for our geophysical equipment products |
| If oil and natural gas prices are low, the level of marine seismic activity decreases |
| This decreases demand for our geophysical equipment products |
| In extreme cases, when oil and natural gas prices are significantly lower, older seismic vessels are decommissioned and the geophysical equipment on those ships is removed and put into storage for future use |
| Under such a scenario, our revenues would further decrease while our customers deplete stored inventories prior to placing new orders |
| Accordingly, a decrease in oil and natural gas prices could decrease our customers’ activity and decrease demand for our geophysical equipment products |
| Any decrease in demand for our geophysical equipment products could have a material adverse effect on our results of operations and financial condition |
| These include: • the level of worldwide oil and gas production and exploration activity • worldwide economic conditions and its effect on worldwide demand for energy • the policies of the Organization of Petroleum Exporting Countries • the cost of producing oil and gas • interest rates and the cost of capital • technological advances affecting hydrocarbon consumption • environmental regulation • level of oil and gas inventories • tax policies • weather-related factors that may disrupt oil and gas exploration • policies of national governments • war, civil disturbances and political instability |
| We expect prices for oil and natural gas to continue to be volatile due to circumstances outside of our control and to continue to affect our customers’ level of activity and the demand for our products |
| Company Specific Risks Loss of any major customer or consolidation among major customers could materially and adversely impact our results of operations and financial condition |
| We have a concentration of business with a few major customers who are independent contractors performing marine seismic surveys on behalf of major oil companies |
| Sales to these major customers are significant in relation to our consolidated revenues |
| In addition, a large percentage of our consolidated accounts receivable balance at the end of any accounting period is from these customers |
| The loss of any major customer could have a material and adverse impact on our results of operations and financial condition |
| This risk would increase if consolidation of oil service companies continues |
| Additional information relating to concentration of business with a few major customers is provided in Note 9 to the Consolidated Financial Statements and in “Management Discussion and Analysis – Liquidity and Capital Resources” |
| We derive a significant amount of our revenues from foreign sales, which pose additional risks, including economic, political and other uncertainties |
| Our foreign sales are significant in relation to consolidated sales |
| In fiscal 2006, sales outside of the United States accounted for approximately 71prca of our consolidated net sales |
| We believe that export sales will remain a significant percentage of our revenue |
| Our sales contracts are denominated in US dollars |
| Fluctuations in foreign exchange rates could make it more difficult for our overseas customers to meet their US dollar obligations |
| In addition, sales of our products to customers operating in foreign countries that experience political/economic instability or armed conflict, could result in difficulties in delivering and installing complete energy source systems within those geographic areas and receiving payment from these customers |
| These factors could materially adversely affect our results of operations and financial condition |
| Refer to Note 9 to the Consolidated Financial Statements for additional information relating to foreign sales |
| 8 ______________________________________________________________________ [9]Table of Contents We experience fluctuations in operating results |
| Complete air gun systems sales, which typically are large dollar amounts, do not occur in every accounting period |
| In certain periods, several complete air gun system sales may be recorded, and none in other periods |
| This “uneven” sales pattern is due largely to our customers’ schedules for the anticipated completion date for building a new seismic vessel or the target date for outfitting a conventional vessel to do seismic work |
| Customer demand for air gun replacement parts and underwater electrical connectors and cables is ongoing, but the demand level for these products varies based on oil and gas prices and trends |
| Accordingly, our results of operations can vary significantly from one fiscal quarter to another and from one fiscal year to another |
| This may cause volatility in the price of the Company’s common stock |
| An impairment of goodwill could reduce our earnings and stockholders’ equity |
| Our consolidated goodwill balance at June 30, 2006 accounts for 32prca of consolidated assets at that date |
| Goodwill is recorded when the purchase price of a business exceeds the fair market value of the tangible and separately measurable intangible net assets of the business |
| Our goodwill balance relates exclusively to the acquisition of subsidiaries |
| Generally accepted accounting principles require us to test goodwill for impairment on an annual basis or when events or circumstances occur indicating that goodwill might be impaired |
| If we were to determine that any of our remaining balance of goodwill was impaired, we would record an immediate non-cash charge to earnings with a corresponding reduction in goodwill |
| Refer to Notes 1 and 2 to the Consolidated Financial Statements for additional information relating to goodwill |
| Weak sales demand or obsolescence of our inventory may require an increase to our inventory valuation reserve |
| A significant source of our revenue arises from the sale of replacement parts required by customers who have previously purchased our products |
| Management has established an inventory valuation reserve to recognize that certain inventory may become obsolete or supplies may be in excess |
| The inventory valuation reserve is a significant estimate made by management |
| The actual results may differ from this estimate, and the difference could be material |
| The inventory valuation reserve is adjusted at the close of each accounting period, based on management’s estimate of the valuation reserve required |
| This estimate is calculated on a consistent basis as determined by our inventory valuation policy |
| Increases to the inventory reserve result in a charge to cost of sales, and decreases to the reserve result in a credit to cost of sales |
| The inventory valuation reserve is also decreased to reflect scrapped or disposed of items |
| Weak sales demand or obsolescence may require an increase to the inventory valuation reserve, and such an increase may have a material and adverse impact on our results of operations with a corresponding decrease to inventory |
| Refer to Notes 1 and 3 to the Consolidated Financial Statements for additional information relating to the inventory valuation reserve |
| Failure to achieve and maintain effective internal controls could adversely affect our business and stock price |
| Effective internal controls are necessary for us to provide reliable financial reports |
| All internal control systems, no matter how well designed, have inherent limitations |
| Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation |
| While we continue to evaluate our internal controls, we cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future |
| If we fail to maintain the adequacy of our internal controls or if we or our independent registered public accounting firm were to discover material weaknesses in our internal controls, we may not be able to ensure that 9 ______________________________________________________________________ [10]Table of Contents we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 |
| Failure to achieve and maintain an effective internal control environment could cause us to be unable to produce reliable financial reports or prevent fraud |
| We also may be required to restate our financial statements |
| If these events occur, investors may lose confidence in our reported financial information, which could have a material adverse effect on our stock price |
| We may be unable to obtain broad intellectual property protection for our current and future products, which could result in loss of revenue and any competitive advantage we hold |
| Certain of the proprietary technologies used in our geophysical equipment and industrial products are not patent protected |
| We rely on a combination of patent, common laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary technologies |
| Our competitors may attempt to copy aspects of our products despite our efforts to protect our proprietary rights, or may design around the proprietary features of our products |
| Policing unauthorized use of our proprietary rights is difficult, and we are unable to determine the extent to which such use occurs |
| Also, the laws of certain foreign countries do not offer as much protection for proprietary rights as the laws of the United States |
| Further, obtaining, maintaining or defending intellectual property rights in many countries is costly |
| The cost of pursuing any intellectual property claim against a third party, whether in the United States or in a foreign country, could be significant |
| From time to time third parties may claim that we have infringed upon their intellectual property rights |
| Any such claims, with or without merit, could be time consuming, result in costly litigation and possible injunctions, require product modifications, cause product shipment delays or require us to enter into royalty or licensing arrangements |
| Such claims could have a material adverse effect on our results of operations and financial condition |
| The loss of any member of our senior management and other key employees may adversely affect our results of operations |
| Our success depends heavily on the continued services of our senior management and other key employees |
| Our senior management consists of a small number of individuals relative to larger companies |
| These individuals, as well as other key employees, possess sales and marketing, engineering, manufacturing, financial and administrative skills that are critical to the operation of our business |
| We generally do not have employment or non-competition agreements with members of our senior management or other key employees, except for employment agreements with our Chief Executive Officer and our subsidiary presidents |
| There is no assurance that any of our senior management or other key personnel will continue in such capacity for any particular period of time |
| If we lose the services of one or more of our senior management or other key employees, our operations may be materially adversely affected |
| We do not maintain “key man” life insurance for any of our senior management or other key employees |
| Provisions in our certificate of incorporation and bylaws could discourage a takeover attempt, which may reduce or eliminate the likelihood of a change of control transaction and, therefore, the ability of our stockholders to sell their shares for a premium |
| Our certificate of incorporation and bylaws, such as certain provisions that have the effect of delaying or preventing a third party from obtaining control of our company |
| These provisions may reduce or eliminate our stockholders’ ability to sell their shares of common stock at a premium |
| These provisions include a classified board, regulation of the nomination and election of directors, limiting who may call special stockholder meetings and requiring the vote of the holders of 95prca of all shares of our stock to authorize certain business combinations |
| 10 ______________________________________________________________________ [11]Table of Contents Because we have no plans to pay any dividends for the foreseeable future, investors must look solely to stock appreciation for a return on their investment in us |
| We have not paid cash dividends on our common stock since 1985 and do not anticipate paying any cash dividends in the foreseeable future |
| We currently intend to retain any future earnings to support our operations and growth |
| Any payment of cash dividends in the future will be dependent on the amount of funds legally available, our earnings, financial condition, capital requirements and other factors that our board of directors may deem relevant |
| Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur as the only way to realize any future gains on their investment |
| Investors seeking cash dividends should not purchase our common stock |
| The market price of our common stock may be volatile |
| The market price of our common stock has experienced significant fluctuations and may continue to fluctuate significantly in the future |
| Many factors cause the market price of our common stock to fluctuate, including, but not limited to (i) the limited volume of trading in our common stock and (ii) sales of our common stock by large institutional investors and others |
| These market fluctuations may adversely affect the market price of our common stock |