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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

COMMISSION FILE NUMBER 1-13402

INPUT/OUTPUT, INC.

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: o

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes: x No: o

At July 31, 2003 there were 51,220,334 shares of common stock, par value $0.01 per share, outstanding.

INPUT/OUTPUT, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2003

INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

See accompanying Notes to Unaudited Consolidated Financial Statements.

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INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

See accompanying Notes to Unaudited Consolidated Financial Statements.

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INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

See accompanying Notes to Unaudited Consolidated Financial Statements.

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INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(1)

Basis of Presentation

     The consolidated balance sheet of Input/Output, Inc. and its subsidiaries (collectively referred to as the “Company” or “I/O”) at December 31, 2002 has been derived from the Company’s audited consolidated financial statements at that date. The consolidated balance sheet at June 30, 2003, the consolidated statements of operations for the three and six months ended June 30, 2003 and 2002, and the consolidated statements of cash flows for the six months ended June 30, 2003 and 2002 have been prepared by the Company without audit. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the three and six months ended June 30, 2003 are not necessarily indicative of the operating results for a full year or of future operations.

     These consolidated financial statements have been prepared using accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and applicable rules of Regulation S-X of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States have been omitted. The accompanying consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. Certain amounts previously reported in the consolidated financial statements have been reclassified to conform to the current period’s presentation.

(2)

Restructuring Activities

     In 2002, the Company initiated a restructuring program which included reducing its full-time headcount by approximately 300 positions and closing certain of its facilities and relocating those operations to other existing Company facilities or outsourcing those operations to contract manufacturers. In July 2003, the Company has completed the move out of its Alvin, Texas manufacturing facility. Therefore, beginning in the third quarter of 2003 the related land and buildings at the Alvin location will be reclassified as “Held for Sale” under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets".

     The Company’s full-time headcount was 534 at June 30, 2003, down from 799 at December 31, 2001. The Company has continued to evaluate its staffing needs and has further reduced its full-time headcount by an additional 45 individuals in July 2003. The Company expects approximately 15 more reductions during the second half of 2003. The additional headcount reductions primarily relate to manufacturing and research and development positions and will result in additional severance charges of approximately $.5 million in the third quarter of 2003. A summary of restructuring activities is as follows (in thousands):

     Of the total severance expense of $1.0 million for the three months ended June 30, 2003, $0.3 million was included in costs of sales and $0.7 million in general and administrative expenses. Approximately $0.6 million of the severance expense included in general and administrative expenses for the quarter was related to severance costs associated with the Company’s former President and Chief Operating Officer and the former Vice President of Business Development. These executive severance costs will be paid over a period of one year from the date of their departure. This expense was partially offset by credits of $0.2 million for the cancellation of unvested restricted stock, which was reflected in general and administrative expenses. The Company paid approximately $0.4 million of accrued severance expenses in July 2003 in connection with the reductions made in July. Of the total severance expenses of $1.5 million for the six months ended June 30, 2003, $0.7 million was included in costs of sales and $0.8 million in general and administrative expense. This expense was partially offset by credits of $0.7 million for the cancellation of unvested restricted stock, which was reflected in general and administrative expenses.

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     The Company determined that it would no longer continue the internal development of the solid streamer project within the Marine segment. As such, certain assets were considered impaired and other assets related to the project were written off as of March 31, 2003. See further discussion of this impairment at Note 4 of Notes to Unaudited Consolidated Financial Statements.

(3)

Investment in Energy Virtual Partners, Inc.

     In April 2003, the Company invested $3.0 million in Series B Preferred securities of Energy Virtual Partners, Inc. (“EVP”) for 22% of the outstanding ownership interests and 11% of the outstanding voting interests. EVP provides asset management services to large oil and gas companies to enhance the value of their oil and gas properties. This investment is accounted for under the cost method basis for investment accounting. Robert P. Peebler, the Company’s President and Chief Executive Officer, founded EVP in April 2001 and served as the President and Chief Executive Officer until joining I/O in March 2003. Mr. Peebler is currently the Chairman of EVP and holds a 23% ownership interest in EVP.

     During the second quarter EVP, failed to close two anticipated asset management agreements. Since that time, EVP has re-evaluated its business model and adequacy of capital. The Board of EVP has voted to liquidate EVP if it is unable to present a clear and feasible business strategy by August 15, 2003. Therefore, in the second quarter the Company wrote its investment down to its approximate liquidation value of $1.0 million, resulting in a charge against earnings of $2.0 million. In order to avoid any potential conflict of interest concerns, Mr. Peebler has suggested and the Company has agreed that all proceeds he receives from liquidation of EVP will be paid to the Company. This amount has been included in the Company's estimate of liquidation value.

(4)

Impairment of Long-lived Assets

     During the first quarter of 2003, the Company initiated an evaluation of its solid streamer project and in May concluded it would no longer internally pursue this product for commercial development. In conjunction with this evaluation, certain fixed assets and patented technology within the Marine segment were deemed impaired in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets". As a result, fixed assets of $0.5 million and intangible assets of $0.6 million were considered impaired and written off as a charge against earnings in the first quarter of 2003. In addition, inventory associated with this project of $0.2 million was written off and included within research and development expenses at March 31, 2003.

     During the second quarter of 2003, the Company incurred a $2.5 million charge to cost of sales related to the write-down of rental equipment associated with the Company’s first generation radio-based VectorSeis® land acquisition systems. This equipment was being utilized in North America as part of the strategic marketing alliance between the Company and Veritas DGC Inc. In May 2003, the strategic marketing alliance was terminated, leading the Company to reassess the net realizable value of this equipment. Because this equipment was an older generation of the Company’s technology, the Company determined that a write-down was appropriate. Subsequent to this write-down, the equipment had a net carrying value of $2.3 million at June 30, 2003.

(5)

Stock-Based Compensation

     If the Company had elected to recognize compensation expense using a fair value approach, net loss, basic loss per share and diluted loss per share for the periods presented would have increased as follows (in thousands, except per share amounts):

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     Effective March 31, 2003, the Company granted its President and Chief Executive Officer stock options to purchase 1,325,000 shares of common stock of the Company at an exercise price of $6.00 per share under the Company’s proposed 2003 Stock Option Plan (the “Plan”). The options will vest in equal monthly installments over a three-year period beginning on the anniversary of the date of grant and have a term of ten years. The Plan was approved by the Company’s stockholders at the Company’s 2003 annual meeting of shareholders in June 2003.

(6)

Segment Information

     The Company evaluates and reviews results based on two segments, Land and Marine, to allow for increased visibility and accountability of costs and more focused customer service and product development. The Company measures segment operating results based on earnings (loss) from operations. A summary of segment information for the three and six months ended June 30, 2003 and 2002 is as follows (in thousands):

     Intersegment sales are insignificant for all periods presented. Corporate assets include all assets specifically related to corporate personnel and operations and all facilities and manufacturing machinery and equipment that are jointly utilized by segments. Depreciation and amortization expense is allocated to segments based upon use of the underlying assets.

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A summary of net sales by geographic area is as follows (in thousands):

     Net sales are attributed to individual countries on the basis of the ultimate destination of the equipment, if known; if the ultimate destination is not known, it is based on the geographical location of initial shipment.

(7)

Inventories

     A summary of inventories, net of reserves, is as follows (in thousands):

     During the first quarter of 2003, inventory of approximately $0.2 million was written off and included within research and development expenses. This write-off relates to the cancellation of the solid streamer project within the Marine segment. See further discussion at Note 4 of Notes to Unaudited Consolidated Financial Statements. In addition, an unrelated inventory obsolescence charge of $0.3 million was reflected in cost of sales in the first quarter 2003 related to the closure of the Company’s Alvin, Texas manufacturing facility.

     The Company has developed a program to reduce its inventory to a level which does not exceed the Company’s near-term requirements. Based upon this program, the Company believes upon disposition of this inventory no significant losses will be incurred in excess of its current reserve estimates.

     As part of the Company’s strategic direction, the Company is increasing the use of contract manufacturers as an alternative to in-house manufacturing. Under many of the Company’s outsourcing arrangements, its manufacturing partners first utilize the Company’s on-hand inventory, then directly purchase inventory at agreed-upon levels to meet the Company’s forecasted demand. If demand proves to be less than the Company originally forecasted, its manufacturing partners have the right to require the Company to purchase any excess or obsolete inventory that its partners purchased on their behalf. Should the Company be required to purchase inventory pursuant to these provisions, the Company may be required to expend large sums of cash for inventory that it may never utilize. Such purchases could materially and adversely effect the Company’s financial position and results of operations. Historically, the Company has not been required to purchase any excess or obsolete inventory under these outsourcing arrangements.

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(8)

Accounts and Notes Receivable

     A summary of accounts receivable is as follows (in thousands):

     The original recorded investment in notes receivable, excluding accrued interest, was $23.4 million at June 30, 2003. A summary of notes receivable, accrued interest and allowance for loan loss is as follows (in thousands):

(9)

Non-Cash Activity

     During the six months ended June 30, 2003, the Company transferred $1.9 million of inventory at cost to rental equipment in connection with leasing arrangements with marine customers and sold previously leased marine rental equipment to a customer via a note agreement for $1.4 million.

(10)

Loss per Common Share

     Basic loss per common share is computed by dividing net loss applicable to common shares by the weighted average number of common shares outstanding during the period. Diluted loss per common share is determined on the assumption that outstanding dilutive stock options have been exercised and the aggregate proceeds were used to reacquire common stock using the average price of such common stock for the period. Basic and diluted loss per share are the same for the three months and six months ended June 30, 2003 and 2002, as all potential common shares were anti-dilutive. In August 2002, the Company repurchased all of the 40,000 outstanding shares of its Series B Convertible Preferred Stock and all of the 15,000 outstanding shares of its Series C Convertible Preferred Stock (the “Preferred Stock”). As part of the repurchase the Company granted warrants to purchase 2,673,517 shares of the Company’s common stock at $8.00 per share through August 5, 2005. The Preferred Stock and warrants are considered anti-dilutive for all periods outstanding and are not included in the calculation of diluted loss per common share.

(11)

Long Term Debt and Lease Obligations

     In May 2003, the Company financed $0.5 million of insurance costs through the execution of a short-term note payable. The principal and interest are due on a monthly basis bearing an interest rate of 5.75%, with final payment due in April 2004. The unpaid balance at June 30, 2003 was $0.3 million.

     In August 2002, in connection with the repurchase of Preferred Stock, the Company issued a $31.0 million unsecured promissory note due May 7, 2004, which bore interest at 8% per year until May 7, 2003, at which time the interest rate increased to 13%. Interest is payable in quarterly payments, with all principal and unpaid interest due on May 7, 2004. The Company records interest on this note at an effective rate of approximately 11% per year over the life of the note. In May 2003, the Company repaid $15.0 million of the note, recording the excess accrued interest of $0.3 million as an adjustment of interest expense in the second quarter of 2003. The excess accrued interest represents the recorded but unpaid interest on the note at its effective rate of approximately 11%, compared to the note’s initial stated rate of 8%. The note restricts cash dividends in excess of $5.0 million per year while the note is outstanding.

     In July 2002, in connection with the acquisition of AXIS Geophysics, Inc. (“AXIS”), the Company entered into a $2.5 million three-year unsecured promissory note payable to the former shareholders of AXIS, bearing interest at 4.34% per year. Principal is payable in quarterly payments of $0.2 million plus interest, with final payment due in July 2005. The unpaid balance at June 30, 2003 was $1.9 million.

     In August 2001, the Company sold its corporate headquarters and manufacturing facility located in Stafford, Texas for $21.0 million. Simultaneous to the sale, the Company entered into a non-cancelable lease with the purchaser of the property. The lease has a

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twelve-year term with three consecutive options to extend the lease for five years each. The Company has no purchase option pursuant to the lease. As a result of the lease terms, the commitment was recorded as a twelve-year $21.0 million lease obligation with an implicit interest rate of 9.1%. The unpaid balance at June 30, 2003 was $19.3 million. The Company paid $1.7 million in commissions and professional fees, which have been recorded as deferred financing costs and are being amortized over the twelve-year term of the obligation. The Company has failed to meet the tangible net worth requirements of this lease for four consecutive quarters. Therefore, the Company is required and is in the process of providing a letter of credit to the landlord of the property in the amount of $1.5 million. In addition to the above lease agreement, the Company has other capital leases totaling $0.2 million at June 30, 2003.

     In January 2001, in connection with the acquisition of Pelton Company, Inc. (“Pelton”), the Company entered into a $3.0 million two-year unsecured promissory note payable to a former shareholder of Pelton, bearing interest at 8.5% per year. The note was paid in full in February 2003.

     A summary of future principal obligations under the notes payable and lease obligations is as follows (in thousands):

(12)

Deferred Income Tax

     In the second quarter of 2002, the Company established an additional valuation allowance to fully reserve for its net deferred tax assets and has continued to maintain a full valuation allowance. The Company’s net deferred assets are primarily net operating loss carryforwards. The establishment of this valuation allowance does not affect the Company’s ability to reduce future tax expense through utilization of prior years net operating losses. Income tax (benefit) expense of $(0.3) million and $0.3 million for the three months and six months ended June 30, 2003, respectively, reflect state and foreign taxes as the Company continues to maintain a full valuation allowance for its net deferred tax assets and a federal tax refund of $0.6 million received in the second quarter of 2003. Additionally, the Company received foreign tax refunds of $1.7 million during the six months ended June 30, 2003, which had been accrued as of December 31, 2002.

     The valuation allowance was calculated in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes,” which places primary importance on the Company’s cumulative operating results in the most recent three-year period when assessing the need for a valuation allowance. Although management believes the Company’s results for those periods were heavily affected not only by industry conditions, but also by deliberate and planned business restructuring activities in response to the prolonged downturn in the seismic equipment market, as well as heavy expenditures on research and development technology, the Company’s cumulative loss in the most recent three-year period and the six months ended June 30, 2003, represented sufficient negative evidence to establish an additional valuation allowance under the provisions of SFAS No. 109. The Company will maintain a full valuation allowance for its net deferred tax assets and net operating loss carryforwards until sufficient positive evidence exists to support reversal of the allowance.

(13)

Comprehensive Loss

     The components of comprehensive loss are as follows (in thousands):

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(14)

Acquisitions

     In July 2002, the Company acquired all of the outstanding capital stock of AXIS for $2.5 million of cash and issued a $2.5 million three-year unsecured promissory note. The Company is obligated to pay additional consideration to the former shareholders of AXIS at an amount equal to 33.33% of AXIS’ EBITDA (as adjusted by the terms of the Earn-Out Agreement), for the years ended December 31, 2003, 2004 and 2005, exceeding a minimum threshold of $1.0 million. AXIS is a seismic data service company based in Denver, Colorado, which provides specialized seismic data processing and integration services to major and independent exploration and production companies. The AXIS Interpretation-Ready Process™ (“IRP”) integrates seismic and subsurface geological data to provide customers more accurate and higher quality data that can result in improved reservoir characterizations.

     In May 2002, the Company acquired certain assets of S/N Technologies (“S/N”) for $0.7 million of cash. The assets acquired from S/N included proprietary technology applicable to solid streamer products used to acquire 2D, 3D and high-resolution marine seismic data. However, in May 2003 the Company determined that it would no longer continue the internal development of the solid streamer project. As such, the acquired assets of S/N were impaired and other assets associated with this project were written off as of March 31, 2003. See further discussion of this impairment at Note 4 of Notes to Unaudited Consolidated Financial Statements.

     The acquisitions were accounted for by the purchase method, with the purchase price allocated to the fair value of assets purchased and liabilities assumed. The allocation of the purchase price, including related direct costs, for the acquisition of AXIS and S/N are as follows (in thousands):

     The consolidated results of operations of the Company include the results of AXIS and S/N from the date of acquisition. Pro-forma results prior to the acquisition date were not material to the Company’s consolidated results of operations. The intangible asset of AXIS relates to proprietary technology, which is being amortized over a 4-year period. The goodwill of AXIS was assigned to the digital land products reporting unit, a reporting unit within the Company’s Land division.

(15)

Commitments and Contingencies

     Legal Matters. In the ordinary course of business, the Company has been named in various lawsuits or threatened actions. While the final resolution of these matters may have an impact on its consolidated financial results for a particular reporting period, the Company believes that the ultimate resolution of these matters will not have a material adverse impact on its financial position, results of operations or liquidity.

     Product Warranty Liabilities. The Company warrants that all manufactured equipment will be free from defects in workmanship, materials and parts. Warranty periods typically range from 90 days to three years from the date of original purchase, depending on the product. The Company provides for estimated warranty as a charge to cost of sales at time of sale, which is when estimated future expenditures associated with such contingency becomes probable and reasonably estimated. However, new information may become available, or circumstances (such as applicable laws and regulations) may change, thereby resulting in an increase or decrease in the amount required to be accrued for such matters (and therefore a decrease or increase in reported net income in the period of such change). A summary of warranty activity is as follows (in thousands):

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(16)

Repurchase of Series B and Series C Preferred Stock

     In August 2002, the Company repurchased all the outstanding shares of Preferred Stock from the holder, SCF-IV, L.P. (“SCF”), a Houston-based private equity fund specializing in oil service investments. In exchange for the Preferred Stock, the Company paid SCF $30.0 million in cash at closing, issued SCF a $31.0 million unsecured promissory note due May 7, 2004 and granted SCF warrants to purchase 2,673,517 shares of the Company’s common stock at $8.00 per share through August 5, 2005. The note bore interest at 8% per year until May 7, 2003, at which time the interest rate increased to 13%. The Company records interest on this note at an effective rate of approximately 11% per year. In May 2003, the Company paid $15.0 million of the outstanding note principal balance to SCF, recording the excess accrued interest of $0.3 million as an adjustment of interest expense in the second quarter of 2003. The excess accrued interest represents the recorded but unpaid interest on the note at its effective rate of approximately 11%, compared to the note’s initial stated rate of 8%.

     Under the terms of a registration rights agreement, SCF has the right to demand that the Company file a registration statement for the resale of the shares of Common Stock SCF acquires upon exercise of the warrants. Sales or the availability for sale of a substantial number of shares of Common Stock in the public market could adversely affect the market price for Common Stock. If the Company is acquired in a business combination pursuant to which the stockholders receive less than 60% of the aggregate consideration in the form of publicly traded common equity, then the holder of the warrants has the option to require the Company to acquire the warrants at their fair value as determined by the Black-Scholes valuation model as further refined by the terms of the warrant agreement. Because the Company may be required to repurchase the warrants in these limited circumstances, the warrants are classified as a current liability on the balance sheet and the Company records any change in value as a credit or charge to the consolidated statement of operations. The change in the fair value of the warrants between January 1, 2003 and June 30, 2003 resulted in other expense of approximately $0.8 million. The fair value of the warrants was $3.0 million at June 30, 2003. Fair value was determined using the Black-Scholes valuation model. The key variables used in valuing the warrants were contractually specified and were as follows: risk-free rate of return of Treasury notes having an approximate duration of the remaining term of the warrants and expected stock price volatility of 60%.

(17)

Recent Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations". This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The provisions of this Statement are effective for fiscal years beginning after June 15, 2002. The Company adopted SFAS No. 143 on January 1, 2003 and its adoption did not have a significant impact on the Company’s results of operations or financial position.

     In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities", which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity is recognized when the liability is incurred. Under EITF Issue 94-3, a liability for an exit cost was recognized at the date of an entity’s commitment to an exit plan. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002, and have been adopted by the Company for 2003. For all exit and disposal activities initiated on or before December 31, 2002, the Company continued to follow EITF No. 94-3.

     In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — and Amendment of FASB No. 123". SFAS No. 148 amends FASB No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change in fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has elected to continue to follow the intrinsic value method of accounting prescribed by Accounting Principal Board Opinion No. 25. See Note 5 of Notes to Unaudited Consolidated Financial Statements for the pro forma results if the Company had adopted SFAS No. 123.

     In November 2002, the FASB issued Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others: an Interpretation of FASB Statements No. 5, 67, and 107 and Rescission of FASB Interpretation No. 34". FIN No. 45 clarifies the requirements of FASB No. 5, “Accounting for Contingencies",

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relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. The initial recognition and measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN No. 45 did not have a significant impact on the Company’s results of operations or financial position.

     In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities", which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133. This statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of this statement is not expected to have any impact on the Company’s results of operations or financial position.

     In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 affects the issuer’s accounting for three types of freestanding financial instruments; (a) mandatorily redeemable shares which the issuing company is obligated to buy back in exchange for cash or other assets, (b) put options and forward purchase contracts that do or may require the issuer to buy back some of its shares in exchange for cash or other assets, and (c) obligations that can be settled with shares, the monetary value of which is fixed, ties solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuer’s shares. SFAS No. 150 also requires disclosures about alternative ways of settling the instruments and the capital structure of entities. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and for all periods beginning after June 15, 2003. The adoption of this statement is not expected to have any impact on the Company’s results of operations or financial position as the Company is not party to any financial instruments which would be impacted by this statement.