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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended June 30, 2002
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 001-13601
OYO GEOSPACE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 76-0447780
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
12750 South Kirkwood, Suite 200
Stafford, Texas 77477
(Address of Principal Executive Offices)
(281) 494-8282
(Registrant's telephone number, including area code)
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
-------- --------
There were 5,546,795 shares of the Registrant's Common Stock outstanding as of
the close of business on August 12, 2002.
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Table of Contents
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risks 25
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 26
Informational Addendum to Report on Form 10-Q pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 28
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS June 30, 2002 September 30, 2001
-------------- ------------------
(unaudited)
Current assets:
Cash and cash equivalents ....................................... $ 1,857 $ 882
Trade accounts and notes receivable, net ........................ 13,746 11,539
Inventories ..................................................... 22,721 28,737
Deferred income tax ............................................. 1,551 1,152
Prepaid expenses and other ...................................... 1,556 1,299
---------- -----------
Total current assets ....................................... 41,431 43,609
Rental equipment, net ............................................... 2,200 2,075
Property, plant and equipment, net .................................. 19,319 20,307
Goodwill and other intangible assets, net ........................... 6,495 4,775
Deferred income tax ................................................. 441 340
Other assets ........................................................ 172 1,982
---------- -----------
Total assets ............................................... $ 70,058 $ 73,088
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt .......... $ 2,352 $ 1,033
Accounts payable ................................................ 2,588 4,984
Accrued expenses and other ...................................... 4,279 4,047
Deferred revenue ................................................ 720 4,859
Income tax payable .............................................. 399 235
---------- -----------
Total current liabilities .................................. 10,338 15,158
Long-term debt ...................................................... 3,597 3,772
Deferred income tax ................................................. 956 1,367
---------- -----------
Total liabilities .......................................... 14,891 20,297
---------- -----------
Minority interest in consolidated subsidiary ........................ 268 --
Stockholders' equity:
Preferred stock ................................................. -- --
Common stock .................................................... 55 55
Additional paid-in capital ...................................... 30,633 30,530
Retained earnings ............................................... 24,936 23,213
Accumulated other comprehensive loss ............................ (716) (865)
Unearned compensation-restricted stock awards ................... (9) (142)
---------- -----------
Total stockholders' equity ................................. 54,899 52,791
---------- -----------
Total liabilities and stockholders' equity ................. $ 70,058 $ 73,088
========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
3
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
-------------------------------- ---------------------------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
Sales ....................................... $ 24,668 $ 15,810 $ 51,401 $ 47,705
Cost of sales ............................... 17,904 10,204 35,747 31,713
--------- --------- --------- ---------
Gross profit ................................ 6,764 5,606 15,654 15,992
Operating expenses:
Selling, general and administrative ..... 2,756 3,373 8,795 9,617
Research and development ................ 1,531 1,532 4,048 4,450
Impairment of assets .................... 1,216 -- 1,216 --
--------- --------- --------- ---------
Total operating expenses ........... 5,503 4,905 14,059 14,067
--------- --------- --------- ---------
Income from operations ...................... 1,261 701 1,595 1,925
Other income (expense):
Interest expense ........................ (162) (93) (476) (267)
Interest income ......................... 44 61 141 169
Other, net .............................. (14) (31) (290) (43)
--------- --------- --------- ---------
Total other expense, net ........... (132) (63) (625) (141)
--------- --------- --------- ---------
Income before income taxes,
minority interest and extraordinary gain .. 1,129 638 970 1,784
Income tax expense (benefit) ................ (38) 10 (160) 328
--------- --------- --------- ---------
Income before minority interest
and extraordinary gain .................... 1,167 628 1,130 1,456
Minority interest ........................... (11) -- (93) --
--------- --------- --------- ---------
Income before extraordinary gain ............ 1,156 628 1,037 1,456
Extraordinary gain, net of tax of $85 ....... -- -- 686 --
--------- --------- --------- ---------
Net income .................................. $ 1,156 $ 628 $ 1,723 $ 1,456
========= ========= ========= =========
Basic earnings per share:
Income before extraordinary item ......... $ 0.21 $ 0.11 $ 0.19 $ 0.27
Extraordinary gain ....................... -- -- 0.12 --
--------- --------- --------- ---------
Net income ............................... $ 0.21 $ 0.11 $ 0.31 $ 0.27
========= ========= ========= =========
Diluted earnings per share:
Income before extraordinary item ......... $ 0.21 $ 0.11 $ 0.19 $ 0.26
Extraordinary gain ....................... -- -- 0.12 --
---------- --------- --------- ---------
Net income ............................... $ 0.21 $ 0.11 $ 0.31 $ 0.26
========= ========= ========= =========
Weighted average shares outstanding - Basic . 5,545,113 5,499,980 5,532,641 5,482,578
========= ========= ========= =========
Weighted average shares outstanding -
Diluted ................................... 5,556,853 5,639,257 5,545,323 5,610,184
========= ========= ========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
4
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Nine Months
Ended Ended
June 30, 2002 June 30, 2001
------------- -------------
Cash flows from operating activities:
Net income ................................................ $ 1,723 $ 1,456
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income tax expense (benefit) .................. (911) 183
Depreciation and amortization .......................... 3,612 3,014
Amortization of restricted stock awards ................ 133 344
Impairment charge ...................................... 1,216 --
Extraordinary gain, net of tax ......................... (686) --
Minority interest ...................................... 93 --
Bad debt expense ....................................... 174 280
Effects of changes in operating assets and
liabilities:
Trade accounts and notes receivable .................... (1,815) (3,692)
Inventories ............................................ 6,702 (5,171)
Prepaid expenses and other assets ...................... (30) 854
Accounts payable ....................................... (2,488) (1,155)
Accrued expenses and other ............................. (4,766) 6,062
Income tax payable ..................................... 79 98
--------- ---------
Net cash provided by operating activities ............ 3,036 2,273
--------- ---------
Cash flows from investing activities:
Capital expenditures ...................................... (2,605) (3,366)
Investment in business acquisition, net of cash acquired .. 913 (1,925)
Purchase of intangible assets ............................. (2,148) --
Proceeds from sale of equipment ........................... 408 246
--------- ---------
Net cash used in investing activities ................ (3,432) (5,045)
--------- ---------
Cash flows from financing activities:
Increase in notes payable ................................. 23,028 21,701
Principal payments on notes payable ....................... (21,883) (21,664)
Proceeds from exercise of stock options ................... 77 360
--------- ---------
Net cash provided by financing activities ............ 1,222 397
--------- ---------
Effect of exchange rate changes on cash ....................... 149 (93)
--------- ---------
Increase (decrease) in cash and cash equivalents .............. 975 (2,468)
Cash and cash equivalents, beginning of period ................ 882 3,989
--------- ---------
Cash and cash equivalents, end of period ...................... $ 1,857 $ 1,521
========== =========
The accompanying notes are an integral part of the
consolidated financial statements.
5
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Basis of Presentation
The consolidated balance sheet of OYO Geospace Corporation and its
subsidiaries (the "Company") at September 30, 2001 has been derived from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 2002 and the consolidated statements of
operations for the three months and nine months ended June 30, 2002 and 2001,
and the consolidated statements of cash flows for the nine months ended June 30,
2002 and 2001, have been prepared by the Company, without audit. In the opinion
of management, all adjustments, consisting of normal recurring adjustments,
necessary to present fairly the consolidated financial position, results of
operations and cash flows have been made. The results of operations for the
three months and nine months ended June 30, 2002 are not necessarily indicative
of the operating results for a full year or of future operations.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with accounting principles generally accepted
in the United States of America have been omitted. The accompanying consolidated
financial statements should be read in conjunction with the financial statements
and notes thereto contained in the Company's Annual Report on Form 10-K for the
year ended September 30, 2001.
Revenue is primarily derived from the sale, and short-term rental under
operating lease, of seismic instruments and equipment and commercial graphics
products. Sales revenues are recognized when the products are shipped and title
and risk of loss have passed to the customer. Rental revenues are recognized as
earned over the rental period. Short-term rentals of the Company's equipment
generally range from daily rentals to rental periods of up to six months.
Products are generally sold without any customer acceptance provisions and the
Company's standard terms of sale do not allow its customers to return products.
The Company's products generally do not require installation assistance or
sophisticated instruction. The Company offers a standard product warranty
obligating it to repair or replace equipment with manufacturing defects. The
Company maintains a reserve for future warranty costs based on historical
experience.
The Company expenses research and development costs as incurred.
The Company records a write-down of its inventory when the cost basis of
any manufactured product (including any estimated future costs to complete the
manufacturing process) exceeds its net realizable value.
In November 2001, the Company acquired an additional equity interest in a
Russian joint venture; thereby, increasing its ownership percentage from 44% to
85%. As a result of this acquisition, the Company records expense or income of
minority interests, reflecting the portion of earnings or loss, respectively, of
the majority-owned operations allocated to the minority interest partners. For
additional information, see Note 6 to the Consolidated Financial Statements
contained in this Report on Form 10-Q.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141").
SFAS 141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. The Company adopted the provisions of
SFAS 141 effective October 1, 2001. Among the provisions of SFAS 141 is the
requirement to record as an extraordinary gain all negative goodwill resulting
from new business combinations. As a result, the Company recorded an
extraordinary gain of $686,000 relating to the acquisition of the Russian joint
venture in November 2001.
Also in July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). Under SFAS 142, goodwill and intangible assets
with indefinite lives are no longer amortized but are reviewed annually for
impairment; or more frequently if impairment is indicated. Intangible assets
that are not deemed to have indefinite lives will continue to be amortized over
their useful lives; however, no maximum life applies. The Company will adopt the
provisions of SFAS 142 effective in its fiscal year 2003, beginning October 1,
2002. At June 30, 2002, the Company had
6
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
goodwill, net of accumulated amortization, of $1.9 million. Management is
currently evaluating the impact of SFAS 142 on the Company's financial position
and results of operations.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
143 - "Accounting for Asset Retirement Obligations". This statement requires the
Company to recognize the fair value of a liability associated with the cost the
Company would be obligated to incur in order to retire an asset at some point in
the future. The liability would be recognized in the period in which it is
incurred and can be reasonably estimated. The standard is effective for fiscal
years beginning after June 15, 2002. The Company expects to adopt this standard
at the beginning of fiscal 2003. Management is currently evaluating the impact
of SFAS No. 143 on the Company's financial position and results of operations.
Additionally, in October 2001, the Financial Accounting Standards Board
issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long Lived
Assets". SFAS No. 144 develops an accounting model, based upon the framework
established in SFAS No. 121, for long-lived assets to be disposed by sales. The
accounting model applies to all long-lived assets, including discontinued
operations, and it replaces the provisions of APB Opinion No. 30, "Reporting
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for disposal of segments of a business. SFAS No. 144 requires
long-lived assets held for disposal to be measured at the lower of carrying
amount or fair values less costs to sell, whether reported in continuing
operations or in discontinued operations. The statement is effective for fiscal
years beginning after December 15, 2001. The Company intends to adopt this
standard at the beginning of its fiscal 2003. Management is currently evaluating
the impact of SFAS No. 144 on the Company's financial position and results of
operations.
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Recission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections". This statement clarifies guidance related to
the reporting of gains and losses from extinguishment of debt and resolves
inconsistencies related to the required accounting treatment of certain lease
modifications. The provisions of this statement relating to extinguishment of
debt become effective for financial statements issued for fiscal years beginning
after May 15, 2002. The provisions of this statement relating to lease
modification are effective for transactions occurring after May 15, 2002. The
Company intends to adopt this standard at the beginning of fiscal 2003.
Management is currently evaluating the impact of SFAS No. 145 on the Company's
financial position and results of operations.
Certain amounts previously presented in the consolidated financial
statements have been reclassified to conform to the current year presentation.
7
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
2. Earnings Per Common Share
The following table summarizes the calculation of net earnings and weighted
average common shares and common equivalent shares outstanding for purposes of
the computation of earnings per share (in thousands, except per share data):
Three Months Ended Nine Months Ended
----------------------------- --------------------------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
Income before extraordinary gain .............. $ 1,156 $ 628 $ 1,037 $ 1,456
Extraordinary gain ............................ -- -- 686 --
--------- --------- --------- ---------
Net earnings available to common
stockholders ................................ $ 1,156 $ 628 $ 1,723 $ 1,456
========= ========= ========= =========
Weighted average common shares outstanding .... 5,545,113 5,499,980 5,532,641 5,482,578
Weighted average common share equivalents
outstanding ................................. 11,740 139,277 12,682 127,606
--------- --------- --------- ---------
Weighted average common shares and common
share equivalents outstanding .............. 5,556,853 5,639,257 5,545,323 5,610,184
========= ========= ========= =========
Basic earnings per share:
Income before extraordinary gain .......... $ 0.21 $ 0.11 $ 0.19 $ 0.27
Extraordinary gain ........................ -- -- 0.12 --
--------- --------- --------- ---------
Net income .................................... $ 0.21 $ 0.11 $ 0.31 $ 0.27
========= ========= ========= =========
Diluted earnings per common share:
Income before extraordinary gain .......... $ 0.21 $ 0.11 $ 0.19 $ 0.26
Extraordinary gain ........................ -- -- 0.12 --
--------- --------- --------- ---------
Net income .................................... $ 0.21 $ 0.11 $ 0.31 $ 0.26
========= ========= ========= =========
3. Comprehensive Income
Comprehensive income includes all changes in a company's equity, except
those resulting from investments by and distributions to owners. The following
table summarizes the components of comprehensive income (in thousands):
Three Months Nine Months
Ended Ended
------------------ ------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
Net income ............................. $ 1,156 $ 628 $ 1,723 $ 1,456
Foreign currency translation adjustments 270 157 149 (93)
------- ------- ------- -------
Total comprehensive income ............. $ 1,426 $ 785 $ 1,872 $ 1,363
======= ======= ======= =======
8
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
4. Trade Accounts and Notes Receivable
Trade accounts and notes receivable consisted of the following (in
thousands):
June 30, September 30,
2002 2001
------- -------------
Trade accounts receivable .......................... $12,842 $ 9,566
Trade notes receivable ............................. 1,462 2,443
Allowance for doubtful accounts and notes .......... (558) (470)
------- -------
$13,746 $11,539
======= =======
5. Inventories
Inventories consisted of the following (in thousands):
June 30, September 30,
2002 2001
------- -------------
Finished goods .................................... $ 4,150 $ 3,649
Work-in-process ................................... 4,867 9,653
Raw materials ..................................... 15,678 16,524
Obsolescence reserve .............................. (1,974) (1,089)
------- -------
$22,721 $28,737
======= =======
The Company's reserve for slow moving and obsolete inventories is analyzed
and adjusted periodically to reflect the Company's best estimate of the net
realizable value of such inventories.
6. Acquisition
Effective November 8, 2001, the Company increased its equity ownership from
44% to 85% in a Russian joint venture formed more than ten years ago with
Geophyspribor Ufa Production Association, Bank Vostock and Chori Co., Ltd. Since
the increase in ownership, the operating results of the reorganized entity, now
known as OYO-GEO Impulse International LLC ("OYO-GEO Impulse"), have been
consolidated with those of the Company. Geophyspibor Ufa Production Association
and Chori Co., Ltd. has continued as minority equity holders of OYO-GEO Impulse.
The Company restructured its participation in the Russian joint venture in
order to broaden production capabilities, reduce production costs and increase
its market scope internationally. In exchange for the additional equity
ownership, the Company forgave a debt of $1.2 million owed to it by OYO-GEO
Impulse. At the time of the acquisition, the Company's basis in the receivable
and related equity investment was zero as such items were written-off in 1994.
In accordance with the provisions of SFAS No. 141, the Company recorded an
extraordinary gain of $686,000, net of income taxes of $85,000. This
extraordinary gain resulted from the write-off of negative goodwill associated
with the acquisition of the additional equity interest of OYO-GEO Impulse.
9
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The allocation of the purchase price and a reconciliation of the purchase
price to the cash provided by business acquisitions follows:
Fair values of assets and liabilities
Accounts receivable ................................ $ 185
Inventories ........................................ 686
Prepaid expenses and other ......................... 263
Accounts payable ................................... (92)
Accrued expenses ................................... (1,009)
Income taxes payable ............................... (85)
Minority interest .................................. (175)
Negative goodwill .................................. (686)
------
Total allocated purchase price ..................... (913)
Less consideration paid ............................ --
-------
Cash provided by business acquisition .............. $ (913)
=======
7. Segment and Geographic Information
The Company evaluates financial performance based on two business segments:
Seismic and Commercial Graphics. The seismic product lines currently consist of
geophones and hydrophones, including multi-component geophones and hydrophones,
seismic leader wire, geophone string connectors, seismic telemetry cable, high
definition reservoir characterization products and services, marine seismic
cable retrieval devices and small data acquisition systems targeted at niche
markets. Commercial graphic products include thermal imaging equipment and dry
thermal film. The following tables summarize the Company's segment information:
Three Months Ended Nine Months Ended
-------------------- ---------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
--------- -------- --------- ---------
Net sales:
Seismic .................. $ 20,997 $ 12,184 $ 41,106 $ 37,630
Commercial graphics ...... 3,765 3,641 10,476 10,137
Eliminations ............. (94) (15) (181) (62)
-------- -------- -------- --------
Total .................... $ 24,668 $ 15,810 $ 51,401 $ 47,705
======== ======== ======== ========
Income (loss) from operations:
Seismic .................. $ 3,095 $ 1,606 $ 4,382 $ 4,845
Commercial graphics ...... (999) (1) -- (112)
Corporate ................ (835) (904) (2,787) (2,808)
-------- -------- -------- --------
Total .................... $ 1,261 $ 701 $ 1,595 $ 1,925
======== ======== ======== ========
June 30, September 30,
2002 2001
--------- -------------
Total assets:
Seismic ................. $ 54,500 $ 56,968
Commercial graphics ..... 11,987 11,059
Corporate ............... 3,571 5,061
-------- --------
$ 70,058 $ 73,088
======== ========
10
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
8. Credit Agreement
The Company has a working capital line of credit pursuant to which it can
borrow up to $10.0 million secured by its accounts receivable and inventories
(the "Credit Agreement"). The Credit Agreement, as amended, expires in January
2003. Borrowings under the Credit Agreement are subject to borrowing base
restrictions based on (i) consolidated net income plus consolidated interest
expense, income taxes, depreciation and amortization and (ii) levels of eligible
accounts receivable and inventories. The Credit Agreement limits the incurrence
of additional indebtedness, requires the maintenance of certain financial
amounts and contains other covenants customary in agreements of this type. As of
June 30, 2002, there were borrowings of $2.1 million outstanding under the
Credit Agreement. Based on the levels of eligible accounts receivable and
inventories, the Company had additional borrowings available under the Credit
Agreement of $5.5 million. The borrowing interest rate at June 30, 2002 was
5.0%.
In January 2002, the Company amended its Credit Agreement to expire in
January 2003. In connection with this amendment, the Company's borrowing
interest rate became the bank's prime rate with a minimum rate of 5.0%. In
addition, the Company arranged for an additional promissory note of $2.5 million
("Additional Note") to assist the Company with the funding of several long-term
projects. As of June 30, 2002 there were no borrowings outstanding under the
Additional Note, and additional borrowings available under the Additional Note
of $2.5 million. The Additional Note had a fixed borrowing rate of 8.0% and
matured on July 15, 2002.
9. Purchase of Intangible Assets
A private corporation headquartered in New York State is currently the
primary supplier of dry thermal film used by the Company's customers in the
thermal imaging equipment that the Company manufactures (the "Primary Film
Supplier"). In April 2002, the Company purchased certain intellectual property
rights from its Primary Film Supplier for a total purchase price inclusive of
professional fees of $2.1 million. As a result of this purchase, the Company has
exclusive ownership of all technology used by the Primary Film Supplier to
manufacture dry thermal film used in the thermal imaging equipment the Company
manufactures. Such purchase includes technology currently existing and any dry
thermal film technology later developed by the Primary Film Supplier for use in
the Company's equipment. In connection with the purchase, the Company licensed
the technology to the Primary Film Supplier on a perpetual basis so long as it
can meet predefined quality and delivery requirements. The Company and the
Primary Film Supplier also entered into an amended supply agreement pursuant to
which the Primary Film Supplier provides the Company with the dry thermal film.
Should the Primary Film Supplier not meet such requirements, the Company has the
right to license to any third party the right to manufacture dry thermal film.
10. Subsequent Events
On July 3, 2002, the Primary Film Supplier filed a Chapter 11
reorganization petition in Federal Bankruptcy Court for the Western District of
New York. At June 30, 2002 and at the date of such bankruptcy filing, the
Company had $3.3 million of long-term assets carried on its balance sheet
(including the $2.1 million investment in certain intellectual property acquired
from such Primary Film Supplier described in Note 9), as a result of the prior
transactions with the Primary Film Supplier. The Primary Film Supplier has
advised the Company that, in connection with its bankruptcy filing, it is
seeking a buyer for its assets that would assume its relationship and contracts
with the Company, and the Company intends to cooperate in such efforts to the
extent its on-going interest can be served thereby. At this time, the Company is
not able to determine whether a buyer can be found to operate the Primary Film
Supplier's business or, if a buyer is found, that it will agree to perform the
Primary Film Supplier's obligations under the agreements entered into between
the Company and the Primary Film Supplier in accordance with the terms thereof,
or whether any such buyer would be capable of carrying out such obligations.
Should such efforts not be successful, the Company intends to use the
intellectual property to manufacture the film internally or establish a
relationship with another vendor as a source of supply for the film used in
connection with the thermal imaging equipment that the Company manufactures.
11
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
As a result of such bankruptcy filing by the Primary Film Supplier and in
accordance with the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," the Company has provided an impairment charge of
approximately $1.2 million due to the ultimate uncertainty of its ability to
realize the value of certain assets, particularly certain prepaid purchase
benefits and similar benefits under the supply contract with the Primary Film
Supplier. The Company does not believe there has been any impairment in the
value of the intellectual property acquired from the Primary Film Supplier in
the April 2002 transaction described above because of its ability to utilize the
intellectual property to have thermal film manufactured elsewhere. No claims
have been made against the Company or by the Company at present in connection
with the Supplier's bankruptcy proceeding. The Company is at present unable to
predict whether any claims will be made by or against the Company in connection
with the Primary Film Supplier's bankruptcy proceeding as to any aspect of the
Company's relationship with such Primary Film Supplier and is otherwise unable
to predict the outcome of this developing situation.
11. Tax Footnote
The United States statutory tax rate for the current year and prior year
periods was 34%. The difference between the Company's effective tax rate and the
statutory tax rate resulted from adjustments due to the resolution of contingent
tax matters and a change in estimates used to calculate the Company's year-end
tax accrual upon the subsequent filing of the previous year's United States tax
return. For the three months and nine months ended June 30, 2002, such
adjustments were $422,000 and $489,000, respectively. For the three months and
nine months ended June 30, 2001, such adjustments were $188,000 and $264,000,
respectively. In addition, the Company recorded a tax expense of $85,000 related
to an extraordinary gain that occurred in the first quarter of 2002.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following analysis of the financial condition and results of operations
of OYO Geospace Corporation should be read in conjunction with the Consolidated
Financial Statements and Notes related thereto included elsewhere in this Form
10-Q.
Industry Overview
We design and manufacture instruments and equipment used in the acquisition
and processing of seismic data. We have been in the seismic instrument and
equipment business since 1980, marketing our products primarily to the oil and
gas industry worldwide. We also design and manufacture thermal imaging equipment
and distribute dry thermal film products to the commercial graphics industry. We
have been serving the commercial graphics industry since 1995.
Seismic Industry
Geoscientists use seismic data to map potential or existing oil and gas
bearing formations and the geologic structures that surround them. Seismic data
is used primarily in connection with the exploration, development and production
of oil and gas.
Seismic data acquisition is conducted on land by combining a seismic energy
source and a data recording system. The energy source imparts seismic waves into
the earth, reflections of which are received and measured by geophones and
hydrophones. Electrical signals generated by the geophones and hydrophones are
simultaneously transmitted through leader wire, geophone and hydrophone string
connectors and telemetric cable to data collection units, which store
information for processing and analysis. Seismic thermal imaging products are
output devices used in the field or office to create a graphic representation of
the seismic data after it has been acquired.
Marine seismic data acquisition is conducted primarily by large ocean-going
vessels that tow long seismic cables known as "streamers". Usually, the energy
source in marine seismic data acquisition is an airgun, and the reflected
seismic waves are received and measured by hydrophones, which are an integral
part of the streamers. The streamers simultaneously transmit the electrical
impulses back to the vessel via telemetric cable included within the streamers,
and the seismic data is recorded in much the same manner as it is on land.
An estimated one to two-thirds of the reserves found with every oil and gas
discovery will be left behind in the reservoir, not recoverable economically or
at times even identified. Reservoir characterization and management programs, in
which the reservoir is carefully imaged and monitored throughout the life of the
field by seismic instruments and equipment, are now seen as vital tools for
improving production recovery rates. Seismic surveys repeated over selected time
intervals show dynamic changes within the reservoir and can be used to monitor
the effects of production.
We expect to incur significant future research and development expenditures
aimed at the development of additional seismic acquisition products and services
used for high definition reservoir characterization for use in both land and
marine environments.
While orders for our products can vary substantially from quarter to
quarter, reservoir characterization projects, especially deepwater projects,
require the use of more equipment over a longer period of time than is required
by conventional surface seismic systems. Revenue recognition in accordance with
generally accepted accounting principles for these large-scale projects has the
potential to result in substantial fluctuations in quarterly performance. These
variations may impact our operating results and cash flow, manufacturing
capability and expense levels in any given quarter. Furthermore, because of the
scale and nature of reservoir characterization projects, there may be delays in
their implementation and uncertainties about their final course. As a result, we
are unable at present to predict the impact of all such projects on our business
and financial results and condition.
13
During our third quarter ended June 30, 2002, we delivered a reservoir
characterization and monitoring system to a major oil company. In accordance
with the terms of the contract, we recognized $15.8 million of revenues in our
third quarter ended June 30, 2002. The contract provides for additional revenue
of $3.2 million based upon the system's performance, and we expect to recognize
such revenue in the last calendar quarter of 2003. All costs related to this
sale, including estimated costs for warranty and delivery, have been recorded in
the third quarter ended June 30, 2002.
Commercial Graphics Industry
We developed our commercial graphics business segment over time as we
leveraged our thermal imaging product technology, originally designed for
seismic data processing applications, into new markets. With minor product
modifications, we were successful in adapting these products for use in the
commercial graphics industry.
Our commercial graphics business segment manufactures and sells thermal
imaging equipment and distributes dry thermal film primarily to the screen
print, point of sale, signage and textile market sectors. Our thermal imaging
equipment is capable of producing data images ranging in size from 12 to 54
inches wide. This business segment has some sales to customers in the seismic
industry.
A private corporation headquartered in New York State is currently the
primary supplier of dry thermal film used by our customers in the thermal
imaging equipment we manufacture (the "Primary Film Supplier"). We also have a
secondary supplier of dry thermal film headquartered in Europe. We are not aware
of other suppliers of dry thermal film for our thermal imaging equipment. While
alternate suppliers might be able to provide dry thermal film, such film has not
historically performed as well in our thermal imaging equipment.
In April 2002, we purchased certain intellectual property rights from our
Primary Film Supplier for $2.1 million. Such purchase gives us exclusive
ownership of all technology used by the Primary Film Supplier to manufacture dry
thermal film used in the thermal imaging equipment we manufacture. Such purchase
includes technology currently existing and any dry thermal film technology
hereinafter developed by the Primary Film Supplier for use in our equipment. We
have also entered into an amended supply agreement pursuant to which the Primary
Film Supplier provides us with the dry thermal film. In connection with the
purchase, we licensed the technology to the Primary Film Supplier on a perpetual
basis, so long as it can meet predefined quality and delivery requirements.
Should the Primary Film Supplier not meet such requirements, we have the right
to license any third party to manufacture dry thermal film.
On July 3, 2002, the Primary Film Supplier filed a Chapter 11
reorganization petition in Federal Bankruptcy Court for the Western District of
New York. At June 30, 2002 and at the date of such bankruptcy filing, we had
$3.3 million of long-term assets carried on our balance sheet (including the
$2.1 million investment in certain intellectual property acquired from such
Primary Film Supplier described above and in Note 9 to Consolidated Financial
Statements), as a result of the prior transactions with the Primary Film
Supplier. The Primary Film Supplier has advised us that, in connection with its
bankruptcy filing, it is seeking a buyer for its assets that would assume its
relationship and contracts with us, and we intend to cooperate in such efforts
to the extent our on-going interest can be served thereby. At this time, we are
not able to determine whether a buyer can be found to operate the Primary Film
Supplier's business or, if a buyer is found, that it will agree to perform the
Primary Film Supplier's obligations under the agreements entered into between us
and the Primary Film Supplier in accordance with the terms thereof, or whether
any such buyer would be capable of carrying out such obligations. Should such
efforts not be successful, we intend to use the intellectual property to
manufacture the film internally or establish a relationship with another vendor
as a source of supply for the film used in connection with the thermal imaging
equipment that we manufacture.
As a result of the bankruptcy filing by the Primary Film Supplier, we have
provided an impairment charge of approximately $1.2 million due to the ultimate
uncertainty of realization of value on certain assets, particularly certain
prepaid purchase benefits and similar benefits under the supply contract with
the Primary Film Supplier. We do not believe there has been any impairment in
the value of the intellectual property we acquired from the Primary Film
Supplier in the April 2002 transaction described above because of our ability to
utilize the intellectual property to have thermal film manufactured internally
or elsewhere. No claims have been made against us or by us at present in
connection
14
with the Primary Film Supplier's bankruptcy proceeding. We are at present unable
to predict whether any claims will be made by or against us in connection with
the Primary Film Supplier's bankruptcy proceeding as to any aspect of our
relationship with such Primary Film Supplier and are otherwise unable to predict
the outcome of this developing situation.
Results of Operations
We report and evaluate financial information for two segments: Seismic and
Commercial Graphics. Summary financial data by business segment follows:
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
Seismic
Revenue ....................... $ 20,997 $ 12,184 $ 41,106 $ 37,630
Operating income .............. 3,095 1,606 4,382 4,845
Commercial Graphics
Revenue ....................... 3,765 3,641 10,476 10,137
Operating income (loss) ....... (999) (1) -- (112)
Corporate
Revenue ....................... -- -- -- --
Operating loss ................ (835) (904) (2,787) (2,808)
--
Eliminations
Revenue ....................... (94) (15) (181) (62)
Operating income .............. -- -- -- --
Consolidated Totals
Revenue ....................... 24,668 15,810 51,401 47,705
Operating income .............. 1,261 701 1,595 1,925
Overview
Third Quarter of Fiscal Year 2002 Compared to Third Quarter of Fiscal Year 2001.
Consolidated sales for the three months and nine months ended June 30, 2002
increased $8.9 million, or 56.0% and $3.7 million, or 7.7%, respectively, from
the corresponding periods of the prior fiscal year. The increase in sales in
both periods was primarily due to (i) a $15.8 million sale of a reservoir
characterization and monitoring system to a major oil company, (ii) the
acquisition and consolidation of OYO GEO Impulse, and (iii) an increase of sales
by our commercial graphics segment. Such increases were partially offset by a
significant decrease in sales of our traditional land-based seismic products.
Such decrease in sales resulted from a softening in the demand for seismic
equipment along with significant competitive pricing pressures due to excess
manufacturing capacity in the seismic business segment.
Consolidated gross profits for the three months ended June 30, 2002
increased by $1.2 million, or 20.6% from the corresponding period of the prior
year. Consolidated gross profits for the nine months ended June 30, 2002
decreased by $0.3 million, or 2.1% from the corresponding period of the prior
year. While the sale of the reservoir characterization system had a favorable
impact on our consolidated gross profits and gross profit margins, the continued
depressed state of the seismic industry adversely affected gross profit margins
for our land-based seismic products. In response to these market conditions, we
recorded a charge of $0.9 million in the quarter ended June 30, 2002 to reflect
the impairment of slow moving inventories and the underutilization of certain
manufacturing plant assets.
15
Consolidated operating expenses for the three months and nine months ended
June 30, 2002 increased by $0.6 million, or 12.2%, and decreased $9,000, or
0.1%, respectively, from the corresponding periods of the prior fiscal year.
Reflected in each period's operating expenses is a $1.2 million impairment
charge related to the Chapter 11 reorganization petition filed by the Primary
Film Supplier. In this regard, see the discussion in Notes 9 and 10 to
Consolidated Financial Statements included in this Report on Form 10-Q and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Industry Overview--Commercial Graphics Industry". Excluding the
impact of the impairment charge, consolidated operating expenses for this three
month and nine month period decreased by $0.6 million, or 12.6%, and $1.2
million, or 8.7%, respectively, from the corresponding period of the prior
fiscal year. The lower expenses are a result of our effort to reduce expenses in
our land-based seismic business segment. In the past year, we have significantly
reduced the workforce in our land-based seismic manufacturing operations.
The effective tax rate for the three months and nine months ended June 30,
2002 was (3.4)% and (16.5)%, respectively. The effective tax rate for the three
months and nine months ended June 30, 2001 was 1.6% and 18.4%, respectively. The
United States statutory tax rate for each of these periods was 34%. For each of
the current year and prior year periods, the difference between our effective
tax rate and the statutory tax rate resulted from the recording of tax benefits
related to the resolution of contingent tax matters from prior years, as well as
a change in the estimates used to calculate our year-end tax accrual to the
subsequently filed United States tax return. In addition, we recorded a tax
expense of $85,000 related to an extraordinary gain that occurred in the first
quarter of 2002.
Seismic
Our seismic product lines currently consist of high definition reservoir
characterization products and services, geophones and hydrophones, including
multi-component geophones and hydrophones, seismic leader wire, geophone string
connectors, seismic telemetry cable, marine seismic cable retrieval devices and
small data acquisition systems targeted at niche markets.
Revenue
Sales of our seismic products for the three months and nine months ended
June 30, 2002 increased $8.8 million, or 72.3%, and $3.5 million or 9.2%
respectively from the corresponding periods of the prior year. The increase in
seismic product sales resulted from (i) the sale of a $15.8 million reservoir
characterization system and (ii) the acquisition of an increased interest in,
and consolidation of, OYO-GEO Impulse discussed hereinafter under
"--International Business Development Initiative". These increases in sales were
significantly offset by a decrease in sales of our traditional land-based
seismic products. This sales decline resulted from a softening in the demand for
seismic equipment along with significant competitive pricing pressures due to
excess manufacturing capacity.
Operating Income
Operating income for the three months and nine months ended June 30, 2002
increased $1.5 million, or 92.7%, and decreased $0.5 million, or 9.6%,
respectively, from the corresponding periods of the prior year. For each period,
operating income was favorably impacted by the sale of a reservoir
characterization and monitoring system. However, operating income was
unfavorably impacted by lower sales levels of our land-based seismic products,
which yielded significantly lower gross profit margins due to unabsorbed fixed
manufacturing costs. Furthermore, we recorded a charge of $0.9 million in the
quarter ended June 30, 2002 to reflect the impairment of slow moving inventories
and the underutilization of certain manufacturing plant assets.
16
International Business Development Initiative
Effective November 8, 2001, the Company increased its equity ownership from
44% to 85% in a Russian joint venture formed more than ten years ago with
Geophyspribor Ufa Production Association, Bank Vostock and Chori Co., Ltd. Since
the increase in ownership, the operating results of the reorganized entity, now
known as OYO-GEO Impulse International LLC ("OYO-GEO Impulse"), have been
consolidated with those of the Company. Geophyspibor Ufa Production Association
and Chori Co., Ltd. have continued as minority equity holders of OYO-GEO
Impulse.
In exchange for the additional equity ownership, we forgave a debt of $1.2
million owed to us by OYO-GEO Impulse. At the time of the acquisition, our basis
in the receivable and related equity investment was zero as such items were
written-off in 1994.
In connection with this acquisition, we recorded an extraordinary gain of
$686,000, net of income taxes of $85,000. This extraordinary gain resulted from
the write-off of negative goodwill associated with the acquisition of the
additional equity interest of OYO-GEO Impulse.
Commercial Graphics
Our commercial graphics business segment manufactures and sells thermal
imaging equipment and distributes dry thermal film primarily to the screen
print, point of sale, signage and textile market sectors. This business segment
has some sales to customers in the seismic industry.
Revenue
Sales of our commercial graphics products for the three months and nine
months ended June 30, 2002 increased $0.1 million, or 3.4% and $0.3 million, or
3.3%, respectively, from the corresponding periods of the prior year. Such
increase in the three months ended June 30, 2002 reflects increases in the sale
of dry thermal film. The increase in the nine months ended June 30, 2002
primarily reflects the impact of our acquisition of the business and assets of
EcoPRO Imaging Corporation in February 2001.
Operating Income
Operating income for the three months and nine months ended June 30, 2002
decreased $1.0 million and increased $0.1 million, respectively, from the
corresponding periods of the prior fiscal year. Both periods reflect the impact
of a $1.2 million impairment charge. In this regard, see the discussion in Notes
9 and 10 to Consolidated Financial Statements included in this Report on Form
10-Q and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Industry Overview--Commercial Graphics Industry".
Excluding the $1.2 million impairment charge, operating income for the three
months and nine months ended June 30, 2002 would have increased $0.2 million and
$1.3 million, respectively, from the corresponding periods of the prior fiscal
year. The increase in operating income is due to increased sales of dry thermal
film products, and the year-to-date impact of the EcoPRO acquisition.
Liquidity and Capital Resources
At June 30, 2002, we had $1.9 million in cash and cash equivalents. For the
nine months ended June 30, 2002, we generated approximately $3.0 million of cash
in operating activities principally resulting from our net income after adding
back $3.6 million of net non-cash charges. In addition, our inventories
decreased $6.7 million principally as a result of the sale of a reservoir
characterization and monitoring system to a major oil company. Such cash flows
were offset by increases in accounts receivable and decreases in account payable
and accrued expenses. Accounts receivable increased $1.8 million as a result of
higher sales, principally the sale of the reservoir characterization and
monitoring system. Accounts payable decreased $2.5 million primarily due to
decreased purchases of raw materials, resulting from lower sales of our
land-based seismic equipment. The decrease in accrued expenses resulted from the
revenue recognition of $4.9 million of deferred revenues in connection with the
sale of the reservoir characterization and monitoring system.
17
For the nine months ended June 30, 2002, we used approximately $3.4 million
of cash in investing activities primarily resulting from $2.6 million of capital
expenditures and our $2.1 million purchase of intangible assets from our Primary
Film Supplier. Such amount was offset by $0.9 million of cash we received
through the acquisition of an additional interest in, and consolidation of,
OYO-GEO Impulse. We estimate that our capital expenditures for fiscal year 2002
will range between $4.0 to $5.0 million, which we expect to fund through
operating cash flows and borrowings under our credit facility.
For the nine months ended June 30, 2002, we generated approximately $1.2
million of cash from financing activities primarily resulting from borrowings
under our credit facility.
We have a working capital line of credit pursuant to which we can borrow up
to $10.0 million secured by our accounts receivable and inventory (the "Credit
Agreement"). The Credit Agreement, as amended, expires in January 2003.
Borrowings under the Credit Agreement are subject to borrowing base restrictions
based on (i) consolidated net income plus consolidated interest expense, income
taxes, depreciation and amortization and (ii) levels of eligible accounts
receivable and inventories. The Credit Agreement limits the incurrence of
additional indebtedness, requires the maintenance of certain financial amounts
and contains other covenants customary in agreements of this type. As of June
30, 2002 there were borrowings of $2.1 million outstanding under the Credit
Agreement. Based on the levels of eligible accounts receivable and inventories,
the Company had additional borrowings available under the Credit Agreement of
$5.5 million. The borrowing interest rate at June 30, 2002 was 5.0%.
In January 2002, we amended our Credit Agreement to expire in January 2003.
In connection with this amendment, our borrowing interest rate became the bank's
prime rate with a minimum rate of 5.0%. In addition, we arranged for an
additional promissory note of $2.5 million ("Additional Note") to assist the
Company with the funding of several long-term projects. As of June 30, 2002
there were no borrowings under the Additional Note and additional borrowings
available under the Additional Note of $2.5 million. The Additional Note had a
fixed borrowing rate of 8.0% and matured on July 15, 2002.
We believe that the combination of existing cash reserves, cash flows from
operations and borrowing availability under our existing credit facility should
provide us sufficient capital resources and liquidity to fund our planned
operations through fiscal year 2003. However, there can be no assurance that
such sources of capital will be sufficient to support our capital requirements
in the long-term, and we may be required to issue additional debt or equity
securities in the future to meet our capital requirements. There can be no
assurance we would be able to issue additional equity or debt securities in the
future on terms that are acceptable to us or at all.
Contractual Obligations and Commercial Commitments
A summary of future payments owed for contractual obligations and
commercial commitments as of June 30, 2002 are shown in the table below (in
thousands).
Less Than 1 - 3 4 -5 After
Total 1 Year Years Years 5 Years
----- ------ ----- ----- -------
Contractual Obligations:
Long-term debt ........................ $ 3,826 $ 224 $ 498 $ 574 $ 2,530
Operating leases ...................... 730 518 212 -- --
-------- --------- -------- -------- --------
Total contractual obligations ......... 4,556 742 710 574 2,530
Commercial Commitments:
Lines of credit ....................... 2,128 2,128 -- -- --
-------- --------- -------- -------- --------
Total contractual obligations and
commercial commitments .............. $ 6,684 $ 2,870 $ 710 $ 574 $ 2,530
======== ========= ======== ======== ========
18
Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141").
SFAS 141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. We adopted the provisions of SFAS 141
effective October 1, 2001. Among the provisions of SFAS 141 is the requirement
to record as an extraordinary gain all negative goodwill resulting from new
business combinations. As a result, we recorded an extraordinary gain of
$686,000 relating to the acquisition of the additional interest in the Russian
joint venture in November 2001.
Also in July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). Under SFAS 142, goodwill and intangible assets
with indefinite lives are no longer amortized but are reviewed annually for
impairment; or more frequently if impairment is indicated. Intangible assets
that are not deemed to have indefinite lives will continue to be amortized over
their useful lives; however, no maximum life applies. We will adopt the
provisions of SFAS 142 effective in our fiscal year 2003, beginning October 1,
2002. At June 30, 2002, we had goodwill, net of accumulated amortization, of
$1.9 million. Management is currently evaluating the impact of SFAS 142 on the
Company's financial position and results of operations.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
143 - "Accounting for Asset Retirement Obligations". This statement requires us
to recognize the fair value of a liability associated with the cost we would be
obligated to incur in order to retire an asset at some point in the future. The
liability would be recognized in the period in which it is incurred and can be
reasonably estimated. The standard is effective for fiscal years beginning after
June 15, 2002. We expect to adopt this standard at the beginning of our fiscal
2003. Management is currently evaluating the impact of SFAS No. 143 on our
financial position and results of operations.
Additionally, in October 2001, the Financial Accounting Standards Board
issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long Lived
Assets". SFAS No. 144 develops an accounting model, based upon the framework
established in SFAS No. 121, for long-lived assets to be disposed by sales. The
accounting model applies to all long-lived assets, including discontinued
operations, and it replaces the provisions of APB Opinion No. 30, "Reporting
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for disposal of segments of a business. SFAS No. 144 requires
long-lived assets held for disposal to be measured at the lower of carrying
amount or fair values less costs to sell, whether reported in continuing
operations or in discontinued operations. The statement is effective for fiscal
years beginning after December 15, 2001. We intend to adopt this standard at the
beginning of our fiscal 2003. Management is currently evaluating the impact of
SFAS No. 144 on our financial position and results of operations.
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Recission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections". This statement clarifies guidance related to
the reporting of gains and losses from extinguishment of debt and resolves
inconsistencies related to the required accounting treatment of certain lease
modifications. The provisions of this statement relating to extinguishment of
debt become effective for financial statements issued for fiscal years beginning
after May 15, 2002. The provisions of this statement relating to lease
modification are effective for transactions occurring after May 15, 2002. We
intend to adopt this standard at the beginning of fiscal 2003. Management is
currently evaluating the impact of SFAS No. 145 on our financial position and
results of operations.
Forward Looking Statements and Risks
Certain of the statements we make in this document and in documents
incorporated by reference herein, including those made under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," are forward-looking statements for purposes of the Securities Act
of 1933 and the Securities Exchange Act of 1934. Such statements include
projections of our expectations regarding our future capital expenditures,
product lines, growth of product markets and other statements that relate to
future events or circumstances. These statements are subject to known and
unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to differ materially from the future
results, performance or achievements expressed or
19
implied by such forward-looking statements, including the risks and factors
described below. You are cautioned to consider the following factors and risks
in connection with evaluating any such forward-looking statements or otherwise
evaluating an investment in our company.
Our New Products May Not Achieve Market Acceptance.
In recent years, we have incurred significant expenditures to fund our
research and development efforts and we intend to continue those expenditures in
the future. However, research and development is by its nature speculative, and
we cannot assure you that these expenditures will result in the development of
new products or services or that any new products and services we have developed
recently or may develop in the future will be commercially marketable or
profitable to us.
In particular, we have incurred substantial expenditures to develop our
recently introduced HDSeis(TM) product line for borehole and reservoir
characterization applications. For a discussion of particular factors and risks
relating to projects in the reservoir characterization area, see the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Industry Overview" in this Report on Form 10-Q. We cannot
assure you that we will realize our expectations regarding market acceptance and
revenues from these products and services.
A Decline in Industry Conditions Could Affect our Projected Results.
Any unexpected material changes in oil and gas prices or other market
trends that would impact seismic exploration activity would likely affect the
forward-looking information contained in this document. Our results for fiscal
year 2000 were materially and adversely affected by the downturn in the industry
that began in fiscal year 1999. Although our results for fiscal year 2001 showed
an improvement over fiscal year 2000 due to increases in oil and gas prices, the
oil and gas industry is extremely volatile and subject to change based on
political and economic factors outside our control as evidenced by recent
decreases in oil and gas prices.
Our estimates as to future results and industry trends described in this
document are based on assumptions regarding the future level of seismic
exploration activity and its effect on the demand and pricing of our products
and services. In analyzing the market and its impact on us, we have made the
following assumptions for fiscal year 2002:
o Oil and gas prices will, on average, be weaker than fiscal year 2001.
As a result, seismic exploration activity will decrease.
o Demand for seismic instruments and equipment will decline from fiscal
year 2001 levels.
o Demand for our new high definition reservoir characterization products
and services will increase as those products and services become known
to the industry and as the need for reservoir characterization
technology increases.
o Deep-water marine seismic activity will remain constrained.
o Demand for our products used in the commercial graphics industry will
increase with continued market acceptance and new product
introductions.
o Pricing for many of our products will continue to be subject to
pressures due to seismic industry customer consolidations and
competition as the seismic industry enters another economic downturn.
We have based these assumptions on various macro-economic factors, and
actual market conditions could vary materially from those assumed.
20
We May Experience Fluctuations in Quarterly Results of Operations.
Historically, the rate of new orders for our products has varied
substantially from quarter to quarter. Moreover, we typically operate, and
expect to continue to operate, on the basis of orders in hand for our products
before we commence substantial manufacturing "runs"; hence, the completion of
orders, particularly large orders for deepwater reservoir characterization
projects, can significantly impact the operating results and cash flow for any
quarter, and results of operations for any one quarter may not be indicative of
results of operations for future quarters.
Our Credit Risks Could Increase as our Customers Continue to Face Difficult
Economic Circumstances.
We believe and have assumed that our allowance for bad debts at June 30,
2002 is adequate in light of known circumstances. However, we cannot assure you
that sufficient aggregate amounts of uncollectible receivables and bad debt
write-offs will not have a material adverse effect on our future results of
operations. Many of our customers have suffered from lower revenues and
experienced liquidity challenges resulting from the economic difficulties
throughout our industry. We have in the past incurred significant write-offs in
our accounts receivable due to customer credit problems. We have found it
necessary from time to time to extend trade credit to long-term customers and
others where some risks of nonpayment or late payment exist. Given recent
industry conditions, some of our customers have experienced a liquidity
difficulty, which increases those credit risks. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources", contained in this Report on Form 10-Q.
Demand for Our Products is Volatile.
Demand for our products depends primarily on the level of worldwide oil and
gas exploration activity. That activity, in turn, depends primarily on
prevailing oil and gas prices. Historically, the markets for oil and gas have
been volatile, and those markets are likely to continue to be volatile. Oil and
gas prices are subject to wide fluctuation in response to relatively minor
changes in the supply of and demand for oil and gas, market uncertainty and a
variety of additional factors that are beyond our control. These factors include
the level of consumer demand, weather conditions, domestic and foreign
governmental regulations, price and availability of alternative fuels, political
conditions in the Middle East and other significant oil-producing regions,
foreign supply of oil and gas, price of foreign imports and overall economic
conditions. Continued low demand for our products could materially and adversely
affect our results of operations and liquidity. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Industry Overview"
contained in this Report on Form 10-Q.
We Have a Relatively Small Public Float, and Our Stock Price May be Volatile.
We have approximately 2.4 million shares outstanding held by nonaffiliates.
This small float results in a relatively illiquid market for our common stock.
Our average daily trading volume during fiscal year 2001 was approximately 5,000
shares. Our small float and daily trading volumes may result in greater
volatility of our stock price.
Our Industry is Characterized by Rapid Technological Evolution and Product
Obsolescence.
Our instruments and equipment are constantly undergoing rapid technological
improvement. Our future success depends on our ability to continue to:
o improve our existing product lines;
o address the increasingly sophisticated needs of our customers;
o maintain a reputation for technological leadership;
o maintain market acceptance;
o anticipate changes in technology and industry standards; and
o respond to technological developments on a timely basis.
Current competitors or new market entrants may develop new technologies,
products or standards that could render our products obsolete. We cannot assure
you that we will be successful in developing and marketing, on a
21
timely and cost effective basis, product enhancements or new products that
respond to technological developments, that are accepted in the marketplace or
that comply with industry standards.
We Operate in Highly Competitive Markets.
The markets for our products are highly competitive. Many of our existing
and potential competitors have substantially greater marketing, financial and
technical resources than we do. Additionally, two competitors in our seismic
business segment currently offer a broader range of instruments and equipment
for sale and market this equipment as a "packaged" data acquisition system. We
do not now offer for sale such a complete "packaged" data acquisition system.
Further, certain of our competitors offer financing arrangements to customers on
terms that we may not be able to match. In addition, new competitors may enter
the market and competition could intensify.
We cannot assure you that sales of our products will continue at current
volumes or prices if current competitors or new market entrants introduce new
products with better features, performance, price or other characteristics than
our products. Competitive pressures or other factors also may result in
significant price competition that could have a material adverse effect on our
results of operations.
We Have a Limited Market.
In our seismic business segment, we market our products to contractors and
large independent and government-owned oil and gas companies. We estimate that,
based on published industry sources, fewer than 100 seismic contracting
companies are currently operating worldwide (excluding those operating in Russia
and the former Soviet Union, India, the People's Republic of China and certain
Eastern European countries, where seismic data acquisition activity is difficult
to verify). We estimate that fewer than ten seismic contractors are engaged in
marine seismic exploration. Due to these market factors, a relatively small
number of customers have accounted for most of our sales. The loss of a small
number of these customers could materially and adversely impact our sales.
We Cannot Be Certain of Patent Protection of Our Products.
We have applied for and hold certain patents relating to our seismic data
acquisition and other products. We cannot assure you that our patents will prove
enforceable, that any patents will be issued for which we have applied or that
competitors will not develop functionally similar technology outside the
protection of any patents we have or may obtain.
Our Foreign Marketing Efforts Face Additional Risks and Difficulties.
Net sales outside the United States accounted for approximately 14.6% of
our net sales during fiscal year 2001. Additionally, our United States
subsidiaries engage in significant export sales. Substantially all of our sales
from the United States are made in U.S. dollars, but from time to time we may
make sales in foreign currencies and may, therefore, be subject to foreign
currency fluctuations on our sales. In addition, net assets reflected on the
balance sheet of our Russian, Canadian and U.K. subsidiaries are subject to
currency fluctuations. Significant foreign currency fluctuations could adversely
impact our results of operations. See also our discussion in "Quantitative and
Qualitative Disclosures About Market Risk" contained in this Report on Form
10-Q.
Foreign sales are subject to special risks inherent in doing business
outside of the United States, including the risk of war, terrorist activities,
civil disturbances, embargo and government activities, all of which may disrupt
markets. Foreign sales are also generally subject to the risk of compliance with
additional laws, including tariff regulations and import and export
restrictions. Sales in certain foreign countries require prior United States
government approval in the form of an export license. We cannot assure you that
we will not experience difficulties in connection with future foreign sales.
22
We Rely on Key Suppliers for Significant Product Components.
A Japanese manufacturer unaffiliated with us is currently the only supplier
of wide format thermal printheads that we use to manufacture our wide format
thermal imager equipment. We often return significant quantities of these
products to the manufacturer for repair, testing and quality assurance review.
We believe we maintain an adequate inventory of these printheads to continue
production for two to three months.
A private corporation headquartered in New York State is currently the
primary supplier of dry thermal film used by our customers in the thermal
imaging equipment we manufacture (the "Primary Film Supplier"). We also have a
secondary supplier of dry thermal film headquartered in Europe. We know of no
other supplier of dry thermal film for our thermal imaging equipment. While
alternate suppliers might be able to provide dry thermal film, such film has not
historically performed as well in our thermal imaging equipment.
In April 2002, we purchased certain intellectual property rights from our
Primary Film Supplier for $2.1 million. Such purchase gives us exclusive
ownership of all technology used by the Primary Film Supplier to manufacture dry
thermal film used in the thermal imaging equipment we manufacture. Such purchase
included technology then existing and any dry thermal film technology
subsequently developed by the Primary Film Supplier for use in our equipment. We
have also entered into an amended supply agreement pursuant to which the Primary
Film Supplier provides us with the dry thermal film. In connection with the
purchase, we licensed the technology to the Primary Film Supplier on a perpetual
basis, so long as it can meet predefined quality and delivery requirements.
Should the Primary Film Supplier not meet such requirements, we have the right
to license any third party to manufacture dry thermal film. In connection with
the purchase of this technology, we received favorable price concessions from
the Primary Film Supplier. We have no assurance that the Primary Film Supplier
will be able to provide us a continued supply of dry thermal film for the
foreseeable future.
Further, we are unable to predict at this time what affect the bankruptcy
of the Primary Film Supplier will have on our business. In this regard see the
discussion in Notes 9 and 10 to Consolidated Financial Statements included in
this Report on Form 10-Q and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Industry Overview--Commercial Graphics
Industry".
If the Japanese manufacturer were to discontinue supplying these printheads
or was unable or unwilling to supply printheads in sufficient quantities to meet
our requirements, if our Primary Film Supplier were to discontinue supplying dry
thermal film, were unable or unwilling to supply dry thermal film in sufficient
quantities to meet our requirements or if we were unable to replace such
supplier, our ability to compete in the thermal imaging marketplace could be
severely damaged, which could adversely affect our financial performance.
We Are Subject to Control by a Principal Stockholder.
OYO Corporation, a Japanese corporation, owns indirectly in the aggregate
approximately 51.7% of our common stock. Accordingly, OYO Corporation, through
its wholly owned subsidiary OYO Corporation U.S.A, is able to elect all of our
directors and to control our management, operations and affairs. We currently
have, and may continue to have, a variety of contractual relationships with OYO
Corporation and its affiliates.
Our Success Depends Upon A Limited Number of Key Personnel.
Our success depends on attracting and retaining highly skilled
professionals. A number of our employees are highly skilled engineers and other
professionals. If we fail to continue to attract and retain such professionals,
our ability to compete in the industry could be adversely effected. In addition,
our success depends to a significant extent upon the abilities and efforts of
several members of our senior management.
Terrorist Attacks in 2001 on the U.S. Together With the Downturn in the U.S.
Economy in 2001 May Adversely Affect our Business.
While we are not yet able to evaluate fully the effect of the recent
terrorist attacks on the U.S., which appear to have coincided with or
contributed to a general downturn in the U.S. economy, both such matters could
adversely
23
affect our business in ways that we cannot yet identify. However, both may
adversely affect the demand for oil and gas generally and therefore, the demand
for our services to the oil and gas industry and related service industry. They
could also affect adversely the demand for consumer products, which could in
turn adversely affect our commercial graphics business. To the extent these
factors adversely affect other seismic companies in the industry, we could see
an oversupply of products and services and downward pressure on pricing for
seismic products and services that would affect us adversely.
Critical Accounting Policies.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the use
of estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. We consider many factors in selecting
appropriate operational and financial accounting policies and controls, and in
developing the estimates and assumptions that are used in the preparation of
these financial statements. We continually evaluate our estimates, including
those related to bad debts, inventory obsolescence, product warranty, intangible
assets and deferred income taxes. We base our estimates on historical experience
and various other factors that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
conditions or assumptions.
Revenue is primarily derived from the sale, and short-term rental under
operating lease, of seismic instruments and equipment and commercial graphics
products. Sales revenues are recognized when our products are shipped and title
and risk of loss have passed to the customer. Rental revenues are recognized as
earned over the rental period. Short-term rentals of our equipment generally
range from daily rentals to rental periods of up to six months. Products are
generally sold without any customer acceptance provisions and our standard terms
of sale do not allow customers to return products. Our products generally do not
require installation assistance or sophisticated instruction. We offer a
standard product warranty obligating us to repair or replace equipment with
manufacturing defects. We maintain a reserve for future warranty costs based on
historical experience. We record a write-down of inventory when the cost basis
of any manufactured product (including any estimated future costs to complete
the manufacturing process) exceeds its net realizable value.
Goodwill, representing the excess of purchase price over the fair value of
net assets acquired and other intangible assets are amortized on a straight-line
basis over the period of expected benefit, not exceeding 40 years. Goodwill is a
residual amount and is determined after numerous estimates are made regarding
the fair values of assets and liabilities included in a business combination. At
June 30, 2002, the Company had goodwill, net of accumulated amortization, of
$1.9 million. The carrying value of long-lived assets, including goodwill, is
reviewed periodically for impairment. Substantial judgment is necessary in the
determination as to whether an event or circumstances have occurred that may
trigger impairment. For information regarding our current and future accounting
policies regarding goodwill amortization, see Note 1 to the Consolidated
Financial Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations - Accounting Pronouncements.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
The following discussion of our exposure to various market risks contains
"forward looking statements" that involve risks and uncertainties. These
projected results have been prepared utilizing certain assumptions considered
reasonable in light of information currently available to us. Nevertheless,
because of the inherent unpredictability of foreign currency rates, as well as
other factors, actual results could differ materially from those projected in
this forward looking information.
We do not have any market risk as to market risk sensitive instruments
entered into for trading purposes and have only very limited risk as to
arrangements entered into other than for trading purposes. Further, we do not
engage in commodity or commodity derivative instrument purchasing or selling
transactions.
Foreign Currency Exchange Rate Risk
We purchase printheads from OYO Corporation pursuant to terms under which
such purchases are denominated in Japanese Yen. We routinely attempt to hedge
our currency exposure on these purchases by entering into foreign currency
forward contracts with a bank. The purpose of entering into these forward hedge
contracts is to eliminate variability of cash flows associated with foreign
currency exposure risk on amounts payable in Japanese Yen. Under SFAS No. 133
and related interpretations, our forward contracts with the bank are considered
derivatives. SFAS No. 133, which was effective for our fiscal year 2001,
requires that we record these foreign currency forward contracts on the balance
sheet and mark them to fair value at each reporting date. Our aggregate dollar
exposure to forward yen contracts has never exceeded $0.4 million and such
contracts ordinarily are settled within 10 months. Resulting gains and losses
are reflected in income and were not material for our fiscal quarter ended June
30, 2002. At June 30, 2002, we had no exposure to yen denominated foreign
currency forward contracts, and we had $59,000 of yen denominated accounts
payable.
Foreign Currency and Operations Risk
We have a subsidiary located in Russia. Therefore, our financial results
may be affected by factors such as changes in foreign currency exchange risks,
weak economic conditions, or changes in Russia's political climate. Our
consolidated balance sheet at June 30, 2002 reflected approximately $2.7 million
of net working capital related to our Russian subsidiary. This subsidiary both
receives its income and pays its expenses primarily in roubles. To the extent
that transactions of this subsidiary are settled in roubles, a devaluation of
the rouble versus the U.S. dollar could reduce any contribution from our Russian
subsidiary to our consolidated results of operations as reported in U.S.
dollars. We do not hedge the market risk with respect to our operations in
Russia; therefore, such risk is a general and unpredictable risk of future
disruptions in the valuation of Russian roubles versus U.S. dollars to the
extent such disruptions result in any reduced valuation of the Russian
subsidiary's net working capital or future contributions to our consolidated
results of operations.
Interest Rate Risk
We have a revolving line of credit with a bank which subjects us to the
risk of increased interest costs associated with any upward movements in bank
market interest rates. Our borrowing interest rate is the bank's prime rate
(4.75% at June 30, 2002) with a minimum rate of 5.0%. Further, amounts payable
under the line of credit are due in full in January 2003. As of June 30, 2002,
we had borrowed $2.1 million under this line of credit at a borrowing rate of
5.0%. Due to the small amount of borrowings under this credit facility and its
short term, we anticipate that any increased interest costs associated with
movements in market interest rates will not be material to our financial
condition, results of operation or cash flow. Similarly, we have a fixed rate
8.0% loan in the amount of $2,500,000 from the same bank payable in July 2002.
At June 30, 2002 there were no borrowings under this loan facility. Because of
the short-term maturity of this loan and the fixed rate, and because we had no
outstanding borrowings under this note, we do not have any material market risk
attributable thereto.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The Company did not file any exhibits with this Quarterly Report.
(b) The Company did not file any reports on Form 8-K during the quarter for
which this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OYO GEOSPACE CORPORATION
Date: August 12, 2002 By: /s/ Gary D. Owens
---------------------------------------
Gary D. Owens, Chairman of the Board
President and Chief Executive Officer
(duly authorized officer)
Date: August 12, 2002 By: /s/ Thomas T. McEntire
---------------------------------------
Thomas T. McEntire
Chief Financial Officer
(principal financial officer)
27
Informational Addendum to Report on Form 10-Q
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Not Filed Pursuant to the Securities Exchange Act of 1934
The undersigned Chief Executive Officer and Chief Financial Officer of OYO
Geospace Corporation do hereby certify as follows:
Solely for the purpose of meeting the apparent requirements of Section 906
of the Sarbanes-Oxley Act of 2002, and solely to the extent this
certification may be applicable to this Report on Form 10-Q, the
undersigned hereby certify that this Report on Form 10-Q fully complies
with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934 and the information contained in this Report on Form 10-Q
fairly presents, in all material respects, the financial condition and
results of operations of OYO Geospace Corporation.
/s/ Gary D. Owens
-----------------------------------------------
Name: Gary D. Owens
Title: Chief Executive Officer
/s/ Thomas T. McEntire
-----------------------------------------------
Name: Thomas T. McEntire
Title: Chief Financial Officer
28