Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-K
-----------------
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year Ended September 30, 2002 OR
[_] 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 (I.R.S. Employer
Jurisdiction of
Incorporation or Identification No.)
Organization)
12750 South Kirkwood, Suite 200
Stafford, Texas 77477
(Address of Principal Executive Offices)
(281) 494-8282
(Registrant's telephone number, including area code)
Securities Registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on
Which Registered
Common Stock NASDAQ National Market
Securities Registered pursuant to Section 12(g) of the Act: NONE
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [_] No [X]
There were 5,547,795 shares of the Registrant's Common Stock outstanding as
of the close of business on December 18, 2002. The aggregate market value of
the Registrant's Common Stock held by non-affiliates was approximately $34
million (based upon the closing price of $14.00 on March 29, 2002, as reported
by the NASDAQ Stock Market, Inc.)
-----------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Registrant's 2003 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
report.
================================================================================
PART I
Item 1. Business
Company 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 output devices
are 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 and processed 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 either
economically or at times even identified. Reservoir characterization and
management programs, in which the reservoir is carefully imaged and monitored
throughout its economic life 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 our 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, financial condition and results of operations.
2
During our fiscal year ended September 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 the
third quarter of our fiscal year ended September 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 first quarter of
fiscal year 2004. All costs related to this sale, including estimated costs for
warranty and delivery, have been recorded in the fiscal year ended September
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 has been 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 (the "Secondary
Film Supplier"). 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 $2.3 million. Such purchase gave 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
thereafter developed by the Primary Film Supplier for use in our equipment. We
also entered into an amended supply agreement pursuant to which the Primary
Film Supplier agreed to provide us with the dry thermal film. In connection
with the purchase, we agreed to license the technology to the Primary Film
Supplier on a perpetual basis so long as it could meet predefined quality and
delivery requirements. If the Primary Film Supplier can not meet such
requirements, we have the right to use the technology ourselves or to license
the technology to 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
the date of such bankruptcy filing, we had $3.4 million of long-term assets
carried on our balance sheet as a result of the prior transactions with the
Primary Film Supplier (including the $2.3 million investment in intellectual
property acquired from such Primary Film Supplier described above). The Primary
Film Supplier advised us that, in connection with its bankruptcy filing, it was
seeking a buyer for its business that would assume its relationship and
contracts with us, and it was our intention to cooperate in such efforts to the
extent our on-going interest could be served thereby. After several months, we
are not optimistic that a buyer can be found to operate the Primary Film
Supplier's business or, if a buyer is found, that it would 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 to 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.
Over the past several months, our Primary Film Supplier has failed to meet
all of our purchase orders and has provided us with only a limited quantity of
film. In November 2002, our Primary Film Supplier stated that it had closed
down its operations. Subsequently, it stated that it was resuming a limited
level of operations while
3
continuing to look for a buyer of its business. As a result, we are currently
purchasing a large quantity of dry thermal film from our Secondary Film
Supplier. We are also in the process of researching and developing a system
that would enable us to use the technology we purchased from the Primary Film
Supplier to manufacture dry thermal film internally if we should elect to do so.
As a result of the bankruptcy filing by the Primary Film Supplier, we
recorded a charge in our third quarter of fiscal year 2002 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 amended 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 because of our ability to utilize
the intellectual property to have thermal film manufactured internally or
possibly elsewhere.
No claims have been made against us or by us at present in connection with
the Primary Film Supplier's bankruptcy, except that on December 10, 2002, we
received a notice of claim for alleged preferential payments made by the
Primary Film Supplier to us in the period before filing of the bankruptcy
proceeding in the approximate amount of $260,000. We have not yet fully
assessed such recent claim and do not have adequate information and necessary
legal advice to do so at this time. We intend to vigorously defend against such
claim under the overall circumstances of our relationship with the Primary Film
Supplier. At present we do not know whether we will make any claims against the
Primary Film Supplier and we are unable to predict whether any additional
claims will be made against us in connection with the Primary Film Supplier's
bankruptcy proceeding as to any aspect of our relationship with such Primary
Film Supplier. We are unable at this time to predict the outcome and effects of
this still developing situation. We have, nevertheless, recently made provision
for existing claims that we believe are adequate at this time, although we are
unable to make such predictions with any certainty.
Acquisitions
Effective November 8, 2001, we increased our equity ownership from 44% to
85% in a Russian joint venture we 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"), are
consolidated with those of the Company. Geophyspribor Ufa Production
Association and Chori Co., Ltd. continue as minority shareholders 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, the debt
owed to us and a related prior equity investment had been written-off due to
prior concerns regarding realization of these assets and had no carrying value
in our financial statements. In connection with this increase in our equity
ownership, we recorded an extraordinary gain of $686,000, net of income taxes
of $85,000. This extraordinary gain represents the negative goodwill that
resulted from the acquisition of the additional equity interest of OYO-GEO
Impulse. SFAS 141 requires negative goodwill resulting from new business
combinations to be recorded as an extraordinary gain.
Based in Ufa, Bashkortostan, Russia, OYO-GEO Impulse has been in operation
since 1990 manufacturing seismic sensors for the Russian marketplace. OYO-GEO
Impulse owns two facilities in Ufa containing 161,000 square feet and employs
approximately 278 people. Our seismic manufacturing operation in Houston is
managing the expansion of OYO-GEO Impulse's operations to produce
international-standard seismic sensors and additional products that will
broaden its market scope.
In February 2001, we acquired substantially all of the assets of EcoPRO
Imaging Corporation ("EcoPRO"), a dry thermal film distribution business, for
$1.9 million of cash from the Primary Film Supplier. The operations of EcoPRO
have been combined with our other commercial graphics operations.
4
Products and Product Development
Seismic Products
Our 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. Our seismic
products are compatible with most major seismic data acquisition systems
currently in use. We believe that our seismic products are among the most
technologically advanced instruments and equipment available for seismic data
acquisition.
Our products used in marine seismic data acquisition include our patented
marine seismic cable retrieval devices. Occasionally, streamers are severed and
become disconnected from the vessel as a result of inclement weather, vessel
traffic or human or technological error. Our seismic cable retrieval devices,
which are attached to the streamers, contain air bags that are designed to
inflate automatically at a given depth, bringing the severed cable to the
surface. This can save the seismic contractor significant time and money over
the alternative of losing the seismic cable. We are also developing seismic
streamer "birds", which are rudderlike or finlike devices that attach to the
streamer and help maintain the streamer at a certain desired depth as it is
towed through the water.
Recent product developments include the HDSeis(TM) product line and a suite
of borehole and reservoir characterization products and services. Our
HDSeis(TM) System is a high definition seismic data acquisition system with
flexible architecture that can be configured as a borehole seismic system or as
a subsurface system for land or marine reservoir-monitoring projects.
The scalable architecture of the HDSeis(TM) System enables custom designed
system configuration for applications ranging from low-channel engineering and
environmental-scale surveys requiring a minimum number of recording channels to
high-channel surveys required to efficiently conduct permanent deepwater
reservoir imaging and monitoring. Modular architecture allows virtually
unlimited channel expansion with global positioning systems and fiber-optic
synchronization. In addition, multi-system synchronization features make the
HDSeis(TM) System well suited for multi-well or multi-site acquisition,
simultaneous surface and downhole acquisition and continuous reservoir
monitoring projects.
Reservoir characterization requires special purpose or custom designed
systems in which portability becomes less critical and functional reliability
assumes greater importance. This helps assure successful operations in
inaccessible locations over a considerable period of time. Additionally,
reservoirs located in deepwater or hostile environments require special
instrumentation and new techniques for life-of-field performance.
Reservoir characterization also requires high-bandwidth, high-resolution
seismic data for engineering project planning and management. Seismic data
acquired at reservoir level, through seismic sources and acoustic receivers
within wellbores, has a bandwidth of several kilohertz, which is capable of
yielding the requisite high-resolution images.
We believe our HDSeis(TM) System and tools, designed for cost-effective
deployment and lifetime performance, will make borehole and seabed seismic
acquisition a cost effective, reliable resolution to the challenges of
reservoir characterization and monitoring.
Other new 3-D seismic product developments include introduction of an
omnidirectional geophone for use in reservoir monitoring; a new compact marine
three-component or four-component gimbaled sensor unit; as well as new
special-purpose connectors, connector arrays and cases.
5
In order to leverage our cable manufacturing facilities and capabilities, we
are designing and selling cable products to the offshore oil and gas and
offshore construction industries. The production of marine cables requires
specialized design capabilities and manufacturing equipment, which we also
utilize for deepwater reservoir characterization products.
We are also working to diversify our existing seismic product lines and
adapt our manufacturing capabilities for uses in industries other than the
seismic industry.
Commercial Graphics Products
We have adapted our thermal imaging technology, which we originally
developed for the seismic industry, for commercial applications in the
newsprint, silkscreen and corrugated printing industries. Our thermal imaging
equipment is capable of producing data images ranging in size from 12 to 54
inches wide. We believe that our wide format thermal printers, which use dry
thermal film technology, are a cost-effective alternative to conventional
equipment and imaging solutions.
We expect to continue our research and development activities to expand the
markets for our thermal imaging products and increase the image clarity of our
thermal imaging equipment and dry thermal film.
Competition
The principal competitors in our seismic business segment for geophones,
hydrophones, geophone string connectors, leader wire and telemetry cable are
Input/Output, Inc. and Sercel. We believe that we are one of the world's
largest manufacturers and distributors of these products. Furthermore, an
entity in China manufactures an older model geophone having the same design and
specifications as our GS-20 DX geophone. In addition to these competitors,
certain manufacturers of marine streamers also manufacture hydrophones for
their own use.
We believe that the principal competitive factors in the seismic instruments
and equipment market are technological superiority, product durability and
reliability and customer service and support. Since price and product delivery
are also important considerations for customers, pricing terms may become more
significant during an industry downturn. These factors can be offset by a
customer's preference for standardization. In general, particular customers
prefer to standardize geophones and hydrophones, particularly if they are used
by a single seismic crew or multiple crews that can support each other. This
makes it more difficult for a geophone or hydrophone manufacturer to gain
market share from other such manufacturers.
A key competitive factor for seismic instruments and equipment is durability
under harsh field conditions. Instruments and equipment must not only meet
rigorous technical specifications regarding signal integrity and sensitivity,
but must also be extremely rugged and durable to withstand the rigors of field
use, often in harsh environments.
With respect to our marine seismic data products, we know of no other
company that manufactures a product similar to our patented seismic streamer
retrieval device. Our primary competitor in the manufacture of birds is
Input/Output, Inc.
Our primary competitors for our deepwater reservoir characterization systems
are traditional seismic equipment manufacturers such as Schlumberger,
Input/Output, Inc. and Sercel.
Our primary competitors for downhole high definition seismic data
acquisition services are Paulson Geophysical and Core Laboratories.
We believe that the primary competitors in our commercial graphics business
segment are Ricoh, Xante, Gerber Scientific, iSys Group, Cypress Tech. and
Atlantek Inc., as well as alternative technologies such as inkjet. As we
advance the resolution capabilities of direct thermal technology, we expose
ourselves to additional competitors in the more traditional wet-film
imagesetting marketplace.
6
Suppliers
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 imaging equipment. Over the years we have experienced some quality
control issues with such printheads and have returned significant quantities of
these products to the manufacturer for repair, testing and quality assurance
review. We are not presently experiencing any significant supply or quality
control problems with our supplier of printheads. However, unforeseen problems,
if they develop, could have a significant effect on our ability to meet future
production and sales commitments. 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, our ability to
compete in the thermal imaging marketplace could be severely damaged, which
could adversely affect our financial performance. We believe we maintain an
adequate inventory of these printheads to continue production for two to three
months.
As discussed above, a private corporation headquartered in New York has been
the primary supplier of dry thermal film used by our customers in the thermal
imaging equipment we manufacture. As a result of recent developments with
regard to such supplier, we are currently purchasing a large quantity of dry
thermal film from the Secondary Film Supplier. 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. We are also in the process
of researching and developing a system that would enable us to use the
technology we purchased from the Primary Film Supplier to manufacture dry
thermal film internally if we should elect to do so. If we are unable to
successfully manufacture dry thermal film internally using the technology we
purchased from our Primary Film Supplier and if our Primary Film Supplier is
unable to locate a buyer of its business or if our Secondary Film Supplier was
to discontinue supplying dry thermal film or was unable to supply dry thermal
film in sufficient quantities to meet our requirements, our ability to compete
in the thermal imaging marketplace could be severely damaged, which could
adversely affect our financial performance. The net book value of our
intellectual property related to dry film technology was $2.1 million at
September 30, 2002.
Product Manufacturing
Our manufacturing and product assembly operations consist of machining or
molding the necessary component parts, configuring these parts along with
components received from various vendors and assembling a final product. Upon
completion, we test the final products to the functional and environmental
extremes of product specifications and inspect the products for quality
assurance. We normally manufacture and ship based on customer orders;
therefore, we typically do not maintain significant inventories of finished
goods.
Markets and Customers
Our principal seismic customers are contractors, many of which are at
present experiencing significantly lessened demand for their services and
consequently financial difficulties, and major independent and government-owned
oil and gas companies that either operate their own seismic crews or specify
seismic instrument and equipment preferences to contractors. Our commercial
graphics customers primarily consist of direct users of our equipment as well
as specialized resellers that focus on the newsprint, silkscreen and corrugated
box printing industries.
Intellectual Property
We seek to protect our intellectual property by means of patents,
trademarks, trade secrets and other measures. Although we do not consider any
single patent essential to our success, we consider our patent regarding our
marine seismic cable retrieval devices to be of significant value to us. This
patent is scheduled to expire in 2012. We have film technology patents that
expire at varying dates beginning in 2013.
7
Research and Development
We expect to incur significant future research and development expenditures
aimed at the development of additional seismic data acquisition products and
services used for high definition reservoir characterization in both land and
marine environments.
For an estimation of our sponsored research and development expenditures
over the past five years, see Item 6, Selected Consolidated Financial Data,
contained in Part II to this Report on Form 10-K.
Employees
As of September 30, 2002, we employed approximately 663 people on a
full-time basis (including the employees of our 85%-owned Russian affiliate),
of which approximately 346 were employed in the United States. We have never
experienced a work stoppage and consider our relationship with our employees to
be satisfactory. None of our employees are unionized.
Financial Information by Geographic Area
For a discussion of financial information by geographic area, see Note 17 to
the Consolidated Financial Statements contained in this Report on Form 10-K.
Item 2. Properties
As of September 30, 2002, our operations included the following locations:
Approximate
Location Owned/Leased Square Footage Use
-------- ------------ -------------- -------------------------
Stafford, Texas Owned 20,000 Headquarters and research
and development
Houston, Texas Owned 77,000/(1)/ Manufacturing and
administrative services
Houston, Texas Leased 58,000 Manufacturing
Houston, Texas Leased 36,000 Manufacturing
Houston, Texas Owned 18,000 Manufacturing
Ufa, Russia Owned 120,000 Manufacturing
Ufa, Russia Owned 41,000 Manufacturing
Calgary, Alberta, Canada Owned 21,000 Sales and service
Luton, Bedfordshire, England Owned 8,000 Sales and service
- --------
/(1)/ This location is used for seismic manufacturing and commercial graphics
manufacturing.
During the fiscal year ended September 30, 2002, we relocated one of our
commercial graphics companies from a leased facility in Houston, Texas to the
owned Houston, Texas facility. The lease on this 34,000 square foot leased
facility expired on October 31, 2002.
We believe that our facilities are adequate for our current and immediately
projected needs.
Item 3. Legal Proceedings
From time to time we are a party to what we believe is routine litigation
and proceedings that may be considered as part of the ordinary course of our
business. We are not aware of any current or pending litigation or proceedings
that could have a material adverse effect on our results of operations, cash
flows or financial condition, although we continue to monitor developments in
the bankruptcy proceeding by our Primary Film Supplier and its existing claim
against us as is described in the section entitled "Business--Company
Overview--Commercial Graphics Industry" contained in this Report on Form 10-K.
Item 4. Submission of Matters to Vote of Security Holders
None.
8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is traded on the Nasdaq National Market under the symbol
"OYOG". On November 30, 2002, there were approximately 61 holders of record of
our common stock.
The following table presents the range of high and low bid quotations for
our common stock during the two fiscal years ended September 30, 2002 and
September 30, 2001, as reported by The NASDAQ Stock Market, Inc.
Low High
------ ------
Year Ended September 30, 2002:
Fourth Quarter................ $ 9.60 $16.00
Third Quarter................. 8.75 14.20
Second Quarter................ 11.95 14.98
First Quarter................. 9.75 15.25
Year Ended September 30, 2001:
Fourth Quarter................ $12.30 $22.94
Third Quarter................. 19.75 25.75
Second Quarter................ 20.88 25.75
First Quarter................. 17.00 24.00
Historically, we have not paid dividends, and we do not intend to pay cash
dividends on our common stock in the foreseeable future. We presently intend to
retain earnings for use in our business, with any future decision to pay cash
dividends dependent upon our growth, profitability, financial condition and
other factors the Board of Directors may deem relevant. Our existing credit
agreement also has covenants which materially limit our ability to pay
dividends. For a more complete discussion of our credit agreement, see the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operation--Liquidity and Capital Resources" contained in this
Report on Form 10-K.
The following equity plan information is provided as of September 30, 2002:
Equity Compensation Plan Information
Number of Securities
Remaining Available for
Future Issuances
Number of Securities to be Weighted-average Under Equity
Issued upon Exercise of Exercise Price of Compensation Plans
Outstanding Options, Outstanding Options, (Excluding Securities
Warrants and Rights Warrants and Rights Reflected in Column (a))
Plan Category (a) (b) (c)
------------- -------------------------- -------------------- ------------------------
Equity Compensation Plans Approved by
Security Holders.................... 556,975 $15.32 261,009
Equity Compensation Plans Not Approved
by Security Holders................. N/A N/A N/A
9
Item 6. Selected Consolidated Financial Data
The following table sets forth certain selected historical financial data of
the Company on a consolidated basis. The selected consolidated financial data
was derived from our consolidated financial statements. The selected
consolidated financial data should be read in conjunction with our consolidated
financial statements appearing elsewhere in this Form 10-K.
Year Ended September 30,
----------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(in thousands, except share and per share amounts)
Statement of Operations Data:
Sales...................................... $ 65,049 $ 63,618 $ 53,474 $ 42,031 $ 65,823
Cost of sales.............................. 46,484 42,957 39,042 25,536 38,425
---------- ---------- ---------- ---------- ----------
Gross profit............................... 18,565 20,661 14,432 16,495 27,398
Operating expenses:
Selling, general and administrative..... 11,538 12,528 10,090 9,682 11,837
Research and development................ 5,347 6,277 6,146 6,246 5,621
Impairment of assets.................... 1,246 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total operating expenses............ 18,131 18,805 16,236 15,928 17,458
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.............. 434 1,856 (1,804) 567 9,940
Other income (expense), net................ (770) (226) 41 84 326
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes, minority
interest and extraordinary gain.......... (336) 1,630 (1,763) 651 10,266
Income tax expense (benefit)............... (857) 292 (572) (187) 3,592
---------- ---------- ---------- ---------- ----------
Income (loss) before minority interest, and
extraordinary gain....................... 521 1,338 (1,191) 838 6,674
Minority interest.......................... (88) -- -- -- --
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary gain.... 433 1,338 (1,191) 838 6,674
Extraordinary gain, net of tax of $85...... 686 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss).......................... $ 1,119 $ 1,338 $ (1,191) $ 838 $ 6,674
========== ========== ========== ========== ==========
Basic earnings (loss) per share:
Income (loss) before extraordinary gain.... $ 0.08 $ 0.24 $ (0.22) $ 0.16 $ 1.32
Extraordinary gain......................... 0.12 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) per share................ $ 0.20 $ 0.24 $ (0.22) $ 0.16 $ 1.32
========== ========== ========== ========== ==========
Diluted earnings (loss) per share:
Income (loss) before extraordinary gain.... $ 0.08 $ 0.24 $ (0.22) $ 0.15 $ 1.29
Extraordinary gain......................... 0.12 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) per share................ $ 0.20 $ 0.24 $ (0.22) $ 0.15 $ 1.29
========== ========== ========== ========== ==========
Weighted average shares outstanding--
Basic.................................... 5,535,979 5,489,251 5,431,901 5,384,530 5,072,262
Weighted average share outstanding--
Diluted.................................. 5,547,774 5,598,597 5,431,901 5,449,404 5,166,756
Other Financial Data:
Depreciation and amortization.............. $ 4,852 $ 4,444 $ 4,014 $ 4,319 $ 8,803
Capital expenditures....................... 4,729 4,909 6,004 3,656 11,953
As of September 30,
---------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
(in thousands)
Balance Sheet Data:
Working capital..... $28,130 $27,891 $28,505 $32,231 $26,812
Total assets........ 68,126 73,000 65,108 63,419 63,288
Short-term debt..... 714 1,033 198 169 38
Long-term debt...... 3,544 3,772 3,984 4,182 956
Stockholders' equity 54,129 52,791 50,709 51,398 49,383
10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following is management's discussion and analysis of the major elements
of our consolidated financial statements. You should read this discussion and
analysis together with our consolidated financial statements and accompanying
notes and other detailed information appearing elsewhere in this Form 10-K. The
discussion of our financial condition and results of operations includes
various forward-looking statements about our markets, the demand for our
products and services and our future results. These statements are based on
assumptions that we consider to be reasonable, but that could prove to be
incorrect. For more information regarding our assumptions, you should refer to
the section entitled "Forward-Looking Statements and Risks" contained in this
Item 7.
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
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 output devices
are 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 and processed 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 either
economically or at times even identified. Reservoir characterization and
management programs, in which the reservoir is carefully imaged and monitored
throughout its economic life 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
11
accounting principles for these large-scale projects has the potential to
result in substantial fluctuations in our 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, financial condition and results of operations.
During our fiscal year ended September 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
fiscal year ended September 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 first quarter of fiscal year 2004. All costs
related to this sale, including estimated costs for warranty and delivery, have
been recorded in the fiscal year ended September 30, 2002.
Because of the scale and nature of reservoir characterization projects,
there may be delays in project implementation and uncertainties about their
final course. As a result, we are unable at present to predict the impact of
such projects on our business and financial results and condition. We continue
to believe, however, that our reservoir characterization systems, including the
system referenced above, are important new technologies in our industry and our
ability to develop and market them will be a key determinant of our success in
the future.
Commercial Graphics
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 products 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.
Results of Operations
We report information for two segments: Seismic and Commercial Graphics.
Summary financial data by business segment follows (in thousands):
Years Ended
----------------------------------------
September 30, September 30, September 30,
2002 2001 2000
------------- ------------- -------------
Seismic
Revenue................ $51,800 $50,433 $39,518
Operating income....... 4,311 5,381 543
Commercial Graphics
Revenue................ 13,490 13,557 14,313
Operating income(loss). (399) 27 770
Corporate
Revenue................ -- -- --
Operating (loss)....... (3,336) (3,552) (3,117)
Eliminations
Revenue................ (241) (372) (357)
Operating (loss)....... (142) -- --
Consolidated Totals
Revenue................ 65,049 63,618 53,474
Operating income (loss) 434 1,856 (1,804)
12
Overview
Fiscal Year 2002 Compared to Fiscal Year 2001.
Consolidated revenues for fiscal year 2002 increased $1.4 million, or 2.3%,
from fiscal year 2001. The increase in revenues was primarily due to a $15.8
million sale of a reservoir characterization and monitoring system to a major
oil company and the acquisition of an additional interest in OYO-GEO Impulse,
which contributed $4.1 million in revenues in fiscal year 2002. Such increases
were largely offset by a significant decrease in sales of our traditional
land-based seismic products, resulting from a softening in the demand for
seismic equipment along with significant competition in pricing due to excess
manufacturing capacity in our seismic business segment.
Our consolidated gross profits for fiscal year 2002 decreased by $2.1
million, or 10.1%, from fiscal year 2001. While the sale of the reservoir
characterization system to the major oil company 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 fiscal year 2002 to reflect the impairment
of slow moving inventories and the underutilization of certain manufacturing
plant assets.
Our consolidated operating expenses for fiscal year 2002 decreased $0.7
million, or 3.6%, from fiscal year 2001. Included in our consolidated operating
expenses for fiscal year 2002 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 Note 18 to the Consolidated Financial
Statements included in this Report on Form 10-K and "Business--Company
Overview--Commercial Graphics Industry". Excluding the impact of the impairment
charge, our consolidated operating expenses for fiscal year 2002 decreased by
$1.9 million, or 10.2%, from the prior fiscal year. The lower expenses are a
result of our effort to reduce expenses in our seismic business segment in
response to market conditions.
Our effective tax rate for fiscal year 2002 was a benefit of 255.1% compared
to an expense of 17.9% for fiscal year 2001. The United States statutory tax
rate for each of these periods was 34%. For the current year and the prior year
period, the difference between our effective tax rate and the statutory tax
rate resulted from the recording of tax benefits for the resolution of
contingent tax matters from prior years. Excluding these benefits, our
effective tax rate for fiscal year 2002 would have been a benefit of 86.0% and
a provision of 34.1% in fiscal years 2002 and 2001, respectively. The benefit
of 86.0% in fiscal year 2002 largely resulted from the exclusion from taxable
income of certain profits earned on export sales. In addition, we recorded a
tax expense of $85,000 related to an extraordinary gain that occurred in the
first quarter of 2002.
Fiscal Year 2001 Compared to Fiscal Year 2000.
Consolidated sales for fiscal year 2001 increased $10.1 million, or 19.0%,
from fiscal year 2000. The increase in sales was primarily due to an increase
in demand for our seismic products.
Consolidated gross profits for fiscal year 2001 increased by $6.2 million,
or 43.2%, from fiscal year 2000. The higher gross profits were realized from
both our seismic and commercial graphics business segments. Compared to the
prior year period, gross profits improved in fiscal year 2001 primarily because
the prior year period reflects the impact of a highly competitive bid on a
large land-based seismic equipment order. Furthermore, fiscal year 2001 sales
contain a higher mix of marine-based seismic products, which historically have
higher gross profit margins.
Consolidated operating expenses for fiscal year 2001 increased $2.6 million,
or 15.8%, from fiscal year 2000. The increase primarily resulted from increased
costs associated with new personnel, sales and marketing efforts, information
technology upgrades and costs associated with our acquisition of substantially
all of the assets of EcoPRO.
13
Our effective tax rate for fiscal year 2001 was a provision of 17.9%
compared to a benefit of 32.4% for fiscal year 2000. Our tax rate for fiscal
2001 included a tax benefit of $0.2 million due to the resolution of contingent
tax matters. Excluding these benefits, our effective tax rate for fiscal 2001
would have been a provision of 34.1%.
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.
Fiscal Year 2002 Compared to Fiscal Year 2001.
Revenue
Sales of our seismic products for fiscal year 2002 increased $1.4 million,
or 2.7% from fiscal year 2001. The increase in sales was primarily due to a
$15.8 million sale of a reservoir characterization and monitoring system to a
major oil company and inclusion of revenues in fiscal year 2002 resulting from
our acquisition of an additional interest in OYO-GEO Impulse and consequent
consolidation of the operating results of OYO-GEO Impulse with us, which
contributed $4.1 million in revenues in fiscal year 2002. Such increases were
largely offset by a significant decrease in sales of our traditional land-based
seismic products, resulting from a softening in the demand for seismic
equipment, along with downward pricing pressure exerted by significant
competition due to excess manufacturing capacity in the industry.
Operating Income
Operating income for fiscal year 2002 decreased $1.1 million from fiscal
year 2001. As a percentage of total sales, operating income decreased to 8.3%
in fiscal year 2002 from 10.7% in fiscal year 2001. 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 fiscal year 2002 to reflect the impairment of slow moving
inventories and the underutilization of certain manufacturing plant assets. The
lower gross profits in fiscal year 2002 were partially offset by decreased
operating expenses.
Fiscal Year 2001 Compared to Fiscal Year 2000.
Revenue
Sales of our seismic products for fiscal year 2001 increased $10.9 million,
or 27.6%, from fiscal year 2000. The increases in seismic product sales
primarily resulted from the increase in sales of both our land-based and
marine-based products due to increasing worldwide oil and gas exploration
activities.
Operating Income
Operating income for fiscal year 2001 increased $4.8 from fiscal year 2000.
As a percentage of total sales, operating income increased to 10.7% in fiscal
year 2001 from 1.4% in fiscal year 2000. The increase in operating income
primarily resulted from increased gross profits associated with increased
sales. During the comparable period of the prior year, a highly competitive bid
on a large land-based seismic equipment order resulted in lower gross profits
and operating income. The improved gross profits in fiscal year 2001 were
partially offset by higher operating expenses.
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.
14
Fiscal Year 2002 Compared to Fiscal Year 2001.
Revenue
Sales of our commercial graphics products for fiscal year 2002 decreased
$67,000, or 0.5%, from fiscal year 2001. The decrease in sales is primarily a
result of a decline in thermal imaging equipment sales, although these sales
were partially offset by increased sales of our dry thermal film products,
primarily reflecting the impact of our acquisition of substantially all of the
assets of EcoPRO in February 2001.
Operating Income
Operating income for fiscal year 2002 decreased $0.4 million from fiscal
year 2001. Our operating loss in fiscal year 2002 was 3.0% of total sales
compared to operating income of 0.2% of total sales in fiscal year 2001. The
decrease in operating income primarily resulted from an impairment charge of
$1.2 million related to the bankruptcy filing of the Primary Film Supplier.
Excluding the impairment charge, operating income for the fiscal year 2002
would be $0.8 million, an increase of $0.8 million over fiscal year 2001. The
increase in operating income is due to increased sales of dry thermal film
products and the impact of our acquisition of substantially all of the assets
of EcoPRO.
Fiscal Year 2001 Compared to Fiscal Year 2000.
Revenue
Sales of our commercial graphics products for fiscal year 2001 decreased
$0.8 million, or 5.3%, from fiscal year 2000. The decrease in sales is
primarily a result of a decline in thermal imaging equipment sales, although
these sales were partially offset by increased sales of our dry thermal film
products resulting from our acquisition of substantially all of the assets of
EcoPRO.
Operating Income
Operating income for fiscal year 2001 decreased $0.7 million, or 96.5%, from
fiscal year 2000. As a percentage of total sales, operating income in fiscal
year 2001 decreased to 0.2% from 5.4% in fiscal year 2000. The decrease in
operating income primarily resulted from a decline in thermal imaging equipment
sales.
Acquisitions and Bankruptcy Filing of Primary Film Supplier
Effective November 8, 2001, we increased our equity ownership from 44% to
85% in a Russian joint venture we 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 are consolidated with those of the
Company. Geophyspribor Ufa Production Association and Chori Co., Ltd. continue
as minority shareholders 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, the debt
owed to us and a related prior equity investment had been written-off due to
prior concerns regarding realization of those assets and had no carrying value
in our financial statements. In connection with this acquisition, we recorded
an extraordinary gain of $686,000, net of income taxes of $85,000. This
extraordinary gain represents the negative goodwill that resulted from the
acquisition of the additional equity interest of OYO-GEO Impulse. SFAS 141
requires negative goodwill resulting from new business combinations to be
recorded as an extraordinary gain.
Based in Ufa, Bashkortostan, Russia, OYO-GEO Impulse has been in operation
since 1990 manufacturing sensors for the Russian seismic marketplace. OYO-GEO
Impulse owns two facilities in Ufa containing a total of 161,000 square feet
and employs approximately 278 people. Our seismic manufacturing subsidiary in
Houston is managing the expansion of OYO-GEO Impulse's operations to produce
international-standard sensors and additional products that will broaden its
market scope.
15
In February 2001, we acquired the operating assets and business of EcoPRO
for $1.9 million of cash from the Primary Film Supplier. The EcoPRO business
distributes EcoPRO brand name thermal imagers and dry thermal film. The
operations of EcoPRO have been combined with our other commercial graphics
operations.
A private corporation headquartered in New York, the Primary Film Supplier,
has been the primary supplier of dry thermal film used by our customers in the
thermal imaging equipment we manufacture. On July 3, 2002, our Primary Film
Supplier filed a Chapter 11 reorganization petition in Federal Bankruptcy Court
for the Western District of New York. The Primary Film Supplier advised us
that, in connection with its bankruptcy filing, it was seeking a buyer for its
business that would assume its relationship and contracts with us. After
several months, we are not optimistic that a buyer can be found to operate the
Primary Film Supplier's business or, if a buyer is found, that it would 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.
Over the past several months, our Primary Film Supplier has failed to meet
all of our purchase orders and has provided us with only a limited quantity of
film. In November of 2002, our Primary Film Supplier stated that it had closed
down its operations. Subsequently, it stated that it was resuming a limited
level of operations while continuing to look for a buyer of its business. As a
result, we are currently purchasing a large quantity of dry thermal film from
our Secondary Film Supplier. 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. We are also in the process of researching and
developing a system that would enable us to use the technology we purchased
from the Primary Film Supplier to manufacture dry thermal film internally if we
should elect to do so.
No claims have been made against us or by us at present in connection with
the Primary Film Supplier's bankruptcy, except that on December 10, 2002, we
received a notice of claim for alleged preferential payments made by the
Primary Film Supplier to us in the period before filing of the bankruptcy
proceeding in the approximate amount of $260,000. We have not yet fully
assessed such recent claim and do not have adequate information and necessary
legal advice to do so at this time. We intend to vigorously defend against such
claim under the overall circumstances of our relationship with the Primary Film
Supplier. At present we do not know whether we will make any claims against the
Primary Film Supplier and we are unable to predict whether any additional
claims will be made against us in connection with the Primary Film Supplier's
bankruptcy proceeding as to any aspect of our relationship with such Primary
Film Supplier. We are unable at this time to predict the outcome and effects of
this still developing situation. We have, nevertheless, recently made provision
for existing claims that we believe are adequate at this time, although we are
unable to make such predictions with any certainty.
Liquidity and Capital Resources
At September 30, 2002, we had $1.5 million in cash and cash equivalents. For
the fiscal year ended September 30, 2002, we generated approximately $6.5
million of cash in operating activities principally resulting from our net
income of $1.1 million and adding back $6.1 million of net non-cash charges. In
addition, our inventories decreased $7.6 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 $6.7 million of increases in other
working capital accounts, including an increase in accounts receivable and
decreases in account payable, accrued expenses and deferred revenue.
Approximately $3.8 million of our accounts receivable at September 30, 2002
resulted from the sale of the reservoir characterization and monitoring system
to the major oil company. Such receivable is expected to be collected in
monthly installments through June 2003. Accounts payable decreased $1.0 million
primarily due to decreased purchases of raw materials, resulting from lower
activity in of our land-based seismic equipment business. The decrease in
deferred revenues primarily resulted from the revenue recognition of $4.9
million of deferred revenues in connection with the sale of the reservoir
characterization and monitoring system.
16
For the fiscal year ended September 30, 2002, we used $5.5 million of cash
and cash equivalents in investing activities, consisting of $4.7 million of
capital expenditures, and a $2.3 million purchase of intellectual property
rights from the Primary Film Supplier, offset by proceeds of $0.6 million from
the sale of fixed assets and $0.9 million of cash we received in conjunction
with the acquisition of an additional interest in OYO-GEO Impulse. We estimate
that our capital expenditures in fiscal 2003 will range between $4.0 to $5.0
million, which we expect to fund through operating cash flow and borrowings
under our credit facility as needed.
We used $0.5 million of cash for financing activities for the fiscal year
ended September 30, 2002, reflecting net borrowings of $0.3 million under our
credit facility and $0.2 million for the repayment of long-term debt.
At September 30, 2001, we had approximately $0.9 million in cash and cash
equivalents. For the fiscal year ended September 30, 2001, we generated
approximately $2.6 million of cash and cash equivalents from operating
activities, principally resulting from our net income, adjusted for non-cash
expenses such as depreciation and amortization, and increases in accrued
expenses and deferred revenue. These sources of cash were partially offset by
increases in trade accounts and notes receivable, inventories and decreases in
accounts payable.
For the fiscal year ended September 30, 2001, we used approximately $6.5
million of cash and cash equivalents in investing activities, consisting of
capital expenditures of approximately $4.9 million and business acquisition
expenditures of $1.9 million, offset by proceeds of $0.3 million from the sale
of fixed assets.
Financing activities for the fiscal year ended September 30, 2001 generated
$1.0 million of cash, reflecting $0.4 million received from the exercise of
stock options and net borrowings of $0.8 million under the credit facility,
offset by the repayment of long-term debt of $0.2 million.
At September 30, 2000, we had approximately $4.0 million in cash and cash
equivalents. For the fiscal year ended September 30, 2000, we generated
approximately $4.8 million of cash and cash equivalents from operating
activities, principally resulting from our net income, adjusted for non-cash
expenses such as depreciation and amortization, and increases in accounts
payable. These sources of cash were partially offset by increases in trade
accounts and notes receivable and prepaid expenses.
For the fiscal year ended September 30, 2000, we used approximately $5.9
million of cash and cash equivalents in investing activities, consisting of
capital expenditures of approximately $6.0 million, partially offset by
approximately $0.1 million of proceeds from the sale of property and equipment.
Financing activities for the fiscal year ended September 30, 2000 generated
$24,000 of cash, reflecting $193,000 received from the exercise of stock
options and borrowings of $1.4 million under a credit facility, offset by the
repayment of long-term debt of $1.6 million.
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
additional indebtedness, requires the maintenance of certain financial amounts
and contains other covenants customary in agreements of this type. As of
September 30, 2002, there were borrowings of $0.5 million outstanding under the
Credit Agreement, and additional borrowings available under the Credit
Agreement of $7.2 million. The borrowing interest rate at September 30, 2002
was 5.0%. We are seeking to extend the credit facility with our existing lender
and expect to be able to do so, but have no assurances that we will be able to
do so. We are also considering obtaining financing from an alternate lender if
an alternate lender can provide more attractive terms.
17
A summary of future payments owed for contractual obligations and commercial
commitments as of September 30, 2002 are shown in the table below (in
thousands):
Less Than 1 - 3 4 - 5 After 5
Total 1 Year Years Years Years
------ --------- ----- ----- -------
Contractual Obligations:
Long-term debt....................................... $3,771 $ 227 $508 $585 $2,451
Operating leases..................................... 584 489 95 -- --
------ ------ ---- ---- ------
Total contractual obligations.................... 4,355 716 603 585 2,451
Commercial Commitments:
Lines of Credit...................................... 487 487 -- -- --
------ ------ ---- ---- ------
Total Contractual Obligations and Commercial Commitments $4,842 $1,203 $603 $585 $2,451
====== ====== ==== ==== ======
We believe that the combination of existing cash reserves, cash flows from
operations and borrowing availability under our existing credit facility,
assuming it is extended, or borrowing availability under a new 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 we will be able to successfully extend our existing credit facility or
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.
Recent 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, net of income taxes of $85,000, relating to our acquisition of an
additional equity 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 for impairment.
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 this standard at the beginning of our fiscal year 2003. At September 30,
2002, we had goodwill, net of accumulated amortization, of $1.8 million and
recognized amortization expense totaling $165,000 during fiscal year 2002. We
do not believe the adoption of SFAS No. 142 will have a material effect on our
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 will adopt this standard at the beginning of fiscal
year 2003. We do not believe the adoption of SFAS No. 143 will have a material
effect on our financial position and results of operations.
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 of by sales. The accounting model
18
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 will adopt this standard at the beginning of our
fiscal year 2003. We do not believe the adoption of SFAS No. 144 will have a
material effect 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 became 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 will adopt this standard at the beginning of fiscal year 2003. We do not
believe the adoption of SFAS No. 145 will have a material effect on our
financial position or results of operations.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities". This
statement revises the accounting and reporting for costs associated with exit
or disposal activities to be recognized when a liability for such costs is
incurred rather than when the entity commits to an exit plan. SFAS No. 146 is
effective for exit or disposal activities initiated after December 31, 2002. We
will adopt this standard at the beginning of our fiscal year 2004. We do not
believe the adoption of SFAS No. 146 will have a material effect on our
financial position and the 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 captions
"Business" and "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 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-K. We
cannot assure you that we will realize our expectations regarding market
acceptance and revenues from these products and services.
19
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 2002 were materially and adversely affected by the downturn in the
industry. Our results for fiscal 2002 showed a decline in profitability from
fiscal year 2001. The oil and gas industry is extremely volatile and subject to
change based on political and economic factors outside our control. Our land
based seismic activity was adversely affected in fiscal year 2002 by industry
conditions.
Our estimates as to future results and industry trends described in this
document are generally based on assumptions regarding the future level of
seismic exploration activity and seismic reservoir monitoring projects and, in
turn, their 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 2003:
. Oil and gas prices, on average, will remain at levels consistent with
fiscal year 2002. As a result, seismic exploration activity will not
increase over fiscal year 2002.
. Customer consolidations and overall industry weakness will cause demand
for our traditional land-based seismic products to remain at or below
fiscal year 2002 levels.
. Demand for our land-based seismic products in Russia and China will
increase over fiscal year 2002 levels.
. Deep-water marine seismic exploration activity will remain constrained
and sales of our marine products are expected to decline in fiscal year
2003.
. Our new high definition reservoir characterization products and services
will become more widely accepted to the industry. Sales in fiscal year
2003 are expected to be lower than fiscal year 2002 levels because fiscal
year 2002 included the sale of a $15.8 million system; a similar delivery
is not expected based on current backlog and quotations.
. Sales of our new offshore cable products are expected to increase in
fiscal year 2003.
. Pricing for many of our products will continue to be subject to pressures
due to seismic industry consolidations and competition as the seismic
industry continues in an economic downturn.
. We are able to solve our film supply issues and demand for our products
used in the commercial graphics industry will increase with continued
market acceptance and new product introductions.
. Political conditions around the world, which have a significant impact on
the oil and gas industry, will remain relatively stable.
We have based these assumptions on various macro-economic factors, and our
internal assessments, and actual market conditions could vary materially from
those assumed.
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 September
30, 2002 is adequate in light of known circumstances. However, we cannot assure
you that additional amounts attributable to uncollectible
20
receivables and bad debt write-offs will not have a material adverse effect on
our future results of operations. Many of our customers, particularly seismic
contractors, 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
non-payment or late payment exist. Given recent industry conditions, some of
our customers have experienced a liquidity difficulty, which increases those
credit risks.
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 and availability of seismic data. 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. For a further discussion on this, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Industry
Overview".
We Have a Relatively Small Public Float, and Our Stock Price May be Volatile.
We have approximately 2.4 million shares outstanding held by non-affiliates.
This small float results in a relatively illiquid market for our common stock.
Our average daily trading volume during fiscal year 2002 was approximately
4,000 shares. Our small float and daily trading volumes has in the past caused,
and may in the future 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:
. improve our existing product lines;
. address the increasingly sophisticated needs of our customers;
. maintain a reputation for technological leadership;
. maintain market acceptance;
. anticipate changes in technology and industry standards; and
. 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 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, three competitors in our seismic
business segment currently offer a broader range of instruments and equipment
for sale and market
21
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 30 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, some of whom are experiencing financial
difficulties, have accounted for most of our sales. From time to time these
seismic contractors have sought to vertically integrate and acquire our
competitors, which has influenced their supplier decisions before and after
such transactions. The loss of a small number of these customers for whatever
reason could materially and adversely impact our sales. For a further
discussion on this, see "Business--Markets and Customers".
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 also acquired several patents which relate
to the development of dry thermal film from our Primary Film Supplier. 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 54% of our
net sales during fiscal year 2002. See Note 17 to our Consolidated Financial
Statements for further information on our sales outside of the United States.
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 sheets of our Russian, Canadian
and U.K. subsidiaries are subject to currency fluctuations. Significant foreign
currency fluctuations could adversely impact our results of operations.
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 and foreign attitudes
about conducting business activities with United States or Japanese trading
partners, 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. Also, should we experience substantial
growth in certain markets, for example Russia, we may not be able to transfer
cash balances to the United States to assist with debt servicing obligations.
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. Over the years we have experienced some quality
control issues with such printheads and have returned significant quantities of
these products to the manufacturer for repair, testing and quality assurance
review. We are not presently experiencing any significant supply or quality
control problems with our supplier of printheads. However, unforseen problems,
if they develop, could have a significant effect on our ability to meet future
production and sales commitments. 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, our ability to
compete in the thermal imaging marketplace could be severely damaged, which
could adversely affect our financial performance. 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, our Primary Film Supplier,
has been the primary supplier of dry thermal film used by our customers in the
thermal imaging equipment we manufacture. On July 3, 2002, our Primary Film
Supplier filed a Chapter 11 reorganization petition in Federal Bankruptcy Court
for the Western District of New York. The Primary Film Supplier advised us
that, in connection with its bankruptcy filing, it was seeking a buyer for its
business that would assume its relationship and contracts with us. After
several months, we are not optimistic that a buyer can be found to operate the
Primary Film Supplier's business or, if a buyer is found, that it would 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.
Over the past few months, our Primary Film Supplier has failed to meet all
of our purchase orders and has provided us with only a limited quantity of
film. In November of 2002, our Primary Film Supplier stated that it had closed
down its operations. Subsequently, it stated that it was resuming a limited
level of operations while continuing to look for a buyer of its business. As a
result, we are currently purchasing a large quantity of dry thermal film from
our Secondary Film Supplier. 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.
We are also in the process of researching and developing a system that would
enable us to use the technology we purchased from the Primary Film Supplier to
manufacture dry thermal film internally if we should elect to do so. If we are
unable to successfully manufacture dry thermal film internally using the
technology we purchased from our Primary Film Supplier and if our Primary Film
Supplier is unable to locate a buyer of its business or if our Secondary Film
Supplier was to discontinue supplying dry thermal film or was unable to supply
dry thermal film in sufficient quantities to meet our requirements, our ability
to compete in the thermal imaging marketplace could be severely damaged, which
could adversely affect our financial performance.
No claims have been made against us or by us at present in connection with
the Primary Film Supplier's bankruptcy, except that on December 10, 2002, we
received a notice of claim for alleged preferential payments made by the
Primary Film Supplier to us in the period before filing of the bankruptcy
proceeding in the approximate amount of $260,000. We have not yet fully
assessed such recent claim and do not have adequate information and necessary
legal advice to do so at this time. We intend to vigorously defend against such
claim under the overall circumstances of our relationship with the Primary Film
Supplier. At present we do not know whether we will make any claims against the
Primary Film Supplier and we are unable to predict whether any additional
claims will be made against us in connection with the Primary Film Supplier's
bankruptcy proceeding as to any aspect of our relationship with such Primary
Film Supplier. Because we are unable at this time to predict the outcome and
effects of this still developing situation, we are unable to assess the
associated risks. We have, nevertheless, recently made provision for existing
claims that we believe are adequate at this time, although we are unable to
make such predictions with any certainty.
23
We Are Subject to Control by a Principal Stockholder.
OYO Corporation, a Japanese corporation, owns indirectly in the aggregate
approximately 51.4% 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.
A Continued General Downturn in the U.S. Economy in 2002 May Adversely Affect
our Business.
A general downturn in the U.S. economy could continue to adversely affect
our business in ways that we cannot yet identify. The downturn may continue to
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. It
could also adversely affect 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 adversely affect us.
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, self-insurance reserves,
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, is carried as an asset in our
financial statements and beginning with fiscal year 2003, will no longer be
amortized. 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 September 30, 2002, we had goodwill, net of
accumulated amortization, of $1.8 million. The carrying value of long-lived
assets, including
24
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. We do not believe that an impairment has
occurred and therefore no adjustments are necessary that will have a material
effect on our financial position and results of operations, but risks of
impairment and write-offs will continue to exist. 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--Recent
Accounting Pronouncements".
Item 7A. 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. For a description of our significant
accounting policies associated with these activities, see Note 1 to the
Consolidated Financial Statements.
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 exchanges 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 year ended
September 30, 2002. At September 30, 2002, we had no exposure to yen
denominated foreign currency forward contracts, and we had $24,000 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 rates, weak
economic conditions or changes in Russia's political climate. Our consolidated
balance sheet at September 30, 2002 reflected approximately $1.5 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. We could potentially encounter currency restrictions
related to transferring such funds to the United States.
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
September 30, 2002) with a minimum rate of 5.0%. Further, amounts payable under
the line
25
of credit are due in full in January 2003. As of September 30, 2002, we had
borrowed $0.5 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.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements, including the reports thereon, the
notes thereto and supplementary data begin at page F-1 of this Form 10-K and
are incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
26
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item is contained in our definitive Proxy
Statement to be distributed in connection with our 2003 Annual Meeting of
Stockholders under the captions "Election of Directors", "Executive Officers
and Compensation" and "Compliance With Section 16(A) of The Securities Exchange
Act of 1934" and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this Item is contained in our definitive Proxy
Statement to be distributed in connection with our 2003 Annual Meeting of
Stockholders under the caption "Executive Officers and Compensation" and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is contained in our definitive Proxy
Statement to be distributed in connection with our 2003 Annual Meeting of
Stockholders under the caption "Security Ownership of Certain Beneficial Owners
and Management" and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is contained in our definitive Proxy
Statement to be distributed in connection with our 2003 Annual Meeting of
Stockholders under the caption "Certain Relationships and Transactions" and is
incorporated herein by reference.
27
PART IV
Item 14. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Within the 90 day period prior to the date of filing this Report on Form
10-K, our Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of our disclosure controls and procedures pursuant to Rule 13a-14
under the Securities Exchange Act of 1934. Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective.
Changes in Internal Control
There were no significant changes in our internal controls or in other
factors that could significantly affect our internal controls subsequent to the
date of the evaluation of our disclosure controls and procedures referred to in
the preceding paragraph.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Financial Statement Schedules
The financial statements and financial statement schedules listed on the
accompanying Index to Financial Statements (see page F-1) are filed as part of
this Form 10-K.
(b) Reports on Form 8-K
None.
28
(c) Exhibits
Exhibit
Number Description of Documents
- ------- ------------------------
3.1(a) Restated Certificate of Incorporation of the Registrant.
3.2(a) Restated Bylaws of the Registrant.
10.1(a) Employment Agreement dated as of August 1, 1997 between the Company and Gary D. Owens.
10.2(a) Employment Agreement dated as of August 1, 1997 between the Company and Michael J. Sheen.
10.3(c) OYO Geospace Corporation 1997 Key Employee Stock Option Plan.
10.4(d) Amendment No. 1 to OYO Geospace Corporation 1997 Key Employee Stock Option Plan, dated
February 2, 1998.
10.5(d) Amendment No. 2 to OYO Geospace Corporation 1997 Key Employee Stock Option Plan, dated
November 16, 1998.
10.6(c) OYO Geospace Corporation 1997 Non-Employee Director Plan.
10.7(a) Printhead Purchase Agreement dated November 10, 1995 between the Company and OYO
Corporation.
10.8(a) Master Sales Agreement dated November 10, 1995 between the Company and OYO Corporation.
10.9(e) Form of Director Indemnification Agreement.
10.10(b) Promissory Note, dated as of June 23, 1998, made by the Company payable to Ameritas Life
Insurance Corp.
10.11(f) Asset Purchase Agreement, dated February 8, 2001, between the Company and EcoPRO Imaging
Corporation.
10.12(f) Business Loan Agreement, dated February 16, 2001, made by and between the Company and
Southwest Bank of Texas, N.A.
10.13(f) Promissory Note, dated February 16, 2001, made by and between the Company and Southwest
Bank of Texas, N.A.
10.14(g) Second Amendment to Loan Agreement, dated as of January 15, 2002, by and between Concord
Technologies, LP, Geospace Engineering Resources International, LP, Geo Space, LP, OYO
Instruments, LP and OYOG Operations, LP and Southwest Bank of Texas, N.A.
10.15(g) Promissory Note A, dated January 15, 2002, made by Concord Technologies, LP, Geospace
Engineering Resources International, LP, Geo Space, LP, OYO Instruments, LP and OYOG
Operations, LP payable to the order of Southwest Bank of Texas, N.A.
10.16(g) Promissory Note B, dated January 15, 2002, made by Concord Technologies, LP, Geospace
Engineering Resources International, LP, Geo Space, LP, OYO Instruments, LP and OYOG
Operations, LP payable to the order of Southwest Bank of Texas, N.A.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants
- --------
(a) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 filed September 30, 1997 (Registration No. 333-36727).
(b) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1998 (File No. 001-13601).
(c) Incorporated by reference to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 filed November 5, 1997 (Registration No.
333-36727).
(d) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended September 30, 1998 (File No. 001-13601).
(e) Incorporated by reference to Amendment No. 2 to the Registrant's
Registration Statement on Form S-1 filed November 18, 1997 (Registration
No. 333-36727).
(f) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2001 (File No. 001-13601).
(g) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended December 31, 2001 (File No. 001-13601).
29
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
By: /s/ GARY D. OWENS
-----------------------------
Gary D. Owens, Chairman of
the Board President and Chief
Executive Officer
December 20, 2002
Pursuant to the requirements of the Securities Exchange Act, this Annual
Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ GARY D. OWENS Chairman of the Board December 20, 2002
- ----------------------------- President and Chief
Gary D. Owens Executive Officer
(Principal Executive
Officer)
/s/ THOMAS T. MCENTIRE Chief Financial Officer December 20, 2002
- ----------------------------- (Principal Financial and
Thomas T. McEntire Accounting Officer)
/s/ SATORU OHYA Director December 20, 2002
- -----------------------------
Satoru Ohya
/s/ KATSUHIKO KOBAYASHI Director December 20, 2002
- -----------------------------
Katsuhiko Kobayashi
/s/ ERNEST M. HALL, JR. Director December 20, 2002
- -----------------------------
Ernest M. Hall, Jr.
/s/ MICHAEL J. SHEEN Director December 20, 2002
- -----------------------------
Michael J. Sheen
/s/ THOMAS L. DAVIS Director December 20, 2002
- -----------------------------
Thomas L. Davis
/s/ CHARLES H. STILL Director December 20, 2002
- -----------------------------
Charles H. Still
30
CERTIFICATIONS
I, Gary D. Owens, certify that:
1. I have reviewed this annual report on Form 10-K of OYO Geospace Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ GARY D. OWENS
December 20, 2002 --------------------------------
Name: Gary D. Owens
Title: Chief Executive Officer
31
CERTIFICATIONS
I, Thomas T. McEntire, certify that:
1. I have reviewed this annual report on Form 10-K of OYO Geospace Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3 Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ THOMAS T. MCENTIRE
December 20, 2002 -------------------------------
Name: Thomas T. McEntire
Title: Chief Financial Officer
32
Informational Addendum to Report on Form 10-K
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 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-K, the undersigned hereby certify
that this Report on Form 10-K 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-K 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
33
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants.............................................................. F-2
Consolidated Balance Sheets as of September 30, 2002 and 2001.................................. F-3
Consolidated Statements of Operations for the Years Ended September 30, 2002, 2001 and 2000.... F-4
Consolidated Statement of Stockholders' Equity for the Years Ended September 30, 2002, 2001 and
2000......................................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended September 30, 2002, 2001 and 2000.... F-6
Notes to Consolidated Financial Statements..................................................... F-7
Report of Independent Accountants on Financial Statement Schedule.............................. F-26
Schedule II--Valuation and Qualifying Accounts................................................. F-27
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of OYO Geospace Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity, and cash flows
present fairly, in all material respects, the financial position of OYO
Geospace Corporation and subsidiaries at September 30, 2002 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 2002, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
Houston, Texas
December 18, 2002
F-2
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
As of September 30,
------------------
2002 2001
ASSETS ------- -------
Current assets:
Cash and cash equivalents........................................................... $ 1,538 $ 882
Trade accounts and notes receivable, net of allowance of $474 and $470.............. 12,585 11,539
Inventories......................................................................... 21,801 28,737
Deferred income tax................................................................. 1,135 1,152
Prepaid expenses and other.......................................................... 1,261 1,299
------- -------
Total current assets............................................................ 38,320 43,609
Rental equipment, net.................................................................. 2,044 2,075
Property, plant and equipment, net..................................................... 20,243 20,307
Patents, net of accumulated amortization of $1,458 and $979............................ 4,556 2,767
Goodwill, net of accumulated amortization of $921 and $756............................. 1,843 2,008
Deferred income tax.................................................................... 931 252
Other assets........................................................................... 189 1,982
------- -------
Total assets.................................................................... $68,126 $73,000
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt.............................. $ 714 $ 1,033
Accounts payable:
Trade............................................................................. 4,023 4,711
Related parties................................................................... 24 273
Accrued expenses and other.......................................................... 4,162 4,047
Deferred revenue.................................................................... 146 4,859
Income tax payable.................................................................. 1,121 795
------- -------
Total current liabilities....................................................... 10,190 15,718
Long-term debt......................................................................... 3,544 3,772
Deferred income tax.................................................................... -- 719
------- -------
Total liabilities............................................................... 13,734 20,209
------- -------
Minority interest in consolidated subsidiary........................................... 263 --
Stockholders' equity:
Preferred stock, 1,000,000 shares authorized, no shares issued and outstanding...... -- --
Common stock, $.01 par value, 20,000,000 shares authorized, 5,546,795 and 5,538,580
shares issued and outstanding..................................................... 55 55
Additional paid-in capital.......................................................... 30,566 30,530
Retained earnings................................................................... 24,332 23,213
Accumulated other comprehensive loss................................................ (819) (865)
Unearned compensation-restricted stock awards....................................... (5) (142)
------- -------
Total stockholders' equity...................................................... 54,129 52,791
------- -------
Total liabilities and stockholders' equity...................................... $68,126 $73,000
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
Year Ended September 30,
----------------------------------
2002 2001 2000
---------- ---------- ----------
Sales................................................................. $ 65,049 $ 63,618 $ 53,474
Cost of sales......................................................... 46,484 42,957 39,042
---------- ---------- ----------
Gross profit.......................................................... 18,565 20,661 14,432
Operating expenses:
Selling, general and administrative expenses....................... 11,538 12,528 10,090
Research and development expenses.................................. 5,347 6,277 6,146
Impairment of assets............................................... 1,246 -- --
---------- ---------- ----------
Total operating expenses....................................... 18,131 18,805 16,236
---------- ---------- ----------
Income (loss) from operations......................................... 434 1,856 (1,804)
---------- ---------- ----------
Other income (expense):
Interest expense................................................... (666) (380) (324)
Interest income.................................................... 177 255 269
Other, net......................................................... (281) (101) 96
---------- ---------- ----------
Total other income (expense), net.............................. (770) (226) 41
---------- ---------- ----------
Income (loss) before income taxes, minority interest and extraordinary
gain................................................................ (336) 1,630 (1,763)
Income tax expense (benefit).......................................... (857) 292 (572)
---------- ---------- ----------
Income (loss) before minority interest, and extraordinary gain........ 521 1,338 (1,191)
Minority interest..................................................... (88) -- --
---------- ---------- ----------
Income (loss) before extraordinary gain............................... 433 1,338 (1,191)
Extraordinary gain, net of tax of $85................................. 686 -- --
---------- ---------- ----------
Net income (loss)..................................................... $ 1,119 $ 1,338 $ (1,191)
========== ========== ==========
Basic earnings (loss) per share:
Income before extraordinary gain...................................... $ 0.08 $ 0.24 $ (0.22)
Extraordinary gain.................................................... 0.12 -- --
---------- ---------- ----------
Net income (loss)..................................................... $ 0.20 $ 0.24 $ (0.22)
========== ========== ==========
Diluted earnings (loss) per share:
Income before extraordinary gain...................................... $ 0.08 $ 0.24 $ (0.22)
Extraordinary gain.................................................... 0.12 -- --
---------- ---------- ----------
Net income (loss)..................................................... $ 0.20 $ 0.24 $ (0.22)
========== ========== ==========
Weighted average shares outstanding:
Basic.............................................................. 5,535,979 5,489,251 5,431,901
---------- ---------- ----------
Diluted............................................................ 5,547,774 5,598,597 5,431,901
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the years ended September 30, 2002, 2001 and 2000
(In thousands, except share amounts)
Accumulated Unearned
Common Stock Additional Other Compensation-
----------------- Paid-In Retained Comprehensive Restricted
Shares Amount Capital Earnings Income (Loss) Stock Awards Total
--------- ------ ---------- -------- ------------- ------------- -------
Balance at September 30, 1999......... 5,501,359 $55 $29,914 $23,066 $(456) $(1,181) $51,398
Comprehensive income:
Net loss............................ -- -- -- (1,191) -- -- (1,191)
Foreign currency translation
adjustments........................ -- -- -- -- (223) -- (223)
-------
Total comprehensive loss............ (1,414)
Issuance of common stock pursuant to
Director Plan........................ 1,654 -- 25 -- -- -- 25
Termination of restricted stock grants (5,000) -- (70) -- -- 70 --
Issuance of common stock pursuant to
exercise of options, net of tax...... 14,700 -- 219 -- -- -- 219
Unearned compensation amortization.... -- -- -- -- -- 481 481
--------- --- ------- ------- ----- ------- -------
Balance at September 30, 2000......... 5,512,713 55 30,088 21,875 (679) (630) 50,709
Comprehensive income:
Net income.......................... -- -- -- 1,338 -- -- 1,338
Foreign currency translation
adjustments........................ -- -- -- -- (186) -- (186)
-------
Total comprehensive income.......... 1,152
Issuance of common stock pursuant to
restricted stock awards.............. 500 -- 8 -- -- (8) --
Issuance of common stock pursuant to
Director Plan........................ 992 -- 25 -- -- -- 25
Termination of restricted stock grants (2,725) -- (45) -- -- 45 --
Issuance of common stock pursuant to
exercise of options, net of tax...... 27,100 -- 454 -- -- -- 454
Unearned compensation amortization.... -- -- -- -- -- 451 451
--------- --- ------- ------- ----- ------- -------
Balance at September 30, 2001......... 5,538,580 55 30,530 23,213 (865) (142) 52,791
Comprehensive income:
Net income.......................... -- -- -- 1,119 -- -- 1,119
Foreign currency translation
adjustments........................ -- -- -- -- 46 -- 46
-------
Total comprehensive income.......... 1,165
Issuance of common stock pursuant to
Director Plan........................ 1,890 -- 25 -- -- -- 25
Termination of restricted stock grants (1,000) -- (8) -- -- 8 --
Issuance of common stock pursuant to
exercise of options, net of tax...... 7,325 -- 19 -- -- -- 19
Unearned compensation amortization.... -- -- -- -- -- 129 129
--------- --- ------- ------- ----- ------- -------
Balance at September 30, 2002......... 5,546,795 $55 $30,566 $24,332 $(819) $ (5) $54,129
========= === ======= ======= ===== ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended September 30,
---------------------------
2002 2001 2000
-------- -------- -------
Cash flows from operating activities:
Net income (loss)......................................................... $ 1,119 $ 1,338 $(1,191)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Deferred income tax expense........................................... (1,381) 81 6
Depreciation, amortization and stock-based compensation............... 4,852 4,444 4,014
Impairment of assets.................................................. 1,246 -- --
Extraordinary gain, net of tax........................................ (686) -- --
Minority interest..................................................... 88 -- --
(Gain) loss on disposal of property, plant and equipment.............. 192 (1) 90
Bad debt expense...................................................... 146 214 190
Effects of changes in operating assets and liabilities:
Trade accounts and notes receivable................................ (626) (3,217) (929)
Inventories........................................................ 7,622 (6,550) (154)
Prepaid expenses and other assets.................................. 262 478 (384)
Accounts payable................................................... (1,030) (926) 2,902
Accrued expenses and other......................................... (786) 1,368 97
Deferred revenue................................................... (4,713) 4,859 --
Income tax payable................................................. 241 523 188
-------- -------- -------
Net cash provided by operating activities...................... 6,546 2,611 4,829
-------- -------- -------
Cash flows from investing activities:
Proceeds from the sales of property, plant and equipment.................. 616 286 83
Capital expenditures...................................................... (4,729) (4,909) (6,004)
Purchase of intangible assets............................................. (2,267) -- --
Business acquisitions, net of cash acquired............................... 913 (1,925) --
-------- -------- -------
Net cash used in investing activities.......................... (5,467) (6,548) (5,921)
-------- -------- -------
Cash flows from financing activities:
Increase in notes payable to banks........................................ 29,266 30,840 1,431
Principal payments on notes payable to banks.............................. (29,812) (30,217) (1,600)
Proceeds from exercise of stock options................................... 77 393 193
-------- -------- -------
Net cash provided by (used in) financing activities............ (469) 1,016 24
-------- -------- -------
Effect of exchange rate changes on cash...................................... 46 (186) (223)
-------- -------- -------
Increase (decrease) in cash and cash equivalents............................. 656 (3,107) (1,291)
Cash and cash equivalents, beginning of period............................... 882 3,989 5,280
-------- -------- -------
Cash and cash equivalents, end of period..................................... $ 1,538 $ 882 $ 3,989
======== ======== =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
The Company
OYO Geospace Corporation ("OYO") designs, manufactures and distributes
instruments and equipment used primarily in the acquisition and processing of
seismic data for the oil and gas industry. OYO also manufactures and
distributes equipment and dry thermal film products to the commercial graphics
industry. As of September 30, 2002, OYO Corporation U.S.A. ("OYO USA" or
"Parent") owned approximately 51.4% of OYO's common stock. OYO USA is a wholly
owned subsidiary of OYO Corporation, a Japanese corporation ("OYO Japan").
OYO and its subsidiaries are referred to collectively as the "Company". The
significant accounting policies followed by the Company are summarized below.
Basis of Presentation
The accompanying financial statements present the consolidated financial
position, results of operations and cash flows of the Company in accordance
with generally accepted accounting principles. Significant intercompany
balances and transactions have been eliminated.
Reclassification
Certain amounts previously presented in the consolidated financial
statements have been reclassified to conform to the current year presentation,
including certain tax accounts.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt securities purchased with an
original or remaining maturity at the time of purchase of three months or less
to be cash equivalents.
Concentrations of Credit Risk
The Company maintains its cash in bank deposit accounts that, at times,
exceed federally insured limits. Management believes that the financial
strength of the financial institutions that hold such deposits minimizes the
credit risk of such deposits.
The Company sells products to customers throughout the United States and
various foreign countries. The Company's normal credit terms for trade
receivables are 30 days. In certain situations, credit terms may be extended to
60 days or longer. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral for its trade receivables.
Additionally, the Company provides long-term financing in the form of
promissory notes when competitive conditions require such financing. In such
cases, the Company may require collateral. Allowances are maintained for
potential credit losses.
F-7
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Inventories
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. Inventories are stated
at the lower of cost (as determined by the first-in, first-out method) or
market value.
Property, Plant and Equipment and Rental Equipment
Property, plant and equipment and rental equipment are stated at cost.
Depreciation expense is provided by the straight-line method over the following
estimated useful lives:
Years
-----
Rental equipment.............. 3-5
Property, plant and equipment:
Machinery and equipment.... 3-15
Buildings.................. 25
Other...................... 5-10
Expenditures for renewals and betterments are capitalized. Repairs and
maintenance are charged to expense as incurred. The cost and accumulated
depreciation of assets sold or otherwise disposed of are removed from the
accounts and any gain or loss thereon is reflected in the statement of
operations.
Patents
Patents are amortized over the life of the patent or the estimated life of
the patent, which ever is shorter. Intellectual property is being amortized
using the straight-line method over five years.
Goodwill
Goodwill represents the excess of the purchase price of purchased businesses
over the estimated fair value of the acquired business' net assets. During
fiscal year 2002 and prior fiscal years, goodwill was amortized using the
straight-line method over 15 years. The Company will adopt the provisions of
SFAS 142 effective in its fiscal year 2003 (See Recent Accounting
Pronouncements in Note 1). In accordance with the provisions of SFAS 142,
beginning in fiscal year 2003, the Company will no longer record goodwill
amortization expense. Amortization expense during the year ended September 30,
2002 was $165,000. The Company will continue to review the carrying value of
goodwill and other long-lived assets to determine whether there has been an
impairment since the date of acquisition.
Revenue Recognition
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 (when the revenue cycle is
completed). 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. Rental revenues are recognized on a
straight-line basis 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.
F-8
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Research and Development Costs
Research and development costs are expensed as incurred.
Product Warranties
The Company sells products under warranties generally ranging from one to
three years. The estimated future cost under existing warranties has been
provided for in the accompanying financial statements.
Stock-Based Compensation
The Company measures compensation expense related to stock-based employee
compensation plans using the intrinsic value method as prescribed in Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees". Accordingly, compensation cost for stock-based awards is measured
as the excess, if any, of the fair market value of the Company's stock at the
date of grant over the exercise price of the award. Compensation cost
determined at the grant date is recognized as expense over the related vesting
period.
Financial Instruments
Fair value estimates are made at discrete points in time based on relevant
market information. These estimates may be subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot be
determined with precision. The Company believes that the carrying amounts of
its financial instruments, consisting of cash and cash equivalents, accounts
and notes receivable, accounts payable and long-term debt, approximate the fair
values of such items.
Foreign Currency Gains and Losses
The assets and liabilities of OYO's foreign subsidiaries have been
translated into U.S. dollars using the exchange rates in effect at the balance
sheet date. Results of operations have been translated using the average
exchange rates during the year. Resulting translation adjustments have been
recorded as a component of accumulated other comprehensive income (loss) in
stockholders' equity. Foreign currency transaction gains and losses are
included in the results of operations as they occur.
Derivatives
The Company records all derivatives on the balance sheet at fair value.
Changes in derivative fair values will either be recognized in earnings as
offsets to the changes in fair value of related hedged assets, liabilities and
firm commitments or for forecasted transactions, deferred and recorded as a
component of accumulated other comprehensive income until the hedged
transactions occur and are recognized in earnings. The Company purchases
printheads from OYO Japan whereby such purchases are denominated in Japanese
yen. The Company routinely attempts to hedge its 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 exchange rates on
amounts payable in Japanese yen. The Company's forward contracts with the bank
are considered derivatives. The Company has recorded these foreign currency
forward contracts on the balance sheet and marked them to fair value at each
reporting date. Resulting gains and losses are reflected in income and were not
material for the fiscal years ended September 30, 2002, 2001 and 2000.
F-9
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
The Company follows the liability method of accounting for income taxes
whereby deferred tax assets and liabilities are determined based on the
differences between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. The Company provides a
valuation allowance, if necessary, to reduce deferred tax assets to their
estimated realizable value.
Recent 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. 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, net of income taxes of $85,000, relating to the
increase in equity ownership 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 for impairment.
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. At September 30, 2002, the Company had goodwill, net of accumulated
amortization, of $1.8 million and recognized amortization expense totaling
$165,000 during fiscal year 2002. The adoption of SFAS No. 142 is not expected
to have a material effect 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 will adopt this standard at
the beginning of fiscal year 2003. The adoption of SFAS No. 143 is not expected
to have a material effect on the Company's financial position and results of
operations.
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 of 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 will adopt this standard at the beginning
of its fiscal year 2003. Management does not believe the adoption of SFAS No.
144 will have a material effect 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
F-10
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 became 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 will adopt this standard at the
beginning of fiscal year 2003. Management does not believe the adoption of SFAS
No. 145 will have a material effect on the Company's financial position or
results of operations.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities". This
statement revises the accounting and reporting for costs associated with exit
or disposal activities to be recognized when a liability for such costs is
incurred rather than when the entity commits to an exit plan. SFAS No. 146 is
effective for exit or disposal activities initiated after December 31, 2002.
Management does not believe the adoption of SFAS No. 146 will have a material
effect on the Company's financial position and the results of operations.
2. Acquisitions:
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, have been consolidated with those of the
Company. Geophyspribor Ufa Production Association and Chori Co., Ltd. continue
as minority equity holders of OYO-GEO Impulse.
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
restructuring, the debt owed the Company and a related prior equity investment
had been written-off and had no carrying value in the Company's financial
statements.
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 Company's acquisition of an additional
equity interest of OYO-GEO Impulse. SFAS 141 requires negative goodwill
resulting from new business combinations to be recorded as an extraordinary
gain.
On February 8, 2001, the Company acquired substantially all of the assets of
EcoPRO Imaging Corporation ("EcoPRO") for $1.9 million and entered into a
three-year global dry thermal film and distribution alliance with the seller of
the EcoPRO assets (hereinafter referred to as the "Primary Film Supplier").
The allocation of the purchase price for the additional equity ownership of
OYO-GEO Impulse and the EcoPRO acquisition, including related direct costs, and
a reconciliation of the purchase price to the cash used for these business
acquisitions is as follows (in thousands):
OYO-GEO
Impulse EcoPRO
------- ------
Fair values of assets and liabilities:
Net current assets, excluding cash acquired.. $ 1,134 $ 501
Deferred purchasing benefits................. -- 1,640
Net current liabilities...................... (1,186) (216)
Minority interest............................ (175) --
Negative goodwill............................ (686) --
------- ------
Cash (provided by) used for business acquisition $ (913) $1,925
======= ======
F-11
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The consolidated results of operations of the Company include the results of
acquired businesses from the dates of acquisition. The revenues and net income
of acquired businesses prior to the acquisition dates were not material to the
Company's consolidated results of operations and, therefore, no proforma
consolidated results of operations as if the acquisitions had occurred at the
beginning of the respective years has been presented.
3. Inventories:
Inventories consisted of the following (in thousands):
As of September 30,
------------------
2002 2001
------- -------
Finished goods...... $ 4,527 $ 3,649
Work in progress.... 3,619 9,653
Raw materials....... 14,586 16,524
Obsolescence reserve (931) (1,089)
------- -------
$21,801 $28,737
======= =======
4. Notes Receivable:
At September 30, 2002 and 2001, the Company had outstanding notes receivable
from customers in the amount of $0.9 million and $2.8 million, respectively.
The notes receivable outstanding at September 30, 2002 bear interest at rates
up to 12.0% and are collectible in monthly installments through August 2003. At
September 30, 2002 and 2001, the reported amount of notes receivable was net of
an allowance for doubtful accounts of zero.
5. Rental Equipment:
Rental equipment consisted of the following (in thousands):
As of September 30,
------------------
2002 2001
------- -------
Geophones and related products $ 7,373 $ 6,445
Less accumulated depreciation. (5,329) (4,370)
------- -------
$ 2,044 $ 2,075
======= =======
6. Property, Plant and Equipment:
Property, plant and equipment consisted of the following (in thousands):
As of September 30,
------------------
2002 2001
-------- --------
Land.................... $ 1,877 $ 1,877
Buildings............... 10,052 8,550
Machinery and equipment. 17,235 15,214
Furniture and fixtures.. 1,575 1,729
Transportation equipment 210 185
Tools and molds......... 1,693 1,703
Leasehold improvements.. 1,108 1,054
Construction in progress 477 1,659
-------- --------
34,227 31,971
Accumulated depreciation (13,984) (11,664)
-------- --------
$ 20,243 $ 20,307
======== ========
F-12
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Depreciation expense was $3.9 million, $3.6 million and $3.1 million in
fiscal years 2002, 2001 and 2000, respectively.
7. Other Assets:
In connection with the acquisition of substantially all of the assets of
EcoPRO during fiscal year 2001, the Company received deferred purchasing
benefits valued at approximately $1.6 million. These deferred purchasing
benefits primarily represented discounts on future film purchases from the
Primary Film Supplier and were recorded as long-term assets on the Company's
balance sheet.
In April 2002, the Company purchased certain intellectual property rights
from the Primary Film Supplier for $2.3 million. Such purchase gave the Company
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. The purchase included then existing technology and any film
technology later developed by the Primary Film Supplier for use in the
Company's equipment. In connection with the purchase, the Company agreed to
license the technology to the Primary Film Supplier on a perpetual basis, so
long as it could 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 agreed to provide the Company with
the dry thermal film. If the Primary Film Supplier can not meet such
requirements, the Company has the right to self-manufacture or license to any
third party the right 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. As a
result of such bankruptcy filing, the Company provided an impairment charge of
approximately $1.2 million due to the ultimate uncertainty of its ability to
realize the value of the deferred purchasing benefits and certain other assets.
See Note 18 for additional information relating to the Primary Film Supplier's
bankruptcy filing.
8. Notes Payable and Long-Term Debt:
Notes payable and long-term debt consisted of the following (in thousands):
As of
September 30,
---------------
2002 2001
------ -------
Mortgage note payable, due in monthly installments of $31 with interest at 7.0%
through January 2014, collateralized by certain land and building............ $2,947 $ 3,112
Mortgage note payable, due in monthly installments of $9 with interest at 7.6%
through July 2013, collateralized by certain land and building............... 824 872
Working capital line of credit................................................. 487 821
------ -------
4,258 4,805
Less current portion........................................................... (714) (1,033)
------ -------
$3,544 $ 3,772
====== =======
The Company has a working capital line of credit under which it is able to
borrow up to $10.0 million secured by 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
F-13
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
additional indebtedness, requires the maintenance of certain financial amounts
and contains other covenants customary in agreements of this type. As of
September 30, 2002, there were borrowings of $0.5 million outstanding under the
Credit Agreement, and additional borrowings available under the Credit
Agreement of $7.2 million. The borrowing interest rate at September 30, 2002
was 5.0%. The Company is seeking to extend the credit facility with the
existing lender and expects to be able to do so, but has no assurances that it
will be able to do so. The Company is also considering obtaining financing from
an alternate lender if an alternate lender can provide more attractive terms.
The Company's long-term debt will mature as follows (in thousands):
Year Ending
September 30,
-------------
2003........ $ 714
2004........ 245
2005........ 263
2006........ 282
2007........ 303
Thereafter.. 2,451
------
$4,258
======
9. Accrued Expenses and Other:
Accrued expenses consisted of the following (in thousands):
As of
September 30,
-------------
2002 2001
------ ------
Employee bonuses........... $ 431 $ 683
Product warranty........... 853 390
Compensated absences....... 562 590
Legal and professional fees 283 295
Payroll.................... 229 220
Property taxes............. 597 626
Accrued medical claims..... 262 236
Other...................... 945 1,007
------ ------
Accrued expenses and other. $4,162 $4,047
====== ======
The Company is self-insured for certain losses related to employee medical
claims. The Company has purchased stop-loss coverage for individual claims in
excess of $60,000 per claimant per year in order to limit its exposure to any
significant levels of employee medical claims. Self-insured losses are accrued
based on the Company's estimates of aggregate liability for uninsured claims
incurred using certain actuarial assumptions followed in the insurance industry
and the Company's historical experience.
10. Employee Benefits:
The Company's employees are participants in the OYO Geospace Corporation
Employee's 401(k) Retirement Plan (the "Plan"), which covers substantially all
eligible employees in the United States. The Plan is a qualified salary
reduction plan in which all eligible participants may elect to have a
percentage of their compensation contributed to the Plan, subject to certain
guidelines issued by the Internal Revenue Service. The
F-14
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company's share of discretionary matching contributions was approximately $0.3
million in each of fiscal years 2002, 2001 and 2000.
11. Stockholders' Equity:
In September 1997, the board of directors approved the 1997 Key Employee
Stock Option Plan, as amended (the "Employee Plan"), and reserved an aggregate
of 875,000 shares of common stock for issuance thereunder. In November 1997,
the board of directors and stockholders approved the Company's 1997
Non-Employee Director Plan (the "Director Plan") and reserved an aggregate of
75,000 shares of common stock for issuance thereunder. At September 30, 2002
the shares of common stock available for grant under the Employee Plan and
Director Plan were 227,125 and 21,784, respectively.
Under the Employee Plan, the Company is authorized to issue nonqualified and
incentive stock options to purchase common stock and restricted stock awards of
common stock to key employees of the Company. Options have a term not to exceed
ten years, with the exception of incentive stock options granted to employees
owning ten percent or more of the outstanding shares of common stock, which
have a term not to exceed five years. The exercise price of any option may not
be less than the fair market value of the common stock on the date of grant. In
the case of incentive stock options granted to an employee owning ten percent
or more of the outstanding shares of common stock, the exercise price of such
option may not be less than 110% of the fair market value of the common stock
on the date of grant. Options vest over a four-year period commencing on the
date of grant in 25% annual increments. Under the Employee Plan, the Company
may issue shares of restricted stock to employees for no payment by the
employee or for a payment below the fair market value on the date of grant. The
restricted stock is subject to certain restrictions described in the Employee
Plan, with no restrictions continuing for more than ten years from the date of
the award.
The Company established the Director Plan pursuant to which options to
purchase shares of common stock are granted annually to non-employee directors
and pursuant to which one-half of the annual fees paid for the services of such
non-employee directors is paid in shares of common stock based on the fair
market value thereof at the date of grant. Options granted under the Director
Plan have a term of ten years. The exercise price of each option granted is the
fair market value of the common stock on the date of grant. Options vest over a
one-year period commencing on the date of grant.
Effective November 5, 1999, the board of directors approved the OYO Geospace
Corporation 1999 Broad-Based Option Plan (the "Broad-Based Plan") and reserved
an aggregate of 50,000 shares for issuance thereunder. Under the Broad-Based
Plan, the Company is authorized to issue to all employees (except executive
officers and employee directors) nonqualified stock options to purchase common
stock of the Company. These options have a term not to exceed ten years. The
exercise price of any broad-based option may not be less than the fair market
value of the common stock on the date of grant. These options vest over a
one-year period commencing on the date of grant. There were 12,100 shares
available for grant under this plan at September 30, 2002.
F-15
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the activity with respect to stock options is as follows:
Weighted
Average
Exercise
Shares Price
------- --------
Outstanding at September 30, 1999 391,150 $14.56
Granted....................... 152,600 14.45
Exercised..................... (14,700) 13.11
Forfeited..................... (29,000) 13.43
Expired....................... (10,350) 14.66
-------
Outstanding at September 30, 2000 489,700 14.64
Granted....................... 118,600 18.96
Exercised..................... (27,000) 14.49
Forfeited..................... (22,775) 17.96
Expired....................... -- --
-------
Outstanding at September 30, 2001 558,525 15.43
Granted....................... 34,000 12.73
Exercised..................... (7,425) 10.61
Forfeited..................... (28,125) 15.66
Expired....................... -- --
-------
Outstanding at September 30, 2002 556,975 15.32
=======
The following table summarizes information about stock options outstanding
and exercisable at September 30, 2002:
Options Outstanding Options Exercisable
--------------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Term Exercise Exercise
Range of Exercise Prices Shares (in years) Price Shares Price
------------------------ ------- ---------- -------- ------- --------
$ 6.81 to $13.49.... 82,175 7.1 $ 9.90 52,900 $ 9.60
$13.50 to $19.99.... 444,900 6.5 15.61 314,225 15.32
$20.00 to $27.63.... 29,900 6.8 25.83 27,650 26.12
------- -------
556,975 6.6 15.32 394,775 15.31
======= =======
The Company granted zero shares, 500 shares and zero shares of restricted
stock during fiscal years 2002, 2001 and 2000, respectively. As partial
compensation for services of its outside directors, the Company issued 1,890
shares, 992 shares and 1,654 shares of common stock to directors during fiscal
years 2002, 2001 and 2000, respectively.
The amortization of unearned compensation related to stock-based employee
compensation included in the results of operations was $0.1 million, $0.5
million and $0.5 million for each of fiscal years 2002, 2001 and 2000,
respectively, pursuant to the provisions of APB 25. Unearned compensation
included in stockholders' equity related to unlapsed restrictions on grants of
restricted stock was approximately $5,000 and $0.1 million as of September 30,
2002 and 2001, respectively.
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123") requires that stock-based awards be
measured and recognized at fair value. Adoption of the cost
F-16
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
recognition provisions of SFAS 123 with respect to stock-based awards to
employees is optional and the Company decided not to elect those provisions. As
a result, the Company continues to apply APB 25 and related interpretations in
accounting for the measurement and recognition of its employee stock-based
awards. However, the Company is required to provide pro forma disclosure as if
the cost recognition provisions under the fair value method of SFAS 123 had
been adopted. Under SFAS 123, compensation cost is measured at the grant date
based on the fair value of the awards and is recognized over the service
period, which is usually the vesting period. The fair value of options granted
during the fiscal years ended September 30, 2002, 2001 and 2000 were estimated
using the Black-Scholes option-pricing model with a dividend yield of zero for
each of the three years. This estimation assumed risk-free interest rates of
3.8%, 5.6% and 6.4%; and expected volatility of 54%, 43% and 38%; with an
expected option term of 5 years for 2002, 2001 and 2000, respectively.
The weighted average fair values per share of stock-based award grants were
as follows:
Year Ended September 30,
------------------------
2002 2001 2000
------ ------ ------
Options................ $ 6.44 $ 8.60 $ 6.34
Restricted stock....... -- 16.00 --
Director's common stock 13.73 25.25 15.13
The pro forma disclosures as if the Company had adopted the cost recognition
requirements of SFAS 123 are presented below (in thousands, except per share
amounts):
Year Ended September 30,
---------------------
2002 2001 2000
------ ------ -------
Net income (loss):
As reported........................... $1,119 $1,338 $(1,191)
Pro forma............................. 462 387 (1,883)
Basic earnings (loss) per common share:
As reported........................... $ 0.20 $ 0.24 $ (0.22)
Pro forma............................. 0.08 0.07 (0.35)
Diluted earnings (loss) per common share:
As reported........................... $ 0.20 $ 0.24 $ (0.22)
Pro forma............................. 0.08 0.07 (0.35)
The effects of applying SFAS 123 in the above pro forma disclosure are not
indicative of future amounts since the Company anticipates making awards in the
future under the Employee and Director Plans.
12. Income Taxes:
Components of income before income taxes, minority interest and
extraordinary gain were as follows (in thousands):
Year Ended September 30,
-----------------------
2002 2001 2000
------- ------ -------
United States $(1,642) $1,290 $(2,716)
Foreign...... 1,306 340 953
------- ------ -------
$ (336) $1,630 $(1,763)
======= ====== =======
F-17
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision (benefit) for income taxes consisted of the following (in
thousands):
Year Ended September 30,
-----------------------
2002 2001 2000
------- ----- -------
Current:
Federal. $ (169) $ 85 $(1,075)
Foreign. 769 123 391
State... (76) 3 106
------- ----- -------
524 211 (578)
------- ----- -------
Deferred:
Federal. (1,430) (166) (247)
Foreign. 49 247 228
State... -- -- 25
------- ----- -------
(1,381) 81 6
------- ----- -------
$ (857) $ 292 $ (572)
======= ===== =======
The differences between the effective tax rate reflected in the total
provision (benefit) for income taxes and the statutory federal tax rate of 34%
were as follows (in thousands):
Year Ended September 30,
------------------------
2002 2001 2000
------- ----- ------
Provision for U.S. federal income tax at statutory rate $ (114) $ 555 $ (598)
Effect of foreign income taxes......................... (10) 78 21
Tax benefit from export sales.......................... (271) (172) (59)
State income taxes, net of federal income tax benefit.. 2 2 94
Nondeductible expenses................................. 104 66 45
Resolution of prior years' tax matters................. (568) (264) (75)
Other, net............................................. -- 27 --
------- ----- ------
$ (857) $ 292 $ (572)
======= ===== ======
(255.1)% 17.9 % (32.5)%
======= ===== ======
Deferred income taxes under the liability method reflect the net tax effects
of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's net deferred income tax asset were as
follows (in thousands):
As of September 30,
------------------
2002 2001
------- -------
Deferred income tax assets:
Allowance for doubtful accounts........................ $ 119 $ 136
Inventory.............................................. 540 683
AMT carryforward....................................... 175 87
NOL carryforward and tax credits....................... 1,759 560
Accrued product warranty............................... 286 133
Accrued compensated absences........................... 191 201
Net foreign operating loss carryforwards and deferrals. 203 252
------- -------
3,273 2,052
Deferred income tax liabilities:
Property, plant and equipment and other................ (1,207) (1,367)
------- -------
Net deferred income tax asset............................. $ 2,066 $ 685
======= =======
F-18
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes are reported as follows in the accompanying
consolidated balance sheet (in thousands):
As of
September 30,
-------------
2002 2001
------ ------
Current deferred income tax asset... $1,135 $1,152
Noncurrent deferred income tax asset 931 252
Noncurrent deferred tax liability... -- (719)
------ ------
$2,066 $ 685
====== ======
Under the liability method, a valuation allowance is provided when it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. Based on the Company's historical taxable income record, and
the expectation that the deductible temporary differences will reverse during
periods in which the Company generates net taxable income or during periods in
which losses can be carried back to offset prior year taxes, management
believes that the Company will realize the benefit of the net deferred income
tax asset after consideration of the valuation allowance.
The financial reporting bases of investments in foreign subsidiaries exceed
their tax basis. A deferred tax liability is not recorded for this temporary
difference because the investment is essentially permanent. A reversal of the
Company's plans to permanently invest in the operations would cause the excess
to become taxable. At September 30, 2002 and 2001 the temporary difference
related to undistributed earnings for which no deferred taxes have been
provided was approximately $2.6 million and $2.4 million, respectively.
From time to time the Company is the subject of audits by various tax
authorities that can result in claims and assessments and additional tax
payments, penalties and interest. At present, there is no pending audit of the
Company's past tax returns except for in one foreign tax jurisdiction. While no
claims or assessments have yet been made against the operations in that
location as a result of the audit, the Company has recorded tax liabilities and
offsetting deferred tax assets in its financial statements in recognition of
its estimated exposure to such audit.
13. Earnings Per Common Share:
Basic earnings per share are computed by dividing net earnings available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is determined on the assumption
that outstanding dilutive stock options have been exercised and the aggregate
proceeds as defined were used to reacquire common stock using the average price
of such common stock for the period.
F-19
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the calculation of net earnings and weighted
average common shares and common equivalent shares outstanding for purposes of
basic and diluted earnings per share (in thousands, except share and per share
amounts):
Year Ended September 30,
--------------------------------
2002 2001 2000
---------- ---------- ----------
Income (loss) before extraordinary item..................... $ 433 $ 1,338 $ (1,191)
Extraordinary gain, net of tax of $85....................... 686 -- --
---------- ---------- ----------
Net earnings (loss) available to common stockholders........ $ 1,119 $ 1,338 $ (1,191)
========== ========== ==========
Weighted average common shares and common share equivalents:
Common shares............................................ 5,535,979 5,489,251 5,431,901
Common share equivalents................................. 11,795 109,346 --
---------- ---------- ----------
Total weighted average common shares and common share
equivalents............................................... 5,547,774 5,598,597 5,431,901
========== ========== ==========
Basic earnings (loss) per share:
Income (loss) before extraordinary gain.................. $ 0.08 $ 0.24 $ (0.22)
Extraordinary gain....................................... 0.12 -- --
---------- ---------- ----------
Net income (loss)........................................... $ 0.20 $ 0.24 $ (0.22)
========== ========== ==========
Diluted earnings (loss) per share:
Income (loss) before extraordinary gain.................. $ 0.08 $ 0.24 $ (0.22)
Extraordinary gain....................................... 0.12 -- --
---------- ---------- ----------
Net income (loss)........................................... $ 0.20 $ 0.24 $ (0.22)
========== ========== ==========
Options on 474,800, 33,700 and 100,300 shares of common stock in fiscal
years 2002, 2001 and 2000 respectively, were not included in the calculation of
weighted average shares for diluted earnings per share because their effects
were antidilutive.
14. Related Party Transactions:
Sales to OYO Japan and other affiliated companies were approximately $0.1
million, $0.2 million and $0.3 million during fiscal years 2002, 2001 and 2000,
respectively. Purchases of inventory and equipment from OYO Japan were
approximately $0.6 million, $1.7 million and $4.2 million during fiscal years
2002, 2001 and 2000, respectively.
F-20
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Commitments and Contingencies:
Operating Leases
The Company leases certain office space and equipment under noncancelable
operating leases. The approximate future minimum rental commitments under
noncancelable operating leases are as follows (in thousands):
Year Ending
September 30,
-------------
2003..... $489
2004..... 95
----
$584
====
Rent expense was approximately $0.7 million, $0.6 million, and $0.5 million
for fiscal years 2002, 2001 and 2000, respectively.
Legal Proceedings
From time to time the Company is a party to what it believes is routine
litigation and proceedings that may be considered as part of the ordinary
course of its business. The Company is not aware of any current or pending
litigation or proceedings that could have a material adverse effect on the
Company's results of operations, cash flows or financial condition, although
the Company continues to monitor developments in the bankruptcy proceeding by
its Primary Film Supplier and the Primary Film Supplier's existing claim
against the Company described in Note 18.
16. Supplemental Cash Flow Information:
Supplemental cash flow information is as follows (in thousands):
Year Ended September 30,
------------------------
2002 2001 2000
----- ------- ----
Cash paid (refund received) for:
Interest................................................... $ 585 $ 378 $305
Income taxes............................................... (153) (1,148) 360
Noncash investing and financing activities:
Common stock issued pursuant to Employee and Director Plan. 25 25 25
17. Segment and Geographic Information:
In fiscal year 2001, the Company expanded its commercial graphics operations
through the acquisition of substantially all of the assets of EcoPRO and
through the reorganization of its United Kingdom subsidiary to focus on the
growing commercial graphics marketplace in Europe. At that time, the Company
began reporting information for two business segments: Seismic and Commercial
Graphics. The Commercial Graphics business segment primarily sells products for
the commercial graphics industry; however, it also has some minor sales of
seismic products.
The Company's 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
F-21
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
small data acquisition systems targeted at niche markets. Commercial graphics
products include thermal imaging equipment and dry thermal film. The following
tables summarize the Company's segment information:
Year Ended September 30,
-------------------------
2002 2001 2000
------- ------- -------
Net sales:
Seismic.................... $51,800 $50,433 $39,518
Commercial Graphics........ 13,490 13,557 14,313
Eliminations............... (241) (372) (357)
------- ------- -------
Total...................... 65,049 63,618 53,474
------- ------- -------
Income (loss) from operations:
Seismic.................... 4,311 5,381 543
Commercial Graphics........ (399) 27 770
Corporate.................. (3,336) (3,552) (3,117)
Eliminations............... (142) -- --
------- ------- -------
Total...................... 434 1,856 (1,804)
------- ------- -------
Total assets:
Seismic.................... 51,308 56,968
Commercial Graphics........ 12,610 11,059
Corporate.................. 4,208 4,973
------- -------
Total...................... $68,126 $73,000
======= =======
Corporate consists primarily of corporate overhead expenses and unallocated
corporate assets. Unallocated corporate assets consist of the Company's
corporate office building and equipment.
The Company has operations in the United States, Canada, United Kingdom and
Russia. Summaries of net sales by geographic area for fiscal years 2002, 2001
and 2000 are as follows (in thousands):
Year Ended September 30,
-----------------------
2002 2001 2000
------- ------- -------
Asia (excluding Japan and Middle East) $ 7,386 $10,005 $ 1,593
Canada................................ 9,058 11,697 15,030
Europe................................ 16,094 11,768 12,341
Japan................................. 436 948 722
Middle East........................... 918 605 5,971
United States......................... 30,137 27,507 16,739
Other................................. 1,020 1,088 1,078
------- ------- -------
$65,049 $63,618 $53,474
======= ======= =======
Net sales are attributed to countries based on the ultimate destination of
the product sold, if known. If the ultimate destination is not known, sales are
attributed to countries based on the geographic location of the initial
shipment.
F-22
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Sales information for the Company is as follows (in thousands):
Year Ended September 30,
--------------------------
2002 2001 2000
-------- ------- -------
United States. $ 61,238 $62,348 $51,740
Canada........ 4,492 6,715 7,512
United Kingdom 6,526 2,583 2,254
Russia........ 4,061 -- --
Eliminations.. (11,268) (8,028) (8,032)
-------- ------- -------
$ 65,049 $63,618 $53,474
======== ======= =======
Long-lived assets were as follows (in thousands):
As of September 30,
-------------------
2002 2001
------- -------
United States. $24,871 $25,922
Canada........ 2,772 2,950
United Kingdom 509 519
Russia........ 1,654 --
------- -------
$29,806 $29,391
======= =======
The Company had one customer comprising 24.5% of annual sales for the fiscal
year 2002 and no individual customers comprising more than 10% of annual sales
for fiscal year 2001. The Company had two customers with individual sales of
15% and 13%, respectively, of total annual sales for fiscal year 2000.
During the Company's fiscal year ended September 30, 2002, it delivered a
reservoir characterization and monitoring system to a major oil company. In
accordance with the terms of the contract, the Company recognized $15.8 million
of revenues in its fiscal year ended September 30, 2002. The contract provides
for additional revenue of $3.2 million based upon the system's performance, and
the Company expects to recognize such revenue in the first fiscal quarter of
fiscal year 2004. All costs related to this sale, including estimated costs for
warranty and delivery, have been recorded in the fiscal year ended September
30, 2002.
18. Bankruptcy Filing of Primary Film Supplier:
On July 3, 2002, the Company's Primary Film Supplier filed a Chapter 11
reorganization petition in Federal Bankruptcy Court for the Western District of
New York. At the date of such bankruptcy filing, the Company had $3.4 million
of long-term assets carried on its balance sheet (including the $2.3 million
investment in certain intellectual property acquired from such Primary Film
Supplier described in Note 7), as a result of the prior transactions with the
Primary Film Supplier. The Primary Film Supplier advised the Company that, in
connection with its bankruptcy filing, it was seeking a buyer for its business
that would assume its relationship and contracts with the Company. After
several months, we are not optimistic that a buyer can be found to operate the
Primary Film Supplier's business or, if a buyer is found, that it would 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.
Over the past few months, the Primary Film Supplier has failed to meet all
of the Company's purchase orders and has provided the Company with only a
limited quantity of film. In November of 2002, the Primary
F-23
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Film Supplier stated that it had closed down its operations. Subsequently, it
stated that it was resuming a limited level of operations while continuing to
look for a buyer of its business. As a result, the Company is currently
purchasing a large quantity of dry thermal film from its secondary supplier
located in Europe. The Company knows of no other supplier of dry thermal film
for its thermal imaging equipment. While alternate suppliers might be able to
provide dry thermal film, such film has not historically performed as well in
the Company's thermal imaging equipment.
The Company also is in the process of researching and developing a system
that would enable it to use the technology it purchased from the Primary Film
Supplier to manufacture dry thermal film internally if it should elect to do
so. The net book value of the Company's intellectual property related to dry
film technology was $2.1 million at September 30, 2002.
On December 10, 2002, the Company received a notice of claim from the
Primary Film Supplier for alleged preferential payments made to the Company in
the period before the filing of the bankruptcy proceeding in the approximate
amount of $260,000. The Company has not yet fully assessed such recent claim
and does not have adequate information and necessary legal advice to do so at
this time. The Company intends to vigorously defend against such claim under
the overall circumstances of its relationship with the Primary Film Supplier.
At present the Company does not know whether it will make any claims against
the Primary Film Supplier and it is unable to predict whether any additional
claims will be made against it in connection with the Primary Film Supplier's
bankruptcy proceeding as to any aspect of its relationship with such Primary
Film Supplier. The Company is unable at this time to predict the outcome and
effects of this still developing situation. The Company has, nevertheless,
recently made provision for existing claims that it believes is adequate at
this time, although it is unable to make such predictions with any certainty.
F-24
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
19. Selected Quarterly Information (Unaudited):
The following table represents summarized data for each of the quarters in
fiscal years 2002 and 2001 (in thousands, except per share amounts).
2002
------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Sales.................................. $13,648 $24,668(a) $13,833 $12,900
Gross profit........................... 2,911 6,764 4,855 4,035
Income (loss) from operations.......... (1,161) 1,261 255 79
Other income (expense), net............ (145) (132) (397) (96)
Income (loss) before extraordinary gain (604) 1,156 (80) (39)
Extraordinary gain, net of tax of $85.. -- -- -- 686
Net income (loss)...................... (604) 1,156 (80) 647
Basic earnings (loss) per share:
Income (loss) from operations.......... $ (0.11) $ 0.21 $ (0.01) $ (0.01)
Extraordinary gain..................... -- -- -- 0.13
Basic earnings (loss) per share........ $ (0.11) $ 0.21 $ (0.01) $ 0.12
======= ======= ======= =======
Diluted earnings (loss) per share:
Income (loss) from operations.......... $ (0.11) $ 0.21 $ (0.01) $ (0.01)
Extraordinary gain..................... -- -- -- 0.13
Diluted earnings (loss) per share...... $ (0.11) $ 0.21 $ (0.01) $ 0.12
======= ======= ======= =======
2001
------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Sales.................................. $15,913 $15,810 $16,928 $14,967
Gross profit........................... 4,669 5,606 5,527 4,859
Income (loss) from operations.......... (69) 701 816 408
Other income (expense), net............ (85) (63) (56) (22)
Net income (loss)...................... (118) 628 557 271
Basic earnings (loss) per share........ $ (0.02) $ 0.11 $ 0.10 $ 0.05
======= ======= ======= =======
Diluted earnings (loss) per share...... $ (0.02) $ 0.11 $ 0.10 $ 0.05
======= ======= ======= =======
- --------
(a) Includes revenues of $15.8 million recognized related to the sale of a
reservoir characterization system to a significant customer. The Company
expects to recognize up to $3.2 million of additional revenue related to
this system during the first quarter of fiscal year 2004 depending on its
future performance.
F-25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of OYO Geospace Corporation:
Our audits of the consolidated financial statements referred to in our
report dated December 18, 2002 appearing in this Annual Report on Form 10-K
also included an audit of the financial statement schedule listed in Item 15(a)
of this Form 10-K. In our opinion, the financial statement schedule presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
Houston, Texas
December 18, 2002
F-26
SCHEDULE II
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Charged
Balance at (Credited) Charged Balance at
Beginning to Costs to Other End of
of Period and Expenses Assets Deductions Period
---------- ------------ -------- ---------- ----------
Year ended September 30, 2002
Allowance for doubtful accounts on accounts and
notes receivable............................. $470 $146 $-- $(142) $474
Year ended September 30, 2001
Allowance for doubtful accounts on accounts and
notes receivable............................. 353 214 -- (97) 470
Year ended September 30, 2000
Allowance for doubtful accounts on accounts and
notes receivable............................. 580 190 -- (417) 353
Charged
Balance at (Credited) Charged Balance at
Beginning to Costs to Other End of
of Period and Expenses Assets Deductions Period
---------- ------------ -------- ---------- ----------
Year ended September 30, 2002
Inventory obsolescence reserve $1,089 $ 970 $-- $(1,128) $ 931
Year ended September 30, 2001
Inventory obsolescence reserve 1,742 1,073 -- (1,726) 1,089
Year ended September 30, 2000
Inventory obsolescence reserve 1,816 990 -- (1,064) 1,742
F-27