Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended December 31, 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 Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
12750 South Kirkwood, Suite 200
Stafford, Texas 77477
(Address of Principal Executive Offices)
(281) 494-8282
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes ____ No X
---
There were 5,547,795 shares of the Registrant's Common Stock outstanding as of
the close of business on February 11, 2003.
================================================================================
Table of Contents
PART I. FINANCIAL INFORMATION Page
- ------------------------------- Number
------
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risks 24
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
- --------------------------
Item 6. Exhibits and Reports on Form 8-K 26
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS December 31, 2002 September 30, 2002
----------------- ------------------
(unaudited)
Current assets:
Cash and cash equivalents .................................. $ 2,556 $ 1,538
Trade accounts and notes receivable, net ................... 10,473 12,585
Inventories ................................................ 24,975 21,801
Deferred income tax ........................................ 1,137 1,135
Prepaid expenses and other ................................. 1,674 1,261
-------- --------
Total current assets .................................. 40,815 38,320
Rental equipment, net .......................................... 1,926 2,044
Property, plant and equipment, net ............................. 19,904 20,243
Goodwill and other intangible assets, net ...................... 6,225 6,399
Deferred income tax ............................................ 474 931
Other assets ................................................... 176 189
-------- --------
Total assets .......................................... $ 69,520 $ 68,126
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt ..... $ 232 $ 714
Accounts payable ........................................... 3,146 4,047
Accrued expenses and other ................................. 4,221 4,162
Deferred revenue ........................................... 89 146
Income tax payable ......................................... 125 1,121
-------- --------
Total current liabilities ............................. 7,813 10,190
Long-term debt ................................................. 8,557 3,544
-------- --------
Total liabilities ..................................... 16,370 13,734
-------- --------
Minority interest in consolidated subsidiary ................... 283 263
Stockholders' equity:
Preferred stock ............................................ - -
Common stock ............................................... 55 55
Additional paid-in capital ................................. 30,576 30,566
Retained earnings .......................................... 23,014 24,332
Accumulated other comprehensive loss ....................... (772) (819)
Unearned compensation-restricted stock awards .............. (6) (5)
-------- --------
Total stockholders' equity ............................ 52,867 54,129
-------- --------
Total liabilities and stockholders' equity ............ $ 69,520 $ 68,126
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
3
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
Three Months Three Months
Ended Ended
December 31, 2002 December 31, 2001
----------------- -----------------
Sales ................................................. $ 10,061 $ 12,900
Cost of sales ......................................... 7,752 8,865
----------- -----------
Gross profit .......................................... 2,309 4,035
Operating expenses:
Selling, general and administrative expenses ...... 2,836 2,876
Research and development expenses ................. 1,379 1,080
----------- -----------
Total operating expenses ..................... 4,215 3,956
----------- -----------
Income (loss) from operations ......................... (1,906) 79
Other income (expense):
Interest expense .................................. (91) (151)
Interest income ................................... 41 50
Other, net ........................................ 46 5
----------- -----------
Total other expense, net ..................... (4) (96)
----------- -----------
Loss before income taxes, minority interest
and extraordinary gain ........................... (1,910) (17)
Income tax benefit .................................... (611) (7)
----------- -----------
Loss before minority interest
and extraordinary gain ........................... (1,299) (10)
Minority interest ..................................... (19) (29)
----------- -----------
Loss before extraordinary gain ........................ (1,318) (39)
Extraordinary gain, net of tax of $85 ................. -- 686
----------- -----------
Net income (loss) ..................................... $ (1,318) $ 647
=========== ===========
Basic earnings per share:
Loss before extraordinary item .................... $ (0.24) $ (0.01)
Extraordinary gain ................................ -- 0.13
----------- -----------
Net income (loss) ................................. $ (0.24) $ 0.12
=========== ===========
Diluted earnings per share:
Loss before extraordinary item .................... $ (0.24) $ (0.01)
Extraordinary gain ................................ -- 0.13
----------- -----------
Net income (loss) ................................. $ (0.24) $ 0.12
=========== ===========
Weighted average shares outstanding - Basic ........... 5,546,572 5,515,642
Weighted average shares outstanding - Diluted ......... 5,546,572 5,535,978
The accompanying notes are an integral part of the consolidated financial
statements.
4
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Three Months
Ended Ended
December 31, 2002 December 31, 2001
----------------- ------------------
Cash flows from operating activities:
Net income (loss) ................................................
Adjustments to reconcile net income (loss) to net cash ........... $(1,318) $ 647
used in operating activities:
Deferred income tax expense (benefit) ......................... 456 (27)
Depreciation and amortization ................................. 973 1,107
Amortization of restricted stock awards ....................... -- 90
Extraordinary gain ............................................ -- (686)
Minority interest ............................................. 20 29
(Gain) loss on disposal of property, plant and equipment....... 29 (8)
Bad debt expense .............................................. 36 221
Effects of changes in operating assets and liabilities:
Trade accounts and notes receivable ........................... 2,075 (1,667)
Inventories ................................................... (3,174) (1,847)
Prepaid expenses and other assets ............................. (411) 126
Accounts payable .............................................. (903) (1,681)
Accrued expenses and other .................................... 166 (1,038)
Income tax payable ............................................ (996) (232)
------- -------
Net cash used in operating activities ....................... (3,047) (4,966)
Cash flows from investing activities: ------- -------
Capital expenditures ............................................. (524) (1,167)
Investment in business acquisition, net of cash acquired ......... -- 913
Proceeds from sale of equipment ................................. -- 8
------- -------
Net cash used in investing activities ...................... (524) (246)
------- -------
Cash flows from financing activities:
Increase in notes payable ....................................... 9,350 9,068
Principal payments on notes payable ............................. (4,817) (3,669)
Proceeds from exercise of stock options ......................... 9 4
------- -------
Net cash provided by financing activities .................. 4,542 5,403
------- -------
Effect of exchange rate changes on cash ............................. 47 (66)
------- -------
Increase in cash and cash equivalents ............................... 1,018 125
Cash and cash equivalents, beginning of period ...................... 1,538 882
------- -------
Cash and cash equivalents, end of period ............................ $ 2,556 $ 1,007
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
5
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Basis of Presentation
The consolidated balance sheet of OYO Geospace Corporation and its
subsidiaries (the "Company") at September 30, 2002 has been derived from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at December 31, 2002 and the consolidated statements
of operations for the three months ended December 31, 2002 and 2001, and the
consolidated statements of cash flows for the three months ended December 31,
2002 and 2001, have been prepared by the Company, without audit. In the opinion
of management, all adjustments, consisting of normal recurring adjustments,
necessary to present fairly the consolidated financial position, results of
operations and cash flows have been made. The results of operations for the
three months ended December 31, 2002 are not necessarily indicative of the
operating results for a full year or of future operations.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with accounting principles generally accepted
in the United States of America have been omitted. The accompanying consolidated
financial statements should be read in conjunction with the financial statements
and notes thereto contained in the Company's Annual Report on Form 10-K for the
year ended September 30, 2002.
Revenue is primarily derived from the sale, and short-term rental under
operating leases, 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.
The Company expenses research and development costs as incurred.
The Company records a write-down of its inventory when the cost basis of any
manufactured product (including any estimated future costs to complete the
manufacturing process) exceeds its net realizable value.
Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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
so as to provide recognition of such costs when a liability 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 results of operations.
In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation and Disclosure - an amendment of FASB Statement No. 123". This
statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative transition methods for a voluntary change
to the fair value of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of FASB Statement
No. 123 to require more prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. See Note 8
for additional disclosures required by SFAS No. 148.
6
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
2. Earnings Per Common Share
The following table summarizes the calculation of net earnings and weighted
average common shares and common equivalent shares outstanding for purposes of
the computation of earnings per share (in thousands, except per share data):
Three Months Ended
-----------------------------------
December 31, 2002 December 31, 2001
----------------- -----------------
Loss before extraordinary gain ................ $ (1,318) $ (39)
Extraordinary gain ............................ -- 686
------------- -----------
Net earnings available to common
stockholders ................................ $ (1,318) $ 647
============= ===========
Weighted average common shares outstanding .... 5,546,572 5,515,642
Weighted average common share equivalents
outstanding ................................. -- 20,336
------------- -----------
Weighted average common shares and common
share equivalents outstanding .............. 5,546,572 5,535,978
============= ===========
Basic Earnings Per Share:
Loss before extraordinary gain ................ $ (0.24) $ (0.01)
Extraordinary gain ............................ -- 13
------------- -----------
Net income (loss) ............................. $ (0.24) $ 0.12
============= ===========
Diluted Earnings Per Share:
Loss before extraordinary gain ................ $ (0.24) $ (0.01)
Extraordinary gain ............................ -- 0.13
------------- -----------
Net income (loss) ............................. $ (0.24) $ 0.12
============= ===========
No common share equivalents have been included in the diluted earnings per share
calculations because of the potential antidilutive effect as a result of the
Company's net loss for the quarter ended December 31, 2002.
3. Comprehensive Income
Comprehensive income includes all changes in a company's equity, except
those resulting from investments by and distributions to owners. The following
table summarizes the components of comprehensive income (in thousands):
Three Months Ended
-----------------------------------
December 31, 2002 December 31, 2001
----------------- -----------------
Net income (loss) ............................. $ (1,318) $ 647
Foreign currency translation adjustments ...... 47 (66)
-------------- -----------
Total comprehensive income (loss) ............. $ (1,271) $ 581
============== ===========
7
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
4. Trade Accounts and Notes Receivable
Trade accounts and notes receivable consisted of the following (in
thousands):
December 31, 2002 September 30, 2002
----------------- ------------------
Trade accounts receivable ............................. $ 10,498 $ 12,160
Trade notes receivable ................................ 463 899
Allowance for doubtful accounts and notes ............. (488) (474)
--------- ----------
$ 10,473 $ 12,585
========= ==========
5. Inventories
Inventories consisted of the following (in thousands):
December 31, 2002 September 30, 2002
----------------- ------------------
Finished goods ........................................ $ 6,396 $ 4,527
Work-in-process ....................................... 5,599 3,619
Raw materials ......................................... 13,931 14,586
Obsolescence reserve .................................. (951) (931)
--------- ----------
$ 24,975 $ 21,801
========= ==========
The Company's reserve for slow moving and obsolete inventories is analyzed
and adjusted periodically to reflect the Company's best estimate of the net
realizable value of such inventories.
6. Segment and Geographic Information
The Company evaluates financial performance based on two business segments:
Seismic and Commercial Graphics. The seismic product lines currently consist of
geophones and hydrophones, including multi-component geophones and hydrophones,
seismic leader wire, geophone string connectors, seismic telemetry cable, high
definition reservoir characterization products and services, marine seismic
cable retrieval devices and small data acquisition systems targeted at niche
markets. Commercial graphics products include thermal imaging equipment and dry
thermal film.
8
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The following tables summarize the Company's segment information:
Three Months Ended Three Months Ended
December 31, 2002 December 31, 2001
----------------- -----------------
Net sales:
Seismic ......................................................... $ 7,063 $ 9,963
Commercial Graphics ............................................. 3,016 3,001
Eliminations .................................................... (18) (64)
-------- --------
Total ........................................................... $ 10,061 $ 12,900
======== ========
Income from operations:
Seismic ......................................................... $ (1,019) $ 656
Commercial Graphics ............................................. (90) 352
Corporate ....................................................... (797) (929)
-------- --------
Total ........................................................... $ (1,906) $ 79
======== ========
December 31, 2002 september 30, 2002
-------- --------
Total assets:
Seismic ........................................................ $ 52,691 $ 51,308
Commercial Graphics ............................................ 13,290 12,610
Corporate ...................................................... 3,539 4,208
-------- --------
$ 69,520 $ 68,126
======== ========
7. Line of Credit
The Company has entered into a credit agreement pursuant to which it can
borrow up to $10.0 million secured by its accounts receivable and inventory (the
"Credit Agreement"). The Credit Agreement, as amended, expires in January 2004.
Borrowings under the Credit Agreement are subject to borrowing base restrictions
based on (i) consolidated net income plus consolidated interest expense, income
taxes, depreciation and amortization and (ii) levels of eligible accounts
receivable and inventories. The Credit Agreement limits the incurrence of
additional indebtedness, requires the maintenance of certain financial amounts
and contains other covenants customary in agreements of this type. As of
December 31, 2002 there were borrowings of $5.1 million outstanding under the
Credit Agreement, and additional borrowings available under the Credit Agreement
of $2.0 million. Since September 30, 2002, the Company has increased its
borrowings under the Credit Facility by $4.5 million. Such additional borrowings
are primarily for working capital needs, including the production of inventories
for shipment in future periods. The borrowing interest rate at December 31, 2002
was 5.0%.
The Company recently amended its Credit Agreement to expire in January 2004.
In connection with this amendment, the Company's borrowing interest rate has
become, at the Company's option, the bank's prime rate or a LIBOR based rate. In
addition, the borrowing base restrictions were modified to allow the Company to
incur additional borrowings up to a maximum of $10.0 million.
9
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
8. Accounting for Stock-Based Compensation
At December 31, 2002, the Company had two stock-based employee compensation
plans. The Company accounts for the plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation.
Three Months Ended
---------------------------------------
December 31, 2002 December 31, 2001
----------------- -----------------
Net income (loss), as reported ....................... $ (1,318) $ 647
Deduct: Total stock-based employee compensation
expense determined under fair value method for
all awards, net of related tax effects ............... (142) (186)
----------- -------------
Pro forma net income (loss) .......................... $ (1,460) $ 461
========== ============
Earnings per share:
Basic-as reported ................................ $ (0.24) $ 0.12
Basic-pro forma .................................. $ (0.26) $ 0.08
Diluted-as reported .............................. $ (0.24) $ 0.12
Diluted-pro forma ................................ $ (0.26) $ 0.08
For a further discussion of the Company's stock-based employee compensation
plans, see Note 11 to the audited Consolidated Financial Statements of the
Company's Annual Report on Form 10-K for the year ended September 30, 2002.
9. Adoption of Accounting Pronouncements
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 adopted the
provisions of SFAS 142 effective October 1, 2002. At December 31, 2002, the
Company had goodwill, net of accumulated amortization, of $1.8 million. The
adoption of SFAS No. 142 did not have a material effect on the Company's first
quarter financial position or 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 adopted this standard effective
October 1,
10
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
2002. The adoption of SFAS No. 143 did not have a material effect on the
Company's financial position or 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 adopted this standard effective October 1, 2002. The
adoption of SFAS No. 144 did not have a material effect on the Company's
financial position or 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 clarified 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 adopted this standard effective October 1, 2002. The adoption of SFAS
No. 145 did not have a material effect on the Company's financial position or
results of operations.
10. Film Supplier Developments
In April 2002, the Company purchased certain intellectual property rights
from its then primary supplier of film (the "Former Primary Film Supplier") for
$2.3 million. Such purchase gave the Company exclusive ownership of all
technology used by the Former Primary Film Supplier to manufacture dry thermal
film used in the thermal imaging equipment the Company manufactures. Such
purchase included technology then existing and any dry thermal film technology
thereafter developed by the Former Primary Film Supplier for use in the
Company's equipment. The Company also entered into an amended supply agreement
pursuant to which the Former Primary Film Supplier agreed to provide the Company
with the dry thermal film. In connection with the purchase, the Company agreed
to license the technology to the Former Primary Film Supplier on a perpetual
basis so long as it could meet predefined quality and delivery requirements. If
the Former Primary Film Supplier could not meet such requirements, the Company
has the right to use the technology itself or to license the technology to any
third party to manufacture dry thermal film.
On July 3, 2002, the Former 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 as a result of the Company's prior
transactions with the Former Primary Film Supplier (including the $2.3 million
investment in intellectual property acquired from the Former Primary Film
Supplier described above). Around that time, the Former 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, and it was the Company's intention to cooperate in
such efforts to the extent its on-going interest could be served thereby. The
Company is no longer optimistic that a buyer can be found to operate the Former
Primary Film Supplier's business.
Over the past several months, the Former Primary Film Supplier has failed to
meet all of the Company's purchase orders and has ceased to provide the Company
with dry thermal film. As a result, the Company is currently
11
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
purchasing a large quantity of dry thermal film from its alternate supplier of
dry thermal film (the "Other Film Supplier"). The Company is also in the final
stages of using the technology it purchased from the Former Primary Film
Supplier to manufacture dry thermal film internally.
As a result of the bankruptcy filing by the Former Primary Film Supplier,
the Company recorded a charge in its 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 agreement with the Former Primary Film
Supplier. The Company does not believe there has been any impairment in the
value of the intellectual property it acquired from the Former Primary Film
Supplier because of its ability to utilize the intellectual property to have
thermal film manufactured internally or possibly elsewhere.
No claims have been made against the Company or by the Company at present in
connection with the Former Primary Film Supplier's bankruptcy, except that on
December 10, 2002, the Company received a notice of claim for alleged
preferential payments made by the Former Primary Film Supplier to the Company in
the period before filing of the bankruptcy proceeding in the approximate amount
of $260,000. The Company has not yet fully assessed that claim or its defenses
and counterclaims to that claim. However, the Company intends to vigorously
defend against such claim under the overall circumstances of its relationship
with the Former Primary Film Supplier. At present, the Company does not know
whether it will make any claims against the Former Primary Film Supplier and it
is unable to predict whether any additional claims will be made against the
Company in connection with the Former Primary Film Supplier's bankruptcy
proceeding as to any aspect of its relationship with the Former 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, made
provision for existing claims that it believes are adequate at this time,
although it is unable to make such predictions with any certainty.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following analysis of the financial condition and results of operations
of OYO Geospace Corporation should be read in conjunction with the Consolidated
Financial Statements and Notes related thereto which are included elsewhere in
this Form 10-Q.
Industry Overview
We design and manufacture instruments and equipment used in the acquisition
and processing of seismic data. We have been in the seismic instrument and
equipment business since 1980, marketing our products primarily to the oil and
gas industry worldwide. We also design and manufacture thermal imaging equipment
and distribute dry thermal film products to the commercial graphics industry. We
have been serving the commercial graphics industry since 1995.
Seismic Industry
Geoscientists use seismic data to map potential or existing oil and gas
bearing formations and the geologic structures that surround them. Seismic data
is used primarily in connection with the exploration, development and production
of oil and gas.
Seismic data acquisition is conducted on land by combining a seismic energy
source and a data recording system. The energy source imparts seismic waves into
the earth, reflections of which are received and measured by geophones and
hydrophones. Electrical signals generated by the geophones and hydrophones are
simultaneously transmitted through leader wire, geophone and hydrophone string
connectors and telemetric cable to data collection units, which store
information for processing and analysis. Seismic thermal imaging 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 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 any such projects on our
business, financial condition and results of operations.
13
Commercial Graphics Industry
We developed our commercial graphics business segment over time as we
leveraged our thermal imaging equipment 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 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.
In April 2002, we purchased certain intellectual property rights from our
then primary supplier of film (the "Former Primary Film Supplier") for $2.3
million. Such purchase gave us exclusive ownership of all technology used by the
Former 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 Former
Primary Film Supplier for use in our equipment. We also entered into an amended
supply agreement pursuant to which the Former 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 Former Primary Film Supplier on a perpetual
basis so long as it could meet predefined quality and delivery requirements. If
the Former Primary Film Supplier could not meet such requirements, the agreement
provides us with 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 Former 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 Former Primary Film Supplier (including the $2.3 million
investment in intellectual property acquired from the Former Primary Film
Supplier described above). The Former 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. We are no longer optimistic that a buyer can be found to
operate the Former Primary Film Supplier's business.
Over the past several months, the Former Primary Film Supplier has failed
to meet all of our purchase orders and has ceased to provide us with film. As a
result, we are currently purchasing a large quantity of dry thermal film from
the Other Film Supplier. We are also in the final stages of using the technology
we purchased from the Former Primary Film Supplier to manufacture dry thermal
film internally.
As a result of the bankruptcy filing by the Former 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 agreement with the Former Primary Film Supplier. We do
not believe there has been any impairment in the value of the intellectual
property we acquired from the Former 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 Former Primary Film Supplier's bankruptcy, except that on December 10, 2002,
we received a notice of claim for alleged preferential payments made by the
Former 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
that claim or the Company's defenses and counterclaims to that claim. However,
we intend to vigorously defend against such claim under the overall
circumstances of our relationship with the Former Primary Film Supplier. At
present we do not know whether we will make any claims against the Former
Primary Film Supplier and we are unable to predict whether any additional claims
will be made against us in connection with the Former Primary Film Supplier's
bankruptcy proceeding as to any aspect of our relationship with such Former
Primary Film Supplier. We are unable at this time to predict the outcome and
effects of this still developing situation. We have, nevertheless, made
provision for existing claims that we believe are adequate at this time,
although we are unable to make such predictions with any certainty.
14
Results of Operations
We report and evaluate financial information for two segments: Seismic and
Commercial Graphics. Summary financial data by business segment follows:
Three Months Ended Three Months Ended
December 31, 2002 December 31, 2001
----------------- -----------------
Seismic
Revenue ........................... $ 7,063 $ 9,963
Operating income (loss) ........... (1,019) 656
Commercial Graphics
Revenue ........................... 3,016 3,001
Operating income (loss) ........... (90) 352
Corporate
Revenue ........................... -- --
Operating loss .................... (797) (929)
Eliminations
Revenue ........................... (18) (64)
Operating income .................. -- --
Consolidated Totals
Revenue ........................... 10,061 12,900
Operating income (loss) ........... (1,906) 79
Overview
First Quarter of Fiscal Year 2003 Compared to First Quarter of Fiscal Year 2002.
Consolidated sales for the three months ended December 31, 2002 decreased
$2.8 million, or 22.0%, from the corresponding period of the prior fiscal year.
The decrease in sales was due to a significant decline in the demand for our
land-based seismic products resulting from a decline in worldwide seismic
activity.
Consolidated gross profits for the three months ended December 31, 2002
decreased by $1.7 million, or 42.8%, from the corresponding period of the prior
year. The lower gross profits resulted from (i) lower sales levels of our
land-based seismic products, (ii) competitive pricing pressures resulting from
manufacturing over-capacity in the seismic industry, and (iii) under-absorption
of fixed manufacturing costs due to depressed seismic industry sales.
Consolidated operating expenses for the three months ended December 31, 2002
increased $0.3 million, or 6.5%, from the corresponding period of the prior
fiscal year. The higher expenses are primarily related to increased research and
development expenditures required to self-manufacture dry thermal film and to
continue development of our reservoir characterization systems.
Our estimated effective tax rate for the three months ended December 31,
2002 was a benefit of 32.0% compared to a benefit of 41.2% for the three months
ended December 31, 2001.
Seismic
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
15
definition reservoir characterization products and services, marine seismic
cable retrieval devices and small data acquisition systems targeted at niche
markets.
Revenue
Sales of our seismic products for the three months ended December 31, 2002
decreased $2.9 million, or 29.1%, from the corresponding period of the prior
year. The decrease in seismic product sales primarily resulted from a
significant decline in demand for our land-based seismic products. This decrease
is attributable to a decline in worldwide seismic activity. Furthermore, seismic
industry manufacturing over-capacity issues continue to drive down prices. This
condition or trend has now existed for over one year, and we do not have
visibility to predict when it will end. An improvement in general economic
conditions and a more definitive view of the world geo-political risks will be
necessary for us to have better visibility as to this condition.
Operating Income (Loss)
Our operating loss for the three months ended December 31, 2002 was $1.0
million, a decrease of $1.7 million from the corresponding period of the prior
year. The decrease in operating income primarily resulted from decreased gross
profits associated with lower sales levels and lower gross profit margins from
our land-based seismic products due to competitive pricing pressures resulting
from industry-wide manufacturing over-capacity, and from under absorption of
fixed manufacturing costs due to depressed seismic product sales.
Commercial Graphics
Our commercial graphics business segment manufactures and sells thermal
imaging equipment and dry thermal film primarily to the screen print, point of
sale, signage and textile market sectors. This business segment has some sales
to customers in the seismic industry.
Revenue
Sales of our commercial graphics products for the three months ended
December 31, 2002 increased $15,000, or 0.5%, from the corresponding period of
the prior year. There were no significant changes in our product mix.
Operating Income (Loss)
Our operating loss for the three months ended December 31, 2002 was $0.1
million, a decrease of $0.4 million, or 125.6% from the corresponding period of
the prior year. The reduction in operating income primarily resulted from (i)
increased research and development expenses related to the self-manufacture of
dry thermal film, (ii) increased research and development expenses associated
with a newly introduced thermal imaging device, and (iii) increased amortization
expenses resulting from the $2.3 million purchase of intellectual property in
April 2002. Such intellectual property is being amortized on a straight basis
over five years.
Liquidity and Capital Resources
At December 31, 2002, we had $2.6 million in cash and cash equivalents. For
the three months ended December 31, 2002, we used approximately $3.0 million of
cash in operating activities principally resulting from a net loss, increased
inventories and decreased accounts payable. Inventories increased $3.2 million
primarily as a result of manufacturing goods for shipment in future periods.
Such uses of cash were offset by a $2.1 million decrease in trade accounts and
notes receivable due to a decrease in sales.
For the three months ended December 31, 2002, we used approximately $0.5
million of cash in investing activities resulting from capital expenditures.
For the three months ended December 31, 2002, cash from financing activities
increased approximately $4.5 million due to borrowings under our credit
facility.
16
We have entered into a credit agreement 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 2004.
Borrowings under the Credit Agreement are subject to borrowing base restrictions
based on (i) consolidated net income plus consolidated interest expense, income
taxes, depreciation and amortization and (ii) levels of eligible accounts
receivable and inventories. The Credit Agreement limits the incurrence of
additional indebtedness, requires the maintenance of certain financial amounts
and contains other covenants customary in agreements of this type. As of
December 31, 2002 there were borrowings of $5.1 million outstanding under the
Credit Agreement, and additional borrowings available under the Credit Agreement
of $2.0 million. Since September 30, 2002, we have increased our borrowings
under the credit by $4.5 million. Such additional borrowings are primarily for
increased working capital needs, including the production of inventories for
shipment in future periods. The borrowing interest rate at December 31, 2001 was
5.0%.
We recently amended our Credit Agreement to expire in January 2004. In
connection with this amendment, our borrowing interest rate has become, at our
option, the bank's prime rate or a LIBOR based rate. In addition, the borrowing
base restrictions were modified to allow the Company to incur additional
borrowings up to a maximum of $10.0 million.
Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 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
adopted the provisions of SFAS 142 effective October 1, 2002. At December 31,
2002, the Company had goodwill, net of accumulated amortization, of $1.8
million. The adoption of SFAS No. 142 did not have a material effect on our
first quarter financial position or 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 adopted this standard effective October 1, 2002. The adoption
of SFAS No. 143 did not have a material effect on our financial position or
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. We adopted this standard effective October 1, 2002. The adoption of
SFAS No. 144 did not have a material effect on our financial position or 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 clarified 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
adopted this standard effective October 1, 2002. The adoption of SFAS No. 145
did not have a material effect on our financial position or results of
operations.
17
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 so as to provide recognition of such costs when a liability
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
do not believe the adoption of SFAS No. 146 will have a material effect on our
financial position or results of operations.
In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation and Disclosure - an amendment of FASB Statement No. 123". This
statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative transition methods for a voluntary change
to the fair value of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of FASB Statement
No. 123 to require more prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. See Note 8
to the Consolidated Financial Statements for additional disclosures under SFAS
No. 148.
Forward Looking Statements and Risks
Certain of the statements we make in this document and in documents
incorporated by reference herein, including those made under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," are forward-looking statements for purposes of the Securities Act
of 1933 and the Securities Exchange Act of 1934. Such statements include
projections of our expectations regarding our future capital expenditures,
product lines, growth of product markets and other statements that relate to
future events or circumstances. These statements are subject to known and
unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to differ materially from the future
results, performance or achievements expressed or 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. We cannot assure you that we will realize our
expectations regarding market acceptance and revenues from these products and
services.
A Decline in Industry Conditions Could Affect our Projected Results.
Any unexpected material changes in oil and gas prices or other market trends
that would impact seismic exploration activity would likely affect the
forward-looking information contained in this document. In addition, the oil and
gas industry is extremely volatile and seismic activity is subject to change
based on political and economic factors outside of our control. In fact, our
results for fiscal year 2002, and results from our land-based seismic activity
in particular, were materially and adversely affected by the downturn in the
industry.
Our estimates as to future results and industry trends, to the extent
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 the
following outlook for fiscal year 2003:
18
. The impact of political conditions around the world including those
of the Middle East, which may have a significant impact on the oil
and gas prices, will not cause a significant increase in demand for
our seismic products during fiscal 2003.
. Customer consolidations, the ample supply of seismic data stored in
libraries, 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 and marine-based seismic products in Russia and
China is expected to increase over fiscal year 2002 levels.
. Deep-water marine seismic exploration activity will remain
constrained and sales of our marine-based products are expected to
decline significantly in fiscal year 2003.
. Our new high definition reservoir characterization products and
services are expected to 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 of that magnitude 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 land-based seismic products will continue to
be subject to pressures due to industry-wide manufacturing
over-capacity.
. We will be able to self-manufacture sufficient quantities of dry
thermal film internally or be able to purchase sufficient quantities
of dry thermal film from our Other Film Supplier. Demand for our
products used in the commercial graphics industry is expected to
increase with continued market acceptance of our dry thermal film and
new product introductions.
. Political conditions and hostilities around the world, which have a
significant impact on the oil and gas industry, will remain and
present serious economic risks.
Our outlook is based 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 December 31,
2002 is adequate in light of known circumstances. However, we cannot assure you
that additional amounts attributable to uncollectible 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 and notes 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 are
experiencing liquidity difficulties, which increases those credit risks.
19
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.
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 Development 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 this equipment as "packaged" data acquisition systems. 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.
20
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.
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 Former 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. 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.
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.
Our Former Primary Film Supplier, had 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. Around that time, the
21
Former 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. We are no longer optimistic that a buyer can
be found to operate the Former Primary Film Supplier's business.
Over the past few months, our Former Primary Film Supplier has failed to
meet all of our purchase orders and has ceased to provide us with dry thermal
film. As a result, we are currently purchasing a large quantity of dry thermal
film from our Other Film Supplier. We are also in the final stages of using the
technology we purchased from the Former Primary Film Supplier to manufacture dry
thermal film internally. 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.
If we are unable to economically manufacture dry thermal film internally
using the technology we purchased from our Former Primary Film Supplier or if
our Other 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.
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 2003 May Adversely Affect
our Business.
An on-going downturn in the U.S. economy could adversely affect our business
in ways that we cannot yet identify. The current economic 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 reserves, inventory obsolescence reserves,
self-insurance reserves, product warranty reserves, intangible assets and
deferred income tax assets. 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 leases, of seismic instruments and equipment and commercial graphics
products. Sales revenues are generally recognized when our products are
22
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.
23
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The following discussion of our exposure to various market risks contains
"forward looking statements" that involve risks and uncertainties. These
projected results have been prepared utilizing certain assumptions considered
reasonable in light of information currently available to us. Nevertheless,
because of the inherent unpredictability of foreign currency rates, as well as
other factors, actual results could differ materially from those projected in
this forward looking information.
We do not have any market risk as to market risk sensitive instruments
entered into for trading purposes and have only very limited risk as to
arrangements entered into other than for trading purposes. Further, we do not
engage in commodity or commodity derivative instrument purchasing or selling
transactions.
Foreign Currency Exchange Rate Risk
We purchase printheads from OYO Corporation pursuant to terms under which
such purchases are denominated in Japanese yen. We routinely attempt to hedge
our currency exposure on these purchases by entering into foreign currency
forward contracts with a bank. The purpose of entering into these forward hedge
contracts is to eliminate variability of cash flows associated with foreign
currency exposure risk on amounts payable in Japanese yen. Under SFAS No. 133
and related interpretations, our forward contracts with the bank are considered
derivatives. SFAS No. 133 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 usually does not
exceeded $0.5 million and such contracts ordinarily are settled within 10
months. Resulting gains and losses are reflected in income and were not material
for our fiscal quarter ended December 31, 2002. At December 31, 2002, we had
$0.4 million of yen denominated foreign currency forward contracts, and we had
$0.4 million of yen denominated accounts payable.
Foreign Currency and Operations Risk
We have a subsidiary located in Russia. Therefore, our financial results may
be affected by factors such as changes in foreign currency exchange risks, weak
economic conditions or changes in Russia's political climate. Our consolidated
balance sheet at December 31, 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 Russian roubles. To the extent
that transactions of this subsidiary are settled in roubles, a devaluation of
the rouble versus the U.S. dollar could reduce any contribution from our Russian
subsidiary to our consolidated results of operations as reported in U.S.
dollars. We do not hedge the market risk with respect to our operations in
Russia; therefore, such risk is a general and unpredictable risk of future
disruptions in the valuation of Russian roubles versus U.S. dollars to the
extent such disruptions result in any reduced valuation of the Russian
subsidiary's net working capital or future contributions to our consolidated
results of operations.
Interest Rate Risk
We have a revolving line of credit with a bank which subjects us to the risk
of increased interest costs associated with any upward movements in bank market
interest rates. Under the Credit Agreement, as amended, our borrowing interest
rate is either the bank's prime rate or a LIBOR based rate, whichever we select.
As of December 31, 2002, we had borrowed $5.1 million under this Credit
Agreement at an interest rate of 5.0%. Due to the 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 operations or cash flows.
24
Item 4. 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-Q, 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.
25
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this Quarterly Report.
3.1 Restated Certificate of Incorporation of the Company *
3.2 Restated Bylaws of the Company *
10.1 Third Amendment to Loan Agreement, dated as of January 14, 2003, 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.
10.2 Promissory Note, dated January 14, 2003, 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
Bank of Texas, N.A.
(b) The Company did not file any reports on Form 8-K during the quarter for
which this report is filed.
- ---------------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 filed September 30, 1997 (Registration No. 333-36727).
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OYO GEOSPACE CORPORATION
Date: February 12, 2003 By: /s/ Gary D. Owens
-------------------------------------
Gary D. Owens, Chairman of the Board
President and Chief Executive Officer
(duly authorized officer)
Date: February 12, 2003 By: /s/ Thomas T. McEntire
-------------------------------------
Thomas T. McEntire
Chief Financial Officer
(principal financial officer)
27
CERTIFICATIONS
I, Gary D. Owens, certify that:
1. I have reviewed this quarterly report on Form 10-Q of OYO Geospace
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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.
February 12, 2003
/s/ Gary D. Owens
-------------------------------------
Name: Gary D. Owens
Title: Chief Executive Officer
28
CERTIFICATIONS
I, Thomas T. McEntire, certify that:
1. I have reviewed this quarterly report on Form 10-K of OYO Geospace
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3 Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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.
February 12, 2003
/s/ Thomas T. McEntire
-----------------------------------------
Name: Thomas T. McEntire
Title: Chief Financial Officer
29
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-Q, the undersigned hereby certify
that this Report on Form 10-Q fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the
information contained in this Report on Form 10-Q fairly presents, in all
material respects, the financial condition and results of operations of OYO
Geospace Corporation.
/s/ Gary D. Owens
-------------------------------------------
Name: Gary D. Owens
Title: Chief Executive Officer
/s/ Thomas T. McEntire
-------------------------------------------
Name: Thomas T. McEntire
Title: Chief Financial Officer
30