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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended March 31, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 001-13601
OYO GEOSPACE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 76-0447780
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
12750 South Kirkwood, Suite 200
Stafford, Texas 77477
(Address of Principal Executive Offices)
(281) 494-8282
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
There were 5,546,795 shares of the Registrant's Common Stock outstanding as of
the close of business on May 10, 2002.
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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 12
Item 3. Quantitative and Qualitative Disclosures about Market Risks 23
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 6. Exhibits and Reports on Form 8-K 25
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS March 31, 2002 September 30, 2001
-------------- ------------------
(unaudited)
Current assets:
Cash and cash equivalents.......................................... $ 1,156 $ 882
Trade accounts and notes receivable, net........................... 11,243 11,539
Inventories........................................................ 32,004 28,737
Deferred income tax................................................ 1,430 1,152
Prepaid expenses and other......................................... 1,882 1,299
--------- ---------
Total current assets.......................................... 47,715 43,609
Rental equipment, net.................................................. 2,481 2,075
Property, plant and equipment, net..................................... 19,211 20,307
Goodwill and other intangible assets, net.............................. 4,565 4,775
Deferred income tax.................................................... 419 340
Other assets........................................................... 1,563 1,982
--------- ---------
Total assets.................................................. $ 75,954 $ 73,088
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt............. $ 5,680 $ 1,033
Accounts payable................................................... 3,290 4,984
Accrued expenses and other......................................... 3,140 4,047
Deferred revenue................................................... 4,959 4,859
Income tax payable................................................. 86 235
--------- ---------
Total current liabilities..................................... 17,155 15,158
Long-term debt......................................................... 3,660 3,772
Deferred income tax.................................................... 1,416 1,367
--------- ---------
Total liabilities............................................. 22,231 20,297
--------- ---------
Minority interest in consolidated subsidiary........................... 257 --
Stockholders' equity:
Preferred stock.................................................... -- --
Common stock....................................................... 55 55
Additional paid-in capital......................................... 30,631 30,530
Retained earnings.................................................. 23,780 23,213
Accumulated other comprehensive loss............................... (986) (865)
Unearned compensation-restricted stock awards...................... (14) (142)
--------- ---------
Total stockholders' equity.................................... 53,466 52,791
--------- ---------
Total liabilities and stockholders' equity.................... $ 75,954 $ 73,088
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
3
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
Three Months Ended Six Months Ended
---------------------------------- ----------------------------------
March 31, 2002 March 31, 2001 March 31, 2002 March 31, 2001
-------------- -------------- -------------- --------------
Sales ...................................... $ 13,833 $ 16,928 $ 26,733 $ 31,895
Cost of sales............................... 8,978 11,401 17,843 21,509
---------- ---------- ---------- ----------
Gross profit................................ 4,855 5,527 8,890 10,386
Operating expenses:
Selling, general and administrative..... 3,163 3,262 6,039 6,244
Research and development................ 1,437 1,449 2,517 2,918
---------- ---------- ---------- ----------
Total operating expenses........... 4,600 4,711 8,556 9,162
---------- ---------- ---------- ----------
Income from operations...................... 255 816 334 1,224
Other income (expense):
Interest expense........................ (163) (94) (314) (174)
Interest income......................... 47 74 97 108
Other, net.............................. (281) (36) (276) (12)
---------- ---------- ---------- ----------
Total other expense, net........... (397) (56) (493) (78)
---------- ---------- ---------- ----------
Income (loss) before income taxes,
minority interest and extraordinary gain (142) 760 (159) 1,146
Income tax expense (benefit)................ (115) 203 (122) 318
---------- ---------- ---------- ----------
Income (loss) before minority interest
and extraordinary gain................. (27) 557 (37) 828
Minority interest........................... (53) -- (82) --
---------- ---------- ---------- ----------
Income (loss) before extraordinary gain..... (80) 557 (119) 828
Extraordinary gain, net of tax of $85....... -- -- 686 --
---------- ---------- ---------- ----------
Net income (loss)........................... $ (80) $ 557 $ 567 $ 828
========== ========== ========== ==========
Basic earnings per share:
Income (loss) before extraordinary item.. $ (0.01) $ 0.10 $ (0.02) $ 0.15
Extraordinary gain....................... -- -- 0.12 --
---------- ---------- ---------- ----------
Net income (loss)........................ $ (0.01) $ 0.10 $ 0.10 $ 0.15
========== ========== ========== ==========
Diluted earnings per share:
Income (loss) before extraordinary item.. $ (0.01) $ 0.10 $ (0.02) $ 0.15
Extraordinary gain....................... -- -- 0.12 --
---------- ---------- ---------- ----------
Net income (loss)........................ $ (0.01) $ 0.10 $ 0.10 $ 0.15
========== ========== ========== ==========
Weighted average shares outstanding - Basic 5,537,409 5,487,990 5,526,406 5,475,435
========== ========== ========== ==========
Weighted average shares outstanding - Diluted 5,537,409 5,633,476 5,539,824 5,600,456
========== ========== ========== ==========
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)
Six Months Six Months
Ended Ended
March 31, 2002 March 31, 2001
-------------- --------------
Cash flows from operating activities:
Net income................................................ $ 567 $ 828
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income tax expense (benefit).................. (308) 484
Depreciation and amortization.......................... 2,231 2,053
Amortization of restricted stock awards................ 128 233
Extraordinary gain..................................... (686) --
Minority interest...................................... 82 --
Bad debt expense....................................... 429 17
Effects of changes in operating assets and liabilities:
Trade accounts and notes receivable.................... 432 (5,184)
Inventories............................................ (2,581) (2,351)
Prepaid expenses and other assets...................... (357) 1,065
Accounts payable....................................... (1,786) (298)
Accrued expenses and other............................. (1,775) 5,223
Income tax payable..................................... (234) 33
---------- ----------
Net cash provided by (used in) operating activities.. (3,858) 2,103
---------- ----------
Cash flows from investing activities:
Capital expenditures...................................... (1,577) (2,519)
Investment in business acquisition, net of cash acquired.. 913 (2,000)
Proceeds from sale of equipment........................... 305 2
---------- ----------
Net cash used in investing activities................ (359) (4,517)
---------- ----------
Cash flows from financing activities:
Increase in notes payable................................. 15,601 13,613
Principal payments on notes payable....................... (11,065) (13,709)
Proceeds from exercise of stock options................... 76 141
---------- ----------
Net cash provided by financing activities............ 4,612 45
---------- ----------
Effect of exchange rate changes on cash....................... (121) (250)
---------- ----------
Increase (decrease) in cash and cash equivalents.............. 274 (2,619)
Cash and cash equivalents, beginning of period................ 882 3,989
---------- ----------
Cash and cash equivalents, end of period...................... $ 1,156 $ 1,370
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
5
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Basis of Presentation
The consolidated balance sheet of OYO Geospace Corporation and its
subsidiaries (the "Company") at September 30, 2001 has been derived from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at March 31, 2002 and the consolidated statements of
operations for the three months and six months ended March 31, 2002 and 2001,
and the consolidated statements of cash flows for the six months ended March 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 and six months ended March 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, 2001.
Revenue is primarily derived from the sale, and short-term rental under
operating lease, of seismic instruments and equipment and commercial graphics
products. Sales revenues are recognized when the products are shipped and title
and risk of loss have passed to the customer. Rental revenues are recognized as
earned over the rental period. Short-term rentals of the Company's equipment
generally range from daily rentals to rental periods of up to six months.
Products are generally sold without any customer acceptance provisions and the
Company's standard terms of sale do not allow its customers to return products.
The Company's products generally do not require installation assistance or
sophisticated instruction. The Company offers a standard product warranty
obligating it to repair or replace equipment with manufacturing defects. The
Company maintains a reserve for future warranty costs based on historical
experience.
The Company expenses research and development costs as incurred.
The Company records a write-down of its inventory when the cost basis of
any manufactured product (including any estimated future costs to complete the
manufacturing process) exceeds its net realizable value.
In November 2001, the Company acquired an additional equity interest in a
Russian joint venture; thereby, increasing its ownership percentage from 44% to
85%. As a result of this acquisition, the Company records minority interest
expense or income, reflecting the portion of earnings or loss, respectively, of
the majority-owned operations allocated to the minority interest partners. For
additional information, see Note 6 to the Consolidated Financial Statements
contained in this Report on Form 10-Q.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141").
SFAS 141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. The Company adopted the provisions of
SFAS 141 effective October 1, 2001. Among the provisions of SFAS 141 is the
requirement to record as an extraordinary gain all negative goodwill resulting
from new business combinations. As a result, the Company recorded an
extraordinary gain of $686,000 relating to the acquisition of the Russian joint
venture in November 2001.
Also in July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). Under SFAS 142, goodwill and intangible assets
with indefinite lives are no longer amortized but are reviewed annually for
impairment; or more frequently if impairment is indicated. Intangible assets
that are not deemed to have indefinite lives will continue to be amortized over
their useful lives; however, no maximum life applies. The Company will adopt the
provisions of SFAS 142 effective in its fiscal year 2003, beginning October 1,
2002. At March 31, 2002, the Company had
6
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
goodwill, net of accumulated amortization, of $1.9 million. Management is
currently evaluating the impact of SFAS 142 on the Company's financial position
and results of operations.
Certain amounts previously presented in the consolidated financial
statements have been reclassified to conform to the current year presentation.
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 Six Months Ended
--------------------------------- ---------------------------------
March 31, 2002 March 31, 2001 March 31, 2002 March 31, 2001
-------------- -------------- -------------- --------------
Income (loss) before extraordinary gain...... $ (80) $ 557 $ (119) $ 828
Extraordinary gain........................... -- -- 686 --
--------- --------- --------- ---------
Net earnings (loss) available to common
stockholders............................... $ (80) $ 557 $ 567 $ 828
========= ========= ========= =========
Weighted average common shares outstanding... 5,537,409 5,487,990 5,526,406 5,475,435
Weighted average common share equivalents
outstanding................................ -- 145,486 13,418 125,021
--------- --------- --------- ---------
Weighted average common shares and common
share equivalents outstanding............. 5,537,409 5,633,476 5,539,824 5,600,456
========= ========= ========= =========
Basic Earnings Per Share:
Income (loss) before extraordinary gain.. $ (0.01) $ 0.10 $ (0.02) $ 0.15
Extraordinary gain....................... -- -- 0.12 --
--------- --------- --------- ---------
Net income (loss)............................ $ (0.01) $ 0.10 $ 0.10 $ 0.15
--------- --------- --------- ---------
Diluted earnings per common share:
Income (loss) before extraordinary gain.. $ (0.01) $ 0.10 $ (0.02) $ 0.15
Extraordinary gain....................... -- -- 0.12 --
--------- --------- --------- ---------
Net income (loss)............................ $ (0.01) $ 0.10 $ 0.10 $ 0.15
========= ========= ========= =========
7
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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 Six Months Ended
------------------------------- --------------------------------
March 31, 2002 March 31, 2001 March 31, 2002 March 31, 2001
-------------- -------------- -------------- --------------
Net income (loss)........................... $ (80) $ 557 $ 567 $ 828
Foreign currency translation adjustments.... (55) (266) (121) (250)
-------------- ----------- ------------ ----------
Total comprehensive income (loss)........... $ (135) $ 291 $ 446 $ 578
============= =========== ============ ==========
4. Trade Accounts and Notes Receivable
Trade accounts and notes receivable consisted of the following (in
thousands):
March 31, 2002 September 30, 2001
-------------- ------------------
Trade accounts receivable......................... $ 10,118 $ 9,566
Trade notes receivable............................ 2,042 2,443
Allowance for doubtful accounts and notes......... (917) (470)
--------- ---------
$ 11,243 $ 11,539
========= =========
5. Inventories
Inventories consisted of the following (in thousands):
March 31, 2002 September 30, 2001
---------------- ------------------
Finished goods.................. $ 4,256 $ 3,649
Work-in-process................. 12,849 9,653
Raw materials................... 14,899 15,435
-------- ---------
$ 32,004 $ 28,737
======== =========
As previously reported, the Company has received a large order from a
customer to deliver a deepwater reservoir characterization system. This order
has not been formalized into a written definitive contract. The Company has been
operating on the assumption that its agreements pertaining to this order are
reflected in a letter of intent and numerous subsequent exchanges of
communication, and the Company has received a substantial progress payment on
this order. Because the Company has not formalized this order into a single,
definitive written contract, it faces the risk that any disputes arising out of
the order will be resolved in a manner and with a reference to terms that the
Company did not agree to and which are unfavorable to it. The Company is not
aware of any disputes or the basis for any dispute at this time. The Company has
very recently reached preliminary agreements with respect to delivery of
ownership of this large order in the near future in return for which it will
receive additional payments of approximately $11 million over approximately the
next fifteen months. While the timing of the system's installation is uncertain,
the Company will continue to have certain warranty exposures relating to the
successful operation of the system once it is deployed. In that regard,
approximately $3 million of the system's sales proceeds will be held back by the
ultimate customer until December 31, 2003. Other details as to the closing out
of this order are being
8
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
discussed and are expected to be reflected in a final document, as will the
final terms of the Company's preliminary agreements outlined above.
At March 31, 2002, the Company had capitalized inventory work-in-process
costs of approximately $11 million in connection with the manufacturing of
deepwater reservoir characterization systems. The Company has received a $4.9
million progress payment from the customer in connection with the large order.
The Company has received $0.1 million from a different customer related to an
indication of an order. These payments are classified as deferred revenue on the
Company's balance sheet.
6. Acquisition
Effective November 8, 2001, the Company increased its equity ownership from
44% to 85% in a Russian joint venture formed more than ten years ago with
Geophyspribor Ufa Production Association, Bank Vostock and Chori Co., Ltd. Since
the increase in ownership, the operating results of the reorganized entity, now
known as OYO-GEO Impulse International LLC ("OYO-GEO Impulse"), have been
consolidated with those of the Company. Geophyspibor Ufa Production Association
and Chori Co., Ltd. will continue as minority equity holders of OYO-GEO Impulse.
The Company restructured its participation in the Russian joint venture in
order to broaden production capabilities, reduce production costs and increase
our market scope internationally. In exchange for the additional equity
ownership, the Company forgave a debt of $1.2 million owed to it by OYO-GEO
Impulse. At the time of the acquisition, the Company's basis in the receivable
and related equity investment was $0 as such items were written-off in 1994.
In accordance with the provisions of SFAS 141, the Company recorded an
extraordinary gain of $686,000, net of income taxes of $85,000. This
extraordinary gain resulted from the write-off of negative goodwill associated
with the acquisition of the additional equity interest of OYO-GEO Impulse.
The allocation of the purchase price and a reconciliation of the purchase
price to the cash provided by business acquisitions follows:
Fair values of assets and liabilities
Accounts receivable.................................... $ 185
Inventories............................................ 686
Prepaid expenses and other ............................ 263
Accounts payable....................................... (92)
Accrued expenses....................................... (1,009)
Income taxes payable................................... (85)
Minority interest...................................... (175)
Negative goodwill...................................... (686)
-------
Total allocated purchase price ........................ (913)
Less consideration paid................................ --
-------
Cash provided by business acquisition.................. $ (913)
=======
9
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. Segment and Geographic Information
The Company evaluates financial performance based on two business segments:
Seismic and Commercial Graphics. The seismic product lines currently consist of
geophones and hydrophones, including multi-component geophones and hydrophones,
seismic leader wire, geophone string connectors, seismic telemetry cable, high
definition reservoir characterization products and services, marine seismic
cable retrieval devices and small data acquisition systems targeted at niche
markets. Commercial graphic products include thermal imaging equipment and dry
thermal film. The following tables summarize the Company's segment information:
Three Months Ended Six Months Ended
------------------------------ ------------------------------
March 31, 2002 March 31, 2001 March 31, 2002 March 31, 2001
-------------- -------------- -------------- --------------
Net sales:
Seismic................................. $ 10,146 $ 13,561 $ 20,109 $ 25,446
Commercial graphics..................... 3,710 3,396 6,711 6,496
Eliminations............................ (23) (29) (87) (47)
------------ ---------- ----------- ---------
Total................................... $ 13,833 $ 16,928 $ 26,733 $ 31,895
============ ========== =========== =========
Income (loss) from operations:
Seismic................................. $ 631 $ 2,325 $ 1,287 $ 3,239
Commercial graphics..................... 647 (461) 999 (111)
Corporate............................... (1,023) (1,048) (1,952) (1,904)
------------ ---------- ----------- ---------
Total................................... $ 255 $ 816 $ 334 $ 1,224
============ ========== =========== =========
March 31, 2002 September 30, 2001
-------------- ------------------
Total assets:
Seismic................................ $ 60,096 $ 56,968
Commercial graphics.................... 11,426 11,059
Corporate.............................. 4,432 5,061
--------- -----------
$ 75,954 $ 73,088
========= =========
8. Credit Agreement
The Company has a working line of credit 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 2003.
Borrowings under the Credit Agreement are subject to borrowing base restrictions
based on (i) consolidated net income plus consolidated interest expense, income
taxes, depreciation and amortization and (ii) levels of eligible accounts
receivable and inventories. The Credit Agreement limits the incurrence of
additional indebtedness, requires the maintenance of certain financial amounts
and contains other covenants customary in agreements of this type. As of March
31, 2002 there were borrowings of $5.5 million outstanding under the Credit
Agreement. Based on the levels of eligible accounts receivable and inventories,
the Company had additional borrowings available under the Credit Agreement of
$1.3 million. The borrowing interest rate at March 31, 2002 was 5.0%.
The Company amended its Credit Agreement to expire in January 2003. In
connection with this amendment, the Company's borrowing interest rate has become
the bank's prime rate with a minimum rate of 5.0%. In addition, the Company
arranged for an additional promissory note of $2.5 million ("Additional Note")
to assist the Company with
10
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
the funding of several long-term projects. As of March 31, 2002 there were no
borrowings outstanding under the Additional Note, and additional borrowings
available under the Additional Note of $2.5 million. The Additional Note has a
fixed borrowing rate of 8.0% and matures on July 15, 2002.
9. Subsequent Events
A private corporation headquartered in New York State is currently the
primary supplier of dry thermal film used by the Company's customers in the
thermal imaging equipment that the Company manufactures (the "Primary Film
Supplier"). In April 2002, the Company purchased certain intellectual property
rights from its Primary Film Supplier for $2.0 million. Such purchase gives 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. Such purchase includes technology currently existing and
any dry thermal film technology later developed by the Primary Film Supplier for
use in the Company's equipment. In connection with the purchase, the Company
licensed the technology to the Primary Film Supplier on a perpetual basis, so
long as it can meet predefined quality and delivery requirements. Should the
Primary Film Supplier not meet such requirements, the Company has the right to
license to any third party the right to manufacture dry thermal film. The
Company and the Primary Film Supplier have also entered into an amended supply
agreement pursuant to which the Primary Film Supplier provides the Company with
dry thermal film.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following analysis of the financial condition and results of operations
of OYO Geospace Corporation should be read in conjunction with the Consolidated
Financial Statements and Notes related thereto included elsewhere in this Form
10-Q.
Industry Overview
We design and manufacture instruments and equipment used in the acquisition
and processing of seismic data. We have been in the seismic instrument and
equipment business since 1980, marketing our products primarily to the oil and
gas industry worldwide. We also design and manufacture thermal imaging equipment
and distribute dry thermal film products to the commercial graphics industry. We
have been serving the commercial graphics industry since 1995.
Seismic Industry
Geoscientists use seismic data to map potential or existing oil and gas
bearing formations and the geologic structures that surround them. Seismic data
is used primarily in connection with the exploration, development and production
of oil and gas.
Seismic data acquisition is conducted on land by combining a seismic energy
source and a data recording system. The energy source imparts seismic waves into
the earth, reflections of which are received and measured by geophones and
hydrophones. Electrical signals generated by the geophones and hydrophones are
simultaneously transmitted through leader wire, geophone and hydrophone string
connectors and telemetric cable to data collection units, which store
information for processing and analysis. Seismic thermal imaging products are
output devices used in the field or office to create a graphic representation of
the seismic data after it has been acquired.
Marine seismic data acquisition is conducted primarily by large ocean-going
vessels that tow long seismic cables known as "streamers". Usually, the energy
source in marine seismic data acquisition is an airgun, and the reflected
seismic waves are received and measured by hydrophones, which are an integral
part of the streamers. The streamers simultaneously transmit the electrical
impulses back to the vessel via telemetric cable included within the streamers,
and the seismic data is recorded in much the same manner as it is on land.
An estimated one to two-thirds of the reserves found with every oil and gas
discovery will be left behind in the reservoir, not recoverable economically or
at times even identified. Reservoir characterization and management programs, in
which the reservoir is carefully imaged and monitored throughout the life of the
field by seismic instruments and equipment, are now seen as vital tools for
improving production recovery rates. Seismic surveys repeated over selected time
intervals show dynamic changes within the reservoir and can be used to monitor
the effects of production.
We expect to incur significant future research and development expenditures
aimed at the development of additional seismic acquisition products and services
used for high definition reservoir characterization for use in both land and
marine environments.
While orders for our products can vary substantially from quarter to
quarter, reservoir characterization projects, especially deepwater projects,
require the use of more equipment over a longer period of time than is required
by conventional surface seismic systems. Revenue recognition in accordance with
generally accepted accounting principles for these large-scale projects has the
potential to result in substantial fluctuations in quarterly performance. These
variations may impact our operating results and cash flow, manufacturing
capability and expense levels in any given quarter.
As previously reported, we have received a large order and strong
indications of interest for additional orders from customers to deliver
deepwater reservoir characterization systems. Such orders and indications have a
12
combined sales price of approximately $24 million. To date, these orders and
indications have not been formalized into written definitive contracts. In the
case of the large order, we have been operating on the assumption that our
agreements are reflected in a letter of intent and numerous subsequent exchanges
of communication, and we have received a substantial progress payment on the
order. Because we have not formalized this order into a single, definitive
written contract, we face the risk that any disputes arising out of the order
will be resolved in a manner and with a reference to terms that we did not agree
to and which are unfavorable to us. We are not aware of any disputes or the
basis for any dispute at this time. We have very recently reached preliminary
agreements with respect to delivery of ownership of the large order in the near
future in return for which we will receive additional payments of approximately
$11 million over approximately the next fifteen months. While the timing of the
system's installation is uncertain, we will continue to have certain warranty
exposures relating to the successful operation of the system once it is
deployed. In that regard, approximately $3 million of the system's sales
proceeds will be held back by the ultimate customer until December 31, 2003.
Other details as to the closing out of this order are being discussed and are
expected to be reflected in a final document, as will the final terms of our
preliminary agreement outlined above.
At March 31, 2002, we had capitalized inventory work-in-process costs of
approximately $11 million in connection with these orders and indications. We
have received a $4.9 million progress payment from the customer in connection
with the large order. We have received $0.1 million from a different customer
related to an indication of an order. These payments are classified as deferred
revenue on our balance sheet.
Because of the scale and nature of these 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 such projects on our business and
financial results and condition. We continue to believe, however, that our
reservoir characterization systems, including the systems related to the large
order and similar indications of interest, are important new technologies in our
industry and will be important to our success in the future.
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.
In fiscal 2001, we expanded this segment by acquiring EcoPRO, a dry thermal
film distribution business, and by altering the marketing focus of our European
subsidiary. In April 2002, we further expanded this segment by purchasing
certain intellectual property associated with the manufacture of dry thermal
film from the Primary Film Supplier.
13
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 Six Months Ended
------------------------------ --------------------------------
March 31, 2002 March 31, 2001 March 31, 2002 March 31, 2001
-------------- -------------- -------------- --------------
Seismic
Revenue................................... $ 10,146 $ 13,561 $ 20,109 $ 25,446
Operating income.......................... 631 2,325 1,287 3,239
Commercial Graphics
Revenue................................... 3,710 3,396 6,711 6,496
Operating income (loss)................... 647 (461) 999 (111)
Corporate
Revenue................................... -- -- -- --
Operating loss............................ (1,023) (1,048) (1,952) (1,904)
-
Eliminations
Revenue................................... (23) (29) (87) (47)
Operating income.......................... -- -- -- --
Consolidated Totals
Revenue................................... 13,833 16,928 26,733 31,895
Operating income.......................... 255 816 334 1,224
Overview
Second Quarter of Fiscal Year 2002 Compared to Second Quarter of Fiscal Year
2001.
Consolidated sales for the three months and six months ended March 31, 2002
decreased $3.1 million, or 18.3% and $5.2 million, or 16.2%, respectively, from
the corresponding periods of the prior fiscal year. The decrease in sales was
due to a declining demand for traditional land seismic equipment, due to a sharp
contraction in seismic crew activity. Sales of our marine seismic products and
our commercial graphics products increased during the quarter, but only
partially offsetting the decline in market demand for our traditional land-based
product lines.
Consolidated gross profits for the three months and six months ended March
31, 2002 decreased by $0.7 million, or 12.1% and $1.5 million, or 14.4%,
respectively, from the corresponding periods of the prior year. The lower gross
profits resulted from lower sales levels primarily resulting from deterioration
in the demand for our land-based seismic products. Consolidated gross profit
margins improved due to increased sales of our marine-based seismic and
commercial graphics products. These product categories generally have higher
gross profit margins than our land-based seismic products.
Consolidated operating expenses for the three months and six months ended
March 31, 2002 decreased $0.1 million, or 2.4% and $0.6 million, or 6.6%,
respectively, from the corresponding periods of the prior fiscal year. The lower
expenses are a result of an effort by the Company to reduce expenses during a
period of declining revenues. The Company significantly reduced its workforce in
its land-based seismic manufacturing operations.
The effective tax rate for the three months and six months ended March 31,
2002 was 81.2% and 76.7%, respectively. The effective tax rate for the three
months and six months ended March 31, 2001 was 26.7% and 27.8%, respectively.
The effective tax rate for these same periods varied from the statutory rate of
34% primarily due to recording benefits of $60,000 and $57,000, respectively,
related to a change in estimate of our year end tax
14
accrual to the subsequently filed United States tax return. We have also
recorded a tax expense of $85,000 related to an extraordinary gain that occurred
in the first quarter of 2002.
Seismic
Our seismic product lines currently consist of 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.
Revenue
Sales of our seismic products for the three months and six months ended
March 31, 2002 decreased $3.4 million, or 25.2%, and $5.3 million or 21.0%
respectively from the corresponding periods of the prior year. The decrease in
seismic product sales primarily resulted from a significant decrease in sales of
our land-based products caused by decreasing worldwide oil and gas exploration
activities. This decrease was partially offset by an increase in sales
associated with our (i) marine-based seismic products, (ii) acquisition and
consolidation of OYO-GEO Impulse and (iii) reservoir characterization products
and services.
Operating Income
Operating income for the three months and six months ended March 31, 2002
decreased $1.7 million, or 72.9% and $2.0 million, or 60.3%, respectively, from
the corresponding periods of the prior year. The decrease in operating income
primarily resulted from decreased gross profits associated with lower sales
levels from our land-based seismic products. Such decrease in operating income
was partially offset by an increase in operating income from (i) our
marine-based seismic products, (ii) the acquisition and consolidation of OYO-GEO
Impulse and (iii) our reservoir characterization products and services.
International Business Development Initiative
Effective November 8, 2001, the Company increased its equity ownership from
44% to 85% in a Russian joint venture formed more than ten years ago with
Geophyspribor Ufa Production Association, Bank Vostock and Chori Co., Ltd. Since
the increase in ownership, the operating results of the reorganized entity, now
known as OYO-GEO Impulse International LLC ("OYO-GEO Impulse"), have been
consolidated with those of the Company. Geophyspibor Ufa Production Association
and Chori Co., Ltd. will 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 acquisition,
the Company's basis in the receivable and related equity investment was $0 as
such items were written-off in 1994.
In accordance with the provision of SFAS 141, the Company recorded an
extraordinary gain of $686,000, net of income taxes of $85,000. This
extraordinary gain resulted from the write-off of negative goodwill associated
with the acquisition of the additional equity interest of OYO-GEO Impulse.
Commercial Graphics
Our commercial graphics business segment manufactures and sells thermal
imaging equipment and distributes dry thermal film primarily to the screen
print, point of sale, signage and textile market sectors. This business segment
has some sales to customers in the seismic industry.
Revenue
Sales of our commercial graphics products for the three months and six
months ended March 31, 2002 increased $0.3 million, or 9.2% and $0.2 million, or
3.3%, respectively, from the corresponding periods of the prior year.
15
Such increase is due to increased sales of dry thermal film products, primarily
resulting from the EcoPRO acquisition in February 2001.
Operating Income
Operating income for the three months and six months ended March 31, 2002
increased $1.1 million from the corresponding periods of the prior year. The
improvement in operating income resulted from lower raw material costs
(primarily costs associated with dry thermal film), increased manufacturing
efficiencies and streamlined operating expenses.
Liquidity and Capital Resources
At March 31, 2002, we had $1.2 million in cash and cash equivalents. For the
six months ended March 31, 2002, we used approximately $3.9 million of cash in
operating activities principally resulting from our net income adjusted for
noncash expenses offset by significant increases in inventories, and significant
decreases in account payable and accrued expenses. The significant increase in
inventories primarily resulted from the production of an ocean-bottom seismic
system related to a recently completed large order whose delivery is expected in
fiscal 2002. The decrease in accounts payable relates to decreased purchases of
raw materials associated with our land-based seismic manufacturing operations,
resulting from lower sales of our land-based seismic equipment. Accrued expenses
decreased as a result of payments of bonuses, earned and accrued in fiscal year
2001, and a decrease in accrued expenses related to our workforce such as
expenses for vacation, wages and payroll taxes. The decrease in workforce
related accruals resulted from reductions of personnel in our land-based seismic
manufacturing operations.
For the six months ended March 31, 2002, we used approximately $0.4 million
of cash in investing activities primarily resulting from $1.6 million of capital
expenditures. Such amount was offset by $0.9 million of cash we received through
the acquisition of an additional interest in, and consolidation of, OYO-GEO
Impulse. We estimate that our capital expenditures in fiscal year 2002 will
range between $4.0 to $5.0 million, which we expect to fund through operating
cash flows and borrowings under our credit facility.
For the six months ended March 31, 2002, we generated approximately $4.6
million of cash from financing activities primarily resulting from borrowings
under our credit facility.
We have a working capital line of credit pursuant to which we can borrow up
to $10.0 million secured by our accounts receivable and inventory (the "Credit
Agreement"). The Credit Agreement, as amended, expires in January 2003.
Borrowings under the Credit Agreement are subject to borrowing base restrictions
based on (i) consolidated net income plus consolidated interest expense, income
taxes, depreciation and amortization and (ii) levels of eligible accounts
receivable and inventories. The Credit Agreement limits the incurrence of
additional indebtedness, requires the maintenance of certain financial amounts
and contains other covenants customary in agreements of this type. As of March
31, 2002 there were borrowings of $5.5 million outstanding under the Credit
Agreement. Based on the levels of eligible accounts receivable and inventories,
the Company had additional borrowings available under the Credit Agreement of
$1.3 million. The borrowing interest rate at March 31, 2002 was 5.0%.
We amended our Credit Agreement to expire in January 2003. In connection
with this amendment, our borrowing interest rate has become the bank's prime
rate with a minimum rate of 5.0%. In addition, we arranged for an additional
promissory note of $2.5 million ("Additional Note") to assist the Company with
the funding of several long-term projects. As of March 31, 2002 there were no
borrowings under the Additional Note and additional borrowings available under
the Additional Note of $2.5 million. The Additional Note has a fixed borrowing
rate of 8.0% and matures on July 15, 2002.
A private corporation headquartered in New York State is currently the
primary supplier of dry thermal film used by our customers in the thermal
imaging equipment we manufacture (the "Primary Film Supplier"). We also have a
secondary supplier of dry thermal film headquartered in Europe. We are not aware
of other suppliers of dry thermal film for our thermal imaging equipment. While
alternate suppliers might be able to provide dry thermal film, such film has not
historically performed as well in our thermal imaging equipment.
16
In April 2002, we purchased certain intellectual property rights from our
Primary Film Supplier for $2.0 million. Such purchase gives us exclusive
ownership of all technology used by the Primary Film Supplier to manufacture dry
thermal film used in the thermal imaging equipment we manufacture. Such purchase
includes technology currently existing and any dry thermal film technology
later developed by the Primary Film Supplier for use in our equipment. In
connection with the purchase, we licensed the technology to the Primary Film
Supplier on a perpetual basis, so long as it can meet predefined quality and
delivery requirements. Should the Primary Film Supplier not meet such
requirements, we have the right to license any third party to manufacture dry
thermal film.
The proceeds from the sale are intended to be used by the Primary Film
Supplier to fund its working capital needs, thereby enabling it to continue
supplying dry thermal film to us for distribution to our customers. We have no
assurance that the transaction with the Primary Film Supplier will assure us a
continued supply of dry thermal film for the foreseeable future or that our
Primary Film Supplier will use the funds for working capital purposes.
We have received a large order from a customer to deliver deepwater
reservoir characterization systems. At March 31, 2002, we have capitalized
inventory work-in-process costs of approximately $11.0 million in connection
with this deepwater reservoir characterization systems. Decisions by customers
regarding the timing, nature and size of purchases for deepwater
characterization systems could significantly impact our liquidity and results of
operations, particularly if orders were cancelled, modified or delayed and if
anticipated orders do not occur as expected.
We believe that the combination of existing cash reserves, cash flows from
operations and borrowing availability under our existing credit facility should
provide us sufficient capital resources and liquidity to fund our planned
operations through fiscal year 2002. However, there can be no assurance that
such sources of capital will be sufficient to support our capital requirements
in the long-term, and we may be required to issue additional debt or equity
securities in the future to meet our capital requirements. There can be no
assurance we would be able to issue additional equity or debt securities in the
future on terms that are acceptable to the Company or at all.
Contractual Obligations and Commercial Commitments
A summary of future payments owed for contractual obligations and
commercial commitments as of March 31, 2002 are shown in the table below (in
thousands).
Less Than 1 - 3 4 - 5 After
Total 1 Year Years Years 5 Years
----- ------ ----- ----- -------
Contractual Obligations:
Long-term debt..................... $ 3,880 $ 220 $ 490 $ 564 $ 2,606
Operating leases................... 898 575 323 -- --
-------- --------- -------- -------- ---------
Total contractual obligations...... 4,778 795 813 564 2,606
Commercial Commitments:
Lines of credit.................... 5,460 5,460 -- -- --
-------- --------- -------- -------- ---------
Total contractual obligations and
commercial commitments........... $ 10,238 $ 6,255 $ 813 $ 564 $ 2,606
======== ========= ======== ======== =========
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 relating to the acquisition of the additional
interest in the Russian joint venture in November 2001.
17
Also in July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). Under SFAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually for
impairment; or more frequently if impairment is indicated. Intangible assets
that are not deemed to have indefinite lives will continue to be amortized over
their useful lives; however, no maximum life applies. The Company will adopt the
provisions of SFAS 142 effective in its fiscal year 2003, beginning October 1,
2002. At March 31, 2002, the Company had goodwill, net of accumulated
amortization, of $1.9 million. Management is currently evaluating the impact of
SFAS 142 on the Company's financial position and results of operations.
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. For a discussion of particular factors and risks
relating to projects in the reservoir characterization area, see the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Industry Overview" in this Report on Form 10-Q. We cannot
assure you that we will realize our expectations regarding market acceptance and
revenues from these products and services.
A Decline in Industry Conditions Could Affect our Projected Results.
Any unexpected material changes in oil and gas prices or other market trends
that would impact seismic exploration activity would likely affect the
forward-looking information contained in this document. Our results for fiscal
year 2000 were materially and adversely affected by the downturn in the industry
that began in fiscal year 1999. Although our results for fiscal year 2001 showed
an improvement over fiscal year 2000 due to increases in oil and gas prices, the
oil and gas industry is extremely volatile and subject to change based on
political and economic factors outside our control as evidenced by recent
decreases in oil and gas prices.
Our estimates as to future results and industry trends described in this
document are based on assumptions regarding the future level of seismic
exploration activity and its effect on the demand and pricing of our products
and services. In analyzing the market and its impact on us, we have made the
following assumptions for fiscal year 2002:
. Oil and gas prices will, on average, be weaker than fiscal year 2001.
As a result, seismic exploration activity will decrease.
. Demand for seismic instruments and equipment will decline from fiscal
year 2001 levels.
18
. Demand for our new high definition reservoir characterization products
and services will increase as those products and services become known
to the industry and as the need for reservoir characterization
technology increases.
. Deep-water marine seismic activity will remain constrained.
. Demand for our products used in the commercial graphics industry will
increase with continued market acceptance and new product
introductions.
. Pricing for many of our products will continue to be subject to
pressures due to seismic industry customer consolidations and
competition as the seismic industry enters another economic downturn.
We have based these assumptions on various macro-economic factors, and
actual market conditions could vary materially from those assumed.
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 March 31,
2002 is adequate in light of known circumstances. However, we cannot assure you
that sufficient aggregate amounts of uncollectible receivables and bad debt
write-offs will not have a material adverse effect on our future results of
operations. Many of our customers have suffered from lower revenues and
experienced liquidity challenges resulting from the economic difficulties
throughout our industry. We have in the past incurred significant write-offs in
our accounts receivable due to customer credit problems. We have found it
necessary from time to time to extend trade credit to long-term customers and
others where some risks of nonpayment or late payment exist. Given recent
industry conditions, some of our customers have experienced a liquidity
difficulty, which increases those credit risks. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources", contained in this Report on Form 10-Q.
Demand for Our Products is Volatile.
Demand for our products depends primarily on the level of worldwide oil and
gas exploration activity. That activity, in turn, depends primarily on
prevailing oil and gas prices. Historically, the markets for oil and gas have
been volatile, and those markets are likely to continue to be volatile. Oil and
gas prices are subject to wide fluctuation in response to relatively minor
changes in the supply of and demand for oil and gas, market uncertainty and a
variety of additional factors that are beyond our control. These factors include
the level of consumer demand, weather conditions, domestic and foreign
governmental regulations, price and availability of alternative fuels, political
conditions in the Middle East and other significant oil-producing regions,
foreign supply of oil and gas, price of foreign imports and overall economic
conditions. Continued low demand for our products could materially and adversely
affect our results of operations and liquidity. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Industry Overview".
We Have a Relatively Small Public Float, and Our Stock Price May be Volatile.
We have approximately 2.4 million shares outstanding held by nonaffiliates.
This small float results in a relatively illiquid market for our common stock.
Our average daily trading volume during fiscal year 2001 was
19
approximately 5,000 shares. Our small float and daily trading volumes may result
in greater volatility of our stock price.
Our Industry is Characterized by Rapid Technological Evolution and Product
Obsolescence.
Our instruments and equipment are constantly undergoing rapid technological
improvement. Our future success depends on our ability to continue to:
. 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, two competitors in our seismic
business segment currently offer a broader range of instruments and equipment
for sale and market this equipment as a "packaged" data acquisition system. We
do not now offer for sale such a complete "packaged" data acquisition system.
Further, certain of our competitors offer financing arrangements to customers on
terms that we may not be able to match. In addition, new competitors may enter
the market and competition could intensify.
We cannot assure you that sales of our products will continue at current
volumes or prices if current competitors or new market entrants introduce new
products with better features, performance, price or other characteristics than
our products. Competitive pressures or other factors also may result in
significant price competition that could have a material adverse effect on our
results of operations.
We Have a Limited Market.
In our seismic business segment, we market our products to contractors and
large independent and government-owned oil and gas companies. We estimate that,
based on published industry sources, fewer than 100 seismic contracting
companies are currently operating worldwide (excluding those operating in Russia
and the former Soviet Union, India, the People's Republic of China and certain
Eastern European countries, where seismic data acquisition activity is difficult
to verify). We estimate that fewer than ten seismic contractors are engaged in
marine seismic exploration. In November 2001, two of our largest seismic
customers (Petroleum Geo-Services ASA and Veritas DGC Inc.), announced plans to
merge. Due to these market factors, a relatively small number of customers have
accounted for most of our sales. The loss of a small number of these customers
could materially and adversely impact our sales.
We Cannot Be Certain of Patent Protection of Our Products.
We have applied for and hold certain patents relating to our seismic data
acquisition and other products. We cannot assure you that our patents will prove
enforceable, that any patents will be issued for which we have applied or that
competitors will not develop functionally similar technology outside the
protection of any patents we have or may obtain.
20
Our Foreign Marketing Efforts Face Additional Risks and Difficulties.
Net sales outside the United States accounted for approximately 14.6% of
our net sales during fiscal year 2001. Additionally, our United States
subsidiaries engage in significant export sales. Substantially all of our sales
from the United States are made in U.S. dollars, but from time to time we may
make sales in foreign currencies and may, therefore, be subject to foreign
currency fluctuations on our sales. In addition, net assets reflected on the
balance sheet of our Russian, Canadian and U.K. subsidiaries are subject to
currency fluctuations. Significant foreign currency fluctuations could adversely
impact our results of operations.
Foreign sales are subject to special risks inherent in doing business
outside of the United States, including the risk of war, terrorist activities,
civil disturbances, embargo and government activities, all of which may disrupt
markets. Foreign sales are also generally subject to the risk of compliance with
additional laws, including tariff regulations and import and export
restrictions. Sales in certain foreign countries require prior United States
government approval in the form of an export license. We cannot assure you that
we will not experience difficulties in connection with future foreign sales.
We Rely on Key Suppliers for Significant Product Components.
A Japanese manufacturer unaffiliated with us is currently the only supplier
of wide format thermal printheads that we use to manufacture our wide format
thermal imager equipment. We often return significant quantities of these
products to the manufacturer for repair, testing and quality assurance review.
We believe we maintain an adequate inventory of these printheads to continue
production for two to three months.
A private corporation headquartered in New York State is currently the
primary supplier of dry thermal film used by our customers in the thermal
imaging equipment we manufacture (the "Primary Film Supplier"). We also have a
secondary supplier of dry thermal film headquartered in Europe. We know of no
other supplier of dry thermal film for our thermal imaging equipment. While
alternate suppliers might be able to provide dry thermal film, such film has not
historically performed as well in our thermal imaging equipment.
During April 2002, we purchased certain intellectual property rights from
our Primary Film Supplier for $2.0 million. Such purchase gives us exclusive
ownership of all technology used by the Primary Film Supplier to manufacture dry
thermal film used in the thermal imaging equipment we manufacture. Such purchase
includes technology currently existing and any technology later developed
by the Primary Film Supplier. In connection with the purchase, we licensed the
technology to the Primary Film Supplier on a perpetual basis, so long as it can
meet predefined quality and delivery requirements. Should the Primary Film
Supplier not meet such requirements, we have the right to license any third
party to manufacture dry thermal film. In conjunction with the purchase of this
technology, we received favorable price concessions from the Primary Film
Supplier. The proceeds from the sale are intended to be used by the Primary Film
Supplier to fund its working capital needs, thereby enabling it to continue
supplying dry thermal film to us for distribution to our customers. We have no
assurance that the transaction with the Primary Film Supplier will assure us a
continued supply of dry thermal film for the foreseeable future or that our
Primary Film Supplier will use the funds for working capital purposes.
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, or if our Primary Film Supplier was to discontinue supplying
dry thermal film or was unable or unwilling 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 51.7% of our common stock. Accordingly, OYO Corporation, through
its wholly owned subsidiary OYO Corporation U.S.A, is able to elect all of our
directors and to control our management, operations and affairs. We currently
have, and may continue to have, a variety of contractual relationships with OYO
Corporation and its affiliates.
21
Our Success Depends Upon A Limited Number of Key Personnel.
Our success depends on attracting and retaining highly skilled
professionals. A number of our employees are highly skilled engineers and other
professionals. If we fail to continue to attract and retain such professionals,
our ability to compete in the industry could be adversely effected. In addition,
our success depends to a significant extent upon the abilities and efforts of
several members of our senior management.
Terrorist Attacks in 2001 on the U.S. Together With the Downturn in the U.S.
Economy in 2001 May Adversely Affect our Business.
While we are not yet able to evaluate fully the effect of the recent
terrorist attacks on the U.S., which appear to have coincided with or
contributed to a general downturn in the U.S. economy, both such matters could
adversely affect our business in ways that we cannot yet identify. However, both
may adversely affect the demand for oil and gas generally and therefore, the
demand for our services to the oil and gas industry and related service
industry. They could also affect adversely the demand for consumer products,
which could in turn adversely affect our commercial graphics business. To the
extent these factors adversely affect other seismic companies in the industry,
we could see an oversupply of products and services and downward pressure on
pricing for seismic products and services that would affect us adversely.
Critical Accounting Policies.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the use
of estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. We consider many factors in selecting
appropriate operational and financial accounting policies and controls, and in
developing the estimates and assumptions that are used in the preparation of
these financial statements. We continually evaluate our estimates, including
those related to bad debts, inventory obsolescence, product warranty, intangible
assets and deferred income taxes. We base our estimates on historical experience
and various other factors that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
conditions or assumptions.
Revenue is primarily derived from the sale, and short-term rental under
operating lease, of seismic instruments and equipment and commercial graphics
products. Sales revenues are recognized when our products are shipped and title
and risk of loss have passed to the customer. Rental revenues are recognized as
earned over the rental period. Short-term rentals of our equipment generally
range from daily rentals to rental periods of up to six months. Products are
generally sold without any customer acceptance provisions and our standard terms
of sale do not allow customers to return products. Our products generally do not
require installation assistance or sophisticated instruction. We offer a
standard product warranty obligating us to repair or replace equipment with
manufacturing defects. We maintain a reserve for future warranty costs based on
historical experience. We record a write-down of inventory when the cost basis
of any manufactured product (including any estimated future costs to complete
the manufacturing process) exceeds its net realizable value.
Goodwill, representing the excess of purchase price over the fair value of
net assets acquired and other intangible assets are amortized on a straight-line
basis over the period of expected benefit, not exceeding 40 years. Goodwill is a
residual amount and is determined after numerous estimates are made regarding
the fair values of assets and liabilities included in a business combination. At
March 31, 2002, the Company had goodwill, net of accumulated amortization, of
$1.9 million. The carrying value of long-lived assets, including goodwill, is
reviewed periodically for impairment. Substantial judgment is necessary in the
determination as to whether an event or circumstances have occurred that may
trigger impairment. For information regarding our current and future accounting
policies regarding goodwill amortization, see Note 1 to the Consolidated
Financial Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations - Accounting Pronouncements.
22
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.
Adoption of New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"), as amended by SFAS
No. 137 and SFAS No. 138, was issued by the Financial Accounting Standards Board
in June 1998. SFAS 133 requires us to record 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.
Foreign Currency Exchange Rate Risk
We purchase printheads from OYO Corporation pursuant to terms under which
such purchases are denominated in Japanese Yen. We routinely attempt to hedge
our currency exposure on these purchases by entering into foreign currency
forward contracts with a bank. The purpose of entering into these forward hedge
contracts is to eliminate variability of cash flows associated with foreign
currency exposure risk on amounts payable in Japanese Yen. Under SFAS No. 133
and related interpretations, our forward contracts with the bank are considered
derivatives. SFAS No. 133, which was effective for our fiscal year 2001,
requires that we record these foreign currency forward contracts on the balance
sheet and mark them to fair value at each reporting date. Our aggregate dollar
exposure to forward yen contracts has never exceeded $0.4 million and such
contracts ordinarily are settled within 10 months. Resulting gains and losses
are reflected in income and were not material for our fiscal quarter ended March
31, 2002. At March 31, 2002, we had no exposure to yen denominated foreign
currency forward contracts, and we had $0.3 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 March 31, 2002 reflected approximately $1.2
million of net working capital related to our Russian subsidiary. This
subsidiary both receives its income and pays its expenses primarily in roubles.
To the extent that transactions of this subsidiary are settled in roubles, a
devaluation of the rouble versus the U.S. dollar could reduce any contribution
from our Russian subsidiary to our consolidated results of operations as
reported in U.S. dollars. We do not hedge the market risk with respect to our
operations in Russia; therefore, such risk is a general and unpredictable risk
of future disruptions in the valuation of Russian roubles versus U.S. dollars to
the extent such disruptions result in any reduced valuation of the Russian
subsidiary's net working capital or future contributions to our consolidated
results of operations.
Interest Rate Risk
We have a revolving line of credit with a bank which subjects us to the risk
of increased interest costs associated with any upward movements in bank market
interest rates. Our borrowing interest rate is the bank's prime rate
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(4.75% at March 31, 2002) with a minimum of 5.0%. Further, amounts payable under
the line of credit are due in full in January 2003. As of March 31, 2002, we had
borrowed $5.5 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. Similarly, we have a fixed rate (8.0%) loan in the
amount of $2,500,000 from the same bank payable in July 2002. Because of the
short-term maturity of this loan and the fixed rate, we do not perceive any
material market risk attributable thereto.
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On February 27, 2002, we held our Annual Meeting of Stockholders (the
"Meeting"). At the Meeting, our stockholders approved the election of Thomas L.
Davis, Ph.D. and Ernest M. Hall, Jr, as directors, each holding office until the
2005 Annual Meeting of Stockholders or until his successor is duly elected and
qualified. The results of the voting follows:
For Against Withheld
--------- ------- --------
Thomas L. Davis, Ph.D. 5,266,816 - 69,000
Ernest M. Hall, Jr. 5,266,716 - 69,100
The total voted shares represented by proxy was 5,538,380.
Item 6. Exhibits and Reports on Form 8-K
(a) The Company did not file any exhibits with this Quarterly Report.
(b) The Company did not file any reports on Form 8-K during the quarter for
which this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OYO GEOSPACE CORPORATION
Date: May 13, 2002 By: /s/ Gary D. Owens
-----------------------------------
Gary D. Owens, Chairman of the Board
President and Chief Executive Officer
(duly authorized officer)
Date: May 13, 2002 By: /s/ Thomas T. McEntire
-----------------------------------
Thomas T. McEntire
Chief Financial Officer
(principal financial officer)
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