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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year Ended September 30, 1999
[_] 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____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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There were 5,501,359 shares of the Registrant's Common Stock outstanding as of
the close of business on December 6, 1999. The aggregate market value of the
Registrant's Common Stock held by non-affiliates was approximately $32 million
(based upon the closing price of $13.63 on December 6, 1999, as reported by the
NASDAQ Stock Market, Inc.).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Registrant's 2000 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
report.
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PART I
Item 1. Business
Company and Seismic Industry Overview
We design and manufacture instruments and equipment used in the acquisition
and processing of seismic data and the commercial graphics industry. We have
been in the seismic instrument and equipment business since 1980, marketing our
products primarily to the oil and gas industry worldwide.
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 in several stages. First, an
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 then 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 attached to
the streamers. The streamers then transmit the electrical impulses back to the
vessel via telemetric cable included within the streamers, and the seismic data
is then processed in much the same manner as it is on land.
The seismic data acquisition industry suffered a substantial downturn in
fiscal 1999, which adversely impacted our operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Industry Overview and Market Trends and Outlook".
Products
Our seismic product lines currently include 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, thermal imaging products, marine seismic
cable retrieval devices and small data acquisition systems targeted at niche
markets. Our seismic products are compatible with most major seismic data
acquisition systems currently in use. We believe that our seismic products are
among the most technologically advanced instruments and equipment available for
seismic data acquisition.
We recently introduced seismic data acquisition products for use downhole.
These products are lowered into a borehole and provide both the energy source
and the sensing devices for high definition seismic data acquisition. 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.
Our products used in marine seismic data acquisition include our patented
marine seismic cable retrieval devices. Occasionally, streamers are severed and
become disconnected from the vessel as a result of inclement weather, vessel
traffic or human or technological error. Our seismic cable retrieval devices,
which are attached to the streamers, contain an air bag that is designed to
inflate automatically at a given depth, bringing the severed cable to the
surface. This can save the seismic contractor significant time and money over
the alternative of losing the seismic cable. We are also developing seismic
streamer "birds", which are rudderlike or finlike devices that attach to the
streamer which help maintain the streamer at a certain desired depth as it is
towed through the water.
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We also have adapted our thermal imaging technology, which we originally
developed for the seismic industry, for commercial applications in the
newsprint, silkscreen and corrugated printing industries. We believe that our
wide format thermal printers, which use dry film technology developed in
conjunction with a film manufacturer, are a cost-effective alternative to
conventional equipment. We expect to continue our research and development
activities to expand the markets for our thermal imaging products and to
increase the image clarity of our products. Thermal imaging and related
products used for commercial applications accounted for approximately 24% of our
sales in fiscal 1999.
We are also working to diversify our existing product lines and adapt our
manufacturing capabilities for uses in industries other than the oil and gas
industry.
Competition
Our principal competitors for geophones, hydrophones and geophone string
connectors are Input/Output, Inc. and Mark Products. We believe that we are one
of the largest manufacturers and distributors of geophones, hydrophones and
geophone string connectors in the world. In addition to these competitors,
certain manufacturers of marine streamers also manufacture hydrophones for their
own use.
We believe that the principal competitive factors in the seismic instruments
and equipment market are technological superiority, product durability and
reliability and customer service and support. Price and product delivery are
also important considerations for customers and pricing terms may become more
significant during an industry downturn. These factors can be offset by a
customer's preference for standardization. In general, particular customers
prefer to standardize geophones and hydrophones, particularly if they are used
by a single seismic crew or multiple crews that can support each other. This is
a factor in the ability of a geophone or hydrophone manufacturer to gain market
share from other such manufacturers.
A key competitive factor for seismic instruments and equipment is durability
under harsh field conditions. Instruments and equipment must not only meet
rigorous technical specifications regarding signal integrity and sensitivity,
but must also be extremely rugged and durable to withstand the rigors of field
use, often in harsh environments.
With respect to our marine seismic data products, we know of no other company
that manufactures a product similar to our patented seismic streamer retrieval
device. Our primary competitor in the manufacture of birds is Input/Output,
Inc.
We believe that our primary competitor in the seismic plotter industry is
Veritas DGC, Inc. The primary competitors for the commercial graphics market
are Xante, Gerber Scientific and EcoPro Imaging.
The primary competitors for downhole high definition seismic data acquisition
services are Baker Atlas, Schlumberger and Tomoseis.
With respect to competition concerning geophones, we and an agency of the
government of the People's Republic of China agreed in 1995 to terminate a joint
venture for the manufacturer of geophones in China based on the design for our
GS-20DX geophone. The former joint venture partner currently has the capability
and legal right to manufacture and market these geophones without restriction.
Although the GS-20DX geophone has been superseded by the more technologically
advanced GS-30CT and GS-32CT geophones, which the former joint venture partner
has no capabilities or rights to produce, we continue to manufacture and sell
limited quantities of the GS-20DX geophone. We therefore, may experience some
competition with respect to this older model geophone. We are unable to predict
the extent or effect of any such competition.
Suppliers
A Japanese manufacturer unaffiliated with us is currently the only supplier of
wide format printheads that we use in our wide format thermal plotters.
Recently, we have returned a significant quantity of these products to the
manufacturer for testing and quality assurance review. We believe we maintain
an adequate inventory of these
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printheads to continue production for two to three months. However, if this
supplier were to discontinue supplying these printheads or was unable or
unwilling to supply printheads in sufficient quantity to meet our requirements,
our ability to compete in the wide format thermal plotting market could be
severely impeded.
We are not presently experiencing any other supply or quality control problems
with our suppliers. However, these problems, if they develop, could have a
significant effect on our ability to meet future production and sales
commitments.
Product Manufacturing
Our manufacturing and product assembly operations consist of machining or
molding the necessary component parts, configuring these parts along with
components received from various vendors and assembling a final product. Upon
completion, we test the final products to the functional and environmental
extremes of product specifications and inspect the products for quality
assurance. Because we normally manufacture and ship based on customer orders,
we typically maintain no significant inventory of finished goods.
Markets and Customers
Our principal customers are seismic contractors and major, independent and
government owned oil and gas companies that either operate their own seismic
crews or specify seismic instrument and equipment preferences to contractors.
In addition to the seismic industry, we sell our wide format thermal plotters
for use in the newsprint, silkscreen and corrugated printing industries. To
date, we have sold these products primarily to equipment distributors that focus
on these industries.
Intellectual Property
We seek to protect our intellectual property by means of patents, trademarks,
trade secrets and other measures. Although we do not consider any single patent
essential to our success, we consider our patent regarding our marine seismic
cable retrieval devices to be of significant value to us. This patent is
scheduled to expire in 2008.
Employees
As of November 30, 1999, we employed approximately 351 people on a full-time
basis, of whom approximately 324 were employed in the United States. We have
never experienced a work stoppage and consider our relationship with our
employees to be satisfactory. None of our employees are unionized.
Item 2. Properties
We conduct operations at the following locations:
<TABLE>
<CAPTION>
Approximate
Location Owned/Leased Square Footage Use
-------- ------------ -------------- --------
<S> <C> <C> C>
Houston, Texas Owned 78,000 Manufacturing
Houston, Texas Leased 58,000 Manufacturing
Houston, Texas Leased 34,000 Manufacturing
Houston, Texas Owned 18,000 Manufacturing
Stafford, Texas Owned 20,000 Headquarters and
research and development
Calgary, Alberta, Canada Owned 21,000 Sales and service
Luton, Bedfordshire, England Owned 8,000 Sales and service
</TABLE>
We believe that our facilities are adequate for our current and immediately
projected needs.
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Item 3. Legal Proceedings
We are not aware of any current or pending litigation or proceedings that
could have a material adverse effect on our results of operations, cash flows or
financial condition.
Item 4. Submission of Matters to and Vote of Security Holders
None.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock began trading on the Nasdaq National Market on November 20,
1997, under the symbol "OYOG". Before that time, there was no market for our
common stock. On November 30, 1999, there were approximately 66 holders of
record of our common stock.
The following table presents the range of high and low bid quotations for our
common stock during the two years ended September 30, 1999, as reported by The
Nasdaq Stock Market, Inc.
<TABLE>
<CAPTION>
Year Ended September 30, 1999: Low High
- ------------------------------ -------- --------
<S> <C> <C>
First Quarter......................................... $ 7 3/4 $16 1/4
Second Quarter........................................ 6 3/4 9 5/8
Third Quarter......................................... 7 3/4 14
Fourth Quarter........................................ 10 14 5/8
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30, 1998: Low High
- -------------------------------- -------- --------
<S> <C> <C>
First Quarter......................................... $14 7/8 $19 3/4
Second Quarter........................................ 15 1/2 23 1/4
Third Quarter......................................... 19 7/8 34 1/8
Fourth Quarter........................................ 13 1/2 30 1/2
</TABLE>
Historically, we have not paid dividends, and we do not intend to pay cash
dividends on our common stock in the foreseeable future. We presently intend to
retain earnings for use in our business, with any future decision to pay cash
dividends dependent upon our growth, profitability, financial condition and
other factors the Board of Directors may deem relevant.
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Item 6. Selected Consolidated Financial Data
The following table sets forth certain selected historical financial data of
the Company on a consolidated basis. The selected consolidated financial data
was derived from the consolidated financial statements of the Company. The
selected consolidated financial data should be read in conjunction with the
consolidated financial statements of the Company appearing elsewhere in this
Form 10-K.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- -------------- ----------- -----------
(in thousands, except share and per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales......................................... $ 42,031 $ 65,823 $ 41,049 $ 30,878 $ 32,615
Cost of sales................................. 25,536 38,425 24,239 17,278 18,909
---------- ---------- ---------- ---------- ----------
Gross profit.................................. 16,495 27,398 16,810 13,600 13,706
Operating expenses:
Selling, general and administrative.......... 9,194 11,934 8,183 6,729 5,854
Research and development..................... 6,246 5,621 2,392 1,959 1,988
Bad debt expense (recovery) (1).............. 488 (97) (4,327) 2,860 1,013
---------- ---------- ---------- ---------- ----------
Total operating expenses...................... 15,928 17,458 6,248 11,548 8,855
---------- ---------- ---------- ---------- ----------
Income from operations........................ 567 9,940 10,562 2,052 4,851
Other income (expense), net................... 84 326 63 (466) (931)
---------- ---------- ---------- ---------- ----------
Income before income taxes.................... 651 10,266 10,625 1,586 3,920
Income tax expense (benefit)................. (187) 3,592 4,003 577 1,579
---------- ---------- ---------- ---------- ----------
Net income.................................... $ 838 $ 6,674 $ 6,622 $ 1,009 $ 2,341
========== ========== ========== ========== ==========
Basic earnings per share...................... $ 0.16 $ 1.32 $ 1.66 $ .25 $ .59
========== ========== ========== ========== ==========
Diluted earnings per share.................... $ 0.15 $ 1.29 $ 1.66 $ .25 $ .59
========== ========== ========== ========== ==========
Weighted average shares outstanding - Basic... 5,384,530 5,072,262 4,000,000 4,000,000 4,000,000
Weighted average share outstanding - Diluted.. 5,449,404 5,166,756 4,000,000 4,000,000 4,000,000
Other Financial Data:
Depreciation and amortization................. $ 4,319 $ 2,803 $ 1,470 $ 1,025 $ 891
Capital expenditures.......................... 3,656 11,953 6,396 2,063 1,391
</TABLE>
<TABLE>
<CAPTION>
As of September 30,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital............................... $ 32,339 $ 26,850 $ 16,140 $ 10,718 $ 9,266
Total assets.................................. 63,419 63,288 35,078 26,272 24,259
Short-term debt............................... 169 38 1,500 3,124 2,932
Long-term debt................................ 4,182 956 -- 7,919 7,818
Stockholder's equity.......................... 51,398 49,383 25,100 8,628 6,241
</TABLE>
(1) Includes $2.8 million in the year ended September 30, 1996, reflecting a
provision for loss on notes receivable from Grant Geophysical, Inc., which
reduced the carrying balance of those notes to zero. The total amount of
indebtedness on those notes as of September 26, 1997, including accrued
interest, was $6.8 million. On September 26, 1997, we received $6.2 million in
conjunction with those notes and related interest income, resulting in a
recovery, net of $1.0 million in purchase credit concessions, of $5.2 million
(including interest of $0.8 million). During the year ended September 30, 1998,
we received $0.2 million of additional recoveries on trade accounts receivable
with Grant Geophysical, Inc. that had been fully reserved in prior years.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is management's discussion and analysis of the major elements of
our consolidated financial statements. You should read this discussion and
analysis together with our consolidated financial statements and accompanying
notes and other detailed information appearing elsewhere in this Form 10-K. Our
discussion of our financial condition and results of operations includes various
forward-looking statements about our markets, the demand for our products and
services and our future results. These statements are based on assumptions that
we consider to be reasonable, but that could prove to be incorrect. For more
information regarding our assumptions, you should refer to "Forward-Looking
Statements".
Industry Overview and Market Trends and Outlook
We design and manufacture instruments and equipment used in the acquisition
and processing of seismic data for the oil and gas industry and for the
commercial graphics industry worldwide. Fiscal 1999 was a particularly
challenging year for the seismic industry as low oil and gas prices delayed land
exploration activities and caused seismic contractors to consolidate crews and
stack equipment. We believe the recent improvement in oil and gas prices should
result in an increase in geophysical activity in fiscal 2000, but we expect that
the industry will continue to be cautious until it becomes apparent that oil and
gas prices have stabilized at levels adequate to sustain profitability.
Demand for our products used in the acquisition and processing of seismic data
is dependent primarily upon the level of worldwide oil and gas exploration
activity. That activity, in turn, is dependent primarily upon the stability of
prevailing oil and gas prices. After a volatile and generally depressed price
environment in 1998, oil prices opened fiscal 1999 at moderate levels and
dropped sharply. The West Texas Intermediate Crude index (the "WTI Index")
reached nearly $16 per barrel on September 30, 1998, and fell sharply in October
and November to remain between $10 and $12 per barrel throughout the winter.
This rapid decline in oil prices forced most major oil companies to
significantly reduce their exploration budgets in 1999 which, in turn, caused
most seismic contractors (our primary customers) to significantly reduce the
number of operational crews performing seismic related activities. This crew
reduction resulted in large amounts of under utilized or idle seismic equipment
in the market place. As a result, we have experienced a decline in demand for
most of our seismic products.
Beginning in March 1999, oil prices rose steadily, in part as a result of
production quotas imposed by OPEC nations, with the WTI Index breaking $25 per
barrel in late September 1999. However, these commodity price increases have
not yet resulted in a recovery of demand for our products in the seismic
marketplace. Until the number of operational seismic crews increases
significantly and until idle seismic equipment is again utilized, we believe our
seismic equipment sales may continue to decline. Further, if oil and gas prices
return to lower levels, our sales may continue to decline.
Many of our customers have suffered from lower revenues and experienced
liquidity challenges resulting from the economic difficulties throughout our
industry. From time to time we extend credit to certain of our customers, and
our credit risks increase when our customers face a difficult business
environment. Recent industry conditions resulted in increased bad debt expense
in fiscal 1999 and could result in additional bad debt expense in future
periods.
The recent industry environment has resulted in, and may continue to result
in, competitive pricing pressures on our land-based seismic products. We intend
to respond competitively to these market forces in order to maintain, or
improve, our market share. In addition, the recent industry environment has
resulted in, and may continue to result in, a greater percentage of our sales
being attributable to products that historically have provided lower gross
profit margins. Further, as overall sales decrease, our manufacturing costs per
unit increase as fixed costs are allocated over fewer units. The combination of
these factors may result in lower gross profit margins in future periods.
Despite lower demand for our products throughout fiscal 1999, we continued our
efforts toward the development of new products and services that should perform
well as market conditions improve, including our new high-definition reservoir
characterization products and services. In addition, we have seen notable
increases in demand for our commercial graphics products that we believe should
continue in the new fiscal year.
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Acquisitions and Corporate Restructuring
On February 3, 1998, the Company acquired 100% of the outstanding common stock
of JRC/Concord Technologies, Inc. ("Concord") as well as certain related
intellectual property for $6.4 million, consisting of cash of $3.6 million and
the issuance of 159,120 shares of the Company's common stock valued at $2.8
million. Concord designs and manufactures equipment used in connection with
deepwater marine seismic surveys.
On November 30, 1998, we acquired substantially all of the assets of LTI, Inc.
and its Canadian subsidiary (together, "LTI") for approximately $1.8 million.
In connection with that acquisition, we issued 55,659 shares of our common stock
valued at $0.6 million and paid approximately $1.3 million of cash. The
operations of LTI included the design and manufacture of land and marine seismic
connectors, which we combined with our existing seismic connector manufacturing
operations.
In June 1999, we merged the manufacturing facilities of our land seismic
connectors and land seismic equipment business. This restructuring allowed us
to address our excess capacity issues in the down market by reducing our
workforce. This restructuring, together with additional cost-saving measures,
resulted in manufacturing and operating expense cost savings in the second half
of fiscal 1999 as compared to the same period in fiscal 1998.
To begin fiscal 2000, we formed a new wholly-owned subsidiary, Geospace
Engineering Resources, Inc., to commercialize downhole products and services for
high-definition reservoir characterization that we have developed since our
initial public offering in the first quarter of fiscal 1998. Although we expect
modest results in this arena in fiscal 2000, we believe this is a significant
future growth opportunity for us.
Results of Operations
The following table sets forth for the fiscal years ended September 30, 1999,
1998 and 1997, the percentage of certain income statement items to total sales:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- ----------
<S> <C> <C> <C>
Sales............................................. 100.0% 100.0% 100.0%
Cost of sales..................................... 60.8 58.4 59.0
Gross profit...................................... 39.2 41.6 41.0
Selling, general and administrative............... 21.9 18.1 19.9
Research and development.......................... 14.9 8.5 5.8
Bad debt expense (recovery)....................... 1.1 (0.1) (10.4)
Income from operations............................ 1.3 15.1 25.7
Other income (expense), net....................... 0.2 0.5 0.2
Income before income taxes........................ 1.5 15.6 25.9
Income tax expense (benefit)...................... (0.5) 5.5 9.8
Net income........................................ 2.0 10.1 16.1
</TABLE>
Year Ended September 30, 1999 Compared to Year Ended September 30, 1998.
Sales for fiscal year 1999 decreased $23.8 million, or 36%, from fiscal year
1998, primarily as a result of sharply reduced demand for our land-based seismic
products. This decrease was partially offset by an increase in sales of our
marine-based seismic products and thermal imaging products targeted outside the
seismic industry.
Cost of sales for fiscal year 1999 decreased $12.9 million, or 34%, from
fiscal year 1998, primarily as a result of reduced sales. Cost of sales
increased as a percentage of total sales to 60.8% in fiscal year 1999 from 58.4%
in fiscal year 1998. This percentage increase was generally attributable to
decreased manufacturing efficiencies as a result of the lower sales volume and
competitive pricing pressures associated with our land-based seismic products.
This percentage increase was partially offset by higher gross profit margins on
certain of our marine products. We could experience significantly lower gross
profit margins if our sales continue to decline or if our sales mix contains a
lesser percentage of marine products, which generally have higher gross profit
margins.
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Selling, general and administrative expenses for fiscal year 1999 decreased
$2.7 million, or 23%, from fiscal year 1998, primarily as a result of cost-
saving measures. Selling, general and administrative expenses increased as a
percentage of total sales to 21.9% in fiscal year 1999 from 18.1% in fiscal year
1998, principally reflecting the impact of fixed expenses over a lower sales
volume.
Research and development expenses for fiscal year 1999 increased $0.6 million,
or 11%, from fiscal year 1998, principally resulting from the increase in
research and development expenditures targeted at the development of our high-
definition reservoir characterization products. Research and development
expenses increased as a percentage of total sales to 14.9% in fiscal year 1999
from 8.5% in fiscal year 1998, reflecting both the increase in spending and
lower sales volume.
Bad debt expense (recovery) increased $0.6 million from fiscal 1998, primarily
due to the increased credit risk resulting from the business climate faced by
our customers, including two customers that sought bankruptcy protection during
fiscal 1999 and the benefit recognized in fiscal 1998 from bad debt recoveries
of $0.2 million. Bad debt expense (recovery) increased as a percentage of total
sales to 1.1% in fiscal year 1999 from (0.1)% in fiscal 1998.
Other income (expense), net decreased $0.2 million, or 74%, from fiscal 1998
and decreased as a percentage of total sales to 0.2% in fiscal year 1999 from
0.5% in fiscal year 1998, primarily as a result of increased interest expense
partially offset by net gains on the sale of surplus real estate.
We recorded a net benefit of $0.2 million for income taxes in fiscal 1999. The
net benefit includes a $0.3 million tax benefit resulting from the resolution of
contingent tax matters and the recognition of tax credits and other attributes
from prior years. Our effective tax rate for fiscal year 1999 was (28.7)%
compared to 35.0% in fiscal year 1998. Excluding the impact of the tax benefits,
our effective tax rate for fiscal 1999 would have been 19% compared to 35% for
fiscal 1998.
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997.
Sales for fiscal year 1998 increased $24.8 million, or 60%, from fiscal year
1997, primarily as a result of increased demand for our products and sales
generated from Concord, which we acquired in February 1998.
Cost of sales for fiscal year 1998 increased $14.2 million, or 59%, from
fiscal year 1997, primarily due to increased sales. Cost of sales decreased as a
percentage of total sales to 58.4% in fiscal year 1998 from 59.0% in fiscal year
1997. This percentage decrease was the result of increased sales of products
containing lower manufacturing costs and from the sale of marine-based seismic
products by Concord, which have higher gross profit margins.
Selling, general and administrative expenses for fiscal year 1998 increased
$3.8 million, or 46%, from fiscal year 1997, primarily due to expenses
associated with increased sales and the acquisition of Concord. Selling, general
and administrative expenses decreased as a percentage of total sales to 18.1% in
fiscal year 1998 from 19.9% in fiscal year 1997, principally reflecting the
impact of increased sales volume and the leveraging of certain fixed expenses.
Research and development expenses for fiscal year 1998 increased $3.2 million,
or 135%, from fiscal year 1997, principally resulting from the increase in
research and development expenditures targeted at new product development for
borehole seismic applications. Research and development expenses increased as a
percentage of total sales to 8.5% in fiscal year 1998 from 5.8% in fiscal year
1997.
Bad debt expense (recovery) increased as a percentage of total sales to (0.1)%
in fiscal year 1998 from (10.4)% in fiscal year 1997, principally resulting from
the recovery in fiscal year 1997 of $4.4 million of accounts previously written
off.
Other income (expense), net increased as a percentage of total sales to 0.5%
in fiscal year 1998 from 0.2% in fiscal year 1997, primarily due to interest
income earned on proceeds from our initial public offering in the first quarter
of
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fiscal 1998 and a decrease in interest expense as a result of using a portion of
the net proceeds of the offering to repay outstanding indebtedness.
Our effective tax rate for fiscal year 1998 was 35.0% compared to 37.7% in
fiscal year 1997. The decrease in our effective tax rate is principally the
result of the implementation of certain tax strategies designed to reduce our
domestic and foreign income tax expense.
Liquidity and Capital Resources
At September 30, 1999, we had $5.3 million in cash and cash equivalents. For
the year ended September 30, 1999, we generated $3.0 million of cash and cash
equivalents from operating activities, principally resulting from our net
income, adjusted for non-cash expenses and decreases in accounts receivable.
These sources of cash were partially offset by decreases in accounts payable and
accrued expenses.
For the year ended September 30, 1999, we used approximately $3.3 million of
cash and cash equivalents in investing activities, consisting of capital
expenditures of approximately $3.7 million and a business acquisition of
approximately $1.3 million, partially offset by $1.6 million of proceeds from
the sale of property and equipment. We estimate that our capital expenditures in
fiscal 2000 will be $5.0 million, which we expect to fund through operating cash
flow and borrowings under our credit facility as needed.
Financing activities for the year ended September 30, 1999 generated $1.5
million of cash, principally resulting from a $3.5 million increase in long-term
mortgage notes payable, offset by the repayment of long-term debt, principally
the repayment of $1.9 million of long-term debt assumed in connection with the
LTI asset acquisition.
At September 30, 1998, we had $4.0 million in cash and cash equivalents. For
the year ended September 30, 1998, cash and cash equivalents generated from
operating activities was $2.4 million, principally consisting of net income
offset by increases in accounts and notes receivable and inventories. For the
year ended September 30, 1998, we used approximately $14.3 million in investing
activities, consisting of capital expenditures of approximately $12.0 million
and a business acquisition of approximately $2.7 million, net of cash acquired.
Financing activities for the year ended September 30, 1998 generated $13.2
million of cash and cash equivalents, principally resulting from the proceeds
from our initial public offering totaling $14.6 million. A portion of these
proceeds were used to repay outstanding bank borrowings of $3.1 million.
At September 30, 1997, we had $2.5 million in cash and cash equivalents. For
the year ended September 30, 1997, cash generated from operating activities was
$10.0 million principally consisting of net income offset by increases in
accounts and notes receivable and inventories. Investing activities used
approximately $5.6 million, principally consisting of capital expenditures
offset by proceeds from the sale of rental equipment and other property, plant
and equipment. Financing activities used $2.7 million of cash, principally
consisting of the repayment of notes payable to related parties partially offset
by cash received from OYO Corporation U.S.A. for outstanding receivables and
additional capital contributions.
We have a working capital line of credit under which we are able to borrow up
to $10.0 million secured by our accounts receivable and inventory. The credit
agreement related to this line of credit expires in June 2000, although we
expect to extend or replace the facility before its scheduled expiration. Our
credit agreement prohibits us from paying cash dividends on our common stock,
limits our capital expenditures, limits our additional indebtedness to $7.5
million, requires us to maintain certain financial ratios and contains other
customary covenants. There were no borrowings outstanding at September 30, 1999
under our credit agreement, and borrowing availability was $10.0 million.
We obtained $3.5 million of cash from a mortgage loan in December 1998 secured
by one of our manufacturing facilities. We may consider obtaining additional
loans to be secured by mortgages on our other facilities. However, we cannot
assure you that we will be able to do so on terms we consider reasonable.
We believe that the combination of cash flow from operations and borrowing
availability under our credit agreement should provide us with sufficient
capital resources and liquidity to fund our operations for fiscal 2000.
10
<PAGE>
Year 2000 Issues
The "Year 2000 problem" is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer programs
having time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations in affected computer and operational systems.
State of Readiness. We have completed an upgrade of our internal accounting
and manufacturing software (information technology systems) to make those
systems more efficient and compatible company-wide. The suppliers of
substantially all of the software we now use for internal accounting and
manufacturing purposes have informed us that all of those suppliers' software is
Year 2000 compliant.
We have reviewed the operational computers built into certain of our
manufacturing equipment, such as milling machines and lathes (non-information
technology), to determine whether or not that equipment may be effected by the
Year 2000 problem. We have received assurances from the manufacturers of all of
our material manufacturing equipment that its operation will not be effected by
the Year 2000 problem.
We have solicited suppliers and vendors with whom we have a material
relationship to determine the readiness of those suppliers and vendors for the
Year 2000 problem. Most, but not all, of those vendors have responded and
indicated that they do not expect to be materially adversely impacted by Year
2000 problems.
Expected Costs and Material Risks. Through November 30, 1999, we have incurred
approximately $50,000 in direct expenses related to investigating our Year 2000
readiness and Year 2000 problems. We do not record internal costs of our
personnel in investigating Year 2000 problems. We do not expect that we will
incur material additional expenditures in discovering and addressing any Year
2000 problems we may have. The Year 2000 problem may impact customers,
suppliers, shippers and other entities with which we transact business, and we
cannot predict the effect of the Year 2000 problem on those entities or how
those entities' Year 2000 problems may indirectly effect us, despite those
entities' assurances of their Year 2000 readiness.
Further, our customers may use our seismic products in conjunction with data
acquisition systems that we did not manufacture. If those systems were to have
Year 2000 problems, it is possible that some of our customers would be unable to
engage in seismic data acquisition, which could result in a decrease in demand
for our products.
The foregoing statements are intended to be and are hereby designated "Year
2000 Readiness Disclosure" within the meaning of the Year 2000 Information and
Readiness Act.
Forward-Looking Statements
Certain of the statements we make in this document and in documents
incorporated by reference herein, including those made under the captions
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," are forward-looking statements for purposes of the
Securities Act of 1933 and the Securities Exchange Act of 1934. 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 as
well as the Year 2000 Issues described above. See "--Year 2000 Issues". You are
cautioned to consider the following factors and the statements described below
under the heading "Risk Factors" in connection with evaluating any such forward-
looking statements.
A Decline in Industry Conditions Could Effect 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 1999 were
materially and adversely affected by the downturn in the industry that began in
fiscal 1998. Although we currently expect that our results for fiscal 2000 will
show an improvement over fiscal 1999 due to the recent
11
<PAGE>
increase in oil and gas prices and drilling activity and a general industry view
that market conditions have bottomed out and are beginning to recover, the oil
and gas industry is extremely volatile and subject to change based on political
and economic factors outside our control.
Our estimates as to future results and industry trends described in this
document are based on assumptions regarding the future prices of oil and gas,
the level of seismic exploration activity and their effect on the demand and
pricing of our products and services. In analyzing the market and its impact on
us, we have made the following assumptions for fiscal 2000:
. The recent increase in the price of oil and gas will result in modest
increases in seismic exploration activity.
. Oil prices will average around $20 per barrel for West Texas
Intermediate crude, and average natural gas prices will remain at or
near their current levels.
. Demand for seismic instruments and equipment will gradually increase as
the current surplus of equipment in the industry is utilized, with the
strongest increases occurring in the second half of fiscal 2000. 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. With the expectation that fewer deep-water marine seismic
vessels will be constructed in fiscal 2000, demand for our marine
seismic products will decline. Demand for our products used in the
commercial graphics industry will increase with continued market
acceptance.
. Pricing for many of our products will continue to be subject to pricing
pressures due to industry consolidations and competition as the industry
recovers.
We have based these assumptions on various macro-economic factors, and actual
market conditions could vary materially from those assumed.
Our Credit Risks Could Increase as our Customers Continue to Face Difficult
Economic Circumstances.
We believe and have assumed that our reserves for bad debt at September 30,
1999 are 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 receivables 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 liquidity
difficulties, which increases those credit risks. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" "Business--Customers" and Notes 1 and 4 of Notes to
Consolidated Financial Statements.
Risk Factors
In addition to the uncertainties described above, the following risks could
impact our business and operations and should be considered by investors.
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
12
<PAGE>
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 and Market
Trends and Outlook".
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 this past year has been around 5,000
shares. This may result in greater volatility of our stock price.
Our Industry is Characterized by Rapid Technological Evolution and Product
Obsolescence.
Seismic 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, one of our competitors currently
offers a broader range of seismic instruments and equipment for sale and markets
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.
We market our products to seismic contractors and large, independent and
government-owned oil and gas companies. We estimate, based on published industry
sources, that fewer than 100 seismic contracting companies are currently
operating worldwide (excluding those operating in Russia and the former Soviet
Union, India, the People's Republic of China and certain Eastern European
countries, where seismic data acquisition activity is difficult to verify). We
estimate that fewer than ten seismic contractors are engaged in marine seismic
exploration. Due to these market factors, a relatively small number of customers
have accounted for most of our sales. The loss of a small number of these
customers could materially and adversely impact our sales. See "Business--
Markets and Customers".
13
<PAGE>
We Cannot Be Certain of Patent Protection of Our Products.
We have applied for and hold certain patents relating to our seismic data
acquisition and other products. We cannot assure you that our patents will prove
enforceable, that any patents will be issued for which we have applied or that
competitors will not develop functionally similar technology outside the
protection of any patents we have or may obtain.
Our Foreign Marketing Efforts Face Additional Risks and Difficulties.
Sales by our foreign subsidiaries accounted for approximately 11% of our sales
during fiscal 1999. Additionally, our United States subsidiaries engage in some
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 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, 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 a Single Supplier for a Significant Product Component.
A Japanese manufacturer unaffiliated with us is currently the only supplier of
wide format printheads that we use in our wide format thermal plotters. If this
supplier were to discontinue supplying these printheads or was unable or
unwilling to supply printheads in sufficient quantity to meet our requirements,
our ability to compete in the wide format thermal plotting market could be
severely impeded, which could adversely affect our financial performance. In
addition, we pay for the printheads in Japanese yen. Accordingly, we are at risk
that, due to currency fluctuations, the cost of the printheads to us could
increase.
Many of our products incorporate products or technology supplied by third
parties. To the extent we experience any significant supply or quality control
problems with our vendors, including those associated with the Year 2000 problem
(see "Year 2000 Issues"), those problems could adversely effect our ability to
meet future production and sales commitments.
We Are Subject to Control by a Principal Stockholder.
OYO Japan owns indirectly in the aggregate approximately 52% of our common
stock. Accordingly, OYO Japan, through its wholly-owned subsidiary OYO 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 Japan 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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
14
<PAGE>
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements, including the reports thereon, the
notes thereto and supplementary data begin at page F-1 of this Form 10-K and are
incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item is contained in our definitive Proxy
Statement to be distributed in connection with our 2000 Annual Meeting of
Stockholders under the captions "Election of Directors", "Executive Officers and
Compensation" and "Compliance With Section 16(A) of The Securities Exchange Act
of 1934" and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this Item is contained in our definitive Proxy
Statement to be distributed in connection with our 2000 Annual Meeting of
Stockholders under the caption "Executive Officers and Compensation" and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is contained in our definitive Proxy
Statement to be distributed in connection with our 2000 Annual Meeting of
Stockholders under the caption "Security Ownership of Certain Beneficial Owners
and Management" and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is contained in our definitive Proxy
Statement to be distributed in connection with our 2000 Annual Meeting of
Stockholders under the caption "Certain Relationships and Transactions" and is
incorporated herein by reference.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) and (d) Financial Statements and Financial Statement Schedules
The financial statements and financial statement schedules listed on the
accompanying Index to Financial Statements (see page F-1) are filed as part of
this Form 10-K.
(b) Reports on Form 8-K
None
(c) Exhibits
Exhibit
Number Description of Documents
- ------ ------------------------
3.1(a) Restated Certificate of Incorporation of the Registrant.
3.2(a) Restated Bylaws of the Registrant.
4.1(b) Business Loan Agreement, dated as of June 26, 1998, made by and
between the Company and Bank of America Texas, N.A.
15
<PAGE>
4.3(b) Security Agreements, dated as of June 26, 1998, made by the Registrant
and its Subsidiaries in favor of Bank of America Texas, N.A.
10.1(a) Employment Agreement between the Company and Gary D. Owens.
10.2(a) Employment Agreement between the Company and Michael J. Sheen.
10.3(c) OYO Geospace Corporation 1997 Key Employee Stock Option Plan.
10.4(d) Amendment No. 1 to OYO Geospace Corporation 1997 Key Employee Stock
Option Plan, dated February 2, 1998.
10.5(d) Amendment No. 2 to OYO Geospace Corporation 1997 Key Employee Stock
Option Plan, dated November 16, 1998.
10.6(c) OYO Geospace Corporation 1997 Non-Employee Director Plan.
10.7(a) Printhead Purchase Agreement dated November 10, 1995 between the
Company and OYO Corporation.
10.8(a) Master Sales Agreement dated November 10, 1995 between the Company and
OYO Corporation.
10.9(e) Form of Director Indemnification Agreement.
10.10(b) Promissory Note, dated as of June 23, 1998, made by and between the
Registrant and Ameritas Life Insurance Corp.
10.11(b) Business Loan Agreement, dated as of June 26, 1998, made by and
between the Company and Bank of America Texas, N.A.
10.12(b) Security Agreements, dated as of June 26, 1998, made by the Registrant
and its Subsidiaries in favor of Bank of America Texas, N.A.
10.13(b) Business Loan Continuing Guaranty Agreements, dated as of June 26,
1998, made by the Registrant and its Subsidiaries in favor of
Bank of America Texas, N.A.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule.
_____________________
(a) Incorporated by reference to the Registrant's Registration Statement
on Form S-1 filed September 30, 1997 (Registration No. 333-36727).
(b) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1998
(File No. 001-13601).
(c) Incorporated by reference to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 filed November 5, 1997
(Registration No. 333-36727).
(d) Incorporated by reference to Registrant's Annual Report on Form 10-K
for the year ended September 30, 1998 (File No. 001-13601).
(e) Incorporated by reference to Amendment No. 2 to the Registrant's
Registration Statement on Form S-1 filed November 18, 1997
(Registration No. 333-36727).
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OYO GEOSPACE CORPORATION
By: /s/ GARY D. OWENS
------------------------------------
Gary D. Owens, Chairman of the Board
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act, this Annual Report
on Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ GARY D. OWENS Chairman of the Board December 7, 1999
- ----------------------------
Gary D. Owens President and Chief Executive
Officer (Principal Executive
Officer)
/s/ THOMAS T. McENTIRE Chief Financial Officer December 7, 1999
- ----------------------------
Thomas T. McEntire (Principal Financial and
Accounting Officer)
/s/ SATORU OHYA Director December 7, 1999
- ----------------------------
Satoru Ohya
/s/ KATSUHIKO KOBAYASHI Director December 7, 1999
- ----------------------------
Katsuhiko Kobayashi
/s/ ERNEST M. HALL, JR. Director December 7, 1999
- ----------------------------
Ernest M. Hall, Jr.
/s/ MICHAEL J. SHEEN Director December 7, 1999
- ----------------------------
Michael J. Sheen
/s/ THOMAS L. DAVIS Director December 7, 1999
- ----------------------------
Thomas L. Davis
/s/ CHARLES H. STILL Director December 7, 1999
- ----------------------------
Charles H. Still
</TABLE>
17
<PAGE>
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants.................................. F-2
Consolidated Balance Sheets as of September 30, 1999 and 1998...... F-3
Consolidated Statements of Operations for the Years Ended
September 30, 1999, 1998 and 1997.................................. F-4
Consolidated Statement of Stockholders' Equity for the Years
Ended September 30, 1999, 1998 and 1997............................ F-5
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1999, 1998 and 1997.................................. F-6
Notes to Consolidated Financial Statements......................... F-7
Report of Independent Accountants on Financial Statement Schedule.. F-21
Schedule II - Valuation and Qualifying Accounts.................... F-22
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of OYO Geospace Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of OYO Geospace
Corporation and subsidiaries at September 30, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1999, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
November 5, 1999
F-2
<PAGE>
OYO Geospace Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-----------------------------------
ASSETS 1999 1998
----------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................................... $ 5,280 $ 3,970
Trade accounts and current portion of notes receivable, net of
allowance of $580 and $503.................................................. 7,770 11,946
Inventories................................................................... 21,941 19,660
Deferred income tax........................................................... 1,864 1,827
Prepaid expenses and other.................................................... 1,394 783
------- -------
Total current assets.................................................. 38,249 38,186
Rental equipment, net........................................................... 1,654 2,615
Property, plant and equipment, net.............................................. 17,060 16,763
Patent, net of accumulated amortization of $480 and $217........................ 3,303 3,463
Goodwill, net of accumulated amortization of $424 and $312...................... 2,295 1,047
Deferred income tax............................................................. 729 818
Other assets.................................................................... 129 396
------- -------
Total assets.......................................................... $63,419 $63,288
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt........................ $ 169 $ 38
Accounts payable:
Trade...................................................................... 1,853 4,421
Related parties............................................................ 939 1,095
Accrued expenses.............................................................. 2,630 5,276
Income tax payable............................................................ 319 506
------- -------
Total current liabilities............................................. 5,910 11,336
Long-term debt.................................................................. 4,182 956
Deferred income tax............................................................. 1,929 1,613
------- -------
Total liabilities..................................................... 12,021 13,905
------- -------
Stockholders' equity:
Preferred stock, 1,000,000 shares authorized, no shares
issued and outstanding..................................................... -- --
Common stock, $.01 par value, 20,000,000 shares
authorized, 5,501,359 and 5,439,030 shares issued and outstanding...........
55 54
Additional paid-in capital.................................................... 29,914 29,280
Retained earnings............................................................. 23,066 22,228
Accumulated other comprehensive loss.......................................... (456) (509)
Unearned compensation-restricted stock awards................................. (1,181) (1,670)
------- -------
Total stockholders' equity............................................ 51,398 49,383
------- -------
Total liabilities and stockholders' equity............................ $63,419 $63,288
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
OYO Geospace Corporation and Subsidiaries
Consolidated Statements of Operations
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------
1999 1998 1997
----------------- ------------------ -----------------
<S> <C> <C> <C>
Sales........................................................... $ 42,031 $ 65,823 $ 41,049
Cost of sales................................................... 25,536 38,425 24,239
---------- ---------- ----------
Gross profit.................................................... 16,495 27,398 16,810
Operating expenses:
Selling, general and administrative expenses.................. 9,194 11,934 8,183
Research and development expenses............................. 6,246 5,621 2,392
Bad debt expense (recovery)................................... 488 (97) (4,327)
---------- ---------- ----------
Total operating expenses............................... 15,928 17,458 6,248
---------- ---------- ----------
Income from operations.......................................... 567 9,940 10,562
---------- ---------- ----------
Other income (expense):
Interest expense.............................................. (336) (59) (606)
Interest income............................................... 257 334 721
Other, net.................................................... 163 51 (52)
---------- ---------- ----------
Total other income (expense), net...................... 84 326 63
---------- ---------- ----------
Income before income taxes...................................... 651 10,266 10,625
Income tax expense (benefit).................................... (187) 3,592 4,003
---------- ---------- ----------
Net income...................................................... $ 838 $ 6,674 $ 6,622
========== ========== ==========
Earnings per common share:
Basic................................................... $ 0.16 $ 1.32 $ 1.66
========== ========== ==========
Diluted................................................. $ 0.15 $ 1.29 $ 1.66
========== ========== ==========
Weighted average shares outstanding:
Basic................................................... 5,384,530 5,072,262 4,000,000
========== ========== ==========
Diluted................................................. 5,449,404 5,166,756 4,000,000
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
OYO Geospace Corporation and Subsidiaries
Consolidated Statement of Stockholders' Equity
For the years ended September 30, 1999, 1998 and 1997
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Unearned
Accumulated Compensation-
Additional Receivable Other Restricted
Common Stock Paid-In Retained From Comprehensive Stock
---------------------
Shares Amount Capital Earnings Parent Income (Loss) Awards Total
---------- -------- ---------- -------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996 $4,000,000 $ 40 $ 4,687 $ 8,932 $ (4,746) $ (285) $ -- $ 8,628
Comprehensive income:
Net income................... -- -- -- 6,622 -- -- -- 6,622
Foreign currency translation
adjustments................ -- -- -- -- -- 6 -- 6
--------
Total comprehensive income 6,628
Capital contribution from
Parent...................... -- -- 5,098 -- -- -- -- 5,098
Decrease in receivable from
Parent...................... -- -- -- -- 4,746 -- -- 4,746
---------- -------- ---------- -------- ---------- ------------- ------------ --------
Balance at September 30, 1997 4,000,000 40 9,785 15,554 -- (279) -- 25,100
Comprehensive income:
Net income.................. -- -- -- 6,674 -- -- -- 6,674
Foreign currency translation
adjustments................ -- -- -- -- -- (230) -- (230)
--------
Total comprehensive income 6,444
Initial public offering of
common stock (net of issuance
costs of $1,483)............. 1,150,000 11 14,617 -- -- -- -- 14,628
Issuance of common stock
pursuant to restricted stock
awards....................... 129,000 1 2,051 -- -- -- (2,052) --
Issuance of common stock
pursuant to Director Plan.... 910 -- 25 -- -- -- -- 25
Issuance of common stock in
acquisition of business...... 159,120 2 2,802 -- -- -- -- 2,804
Unearned compensation
amortization................. -- -- -- -- -- -- 382 382
---------- -------- ---------- -------- ---------- ------------- ------------ --------
Balance at September 30, 1998 5,439,030 54 29,280 22,228 -- (509) (1,670) 49,383
Comprehensive income:
Net income.................. -- -- -- 838 -- -- -- 838
Foreign currency translation
adjustments................ -- -- -- -- -- 53 -- 53
--------
Total comprehensive income 891
Issuance of common stock
pursuant to restricted stock
awards....................... 3,000 -- 24 -- -- -- (24) --
Issuance of common stock
pursuant to Director Plan.... 3,670 -- 25 -- -- -- -- 25
Issuance of common stock in
acquisition of business...... 55,659 1 585 -- -- -- -- 586
Unearned compensation
amortization................. -- -- -- -- -- -- 513 513
---------- -------- ---------- -------- ---------- ------------- ------------ --------
Balance at September 30, 1999 5,501,359 $ 55 $ 29,914 $ 23,066 $ -- (456) $ (1,181) $ 51,398
========== ======== ========== ======== ========== ============= ============ ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
OYO Geospace Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
1999 1998 1997
------------- -------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................................................... $ 838 $ 6,674 $ 6,622
Adjustments to reconcile net income to net cash provided
by operating activities:
Deferred income tax expense (benefit)......................................... 368 (1,213) 1,482
Depreciation and amortization................................................. 4,319 2,803 1,470
Gain on disposal of rental equipment and property, plant and equipment (125) (48) (101)
Bad debt expense.............................................................. 488 62 205
Effects of changes in operating assets and liabilities:
Trade accounts and notes receivable......................................... 4,375 (4,531) (984)
Inventories................................................................. (533) (3,429) (2,171)
Prepaid expenses and other assets........................................... 251 (832) (268)
Accounts payable............................................................ (3,518) 2,388 443
Accrued expenses and other.................................................. (3,233) 1,040 1,785
Income tax payable.......................................................... (188) (472) 1,515
------- -------- -------
Net cash provided by operating activities................................ 3,042 2,442 9,998
------- -------- -------
Cash flows from investing activities:
Proceeds from sale of rental equipment and property, plant and
equipment..................................................................... 1,625 311 794
Capital expenditures............................................................. (3,656) (11,953) (6,396)
Business acquisitions, net of cash acquired...................................... (1,259) (2,688) --
------- -------- -------
Net cash used in investing activities.................................... (3,290) (14,330) (5,602)
------- -------- -------
Cash flows from financing activities:
Increase in notes payable to banks............................................... 9,500 1,700 1,500
Principal payments on notes payable to banks..................................... (8,036) (3,113) --
Principal payments on notes payable to related parties........................... -- -- (9,733)
Net proceeds from initial public offering of common stock........................ -- 14,628 --
Contributions from Parent........................................................ -- -- 816
Decrease in receivable from Parent............................................... -- -- 4,746
------- -------- -------
Net cash provided by (used in) financing activities...................... 1,464 13,215 (2,671)
------- -------- -------
Effect of exchange rate changes on cash............................................ 94 155 (17)
------- -------- -------
Increase in cash and cash equivalents.............................................. 1,310 1,482 1,708
Cash and cash equivalents, beginning of period..................................... 3,970 2,488 780
------- -------- -------
Cash and cash equivalents, end of period........................................... $ 5,280 $ 3,970 $ 2,488
======= ======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
1. Summary of Significant Accounting Policies:
The Company
OYO Geospace Corporation ("OYO") designs, manufactures and distributes
instruments and equipment used primarily in the acquisition and processing of
seismic data for the oil and gas industry. Prior to the completion of an
initial public offering of common stock on November 26, 1997, OYO was a wholly-
owned subsidiary of OYO Corporation U.S.A. ("OYO USA" or "Parent"). OYO USA is
a wholly-owned subsidiary of OYO Corporation, a Japanese corporation ("OYO
Japan"). As of September 30, 1999, approximately 52% of OYO's common stock was
owned by OYO USA.
OYO and its subsidiaries are referred to collectively as the "Company". The
significant accounting policies followed by the Company are summarized below.
Basis of Presentation
The accompanying financial statements present the consolidated financial
position, results of operations and cash flows of the Company in accordance with
generally accepted accounting principles. Significant intercompany balances and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt securities purchased with an
original or remaining maturity at the time of purchase of three months or less
to be cash equivalents.
Concentrations of Credit Risk
The Company maintains its cash in bank deposit accounts which, at times,
exceed federally insured limits. Management believes that the financial
strength of the financial institutions that hold such deposits minimizes the
credit risk of such deposits.
The Company sells products to customers throughout the United States and
various foreign countries. The Company's normal credit terms for trade
receivables are 30 days. In certain situations, credit terms may be extended to
60 days or longer. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. Additionally, the Company
provides long-term financing in the form of promissory notes when competitive
conditions require such financing. Allowances are maintained for potential
credit losses.
Demand for the Company's products used in the acquisition and processing of
seismic data is dependent primarily upon the level of worldwide oil and gas
exploration activity. Such activity, in turn, is dependent upon several
factors. Oil and gas prices, a principal factor, are subject to wide
fluctuations for a variety of reasons beyond the control of the Company.
Beginning in October 1998 and continuing through the ensuing winter months,
crude oil prices fell to their lowest levels since 1986. The reduction in
prices prompted lower exploration budgets by energy companies, which resulted in
lower seismic data gathering activity and reduced demand for the Company's
seismic data acquisition equipment. The reduction in seismic data gathering
activity also placed economic burdens on many seismic contractors, which are the
Company's primary customers. While crude oil prices have recovered in recent
months, the level of seismic data gathering activity has, to date, not reflected
a corresponding increase. It is reasonably possible that seismic data gathering
activity may not return to previous levels in the near term, which may
contribute to the deterioration in the financial condition of certain customers
and which may lead to trade accounts and notes receivable payment defaults that
have a material adverse effect on the Company's financial position and results
of operations.
F-7
<PAGE>
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Inventories
Inventories are stated at the lower of cost (as determined by the first-in,
first-out method) or market. A single company is the sole supplier of a key
component of the Company's wide-body thermal plotters.
Property, Plant and Equipment and Rental Equipment
Property, plant and equipment and rental equipment are stated at cost.
Depreciation expense is provided by straight-line method over the following
estimated useful lives:
<TABLE>
<CAPTION>
Years
--------
<S> <C>
Rental equipment.............................................................. 3-5
Property, plant and equipment:
Machinery and equipment..................................................... 3-15
Buildings................................................................... 25
Other....................................................................... 5-10
</TABLE>
Expenditures for renewals and betterments are capitalized. Repairs and
maintenance are charged to expense as incurred. The cost and accumulated
depreciation of assets sold or otherwise disposed of are removed from the
accounts and any gain or loss thereon is reflected in the statement of
operations.
Revenue Recognition
Revenue is primarily derived from the sale, and short-term rental under
operating lease, of seismic instruments and equipment. Revenue is recognized
when the products are shipped and title has passed to the customer or when
rentals occur. Short-term rentals comprised less than 10% of sales revenues for
fiscal 1999, 1998 and 1997.
Foreign Currency Gains and Losses
The assets and liabilities of foreign subsidiaries have been translated into
U.S. dollars using the exchange rates in effect at the balance sheet date.
Results of operations have been translated using the average exchange rates
during the year. Resulting translation adjustments have been recorded as a
component of accumulated other comprehensive loss in stockholders' equity.
Foreign currency transaction gains and losses are included in the results of
operations as they occur.
Income Taxes
The Company was included in the consolidated U.S. income tax return of OYO
USA through the date of the initial public offering and the income taxes for all
periods prior to that date have been allocated to the Company as if it filed a
separate return. Effective with the income tax reporting period ended September
30, 1998, OYO and its U.S. subsidiaries file a consolidated income tax return.
Foreign subsidiaries file separate income tax returns in the applicable foreign
jurisdictions.
The Company follows the liability method of accounting for income taxes
whereby deferred tax assets and liabilities are determined based on the
differences between financial reporting and tax basis of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. The Company provides a valuation
allowance, if necessary, to reduce deferred tax assets to their estimated
realizable value.
Research and Development Costs
Research and development costs are expensed as incurred.
Patent
A patent acquired in a business acquisition is being amortized using the
straight-line method over the estimated life of 15 years.
F-8
<PAGE>
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Goodwill
Goodwill represents the excess of the purchase price of purchased businesses
over the estimated fair value of the acquired business' net assets. Goodwill is
amortized using the straight-line method over periods ranging from 15 to 40
years. The Company reviews the carrying value of goodwill and other long-lived
assets to determine whether there has been an impairment since the date of
acquisition by comparing the book value of those assets to the anticipated
future undiscounted cash flows of those businesses or transactions which gave
rise to the assets. If such undiscounted cash flows are less than the book
value of the assets, such assets are written down to fair value.
Product Warranties
The Company sells products under warranties generally ranging from one to
three years. The estimated future cost under existing warranties has been
provided for in the accompanying financial statements.
Stock-Based Compensation
The Company measures compensation expense related to stock-based employee
compensation plans using the intrinsic value method as prescribed in Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees". Accordingly, compensation cost for stock-based awards is measured
as the excess, if any, of the fair market value of the Company's stock at the
date of grant over the exercise price of the award. Compensation cost
determined at the grant date is recognized as expense over the related vesting
period.
Financial Instruments
Fair value estimates are made at discrete points in time based on relevant
market information. These estimates may be subjective in nature and involve
uncertainties and matters of significant judgement and, therefore, cannot be
determined with precision.
The Company believes that the carrying amounts of its financial instruments,
consisting of cash and cash equivalents, accounts and notes receivable, accounts
payable and long-term debt, approximate the fair values of such items.
2. Acquisitions:
On February 3, 1998, the Company acquired 100% of the outstanding common
stock of JRC/Concord Technologies, Inc. ("Concord") as well as certain related
intellectual property for $6.4 million, consisting of cash of $3.6 million and
the issuance of 159,120 shares of the Company's common stock valued at $2.8
million. Concord designs and manufactures equipment used in connection with
deepwater marine seismic surveys.
On November 30, 1998, the Company acquired substantially all of the assets of
LTI, Inc. and its Canadian subsidiary (together, "LTI") for approximately $1.8
million. In connection with that acquisition, the Company issued 55,659 shares
of its common stock valued at $0.6 million and paid approximately $1.3 million
of cash. The operations of LTI included the design and manufacture of land and
marine seismic connectors, which were combined with the Company's existing
seismic connector manufacturing operations.
F-9
<PAGE>
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The allocation of the purchase price, including related direct costs, and a
reconciliation of the purchase price to the cash used for business acquisitions
is as follows (in thousands):
<TABLE>
<CAPTION>
LTI CONCORD
------------------ ------------------
<S> <C> <C>
Fair values of assets and liabilities.......................................
Net current assets..................................................... $ 1,907 $ 2,465
Property, plant and equipment.......................................... 483 1,688
Patent................................................................. -- 3,587
Goodwill............................................................... 1,348 --
Deferred income tax.................................................... -- (441)
Long-term debt......................................................... (1,893) (907)
------- -------
Total allocated purchase price.................................... 1,845 6,392
Less noncash consideration - common stock issued............................ (586) (2,804)
Less cash of acquired business.............................................. -- (900)
------- -------
Cash used for business acquisition, net of cash acquired.................... $ 1,259 $ 2,688
======= =======
</TABLE>
The consolidated results of operations of the Company include the results of
acquired businesses from the dates of acquisition. The revenues and net income
of acquired businesses prior to the acquisition dates were not material to the
Company's consolidated results of operations.
3. Inventories:
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
Finished goods.............................................................. $ 3,070 $ 3,282
Work in process............................................................. 2,639 3,686
Raw materials............................................................... 16,232 12,692
------- -------
$21,941 $19,660
======= =======
</TABLE>
4. Notes Receivable:
At September 30, 1999 and 1998, the Company had outstanding notes receivable
from customers in the amount of $0.8 million and $0.2 million, respectively,
which are included in current trade accounts and notes receivable. The notes
receivable outstanding at September 30, 1999, bear interest at rates up to 15%
and are collectible in monthly installments through March 2000. At September
30, 1999 and 1998, the reported amount of notes receivable was net of an
allowance for doubtful accounts of $0.2 million and $0.1 million, respectively.
In September 1997, the Company collected $6.2 million, including $0.1 for
legal fees, in the final settlement of outstanding notes receivable with a
customer. Prior to fiscal 1997, the Company had provided an allowance for
doubtful accounts against the entire outstanding principal balance of the notes
receivable and had deferred the recognition of interest income earned during
fiscal 1997 and prior years as a result of the customer's financial
difficulties. The Company recognized $5.1 million of income in fiscal 1997 from
the settlement, consisting of $4.4 million of recovery of bad debt expense
recognized in the current and prior years, and $0.7 million of interest income.
In connection with the settlement, the Company provided the customer with $1.0
million of equipment purchase credits, which were utilized during fiscal 1998.
F-10
<PAGE>
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
5. Rental Equipment:
Rental equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
--------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
Geophones and related products............................................... $ 5,036 $ 5,311
Less accumulated depreciation................................................ (3,382) (2,696)
------- -------
$ 1,654 $ 2,615
======= =======
</TABLE>
6. Property, Plant and Equipment:
Property, plant and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
---------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Land.......................................................................... $ 1,523 $ 1,845
Buildings..................................................................... 8,585 9,728
Machinery and equipment....................................................... 10,172 8,033
Furniture and fixtures........................................................ 1,361 509
Transportation equipment...................................................... 320 396
Tools and molds............................................................... 1,628 1,293
Leasehold improvements........................................................ 791 307
Construction in progress...................................................... 52 1,113
------- -------
24,432 23,224
Accumulated depreciation and amortization..................................... (7,372) (6,461)
------- -------
$17,060 $16,763
======= =======
</TABLE>
7. Notes Payable and Long-term Debt:
Notes payable and long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
---------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Mortgage note payable, due in monthly installments with
interest at 7.0% through January 2014, collateralized by
certain land and building................................................... $3,398 $ --
Mortgage note payable, due in monthly installments with
interest at 7.6% through July 2013, collateralized by
certain land and building................................................... 953 994
------ -----
4,351 994
Less current portion.......................................................... (169) (38)
------ -----
$4,182 $ 956
====== =====
</TABLE>
The Company has a $10.0 million working capital line of credit (the "Credit
Agreement") with a bank that expires in June 2000. Borrowings under the Credit
Agreement are subject to borrowing base restrictions based on consolidated
operating results and are collateralized by the Company's accounts receivable
and inventory. At the Company's option, interest on borrowings is based on the
Bank's prime rate or offshore rate. The Credit Agreement prohibits the payment
of cash dividends on the Company's common stock, limits capital expenditures,
limits additional indebtedness to $7.5 million, requires the maintenance of
certain financial amounts and contains other covenants customary in transactions
of this type. As of September 30, 1999, the amount available for borrowings,
F-11
<PAGE>
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
subject to the borrowing base, was $10.0 million. The company had no outstanding
borrowings under the Credit Agreement as of September 30, 1999 and 1998.
Annual maturities of long-term debt and notes payable as of September 30, 1999
were (in thousands): $169 in fiscal 2000; $198 in fiscal 2001; $212 in fiscal
2002; $228 in fiscal 2003; $245 in fiscal 2004 and $3,299 thereafter.
8. Accrued Expenses:
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Employee bonuses................................... $ 185 $2,356
Product warranty................................... 410 776
Compensated absences............................... 501 465
Legal and professional fees........................ 266 251
Payroll............................................ 402 613
Property taxes..................................... 681 415
Other.............................................. 185 400
------ ------
$2,630 $5,276
====== ======
</TABLE>
9. Stockholders' Equity:
In September 1997, the board of directors of the Company approved an increase
in the authorized shares of the Company's common stock to 20,000,000 and
approved a 4,000-for-1 common stock split. Earnings per share information for
fiscal 1997 has been computed as if the Company's common stock, giving effect to
the stock split, had been outstanding for the entire year.
In November 1997, the Company completed an initial public offering (the
"Offering") of its common stock by selling 2,300,000 common shares, including
1,150,000 common shares previously owned by OYO USA. After deducting
underwriting discounts and offering expenses, the net proceeds from the Offering
were $29.2 million, which were split equally between the Company and the OYO
USA.
10. Employee Benefits:
The Company's employees are participants in the OYO Geospace Corporation
Employee's 401(k) Retirement Plan (the "Plan"), which covers substantially all
eligible employees in the United States. The Plan is a qualified salary
reduction plan in which all eligible participants may elect to have a percentage
of their compensation contributed to the Plan, subject to certain guidelines
issued by the Internal Revenue Service. The Company's share of discretionary
matching contributions was approximately $0.3 million, $0.3 million, and $0.2
million in fiscal 1999, 1998 and 1997, respectively.
In September 1997, the board of directors approved the 1997 Key Employee Stock
Option Plan (the "Employee Plan") and reserved an aggregate of 425,000 shares
for issuance thereunder. In November 1997, the board of directors and
stockholders approved the Company's 1997 Non-Employee Director Plan (the
"Director Plan") and reserved an aggregate of 75,000 shares for issuance
thereunder. There were 211,850 shares available for grant under these plans at
September 30, 1999.
Under the Employee Plan, the Company is authorized to issue nonqualified and
incentive stock options to purchase common stock and restricted stock awards of
common stock to key employees of the Company. Options have a term not to exceed
ten years, with the exception of incentive stock options granted to employees
owning ten percent or more of the outstanding shares of common stock, which have
a term not to exceed five years. The
F-12
<PAGE>
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
exercise price of any option may not be less than the fair market value of the
common stock on the date of grant. In the case of incentive stock options
granted to an employee owning ten percent or more of the outstanding shares of
common stock, the exercise price of such option may not be less than 110% of the
fair market value of the common stock on the date of grant. Options vest over a
four-year period commencing on the date of grant in 25% annual increments. Under
the Employee Plan, the Company may issue shares of restricted stock to employees
for no payment by the employee or for a payment below the fair market value on
the date of grant. The restricted stock is subject to certain restrictions
described in the Employee Plan, with no restrictions continuing for more than
ten years from the date of the award.
The Company established the Director Plan, pursuant to which options to
purchase shares of common stock are granted annually to non-employee
directors and pursuant to which one-half of the annual fees paid for the
services of such non-employee directors is paid in shares of common stock based
on the fair market value thereof at the date of grant. Options granted under the
Director Plan have a term of ten years. The exercise price of each option
granted is the fair market value of the common stock on the date of grant.
Options vest over a one-year period commencing on the date of grant.
A summary of the activity with respect to stock options is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
------------ -----------
<S> <C> <C>
Outstanding at October 1, 1997 -- $ --
Granted........................................................ 313,000 16.00
Exercised...................................................... -- --
Forfeited...................................................... (6,000) 14.00
------- ------
Outstanding at September 30, 1998................................. 307,000 16.04
Granted........................................................ 105,900 10.66
Exercised...................................................... -- --
Forfeited...................................................... (21,750) 17.10
------- ------
Outstanding at September 30, 1999................................. 391,150 $14.56
======= ======
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable at September 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Term Exercise Exercise
Range of Exercise Prices Shares (in years) Price Shares Price
------------------------ ---------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
$ 6.81 to $13.49............. 72,600 9.50 $ 8.97 -- $ --
$13.50 to $20.00............. 298,000 8.31 15.13 85,050 14.96
$20.01 to $27.63............. 20,550 8.73 26.35 10,050 26.80
-------- ------- -------- -------- ----------
391,150 8.55 $14.56 95,100 $ 16.21
======== ======= ======== ======== ==========
</TABLE>
The Company granted 3,000 shares and 129,000 shares of restricted stock during
fiscal 1999 and 1998, respectively. The Company issued 3,670 shares and 910
shares of common stock to directors during fiscal 1999 and 1998 respectively as
partial compensation for services.
The amount of compensation expense related to stock-based employee and
director compensation included in the results of operations was $0.5 million and
$0.4 million fiscal 1999 and 1998, respectively, pursuant to the provisions
F-13
<PAGE>
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
of APB 25. Unearned compensation included in stockholders' equity related to
unlapsed restrictions on grants of restricted stock was approximately $1.2
million and $1.7 million as of September 30, 1999 and 1998, respectively.
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-
Based Compensation" ("SFAS 123") requires that stock-based awards be measured
and recognized at fair value. Adoption of the cost recognition provisions of
SFAS 123 with respect to stock-based awards to employees is optional and the
Company decided not to elect those provisions. As a result, the Company
continues to apply APB 25 and related interpretations in accounting for the
measurement and recognition of its employee stock-based awards. However, the
Company is required to provide pro forma disclosure as if the cost recognition
provisions of SFAS 123 had been adopted. Under SFAS 123, compensation cost is
measured at the grant date based on the fair value of the awards and is
recognized over the service period, which is usually the vesting period. The
fair value of options granted during the year ended September 30, 1999 was
estimated using the Black-Scholes option-pricing model with the following
assumptions: dividend yield of 0%; risk-free interest rates of 5%; expected
volatility of 38%; and expected option term of 5 years.
The weighted average fair values of stock-based award grants were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------
1999 1998
------------------- -----------------
<S> <C> <C>
Options................................................... $ 4.51 $ 6.27
Restricted stock.......................................... $10.69 $16.11
Director's common stock................................... $ 6.81 $27.50
</TABLE>
The pro forma disclosures as if the Company had adopted the cost recognition
requirements of SFAS 123 are presented below (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------
1999 1998
------------------- -----------------
<S> <C> <C>
Net income:...............................................
As reported......................................... $ 838 $6,674
Pro forma........................................... 327 6,439
Basic earnings per common share:..........................
As reported......................................... $0.16 $ 1.32
Pro forma........................................... 0.06 1.27
Diluted earnings per common share:
As reported......................................... $0.15 $ 1.29
Pro forma........................................... 0.06 1.25
</TABLE>
The effects of applying SFAS 123 in the above pro forma disclosure are not
indicative of future amounts since the Company anticipates making awards in the
future under the Employee and Director Plans.
Effective November 5, 1999, the board of directors approved the OYO Geospace
Corporation 1999 Broad-Based Option Plan (the "Broad-Based Plan") and reserved
an aggregate of 50,000 shares for issuance thereunder. Under the Broad-Based
Plan, the Company is authorized to issue nonqualified stock options to purchase
common stock to all employees (except executive officers and employee directors)
of the Company. Options have a term not to exceed ten years. The exercise price
of any option may not be less than fair market value of the common stock on the
date of grant. Options vest over a one-year period commencing on the date of
grant.
F-14
<PAGE>
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
11. Income Taxes:
Components of income before income taxes were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------
1999 1998 1997
------------ ------------- -----------
<S> <C> <C> <C>
United States.............................................. $ 448 $10,915 $ 9,265
Foreign.................................................... 203 (649) 1,360
-------- ------- -------
$ 651 $10,266 $10,625
======== ======= =======
</TABLE>
The provision (benefit) for income taxes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1999 1998 1997
----------- --------- -------
<S> <C> <C> <C>
Current:
Federal.................................................. $(560) $ 3,909 $1,731
Foreign.................................................. 5 548 634
State.................................................... -- 348 156
----- ------- ------
(555) 4,805 2,521
----- ------- ------
Deferred:
Federal................................................... 279 (395) 1,281
Foreign................................................... 89 (818) --
State..................................................... -- -- 201
----- ------- ------
368 (1,213) 1,482
----- ------- ------
$(187) $ 3,592 $4,003
===== ======= ======
</TABLE>
The differences between the effective tax rate reflected in the total
provision (benefit) for income taxes and the statutory federal tax rate of 34%
were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1999 1998 1997
---------- ------------- ---------
<S> <C> <C> <C>
Provision for U.S. federal income tax at statutory rate................. $ 221 $3,490 $3,613
Effect of foreign income taxes.......................................... 25 (58) 171
Tax benefit from use of foreign sales corporation....................... (159) (195) --
State income taxes, net of federal income tax benefit................... -- 229 236
Nondeductible expenses.................................................. 38 42 12
Resolution of prior years' tax matters.................................. (312) -- --
Other, net.............................................................. -- 84 (29)
------- ------ ------
$ (187) $3,592 $4,003
======= ====== ======
(28.7)% 35.0% 37.7%
======= ====== ======
</TABLE>
F-15
<PAGE>
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Deferred income taxes under the liability method reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's net deferred income tax asset
were as follows (in thousands):
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
----------------------------
1999 1998
------------ -----------
<S> <C> <C>
Deferred income tax assets:
Allowance for doubtful accounts........................................... $ 194 $ 128
Inventory................................................................. 1,362 1,277
Accrued product warranty.................................................. 140 264
Accrued compensated absences.............................................. 168 158
Net foreign operating loss carryforwards.................................. 729 818
------------ -----------
2,593 2,645
Deferred income tax liabilities:
Property, plant and equipment and other................................... (1,929) (1,613)
------------ -----------
Net deferred income tax asset............................................... $ 664 $ 1,032
============ ===========
</TABLE>
Deferred income taxes are reported as follows in the accompanying
consolidated balance sheet (in thousands):
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
----------------------------
1999 1998
------------ -----------
<S> <C> <C>
Current deferred income tax asset........................................... $ 1,864 $ 1,827
Noncurrent deferred income tax asset........................................ 729 818
Noncurrent deferred tax liability........................................... (1,929) (1,613)
------------ -----------
$ 664 $ 1,032
============ ===========
</TABLE>
Under the liability method, a valuation allowance is provided when it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. Based on the Company's historical taxable income record, and
the expectation that the deductible temporary differences will reverse during
periods in which the Company generates net taxable income or during periods in
which losses can be carried back to offset prior year taxes, management believes
that the Company will realize the benefit of the net deferred income tax asset
after consideration of the valuation allowance.
As of September 30, 1999, the Company had foreign net operating loss
carryforwards of approximately $1.0 million which if not utilized will expire in
varying amounts during fiscal years 2001 through 2005.
The financial reporting bases of investments in foreign subsidiaries
exceeds their tax basis. A deferred tax liability is not recorded for this
temporary difference because the investment is essentially permanent. A reversal
of the Company's plans to permanently invest in the operations would cause the
excess to become taxable. At September 30, 1999 and 1998, the temporary
difference related to undistributed earnings for which no deferred taxes have
been provided was approximately $1.6 million and $1.5 million, respectively. The
determination of the unrecognized deferred tax liability related to the
undistributed earnings is not practical.
12. Earnings Per Common Share:
Basic earnings per share is computed by dividing net earnings available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is determined on the assumption
that outstanding dilutive stock options have been exercised and the aggregate
proceeds as defined were used to reacquire common stock using the average price
of such common stock for the period.
F-16
<PAGE>
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The following table summarizes the calculation of net earnings and weighted
average common shares and common equivalent shares outstanding for purposes of
basic and diluted earnings per share (in thousands, except share and per share
amounts):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net earnings available to common stockholders.... $ 838 $ 6,674 $ 6,622
========== ========== ==========
Weighted average common shares and
common share equivalents:
Common shares............................... 5,384,530 5,072,262 4,000,000
Common share equivalents.................... 64,874 94,494 --
---------- ---------- ----------
Total weighted average common shares and common
share equivalents.............................. 5,449,404 5,166,756 4,000,000
========== ========== ==========
Basic earnings per common share.................. $ 0.16 $ 1.32 $ 1.66
========== ========== ==========
Diluted earnings per common share................ $ 0.15 $ 1.29 $ 1.66
========== ========== ==========
</TABLE>
Options on 328,550 and 25,300 shares of common stock in fiscal 1999 and
1998, respectively, were not included in the calculation of weighted average
shares for diluted earnings per share because their effects were antidilutive.
13. Related Party Transactions:
Sales to OYO Japan and other affiliated companies were approximately $0.3
million, $0.4 million and $2.0 million during fiscal 1999, 1998 and 1997,
respectively. Purchases of inventory and equipment for resale from OYO Japan
were approximately $2.7 million, $2.6 million and $2.8 million during fiscal
1999, 1998 and 1997, respectively.
Interest expense on lines of credit from OYO Japan was approximately $0.4
million during fiscal 1997. The average outstanding principal balance on lines
of credit from OYO Japan was approximately $7.4 million during fiscal 1997.
Effective September 30, 1997, the Company purchased land, buildings and
equipment used in the Company's operations from affiliates for $2.5 million in
cash. The Company previously leased the facilities from the affiliates and
incurred rent expense of approximately $0.2 million during fiscal 1997.
F-17
<PAGE>
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
14. Commitments and Contingencies:
Operating Leases
The Company leases certain office space and equipment under noncancelable
operating leases. The approximate future minimum rental commitments under
noncancelable operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30,
-------------
<S> <C>
2000............................................................. $ 495
2001............................................................. 500
2002............................................................. 498
2003............................................................. 296
2004............................................................. 80
------
$1,869
======
</TABLE>
Rent expense was approximately $0.5 million, $0.2 million, and $0.4 million
for fiscal 1999, 1998 and 1997, respectively.
In October 1999, the Company extended an existing operating lease for
manufacturing space for an additional three years. The extended lease commenced
on November 1, 1999, with annual rental payments of approximately $0.2 million.
Legal Proceedings
From time to time the Company is a party to what it believes is routine
litigation and proceedings that may be considered as part of the ordinary course
of its business. The Company is not aware of any current or pending litigation
or proceedings that could have a material adverse effect on the Company's
results of operations, cash flows or financial condition.
15. Supplemental Cash Flow Information:
Supplemental cash flow information was as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
Cash paid for:
Interest...................................................... $ 332 $ 59 $ 207
Income taxes.................................................. 143 5,292 2,241
Noncash investing and financing activities:
Contribution of obligations owed to OYO USA................... -- -- 4,165
Common stock issued in business acquisitions.................. 586 2,804 --
Common stock issued pursuant to Employee
and Director Plan.......................................... 49 2,077 --
</TABLE>
16. Segment and Geographic Information:
The Company manages its business and makes decisions with respect to the
deployment of resources on a single consolidated product-line basis. The
Company has one reportable segment comprised of operations in the United States,
Canada and United Kingdom. The reportable segment provides products as
described in Note 1.
F-18
<PAGE>
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
A summary of net sales by geographic area for fiscal 1999 is as follows (in
thousands):
<TABLE>
<S> <C>
Asia (excluding Japan and Middle East)..... $ 3,515
Canada..................................... 3,339
Europe..................................... 14,171
Japan...................................... 470
Middle East................................ 103
United States.............................. 19,452
Other...................................... 981
-------
$42,031
=======
</TABLE>
Net sales are attributed to countries based on the ultimate destination of
the product sold, if known. If the ultimate destination is not known, sales are
attributed to countries based on the geographic location of the initial
shipment. Net sales information by geographic area for fiscal 1998 and 1997 has
been excluded since presenting such information is not practical. Sales
information for the Company's U.S. domestic and foreign subsidiaries is as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
United States.............................. $40,662 $65,498 $39,736
Canada..................................... 1,738 4,574 4,590
United Kingdom............................. 2,804 2,733 2,541
Eliminations............................... (3,173) (6,982) (5,818)
------- ------- -------
$42,031 $65,823 $41,049
======= ======= =======
</TABLE>
Long-lived assets were as follows (in thousands):
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
United States.............................. $22,861 $23,484 $ 5,303
Canada..................................... 1,645 856 3,842
United Kingdom............................. 664 762 669
------- ------- -------
$25,170 $25,102 $ 9,814
======= ======= =======
</TABLE>
The Company had no individual customers comprising more than 10% of annual
sales for fiscal 1999, 1998 and 1997.
F-19
<PAGE>
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
18. Selected Quarterly Information (Unaudited):
The following table represents summarized data for each of the quarters in
fiscal 1999 and 1998 (in thousands, except per share amounts).
<TABLE>
<CAPTION>
1999
-----------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales................................................. $ 9,258 $ 9,564 $12,133 $11,076
Gross profit.......................................... 3,039 3,791 5,341 4,324
Income (loss) from operations......................... (492) 138 771 150
Other income (expense), net........................... 283 (103) (122) 26
Net income............................................ 98 203 422 115
Basic earnings per share.............................. $ 0.02 $ 0.04 $ 0.08 $ 0.02
======= ======= ======= =======
Diluted earnings per share............................ $ 0.02 $ 0.04 $ 0.08 $ 0.02
======= ======= ======= =======
<CAPTION>
1998
-----------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales................................................. $15,776 $18,484 $19,028 $12,535
Gross profit.......................................... 6,512 7,427 8,451 5,008
Income from operations................................ 1,829 2,508 4,107 1,496
Other income (expense), net........................... (126) 151 227 74
Net income............................................ 1,108 1,843 2,750 973
Basic earnings per share.............................. $ 0.21 $ 0.35 $ 0.52 $ 0.22
======= ======= ======= =======
Diluted earnings per share............................ $ 0.20 $ 0.34 $ 0.51 $ 0.22
======= ======= ======= =======
</TABLE>
F-20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of OYO Geospace Corporation:
Our audits of the consolidated financial statements referred to in our report
dated November 5, 1999 appearing in this Annual Report on Form 10-K also
included an audit of the financial statement schedule listed in Item 14(a)(2) of
this Form 10-K. In our opinion, the financial statement schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
November 5, 1999
F-21
<PAGE>
Schedule II
OYO Geospace Corporation and Subsidiaries
Valuation and Qualifying Accounts
(In Thousands)
<TABLE>
<CAPTION>
Charged
(Credited)
Balance at to Costs Charged Balance at
Beginning and to Other End
of Period Expenses Assets Deductions of Period
--------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1999
Allowance for doubtful accounts on
accounts and notes receivable $ 503 $ 488 $ - $ (411) $ 580
Year ended September 30, 1998
Allowance for doubtful accounts on
accounts and notes receivable 771 (97) - (171) 503
Year ended September 30, 1997
Allowance for doubtful accounts on
accounts and notes receivable 5,398 (4,327) - (300) 771
Deferred interest on note receivable 1,861 - - (1,861) -
</TABLE>
F-22
<PAGE>
Exhibit 21.1
Subsidiaries of
OYO Geospace Corporation
5404339 and More Royalties Company, a Nevada corporation
Concord Technologies, Inc., a Texas corporation
Control Logic, Inc., a Texas Corporation
Geo Space Corporation, a Texas corporation
OYO Geo Space Canada, Inc., an Alberta corporation
OYO Geospace EAME Limited, a United Kingdom company
OYO Geospace International, Inc., a Barbados corporation
OYO Geospace J.V., Inc., a Texas corporation
OYO Instruments, Inc., a Texas corporation
Geospace Engineering Resources, Inc., a Delaware corporation
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of OYO Geospace Corporation:
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-80003) of OYO Geospace Corporation of our report
dated November 5, 1999 relating to the financial statements, which appears in
this Annual Report on Form 10-K. We also consent to the incorporation by
reference of our report dated November 5, 1999 relating to the financial
statement schedule, which appears in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
December 7, 1999
Houston, Texas
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,280
<SECURITIES> 0
<RECEIVABLES> 8,350
<ALLOWANCES> 580
<INVENTORY> 21,941
<CURRENT-ASSETS> 38,249
<PP&E> 29,468
<DEPRECIATION> 10,754
<TOTAL-ASSETS> 63,419
<CURRENT-LIABILITIES> 5,910
<BONDS> 4,182
0
0
<COMMON> 55
<OTHER-SE> 51,343
<TOTAL-LIABILITY-AND-EQUITY> 63,419
<SALES> 42,031
<TOTAL-REVENUES> 42,031
<CGS> 25,536
<TOTAL-COSTS> 15,928
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 488
<INTEREST-EXPENSE> 336
<INCOME-PRETAX> 651
<INCOME-TAX> (187)
<INCOME-CONTINUING> 838
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 838
<EPS-BASIC> 0.16
<EPS-DILUTED> 0.15
</TABLE>
