-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P9bcwOr6IsZut9uAGXHwB5nI4JpaBrCP03YSC6xEX0//+m7qxjjc0WA48YSHGYlC cC+YJ5yShMCur3PVREMhTQ== 0000899243-03-000262.txt : 20030213 0000899243-03-000262.hdr.sgml : 20030213 20030213150604 ACCESSION NUMBER: 0000899243-03-000262 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OYO GEOSPACE CORP CENTRAL INDEX KEY: 0001001115 STANDARD INDUSTRIAL CLASSIFICATION: MEASURING & CONTROLLING DEVICES, NEC [3829] IRS NUMBER: 760447780 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-36727 FILM NUMBER: 03559048 BUSINESS ADDRESS: STREET 1: 7334 N GESSNER RD CITY: HOUSTON STATE: TX ZIP: 77040 BUSINESS PHONE: 7139399700 MAIL ADDRESS: STREET 1: 9777 W GULF BANK ROAD SUITE 5 CITY: HOUSTON STATE: TX ZIP: 77040 10-Q 1 d10q.txt FORM 10-Q FOR PERIOD ENDING DECEMBER 31, 2002 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended December 31, 2002 OR [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 001-13601 OYO GEOSPACE CORPORATION (Exact Name of Registrant as Specified in Its Charter) Delaware 76-0447780 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 12750 South Kirkwood, Suite 200 Stafford, Texas 77477 (Address of Principal Executive Offices) (281) 494-8282 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ____ No X --- There were 5,547,795 shares of the Registrant's Common Stock outstanding as of the close of business on February 11, 2003. ================================================================================ Table of Contents
PART I. FINANCIAL INFORMATION Page - ------------------------------- Number ------ Item 1. Financial Statements 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures about Market Risks 24 Item 4. Controls and Procedures 25 PART II. OTHER INFORMATION - -------------------------- Item 6. Exhibits and Reports on Form 8-K 26
2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements OYO GEOSPACE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
ASSETS December 31, 2002 September 30, 2002 ----------------- ------------------ (unaudited) Current assets: Cash and cash equivalents .................................. $ 2,556 $ 1,538 Trade accounts and notes receivable, net ................... 10,473 12,585 Inventories ................................................ 24,975 21,801 Deferred income tax ........................................ 1,137 1,135 Prepaid expenses and other ................................. 1,674 1,261 -------- -------- Total current assets .................................. 40,815 38,320 Rental equipment, net .......................................... 1,926 2,044 Property, plant and equipment, net ............................. 19,904 20,243 Goodwill and other intangible assets, net ...................... 6,225 6,399 Deferred income tax ............................................ 474 931 Other assets ................................................... 176 189 -------- -------- Total assets .......................................... $ 69,520 $ 68,126 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current maturities of long-term debt ..... $ 232 $ 714 Accounts payable ........................................... 3,146 4,047 Accrued expenses and other ................................. 4,221 4,162 Deferred revenue ........................................... 89 146 Income tax payable ......................................... 125 1,121 -------- -------- Total current liabilities ............................. 7,813 10,190 Long-term debt ................................................. 8,557 3,544 -------- -------- Total liabilities ..................................... 16,370 13,734 -------- -------- Minority interest in consolidated subsidiary ................... 283 263 Stockholders' equity: Preferred stock ............................................ - - Common stock ............................................... 55 55 Additional paid-in capital ................................. 30,576 30,566 Retained earnings .......................................... 23,014 24,332 Accumulated other comprehensive loss ....................... (772) (819) Unearned compensation-restricted stock awards .............. (6) (5) -------- -------- Total stockholders' equity ............................ 52,867 54,129 -------- -------- Total liabilities and stockholders' equity ............ $ 69,520 $ 68,126 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 3 OYO GEOSPACE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) (unaudited)
Three Months Three Months Ended Ended December 31, 2002 December 31, 2001 ----------------- ----------------- Sales ................................................. $ 10,061 $ 12,900 Cost of sales ......................................... 7,752 8,865 ----------- ----------- Gross profit .......................................... 2,309 4,035 Operating expenses: Selling, general and administrative expenses ...... 2,836 2,876 Research and development expenses ................. 1,379 1,080 ----------- ----------- Total operating expenses ..................... 4,215 3,956 ----------- ----------- Income (loss) from operations ......................... (1,906) 79 Other income (expense): Interest expense .................................. (91) (151) Interest income ................................... 41 50 Other, net ........................................ 46 5 ----------- ----------- Total other expense, net ..................... (4) (96) ----------- ----------- Loss before income taxes, minority interest and extraordinary gain ........................... (1,910) (17) Income tax benefit .................................... (611) (7) ----------- ----------- Loss before minority interest and extraordinary gain ........................... (1,299) (10) Minority interest ..................................... (19) (29) ----------- ----------- Loss before extraordinary gain ........................ (1,318) (39) Extraordinary gain, net of tax of $85 ................. -- 686 ----------- ----------- Net income (loss) ..................................... $ (1,318) $ 647 =========== =========== Basic earnings per share: Loss before extraordinary item .................... $ (0.24) $ (0.01) Extraordinary gain ................................ -- 0.13 ----------- ----------- Net income (loss) ................................. $ (0.24) $ 0.12 =========== =========== Diluted earnings per share: Loss before extraordinary item .................... $ (0.24) $ (0.01) Extraordinary gain ................................ -- 0.13 ----------- ----------- Net income (loss) ................................. $ (0.24) $ 0.12 =========== =========== Weighted average shares outstanding - Basic ........... 5,546,572 5,515,642 Weighted average shares outstanding - Diluted ......... 5,546,572 5,535,978
The accompanying notes are an integral part of the consolidated financial statements. 4 OYO GEOSPACE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Three Months Three Months Ended Ended December 31, 2002 December 31, 2001 ----------------- ------------------ Cash flows from operating activities: Net income (loss) ................................................ Adjustments to reconcile net income (loss) to net cash ........... $(1,318) $ 647 used in operating activities: Deferred income tax expense (benefit) ......................... 456 (27) Depreciation and amortization ................................. 973 1,107 Amortization of restricted stock awards ....................... -- 90 Extraordinary gain ............................................ -- (686) Minority interest ............................................. 20 29 (Gain) loss on disposal of property, plant and equipment....... 29 (8) Bad debt expense .............................................. 36 221 Effects of changes in operating assets and liabilities: Trade accounts and notes receivable ........................... 2,075 (1,667) Inventories ................................................... (3,174) (1,847) Prepaid expenses and other assets ............................. (411) 126 Accounts payable .............................................. (903) (1,681) Accrued expenses and other .................................... 166 (1,038) Income tax payable ............................................ (996) (232) ------- ------- Net cash used in operating activities ....................... (3,047) (4,966) Cash flows from investing activities: ------- ------- Capital expenditures ............................................. (524) (1,167) Investment in business acquisition, net of cash acquired ......... -- 913 Proceeds from sale of equipment ................................. -- 8 ------- ------- Net cash used in investing activities ...................... (524) (246) ------- ------- Cash flows from financing activities: Increase in notes payable ....................................... 9,350 9,068 Principal payments on notes payable ............................. (4,817) (3,669) Proceeds from exercise of stock options ......................... 9 4 ------- ------- Net cash provided by financing activities .................. 4,542 5,403 ------- ------- Effect of exchange rate changes on cash ............................. 47 (66) ------- ------- Increase in cash and cash equivalents ............................... 1,018 125 Cash and cash equivalents, beginning of period ...................... 1,538 882 ------- ------- Cash and cash equivalents, end of period ............................ $ 2,556 $ 1,007 ======= =======
The accompanying notes are an integral part of the consolidated financial statements. 5 OYO GEOSPACE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Basis of Presentation The consolidated balance sheet of OYO Geospace Corporation and its subsidiaries (the "Company") at September 30, 2002 has been derived from the Company's audited consolidated financial statements at that date. The consolidated balance sheet at December 31, 2002 and the consolidated statements of operations for the three months ended December 31, 2002 and 2001, and the consolidated statements of cash flows for the three months ended December 31, 2002 and 2001, have been prepared by the Company, without audit. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows have been made. The results of operations for the three months ended December 31, 2002 are not necessarily indicative of the operating results for a full year or of future operations. Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying consolidated financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended September 30, 2002. Revenue is primarily derived from the sale, and short-term rental under operating leases, of seismic instruments and equipment and commercial graphics products. Sales revenues are recognized when the products are shipped and title and risk of loss have passed to the customer (when the revenue cycle is completed). Products are generally sold without any customer acceptance provisions and the Company's standard terms of sale do not allow its customers to return products. The Company's products generally do not require installation assistance or sophisticated instruction. The Company offers a standard product warranty obligating it to repair or replace equipment with manufacturing defects. The Company maintains a reserve for future warranty costs based on historical experience. Rental revenues are recognized on a straight-line basis as earned over the rental period. Short-term rentals of the Company's equipment generally range from daily rentals to rental periods of up to six months. The Company expenses research and development costs as incurred. The Company records a write-down of its inventory when the cost basis of any manufactured product (including any estimated future costs to complete the manufacturing process) exceeds its net realizable value. Recent Accounting Pronouncements In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This statement revises the accounting and reporting for costs associated with exit or disposal activities so as to provide recognition of such costs when a liability is incurred rather than when the entity commits to an exit plan. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. Management does not believe the adoption of SFAS No. 146 will have a material effect on the Company's financial position and results of operations. In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation and Disclosure - an amendment of FASB Statement No. 123". This statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative transition methods for a voluntary change to the fair value of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of FASB Statement No. 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. See Note 8 for additional disclosures required by SFAS No. 148. 6 OYO GEOSPACE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 2. Earnings Per Common Share The following table summarizes the calculation of net earnings and weighted average common shares and common equivalent shares outstanding for purposes of the computation of earnings per share (in thousands, except per share data):
Three Months Ended ----------------------------------- December 31, 2002 December 31, 2001 ----------------- ----------------- Loss before extraordinary gain ................ $ (1,318) $ (39) Extraordinary gain ............................ -- 686 ------------- ----------- Net earnings available to common stockholders ................................ $ (1,318) $ 647 ============= =========== Weighted average common shares outstanding .... 5,546,572 5,515,642 Weighted average common share equivalents outstanding ................................. -- 20,336 ------------- ----------- Weighted average common shares and common share equivalents outstanding .............. 5,546,572 5,535,978 ============= =========== Basic Earnings Per Share: Loss before extraordinary gain ................ $ (0.24) $ (0.01) Extraordinary gain ............................ -- 13 ------------- ----------- Net income (loss) ............................. $ (0.24) $ 0.12 ============= =========== Diluted Earnings Per Share: Loss before extraordinary gain ................ $ (0.24) $ (0.01) Extraordinary gain ............................ -- 0.13 ------------- ----------- Net income (loss) ............................. $ (0.24) $ 0.12 ============= ===========
No common share equivalents have been included in the diluted earnings per share calculations because of the potential antidilutive effect as a result of the Company's net loss for the quarter ended December 31, 2002. 3. Comprehensive Income Comprehensive income includes all changes in a company's equity, except those resulting from investments by and distributions to owners. The following table summarizes the components of comprehensive income (in thousands):
Three Months Ended ----------------------------------- December 31, 2002 December 31, 2001 ----------------- ----------------- Net income (loss) ............................. $ (1,318) $ 647 Foreign currency translation adjustments ...... 47 (66) -------------- ----------- Total comprehensive income (loss) ............. $ (1,271) $ 581 ============== ===========
7 OYO GEOSPACE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 4. Trade Accounts and Notes Receivable Trade accounts and notes receivable consisted of the following (in thousands):
December 31, 2002 September 30, 2002 ----------------- ------------------ Trade accounts receivable ............................. $ 10,498 $ 12,160 Trade notes receivable ................................ 463 899 Allowance for doubtful accounts and notes ............. (488) (474) --------- ---------- $ 10,473 $ 12,585 ========= ==========
5. Inventories Inventories consisted of the following (in thousands):
December 31, 2002 September 30, 2002 ----------------- ------------------ Finished goods ........................................ $ 6,396 $ 4,527 Work-in-process ....................................... 5,599 3,619 Raw materials ......................................... 13,931 14,586 Obsolescence reserve .................................. (951) (931) --------- ---------- $ 24,975 $ 21,801 ========= ==========
The Company's reserve for slow moving and obsolete inventories is analyzed and adjusted periodically to reflect the Company's best estimate of the net realizable value of such inventories. 6. Segment and Geographic Information The Company evaluates financial performance based on two business segments: Seismic and Commercial Graphics. The seismic product lines currently consist of geophones and hydrophones, including multi-component geophones and hydrophones, seismic leader wire, geophone string connectors, seismic telemetry cable, high definition reservoir characterization products and services, marine seismic cable retrieval devices and small data acquisition systems targeted at niche markets. Commercial graphics products include thermal imaging equipment and dry thermal film. 8 OYO GEOSPACE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) The following tables summarize the Company's segment information:
Three Months Ended Three Months Ended December 31, 2002 December 31, 2001 ----------------- ----------------- Net sales: Seismic ......................................................... $ 7,063 $ 9,963 Commercial Graphics ............................................. 3,016 3,001 Eliminations .................................................... (18) (64) -------- -------- Total ........................................................... $ 10,061 $ 12,900 ======== ======== Income from operations: Seismic ......................................................... $ (1,019) $ 656 Commercial Graphics ............................................. (90) 352 Corporate ....................................................... (797) (929) -------- -------- Total ........................................................... $ (1,906) $ 79 ======== ======== December 31, 2002 september 30, 2002 -------- -------- Total assets: Seismic ........................................................ $ 52,691 $ 51,308 Commercial Graphics ............................................ 13,290 12,610 Corporate ...................................................... 3,539 4,208 -------- -------- $ 69,520 $ 68,126 ======== ========
7. Line of Credit The Company has entered into a credit agreement pursuant to which it can borrow up to $10.0 million secured by its accounts receivable and inventory (the "Credit Agreement"). The Credit Agreement, as amended, expires in January 2004. Borrowings under the Credit Agreement are subject to borrowing base restrictions based on (i) consolidated net income plus consolidated interest expense, income taxes, depreciation and amortization and (ii) levels of eligible accounts receivable and inventories. The Credit Agreement limits the incurrence of additional indebtedness, requires the maintenance of certain financial amounts and contains other covenants customary in agreements of this type. As of December 31, 2002 there were borrowings of $5.1 million outstanding under the Credit Agreement, and additional borrowings available under the Credit Agreement of $2.0 million. Since September 30, 2002, the Company has increased its borrowings under the Credit Facility by $4.5 million. Such additional borrowings are primarily for working capital needs, including the production of inventories for shipment in future periods. The borrowing interest rate at December 31, 2002 was 5.0%. The Company recently amended its Credit Agreement to expire in January 2004. In connection with this amendment, the Company's borrowing interest rate has become, at the Company's option, the bank's prime rate or a LIBOR based rate. In addition, the borrowing base restrictions were modified to allow the Company to incur additional borrowings up to a maximum of $10.0 million. 9 OYO GEOSPACE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 8. Accounting for Stock-Based Compensation At December 31, 2002, the Company had two stock-based employee compensation plans. The Company accounts for the plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
Three Months Ended --------------------------------------- December 31, 2002 December 31, 2001 ----------------- ----------------- Net income (loss), as reported ....................... $ (1,318) $ 647 Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects ............... (142) (186) ----------- ------------- Pro forma net income (loss) .......................... $ (1,460) $ 461 ========== ============ Earnings per share: Basic-as reported ................................ $ (0.24) $ 0.12 Basic-pro forma .................................. $ (0.26) $ 0.08 Diluted-as reported .............................. $ (0.24) $ 0.12 Diluted-pro forma ................................ $ (0.26) $ 0.08
For a further discussion of the Company's stock-based employee compensation plans, see Note 11 to the audited Consolidated Financial Statements of the Company's Annual Report on Form 10-K for the year ended September 30, 2002. 9. Adoption of Accounting Pronouncements In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed for impairment. Intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives; however, no maximum life applies. The Company adopted the provisions of SFAS 142 effective October 1, 2002. At December 31, 2002, the Company had goodwill, net of accumulated amortization, of $1.8 million. The adoption of SFAS No. 142 did not have a material effect on the Company's first quarter financial position or results of operations. In August 2001, the Financial Accounting Standards Board issued SFAS No. 143 - - "Accounting for Asset Retirement Obligations". This statement requires the Company to recognize the fair value of a liability associated with the cost the Company would be obligated to incur in order to retire an asset at some point in the future. The liability would be recognized in the period in which it is incurred and can be reasonably estimated. The standard is effective for fiscal years beginning after June 15, 2002. The Company adopted this standard effective October 1, 10 OYO GEOSPACE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 2002. The adoption of SFAS No. 143 did not have a material effect on the Company's financial position or results of operations. In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets". SFAS No. 144 develops an accounting model, based upon the framework established in SFAS No. 121, for long-lived assets to be disposed of by sales. The accounting model applies to all long-lived assets, including discontinued operations, and it replaces the provisions of APB Opinion No. 30, "Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for disposal of segments of a business. SFAS No. 144 requires long-lived assets held for disposal to be measured at the lower of carrying amount or fair values less costs to sell, whether reported in continuing operations or in discontinued operations. The statement is effective for fiscal years beginning after December 15, 2001. The Company adopted this standard effective October 1, 2002. The adoption of SFAS No. 144 did not have a material effect on the Company's financial position or results of operations. In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Recission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This statement clarified guidance related to the reporting of gains and losses from extinguishment of debt and resolves inconsistencies related to the required accounting treatment of certain lease modifications. The provisions of this statement relating to extinguishment of debt became effective for financial statements issued for fiscal years beginning after May 15, 2002. The provisions of this statement relating to lease modification are effective for transactions occurring after May 15, 2002. The Company adopted this standard effective October 1, 2002. The adoption of SFAS No. 145 did not have a material effect on the Company's financial position or results of operations. 10. Film Supplier Developments In April 2002, the Company purchased certain intellectual property rights from its then primary supplier of film (the "Former Primary Film Supplier") for $2.3 million. Such purchase gave the Company exclusive ownership of all technology used by the Former Primary Film Supplier to manufacture dry thermal film used in the thermal imaging equipment the Company manufactures. Such purchase included technology then existing and any dry thermal film technology thereafter developed by the Former Primary Film Supplier for use in the Company's equipment. The Company also entered into an amended supply agreement pursuant to which the Former Primary Film Supplier agreed to provide the Company with the dry thermal film. In connection with the purchase, the Company agreed to license the technology to the Former Primary Film Supplier on a perpetual basis so long as it could meet predefined quality and delivery requirements. If the Former Primary Film Supplier could not meet such requirements, the Company has the right to use the technology itself or to license the technology to any third party to manufacture dry thermal film. On July 3, 2002, the Former Primary Film Supplier filed a Chapter 11 reorganization petition in Federal Bankruptcy Court for the Western District of New York. At the date of such bankruptcy filing, the Company had $3.4 million of long-term assets carried on its balance sheet as a result of the Company's prior transactions with the Former Primary Film Supplier (including the $2.3 million investment in intellectual property acquired from the Former Primary Film Supplier described above). Around that time, the Former Primary Film Supplier advised the Company that, in connection with its bankruptcy filing, it was seeking a buyer for its business that would assume its relationship and contracts with the Company, and it was the Company's intention to cooperate in such efforts to the extent its on-going interest could be served thereby. The Company is no longer optimistic that a buyer can be found to operate the Former Primary Film Supplier's business. Over the past several months, the Former Primary Film Supplier has failed to meet all of the Company's purchase orders and has ceased to provide the Company with dry thermal film. As a result, the Company is currently 11 OYO GEOSPACE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) purchasing a large quantity of dry thermal film from its alternate supplier of dry thermal film (the "Other Film Supplier"). The Company is also in the final stages of using the technology it purchased from the Former Primary Film Supplier to manufacture dry thermal film internally. As a result of the bankruptcy filing by the Former Primary Film Supplier, the Company recorded a charge in its third quarter of fiscal year 2002 of approximately $1.2 million due to the ultimate uncertainty of realization of value on certain assets, particularly certain prepaid purchase benefits and similar benefits under the amended supply agreement with the Former Primary Film Supplier. The Company does not believe there has been any impairment in the value of the intellectual property it acquired from the Former Primary Film Supplier because of its ability to utilize the intellectual property to have thermal film manufactured internally or possibly elsewhere. No claims have been made against the Company or by the Company at present in connection with the Former Primary Film Supplier's bankruptcy, except that on December 10, 2002, the Company received a notice of claim for alleged preferential payments made by the Former Primary Film Supplier to the Company in the period before filing of the bankruptcy proceeding in the approximate amount of $260,000. The Company has not yet fully assessed that claim or its defenses and counterclaims to that claim. However, the Company intends to vigorously defend against such claim under the overall circumstances of its relationship with the Former Primary Film Supplier. At present, the Company does not know whether it will make any claims against the Former Primary Film Supplier and it is unable to predict whether any additional claims will be made against the Company in connection with the Former Primary Film Supplier's bankruptcy proceeding as to any aspect of its relationship with the Former Primary Film Supplier. The Company is unable at this time to predict the outcome and effects of this still developing situation. The Company has, nevertheless, made provision for existing claims that it believes are adequate at this time, although it is unable to make such predictions with any certainty. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following analysis of the financial condition and results of operations of OYO Geospace Corporation should be read in conjunction with the Consolidated Financial Statements and Notes related thereto which are included elsewhere in this Form 10-Q. Industry Overview We design and manufacture instruments and equipment used in the acquisition and processing of seismic data. We have been in the seismic instrument and equipment business since 1980, marketing our products primarily to the oil and gas industry worldwide. We also design and manufacture thermal imaging equipment and distribute dry thermal film products to the commercial graphics industry. We have been serving the commercial graphics industry since 1995. Seismic Industry Geoscientists use seismic data to map potential or existing oil and gas bearing formations and the geologic structures that surround them. Seismic data is used primarily in connection with the exploration, development and production of oil and gas. Seismic data acquisition is conducted on land by combining a seismic energy source and a data recording system. The energy source imparts seismic waves into the earth, reflections of which are received and measured by geophones and hydrophones. Electrical signals generated by the geophones and hydrophones are simultaneously transmitted through leader wire, geophone and hydrophone string connectors and telemetric cable to data collection units, which store information for processing and analysis. Seismic thermal imaging output devices are used in the field or office to create a graphic representation of the seismic data after it has been acquired. Marine seismic data acquisition is conducted primarily by large ocean-going vessels that tow long seismic cables known as "streamers". Usually, the energy source in marine seismic data acquisition is an airgun, and the reflected seismic waves are received and measured by hydrophones, which are an integral part of the streamers. The streamers simultaneously transmit the electrical impulses back to the vessel via telemetric cable included within the streamers, and the seismic data is recorded and processed in much the same manner as it is on land. An estimated one to two-thirds of the reserves found with every oil and gas discovery will be left behind in the reservoir, not recoverable economically or at times even identified. Reservoir characterization and management programs, in which the reservoir is carefully imaged and monitored throughout its economic life by seismic instruments and equipment, are now seen as vital tools for improving production recovery rates. Seismic surveys repeated over selected time intervals show dynamic changes within the reservoir and can be used to monitor the effects of production. We expect to incur significant future research and development expenditures aimed at the development of additional seismic acquisition products and services used for high definition reservoir characterization for use in both land and marine environments. While orders for our products can vary substantially from quarter to quarter, reservoir characterization projects, especially deepwater projects, require the use of more equipment over a longer period of time than is required by conventional surface seismic systems. Revenue recognition in accordance with generally accepted accounting principles for these large-scale projects has the potential to result in substantial fluctuations in our quarterly performance. These variations may impact our operating results and cash flow, manufacturing capability and expense levels in any given quarter. Furthermore, because of the scale and nature of reservoir characterization projects, there may be delays in their implementation and uncertainties about their final course. As a result, we are unable at present to predict the impact of any such projects on our business, financial condition and results of operations. 13 Commercial Graphics Industry We developed our commercial graphics business segment over time as we leveraged our thermal imaging equipment technology, originally designed for seismic data processing applications, into new markets. With minor product modifications, we were successful in adapting these products for use in the commercial graphics industry. Our commercial graphics business segment manufactures and sells thermal imaging equipment and dry thermal film primarily to the screen print, point of sale, signage and textile market sectors. Our thermal imaging equipment is capable of producing data images ranging in size from 12 to 54 inches wide. This business segment has some sales to customers in the seismic industry. In April 2002, we purchased certain intellectual property rights from our then primary supplier of film (the "Former Primary Film Supplier") for $2.3 million. Such purchase gave us exclusive ownership of all technology used by the Former Primary Film Supplier to manufacture dry thermal film used in the thermal imaging equipment we manufacture. Such purchase included technology then existing and any dry thermal film technology thereafter developed by the Former Primary Film Supplier for use in our equipment. We also entered into an amended supply agreement pursuant to which the Former Primary Film Supplier agreed to provide us with the dry thermal film. In connection with the purchase, we agreed to license the technology to the Former Primary Film Supplier on a perpetual basis so long as it could meet predefined quality and delivery requirements. If the Former Primary Film Supplier could not meet such requirements, the agreement provides us with the right to use the technology ourselves or to license the technology to any third party to manufacture dry thermal film. On July 3, 2002, the Former Primary Film Supplier filed a Chapter 11 reorganization petition in Federal Bankruptcy Court for the Western District of New York. At the date of such bankruptcy filing, we had $3.4 million of long-term assets carried on our balance sheet as a result of the prior transactions with the Former Primary Film Supplier (including the $2.3 million investment in intellectual property acquired from the Former Primary Film Supplier described above). The Former Primary Film Supplier advised us that, in connection with its bankruptcy filing, it was seeking a buyer for its business that would assume its relationship and contracts with us, and it was our intention to cooperate in such efforts to the extent our on-going interest could be served thereby. We are no longer optimistic that a buyer can be found to operate the Former Primary Film Supplier's business. Over the past several months, the Former Primary Film Supplier has failed to meet all of our purchase orders and has ceased to provide us with film. As a result, we are currently purchasing a large quantity of dry thermal film from the Other Film Supplier. We are also in the final stages of using the technology we purchased from the Former Primary Film Supplier to manufacture dry thermal film internally. As a result of the bankruptcy filing by the Former Primary Film Supplier, we recorded a charge in our third quarter of fiscal year 2002 of approximately $1.2 million due to the ultimate uncertainty of realization of value on certain assets, particularly certain prepaid purchase benefits and similar benefits under the amended supply agreement with the Former Primary Film Supplier. We do not believe there has been any impairment in the value of the intellectual property we acquired from the Former Primary Film Supplier because of our ability to utilize the intellectual property to have thermal film manufactured internally or possibly elsewhere. No claims have been made against us or by us at present in connection with the Former Primary Film Supplier's bankruptcy, except that on December 10, 2002, we received a notice of claim for alleged preferential payments made by the Former Primary Film Supplier to us in the period before filing of the bankruptcy proceeding in the approximate amount of $260,000. We have not yet fully assessed that claim or the Company's defenses and counterclaims to that claim. However, we intend to vigorously defend against such claim under the overall circumstances of our relationship with the Former Primary Film Supplier. At present we do not know whether we will make any claims against the Former Primary Film Supplier and we are unable to predict whether any additional claims will be made against us in connection with the Former Primary Film Supplier's bankruptcy proceeding as to any aspect of our relationship with such Former Primary Film Supplier. We are unable at this time to predict the outcome and effects of this still developing situation. We have, nevertheless, made provision for existing claims that we believe are adequate at this time, although we are unable to make such predictions with any certainty. 14 Results of Operations We report and evaluate financial information for two segments: Seismic and Commercial Graphics. Summary financial data by business segment follows: Three Months Ended Three Months Ended December 31, 2002 December 31, 2001 ----------------- ----------------- Seismic Revenue ........................... $ 7,063 $ 9,963 Operating income (loss) ........... (1,019) 656 Commercial Graphics Revenue ........................... 3,016 3,001 Operating income (loss) ........... (90) 352 Corporate Revenue ........................... -- -- Operating loss .................... (797) (929) Eliminations Revenue ........................... (18) (64) Operating income .................. -- -- Consolidated Totals Revenue ........................... 10,061 12,900 Operating income (loss) ........... (1,906) 79 Overview First Quarter of Fiscal Year 2003 Compared to First Quarter of Fiscal Year 2002. Consolidated sales for the three months ended December 31, 2002 decreased $2.8 million, or 22.0%, from the corresponding period of the prior fiscal year. The decrease in sales was due to a significant decline in the demand for our land-based seismic products resulting from a decline in worldwide seismic activity. Consolidated gross profits for the three months ended December 31, 2002 decreased by $1.7 million, or 42.8%, from the corresponding period of the prior year. The lower gross profits resulted from (i) lower sales levels of our land-based seismic products, (ii) competitive pricing pressures resulting from manufacturing over-capacity in the seismic industry, and (iii) under-absorption of fixed manufacturing costs due to depressed seismic industry sales. Consolidated operating expenses for the three months ended December 31, 2002 increased $0.3 million, or 6.5%, from the corresponding period of the prior fiscal year. The higher expenses are primarily related to increased research and development expenditures required to self-manufacture dry thermal film and to continue development of our reservoir characterization systems. Our estimated effective tax rate for the three months ended December 31, 2002 was a benefit of 32.0% compared to a benefit of 41.2% for the three months ended December 31, 2001. Seismic Our seismic product lines currently consist of geophones and hydrophones, including multi-component geophones and hydrophones, seismic leader wire, geophone string connectors, seismic telemetry cable, high 15 definition reservoir characterization products and services, marine seismic cable retrieval devices and small data acquisition systems targeted at niche markets. Revenue Sales of our seismic products for the three months ended December 31, 2002 decreased $2.9 million, or 29.1%, from the corresponding period of the prior year. The decrease in seismic product sales primarily resulted from a significant decline in demand for our land-based seismic products. This decrease is attributable to a decline in worldwide seismic activity. Furthermore, seismic industry manufacturing over-capacity issues continue to drive down prices. This condition or trend has now existed for over one year, and we do not have visibility to predict when it will end. An improvement in general economic conditions and a more definitive view of the world geo-political risks will be necessary for us to have better visibility as to this condition. Operating Income (Loss) Our operating loss for the three months ended December 31, 2002 was $1.0 million, a decrease of $1.7 million from the corresponding period of the prior year. The decrease in operating income primarily resulted from decreased gross profits associated with lower sales levels and lower gross profit margins from our land-based seismic products due to competitive pricing pressures resulting from industry-wide manufacturing over-capacity, and from under absorption of fixed manufacturing costs due to depressed seismic product sales. Commercial Graphics Our commercial graphics business segment manufactures and sells thermal imaging equipment and dry thermal film primarily to the screen print, point of sale, signage and textile market sectors. This business segment has some sales to customers in the seismic industry. Revenue Sales of our commercial graphics products for the three months ended December 31, 2002 increased $15,000, or 0.5%, from the corresponding period of the prior year. There were no significant changes in our product mix. Operating Income (Loss) Our operating loss for the three months ended December 31, 2002 was $0.1 million, a decrease of $0.4 million, or 125.6% from the corresponding period of the prior year. The reduction in operating income primarily resulted from (i) increased research and development expenses related to the self-manufacture of dry thermal film, (ii) increased research and development expenses associated with a newly introduced thermal imaging device, and (iii) increased amortization expenses resulting from the $2.3 million purchase of intellectual property in April 2002. Such intellectual property is being amortized on a straight basis over five years. Liquidity and Capital Resources At December 31, 2002, we had $2.6 million in cash and cash equivalents. For the three months ended December 31, 2002, we used approximately $3.0 million of cash in operating activities principally resulting from a net loss, increased inventories and decreased accounts payable. Inventories increased $3.2 million primarily as a result of manufacturing goods for shipment in future periods. Such uses of cash were offset by a $2.1 million decrease in trade accounts and notes receivable due to a decrease in sales. For the three months ended December 31, 2002, we used approximately $0.5 million of cash in investing activities resulting from capital expenditures. For the three months ended December 31, 2002, cash from financing activities increased approximately $4.5 million due to borrowings under our credit facility. 16 We have entered into a credit agreement pursuant to which we can borrow up to $10.0 million secured by our accounts receivable and inventory (the "Credit Agreement"). The Credit Agreement, as amended, expires in January 2004. Borrowings under the Credit Agreement are subject to borrowing base restrictions based on (i) consolidated net income plus consolidated interest expense, income taxes, depreciation and amortization and (ii) levels of eligible accounts receivable and inventories. The Credit Agreement limits the incurrence of additional indebtedness, requires the maintenance of certain financial amounts and contains other covenants customary in agreements of this type. As of December 31, 2002 there were borrowings of $5.1 million outstanding under the Credit Agreement, and additional borrowings available under the Credit Agreement of $2.0 million. Since September 30, 2002, we have increased our borrowings under the credit by $4.5 million. Such additional borrowings are primarily for increased working capital needs, including the production of inventories for shipment in future periods. The borrowing interest rate at December 31, 2001 was 5.0%. We recently amended our Credit Agreement to expire in January 2004. In connection with this amendment, our borrowing interest rate has become, at our option, the bank's prime rate or a LIBOR based rate. In addition, the borrowing base restrictions were modified to allow the Company to incur additional borrowings up to a maximum of $10.0 million. Accounting Pronouncements In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed for impairment. Intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives; however, no maximum life applies. We adopted the provisions of SFAS 142 effective October 1, 2002. At December 31, 2002, the Company had goodwill, net of accumulated amortization, of $1.8 million. The adoption of SFAS No. 142 did not have a material effect on our first quarter financial position or results of operations. In August 2001, the Financial Accounting Standards Board issued SFAS No. 143 - - "Accounting for Asset Retirement Obligations". This statement requires us to recognize the fair value of a liability associated with the cost we would be obligated to incur in order to retire an asset at some point in the future. The liability would be recognized in the period in which it is incurred and can be reasonably estimated. The standard is effective for fiscal years beginning after June 15, 2002. We adopted this standard effective October 1, 2002. The adoption of SFAS No. 143 did not have a material effect on our financial position or results of operations. In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets". SFAS No. 144 develops an accounting model, based upon the framework established in SFAS No. 121, for long-lived assets to be disposed of by sales. The accounting model applies to all long-lived assets, including discontinued operations, and it replaces the provisions of APB Opinion No. 30, "Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for disposal of segments of a business. SFAS No. 144 requires long-lived assets held for disposal to be measured at the lower of carrying amount or fair values less costs to sell, whether reported in continuing operations or in discontinued operations. The statement is effective for fiscal years beginning after December 15, 2001. We adopted this standard effective October 1, 2002. The adoption of SFAS No. 144 did not have a material effect on our financial position or results of operations. In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Recission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This statement clarified guidance related to the reporting of gains and losses from extinguishment of debt and resolves inconsistencies related to the required accounting treatment of certain lease modifications. The provisions of this statement relating to extinguishment of debt became effective for financial statements issued for fiscal years beginning after May 15, 2002. The provisions of this statement relating to lease modification are effective for transactions occurring after May 15, 2002. We adopted this standard effective October 1, 2002. The adoption of SFAS No. 145 did not have a material effect on our financial position or results of operations. 17 In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This statement revises the accounting and reporting for costs associated with exit or disposal activities so as to provide recognition of such costs when a liability is incurred rather than when the entity commits to an exit plan. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. We do not believe the adoption of SFAS No. 146 will have a material effect on our financial position or results of operations. In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation and Disclosure - an amendment of FASB Statement No. 123". This statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative transition methods for a voluntary change to the fair value of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of FASB Statement No. 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. See Note 8 to the Consolidated Financial Statements for additional disclosures under SFAS No. 148. Forward Looking Statements and Risks Certain of the statements we make in this document and in documents incorporated by reference herein, including those made under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements for purposes of the Securities Act of 1933 and the Securities Exchange Act of 1934. Such statements include projections of our expectations regarding our future capital expenditures, product lines, growth of product markets and other statements that relate to future events or circumstances. These statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to differ materially from the future results, performance or achievements expressed or implied by such forward-looking statements, including the risks and factors described below. You are cautioned to consider the following factors and risks in connection with evaluating any such forward-looking statements or otherwise evaluating an investment in our company. Our New Products May Not Achieve Market Acceptance. In recent years, we have incurred significant expenditures to fund our research and development efforts and we intend to continue those expenditures in the future. However, research and development is by its nature speculative, and we cannot assure you that these expenditures will result in the development of new products or services or that any new products and services we have developed recently or may develop in the future will be commercially marketable or profitable to us. In particular, we have incurred substantial expenditures to develop our recently introduced HDSeis(TM) product line for borehole and reservoir characterization applications. We cannot assure you that we will realize our expectations regarding market acceptance and revenues from these products and services. A Decline in Industry Conditions Could Affect our Projected Results. Any unexpected material changes in oil and gas prices or other market trends that would impact seismic exploration activity would likely affect the forward-looking information contained in this document. In addition, the oil and gas industry is extremely volatile and seismic activity is subject to change based on political and economic factors outside of our control. In fact, our results for fiscal year 2002, and results from our land-based seismic activity in particular, were materially and adversely affected by the downturn in the industry. Our estimates as to future results and industry trends, to the extent described in this document, are generally based on assumptions regarding the future level of seismic exploration activity and seismic reservoir monitoring projects and, in turn, their effect on the demand and pricing of our products and services. In analyzing the market and its impact on us, we have the following outlook for fiscal year 2003: 18 . The impact of political conditions around the world including those of the Middle East, which may have a significant impact on the oil and gas prices, will not cause a significant increase in demand for our seismic products during fiscal 2003. . Customer consolidations, the ample supply of seismic data stored in libraries, and overall industry weakness will cause demand for our traditional land-based seismic products to remain at or below fiscal year 2002 levels. . Demand for our land and marine-based seismic products in Russia and China is expected to increase over fiscal year 2002 levels. . Deep-water marine seismic exploration activity will remain constrained and sales of our marine-based products are expected to decline significantly in fiscal year 2003. . Our new high definition reservoir characterization products and services are expected to become more widely accepted to the industry. Sales in fiscal year 2003 are expected to be lower than fiscal year 2002 levels because fiscal year 2002 included the sale of a $15.8 million system; a similar delivery of that magnitude is not expected based on current backlog and quotations. . Sales of our new offshore cable products are expected to increase in fiscal year 2003. . Pricing for many of our land-based seismic products will continue to be subject to pressures due to industry-wide manufacturing over-capacity. . We will be able to self-manufacture sufficient quantities of dry thermal film internally or be able to purchase sufficient quantities of dry thermal film from our Other Film Supplier. Demand for our products used in the commercial graphics industry is expected to increase with continued market acceptance of our dry thermal film and new product introductions. . Political conditions and hostilities around the world, which have a significant impact on the oil and gas industry, will remain and present serious economic risks. Our outlook is based on various macro-economic factors, and our internal assessments, and actual market conditions could vary materially from those assumed. We May Experience Fluctuations in Quarterly Results of Operations. Historically, the rate of new orders for our products has varied substantially from quarter to quarter. Moreover, we typically operate, and expect to continue to operate, on the basis of orders in hand for our products before we commence substantial manufacturing "runs"; hence, the completion of orders, particularly large orders for deepwater reservoir characterization projects, can significantly impact the operating results and cash flow for any quarter, and results of operations for any one quarter may not be indicative of results of operations for future quarters. Our Credit Risks Could Increase as our Customers Continue to Face Difficult Economic Circumstances. We believe and have assumed that our allowance for bad debts at December 31, 2002 is adequate in light of known circumstances. However, we cannot assure you that additional amounts attributable to uncollectible receivables and bad debt write-offs will not have a material adverse effect on our future results of operations. Many of our customers, particularly seismic contractors, have suffered from lower revenues and experienced liquidity challenges resulting from the economic difficulties throughout our industry. We have in the past incurred significant write-offs in our accounts and notes receivable due to customer credit problems. We have found it necessary from time to time to extend trade credit to long-term customers and others where some risks of non-payment or late payment exist. Given recent industry conditions, some of our customers are experiencing liquidity difficulties, which increases those credit risks. 19 Demand for Our Products is Volatile. Demand for our products depends primarily on the level of worldwide oil and gas exploration activity. That activity, in turn, depends primarily on prevailing oil and gas prices and availability of seismic data. Historically, the markets for oil and gas have been volatile, and those markets are likely to continue to be volatile. Oil and gas prices are subject to wide fluctuation in response to relatively minor changes in the supply of and demand for oil and gas, market uncertainty and a variety of additional factors that are beyond our control. These factors include the level of consumer demand, weather conditions, domestic and foreign governmental regulations, price and availability of alternative fuels, political conditions in the Middle East and other significant oil-producing regions, foreign supply of oil and gas, price of foreign imports and overall economic conditions. Continued low demand for our products could materially and adversely affect our results of operations and liquidity. We Have a Relatively Small Public Float, and Our Stock Price May be Volatile. We have approximately 2.4 million shares outstanding held by non-affiliates. This small float results in a relatively illiquid market for our common stock. Our average daily trading volume during fiscal year 2002 was approximately 4,000 shares. Our small float and daily trading volumes has in the past caused, and may in the future result in, greater volatility of our stock price. Our Industry is Characterized by Rapid Technological Development and Product Obsolescence. Our instruments and equipment are constantly undergoing rapid technological improvement. Our future success depends on our ability to continue to: . improve our existing product lines; . address the increasingly sophisticated needs of our customers; . maintain a reputation for technological leadership; . maintain market acceptance; . anticipate changes in technology and industry standards; and . respond to technological developments on a timely basis. Current competitors or new market entrants may develop new technologies, products or standards that could render our products obsolete. We cannot assure you that we will be successful in developing and marketing, on a timely and cost effective basis, product enhancements or new products that respond to technological developments, that are accepted in the marketplace or that comply with industry standards. We Operate in Highly Competitive Markets. The markets for our products are highly competitive. Many of our existing and potential competitors have substantially greater marketing, financial and technical resources than we do. Additionally, three competitors in our seismic business segment currently offer a broader range of instruments and equipment for sale and market this equipment as "packaged" data acquisition systems. We do not now offer for sale such a complete "packaged" data acquisition system. Further, certain of our competitors offer financing arrangements to customers on terms that we may not be able to match. In addition, new competitors may enter the market and competition could intensify. We cannot assure you that sales of our products will continue at current volumes or prices if current competitors or new market entrants introduce new products with better features, performance, price or other characteristics than our products. Competitive pressures or other factors also may result in significant price competition that could have a material adverse effect on our results of operations. 20 We Have a Limited Market. In our seismic business segment, we market our products to contractors and large, independent and government-owned oil and gas companies. We estimate that, based on published industry sources, fewer than 30 seismic contracting companies are currently operating worldwide (excluding those operating in Russia and the former Soviet Union, India, the People's Republic of China and certain Eastern European countries, where seismic data acquisition activity is difficult to verify). We estimate that fewer than ten seismic contractors are engaged in marine seismic exploration. Due to these market factors, a relatively small number of customers, some of whom are experiencing financial difficulties, have accounted for most of our sales. From time to time these seismic contractors have sought to vertically integrate and acquire our competitors, which has influenced their supplier decisions before and after such transactions. The loss of a small number of these customers for whatever reason could materially and adversely impact our sales. We Cannot Be Certain of Patent Protection of Our Products. We have applied for and hold certain patents relating to our seismic data acquisition and other products. We also acquired several patents which relate to the development of dry thermal film from our Former Primary Film Supplier . We cannot assure you that our patents will prove enforceable, that any patents will be issued for which we have applied or that competitors will not develop functionally similar technology outside the protection of any patents we have or may obtain. Our Foreign Marketing Efforts Face Additional Risks and Difficulties. Net sales outside the United States accounted for approximately 54% of our net sales during fiscal year 2002. Substantially all of our sales from the United States are made in U.S. dollars, but from time to time we may make sales in foreign currencies and may, therefore, be subject to foreign currency fluctuations on our sales. In addition, net assets reflected on the balance sheets of our Russian, Canadian and U.K. subsidiaries are subject to currency fluctuations. Significant foreign currency fluctuations could adversely impact our results of operations. Foreign sales are subject to special risks inherent in doing business outside of the United States, including the risk of war, terrorist activities, civil disturbances, embargo and government activities and foreign attitudes about conducting business activities with United States or Japanese trading partners, all of which may disrupt markets. Foreign sales are also generally subject to the risk of compliance with additional laws, including tariff regulations and import and export restrictions. Sales in certain foreign countries require prior United States government approval in the form of an export license. We cannot assure you that we will not experience difficulties in connection with future foreign sales. Also, should we experience substantial growth in certain markets, for example Russia, we may not be able to transfer cash balances to the United States to assist with debt servicing obligations. We Rely on Key Suppliers for Significant Product Components. A Japanese manufacturer unaffiliated with us is currently the only supplier of wide format thermal printheads that we use to manufacture our wide format thermal imager equipment. Over the years we have experienced some quality control issues with such printheads and have returned significant quantities of these products to the manufacturer for repair, testing and quality assurance review. We are not presently experiencing any significant supply or quality control problems with our supplier of printheads. However, unforseen problems, if they develop, could have a significant effect on our ability to meet future production and sales commitments. If the Japanese manufacturer were to discontinue supplying these printheads or was unable or unwilling to supply printheads in sufficient quantities to meet our requirements, our ability to compete in the thermal imaging marketplace could be severely damaged, which could adversely affect our financial performance. We believe we maintain an adequate inventory of these printheads to continue production for two to three months. Our Former Primary Film Supplier, had been the primary supplier of dry thermal film used by our customers in the thermal imaging equipment we manufacture. On July 3, 2002, our Primary Film Supplier filed a Chapter 11 reorganization petition in Federal Bankruptcy Court for the Western District of New York. Around that time, the 21 Former Primary Film Supplier advised us that, in connection with its bankruptcy filing, it was seeking a buyer for its business that would assume its relationship and contracts with us. We are no longer optimistic that a buyer can be found to operate the Former Primary Film Supplier's business. Over the past few months, our Former Primary Film Supplier has failed to meet all of our purchase orders and has ceased to provide us with dry thermal film. As a result, we are currently purchasing a large quantity of dry thermal film from our Other Film Supplier. We are also in the final stages of using the technology we purchased from the Former Primary Film Supplier to manufacture dry thermal film internally. We know of no other supplier of dry thermal film for our thermal imaging equipment. While alternate suppliers might be able to provide dry thermal film, such film has not historically performed as well in our thermal imaging equipment. If we are unable to economically manufacture dry thermal film internally using the technology we purchased from our Former Primary Film Supplier or if our Other Film Supplier was to discontinue supplying dry thermal film or was unable to supply dry thermal film in sufficient quantities to meet our requirements, our ability to compete in the thermal imaging marketplace could be severely damaged, which could adversely affect our financial performance. We Are Subject to Control by a Principal Stockholder. OYO Corporation, a Japanese corporation, owns indirectly in the aggregate approximately 51.4% of our common stock. Accordingly, OYO Corporation, through its wholly owned subsidiary OYO Corporation U.S.A., is able to elect all of our directors and to control our management, operations and affairs. We currently have, and may continue to have, a variety of contractual relationships with OYO Corporation and its affiliates. Our Success Depends Upon A Limited Number of Key Personnel. Our success depends on attracting and retaining highly skilled professionals. A number of our employees are highly skilled engineers and other professionals. If we fail to continue to attract and retain such professionals, our ability to compete in the industry could be adversely effected. In addition, our success depends to a significant extent upon the abilities and efforts of several members of our senior management. A Continued General Downturn in the U.S. Economy in 2003 May Adversely Affect our Business. An on-going downturn in the U.S. economy could adversely affect our business in ways that we cannot yet identify. The current economic downturn may continue to adversely affect the demand for oil and gas generally and, therefore, the demand for our services to the oil and gas industry and related service industry. It could also adversely affect the demand for consumer products, which could in turn adversely affect our commercial graphics business. To the extent these factors adversely affect other seismic companies in the industry, we could see an oversupply of products and services and downward pressure on pricing for seismic products and services that would adversely affect us. Critical Accounting Policies The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We consider many factors in selecting appropriate operational and financial accounting policies and controls and in developing the estimates and assumptions that are used in the preparation of these financial statements. We continually evaluate our estimates, including those related to bad debts reserves, inventory obsolescence reserves, self-insurance reserves, product warranty reserves, intangible assets and deferred income tax assets. We base our estimates on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different conditions or assumptions. Revenue is primarily derived from the sale, and short-term rental under operating leases, of seismic instruments and equipment and commercial graphics products. Sales revenues are generally recognized when our products are 22 shipped and title and risk of loss have passed to the customer. Rental revenues are recognized as earned over the rental period. Short-term rentals of our equipment generally range from daily rentals to rental periods of up to six months. Products are generally sold without any customer acceptance provisions and our standard terms of sale do not allow customers to return products. Our products generally do not require installation assistance or sophisticated instruction. We offer a standard product warranty obligating us to repair or replace equipment with manufacturing defects. We maintain a reserve for future warranty costs based on historical experience. We record a write-down of inventory when the cost basis of any manufactured product (including any estimated future costs to complete the manufacturing process) exceeds its net realizable value. 23 Item 3. Quantitative and Qualitative Disclosures about Market Risk The following discussion of our exposure to various market risks contains "forward looking statements" that involve risks and uncertainties. These projected results have been prepared utilizing certain assumptions considered reasonable in light of information currently available to us. Nevertheless, because of the inherent unpredictability of foreign currency rates, as well as other factors, actual results could differ materially from those projected in this forward looking information. We do not have any market risk as to market risk sensitive instruments entered into for trading purposes and have only very limited risk as to arrangements entered into other than for trading purposes. Further, we do not engage in commodity or commodity derivative instrument purchasing or selling transactions. Foreign Currency Exchange Rate Risk We purchase printheads from OYO Corporation pursuant to terms under which such purchases are denominated in Japanese yen. We routinely attempt to hedge our currency exposure on these purchases by entering into foreign currency forward contracts with a bank. The purpose of entering into these forward hedge contracts is to eliminate variability of cash flows associated with foreign currency exposure risk on amounts payable in Japanese yen. Under SFAS No. 133 and related interpretations, our forward contracts with the bank are considered derivatives. SFAS No. 133 requires that we record these foreign currency forward contracts on the balance sheet and mark them to fair value at each reporting date. Our aggregate dollar exposure to forward yen contracts usually does not exceeded $0.5 million and such contracts ordinarily are settled within 10 months. Resulting gains and losses are reflected in income and were not material for our fiscal quarter ended December 31, 2002. At December 31, 2002, we had $0.4 million of yen denominated foreign currency forward contracts, and we had $0.4 million of yen denominated accounts payable. Foreign Currency and Operations Risk We have a subsidiary located in Russia. Therefore, our financial results may be affected by factors such as changes in foreign currency exchange risks, weak economic conditions or changes in Russia's political climate. Our consolidated balance sheet at December 31, 2002 reflected approximately $1.5 million of net working capital related to our Russian subsidiary. This subsidiary both receives its income and pays its expenses primarily in Russian roubles. To the extent that transactions of this subsidiary are settled in roubles, a devaluation of the rouble versus the U.S. dollar could reduce any contribution from our Russian subsidiary to our consolidated results of operations as reported in U.S. dollars. We do not hedge the market risk with respect to our operations in Russia; therefore, such risk is a general and unpredictable risk of future disruptions in the valuation of Russian roubles versus U.S. dollars to the extent such disruptions result in any reduced valuation of the Russian subsidiary's net working capital or future contributions to our consolidated results of operations. Interest Rate Risk We have a revolving line of credit with a bank which subjects us to the risk of increased interest costs associated with any upward movements in bank market interest rates. Under the Credit Agreement, as amended, our borrowing interest rate is either the bank's prime rate or a LIBOR based rate, whichever we select. As of December 31, 2002, we had borrowed $5.1 million under this Credit Agreement at an interest rate of 5.0%. Due to the amount of borrowings under this credit facility and its short term, we anticipate that any increased interest costs associated with movements in market interest rates will not be material to our financial condition, results of operations or cash flows. 24 Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures Within the 90 day period prior to the date of filing this Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. Changes in Internal Control There were no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the date of the evaluation of our disclosure controls and procedures referred to in the preceding paragraph. 25 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed with this Quarterly Report. 3.1 Restated Certificate of Incorporation of the Company * 3.2 Restated Bylaws of the Company * 10.1 Third Amendment to Loan Agreement, dated as of January 14, 2003, by and between Concord Technologies, LP, Geospace Engineering Resources International, LP, Geo Space, LP, OYO Instruments, LP and OYOG Operations, LP and Southwest Bank of Texas, N.A. 10.2 Promissory Note, dated January 14, 2003, made by Concord Technologies, LP, Geospace Engineering Resources International, LP, Geo Space, LP, OYO Instruments, LP and OYOG Operations, LP payable to the order of Bank of Texas, N.A. (b) The Company did not file any reports on Form 8-K during the quarter for which this report is filed. - --------------------- * Incorporated by reference to the Company's Registration Statement on Form S-1 filed September 30, 1997 (Registration No. 333-36727). 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OYO GEOSPACE CORPORATION Date: February 12, 2003 By: /s/ Gary D. Owens ------------------------------------- Gary D. Owens, Chairman of the Board President and Chief Executive Officer (duly authorized officer) Date: February 12, 2003 By: /s/ Thomas T. McEntire ------------------------------------- Thomas T. McEntire Chief Financial Officer (principal financial officer) 27 CERTIFICATIONS I, Gary D. Owens, certify that: 1. I have reviewed this quarterly report on Form 10-Q of OYO Geospace Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. February 12, 2003 /s/ Gary D. Owens ------------------------------------- Name: Gary D. Owens Title: Chief Executive Officer 28 CERTIFICATIONS I, Thomas T. McEntire, certify that: 1. I have reviewed this quarterly report on Form 10-K of OYO Geospace Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3 Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. February 12, 2003 /s/ Thomas T. McEntire ----------------------------------------- Name: Thomas T. McEntire Title: Chief Financial Officer 29 Informational Addendum to Report on Form 10-K Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Not Filed Pursuant to the Securities Exchange Act of 1934 The undersigned Chief Executive Officer and Chief Financial Officer of OYO Geospace Corporation do hereby certify as follows: Solely for the purpose of meeting the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, and solely to the extent this certification may be applicable to this Report on Form 10-Q, the undersigned hereby certify that this Report on Form 10-Q fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in this Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of OYO Geospace Corporation. /s/ Gary D. Owens ------------------------------------------- Name: Gary D. Owens Title: Chief Executive Officer /s/ Thomas T. McEntire ------------------------------------------- Name: Thomas T. McEntire Title: Chief Financial Officer 30 EX-10.1 3 dex101.txt THIRD AMENDMENT TO LOAN AGREEMENT Exhibit 10.1 THIRD AMENDMENT TO LOAN AGREEMENT THIS THIRD AMENDMENT TO LOAN AGREEMENT (this "Amendment"), dated as of January 14, 2003, is between CONCORD TECHNOLOGIES, LP, a Texas limited partnership ("Concord"), GEOSPACE ENGINEERING RESOURCES INTERNATIONAL, LP, a Texas limited partnership ("Engineering"), GEO SPACE, LP, a Texas limited partnership ("Geo Space"), OYO INSTRUMENTS, LP, a Texas limited partnership ("Instruments"), and OYOG OPERATIONS, LP, a Texas limited partnership ("Operations", and together with Concord, Engineering, Geo Space and Instruments, the "Borrowers"), jointly and severally, and SOUTHWEST BANK OF TEXAS, N.A., a national banking association ("Lender"). RECITALS: A. Borrowers and Lender entered into that certain Loan Agreement dated as of February 16, 2001, as amended by First Amendment to Loan Agreement dated as of February 17, 2001 and Second Amendment to Loan Agreement dated as of January 15, 2002 (the "Agreement"). B. Pursuant to the Agreement, OYOG, LLC, a Delaware limited liability company, OYO Geospace Corporation, a Delaware corporation, and OYOG Limited Partner, LLC, a Nevada limited liability company ("Guarantors") executed those certain Guaranty Agreements dated as of January 15, 2002 (the "Guaranty Agreements") pursuant to which Guarantors guaranteed to Lender the payment and performance of the Obligations (as defined in the Agreement). C. Borrowers and Lender now desire to amend the Agreement as herein set forth. NOW, THEREFORE, in consideration of the premises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I. Definitions Section I.1. Definitions. Capitalized terms used in this Amendment, to the extent not otherwise defined herein, shall have the meanings given to such terms in the Agreement, as amended hereby. -1- ARTICLE II. Amendments Section II.1. Amendment to Certain Definitions. (a) The definition of each of the following terms contained in Section 1.1 of the Agreement is amended to read in its respective entirety as follows: "Borrowing Base" means, at any particular time, an amount equal to the sum of (a) eighty percent (80%) of Eligible Accounts plus (b) the lesser of (i) twenty-five percent (25%) of Eligible Inventory and (ii) $5,000,000.00 plus (c) eighty percent (80%) of Eligible Notes. "EBITDA" means for Parent and its Subsidiaries, on a consolidated basis, for any period, the sum of (a) Net Income for such period, plus (b) depreciation, amortization and other non cash charges for such period, plus (c) Interest Expense for such period, plus (d) income tax expense for such period, plus (e) for the fiscal quarter ended June 30, 2002, the $1,246,000.00 non-cash write-off of Borrower's advance to Labelon Corporation. "Termination Date-A" means 11:00 a.m., Houston, Texas time on January 13, 2004, or such earlier date on which the Commitment-A terminates as provided in this Agreement. (b) The following definitions shall be added to Section 1.1 of the Agreement in proper alphabetical order: "Advance Request Forms" means the Advance Request Form-A and the Advance Request Form-B. "Advances" means Advance-A and Advance-B. "Applicable Rate" means (a) during the period that an Advance is a LIBOR Advance, the sum of the LIBOR Rate plus two and one-half percent (2.50%), and (b) during the period that an Advance is a Prime Rate Advance, the Prime Rate. "Continue", "Continuation" and "Continued" shall refer to continuation pursuant to Section 3.7 of an Advance as an Advance of the same Type from one Interest Period to the next Interest Period. -2- "Convert", "Conversion" and "Converted" shall refer to a conversion pursuant to Section 3.7 or 3.8 of one Type of Advance into another Type of Advance. "Dollar," "Dollars" and "$" means currency of the United States of America which is at the time of payment legal tender for the payment of public and private debts in the United States of America. "Interest Period" means with respect to any LIBOR Advance, each period commencing on the date such Advance is made or the date such Advance is Converted from an Advance of another Type or, in the case of each subsequent, successive Interest Period applicable to a LIBOR Advance, each period commencing on the last day of the immediately preceding Interest Period with respect to such LIBOR Advance, and in each case ending on the thirtieth (30th), sixtieth (60th) or ninetieth (90th) day thereafter as provided in Section 2.5 or 3.7; provided, however, that (a) each Interest Period which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day, (b) any Interest Period for any LIBOR Advance which would otherwise extend beyond the Termination Dates, shall end on the Termination Dates, (c) no more than five (5) Interest Periods for the Advances shall be in effect at the same time and (d) no Interest Period shall have a duration of less than thirty (30) days, and, if the Interest Period for any LIBOR Advance would otherwise be a shorter period, such Advance shall be a Prime Rate Advance. "LIBOR Advances" means Advances the interest rate on which are determined on the basis of the rates referred to in the definition of "LIBOR Rate". "LIBOR Rate" means, for any LIBOR Advance, for any Interest Period therefor, the rate per annum offered for Dollar deposits in an amount comparable to the principal amount of such LIBOR Advance for a period of time equal to such Interest Period as of 11:00 A.M. City of London, England time two (2) London Business Days prior to the first date of such Interest Period as shown on the display designated as "British Bankers Association Interest Settlement Rates" on the Bloomberg system ("Bloomberg"); provided, however, that if such rate is not available on Bloomberg then such offered rate shall be otherwise independently determined by Lender from an alternate, substantially similar independent source available to Lender and recognized in the banking industry. -3- "London Business Day" means any day other than a Saturday, Sunday or a day on which banking institutions are generally authorized or obligated by laws or executive order to close in the City of London, England. "Prime Rate Advances" means Advances that bear interest at rates based upon the Prime Rate. "Reserve Requirement" means the aggregate maximum reserve percentages (including any marginal, special, supplemental or emergency reserves, and expressed as a decimal) established by the Federal Reserve Board or any other United States banking authority to which Lender is subject for "Eurocurrency Liabilities" (as defined in Regulation D of the Board of Governors of the Federal Reserve System). Such reserve percentages shall include, without limitation, those imposed under Regulation D of the Board of Governors of the Federal Reserve System. "Type" means the type of Advance (i.e. Prime Rate Advance or LIBOR Advance). Section II.2. Amendment to Section 2.3. Section 2.3 contained in the Agreement is amended to read in its entirety as follows: Section 2.3. Repayment of Principal and Interest; Extension. (a) Accrued and unpaid interest on the Advances-A (and, therefore, Note-A) shall be due and payable as follows: (i) in the case of each Advance-A which is a Prime Rate Advance, on the first day of each month, commencing February 1, 2003; (ii) in the case of each Advance-A which is a LIBOR Advance, on the last day of each Interest Period therefor; (iii) upon the payment or prepayment (mandatory or optional) of any Advance-A or the Conversion of any Advance-A (but only on the principal amount so paid, prepaid, or Converted); and (iv) on the Termination Date-A. (b) The principal of the Advances-A shall be due and payable on the Termination Date-A. -4- (c) Prior to the Termination Date-A, Lender will review such matters as it may deem appropriate in its sole discretion and may, in its sole and absolute discretion, determine whether to extend the Termination Date-A. Section II.3. Amendment to Section 2.4. Section 2.4 of the Agreement is amended to read in its entirety as follows: Section 2.4. Interest. The unpaid principal amount of the Advances-A shall bear interest prior to maturity at a varying rate per annum equal from day to day to the lesser of (a) the Maximum Rate or (b) the Applicable Rate in effect from day to day, and each change in the rate of interest charged on the Advances-A shall become effective, without notice to any Borrower, on the effective date of each change in the Applicable Rate or the Maximum Rate, as the case may be; provided, however, if at any time the rate of interest specified in clause (b) preceding shall exceed the Maximum Rate, thereby causing the interest on the Advances-A to be limited to the Maximum Rate, then any subsequent reduction in the Applicable Rate shall not reduce the rate of interest on the Advances-A below the Maximum Rate until the aggregate amount of interest actually accrued on the Advances-A equals the amount of interest which would have accrued on the Advances-A if the interest rate specified in clause (b) preceding had at all times been in effect. If an Event of Default has occurred and is continuing, all principal of the Advances-A shall bear interest at the Default Rate. Section II.4. Amendment to Section 2.5. Section 2.5 contained in the Agreement is amended to read in its entirety as follows: Section 2.5. Requests for Advances-A. (a) As long as the Autopay Agreement is in effect, Advances-A which are Prime Rate Advances may be made as provided in the Autopay Agreement, and Borrowers shall not be required to request an Advance-A directly from Lender by means of an Advance Request Form-A. (b) The provisions of this paragraph shall apply to all requests for Advances-A which are to be LIBOR Advances. The provisions of this paragraph shall also apply to Advances-A which are to be Prime Rate Advances if Borrowers so choose, or if the Autopay Agreement is not in effect, or if the Available Amount (as defined in the Autopay Agreement) is, or has been declared to be, equal to zero. Borrowers shall request each Advance-A by delivering to Lender an Advance Request Form-A (i) stating the amount of the Advance-A, (ii) stating the date on which Borrowers desire that the Advance-A be funded (provided that without any date specified, an Advance-A that is to be a Prime Rate Advance shall be funded on the next Business Day and an Advance-A that is to be a LIBOR Advance shall be funded on the succeeding third Business Day following such Advance Request Form-A), (iii) -5- stating the Type of the Advance-A, and (iv) if such Advance-A is a LIBOR Advance, designating the Interest Period thereof. Such documents shall be delivered to Lender at least (i) one (1) Business Day before the date on which Borrowers desire that the Advance-A be funded in the case of each Advance-A which is to be a Prime Rate Advance and (ii) at least three (3) Business Days before the date on which Borrowers desire that the Advance-A be funded in the case of each Advance-A which is to be a LIBOR Advance; provided that no Advance-A which is a LIBOR Advance may be in an amount which is less that $500,000.00. Borrowers at any time may redesignate the amounts of, and Convert and Continue the Advances-A, but only to be effective from and after the end of the Interest Period therefor if an Advance-A is to be Continued as, or Converted from, a LIBOR Advance, and subject to the terms and provisions of this Agreement, including Sections 3.7, 3.8 and 3.9 hereof. Prior to making any Advance-A, Lender may require that Borrowers deliver a Borrowing Base Certificate dated a recent date acceptable to Lender evidencing that the amount of the outstanding Advances-A plus the requested Advance-A plus the Letter of Credit Liabilities is less than the lesser of (i) the Commitment-A or (ii) the Borrowing Base. Section II.5. Amendment to Section 3.6. The phrase "in this Section 3.7" contained in Section 3.6 of the Agreement shall be amended to read "in this Section 3.6" each time such phrase appears in Section 3.6. Section II.6. Addition of Sections 3.7, 3.8 and 3.9. Sections 3.7, 3.8 and 3.9 shall be added to the Agreement and shall read in their entirety as follows: Section 3.7. Conversions and Continuations. Borrowers shall have the right from time to time to Convert any Advance from one Type of Advance into another Type of Advance or to Continue any LIBOR Advance as a LIBOR Advance by giving Lender written notice at least one (1) Business Day before Conversion into a Prime Rate Advance and at least three (3) Business Days before Conversion into or Continuation of a LIBOR Advance, specifying (a) the Conversion or Continuation date, and (b) in the case of Conversions, the Type of Advance to be Converted into; provided that (w) no more than five (5) Interest Periods may be in effect for the LIBOR Advances at any time, (x) no LIBOR Advance may be in an amount which is less than $500,000.00, (y) a LIBOR Advance may only be Converted on the last day of the Interest Period therefor, and (z) except for Conversions to Prime Rate Advances, Lender shall have no obligation to make any Conversions while an Event of Default has occurred and is continuing. All notices under this Section shall be irrevocable and shall be given not later than 11:00 A.M. Houston, Texas time -6- on the day which is not less than the number of Business Days specified above for such notice. If Borrowers shall fail to give Lender the notice specified above for Continuation or Conversion of any LIBOR Advance prior to the end of the Interest Period with respect thereto, such LIBOR Advance shall automatically be Converted into a Prime Rate Advance on the last day of such Interest Period. Section 3.8. Illegality, Impossibility, Regulatory Change and Compensation. In the event that (a) it becomes unlawful for Lender to honor its obligation to make LIBOR Advances hereunder or to maintain LIBOR Advances hereunder, (b) Lender determines that (i) quotations of interest rates for the relevant deposits referred to in the definition of "LIBOR Rate" are not being provided in the relative amounts or for the relative maturities for determining the interest rates borne by the LIBOR Advances as provided in this Agreement or (ii) such quotations do not accurately reflect Lender's costs in connection therewith, or (c) a Regulatory Change (including the imposition of a Reserve Requirement) occurs which changes Lender's basis of taxation with respect to LIBOR Advances or imposes reserve, capital or other requirements with respect thereto, then Lender shall notify Borrowers of any such event. Following such notice, upon written notice to Borrowers showing the computation of such amounts in reasonable detail, Borrowers shall promptly pay to Lender such amounts as Lender may determine (which determination shall be conclusive provided such determination is made on a reasonable basis) to be necessary to compensate Lender for any increased costs incurred by Lender after such notice or decreases in amounts receivable by Lender after such notice which Lender determines are attributable to any event described in clauses (a), (b) or (c) above. For so long as such event or circumstance shall continue in effect, the obligation of Lender to make or Continue LIBOR Advances or to Convert Prime Rate Advances to LIBOR Advances shall terminate, and (i) all future Advances shall be Prime Rate Advances and (ii) all outstanding Advances which are LIBOR Advances shall be Converted to Prime Rate Advances on the last day of the current Interest Period therefor. Section 3.9. Compensation for Prepayment or Failure to Borrow. Upon (a) any prepayment or Conversion of any LIBOR Advance on a day other than the last day of an Interest Period therefor or (b) the failure by Borrowers to borrow as provided in an Advance Request Form delivered to Lender, Convert or prepay a LIBOR Advance on any date required hereby, Borrowers shall pay to Lender a fee in an amount reasonably determined by Lender equal to funding losses actually incurred by Lender as a result of such event, but not more than one percent (1.00%) of the principal amount of the -7- Advance times a fraction, the numerator of which is the number of days remaining in the Interest Period and the denominator of which is 365. Section II.7. Amendment to Section 7.1. Clause (b) contained in Section 7.1 of the Agreement is amended to read in its entirety as follows: (b) Quarterly Financial Statements - Parent. As soon as available, and in any event within sixty (60) days after the end of each of the first three quarters of each fiscal year of Parent, a copy of the consolidated financial statements of Parent and its Subsidiaries as of the end of such fiscal quarter and for the portion of the fiscal year then ended, on SEC Form 10-Q, containing, on a consolidated basis, balance sheets, statements of income and cash flows in each case setting forth in comparative form the figures for the corresponding period of the preceding fiscal year, all in reasonable detail, prepared in accordance with GAAP and reviewed by independent certified public accountants acceptable to Lender. Section II.8. Amendment to Section 8.1. Section 8.1 contained in the Agreement is amended to read in its entirety as follows: Section 8.1. Debt. No Borrower will incur, create, assume or permit to exist, nor will it permit any Guarantor or any Subsidiary to incur, create, assume, or permit to exist, any Debt, except (a) Debt to Lender, (b) Debt of Borrowers, Guarantors and their Subsidiaries in an aggregate principal amount which does not exceed $3,000,000.00 outstanding at any time, (c) Debt described in Schedule 8.1(c), (d) Subordinated Debt, (e) accounts payable in the ordinary course of business, and (f) Debt arising from the endorsement of instruments for collection in the ordinary course of business. Section II.9. Amendment to Exhibits. (a) Exhibit "A" to the Agreement (Note-A) is amended to conform in its entirety to Annex "A" to this Amendment, (b) Exhibit "L" to the Agreement (Borrowing Base Certificate) is amended to conform in its entirety to Annex "B" to this Amendment and (c) Exhibit "M" to the Agreement (No Default Certificate) is amended to conform in its entirety to Annex "C" to this Amendment. -8- ARTICLE III. Conditions Precedent Section III.1. Conditions. The effectiveness of this Amendment is subject to the receipt by Lender of the following in form and substance satisfactory to Lender: (a) Certificate - Borrowers. A certificate of the Secretary or the Assistant Secretary (or another officer acceptable to Lender) of each Borrower certifying resolutions of the board of directors of the General Partner as general partner of each Borrower which authorize the execution, delivery and performance by each Borrower of this Amendment and the other Loan Documents to which such Person is or is to be a party. (b) Governmental Certificates - General Partner and Each Borrower. Certificates issued by the appropriate government official of the state of organization of General Partner and each Borrower as to the existence and good standing of such Person, and certificates of existence and good standing of General Partner as a foreign entity in the state of Texas. (c) Note-A. Note-A executed by Borrowers. (d) Additional Information. Such additional documents, instruments and information as Lender may request. Section III.2. Additional Conditions. The effectiveness of this Amendment is also subject to the satisfaction of the additional conditions precedent that (a) the representations and warranties contained herein and in all other Loan Documents, as amended hereby, shall be true and correct as of the date hereof as if made on the date hereof, (b) all proceedings, corporate or otherwise, taken in connection with the transactions contemplated by this Amendment and all documents, instruments and other legal matters incident thereto shall be satisfactory to Lender, and (c) no Event of Default or Unmatured Event of Default shall have occurred and be continuing. -9- ARTICLE IV. Ratifications, Representations, and Warranties Section IV.1. Ratifications. The terms and provisions set forth in this Amendment shall modify and supersede all inconsistent terms and provisions set forth in the Agreement and except as expressly modified and superseded by this Amendment, the terms and provisions of the Agreement are ratified and confirmed and shall continue in full force and effect. Borrowers and Lender agree that the Agreement as amended hereby shall continue to be the legal, valid and binding obligation of such Persons enforceable against such Persons in accordance with its terms. Section IV.2. Representations, Warranties and Agreements. Each Borrower hereby represents and warrants to Lender that (a) the execution, delivery, and performance of this Amendment and any and all other Loan Documents executed or delivered in connection herewith have been authorized by all requisite action on the part of such Borrower and General Partner and will not violate the Organizational Documents of such Borrower, (b) the representations and warranties contained in the Agreement as amended hereby, and all other Loan Documents are true and correct on and as of the date hereof as though made on and as of the date hereof, (c) no Event of Default or Unmatured Event of Default has occurred and is continuing, (d) Borrower is in full compliance with all covenants and agreements contained in the Agreement as amended hereby, (e) Borrower is indebted to Lender pursuant to the terms of the Notes, as the same may have been renewed, modified, extended and rearranged, including, without limitation, renewals, modifications and extensions made pursuant to this Amendment, (f) the liens, security interests, encumbrances and assignments created and evidenced by the Loan Documents are, respectively, valid and subsisting liens, security interests, encumbrances and assignments and secure the Notes as the same may have been renewed, modified or rearranged, including, without limitation, renewals, modifications and extensions made pursuant to this Amendment and (g) Borrower has no claims, credits, offsets, defenses or counterclaims arising from the Loan Documents or Lender's performance under the Loan Documents. -10- ARTICLE V. Miscellaneous Section V.1. Survival of Representations and Warranties. All representations and warranties made in this Amendment or any other Loan Documents including any Loan Document furnished in connection with this Amendment shall fully survive the execution and delivery of this Amendment and the other Loan Documents, and no investigation by Lender or any closing shall affect the representations and warranties or the right of Lender to rely on them. Section V.2. Reference to Agreement. Each of the Loan Documents, including the Agreement and any and all other agreements, documents, or instruments now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Agreement, as amended hereby, are hereby amended so that any reference in such Loan Documents to the Agreement shall mean a reference to the Agreement, as amended hereby. Section V.3. Expenses of Lender. As provided in the Agreement, Borrowers agree to pay on demand all reasonable costs and expenses incurred by Lender in connection with the preparation, negotiation and execution of this Amendment and the other documents and instruments executed pursuant hereto, including, without limitation, the reasonable costs and fees of Lender's legal counsel. Section V.4. Severability. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable. Section V.5. APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE IN HOUSTON, HARRIS COUNTY, TEXAS AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. Section V.6. Successors and Assigns. This Amendment is binding upon and shall inure to the benefit of Lender and Borrowers and their respective successors and assigns, except no Borrower may assign or transfer any of its rights or obligations hereunder without the prior written consent of Lender. Section V.7. Counterparts. This Amendment may be executed in one or more counterparts, each of which when so executed shall be deemed to be an -11- original, but all of which when taken together shall constitute one and the same instrument. Section V.8. Effect of Waiver. No consent or waiver, express or implied, by Lender to or for any breach of or deviation from any covenant, condition or duty by Borrowers shall be deemed a consent or waiver to or of any other breach of the same or any other covenant, condition or duty. Section V.9. Headings. The headings, captions, and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment. Section V.10. ENTIRE AGREEMENT. THIS AMENDMENT AND ALL OTHER INSTRUMENTS, DOCUMENTS, AND AGREEMENTS EXECUTED AND DELIVERED IN CONNECTION WITH THIS AMENDMENT EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF AND THEREOF AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF, AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO. Executed as of the date first written above. BORROWERS: CONCORD TECHNOLOGIES, LP By: OYOG, LLC, its general partner By: /s/ Thomas T. McEntire ------------------------------- Thomas T. McEntire Vice President and Chief Financial Officer -12- GEOSPACE ENGINEERING RESOURCES INTERNATIONAL, LP By: OYOG, LLC, its general partner By: /s/ Thomas T. McEntire ------------------------------------- Thomas T. McEntire Vice President and Chief Financial Officer GEO SPACE, LP By: OYOG, LLC, its general partner By: /s/ Thomas T. McEntire ------------------------------------- Thomas T. McEntire Vice President and Chief Financial Officer OYO INSTRUMENTS, LP By: OYOG, LLC, its general partner By: /s/ Thomas T. McEntire ------------------------------------- Thomas T. McEntire Vice President and Chief Financial Officer -13- OYOG OPERATIONS, LP By: OYOG, LLC, its general partner By: /s/ Thomas T. McEntire ------------------------------------ Thomas T. McEntire Vice President and Chief Financial Officer LENDER: SOUTHWEST BANK OF TEXAS, N.A. By: /s/ Edward K. Bowdon ---------------------------------------- Edward K. Bowdon Vice President Each of the undersigned Guarantors hereby consents and agrees to this Amendment and agrees that the Guaranty Agreement executed by such person shall remain in full force and effect and shall continue to be the legal, valid and binding obligations of such Guarantor, enforceable against such Guarantor in accordance with its terms and shall evidence such Guarantor's guaranty of Note-A, as renewed and extended from time to time, including, without limitation, the renewal and extension evidenced by Note-A in substantially the form of Annex "A" attached hereto. OYOG, LLC By: /s/ Thomas T. McEntire ---------------------------------------- Thomas T. McEntire Vice President and Chief Financial Officer -14- OYOG LIMITED PARTNER, LLC By: /s/ Thomas T. McEntire ---------------------------------------- Thomas T. McEntire Manager OYO GEOSPACE CORPORATION By: /s/ Thomas T. McEntire ---------------------------------------- Thomas T. McEntire Vice President and Chief Financial Officer -15- EX-10.2 4 dex102.txt PROMISSORY NOTE Exhibit 10.2 PROMISSORY NOTE $10,000,000.00 Houston, Texas January 14, 2003 FOR VALUE RECEIVED, the undersigned, CONCORD TECHNOLOGIES, LP, a Texas limited partnership, GEOSPACE ENGINEERING RESOURCES INTERNATIONAL, LP, a Texas limited partnership, GEO SPACE, LP, a Texas limited partnership, OYO INSTRUMENTS, LP, a Texas limited partnership and OYOG OPERATIONS, LP, a Texas limited partnership, jointly and severally ("Maker"), hereby promise to pay to the order of SOUTHWEST BANK OF TEXAS, N.A., a national banking association ("Payee"), at its offices at Five Post Oak Park, 4400 Post Oak Parkway, Houston, Harris County, Texas, or such other address as may be designated by Payee, in lawful money of the United States of America, the principal sum of TEN MILLION AND NO/100 DOLLARS ($10,000,000.00). Maker promises to pay interest on the outstanding principal balance of this note (this "Note") from day to day remaining, at a varying rate per annum which shall from day to day be equal to the lesser of (a) the Maximum Rate as defined in the Loan Agreement (hereinafter defined), or (b) the Applicable Rate as defined in the Loan Agreement. The principal balance hereof and all accrued and unpaid interest thereon shall be due and payable as provided for in the Loan Agreement. This Note is Note-A provided for in the Loan Agreement dated as of February 16, 2001, between Maker and Payee, as amended by First Amendment to Loan Agreement dated as of February 17, 2001, Second Amendment to Loan Agreement dated as of January 15, 2002 and Third Amendment to Loan Agreement dated as of January 14, 2003 (such Loan Agreement, as so amended and as it may be further amended is referred to herein as the "Loan Agreement"). This Note evidences Maker's obligations pursuant to the Loan Agreement to repay to Payee all Advances-A made by Payee to Maker pursuant to the Loan Agreement. Maker may borrow, repay and reborrow hereunder upon the terms and conditions specified in the Loan Agreement. This Note is secured as provided in the Loan Agreement. Reference is made to the Loan Agreement for provisions for the payment and prepayment hereof, the acceleration of the maturity hereof, and definitions of terms used and not otherwise defined in this Note. Notwithstanding anything to the contrary contained herein, no provisions of this Note shall require the payment or permit the collection of interest in excess of -1- the Maximum Rate. If any excess of interest in such respect is herein provided for, or shall be adjudicated to be so provided, in this Note or otherwise in connection with this loan transaction, the provisions of this paragraph shall govern and prevail, and neither Maker nor the sureties, guarantors, successors or assigns of Maker shall be obligated to pay the excess amount of such interest, or any other excess sum paid for the use, forbearance or detention of sums loaned pursuant hereto. If for any reason interest in excess of the Maximum Rate shall be deemed charged, required or permitted by any court of competent jurisdiction, any such excess shall be applied as a payment and reduction of the principal of indebtedness evidenced by this Note; and, if the principal amount hereof has been paid in full, any remaining excess shall forthwith be paid to Maker. In determining whether or not the interest paid or payable exceeds the Maximum Rate, Maker and Payee shall, to the extent permitted by applicable law, (a) characterize any non-principal payment as an expense, fee, or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the entire contemplated term of the indebtedness evidenced by this Note so that the interest for the entire term does not exceed the Maximum Rate. If default occurs in the payment of principal or interest under this Note and the applicable period for cure provided in the Loan Agreement has expired, or upon the occurrence of any other Event of Default, as such term is defined in the Loan Agreement, the holder hereof may during the continuation of such Event of Default, at its option, (a) declare the entire unpaid principal of and accrued interest on this Note immediately due and payable without notice, demand or presentment, all of which are hereby waived, and upon such declaration, the same shall become and shall be immediately due and payable, (b) foreclose or otherwise enforce all liens or security interests securing payment hereof, or any part hereof, (c) offset against this Note any sum or sums owed by the holder hereof to Maker and (d) take any and all other actions available to Payee under this Note, the Loan Agreement, the other Loan Documents (as such term is defined in the Loan Agreement) at law, in equity or otherwise. Failure of the holder hereof to exercise any of the foregoing options shall not constitute a waiver of the right to exercise the same upon the occurrence of a subsequent Event of Default. If the holder hereof expends any effort in any attempt to enforce payment of all or any part or installment of any sum due the holder hereunder, or if this Note is placed in the hands of an attorney for collection, or if it is collected through any legal proceedings, Maker agrees to pay all costs, expenses, and fees incurred by the holder, including all reasonable attorneys' fees. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THIS NOTE IS PERFORMABLE IN HARRIS COUNTY, TEXAS. -2- Maker and each surety, guarantor, endorser, and other party ever liable for payment of any sums of money payable on this Note jointly and severally waive notice, presentment, demand for payment, protest, notice of protest and non-payment or dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, diligence in collecting, grace, and all other formalities of any kind, and consent to all extensions without notice for any period or periods of time and partial payments, before or after maturity, and any impairment of any collateral securing this Note, all without prejudice to the holder. The holder shall similarly have the right to deal in any way, at any time, with one or more of the foregoing parties without notice to any other party, and to grant any such party any extensions of time for payment of any of said indebtedness, or to release or substitute part or all of the collateral securing this Note, or to grant any other indulgences or forbearances whatsoever, without notice to any other party and without in any way affecting the personal liability of any party hereunder. This Note is in renewal and extension of, but not in discharge or novation of, the indebtedness and obligations evidenced by that certain promissory note in the original principal amount of $10,000,000.00, dated January 15, 2002, executed by Maker and payable to the order of Payee, which was executed in renewal and extension of, but not in discharge or novation of, the indebtedness and obligations evidenced by that certain promissory note in the original principal amount of $10,000,000.00, dated February 16, 2001, executed by Maker and payable to the order of Payee. CONCORD TECHNOLOGIES, LP By: OYOG, LLC, its general partner By: /s/ Thomas T. McEntire ---------------------------- Thomas T. McEntire Vice President and Chief Financial Officer -3- GEOSPACE ENGINEERING RESOURCES INTERNATIONAL, LP By: OYOG, LLC, its general partner By: /s/ Thomas T. McEntire ---------------------------- Thomas T. McEntire Vice President and Chief Financial Officer GEO SPACE, LP By: OYOG, LLC, its general partner By: /s/ Thomas T. McEntire ---------------------------- Thomas T. McEntire Vice President and Chief Financial Officer OYO INSTRUMENTS, LP By: OYOG, LLC, its general partner By: /s/ Thomas T. McEntire ---------------------------- Thomas T. McEntire Vice President and Chief Financial Officer -4- OYOG OPERATIONS, LP By: OYOG, LLC, its general partner By: /s/ Thomas T. McEntire ---------------------------- Thomas T. McEntire Vice President and Chief Financial Officer -5- -----END PRIVACY-ENHANCED MESSAGE-----