2 0 0 3
For the past several years my reports to you have chronicledour progress in developing the new GeoRes suite of seismicrecording systems for the emerging reservoir
characterization and monitoring
market. Last year, I highlighted the
sale of a large permanent subsea
seismic recording system for
installation on BP’s Valhall field
in the North Sea.
porosity, permeability, fracturing, principle stress direction
and anisotropy. BP and its partners are using this high
resolution, full wavefield data to refine their reservoir model.
BP plans to shoot six additional
surveys across the field over the next18 months to further describe andmap fluid flow dynamics. With each
new survey, BP and its partners will
be able to better refine the reservoir
model and reshape their drainage
strategy to further accelerate
production and enhance reserve
recovery over the life of the field. Geospace Engineering ResourcesInternational designed and
manufactured the Valhall system in
collaboration with the manu-facturing divisions of OYO Geospace.
With 10,016-channels, the Valhall
system is the world’s largest
permanent deepwater seismic
recording system.
The BP system is only one of a suite
Today, I’m pleased to report that
the GeoRes system was installed this
summer and its full wavefield, high-
resolution data is already yielding a
better, more comprehensive model of
the reservoir. As a result of the data
already provided by this system,
BP believes that an additional 60million barrels of oil will be recoverable
from the Valhall Field through
improved drainage and well placement.
Valhall Field Permanent
Subsea Recording System –
An Operational Success
of GeoRes systems that can be used in land and marine
applications to describe and manage reservoirs more
effectively. For Valhall, this special purpose GeoRes system
was comprised of armored cables, housing 2,504 multi-
component sensor stations of embedded electronics and
deepwater hydrophones. Remote operating vehicles were
used to trench the 120 kilometers of armored cable onemeter below the ocean floor to cover a 45 -square kilometerlive survey area.
Prior to the installation of this multi-
component GeoRes system, the one
billion barrel Valhall field had proven
to be an imaging challenge for BP andits partners, divisions of Shell, Amerada
Hess and Total. A gas cloud positioned
between the seafloor and the top of thereservoir distorted conventional seismicpressure wave signals, frustrating
accurate reservoir description.
The GeoRes system’s multi-
component stations, permanently
embedded in the seafloor, record high
quality shear wave data along with
Another version of the GeoRes, a retrievable, deepwater
system, has been repeatedly deployed with great success
in a variety of surveys in the Norwegian Sector of the
North Sea. GeoRes retrievable borehole systems are alsocurrently in use in North America, China, Europe and theMiddle East for downhole seismic acquisition and for
microseismic monitoring.
pressure wave data to improve the
definition of reservoir volume, lithology, fluid content,
This effort will shortly
For OYO Geospace, the GeoRes product line is providing
The field proven GeoRes product line is flexible and
scalable. From shallow to deep water, for permanent or
retrievable applications, a GeoRes system can be customconfigured for any situation. In application after
application, the GeoRes suite of systems is increasinglyrecognized as the premier solution for reservoir descriptionand management challenges.
culminate in the consolidationof our five Houston-area locationsinto a single 208,000 square footoperating facility andheadquarters in Houston, which
we have depicted on the cover.
We closed on the purchase of the
new facility in September and
already our move is underway. By the second quarter of
Fiscal 2004, our restructuring effort will be complete. OYOGeospace will be represented by four major divisions, whichwill be supported by our comprehensive manufacturing
capabilities and exceptional engineering staff.
grows and as exploration and production companies seek toincrease recovery from existing reservoirs and strive to containfinding and development costs, our GeoRes suite of systems
should play an increasing role in the market of tomorrow.
a strong avenue for future growth. Already in Fiscal 2004,
new international customers have placed orders for theseproducts and two existing customers are acquiring additionalequipment to expand their operations.
• Geospace Technologies will be responsible forproviding seismic exploration products.
As the reservoir characterization and monitoring market
• OYO Instruments will continue to provide thermal imaging equipment and film for screen print, signage and textile applications in the commercial graphics market.
Seismic Exploration Turnaround ElusiveIn our traditional seismic exploration products market, Fiscal
2003 proved to be another challenging year. Persistent weakness
in exploration activity and industry overcapacity combinedto reduce both the absolute and relative demand for seismicequipment and instrumentation. While there are a few pockets
of exploration activity around the globe, any sort of near-
term turnaround remains elusive.
From this new organizational and cost structure, we
• Geospace Offshore is charged with providingcustom cable and umbilicals for the offshore andspecialty cable markets.
• Geospace Engineering Resources International will continue to develop and market reservoir characterization and monitoring systems.
believe OYO Geospace will be repositioned to deliverexceptional value to our critical stakeholders: our customersand our shareholders.
We will continue to pursue opportunities in this market
as they arise, but fortunately we began to diversify OYO
Geospace’s operations in 1997. From those earlier efforts our
once total dependence upon the seismic market is now
considerably lessened.
Commercial Graphics Emerges as
Film Manufacturer
Fiscal 2003 was a transition year for our commercial
graphics division as we coped with the disruption caused
by the bankruptcy of our primary film supplier and as we
Re-Structuring to Deliver Exceptional ValueIn Fiscal 2003, we also undertook a substantial set of initiatives
to restore our profitability, independent of seismic industry
cycles. Our financial goal was clear: to extract $4 million
from our manufacturing and operating cost structure. Ourorganizational goals were also clear: to eliminate redundanciesin our manufacturing processes and to realign our operationsto best serve each of our markets.
initiated operations to manufactureour own film. In fiscal 2003,
warranty issues related to the lastof the film supplier’s shipments andwrite-offs of defective film
inventories substantially reduced
this group’s operating results.
By year-end, however, our
commercial graphics operations
appeared to have turned the corner.
We are now successfully and
routinely producing our own privatelabel film, which meets the strictest standards for quality
and reliability. Our new 1200 dpi imagers are also gaining
market acceptance and we have begun to develop film forhigher density applications. In Fiscal 2004, we believe OYOInstruments’ operations will return to historical higher
levels of profitability.
OYO-GEO Impulse is already well-
known as a major low-cost provider
of sensors and other products to the
Russian marketplace. With new
technology transfers, OYO-GEOImpulse is now an important supplierof international-grade sensors to the
international marketplace.
Fiscal 2004 – Return to
Profitability
Fiscal 2003 was a truly a challenging
year of transition. For the year, we recorded a net loss of $2.5
million, or $(0.46) per diluted share, on revenues of $50.9
million. This compares with net income of $1.1 million, or
$0.20 per diluted share, on revenues of $65.0 million in the
preceding year. We are disappointed in these results.
Offshore Cable and Umbilical Group Launched
For our new offshore and umbilical products
group, Fiscal 2003 was a year of tremendous
growth. In its first full year of operations, thegroup recorded steady growth in bookings andquotes, as our cable design and production
capabilities became more widely known
throughout the offshore market. We expect
revenues from this group to increase
substantially in Fiscal 2004.
We believe, however, that in Fiscal 2004 OYO Geospace
will return to profitability. We also believe that realignment
of our businesses will give us the flexibility to best meet our
customers’ needs in each of the markets we serve. We are
structured to meet tomorrow’s market challenges – today.
On behalf of the management team and board of
directors, I want to thank our shareholders for their patienceand support, our customers for their enthusiastic responseand our employees for their tireless efforts.
International InitiativesIn other developments, we successfully
increased our percentage ownership in OYO-GEO Impulse International LLC, our Russian
joint venture, from 85% to 97%. We also
continue to transfer technology to OYO-GEO
Impulse’s manufacturing operations in Ufa,
Bashkortostan, Russia.
Sincerely,
Gary D. Owens
Chairman, President & CEO
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
È Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
for the Fiscal Year Ended September 30, 2003
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
(State or Other Jurisdiction of
Incorporation or Organization)
76-0447780
(I.R.S. Employer
Identification No.)
7007 Pinemont Drive
Houston, Texas 77040-6601
(Address of Principal Executive Offices)
(713) 986-4444
(Registrant’s telephone number, including area code)
Securities Registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock
Name of Each Exchange on Which Registered
NASDAQ National Market
Securities Registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes È No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. È
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes ‘ No È
There were 5,554,874 shares of the Registrant’s Common Stock outstanding as of the close of business on
December 1, 2003. The aggregate market value of the Registrant’s Common Stock held by non-affiliates was
approximately $23 million (based upon the closing price of $9.50 on March 31, 2003, as reported by the
NASDAQ Stock Market, Inc.)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Registrant’s 2004 Annual Meeting of Stockholders are
incorporated by reference into Part III of this report.
Item 1. Business
Company Overview
PART I
We design and manufacture instruments and equipment used in the acquisition and processing of seismic
data. We have been in the seismic instrument and equipment business since 1980, marketing our products
primarily to the oil and gas industry worldwide. We also design and manufacture thermal imaging equipment and
distribute dry thermal film products to the commercial graphics industry. We have been serving the commercial
graphics industry since 1995.
Seismic Industry
Geoscientists use seismic data to map potential or existing oil and gas bearing formations and the geologic
structures that surround them. Seismic data is used primarily in connection with the exploration, development
and production of oil and gas.
Seismic data acquisition is conducted on land by combining a seismic energy source and a data recording
system. The energy source imparts seismic waves into the earth, reflections of which are received and measured
by geophones and hydrophones. Electrical signals generated by the geophones and hydrophones are
simultaneously transmitted through leader wire, geophone and hydrophone string connectors and telemetric cable
to data collection units, which store information for processing and analysis. Seismic thermal imaging output
devices are used in the field or office to create a graphic representation of the seismic data after it has been
acquired.
Marine seismic data acquisition is conducted primarily by large ocean-going vessels that tow long seismic
cables known as “streamers”. Usually, the energy source in marine seismic data acquisition is an airgun, and the
reflected seismic waves are received and measured by hydrophones, which are an integral part of the streamers.
The streamers simultaneously transmit the electrical impulses back to the vessel via telemetric cable included
within the streamers, and the seismic data is recorded and processed in much the same manner as it is on land.
An estimated one to two-thirds of the reserves found with every oil and gas discovery will be left behind in
the reservoir, not recoverable either economically or at times even identified. Reservoir characterization and
management programs, in which the reservoir is carefully imaged and monitored throughout its economic life by
seismic instruments and equipment, are now seen as vital tools for improving production recovery rates. Seismic
surveys repeated over selected time intervals show dynamic changes within the reservoir and can be used to
monitor the effects of production. We now provide products and services for use in the reservoir monitoring and
characterization marketplace and expect to incur significant future research and development expenditures aimed
at the development of additional seismic acquisition products used for high definition reservoir characterization
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.
Commercial Graphics Industry
Our entry into the commercial graphics business occurred in 1995 as we leveraged our thermal imaging
product technology, originally designed for seismic data processing applications, into new markets. With minor
product modifications, we were successful in adapting these products for use in the commercial graphics
industry.
2
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, with resolution ranging
from 400 to 1,200 dpi (dots per inch). This business segment has some sales to customers in the seismic industry.
In April 2002, we purchased for $2.3 million certain intellectual property rights from our then primary
supplier of dry thermal film (the “Former Primary Film Supplier”). 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 provided 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 such 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 no longer believe that a buyer can be found to operate the Former Primary Film Supplier’s business.
During the fiscal year ended September 30, 2003, the Former Primary Film Supplier failed to meet
substantially all of our purchase orders and has ceased providing us with dry thermal film. As a result, we are
currently purchasing a large quantity of dry thermal film from an alternative film supplier (the “Other Film
Supplier”), and we are 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
contract 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 either internally or 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 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 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.
3
Acquisitions
OYO-GEO Impulse International, LLC
Effective November 8, 2001, we increased our equity ownership from 44% to 85% in OYO-GEO Impulse
International, LLC (“OYO-GEO Impulse”), a Russian joint venture we formed more than ten years ago with
Geophyspribor Ufa Production Association, Bank Vostock and Chori Co., Ltd. Subsequent to the effectiveness of
such increase in ownership, the operating results of the reorganized entity have been consolidated with those of
our Company. At that time, Geophyspribor Ufa Production Association and Chori Co., Ltd. continued as
minority shareholders of OYO-GEO Impulse.
In exchange for the additional equity ownership, we forgave a debt of $1.2 million owed to us by
OYO-GEO Impulse. At the time of the acquisition, the debt owed to us and a related prior equity investment had
been written-off due to prior concerns regarding realization of those assets and had no carrying value in our
financial statements. In connection with this acquisition, we recorded an extraordinary gain of $686,000, net of
income taxes of $85,000. This extraordinary gain represents the negative goodwill that resulted from the
acquisition of the additional equity interest of OYO-GEO Impulse. SFAS 141 requires negative goodwill
resulting from new business combinations to be recorded as an extraordinary gain.
On September 12, 2003, we purchased for $164,000 an additional 12% ownership interest in OYO-GEO
Impulse from Geophyspribor Ufa Production Association, thereby increasing our ownership interest to 97%.
Chori Co., Ltd. continues as a 3% minority shareholder of OYO-GEO Impulse.
Based in Ufa, Bashkortostan, Russia, OYO-GEO Impulse has been in operation since 1990, manufacturing
sensors for the Russian seismic marketplace. At September 30, 2003, OYO-GEO Impulse owned two facilities in
Ufa containing a total of 161,000 square feet and employed approximately 357 people. Our seismic equipment
manufacturing subsidiary in Houston is managing the expansion of OYO-GEO Impulse’s operations to produce
international-standard sensors and additional products that will broaden its market scope.
EcoPRO Imaging
In February 2001, we acquired the operating assets and business of EcoPRO for $1.9 million of cash from
the Former Primary Film Supplier. The EcoPRO business distributes EcoPRO brand name thermal imagers and
dry thermal film. The operations of EcoPRO have been combined with our commercial graphics business
segment.
Products and Product Development
Seismic Products
Our seismic product lines currently consist of geophones and hydrophones, including multi-component
geophones and hydrophones, seismic leader wire, geophone string connectors, seismic telemetry cable, high
definition reservoir characterization products and services, marine seismic cable retrieval devices, marine seismic
cable steering devices, and small data acquisition systems targeted at niche markets. Our seismic products are
compatible with most major seismic data acquisition systems currently in use. We believe that our seismic
products are among the most technologically advanced instruments and equipment available for seismic data
acquisition.
Our products used in marine seismic data acquisition include our patented marine seismic cable retrieval
devices. Occasionally, streamers are severed and become disconnected from the vessel as a result of inclement
weather, vessel traffic or human or technological error. Our seismic cable retrieval devices, which are attached to
the streamers, contain air bags that are designed to inflate automatically at a given depth, bringing the severed
cable to the surface. This can save the seismic contractor significant time and money compared to the alternative
of losing the seismic streamer. We also produce seismic streamer “birds”, which are finlike devices that attach to
the streamer and help maintain the streamer at a certain desired depth as it is towed through the water.
4
Other product developments include the HDSeis™ product line and a suite of borehole and reservoir
characterization products and services. Our HDSeis™ System is a high definition seismic data acquisition system
with flexible architecture that can be configured as a borehole seismic system or as a subsurface system for land
or marine reservoir-monitoring projects.
The scalable architecture of the HDSeis™ System enables custom designed system configuration for
applications ranging from low-channel engineering and environmental-scale surveys requiring a minimum
number of recording channels to high-channel surveys required to efficiently conduct permanent deepwater
reservoir imaging and monitoring. Modular architecture allows virtually unlimited channel expansion with global
positioning systems and fiber-optic synchronization. In addition, multi-system synchronization features make the
HDSeis™ System well suited for multi-well or multi-site acquisition, simultaneous surface and downhole
acquisition and continuous reservoir monitoring projects.
Reservoir characterization requires special purpose or custom designed systems in which portability
becomes less critical and functional reliability assumes greater importance. This reliability factor helps assure
successful operations in inaccessible locations over a considerable period of time. Additionally, reservoirs
located in deepwater or hostile environments require special instrumentation and new techniques for life-of-field
performance.
Reservoir characterization also requires high-bandwidth, high-resolution seismic data for engineering
project planning and management. Seismic data acquired at reservoir level, through seismic sources and acoustic
receivers within a wellbore, has a bandwidth of several kilohertz, which is capable of yielding the requisite
high-resolution images.
We believe our HDSeis™ System and tools, designed for cost-effective deployment and lifetime
performance, will make borehole and seabed seismic acquisition a cost-effective, reliable process for the
challenges of reservoir characterization and monitoring.
Other new 3-D seismic product developments include introduction of an omnidirectional geophone for use
in reservoir monitoring; a new compact marine three-component or four-component gimbaled sensor and new
special-purpose connectors, connector arrays and cases.
In order to leverage our cable manufacturing facilities and capabilities, we are designing and selling cable
products to the offshore oil and gas and offshore construction industries. The production of marine cables
requires specialized design capabilities and manufacturing equipment, which we also utilize for deepwater
reservoir characterization products.
We are also working to diversify our existing seismic product lines and adapt our manufacturing capabilities
for uses in industries other than the seismic industry.
Commercial Graphics Products
We have adapted our thermal imaging technology, which we originally developed for the seismic industry,
for commercial applications in the newsprint, silkscreen and corrugated box printing industries. Our thermal
imaging equipment is capable of producing data images ranging in size from 12 to 54 inches wide, with
resolution ranging from 400 to 1,200 dpi (dots per inch). We believe that our wide format thermal printers, which
use dry thermal film technology, are a cost-effective alternative to conventional equipment and imaging
solutions.
We expect to continue our research and development activities to expand the markets for our thermal
imaging products and increase the image clarity of our thermal imaging equipment and dry thermal film.
5
Competition
We believe that we are one of the world’s largest manufacturers and distributors of seismic related products.
The principal competitors in our seismic business segment for geophones, hydrophones, geophone string
connectors, leader wire and telemetry cable are Input/Output, Sercel and Steward Cable. Furthermore, an entity
in China manufactures an older model geophone having the same design and specifications as our GS-20 DX
geophone. In addition to these competitors, certain manufacturers of marine streamers also manufacture
hydrophones for their own use.
We believe that the principal competitive factors in the seismic instruments and equipment market are
technological superiority, product durability and reliability and customer service and support. Since price and
product delivery are also important considerations for customers, pricing terms may become more significant
during an industry downturn. These factors can be offset by a customer’s preference for standardization. In
general, particular customers prefer to standardize geophones and hydrophones, particularly if they are used by a
single seismic crew or multiple crews that can support each other. Customer directed standardization makes it
more difficult for a geophone or hydrophone manufacturer to gain market share from other such manufacturers.
A key competitive factor for seismic instruments and equipment is durability under harsh field conditions.
Instruments and equipment must not only meet rigorous technical specifications regarding signal integrity and
sensitivity, but must also be extremely rugged and durable to withstand the rigors of field use, often in harsh
environments.
With respect to our marine seismic data products, we know of no other company that manufactures a
product similar to our patented seismic streamer retrieval device. Our primary competitor in the manufacture of
our streamer depth positioning device is Input/Output.
Our primary competitors for our deepwater reservoir characterization systems are traditional seismic
equipment manufacturers such as Schlumberger, Input/Output and Sercel.
Our primary competitors for downhole high definition seismic data acquisition services are Paulson
Geophysical and Core Laboratories.
We believe that the primary competitors in our commercial graphics business segment are Ricoh, Xante,
Gerber Scientific, iSys Group, Cypress Tech. and Atlantek, as well as alternative technologies such as inkjet
printing. Also, as we advance the resolution capabilities of direct thermal technology, we expose ourselves to
additional competitors in the more traditional wet-film imagesetting marketplace.
Suppliers
A Japanese manufacturer unaffiliated with us is currently the only supplier (the “Japanese Supplier”) of
wide format thermal printheads that we use to manufacture our wide format thermal imaging equipment. Over
the years we have experienced some quality control issues with these printheads and have returned significant
quantities of these products to the Japanese Supplier for repair, testing and quality assurance review. We are also
aware that the Japanese Supplier is experiencing operating difficulties and consider it possible that such supplier
may be forced to dispose of or discontinue this line of business. In this regard, we have publicly available
information as to the Japanese Supplier that it has incurred significant operating losses in recent periods. We are
not presently experiencing any significant supply or quality control problems with the Japanese Supplier.
However, unforeseen problems with the Japanese Supplier, if they develop, could have a significant effect on our
ability to meet future production and sales commitments. If the Japanese Supplier 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, adversely
affecting our financial performance. We are not able to evaluate the implications, if any, of that situation at
present. We believe we maintain an adequate inventory of these printheads to continue production for two to six
months should our source of supply be disrupted.
6
Our Former Primary Film Supplier had been the primary manufacturer of the dry thermal film used by our
customers in the thermal imaging equipment we sell. 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. Around
that time, 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 no longer believe that
a buyer can be found to operate the Former Primary Film Supplier’s business.
During the fiscal year ended September 30, 2003, the Former Primary Film Supplier failed to meet
substantially all of our purchase orders and has ceased providing us with dry thermal film. As a result, we are
currently purchasing a large quantity of dry thermal film from our Other Film Supplier and we are using the
technology we purchased from the Former Primary Film Supplier to manufacture dry thermal film internally.
Except for the Other Film Supplier, we know of no other source for dry thermal film that performs 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 were to discontinue supplying
dry thermal film or became 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, adversely affecting our
financial performance.
Product Manufacturing
Our manufacturing and product assembly operations consist of machining or molding the necessary
component parts, configuring these parts along with components received from various vendors and assembling a
final product. With regards to dry thermal film, we mix and react various chemicals to formulate a reactive layer
that is then coated onto a clear polyester film. The film is then coated with a protective topcoat that produces the
final product. Upon completion, we test our final products to the functional and environmental extremes of
product specifications and inspect the products for quality assurance. We normally manufacture and ship based
on customer orders and therefore, typically do not maintain significant inventories of finished goods.
Markets and Customers
Our principal seismic customers are seismic contractors, many of which are at present experiencing
significantly lessened demand for their services and consequently financial difficulties, and major independent
and government-owned oil and gas companies that either operate their own seismic crews or specify seismic
instrument and equipment preferences to contractors. Our commercial graphics customers primarily consist of
direct users of our equipment as well as specialized resellers that focus on the newsprint, silkscreen and
corrugated box printing industries.
Intellectual Property
We seek to protect our intellectual property by means of patents, trademarks, trade secrets and other
measures. Although we do not consider any single patent essential to our success, we consider our patent
regarding our marine seismic cable retrieval devices to be of particular value to us. This patent is scheduled to
expire in 2012. We have dry thermal film technology patents that expire at varying dates beginning in 2013.
Research and Development
We expect to incur significant future research and development expenditures aimed at the development of
additional seismic data acquisition products used for high definition reservoir characterization in both land and
marine environments. For a summary of our research and development expenditures over the past five years, see
Item 6, Selected Consolidated Financial Data, contained in Part II to this Report on Form 10-K.
7
Employees
As of September 30, 2003 we employed approximately 650 people on a full-time basis, of which
approximately 253 were employed in the United States. We have never experienced a work stoppage and
consider our relationship with our employees to be satisfactory. Our employees are not unionized.
Financial Information by Geographic Area
For a discussion of financial information by geographic area, see Note 17 to the Consolidated Financial
Statements contained in this Report on Form 10-K.
Item 2. Properties
As of September 30, 2003, our operations included the following locations:
Location
Owned/Leased
Approximate
Square Footage
Use
Houston, Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stafford, Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Houston, Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Houston, Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Houston, Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ufa, Bashkortostan, Russia . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ufa, Bashkortostan, Russia . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Calgary, Alberta, Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Luton, Bedfordshire, England . . . . . . . . . . . . . . . . . . . . . . . . . .
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Owned
208,000
20,000
77,000
58,000
18,000
120,000
41,000
21,000
8,000
(1)
(2)
(3)
(4)
(5)
Manufacturing
Manufacturing
Sales and service
Sales and service
We believe that our facilities are adequate for our current and immediately projected needs.
(1) This property is located at 7007 Pinemont Drive in Houston, Texas (the “Pinemont Facility”). It was
purchased in September 2003 at a cost of $3.8 million, $3.0 million of which was financed by a 7-year
mortgage. The Pinemont Facility is currently being refurbished and modified for our needs at an estimated
cost of $0.8 million. The Pinemont Facility will eventually consolidate in one location all manufacturing,
engineering, and selling and marketing and administrative activities for OYO Geospace in the United States.
The Pinemont Facility will also serve as OYO Geospace’s world-wide headquarters. Such consolidation is a
critical element in our strategic restructuring initiative aimed at making our operations more efficient in the
face of continuing pricing pressure on our traditional seismic businesses.
(2) This property was utilized as our world-wide headquarters and for certain research and development
operations. These operations were relocated to the Pinemont Facility in November 2003. We are seeking to
sell this property.
(3) This property contains a manufacturing operation and certain support functions. We are in the process of
relocating such operations to the Pinemont Facility and expect to conclude such relocation in December
2003. We plan to lease or sell this facility depending on local real estate market conditions and other factors.
(4) This property serves as a manufacturing operation. We are in the process of relocating this operation to the
Pinemont Facility. The lease for this property expires on December 31, 2003 and will not be renewed.
(5) This property served as a manufacturing operation. We transferred this operation to the Pinemont Facility in
November 2003 and the property was sold on December 1, 2003.
8
Item 3. Legal Proceedings
From time to time we are a party to what we believe is routine litigation and proceedings that may be
considered as part of the ordinary course of our business. We are not aware of any current or pending litigation or
proceedings that could have a material adverse effect on our results of operations, cash flows or financial
condition, although we continue to monitor developments in the bankruptcy proceeding by our Former Primary
Film Supplier and its existing claim against us as is described in the section entitled “Business—Company
Overview—Commercial Graphics Industry” contained in this Report on Form 10-K.
In the course of shipping several heavy reels of undersea sensor cable to the North Sea pursuant to a contract
with a major oil company, the reels were mishandled by a third party during discharge from the vessel. Our
customer then rejected the cables. We have made a claim in the amount of $1.7 million with the insurance
company writing the policy covering the cargo during transit. To date, the insurance company is still conducting
its due diligence and has not accepted or rejected our claim. In the event we are unable to reach an
accommodation with the insurance company, we are prepared to bring suit to enforce our rights under the policy.
Item 4. Submission of Matters to Vote of Security Holders
None.
9
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
Our common stock is traded on the Nasdaq National Market under the symbol “OYOG”. On November 30,
2003, there were approximately 59 holders of record of our common stock.
The following table presents the range of high and low bid quotations for our common stock during the two
fiscal years ended September 30, 2003 and September 30, 2002, as reported by The NASDAQ Stock Market, Inc.
Year Ended September 30, 2003:
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First Quarter
Year Ended September 30, 2002:
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First Quarter
Low
High
$10.06
9.50
6.72
7.60
$13.75
14.00
9.50
12.95
$ 9.60
8.75
11.95
9.75
$16.00
14.20
14.98
15.25
Historically, we have not paid dividends, and we do not intend to pay cash dividends on our common stock
in the foreseeable future. We presently intend to retain earnings for use in our business, with any future decision
to pay cash dividends dependent upon our growth, profitability, financial condition and other factors the Board of
Directors may deem relevant. Our existing credit agreement also has covenants which materially limit our ability
to pay dividends. For a more complete discussion of our credit agreement, see the section entitled
“Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and
Capital Resources” contained in this Report on Form 10-K.
The following equity plan information is provided as of September 30, 2003
Equity Compensation Plan Information
Number of Securities to be
Issued upon Exercise of
Outstanding Options,
Warrants and Rights
(a)
Weighted-average Exercise
Price of Outstanding Options,
Warrants and Rights
(b)
Number of Securities
Remaining Available for
Future Issuances Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a))
(c)
729,300
$12.89
80,605
N/A
N/A
N/A
Plan Category
Equity Compensation
Plans Approved by
Security Holders . . . . . . . .
Equity Compensation
Plans Not Approved by
Security Holders . . . . . . . .
10
Item 6. Selected Consolidated Financial Data
The following table sets forth certain selected historical financial data on a consolidated basis. The selected
consolidated financial data was derived from our consolidated financial statements. The selected consolidated
financial data should be read in conjunction with our consolidated financial statements appearing elsewhere in
this Form 10-K.
Year Ended September 30,
2003
2002
2001
2000
1999
(in thousands, except share and per share amounts)
Statement of Operations Data:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
Selling, general and administrative . . . . . . . . . . . . .
Research and development
. . . . . . . . . . . . . . . . . . .
Impairment of assets . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from operations . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes, minority interest and
extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit)
Income (loss) before minority interest, and
extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minority interest
Income (loss) before extraordinary gain . . . . . . . . . . . . .
Extraordinary gain, net of tax of $85 . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings (loss) per share:
Income (loss) before extraordinary gain . . . . . . . . . . . . .
Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) per share . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings (loss) per share:
Income (loss) before extraordinary gain . . . . . . . . . . . . .
Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) per share . . . . . . . . . . . . . . . . . . . . . . .
$
50,854
38,337
12,517
11,273
5,226
—
16,499
(3,982)
69
(3,913)
(1,399)
(2,514)
(19)
(2,533)
—
65,049
46,484
18,565
11,538
5,347
1,246
18,131
434
(770)
(336)
(857)
521
(88)
433
686
$
$
$
$
$
(2,533) $
1,119
(0.46) $
—
(0.46) $
(0.46) $
—
(0.46) $
0.08
0.12
0.20
0.08
0.12
0.20
$
$
$
$
$
$
63,618
42,957
20,661
12,528
6,277
—
18,805
1,856
(226)
1,630
292
1,338
—
1,338
—
1,338
0.24
—
0.24
0.24
—
0.24
$
$
$
$
$
$
53,474
39,042
14,432
10,090
6,146
—
16,236
(1,804)
41
(1,763)
(572)
(1,191)
—
(1,191)
—
(1,191) $
(0.22) $
—
(0.22) $
(0.22) $
—
(0.22) $
$
42,031
25,536
16,495
9,682
6,246
—
15,928
567
84
651
(187)
838
—
838
—
838
0.16
—
0.16
0.15
—
0.15
Weighted average shares outstanding—Basic . . . . . . . .
Weighted average share outstanding—Diluted . . . . . . . .
5,550,216
5,550,216
5,535,979
5,547,774
5,489,251
5,598,597
5,431,901
5,431,901
5,384,530
5,449,404
Other Financial Data:
Depreciation, amortization and stock-based
compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4,268
6,045
$
4,852
4,729
$
4,444
4,909
$
4,014 $
6,004
4,319
3,656
As of September 30,
2003
2002
2001
2000
1999
(in thousands)
Balance Sheet Data:
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
24,937
71,435
5,889
6,232
52,471
$
28,130
68,126
714
3,544
54,129
$
27,891
73,000
1,033
3,772
52,791
$
28,505
65,108
198
3,984
50,709
32,231
63,419
169
4,182
51,398
11
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is management’s discussion and analysis of the major elements of our consolidated financial
statements. You should read this discussion and analysis together with our consolidated financial statements and
accompanying notes and other detailed information appearing elsewhere in this Form 10-K. The discussion of
our financial condition and results of operations includes various forward-looking statements about our markets,
the demand for our products and services and our future plans and results. These statements are based on
assumptions that we consider to be reasonable, but that could prove to be incorrect. For more information
regarding our assumptions, you should refer to the section entitled “Forward-Looking Statements and Risks”
contained in this Item 7.
Industry Overview
We design and manufacture instruments and equipment used in the acquisition and processing of seismic
data. We have been in the seismic instrument and equipment business since 1980, marketing our products
primarily to the oil and gas industry worldwide. We also design and manufacture thermal imaging equipment and
distribute dry thermal film products to the commercial graphics industry. We have been serving the commercial
graphics industry since 1995.
Seismic
Geoscientists use seismic data to map potential or existing oil and gas bearing formations and the geologic
structures that surround them. Seismic data is used primarily in connection with the exploration, development
and production of oil and gas.
Seismic data acquisition is conducted on land by combining a seismic energy source and a data recording
system. The energy source imparts seismic waves into the earth, reflections of which are received and measured
by geophones and hydrophones. Electrical signals generated by the geophones and hydrophones are
simultaneously transmitted through leader wire, geophone and hydrophone string connectors and telemetric cable
to data collection units, which store information for processing and analysis. Seismic thermal imaging output
devices are used in the field or office to create a graphic representation of the seismic data after it has been
acquired.
Marine seismic data acquisition is conducted primarily by large ocean-going vessels that tow long seismic
cables known as “streamers”. Usually, the energy source in marine seismic data acquisition is an airgun, and the
reflected seismic waves are received and measured by hydrophones, which are an integral part of the streamers.
The streamers simultaneously transmit the electrical impulses back to the vessel via telemetric cable included
within the streamers, and the seismic data is recorded and processed in much the same manner as it is on land.
An estimated one to two-thirds of the reserves found with every oil and gas discovery will be left behind in
the reservoir, not recoverable either economically or at times even identified. Reservoir characterization and
management programs, in which the reservoir is carefully imaged and monitored throughout its economic life by
seismic instruments and equipment, are now seen as vital tools for improving production recovery rates. Seismic
surveys repeated over selected time intervals show dynamic changes within the reservoir and can be used to
monitor the effects of production.
We expect to incur significant future research and development expenditures aimed at the development of
additional seismic acquisition products and services used for high definition reservoir characterization for use in
both land and marine environments.
While orders for our products can vary substantially from quarter to quarter, reservoir characterization
projects, especially deepwater projects, require the use of more equipment over a longer period of time than is
required by conventional surface seismic systems. Revenue recognition in accordance with generally accepted
accounting principles for these large-scale projects has the potential to result in substantial fluctuations in our
12
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.
During our fiscal year ended September 30, 2002, we delivered a reservoir characterization and monitoring
system to a major oil company, for installation in one of its fields in the North Sea. In accordance with the terms
of the contract, we recognized $15.8 million of revenues in our fiscal year ended September 30, 2002 and $2.5
million of revenues in our fiscal year ended September 30, 2003. The contract provides for additional revenue of
$3.6 million based upon the sucessful performance of the system through December 31, 2003. Provided the
system continues to perform sucessfully through December 31, 2003, we will recognize such revenue in the first
quarter of fiscal year 2004. All costs related to this sale, including estimated costs for warranty and delivery,
were recorded in the fiscal year ended September 30, 2002.
We believe that our reservoir characterization systems, including the system referenced above, are important
new technologies in our industry and our ability to develop and market them will be a key determinant of our
success in the future.
Commercial Graphics
Our entry into the commercial graphics business occurred in 1995 as we leveraged our thermal imaging
product technology, originally designed for seismic data processing applications, into new markets. With minor
product modifications, we were successful in adapting these products for use in the commercial graphics
industry.
Our commercial graphics business segment manufactures and sells thermal imaging equipment and
distributes dry thermal film primarily to the screen print, point of sale, signage and textile market sectors. Our
thermal imaging equipment is capable of producing data images ranging in size from 12 to 54 inches wide, with
resolution ranging from 400 to 1,200 dpi. This business segment has some sales to customers in the seismic
industry.
Results of Operations
We report and evaluate financial information for two segments: Seismic and Commercial Graphics.
Summary financial data by business segment follows (in thousands):
Years Ended
September 30,
2003
September 30,
2002
September 30,
2001
Seismic
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$37,619
(833)
$51,800
4,311
$50,433
5,381
Commercial Graphics
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,333
231
Corporate
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating (loss)
—
(3,380)
Eliminations
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating (loss)
(98)
—
13,490
(399)
—
(3,336)
(241)
(142)
13,557
27
—
(3,552)
(372)
—
Consolidated Totals
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50,854
(3,982)
65,049
434
63,618
1,856
13
Overview
As discussed under “Item 2. Properties”, we purchased the Pinemont Facility, having 208,000 square feet,
which will house our worldwide headquarters and all U.S. manufacturing, engineering, selling, marketing, and
administrative activities. We have begun the move into such facility and expect it to be completely occupied by
early 2004. The purchase price for the Pinemont Facility was $3.8 million, of which $3.0 million was financed by
a 7-year mortgage. We expect to incur $0.8 million of capitalized costs for the remodeling of the facility. In
addition, we expect to incur charges of $0.4 million in the first quarter of fiscal year 2004 to relocate our
operations into the Pinemont Facility. We sold one of our former facilities in December 2003, and we will allow
a lease to expire on December 31, 2003 on another facility, and will hold our remaining facilities in Texas for
sale or lease. At September 30, 2003, the net book value of assets to be sold or leased was $6.8 million. We
expect the results of the move and restructuring to be the elimination of substantial manufacturing and operating
expenses in future periods, which should easily offset the one-time costs of the move and justify the capital
expenditures made with respect to the Pinemont Facility.
Fiscal Year 2003 Compared to Fiscal Year 2002.
Consolidated net sales for the year ended September 30, 2003 decreased $14.2 million, or 21.8% from fiscal
year 2002. The decrease in net sales resulted primarily from the prior fiscal year containing a $15.8 million sale
of a reservoir characterization and monitoring system compared to only $2.5 million of similar sales in fiscal year
2003. In addition, sales of our marine-based seismic products also declined significantly during fiscal year 2003,
partially offset by increased sales of our new offshore cable products and certain land-based seismic products.
Due to the continued soft demand for traditional seismic equipment, we expect these sales to remain weak in the
near term. However, we also expect continued growth and acceptance of our new deepwater reservoir
characterization and our offshore cable products, although we cannot predict the exact timing thereof or the
periods in which we will specifically see growth and acceptance of these products.
Consolidated gross profits for the year ended September 30, 2003 decreased by $6.0 million, or 32.6% from
fiscal year 2002. The lower gross profits in fiscal year 2003 are primarily the result the large sale of a reservoir
characterization and monitoring system in fiscal year 2002, which yielded a higher than average gross profit
margin. In addition, we recorded charges of $0.7 million in fiscal year 2003 to write-off defective dry thermal
film inventories and obsolete borehole seismic assets. Finally, competitive pricing pressures in the seismic
industry resulting from manufacturing over-capacity and the under-absorption of fixed manufacturing costs are
expected to continue to have an unfavorable impact upon the gross profit margins we realized from sales of our
traditional seismic products. In light of the current environment, we are taking steps to consolidate and
reorganize our manufacturing operations in order to improve our gross profit margins.
Consolidated operating expenses for the year ended September 30, 2003 decreased $1.6 million, or 9.0%
from fiscal year 2002. The prior year period includes a $1.2 million asset impairment charge relating to the
bankruptcy of the Former Primary Film Supplier. Excluding the asset impairment charge, our operating expenses
for fiscal year 2003 decreased $0.4 million, or 2.2% from fiscal year 2002, primarily due to the lower level of
sales and actions taken to reduce operating costs in response to current market conditions. We are undertaking
additional cost-cutting actions to consolidate and reorganize our business operations in an effort to increase
efficiency.
The United States statutory tax rate for the periods reported was 34%. The effective tax rate for the year
ended September 30, 2003 was 35.8% compared to an effective tax rate of 255.1% (benefit) in fiscal year 2002.
The fiscal year 2002 benefit primarily resulted from the resolution of contingent tax matters and extraterritorial
income deductions. During the fiscal year 2003, we filed amended tax returns for certain prior year periods and
also completed our fiscal 2002 federal tax filing. Upon completion of such filings, we identified $0.8 million of
additional tax benefits that are available for possible use in future periods. These additional benefits are related to
foreign tax credits. Based upon the current seismic industry environment and our projections of future taxable
14
income, we have reviewed our deferred tax assets and recorded a valuation allowance of approximately $0.8
million against the foreign tax credits. Including the valuation allowance, we have net deferred tax assets of $3.1
million at September 30, 2003. We will continue to evaluate our deferred tax position on a regular basis to
determine whether additions to or reversal of a valuation is needed. Further operating losses could result in
additional valuation allowances being recorded in future periods.
Fiscal Year 2002 Compared to Fiscal Year 2001.
Consolidated revenues for fiscal year 2002 increased $1.4 million, or 2.3%, from fiscal year 2001. The
increase in revenues was primarily due to a $15.8 million sale of a reservoir characterization and monitoring
system to a major oil company and the acquisition of an additional interest in OYO-GEO Impulse, which
contributed $4.1 million in revenues in fiscal year 2002. Such increases were largely offset by a significant
decrease in sales of our traditional land-based seismic products, resulting from a softening in the demand for
seismic equipment along with significant competition in pricing due to excess manufacturing capacity in our
seismic business segment.
Our consolidated gross profits for fiscal year 2002 decreased by $2.1 million, or 10.1%, from fiscal year
2001. While the sale of the reservoir characterization system to a major oil company had a favorable impact on
our consolidated gross profits and gross profit margins, the continued depressed state of the seismic industry
adversely affected gross profit margins for our land-based seismic products. In response to these market
conditions, we recorded a charge of $0.9 million in fiscal year 2002 to reflect the impairment of slow moving
inventories and the underutilization of certain manufacturing plant assets.
Our consolidated operating expenses for fiscal year 2002 decreased $0.7 million, or 3.6%, from fiscal year
2001. Included in our consolidated operating expenses for fiscal year 2002 is a $1.2 million impairment charge
related to the Chapter 11 reorganization petition filed by our Former Primary Film Supplier. In this regard, see
the discussion in Note 18 to the Consolidated Financial Statements included in this Report on Form 10-K and
“Business—Company Overview—Commercial Graphics Industry”. Excluding the impact of the impairment
charge, our consolidated operating expenses for fiscal year 2002 decreased by $1.9 million, or 10.2%, from the
prior fiscal year.
The lower expenses are a result of our effort to reduce expenses in our seismic business segment in response
to market conditions.
Our effective tax rate for fiscal year 2002 was a benefit of 255.1% compared to an expense of 17.9% for
fiscal year 2001. The United States statutory tax rate for each of these periods was 34%. For the current year and
the prior year period, the difference between our effective tax rate and the statutory tax rate resulted from the
recording of tax benefits for the resolution of contingent tax matters from prior years. Excluding these benefits,
our effective tax rate for fiscal year 2002 would have been a benefit of 86.0% and a provision of 34.1% in fiscal
years 2002 and 2001, respectively. The benefit of 86.0% in fiscal year 2002 largely resulted from the exclusion
from taxable income of certain profits earned on export sales. In addition, we recorded a tax expense of $85,000
related to an extraordinary gain that occurred in the first quarter of 2002.
Seismic
Our seismic product lines currently consist of high definition reservoir characterization products and
services, geophones and hydrophones, including multi-component geophones and hydrophones, seismic leader
wire, geophone string connectors, seismic telemetry cable, marine seismic cable retrieval devices and small data
acquisition systems targeted at niche markets.
15
Fiscal Year 2003 Compared to Fiscal Year 2002.
Net Sales
Sales of our seismic products for fiscal year 2003 decreased $14.2 million, or 27.4% from fiscal year 2002.
The decrease in sales principally resulted from fiscal year 2002 containing a $15.8 million sale of a large
deepwater reservoir characterization and monitoring system compared to only $2.5 million of similar sales in
fiscal year 2003. In addition, sales of our marine-based seismic products also declined significantly during fiscal
year 2003, partially offset by increased sales of our new offshore cable products and certain land-based seismic
products.
Operating Income (Loss)
Operating income (loss) for fiscal year 2003 decreased $5.1 million, or 119.3% from fiscal year 2002. The
decrease is primarily attributable to the gross profit associated with the $15.8 million sale of the deepwater
reservoir characterization and monitoring system in fiscal year 2002. In addition, the decline in sales and gross
profits from our higher profit margin marine-based seismic products unfavorably impacted our operating income
(loss) in fiscal year 2003.
Fiscal Year 2002 Compared to Fiscal Year 2001.
Net Sales
Sales of our seismic products for fiscal year 2002 increased $1.4 million, or 2.7% from fiscal year 2001. The
increase in sales was primarily due to a $15.8 million sale of a reservoir characterization and monitoring system
to a major oil company and inclusion of revenues in fiscal year 2002 resulting from our acquisition of an
additional interest in OYO-GEO Impulse and consequent consolidation of the operating results of OYO-GEO
Impulse with us, which contributed $4.1 million in revenues in fiscal year 2002. Such increases were largely
offset by a significant decrease in sales of our traditional land-based seismic products, resulting from a softening
in the demand for seismic equipment, along with downward pricing pressure exerted by significant competition
due to excess manufacturing capacity in the industry.
Operating Income
Operating income for fiscal year 2002 decreased $1.1 million from fiscal year 2001. As a percentage of total
sales, operating income decreased to 8.3% in fiscal year 2002 from 10.7% in fiscal year 2001. While the sale of
the reservoir characterization system had a favorable impact on our consolidated gross profits and gross profit
margins, the continued depressed state of the seismic industry adversely affected gross profit margins for our
land-based seismic products. In response to these market conditions, we recorded a charge of $0.9 million in
fiscal year 2002 to reflect the impairment of slow moving inventories and the underutilization of certain
manufacturing plant assets. The lower gross profits in fiscal year 2002 were partially offset by decreased
operating expenses.
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.
Fiscal Year 2003 Compared to Fiscal Year 2002.
Net Sales
Sales of our commercial graphics products for fiscal year 2003 decreased $0.2 million, or 1.2% from fiscal
year 2002. The decrease in sales primarily resulted from a decline in sales of equipment and accessories, partially
offset by increasing sales of dry thermal film.
16
Operating Income (Loss)
Our operating income for fiscal year 2003 increased $0.6 million from fiscal year 2002. Fiscal year 2002
included a $1.2 million asset impairment charge relating to the bankruptcy of Former Primary Film Supplier.
Excluding the $1.2 million asset impairment charge in fiscal 2002, our operating income in fiscal 2003 decreased
$0.6 million. This reduction in operating income primarily resulted from (i) increased manufacturing and
operating costs associated with the self-manufacture of dry thermal film, including the write-off of $0.6 million
of defective dry thermal film inventories, (ii) increased research and development expenses associated with a
newly introduced 1200 dpi thermal imaging device and (iii) amortization expenses resulting from the $2.3
million purchase of intellectual property from our Former Primary Film Supplier (see “Item 1. Business—
Company Overview”) in April 2002 (being amortized on a straight basis over five years).
Fiscal Year 2002 Compared to Fiscal Year 2001.
Net Sales
Sales of our commercial graphics products for fiscal year 2002 decreased $67,000, or 0.5%, from fiscal year
2001. The decrease in sales is primarily a result of a decline in thermal imaging equipment sales, although these
sales were partially offset by increased sales of our dry thermal film products, primarily reflecting the impact of
our acquisition of substantially all of the assets of EcoPRO in February 2001.
Operating Income
Operating income for fiscal year 2002 decreased $0.4 million from fiscal year 2001. Our operating loss in
fiscal year 2002 was 3.0% of total sales compared to operating income of 0.2% of total sales in fiscal year 2001.
The fiscal year 2002 results include an impairment charge of $1.2 million related to the bankruptcy filing of the
Former Primary Film Supplier. Excluding the impairment charge, operating income for the fiscal year 2002
would be $0.8 million, an increase of $0.8 million over fiscal year 2001. The increase in operating income is due
to increased sales of dry thermal film products and the impact of our acquisition of substantially all of the assets
of EcoPRO.
Acquisitions
OYO-GEO Impulse International, LLC
Effective November 8, 2001, we increased our equity ownership from 44% to 85% in OYO-GEO Impulse, a
Russian joint venture we formed more than ten years ago with Geophyspribor Ufa Production Association, Bank
Vostock and Chori Co., Ltd. Upon the effectiveness of the increase in ownership, the operating results of the
reorganized entity were consolidated with those of our company. At that time, Geophyspribor Ufa Production
Association and Chori Co., Ltd. continued as minority shareholders of OYO-GEO Impulse.
In exchange for the additional equity ownership, we forgave a debt of $1.2 million owed to us by
OYO-GEO Impulse. At the time of the acquisition, the debt owed to us and a related prior equity investment had
been written-off due to prior concerns regarding realization of those assets. As a result, these assets had no
carrying value in our financial statements. In connection with this acquisition, we recorded an extraordinary gain
of $686,000, net of income taxes of $85,000. This extraordinary gain represents the negative goodwill that
resulted from the acquisition of the additional equity interest of OYO-GEO Impulse. Accounting principles
generally accepted in the United States require negative goodwill resulting from new business combinations to be
recorded as an extraordinary gain.
On September 12, 2003, we purchased for $164,000 an additional 12% ownership interest in OYO-GEO
Impulse from Geophyspribor Ufa Production Association, thereby increasing our ownership interest to 97%.
Chori Co., Ltd. continues as a 3% minority shareholder of OYO-GEO Impulse.
17
Based in Ufa, Bashkortostan, Russia, OYO-GEO Impulse has been in operation since 1990, manufacturing
sensors for the Russian seismic marketplace. At September 30, 2003, OYO-GEO Impulse owned two facilities in
Ufa containing a total of 161,000 square feet and employed approximately 357 people. Our seismic equipment
manufacturing operation in Houston is managing the expansion of OYO-GEO Impulse’s operations to produce
international-standard sensors and additional products that will broaden its market scope.
EcoPRO Imaging
In February 2001, we acquired the operating assets and business of EcoPRO for $1.9 million of cash from
the Former Primary Film Supplier. The EcoPRO business distributes EcoPRO brand name thermal imagers and
dry thermal film. The operations of the EcoPRO business were combined with our other commercial graphics
operations.
Liquidity and Capital Resources
At September 30, 2003, we had $0.7 million in cash and cash equivalents. For the fiscal year ended
September 30, 2003, we used approximately $2.6 million of cash used in operating activities principally resulting
from our net loss of $2.5 million, which included a $1.0 million deferred tax benefit. In addition, we increased
our inventories by $1.1 million principally for completed orders awaiting shipment and to build ample stocks of
dry thermal film. We increased our prepaid expenses by $1.5 million, primarily reflecting an outstanding
insurance claim for goods damaged in transit to a customer (see Item 3. Legal Proceedings). We decreased our
accounts payable by $1.2 million as a result of a recent decline in purchases of raw material inventories. Finally,
we reduced our income taxes payable by $1.1 million primarily related to the payment of foreign income taxes.
Such uses of cash were offset by a $4.3 million charge for depreciation and amortization, a $2.4 million decrease
in accounts and notes receivable due to a decline in sales, and a $1.0 million decrease in accrued expenses and
other items.
For the year ended September 30, 2003, we used approximately $6.2 million of cash in investing activities,
principally consisting of $6.0 million of capital expenditures and a $0.2 million investment in OYO-GEO
Impulse. Included in the capital expenditures is a $3.8 million investment in the new Pinemont Facility in
September 2003.
For the year ended September 30, 2003, cash from financing activities increased approximately $7.9
million, consisting of $4.9 million of borrowings under our credit facility and $3.0 million of mortgage
borrowings to purchase the Pinemont Facility. We estimate that our capital expenditures in fiscal year 2004 will
range from $2.0 to $3.0 million, which we expect to fund through operating cash flows and borrowings under our
credit facility as needed.
At September 30, 2002, we had $1.5 million in cash and cash equivalents. For the fiscal year ended
September 30, 2002, we generated approximately $6.5 million of cash in operating activities principally resulting
from our net income of $1.1 million and adjustments of $6.1 million of net non-cash charges for depreciation,
amortization and impairment charges. In addition, our inventories decreased $7.6 million principally as a result
of the sale of a reservoir characterization and monitoring system to a major oil company. Such cash flows were
offset by $6.7 million of increases in other working capital accounts, including an increase in accounts receivable
and decreases in accounts payable, accrued expenses and deferred revenue. Approximately $3.8 million of our
accounts receivable at September 30, 2002 resulted from the sale of a reservoir characterization and monitoring
system to a major oil company. Such receivable was collected in monthly installments through June 2003.
Accounts payable decreased $1.0 million primarily due to decreased purchases of raw materials, resulting from
lower activity in our land-based seismic equipment business. The decrease in deferred revenues primarily
resulted from the revenue recognition of $4.9 million of deferred revenues in connection with the sale of the
reservoir characterization and monitoring system.
18
For the fiscal year ended September 30, 2002, we used $5.5 million of cash and cash equivalents in
investing activities, consisting of $4.7 million of capital expenditures, and a $2.3 million purchase of intellectual
property rights from the Former Primary Film Supplier, offset by proceeds of $0.6 million from the sale of fixed
assets and $0.9 million of cash we consolidated into our balance sheet in connection with the acquisition of an
additional equity interest in OYO-GEO Impulse.
We used $0.5 million of cash for financing activities for the fiscal year ended September 30, 2002,
reflecting net borrowings of $0.3 million under our credit facility, and $0.2 million for the repayment of long-
term debt.
At September 30, 2001, we had approximately $0.9 million in cash and cash equivalents. For the fiscal year
ended September 30, 2001, we generated approximately $2.6 million of cash and cash equivalents from operating
activities, principally resulting from our net income, adjusted for non-cash expenses such as depreciation and
amortization, and increases in accrued expenses and deferred revenue. These sources of cash were partially offset
by increases in trade accounts and notes receivable, inventories and decreases in accounts payable.
For the fiscal year ended September 30, 2001, we used approximately $6.5 million of cash and cash
equivalents in investing activities, consisting of capital expenditures of approximately $4.9 million and business
acquisition expenditures of $1.9 million, offset by proceeds of $0.3 million from the sale of fixed assets.
Financing activities for the fiscal year ended September 30, 2001 generated $1.0 million of cash, reflecting
$0.4 million received from the exercise of stock options and net borrowings of $0.8 million under the credit
facility, offset by the repayment of long-term debt of $0.2 million.
Under our credit agreement with a bank, at present, we can borrow up to $10.0 million secured by our
accounts receivable and inventories (the “Credit Agreement”). However, 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
(“EBITDA”) and (ii) levels of eligible accounts receivable, notes 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 a result of operating losses
through September 30, 2003, we failed to meet certain covenants for the year ended September 30, 2003, relating
to the maintenance of specified ratios of EBITDA to interest expense and senior debt to EBITDA. We received a
waiver of these covenant violations from our bank as of such date in consideration for a fee of $10,000, the
exclusion of eligible notes receivable from our borrowing base and an increase in interest rates for future
borrowings. On August 11, 2003, our LIBOR-based borrowing rate increased by 1.0% and, effective October 1,
2003, our prime-based borrowing rate increased by 1.0%. As of September 30, 2003 there were borrowings of
$5.4 million outstanding under the Credit Agreement, and additional borrowings available under the Credit
Agreement of $4.6 million. Our borrowing interest rate at September 30, 2003 was 4.6% for our LIBOR-based
borrowings and 4.0% for our prime-based borrowings.
We are seeking to extend the credit facility with our existing lender and expect to be able to do so, but have
no assurances that we will be able to do so. We anticipate that the existing cash balance as of September 30,
2003, cash flow from operations and borrowing availability under our existing credit facility, assuming it is
extended, or borrowing availability under a new credit facility will provide adequate cash flows and liquidity for
fiscal year 2004. We expect that the liquidity from such amounts and cash flows from operations in fiscal year
2004 will satisfy the capital expenditures, scheduled debt payments, and operational budgets for the upcoming
year.
19
A summary of future payments owed for contractual obligations and commercial commitments as of
September 30, 2003 are shown in the table below (in thousands):
Total
Less Than
1 Year
1 – 3
Years
4 – 5
Years
After 5
Years
Contractual Obligations:
Long-term debt
. . . . . . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . .
$ 6,697
76
Total contractual obligations . . . . . . . . . . . . . .
6,773
$ 465
64
529
$849
9
858
$957
3
960
$4,426
—
4,426
Commercial Commitments:
Lines of Credit . . . . . . . . . . . . . . . . . . . . . . . . .
5,424
5,424
—
—
—
Total Contractual Obligations and Commercial
Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,197
$5,953
$858
$960
$4,426
We believe that the combination of existing cash reserves, cash flows from operations and borrowing
availability under our existing credit facility, assuming it is extended, or borrowing availability under a new
credit facility, should provide us sufficient capital resources and liquidity to fund our planned operations through
fiscal year 2004. However, there can be no assurance that we will be able to successfully extend our existing
credit facility or that such sources of capital will be sufficient to support our capital requirements in the long-
term, and we may be required to issue additional debt or equity securities in the future to meet our capital
requirements. There can be no assurance we would be able to issue additional equity or debt securities in the
future on terms that are acceptable to us or at all.
Off-Balance Sheet Arrangements
We do not have any obligations which meet the definition of an off-balance sheet arrangement and which
have or are reasonably likely to have a material effect on our financial statements.
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
debt 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 shipped and title and risk of loss have passed to the customer. Rental revenues are recognized as
earned over the rental period. Rentals of our equipment are short term and 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 for credit. Most of our products 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 item (including any
estimated future costs to complete the manufacturing process) exceeds its net realizable value.
20
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standards (“SFAS”) No. 141, “Business Combinations”. SFAS 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the purchase method. We adopted the
provisions of SFAS 141 effective October 1, 2001. Among the provisions of SFAS 141 is the requirement to
record as an extraordinary gain all negative goodwill resulting from new business combinations. As a result, we
recorded an extraordinary gain of $686,000, net of income taxes of $85,000, relating to our acquisition of an
additional equity interest in OYO-GEO Impulse in November 2001.
Also in July 2001, the FASB issued 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 September 30, 2003, we had goodwill, net of accumulated amortization, of $1.8 million. Adoption of
SFAS 142 resulted in a $165,000 reduction of amortization expense for the year ended September 30, 2003.
In August 2001, the FASB 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 and results of operations.
In October 2001, the FASB 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 and results of operations.
In April 2002, the FASB issued SFAS No. 145, “Recission of FASB Statement No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections”. This statement clarifies guidance related to
the reporting of gains and losses from extinguishment of debt and resolves inconsistencies related to the required
accounting treatment of certain lease modifications. The provisions of this statement relating to extinguishment
of debt became effective for financial statements issued for fiscal years beginning after May 15, 2002. The
provisions of this statement relating to lease modification are effective for transactions occurring after May 15,
2002. We 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.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal
Activities”. This statement revises the accounting and reporting for costs associated with exit or disposal
activities to be recognized when a liability for such costs is incurred rather than when the entity commits to an
exit plan. SFAS No. 146 is effective for exit or disposal activities initiated after June 30, 2003. Adoption of
SFAS No. 146 did not have a material effect on our financial position and results of operations.
On November 25, 2002, the FASB issued FASB interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, an
interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB interpretation No. 34. FIN 45
21
clarifies the requirements of FASB Statement No. 5, Accounting for Contingencies (FAS 5), relating to a
guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. We are implementing
the disclosure requirements of this standard this year and will disclose the measurement and other provisions of
FIN 45 in our fiscal year 2004 financial statements; this disclosure has been included in Note 1 to the
Consolidated Financial Statements. 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.
In December 2002, the FASB issued SFAS 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. At September 30, 2003, we had two stock-based employee
compensation plans. We account 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 has been 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. In its October 29, 2003
meeting, the FASB voted to make the expensing of stock options mandatory beginning in 2005. The guidance
regarding this change is expected to be released in early 2004. Additionally, the FASB voted to specify the
approach that companies can use in making the transition to the expensing of options, allowing companies to
include previously granted unvested options in their calculations as well as the ones granted in the current year.
When the rules are finalized, we will evaluate the impact on our financial position, results of operations and cash
flows.
The FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which we
adopted effective January 31, 2003. This statement addresses the consolidation of variable interest entities
(“VIEs”) by business enterprises that are primary beneficiaries thereof. A VIE is an entity that does not have
sufficient equity investment at risk to permit it to finance its activities without additional subordinated financial
support, or whose equity investors lack the characteristics of a controlling financial interest. The primary
beneficiary of a VIE is the enterprise that has the majority of the risks or rewards associated with the VIE. We
believe we have no material interests in VIEs that will require disclosure or consolidation under FIN 46.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments
and Hedging Activities”. Statement 149 amends and clarifies financial accounting and reporting of derivative
instruments, including certain derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS 133, “Accounting for Derivative Instruments and Hedging
Activities”. This statement is effective for contracts entered into or modified after June 30, 2003, except for
certain hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a
material effect on our financial position and results of operations.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity” SFAS No. 150 specifies that freestanding financial instruments
within its scope constitute obligations of the issuer and that, therefore, the issuer must classify them as liabilities.
Such freestanding financial instruments include mandatory redeemable financial instruments, obligations to
repurchase the issuer’s equity shares by transferring assets, and certain obligations to issue a variable number of
shares. SFAS No. 150 is effective immediately for all financial instruments entered into or modified after
May 31, 2003. For all other instruments, SFAS No. 150 is effective at the beginning of the third quarter of 2003.
The adoption SFAS No. 150 did not have a material effect on our financial position or results of operations.
22
Forward-Looking Statements and Risks
Certain of the statements we make in this document and in documents incorporated by reference herein,
including those made under the captions “Business”, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”, and in “Management’s Current Outlook”, which follows, 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, research and
development expenses, expansion of 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.
Management’s Current Outlook.
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. Our analysis of the
market and its impact on us is based upon the following outlook for fiscal year 2004:
•
The impact of political conditions and hostilities around the world, including those of the Middle East,
which may have a significant impact on the oil and gas commodity prices, will not cause a significant
increase or further significant decrease in demand for our seismic products during fiscal year 2004.
• On the other hand, 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 for our seismic business.
• 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 2003 levels.
• Deep-water marine seismic exploration activity will remain constrained and sales of our marine-based
products are expected to remain at or below fiscal year 2003 levels.
• Our new high definition reservoir characterization products and services are expected to become more
widely accepted by the industry. Sales in fiscal year 2004 are expected to be higher than fiscal year 2003
levels based on current order levels and pending quotations.
•
•
Sales of our new offshore cable products are expected to increase in fiscal year 2004.
Pricing for many of our land-based seismic products will continue to be subject to pressures due to
industry-wide manufacturing over-capacity.
• Demand for our products used in the commercial graphics industry is expected to increase slightly in
fiscal year 2004 with continued market acceptance of our dry thermal film and new product
introductions.
Our outlook is based on various macro-economic factors and our internal assessments, and actual market
conditions could vary materially from those assumed.
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.
23
In particular, we have incurred substantial expenditures to develop our recently introduced HDSeis™
product line for borehole and reservoir characterization applications. For a discussion of particular factors and
risks relating to projects in the reservoir characterization area, see the section entitled “Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Industry Overview” in this Report on
Form 10-K. We cannot assure you that we will realize our expectations regarding market acceptance and
revenues from these products and services.
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 subject to change based on political and economic factors
outside our control. In fact, our results for fiscal year 2003 and results from our land based seismic activity in
particular, were adversely affected by the downturn in the industry, particularly as the industry has continued to
limit exploration activities and to be cautious in spending notwithstanding some improvements in, or some
relative stabilization of, oil and gas commodity prices.
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”. Thus completion of orders, particularly large orders for
deepwater reservoir characterization projects, can significantly impact the operating results and cash flow for any
quarter, and results of operations for any one quarter may not be indicative of results of operations for future
quarters.
Our Credit Risks Could Increase as our Customers Continue to Face Difficult Economic Circumstances.
We believe, and have assumed that our allowance for bad debts at September 30, 2003 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 receivable due to customer credit problems. We have found it
necessary from time to time to extend trade credit and promissory notes to long-term customers and others where
some risks of non-payment or late payment exist. Given recent industry conditions, some of our customers have
experienced liquidity difficulties, which increases those credit risks.
Demand for Our Products is Volatile.
Demand for our products depends primarily on the level of worldwide oil and gas exploration activity. That
activity, in turn, depends primarily on prevailing oil and gas prices and availability of seismic data. Historically,
the markets for oil and gas have been volatile, and those markets are likely to continue to be volatile. Oil and gas
prices are subject to wide fluctuation in response to relatively minor changes in the supply of and demand for oil
and gas, market uncertainty and a variety of additional factors that are beyond our control. These factors include
the level of consumer demand, weather conditions, domestic and foreign governmental regulations, price and
availability of alternative fuels, political conditions and hostilities in the Middle East and other significant oil-
producing regions, foreign supply of oil and gas, prices of foreign imports and overall economic conditions.
Continued low demand for our products could materially and adversely affect our results of operations and
liquidity. For a further discussion on this, see “Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Industry Overview”.
24
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 2003 was
approximately 2,500 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
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.
We Have a Limited Market.
In our seismic business segment, we market our products to contractors and large, independent and
government-owned oil and gas companies. We estimate that, based on published industry sources, fewer than 30
seismic contracting companies are currently operating worldwide (excluding those operating in Russia and the
former Soviet Union, India, the People’s Republic of China and certain Eastern European countries, where
seismic data acquisition activity is difficult to verify). We estimate that fewer than ten seismic contractors are
engaged in marine seismic exploration. Due to these market factors, a relatively small number of customers,
some of whom are experiencing financial difficulties, have accounted for most of our sales. From time to time
these seismic contractors have sought to vertically integrate and acquire our competitors, which has influenced
their supplier decisions before and after such transactions. The loss of a small number of these customers for
whatever reason could materially and adversely impact our sales. For a further discussion on this, see
“Business—Markets and Customers”.
25
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 60% of our net sales during fiscal year
2003. See Note 17 to the Consolidated Financial Statements contained in this Report on Form 10-K for further
information on our sales outside of the United States. 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, with reference to our Japanese parent OYO
Corporation, 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 (the “Japanese 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 Japanese Supplier for repair, testing and quality assurance review. We have
publicly available information as to the Japanese Supplier that it has incurred significant operating losses in
recent periods and consider it possible that such supplier may be forced to dispose of or discontinue this line of
business. We are not at present experiencing any significant supply or quality control problems with the Japanese
Supplier. However, unforeseen problems with the Japanese Supplier, if they develop, could have a significant
effect on our ability to meet future production and sales commitments. If the Japanese Supplier 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,
adversely affecting our financial performance. We are not able to evaluate the implications, if any, of that
situation at present. We believe we maintain an adequate inventory of certain printheads to continue production
for two to six months should our source of supply be disrupted.
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, the Former Primary Film Supplier filed a
Chapter 11 reorganization petition in Federal Bankruptcy Court for the Western District of New York. The
Primary Film Supplier advised us that, in connection with its bankruptcy filing, it was seeking a buyer for its
business that would assume its relationship and contracts with us. We no longer believe that a buyer can be found
to operate the Former Primary Film Supplier’s business.
26
During fiscal year 2003, our Former Primary Film Supplier has failed to meet substantially 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 and we are using the technology we purchased
from the Former Primary Film Supplier to manufacture dry thermal film internally. Except for our Other Film
Supplier, we know of no other source for dry thermal film that performs 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 were to discontinue supplying
dry thermal film or were 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, adversely affecting our
financial performance.
We Are Subject to Control by a Principal Stockholder.
OYO Corporation, a Japanese corporation, owns indirectly in the aggregate approximately 51.3% 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 General Downturn in the U.S. Economy in Fiscal 2004 May Adversely Affect our Business.
A general downturn in the U.S. economy in Fiscal 2004 could adversely affect our business in ways that we
cannot yet identify. The economic downturn, which has been experienced for the last several years, may continue
to adversely affect the demand for oil and gas generally or cause volitility in oil and gas prices and, therefore,
adversely affect 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 continued downward pressure on pricing for seismic products and
services that would also adversely affect us.
Sarbanes-Oxley Act of 2002.
In response to several high profile cases of accounting irregularities, the Sarbanes-Oxley Act of 2002 (“the
Act”) was enacted into law on July 30, 2002. We are required to begin to comply with the annual requirements of
Section 404 of the Act effective with its fiscal year beginning October 1, 2004. The Act, and rules promulgated
thereunder, as well as new Nasdaq listing standards addressing corporate governance issues, endeavor to provide
greater accountability and promote investor confidence by imposing specific corporate governance requirements,
by requiring more stringent controls and certifications by corporate management and by utimately imposing new
auditor attestations. The Act and new Nasdaq rules affect how audit committees, corporate management and
auditors of publicly traded companies carry out their respective responsibilities and interact with each other and
mandate composition of audit committees by independent directors. The Act will likely result in higher expenses
for publicly traded companies as a result of higher audit and review fees, higher director fees, higher internal
costs to document and test internal controls and higher legal fees. The Act, together with the financial scandals
27
and difficult economic enviroment of recent years have also led to substantially increased premiums for director
and officer liability insurance. These increased premiums for director and officer insurance will begin to affect us
in the first quarter of fiscal year 2004 when we renew our coverage. These likely increased expenses will affect
smaller public companies, like us, disproportionately from their effects on companies with larger revenue and
operating income bases with which to absorb such increased costs.
We may not enjoy the expected benefits of our move to a new facility and other internal restructurings.
While we have recently purchased a large new facility to house all our existing U.S. operations and
activities and have taken other measures, all with the expectation of improving our efficiency and margins, we
cannot assure you that our efforts will be successful or that we will enjoy the full benefit of capital and operating
expenditures incurred in connection with such measures.
We may not be able to extend or replace our existing credit agreement.
Our existing credit agreement with a bank expires in January 2004. While we are attempting to extend or
replace our credit agreement, we have no assurance that we will be able to do so or to do so on terms that are
commercially satisfactory to us. While we do not believe that we will experience any significant liquidity
problems on account of the expiration of such credit agreement, we regard it as an important security measure to
have in place an adequate credit arrangement to assure stability in our cash flow cycles, and the failure to extend
or renew such credit agreement will lessen our security as to liquidity.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The following discussion of our exposure to various market risks contains “forward looking statements” that
involve risks and uncertainties. These projected results have been prepared utilizing certain assumptions
considered reasonable in light of information currently available to us. Nevertheless, because of the inherent
unpredictability of foreign currency rates, as well as other factors, actual results could differ materially from
those projected in this forward looking information. For a description of our significant accounting policies
associated with these activities, see Note 1 to the Consolidated Financial Statements.
We do not have any market risk with respect to 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, which purchases them from the Japanese Supplier,
pursuant to terms under which such purchases are denominated in Japanese yen. We routinely attempt to hedge
our currency exposure on these purchases by entering into foreign currency forward contracts with a bank. The
purpose of entering into these forward hedge contracts is to eliminate variability of cash flows associated with
foreign currency exchanges on amounts payable in Japanese yen. Our forward contracts with the bank are
considered derivatives. Accounting principles generally accepted in the United States require 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 exceed $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 year ended September 30, 2003. At September 30, 2003, 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 rates, weak economic conditions in Russia or changes in Russia’s political
28
climate. Our consolidated balance sheet at September 30, 2003 reflected approximately $1.2 million of net
working capital related to our Russian subsidiary. This subsidiary both receives its income and pays its expenses
primarily in rubles. To the extent that transactions of this subsidiary are settled in rubles, a devaluation of the
ruble 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
rubles 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 credit agreement and a real estate mortgage agreement with banks, each with floating
interest rates. These floating interest rates subject us to the risk of increased interest costs associated with any
upward movements in bank market interest rates. Under the revolving credit agreement, our borrowing interest
rate is the bank’s prime rate or a LIBOR rate plus 350 basis points, whichever we select. Under the real estate
mortgage agreement, our borrowing rate was a LIBOR rate plus 250 basis points with a minimum rate of 4.0%.
As of September 30, 2003, we had borrowed $5.4 million under our revolving credit agreement at an average
borrowing rate of 4.2% and $3.0 million borrowed under our real estate mortgage agreement at a borrowing rate
of 4.0%. Due to the amount of borrowings outstanding under these facilities, any increased interest costs
associated with movements in market interest rates could be material to our financial condition, results of
operation or cash flow.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements, including the reports thereon, the notes thereto and supplementary
data begin at page F-1 of this Form 10-K and are incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of September 30, 2003, our Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 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.
29
Item 10. Directors and Executive Officers of the Registrant
PART III
The information required by this Item is contained in our definitive Proxy Statement to be distributed in
connection with our 2004 Annual Meeting of Stockholders under the captions “Election of Directors”,
“Executive Officers and Compensation” and “Compliance With Section 16(a) of The Securities Exchange Act of
1934” and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this Item is contained in our definitive Proxy Statement to be distributed in
connection with our 2004 Annual Meeting of Stockholders under the caption “Executive Officers and
Compensation” and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is contained in our definitive Proxy Statement to be distributed in
connection with our 2004 Annual Meeting of Stockholders under the caption “Security Ownership of Certain
Beneficial Owners and Management” and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is contained in our definitive Proxy Statement to be distributed in
connection with our 2004 Annual Meeting of Stockholders under the caption “Certain Relationships and
Transactions” and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by this Item is contained in our definitive Proxy Statement to be distributed in
connection with our 2004 Annual Meeting of Stockholders under the caption “Relationship with Independent
Auditors” and is incorporated herein by reference.
30
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Financial Statement Schedules
The financial statements and financial statement schedules listed on the accompanying Index to Financial
Statements (see page F-1) are filed as part of this Form 10-K.
(b) Reports on Form 8-K
On July 28, 2003, the Company filed a current report on Form 8-K pursuant to Item 12 reporting the
earnings for the third quarter.
(c) Exhibits
Exhibit
Number
Description of Documents
3.1 (a) Restated Certificate of Incorporation of the Registrant.
3.2 (a) Restated Bylaws of the Registrant.
10.1 (a) Employment Agreement dated as of August 1, 1997 between the Company and Gary D. Owens.
10.2 (a) Employment Agreement dated as of August 1, 1997 between the Company and Michael J. Sheen.
10.3 (c) OYO Geospace Corporation 1997 Key Employee Stock Option Plan.
10.4 (d) Amendment No. 1 to OYO Geospace Corporation 1997 Key Employee Stock Option Plan, dated
February 2, 1998.
10.5 (d) Amendment No. 2 to OYO Geospace Corporation 1997 Key Employee Stock Option Plan, dated
November 16, 1998.
10.6 (c) OYO Geospace Corporation 1997 Non-Employee Director Plan.
10.7 (a)
Printhead Purchase Agreement dated November 10, 1995 between the Company and OYO
Corporation.
10.8 (a) Master Sales Agreement dated November 10, 1995 between the Company and OYO Corporation.
10.9 (e)
Form of Director Indemnification Agreement.
10.10(b)
Promissory Note, dated as of June 23, 1998, made by the Company payable to Ameritas Life
Insurance Corp.
10.11(f) Asset Purchase Agreement, dated February 8, 2001, between the Company and EcoPRO Imaging
Corporation.
10.12(f) Business Loan Agreement, dated February 16, 2001, made by and between the Company and
Southwest Bank of Texas, N.A.
10.13(f)
Promissory Note, dated February 16, 2001, made by and between the Company and Southwest Bank
of Texas, N.A.
10.14(g)
Second Amendment to Loan Agreement, dated as of January 15, 2002, by and between Concord
Technologies, LP, Geospace Engineering Resources International, LP, Geo Space, LP, OYO
Instruments, LP and OYOG Operations, LP and Southwest Bank of Texas, N.A.
10.15(h) 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.
31
Exhibit
Number
Description of Documents
10.16(h) 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 Southwest Bank of Texas, N.A.
10.17
Deed of Trust, Security Agreement, Assignment of Rents and Financing Statement, dated
September 10, 2003, by and between OYOG Operations, LP and Compass Bank.
10.18
Promissory Note, dated September 10, 2003, made by OYOG Operations, LP payable to Compass Bank.
10.19
10.20
10.21
10.22
10.23
10.24
14.1
21.1
23.1
31.1
31.2
32.1
32.2
Guaranty Agreement, dated September 10, 2003, by and between OYO Geospace Corporation and
Compass Bank.
Earnest Money Contract, dated May 27, 2003, by and between Cooper Tools, Inc. and OYOG
Operations, L.P.
First Amendment to Earnest Money Contract, dated July 14, 2003, by and between Cooper Tools, Inc.
and OYOG Operations, LP.
Second Amendment to Earnest Money Contract, dated August 14, 2003, by and between Cooper
Tools, Inc. and OYOG Operations, LP.
Third Amendment to Earnest Money Contract, dated August 22, 2003, by and between Cooper Tools,
Inc. and OYOG Operations, LP.
Fourth Amendment to Loan Agreement, dated as of March 31, 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.
OYO Geospace Corporation General Code of Business Conduct and Supplemental Code of Ethics for
CEO and Senior Financial Officers
Subsidiaries of the Registrant.
Consent of Independent Accountants
Certification of the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
Certification of the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Certification of the Company’s Chief Executive Officer pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
Certification of the Company’s Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(a)
(b)
(c)
(d)
(e)
Incorporated by reference to the Registrant’s Registration Statement on Form S-1 filed September 30, 1997
(Registration No. 333-36727).
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1998 (File No. 001-13601).
Incorporated by reference to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1
filed November 5, 1997 (Registration No. 333-36727).
Incorporated by reference to Registrant’s Annual Report on Form 10-K for the year ended September 30,
1998 (File No. 001-13601).
Incorporated by reference to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1
filed November 18, 1997 (Registration No. 333-36727).
32
(f)
(g)
(h)
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2001 (File No. 001-13601).
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period
ended December 31, 2001 (File No. 001-13601).
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period
ended December 31, 2002 (File No. 333-36727).
33
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.
SIGNATURES
OYO GEOSPACE CORPORATION
By:
/s/ GARY D. OWENS
Gary D. Owens, Chairman of the Board
President and Chief Executive Officer
December 2, 2003
Pursuant to the requirements of the Securities Exchange Act, this Annual Report on Form 10-K has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
Signature
Title
Date
/s/ GARY D. OWENS
Gary D. Owens
Chairman of the Board President and
Chief Executive Officer (Principal
Executive Officer)
December 2, 2003
/s/ THOMAS T. MCENTIRE
Chief Financial Officer (Principal
December 2, 2003
Thomas T. McEntire
Financial and Accounting Officer)
/s/ SATORU OHYA
Satoru Ohya
Director
December 2, 2003
/s/ KATSUHIKO KOBAYASHI
Director
December 2, 2003
Katsuhiko Kobayashi
/s/ ERNEST M. HALL, JR.
Director
December 2, 2003
Ernest M. Hall, Jr.
/s/ MICHAEL J. SHEEN
Director
December 2, 2003
Michael J. Sheen
/s/ THOMAS L. DAVIS
Director
December 2, 2003
Thomas L. Davis
/s/ CHARLES H. STILL
Director
December 2, 2003
Charles H. Still
34
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of September 30, 2003 and 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the Years Ended September 30, 2003, 2002 and 2001 . . . . . . . .
Consolidated Statement of Stockholders’ Equity for the Years Ended September 30, 2003, 2002 and
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the Years Ended September 30, 2003, 2002 and 2001 . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-2
F-3
F-4
F-5
F-6
F-7
Report of Independent Auditors on Financial Statement Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-31
Schedule II—Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-32
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and
Stockholders of OYO Geospace Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of
operations, stockholders’ equity, and cash flows present fairly, in all material respects, the financial position of
OYO Geospace Corporation and subsidiaries at September 30, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended September 30, 2003, in conformity with
accounting principles generally accepted in the United States of America. These financial statements are the
responsibility of the Company’s management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
Houston, Texas
November 24, 2003
F-2
OYO Geospace Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
Current assets:
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade accounts receivable, net of allowance of $478 and $474 . . . . . . . . . . . . . . . . . . . .
Notes receivable, net of allowance of $0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rental equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Patents, net of accumulated amortization of $2,153 and $1,458 . . . . . . . . . . . . . . . . . . . . . . .
Goodwill, net of accumulated amortization of $921 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AS OF
SEPTEMBER 30,
2003
2002
$
671
7,849
2,129
22,929
1,233
2,739
37,550
2,175
22,379
3,861
1,843
1,869
1,758
$ 1,538
11,686
899
21,801
1,135
1,261
38,320
2,044
20,243
4,556
1,843
931
189
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$71,435
$68,126
Current liabilities:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Notes payable and current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable:
Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,889
$
714
2,418
383
3,758
138
27
12,613
6,232
—
4,023
24
4,162
146
1,121
10,190
3,544
—
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,845
13,734
Minority interest in consolidated subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
119
263
Stockholders’ equity:
Preferred stock, 1,000,000 shares authorized, no shares issued and outstanding . . . . . . .
Common stock, $.01 par value, 20,000,000 shares authorized, 5,554,874 and 5,546,795
shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned compensation-restricted stock awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
56
30,636
21,799
(16)
(4)
55
30,566
24,332
(819)
(5)
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
52,471
54,129
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$71,435
$68,126
The accompanying notes are an integral part of the consolidated financial statements.
F-3
OYO Geospace Corporation and Subsidiaries
Consolidated Statements of Operations
(In thousands, except share and per share amounts)
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
YEAR ENDED SEPTEMBER 30,
2003
2002
2001
$
50,854
38,337
12,517
65,049
46,484
18,565
$
63,618
42,957
20,661
Operating expenses:
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . .
Research and development expenses . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,273
5,226
—
16,499
Income (loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,982)
Other income (expense):
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other income (expense), net . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes, minority interest and extraordinary
gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit)
Income (loss) before minority interest, and extraordinary gain . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minority interest
Income (loss) before extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . .
Extraordinary gain, net of tax of $85 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(464)
329
204
69
(3,913)
(1,399)
(2,514)
(19)
(2,533)
—
11,538
5,347
1,246
18,131
434
(666)
177
(281)
(770)
(336)
(857)
521
(88)
433
686
Net income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(2,533) $
1,119
$
Basic earnings (loss) per share:
Income before extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(0.46) $
—
Net income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(0.46) $
Diluted earnings (loss) per share:
Income before extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(0.46) $
—
Net income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(0.46) $
0.08
0.12
0.20
0.08
0.12
0.20
$
$
$
$
12,528
6,277
—
18,805
1,856
(380)
255
(101)
(226)
1,630
292
1,338
—
1,338
—
1,338
0.24
—
0.24
0.24
—
0.24
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,550,216
5,535,979
5,489,251
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,550,216
5,547,774
5,598,597
The accompanying notes are an integral part of the consolidated financial statements.
F-4
OYO Geospace Corporation and Subsidiaries
Consolidated Statement of Stockholders’ Equity
For the years ended September 30, 2003, 2002 and 2001
(In thousands, except share amounts)
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Unearned
Compensation—
Restricted
Stock
Awards
Total
5,512,713
$ 55
$30,088
$21,875
$(679)
$(630)
$50,709
—
—
500
992
—
—
Balance at September 30, 2000 . . . . .
Comprehensive income:
Net income . . . . . . . . . . . . . . . . .
Foreign currency translation
Adjustments . . . . . . . . . . . . . .
Total comprehensive income . . .
Issuance of common stock pursuant
to restricted stock awards . . . . . . . .
Issuance of common stock pursuant
to Director Plan . . . . . . . . . . . . . . .
Termination of restricted stock
grants . . . . . . . . . . . . . . . . . . . . . . .
(2,725)
Issuance of common stock pursuant
to exercise of options, net of tax . .
27,100
Unearned compensation
Amortization . . . . . . . . . . . . . . . . .
—
Balance at September 30, 2001 . . . . .
Comprehensive income:
Net income . . . . . . . . . . . . . . . . .
Foreign currency translation
Adjustments . . . . . . . . . . . . . .
Total comprehensive income . . .
Issuance of common stock pursuant
to Director Plan . . . . . . . . . . . . . . .
1,890
Termination of restricted stock
grants . . . . . . . . . . . . . . . . . . . . . . .
(1,000)
Issuance of common stock pursuant
to exercise of options, net of tax . .
7,325
Unearned compensation
Amortization . . . . . . . . . . . . . . . . .
—
—
—
—
—
—
—
—
—
—
8
25
(45)
454
—
1,338
—
—
—
—
—
—
—
(186)
—
—
—
—
—
—
—
—
—
—
—
—
—
25
(8)
19
—
1,119
—
—
—
—
—
—
46
—
—
—
—
5,538,580
55
30,530
23,213
(865)
5,546,795
55
30,566
24,332
(819)
Balance at September 30, 2002 . . . . .
Comprehensive income:
Net (loss) . . . . . . . . . . . . . . . . . .
Foreign currency translation
Adjustments . . . . . . . . . . . . . .
Total comprehensive (loss) . . . .
Issuance of common stock pursuant
—
—
—
—
to Director Plan . . . . . . . . . . . . . . .
3,604
1
Termination of restricted stock
grants . . . . . . . . . . . . . . . . . . . . . . .
—
Issuance of common stock pursuant
to exercise of options, net of tax . .
4,475
Unearned compensation
Amortization . . . . . . . . . . . . . . . . .
—
—
—
—
—
—
25
—
45
—
(2,533)
—
—
—
—
—
—
803
—
—
—
—
—
—
(8)
—
45
—
451
(142)
—
—
—
8
—
129
(5)
—
—
—
—
—
1
1,338
(186)
1,152
—
25
—
454
451
52,791
1,119
46
1,165
25
—
19
129
54,129
(2,533)
803
(1,730)
26
—
45
1
Balance at September 30, 2003 . . . . .
5,554,874
$ 56
$30,636
$21,799
$ (16)
$ (4)
$52,471
The accompanying notes are an integral part of the consolidated financial statements.
F-5
OYO Geospace Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
YEAR ENDED SEPTEMBER 30,
2003
2002
2001
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income (loss) to net cash provided by
$ (2,533) $ 1,119
$ 1,338
operating activities:
Deferred income tax expense (benefit)
. . . . . . . . . . . . . . . . . . . . . . . .
Depreciation, amortization and stock-based compensation . . . . . . . . .
Impairment of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Extraordinary gain, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) loss on disposal of property, plant and equipment . . . . . . . . . .
Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effects of changes in operating assets and liabilities:
Trade accounts and notes receivable . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) operating activities . . . . . . .
Cash flows from investing activities:
Proceeds from the sales of property, plant and equipment
. . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . .
(1,036)
4,268
—
—
20
22
229
2,377
(1,128)
(1,478)
(1,246)
(995)
(8)
(1,094)
(2,602)
33
(6,045)
—
(164)
(1,381)
4,852
1,246
(686)
88
192
146
(626)
7,622
262
(1,030)
(786)
(4,713)
241
81
4,444
—
—
—
(1)
214
(3,217)
(6,550)
478
(926)
1,368
4,859
523
6,546
2,611
616
(4,729)
(2,267)
913
286
(4,909)
—
(1,925)
Net cash used in investing activities . . . . . . . . . . . . . . . . . .
(6,176)
(5,467)
(6,548)
Cash flows from financing activities:
Increase in notes payable to banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal payments on notes payable to banks . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . .
32,570
(24,706)
39
29,266
(29,812)
77
30,840
(30,217)
393
Net cash provided by (used in) financing activities . . . . . . .
7,903
(469)
1,016
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . .
8
(867)
1,538
46
656
882
(186)
(3,107)
3,989
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
671
$ 1,538
$
882
The accompanying notes are an integral part of the consolidated financial statements.
F-6
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies:
The Company
OYO Geospace Corporation (“OYO”) designs, manufactures and distributes instruments and equipment
used primarily in the acquisition and processing of seismic data for the oil and gas industry. OYO also
manufactures and distributes equipment and dry thermal film products to the commercial graphics industry. As of
September 30, 2003, OYO Corporation U.S.A. (“OYO USA” or “Parent”) owned approximately 51.3% of
OYO’s common stock. OYO USA is a wholly owned subsidiary of OYO Corporation, a Japanese corporation
(“OYO Japan”).
OYO and its subsidiaries are referred to collectively as the “Company”. The significant accounting policies
followed by the Company are summarized below.
Basis of Presentation
The accompanying financial statements present the consolidated financial position, results of operations and
cash flows of the Company in accordance with generally accepted accounting principles. All intercompany
balances and transactions have been eliminated.
Use of Estimates
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. The Company considers 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. The Company continually evaluates its estimates,
including those related to bad debt reserves, inventory obsolescence reserves, self-insurance reserves, product
warranty reserves, intangible assets and deferred income tax assets. The Company bases its 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.
Cash and Cash Equivalents
The Company considers all highly liquid debt securities purchased with an original or remaining maturity at
the time of purchase of three months or less to be cash equivalents.
Concentrations of Credit Risk
The Company maintains its cash in bank deposit accounts that, at times, exceed federally insured limits.
Management believes that the financial strength of the financial institutions that hold such deposits minimizes the
credit risk of such deposits. The Company anticipates that the existing cash balance as of September 30, 2003,
cash flow from operations and borrowing availability under our existing credit facility, assuming it is extended,
or borrowing availability under a new credit facility will provide adequate cash flows and liquidity for 2004.
Management expects that the liquidity from such amounts and cash flows from operations in 2004 will satisfy the
capital expenditures, schedules debt payments, and operational budgets of the Company for the upcoming year.
The Company sells products to customers throughout the United States and various foreign countries. The
Company’s normal credit terms for trade receivables are 30 days. In certain situations, credit terms may be
extended to 60 days or longer. The Company performs ongoing credit evaluations of its customers and generally
F-7
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
does not require collateral for its trade receivables. Additionally, the Company provides long-term financing in
the form of promissory notes when competitive conditions require such financing. In such cases, the Company
may require collateral. Allowances are recognized for potential credit losses.
A Japanese manufacturer unaffiliated with the Company is currently the only supplier (the “Japanese
Supplier”) of wide format thermal printheads that are used to manufacture wide format thermal imaging
equipment. Over the years the Company has experienced some quality control issues with such printheads and
has returned significant quantities of these products to the Japanese Supplier for repair, testing and quality
assurance review.
The Company has publicly available information as to the Japanese Supplier that it has incurred significant
operating losses in recent periods and consider it possible that such supplier may be forced to dispose of or
discontinue this line of business. The Company is not at present experiencing any significant supply or quality
control problems with the Japanese Supplier. However, unforeseen problems with the Japanese Supplier, if they
develop, could have a significant effect on the Company’s ability to meet future production and sales
commitments. If the Japanese Supplier were to discontinue supplying these printheads or was unable or unwilling
to supply printheads in sufficient quantities to meet the Company’s requirements, its ability to compete in the
thermal imaging marketplace could be severely damaged, adversely affecting its financial performance. The
Company is not able to evaluate the implications, if any, of that situation at present. The Company believes that it
maintains an adequate inventory of certain printheads to continue production for two to six months should its
source of supply be disrupted.
The Company has a subsidiary located in Russia. Therefore, the Company’s financial results may be
affected by factors such as changes in foreign currency exchange rates, weak economic conditions in Russia or
changes in Russia’s political climate. The Company’s consolidated balance sheet at September 30, 2003 reflected
approximately $1.2 million of net working capital related to its Russian subsidiary. This subsidiary both receives
its income and pays its expenses primarily in rubles. To the extent that transactions of this subsidiary are settled
in rubles, a devaluation of the ruble versus the U.S. dollar could reduce any contribution from the Company’s
Russian subsidiary to its consolidated results of operations as reported in U.S. dollars. The Company does not
hedge the market risk with respect to its operations in Russia; therefore, such risk is a general and unpredictable
risk of future disruptions in the valuation of Russian rubles 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 its
consolidated results of operations.
Inventories
The Company records a write-down of its inventory when the cost basis of any manufactured product
(including any estimated future costs to complete the manufacturing process) exceeds its net realizable value.
Inventories are stated at the lower of cost (as determined by the first-in, first-out method) or market value.
Prepaid Expenses and Other Assets
Prepaid expenses and other current assets includes prepayments for insurance and inventory purchases,
assets held for sale, manufacturing supplies and other current assets. At September 30, 2003, this category of
assets also included an insurance claim of $1.1 million, representing the cost basis of inventories mishandled
while in transit to a customer. See Note 15 for additional information relating to the insurance claim.
F-8
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Property, Plant and Equipment and Rental Equipment
Property, plant and equipment and rental equipment are stated at cost. Depreciation expense is provided by
the straight-line method over the following estimated useful lives:
Rental equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment:
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
Years
3-5
3-15
25-40
5-10
Expenditures for renewals and betterments are capitalized. Repairs and maintenance are charged to expense
as incurred. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the
accounts and any gain or loss thereon is reflected in the statement of operations.
Patents
Patents are amortized over the life of the patent or the estimated life of the patent, whichever is shorter.
Intellectual property is being amortized using the straight-line method over five years.
Impairment of Long-lived Assets
Property, plant and equipment and goodwill are reviewed for impairment whenever an event or change in
circumstances indicates the carrying amount of an asset or group of assets may not be recoverable. The
impairment review includes comparison of future cash flows expected to be generated by the asset or group of
assets with the associated assets’ carrying value. If the carrying value of the asset or group of assets exceeds the
expected future cash flows (undiscounted and without interest changes), an impairment loss is recognized to the
extent that the carrying amount of the asset exceeds its fair value.
Goodwill
Goodwill represents the excess of the purchase price of purchased businesses over the estimated fair value
of the acquired business’ net assets. 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. In accordance with the provisions of SFAS 142, the
Company no longer records goodwill amortization expense. Adoption of SFAS 142 resulted in a $165,000
reduction of amortization expense for the fiscal year ended September 30, 2003. The Company will continue to
review the carrying value of goodwill and other long-lived assets to determine whether there has been an
impairment since the date of acquisition. There was no impairment recognized upon the adoption of SFAS 142.
The Company’s goodwill is related to prior acquisitions of manufacturers of seismic connector products.
Other Assets
Other assets includes $1.3 million of long-term notes receivable. Payments are scheduled to be received by
the company over the next 3 years.
Revenue Recognition
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 the
F-9
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Company’s products are shipped and title and risk of loss have passed to the customer. Rental revenues are
recognized as earned over the rental period. Rentals of the Company’s equipment are short term and generally
range from daily rentals to rental periods of up to six months. Products are generally sold without any customer
acceptance provisions and the Company’s standard terms of sale do not allow customers to return products for
credit. Most of the Company’s products do not require installation assistance or sophisticated instruction.
Research and Development Costs
The Company expenses research and development costs as incurred. Reaearch and development costs
include salaries, employee benefit costs, department supplies, and other related costs.
Product Warranties
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 or, in the absence of historical product experience, management’s estimates. Changes in the warranty
reserve are contained in the following table (in thousands):
Balance at the beginning of the period (October 1, 2002) . . . . . . . . . . . . . . . . . . . . . .
Accruals for warranties issued during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accruals related to pre-existing warranties (including changes in estimates) . . . . . . .
Settlements made (in cash or in kind) during the period . . . . . . . . . . . . . . . . . . . . . . .
$ 841
795
—
(759)
Balance at the end of the period (September 30, 2003) . . . . . . . . . . . . . . . . . . . . . . . .
$ 877
Stock-Based Compensation
The Company measures compensation expense related to stock-based employee compensation plans using
the intrinsic value method as prescribed in Accounting Principles Board Opinion No. 25 (“APB 25”),
“Accounting for Stock Issued to Employees”. Accordingly, compensation cost for stock-based awards is
measured as the excess, if any, of the fair market value of the Company’s stock at the date of grant over the
exercise price of the award. Compensation cost determined at the grant date is recognized as expense over the
related vesting period.
Financial Instruments
Fair value estimates are made at discrete points in time based on relevant market information. These
estimates may be subjective in nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. The Company believes that the carrying amounts of its financial
instruments, consisting of cash and cash equivalents, accounts and notes receivable, accounts payable and
long-term debt, approximate the fair values of such items.
Foreign Currency Gains and Losses
The assets and liabilities of OYO’s foreign subsidiaries have been translated into U.S. dollars using the
exchange rates in effect at the balance sheet date. Results of operations have been translated using the average
exchange rates during the year. Resulting translation adjustments have been recorded as a component of
accumulated other comprehensive income (loss) in stockholders’ equity. Foreign currency transaction gains and
losses are included in the results of operations as they occur.
F-10
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Derivatives
The Company records all derivatives on the balance sheet at fair value. Changes in derivative fair values
will either be recognized in earnings as offsets to the changes in fair value of related hedged assets, liabilities and
firm commitments or for forecasted transactions, deferred and recorded as a component of accumulated other
comprehensive income until the hedged transactions occur and are recognized in earnings. The Company
purchases printheads from OYO Japan whereby such purchases are denominated in Japanese yen. The Company
routinely attempts to hedge its currency exposure on these purchases by entering into foreign currency forward
contracts with a bank. The purpose of entering into these forward hedge contracts is to eliminate variability of
cash flows associated with foreign currency exchange rates on amounts payable in Japanese yen. The Company’s
forward contracts with the bank are considered derivatives. The Company has recorded these foreign currency
forward contracts on the balance sheet and marked them to fair value at each reporting date. Resulting gains and
losses are reflected in other income and deductions – within the accompanying consolidated financials and were
not material for the fiscal years ended September 30, 2003, 2002 and 2001. At September 30, 2003, the Company
had $0.4 million of yen-denominated foreign currency forward contracts, and had $0.4 million of
yen-denominated accounts payable.
Income Taxes
The Company follows the liability method of accounting for income taxes whereby deferred tax assets and
liabilities are determined based on the differences between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are
expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to
their estimated realizable value.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standards (“SFAS”) No. 141, “Business Combinations”. SFAS 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the purchase method. The Company adopted
the provisions of SFAS 141 effective October 1, 2001. Among the provisions of SFAS 141 is the requirement to
record as an extraordinary gain all negative goodwill resulting from new business combinations. As a result, the
Company recorded an extraordinary gain of $686,000, net of income taxes of $85,000, relating to our acquisition
of an additional equity interest in OYO-GEO Impulse in November 2001.
Also in July 2001, the FASB issued 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. The Company adopted the provisions of SFAS 142
effective October 1, 2002. At September 30, 2003, the Company had goodwill, net of accumulated amortization,
of $1.8 million. Adoption of SFAS 142 resulted in a reduction of amortization expense for the year ended
September 30, 2003 of $165,000.
In August 2001, the FASB 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 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, 2002. The adoption of
SFAS No. 143 did not have a material effect on the Company’s financial position and results of operations.
F-11
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
In October 2001, the FASB 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 and results of
operations.
In April 2002, the FASB issued SFAS No. 145, “Recission of FASB Statement No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections”. This statement clarifies guidance related to
the reporting of gains and losses from extinguishment of debt and resolves inconsistencies related to the required
accounting treatment of certain lease modifications. The provisions of this statement relating to extinguishment
of debt became effective for financial statements issued for fiscal years beginning after May 15, 2002. The
provisions of this statement relating to lease modification are effective for transactions occurring after May 15,
2002. 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.
In June 2002, the FASB issued SFAS (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 June 30,
2003. Adoption of SFAS No. 146 did not have a material effect on the Company’s financial position and results
of operations.
On November 25, 2002, the FASB issued FASB interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an
interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB interpretation No. 34. FIN 45
clarifies the requirements of FASB Statement No. 5, Accounting for Contingencies (FAS 5),” relating to the
guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. The Company is
implementing the disclosure requirements of this standard this year and will disclose the measurement and other
provisions of FIN 45 in its fiscal year 2004 financial statements. 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.
In December 2002, the FASB issued SFAS 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. At September 30, 2003, 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 has been 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
F-12
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
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.
Year Ended
September 30,
2003
September 30,
2002
September 30,
2001
$(2,533)
$1,119
$1,338
Net income (loss), as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards, net of related
tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(443)
(428)
Pro forma income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(2,976)
$ 691
Earnings (loss) per share:
Basic-as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic-pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted-as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted-pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (0.46)
$ (0.54)
$ (0.46)
$ (0.54)
$ 0.20
$ 0.12
$ 0.20
$ 0.12
(951)
$ 387
$ 0.24
$ 0.07
$ 0.24
$ 0.07
In its October 29, 2003 meeting, the FASB voted to make the expensing of stock options mandatory
beginning in 2005. The guidance regarding this change is expected to be released in early 2004. Additionally, the
FASB voted to specify the approach that companies can use in making the transition to the expensing of options,
allowing companies to include previously granted unvested options in their calculations as well as the ones
granted in the current year. When the rules are finalized, the Company will evaluate the impact on its financial
position, results of operations and cash flows.
For a further discussion of the Company’s stock-based employee compensation plans, see Note 11 to the
Consolidated Financial Statements.
The FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which the
Company adopted effective January 31, 2003. This statement addresses the consolidation of variable interest
entities (“VIEs”) by business enterprises that are primary beneficiaries. A VIE is an entity that does not have
sufficient equity investment at risk to permit it to finance its activities without additional subordinated financial
support, or whose equity investors lack the characteristics of a controlling financial interest. The primary
beneficiary of a VIE is the enterprise that has the majority of the risks or rewards associated with the VIE. The
Company believes it has no material interests in VIEs that will require disclosure or consolidation under FIN 46.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments
and Hedging Activities.” Statement 149 amends and clarifies financial accounting and reporting of derivative
instruments, including certain derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS 133, “Accounting for Derivative Instruments and Hedging
Activities.” This statement is effective for contracts entered into or modified after June 30, 2003, except for
certain hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a
material effect on the Company’s financial position and results of operations.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.” SFAS No. 150 specifies that freestanding financial instruments
within its scope constitute obligations of the issuer and that, therefore, the issuer must classify them as liabilities.
Such freestanding financial instruments include mandatory redeemable financial instruments, obligations to
F-13
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
repurchase the issuer’s equity shares by transferring assets, and certain obligations to issue a variable number of
shares. SFAS No. 150 is effective immediately for all financial instruments entered into or modified after May
31, 2003. For all other instruments, SFAS No. 150 is effective at the beginning of the third quarter of 2003. The
adoption of SFAS No. 150 did not have a material effect on the Company’s financial position and results of
operations.
2. Acquisitions:
Effective November 8, 2001, the Company increased its equity ownership from 44% to 85% in a Russian
joint venture formed more than ten years ago with Geophyspribor Ufa Production Association, Bank Vostock
and Chori Co., Ltd. Since the increase in ownership, the operating results of the reorganized entity, now known
as OYO-GEO Impulse, have been consolidated with those of the Company. Geophyspribor Ufa Production
Association and Chori Co., Ltd. continue as minority equity holders of OYO-GEO Impulse.
In exchange for the additional equity ownership, the Company forgave a debt of $1.2 million owed to it by
OYO-GEO Impulse. At the time of the restructuring, the debt owed the Company and a related prior equity
investment had been written-off and had no carrying value in the Company’s financial statements.
The Company recorded an extraordinary gain of $686,000, net of income taxes of $85,000. This
extraordinary gain resulted from the Company’s acquisition of an additional equity interest of OYO-GEO
Impulse. Accounting principles generally accepted in the United States require negative goodwill resulting from
new business combinations to be recorded as an extraordinary gain.
On September 12, 2003, the Company purchased for $164,000 an additional 12% ownership interest in
OYO-GEO Impulse from Geophyspribor Ufa Production Association, thereby increasing its ownership interest to
97%. Chori Co., Ltd. continues as a 3% minority shareholder of OYO-GEO Impulse.
On February 8, 2001, the Company acquired substantially all of the assets of EcoPRO Imaging Corporation
(“EcoPRO”) for $1.9 million and entered into a three-year global dry thermal film and distribution alliance with
the seller of the EcoPRO assets (hereinafter referred to as the “Former Primary Film Supplier”).
The allocation of the purchase price for the fiscal year 2002 acquisition of OYO-GEO Impulse and the fiscal
year 2001 acquisition of EcoPRO, including related direct costs, and a reconciliation of the purchase price to the
cash used for these business acquisitions during fiscal years 2002 and 2001, respectively, are as follows (in
thousands):
OYO-GEO
Impulse
EcoPRO
Fair values of assets and liabilities:
Net current assets, excluding cash acquired . . . . . . . . . . . . . . . .
Deferred purchasing benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minority interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Negative goodwill
$ 1,134
—
(1,186)
(175)
(686)
$ 501
1,640
(216)
—
—
Cash (provided by) used for business acquisition . . . . . . . . . . . . . . . .
$ (913)
$1,925
F-14
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The consolidated results of operations of the Company include the results of acquired businesses from the
dates of acquisition. The revenues and net income of acquired businesses prior to the acquisition dates were not
material to the Company’s consolidated results of operations and, therefore, no proforma consolidated results of
operations as if the acquisitions had occurred at the beginning of the respective years has been presented.
3. Inventories:
Inventories consisted of the following (in thousands):
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obsolescence reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AS OF
SEPTEMBER 30,
2003
2002
$ 4,900
3,241
15,841
(1,053)
$ 4,527
3,619
14,586
(931)
$22,929
$21,801
Inventory obsolescence expense was approximately $0.2 million, $1.0 million and $0.9 million during fiscal
years 2003, 2002 and 2001, respectively.
4. Notes Receivable:
At September 30, 2003 and 2002, the Company had outstanding notes receivable from customers in the
amount of $3.4 million (including $1.3 million classified as long-term) and $0.9 million, respectively. The notes
receivable outstanding at September 30, 2003 bear interest at rates up to 10.0% and are collectible in monthly
installments through May 2005. At September 30, 2003 and 2002, the reported amount of notes receivable was
net of an allowance for doubtful accounts of zero.
5. Rental Equipment:
Rental equipment consisted of the following (in thousands):
Geophones and related products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8,198
(6,023)
$ 7,373
(5,329)
$ 2,175
$ 2,044
AS OF
SEPTEMBER 30,
2003
2002
F-15
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
6. Property, Plant and Equipment:
Property, plant and equipment consisted of the following (in thousands):
AS OF
SEPTEMBER 30,
2003
2002
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tools and molds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,366
12,205
17,872
1,580
212
1,679
943
418
$ 1,877
10,052
17,235
1,575
210
1,693
1,108
477
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38,275
(15,896)
34,227
(13,984)
$ 22,379
$ 20,243
Depreciation expense was $3.6 million, $3.9 million and $3.6 million in fiscal years 2003, 2002 and 2001,
respectively. At September 30, 2003, the Company recorded $0.3 million, in property held for sale, for raw land
that was sold during October 2003.
As discussed under “Item 2. Properties” the Company purchased a facility located at 7007 Pinemont Drive
in Houston, Texas (“the Pinemont Facility”) having 208,000 square feet, which will house its worldwide
headquarters and all U.S. manufacturing, engineering, selling, marketing, and administrative activities. The
Company has begun the move into such facility and expect it to be completely occupied by early 2004. The
purchase price for the Pinemont Facility was $3.8 million, of which $3.0 million was financed by a 7-year
mortgage. The Company expects to incurr $0.8 million of capitalized costs for the remodeling of the facility. In
addition, the Company expects to incur charges of $0.4 million in the first quarter of fiscal 2004 to relocate its
operations into the Pinemont Facility. The Company sold one of its former facilities in December 2003, and it
will allow a lease to expire on December 31, 2003 on another facility, and will hold its remaining Texas-based
facilities for sale or lease. At September 30, 2003, the net book value of assets to be sold or leased was $6.8
million. The Company expects the results of the move and restructuring to be the elimination of substantial
manufacturing and operating expenses in future periods, which should easily offset the one-time costs of the
move and justify the capital expenditures made with respect to the Pinemont Facility.
7. Other Assets:
In April 2002, the Company purchased certain intellectual property rights from 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. The purchase included then existing technology and any film technology later
developed by the Former Primary Film Supplier for use in the Company’s equipment. 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. The Company and the Former
Primary Film Supplier 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. If the Former Primary Film Supplier
F-16
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
could not meet such requirements, the Company had the right to self-manufacture or license to any third party the
right 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. As a result of such bankruptcy filing, the Company
provided an impairment charge of approximately $1.2 million due to the ultimate uncertainty of its ability to
realize the value of the deferred purchasing benefits and certain other assets during fiscal year 2002. See Note 18
for additional information relating to the Former Primary Film Supplier’s bankruptcy filing.
8. Notes Payable and Long-Term Debt:
Notes payable and long-term debt consisted of the following (in thousands):
Mortgage note payable, due in monthly installments of $31 with interest at 7.0%
through January 2014, collateralized by certain land and building . . . . . . . . . .
Mortgage note payable, due in monthly installments of $9 with interest at 7.6%
through July 2013, collateralized by certain land and building . . . . . . . . . . . . .
Mortgage note payable, due in monthly installments of $10 with interest at 4.0%
through September 2010, with remaining principal and interest due
September, collateralized by certain land and building . . . . . . . . . . . . . . . . . . .
OYO-GEO Impulse note payable, with interest at 18.0%, due December 2003 . .
Working capital line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AS OF
SEPTEMBER 30,
2002
2003
$ 2,771
$2,947
773
824
3,040
113
5,424
—
—
487
12,121
(5,889)
4,258
(714)
$ 6,232
$3,544
During September 2003, the Company obtained a $3.0 million mortgage from a bank to purchase the
Pinemont Facility. The mortgage will mature in September 2010.
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 inventories (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
(“EBITDA”) and (ii) levels of eligible accounts receivable, notes 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 a result of operating losses
through September 30, 2003, the Company failed to meet certain covenants for the year ended September 30,
2003, relating to specified ratios of EBITDA, as defined, to interest expense and senior debt to EBITDA. The
Company received a waiver of these covenants from the bank as of such date in consideration for a fee of
$10,000, the exclusion of eligible notes receivable from the Company’s borrowing base and an increase in
borrowing rates for future borrowings. On August 11, 2003, the Company’s LIBOR-based borrowing rate
increased by 1.0% and, effective October 1, 2003, the Company’s prime-based borrowing rate increased by
1.0%. As of September 30, 2003 there were borrowings of $5.4 million outstanding under the Credit Agreement,
and additional borrowings available under the Credit Agreement of $4.6 million. The Company’s borrowing
interest rate at September 30, 2003 was 4.6% for its LIBOR-based borrowings and 4.0% for its prime-based
F-17
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
borrowings. The Company is seeking to extend the credit facility with its existing lender and expects to be able to
do so, but has no assurances that it will be able to do so.
The Company anticipates that the existing cash balance as of September 30, 2003, cash flow from
operations and borrowing availability under our existing credit facility, assuming it is extended, or borrowing
availability under a new credit facility will provide adequate cash flows and liquidity for fiscal year 2004. The
Company expects that the liquidity from such amounts and cash flows from operations in fiscal year 2004 will
satisfy the capital expenditures, scheduled debt payments, and operational budgets of the Company for the
upcoming year.
The Company’s long-term debt will mature as follows (in thousands):
YEAR ENDING SEPTEMBER 30,
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,889
412
437
464
493
4,426
$12,121
9. Accrued Expenses and Other:
Accrued expenses consisted of the following (in thousands):
AS OF
SEPTEMBER 30,
2003
2002
Employee bonuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensated absences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal and professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payroll . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medical claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
17
877
544
308
312
723
225
752
$ 431
853
562
283
229
597
262
945
Accrued expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,758
$4,162
The Company is self-insured for certain losses related to employee medical claims. The Company has
purchased stop-loss coverage for individual claims in excess of $75,000 per claimant per year in order to limit its
exposure to any significant levels of employee medical claims. Self-insured losses are accrued based on the
Company’s estimates of aggregate liability for uninsured claims incurred using certain actuarial assumptions
followed in the insurance industry and the Company’s historical experience.
10. Employee Benefits:
The Company’s employees are participants in the OYO Geospace Corporation Employee’s 401(k)
Retirement Plan (the “Plan”), which covers substantially all eligible employees in the United States. The Plan is a
F-18
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
qualified salary reduction plan in which all eligible participants may elect to have a percentage of their
compensation contributed to the Plan, subject to certain guidelines issued by the Internal Revenue Service. The
Company’s share of discretionary matching contributions was approximately $0.3 million in each of fiscal years
2003, 2002 and 2001.
11. Stockholders’ Equity:
In September 1997, the board of directors approved the 1997 Key Employee Stock Option Plan, as amended
(the “Employee Plan”), and reserved an aggregate of 875,000 shares of common stock for issuance thereunder. In
November 1997, the board of directors and stockholders approved the Company’s 1997 Non-Employee Director
Plan (the “Director Plan”) and reserved an aggregate of 75,000 shares of common stock for issuance thereunder.
At September 30, 2003 the shares of common stock available for grant under the Employee Plan and Director
Plan were 52,625 and 11,880, respectively.
Under the Employee Plan, the Company is authorized to issue nonqualified and incentive stock options to
purchase common stock and restricted stock awards of common stock to key employees of the Company.
Options have a term not to exceed ten years, with the exception of incentive stock options granted to employees
owning ten percent or more of the outstanding shares of common stock, which have a term not to exceed five
years. The exercise price of any option may not be less than the fair market value of the common stock on the
date of grant. In the case of incentive stock options granted to an employee owning ten percent or more of the
outstanding shares of common stock, the exercise price of such option may not be less than 110% of the fair
market value of the common stock on the date of grant. Options vest over a four-year period commencing on the
date of grant in 25% annual increments. Under the Employee Plan, the Company may issue shares of restricted
stock to employees for no payment by the employee or for a payment below the fair market value on the date of
grant. The restricted stock is subject to certain restrictions described in the Employee Plan, with no restrictions
continuing for more than ten years from the date of the award.
The Company established the Director Plan pursuant to which options to purchase shares of common stock
are granted annually to non-employee directors and pursuant to which one-half of the annual fees paid for the
services of such non-employee directors is paid in shares of common stock based on the fair market value thereof
at the date of grant. Options granted under the Director Plan have a term of ten years. The exercise price of each
option granted is the fair market value of the common stock on the date of grant. Options vest over a one-year
period commencing on the date of grant.
Effective November 5, 1999, the board of directors approved the OYO Geospace Corporation 1999 Broad-
Based Option Plan (the “Broad-Based Plan”) and reserved an aggregate of 50,000 shares for issuance thereunder.
Under the Broad-Based Plan, the Company is authorized to issue to all employees (except executive officers and
employee directors) nonqualified stock options to purchase common stock of the Company. These options have a
term not to exceed ten years. The exercise price of any broad-based option may not be less than the fair market
value of the common stock on the date of grant. These options vest over a one-year period commencing on the
date of grant. There were 16,100 shares available for grant under this plan at September 30, 2003.
F-19
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
A summary of the activity with respect to stock options is as follows:
Outstanding at September 30, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at September 30, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at September 30, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares
489,700
118,600
(27,000)
(22,775)
—
558,525
34,000
(7,425)
(28,125)
—
556,975
227,500
(4,475)
(50,700)
—
Outstanding at September 30, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . .
729,300
Weighted
Average
Exercise
Price
14.64
18.96
14.49
17.96
—
15.43
12.73
10.61
15.66
—
15.32
7.54
8.87
15.89
—
12.89
The following table summarizes information about stock options outstanding and exercisable at September
30, 2003:
Range of Exercise Prices
$ 6.81 to $13.49 . . . . . . . . . . . . .
$13.50 to $19.99 . . . . . . . . . . . . .
$20.00 to $27.63 . . . . . . . . . . . . .
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Term
(in years)
8.8
5.6
6.0
6.9
Weighted
Average
Exercise
Price
$ 8.09
15.60
25.85
Shares
60,337
344,150
23,500
12.89
427,987
Weighted
Average
Exercise
Price
$ 9.67
15.35
26.08
15.14
Shares
296,900
407,400
25,000
729,300
The Company granted zero shares, zero shares and 500 shares of restricted stock during fiscal years 2003,
2002 and 2001, respectively. As partial compensation for services of its outside directors, the Company issued
3,604 shares, 1,890 shares and 992 shares of common stock to directors during fiscal years 2003, 2002 and 2001,
respectively.
The amortization of unearned compensation related to stock-based employee compensation included in the
consolidated results of operations was $1,000, $0.1 million and $0.5 million for each of fiscal years 2003, 2002
and 2001, respectively, pursuant to the provisions of APB 25. Unearned compensation included in stockholders’
equity related to unlapsed restrictions on grants of restricted stock was approximately $4,000 and $5,000 as of
September 30, 2003 and 2002, respectively.
Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation”
(“SFAS 123”) requires that stock-based awards be measured and recognized at fair value. Adoption of the cost
F-20
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
recognition provisions of SFAS 123 with respect to stock-based awards to employees is optional and the
Company decided not to elect those provisions. As a result, the Company continues to apply APB 25 and related
interpretations in accounting for the measurement and recognition of its employee stock-based awards. However,
the Company is required to provide pro forma disclosure as if the cost recognition provisions under the fair value
method of SFAS 123 had been adopted. Under SFAS 123, compensation cost is measured at the grant date based
on the fair value of the awards and is recognized over the service period, which is usually the vesting period. The
fair value of options granted during the fiscal years ended September 30, 2003, 2002 and 2001 were estimated
using the Black-Scholes option-pricing model with a dividend yield of zero for each of the three years. This
estimation assumed risk-free interest rates of 4.2%, 3.8% and 5.6%; and expected volatility of 65%, 54% and
43%; with an expected option term of 5 years for 2003, 2002 and 2001, respectively.
The weighted average fair values per share of stock-based award grants were as follows:
YEAR ENDED
SEPTEMBER 30,
2003
2002
2001
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director’s common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7.54
—
6.94
$ 6.44
—
13.73
$ 8.60
16.00
25.25
The pro forma disclosures as if the Company had adopted the cost recognition requirements of SFAS 123
are presented below (in thousands, except per share amounts):
YEAR ENDED SEPTEMBER 30,
2003
2002
2001
Net income (loss):
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(2,533)
(443)
$1,119
691
$1,338
387
Basic earnings (loss) per common share:
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (0.46)
(0.54)
$ 0.20
0.12
$ 0.24
0.07
Diluted earnings (loss) per common share:
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (0.46)
(0.54)
$ 0.20
0.12
$ 0.24
0.07
The effects of applying SFAS 123 in the above pro forma disclosure are not indicative of future amounts
since the Company anticipates making awards in the future under the Employee and Director Plans.
12. Income Taxes:
Components of income(loss) before income taxes, minority interest and extraordinary gain were as follows
(in thousands):
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(4,334)
421
$(1,642)
1,306
$1,290
340
$(3,913)
$ (336)
$1,630
YEAR ENDED SEPTEMBER 30,
2003
2002
2001
F-21
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The provision (benefit) for income taxes consisted of the following (in thousands):
YEAR ENDED SEPTEMBER 30,
2003
2002
2001
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (345)
(28)
10
$ (169)
769
(76)
(363)
524
$ 85
123
3
211
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,198)
162
—
(1,430)
49
—
(1,036)
(1,381)
(166)
247
—
81
$(1,399)
$ (857)
$ 292
The differences between the effective tax rate reflected in the total provision (benefit) for income taxes and
the statutory federal tax rate of 34% were as follows (in thousands):
Provision for U.S. federal income tax at statutory rate . . . . . .
Effect of foreign income taxes . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit from export sales . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes, net of federal income tax benefit . . . . . . .
Nondeductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resolution of prior years’ tax matters . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
YEAR ENDED SEPTEMBER 30,
2003
2002
2001
$(1,330)
(10)
(24)
7
28
(70)
—
$ (114)
(10)
(271)
2
104
(568)
—
$ 555
78
(172)
2
66
(264)
27
$(1,399)
$ (857)
$ 292
(35.8)% (255.1)% 17.9%
F-22
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Deferred income taxes under the liability method reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Significant components of the Company’s net deferred income tax asset were as follows (in
thousands):
Deferred income tax assets:
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized research and development costs . . . . . . . . . . . . . . . . .
AMT carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NOL carryforward and tax credits . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued product warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensated absences . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net foreign operating loss carryforwards and deferrals . . . . . . . . .
AS OF
SEPTEMBER 30,
2003
2002
$
132
617
1,426
272
2,214
298
185
41
5,185
$
119
540
—
175
1,759
286
191
203
3,273
Deferred income tax liabilities:
Property, plant and equipment and other . . . . . . . . . . . . . . . . . . . .
(1,283)
(1,207)
Net deferred income tax asset before valuation allowance . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,902
(800)
2,066
—
Net deferred income tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,102
$ 2,066
Deferred income taxes are reported as follows in the accompanying consolidated balance sheet (in
thousands):
Current deferred income tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent deferred income tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,233
1,869
—
$1,135
931
—
$3,102
$2,066
AS OF
SEPTEMBER 30,
2003
2002
During the fiscal year 2003, the Company filed amended tax returns for certain prior year periods and also
completed its fiscal 2002 federal tax filing. Upon completion of such filings, the Company identified $0.8 million
of additional tax benefits that are available for potential use in future periods. These additional benefits are
related to foreign tax credits. Based upon the current industry environment and the Company’s projections of
future taxable income, the Company has reviewed its deferred tax assets and recorded a valuation allowance of
approximately $0.8 million against the foreign tax credits.
Under the liability method, a valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Based on the Company’s historical taxable income
record, and the expectation that the deductible temporary differences will reverse during periods in which the
Company generates net taxable income or during periods in which losses can be carried back to offset prior year
taxes, management believes that the Company will realize the benefit of the net deferred income tax asset after
consideration of the valuation allowance.
F-23
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The financial reporting bases of investments in foreign subsidiaries exceed their tax basis. A deferred tax
liability is not recorded for this temporary difference because the investment is essentially permanent. A reversal
of the Company’s plans to permanently invest in the operations would cause the excess to become taxable. At
September 30, 2003 and 2002 the temporary difference related to undistributed earnings for which no deferred
taxes have been provided was approximately $2.8 million and $2.6 million, respectively.
From time to time the Company is the subject of audits by various tax authorities that can result in claims
and assessments and additional tax payments, penalties and interest. At present, there are no pending audits of the
Company’s past tax returns.
As of September 30, 2003, the Company had $3.8 million in net operating loss (“NOLs”) carryforwards.
These NOLs may be carried forward for a period of 20 years and are available as an offset to future taxable
income. These NOLs will begin to expire in fiscal year 2023. The company also has certain tax credit
carryforwards available to offset future federal income taxes payable. As of September 30, 2003, the Company
had $0.9 million in foreign tax credits that can be carried forward for five years. These foreign tax credits begin
to expire in fiscal year 2005. Furthermore, the Company’s current general business credits of $46,000 will begin
to expire in fiscal year 2013. In addition, the Company has alternative minimum tax carryforwards of $0.3
million that have no expiration date.
13. Earnings Per Common Share:
Basic earnings per share are computed by dividing net earnings available to common stockholders by the
weighted average number of common shares outstanding during the period. Diluted earnings per share is
determined on the assumption that outstanding dilutive stock options have been exercised and the aggregate
proceeds as defined were used to reacquire common stock using the average price of such common stock for the
period.
F-24
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The following table summarizes the calculation of net earnings and weighted average common shares and
common equivalent shares outstanding for purposes of basic and diluted earnings per share (in thousands, except
share and per share amounts):
YEAR ENDED SEPTEMBER 30,
2003
2002
2001
Income (loss) before extraordinary item . . . . . . . . . . . . . . .
Extraordinary gain, net of tax of $85 . . . . . . . . . . . . . . . . .
Net earnings (loss) available to common stockholders . . . .
$
$
(2,533)
—
(2,533)
$
$
433
686
1,119
$
$
1338
—
1,338
Weighted average common shares and common share
equivalents:
Common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common share equivalents . . . . . . . . . . . . . . . . . . . . .
5,550,216
—
5,535,979
11,795
5,489,251
109,346
Total weighted average common shares and common
share equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,550,216
5,547,774
5,598,597
Basic earnings (loss) per share:
Income (loss) before extraordinary gain . . . . . . . . . . .
Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings (loss) per share:
Income (loss) before extraordinary gain . . . . . . . . . . .
Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
(0.46)
—
(0.46)
(0.46)
—
(0.46)
$
$
$
$
0.08
0.12
0.20
0.08
0.12
0.20
$
$
$
$
0.24
—
0.24
0.24
—
0.24
Options totaling 729,300, 474,800 and 33,700 shares of common stock in fiscal years 2003, 2002 and 2001
respectively, were not included in the calculation of weighted average shares for diluted earnings per share
because their effects were antidilutive.
14. Related Party Transactions:
Sales to OYO Japan and other affiliated companies were approximately $0.3 million, $0.1 million and $0.2
million during fiscal years 2003, 2002 and 2001, respectively. Purchases of inventory and equipment from OYO
Japan were approximately $1.8 million, $0.6 million and $1.7 million during fiscal years 2003, 2002 and 2001,
respectively.
15. Commitments and Contingencies:
Operating Leases
The Company leases certain office space and equipment under noncancelable operating leases. The
approximate future minimum rental commitments under noncancelable operating leases are as follows (in
thousands):
YEAR ENDING SEPTEMBER 30,
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$64
9
3
$76
F-25
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Rent expense was approximately $0.6 million, $0.7 million, and $0.6 million for fiscal years 2003, 2002 and
2001, respectively.
Legal Proceedings
From time to time the Company is a party to what it believes is routine litigation and proceedings that may
be considered as part of the ordinary course of its business. The Company is not aware of any current or pending
litigation or proceedings that could have a material adverse effect on the Company’s results of operations, cash
flows or financial condition, although the Company continues to monitor developments in the bankruptcy
proceeding by its Former Primary Film Supplier and the Former Primary Film Supplier’s existing claim against
the Company described in Note 18.
In the course of shipping several heavy reels of undersea sensor cable to the North Sea pursuant to a contract
with a major oil company, the reels were mishandled by a third party during discharge from the vessel. Our
customer then rejected the cables. The Company has made a claim in the amount of $1.7 million with the
insurance company writing the policy covering the cargo during transit. To date the insurance company is still
conducting its due diligence and has not accepted or rejected the Company’s claim. In the event the Company is
unable to reach an accommodation with the insurance company, it is prepared to bring suit to enforce its rights
under the policy.
16. Supplemental Cash Flow Information:
Supplemental cash flow information is as follows (in thousands):
YEAR ENDED
SEPTEMBER 30,
2003
2002
2001
Cash paid (refund received) for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$116
199
$ 585
(153)
$
378
(1,148)
Noncash investing and financing activities:
Common stock issued pursuant to Employee and Director
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25
25
25
17. Segment and Geographic Information:
In fiscal year 2001, the Company expanded its commercial graphics operations through the acquisition of
substantially all of the assets of EcoPRO and through the reorganization of its United Kingdom subsidiary to
focus on the growing commercial graphics marketplace in Europe. At that time, the Company began reporting
information for two business segments: Seismic and Commercial Graphics. The Commercial Graphics business
segment primarily sells products into the commercial graphics industry; however, it also has some minor sales
into the seismic industry.
F-26
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The Company’s seismic product lines currently consist of geophones and hydrophones, including multi-
component geophones and hydrophones, seismic leader wire, geophone string connectors, seismic telemetry
cable, high definition reservoir characterization products and services, marine seismic cable retrieval devices and
small data acquisition systems targeted at niche markets. Commercial graphics products include thermal imaging
equipment and dry thermal film. The following tables summarize the Company’s segment information:
YEAR ENDED SEPTEMBER 30,
2003
2002
2001
Net sales:
Seismic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Graphics . . . . . . . . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$37,619
13,333
(98)
$51,800
13,490
(241)
$50,433
13,557
(372)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50,854
65,049
63,618
Income (loss) from operations:
Seismic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Graphics . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(833)
231
(3,380)
—
(3,982)
4,311
(399)
(3,336)
(142)
434
5,381
27
(3,552)
—
1,856
Total assets:
Seismic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Graphics . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47,391
14,256
9,788
51,308
12,610
4,208
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$71,435
$68,126
Corporate consists primarily of corporate overhead expenses and unallocated corporate assets. Unallocated
corporate assets consist of the Company’s corporate office building and equipment.
The Company has operations in the United States, Canada, United Kingdom and Russia. Summaries of net
sales by geographic area for fiscal years 2003, 2002 and 2001 are as follows (in thousands):
YEAR ENDED SEPTEMBER 30,
2003
2002
2001
Asia (excluding Japan and Middle East) . . . . . . . . . . . . . .
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Middle East
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,778
6,503
11,501
618
1,255
20,221
978
$ 7,386
9,058
16,094
436
918
30,137
1,020
$10,005
11,697
11,768
948
605
27,507
1,088
$50,854
$65,049
$63,618
Net sales are attributed to countries based on the ultimate destination of the product sold, if known. If the
ultimate destination is not known, net sales are attributed to countries based on the geographic location of the
initial shipment.
F-27
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Sales information for the Company is as follows (in thousands):
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Russia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-lived assets were as follows (in thousands):
YEAR ENDED SEPTEMBER 30,
2003
2002
2001
$41,335
5,608
3,105
4,836
(4,030)
$ 61,238
4,492
6,526
4,061
(11,268)
$62,348
6,715
2,583
—
(8,028)
$50,854
$ 65,049
$63,618
AS OF SEPTEMBER 30,
2003
2002
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Russia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$25,646
3,800
517
2,053
$24,143
2,569
509
1,654
$32,016
$28,875
The Company had no customers comprising more than 10% of sales for the fiscal year 2003 and one
customer comprising 24.5% of annual sales for the fiscal year 2002. The Company had no customers comprising
more than 10% of sales for the fiscal year 2001.
During fiscal year 2002, the Company delivered a reservoir characterization and monitoring system to a
major oil company. In accordance with the terms of the contract, the Company recognized $15.8 million of
revenues in its fiscal year ended September 30, 2002 and $2.5 million in its fiscal year ended September 30,
2003. The contract provides for additional revenue of $3.6 million based upon the system’s performance and,
assuming successful performance, the Company will to recognize such revenue in the first fiscal quarter of fiscal
year 2004. All costs related to this sale, including estimated costs for warranty and delivery, have been recorded
in the fiscal year ended September 30, 2002.
18. Film Supplier Developments:
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 prior transactions with the Former
Primary Film Supplier (including the $2.3 million investment in intellectual property acquired from such 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, 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 no longer believe that a buyer can be found to
operate the Former Primary Film Supplier’s business.
During the fiscal year ended September 30, 2003, the Former Primary Film Supplier failed to meet
substantially all of our purchase orders and has ceased providing the Company with dry thermal film. As a result,
F-28
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
the Company is currently purchasing a large quantity of dry thermal film from an alternative film supplier (the
“Other Film Supplier”) and the Company is 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 contract with the Former Primary Film Supplier. We do not believe there has been any impairment in the
value of the intellectual property the Company acquired from the Former Primary Film Supplier because of the
Company’s ability to utilize the intellectual property to have thermal film manufactured either internally or
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 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
Primary Film Supplier and the Company is unable to predict whether any additional claims will be made against
it in connection with the Former Primary Film Supplier’s bankruptcy proceeding as to any aspect of the
Company’s relationship with such Former Primary Film Supplier. The Company is unable at this time to predict
the outcome and effects of this 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.
F-29
OYO Geospace Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
19. Selected Quarterly Information (Unaudited):
The following table represents summarized data for each of the quarters in fiscal years 2003 and 2002 (in
thousands, except per share amounts).
2003
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from operations . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . . . . . . . . . .
Income (loss) before extraordinary gain . . . . . . . . . . . .
Extraordinary gain, net of tax of $85 . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss)
$11,421
2,908
(823)
(58)
(494)
—
(494)
$12,855
2,704
(1,402)
88
(759)
—
(759)
Basic earnings (loss) per share:
Income (loss) from operations . . . . . . . . . . . . . . . . . . .
Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings (loss) per share . . . . . . . . . . . . . . . . . . .
$ (0.09)
—
$ (0.09)
$ (0.14)
—
$ (0.14)
Diluted earnings (loss) per share:
Income (loss) from operations . . . . . . . . . . . . . . . . . . .
Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings (loss) per share . . . . . . . . . . . . . . . . . .
$ (0.09)
—
$ (0.09)
$ (0.14)
—
$ (0.14)
$16,517
4,596
149
(72)
38
—
38
$
$
$
$
0.01
—
0.01
0.01
—
0.01
$10,061
2,309
(1,906)
(4)
(1,318)
—
(1,318)
$ (0.24)
—
$ (0.24)
$ (0.24)
—
$ (0.24)
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from operations . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . . . . . . . . . .
Income (loss) before extraordinary gain . . . . . . . . . . . .
Extraordinary gain, net of tax of $85 . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss)
Basic earnings (loss) per share:
Income (loss) from operations . . . . . . . . . . . . . . . . . . .
Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings (loss) per share . . . . . . . . . . . . . . . . . . .
Diluted earnings (loss) per share:
Income (loss) from operations . . . . . . . . . . . . . . . . . . .
Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings (loss) per share . . . . . . . . . . . . . . . . . .
2002
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
$13,648
2,911
(1,161)
(145)
(604)
—
(604)
$ (0.11)
—
$ (0.11)
$ (0.11)
—
$ (0.11)
$24,668(a) $13,833
4,855
255
(397)
(80)
—
(80)
6,764
1,261
(132)
1,156
—
1,156
$12,900
4,035
79
(96)
(39)
686
647
$
$
$
$
0.21
—
0.21
0.21
—
0.21
$ (0.01)
—
$ (0.01)
$ (0.01)
0.13
0.12
$
$ (0.01)
—
$ (0.01)
$ (0.01)
0.13
0.12
$
(a)
Includes revenues of $15.8 million recognized related to the sale of a reservoir characterization system. The
Company expects to recognize up to $3.6 million of additional revenues related to this trasnsaction during
the first quarter of fiscal year 2004 depending on the system’s future performance through December 31,
2003.
F-30
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and
Stockholders of OYO Geospace Corporation:
Our audits of the consolidated financial statements referred to in our report dated November 24, 2003
appearing in this Annual Report on Form 10-K also included an audit of the financial statement schedule listed in
Item 15(a) of this Form 10-K. In our opinion, the financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the related consolidated financial
statements.
/s/ PRICEWATERHOUSECOOPERS LLP
Houston, Texas
November 24, 2003
F-31
Schedule II
OYO Geospace Corporation and Subsidiaries
Valuation and Qualifying Accounts
(In Thousands)
Charged
(Credited)
to Costs
and
Expenses
Balance at
Beginning
of Period
Charged
to Other
Assets
Deductions
Balance at
End
of Period
Year ended September 30, 2003
Allowance for doubtful accounts on accounts and notes
receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$474
$229
$ —
$(225)
$478
Year ended September 30, 2002
Allowance for doubtful accounts on accounts and notes
receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
470
146
—
(142)
474
Year ended September 30, 2001
Allowance for doubtful accounts on accounts and notes
receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
353
214
—
(97)
470
Charged
(Credited)
to Costs
and
Expenses
Balance at
Beginning
of Period
Charged
to Other
Assets
Deductions
Balance at
End
Of Period
Year ended September 30, 2003
Inventory obsolescence reserve . . . . . . . . . . . . . . . . . . . . .
$ 931
$ 234
$ —
$ (112)
$1,053
Year ended September 30, 2002
Inventory obsolescence reserve . . . . . . . . . . . . . . . . . . . . .
1,089
970
Year ended September 30, 2001
Inventory obsolescence reserve . . . . . . . . . . . . . . . . . . . . .
1,742
1,073
—
—
(1,128)
931
(1,726)
1,089
32