SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended June 30, 1998 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 001-13601 OYO GEOSPACE CORPORATION (Exact Name of Registrant as Specified in Its Charter) DELAWARE 76-0447780 (State or Other (I.R.S. Jurisdiction of Employer Incorporation or Identification Organization) No.) 12750 SOUTH KIRKWOOD, SUITE 200 STAFFORD, TEXAS 77477 (Address of Principal Executive Offices) (281) 494-8282 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] There were 5,310,990 shares of the Registrant's Common Stock outstanding as of the close of business on August 6, 1998.
TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE NUMBER Item 1. Financial Statements 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds 14 Item 6. Exhibits and Reports on Form 8-K 14 2
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors OYO Geospace Corporation and Subsidiaries We have reviewed the accompanying consolidated balance sheet of OYO Geospace Corporation and Subsidiaries as of June 30, 1998, the related consolidated statements of operations for the three months and nine months ended June 30, 1998 and 1997, and the consolidated statement of cash flows for the nine months ended June 30, 1998 and 1997. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express an opinion or any form of assurance on such financial statements. Based on our review, we are not aware of any material modifications that should be made to the aforementioned financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of September 30, 1997, and the related consolidated statements of operations, changes in shareholder's equity, and cash flows for the year then ended (not presented herein) and, in our report dated November 3, 1997, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of September 30, 1997, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ PricewaterhouseCoopers LLP Houston, Texas July 27, 1998 3
OYO GEOSPACE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) JUNE 30, SEPTEMBER 30, ASSETS 1998 1997 -------- -------- (unaudited) Current assets: Cash and cash equivalents ......................... $ 2,936 $ 2,488 Trade accounts and notes receivable, net .......... 15,468 6,494 Inventories ....................................... 18,732 15,035 Deferred income tax ............................... 2,111 1,115 Prepaid expenses and other ........................ 630 132 -------- -------- Total current assets ........................... 39,877 25,264 Rental equipment, net ................................ 2,672 2,394 Property, plant and equipment, net ................... 14,944 6,108 Goodwill and other intangible assets, net ............ 4,575 1,006 Other assets ......................................... 279 306 -------- -------- Total assets ................................... $ 62,347 $ 35,078 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt and notes payable $ 37 $ 1,500 Accounts payable .................................. 6,636 3,048 Accrued expenses and other ........................ 4,420 3,716 Income tax payable ................................ 822 860 -------- -------- Total current liabilities ...................... 11,915 9,124 Long-term debt ....................................... 963 -- Deferred income tax .................................. 1,416 854 -------- -------- Total liabilities .............................. 14,294 9,978 -------- -------- Commitments and contingencies ........................ -- -- Stockholders' equity: Preferred stock ................................... -- -- Common stock ...................................... 54 40 Additional paid-in capital ........................ 29,130 9,785 Retained earnings ................................. 21,119 15,554 Cumulative foreign currency translation adjustments (563) (279) Unearned compensation-restricted stock awards ..... (1,687) -- -------- -------- Total stockholders' equity ..................... 48,053 25,100 -------- -------- Total liabilities and stockholders' equity ..... $ 62,347 $ 35,078 ======== ======== The accompanying notes are an integral part of the consolidated financial statements. 4
OYO GEOSPACE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) (unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED ------------------------ -------------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1998 1997 1998 1997 ---------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Sales ....................................... $ 18,484 $ 12,452 $ 50,047 $ 30,454 Cost of sales ............................... 11,057 7,471 29,161 18,023 ---------- ----------- ----------- ----------- Gross profit ................................ 7,427 4,981 20,886 12,431 Operating expenses: Selling, general and administrative ...... 3,086 2,264 8,921 5,959 Research and development ................. 1,833 598 3,854 1,772 ---------- ----------- ----------- ----------- Total operating expenses .............. 4,919 2,862 12,775 7,731 ---------- ----------- ----------- ----------- Income from operations ...................... 2,508 2,119 8,111 4,700 Other income (expense): Interest expense ......................... -- (222) (28) (441) Interest income .......................... 86 25 300 69 Other, net ............................... 65 95 180 249 ---------- ----------- ----------- ----------- Total other income (expense), net ..... 151 (102) 452 (123) ---------- ----------- ----------- ----------- Income before provision for income taxes .... 2,659 2,017 8,563 4,577 Provision for income taxes .................. 816 760 2,997 1,726 ---------- ----------- ----------- ----------- Net income .................................. $ 1,843 $ 1,257 $ 5,566 $ 2,851 ========== =========== =========== =========== Basic earnings per share .................... $ 0.35 $ 0.31 $ 1.12 $ 0.71 ========== =========== =========== =========== Diluted earnings per share .................. $ 0.34 $ 0.31 $ 1.10 $ 0.71 ========== =========== =========== =========== Weighted average shares outstanding - Basic . 5,309,790 4,000,000 4,991,798 4,000,000 Weighted average shares outstanding - Diluted 5,438,377 4,000,000 5,082,983 4,000,000 </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 5
OYO GEOSPACE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) <TABLE> <CAPTION> NINE MONTHS NINE MONTHS ENDED ENDED JUNE 30, 1998 JUNE 30, 1997 -------- ------- <S> <C> <C> Cash flows from operating expenses: Net income ........................................... $ 5,566 $ 2,851 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income tax ............................... (874) (109) Depreciation and amortization ..................... 1,747 1,053 Amortization of restricted stock awards ........... 241 -- Bad debt expense .................................. 109 79 Effects of changes in operating assets and liabilities: Trade accounts and notes receivable ................ (8,100) (2,943) Inventories ........................................ (2,575) (428) Prepaid expenses and other assets .................. (503) (80) Accounts payable ................................... 3,508 430 Accrued expenses and other ......................... 184 277 Income tax payable ................................. (156) 1,124 -------- ------- Net cash (used in) provided by operating activities ............................ (853) 2,254 Cash flows from investing activities: Capital expenditures ................................. (9,426) (2,572) Investment in business acquisition, net of cash acquired ................................... (2,688) -- Proceeds from sale of equipment ...................... 249 595 -------- ------- Net cash used in investing activities ............. (11,865) (1,977) -------- ------- Cash flows from financing activities: Net proceeds from initial public offering ............ 14,627 -- Increase in notes payable to banks ................... 1,000 -- Decrease in notes payable to banks ................... (2,407) (701) Decrease in receivable from Parent ................... -- 1,487 -------- ------- Net cash provided by financing activities ......... 13,220 786 -------- ------- Effect of exchange rate on cash ......................... (54) 64 -------- ------- Increase in cash and cash equivalents ................... 448 1,127 Cash and cash equivalents, beginning of period .......... 2,488 780 -------- ------- Cash and cash equivalents, end of period ................ $ 2,936 $ 1,907 ======== ======= </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 6
OYO GEOSPACE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The consolidated balance sheet of OYO Geospace Corporation and its subsidiaries (the "Company") at September 30, 1997 has been condensed from the Company's audited consolidated financial statements at that date. The consolidated balance sheet at June 30, 1998, the consolidated statements of operations for the three months and nine months ended June 30, 1998 and 1997 and the consolidated statements of cash flows for the nine months ended June 30, 1998 and 1997 have been prepared by the Company, without audit. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows have been made. The results of operations for the three months and nine months ended June 30, 1998 are not necessarily indicative of the operating results for a full year or of future operations. Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been omitted. The accompanying consolidated financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company's Registration Statement on Form S-1 (Registration No. 333-36727) as filed with the Securities and Exchange Commission on November 18, 1997. 2. INITIAL PUBLIC OFFERING In November 1997, the Company completed an initial public offering (the "Offering") of its common stock by selling 2,300,000 common shares, including 1,150,000 common shares owned by its parent, OYO Corporation U.S.A. ("OYO U.S.A."). After deducting underwriting discounts and offering expenses, the net proceeds from the Offering were $29.3 million, which were split equally between the Company and OYO U.S.A. Immediately following the Offering, OYO U.S.A. held approximately 55% of the outstanding stock of the Company. 3. EARNINGS PER COMMON SHARE Effective October 1, 1997, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS 128 simplifies the computation of earnings per share by replacing the primary and fully diluted presentations with the new basic and diluted presentations. Basic earnings per common share is computed by dividing income available for common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per common share is computed by dividing income available for common shareholders by the sum of the weighted average number of common shares outstanding and the effect of all dilutive potential common shares outstanding for the period All prior period earnings per share amounts have been restated to conform with SFAS No. 128. 7
The following table summarizes the calculation of net earnings and weighted average common shares and common equivalent shares outstanding for purposes of the computation of earnings per share: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED --------------------------------- --------------------------------- JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997 --------------- --------------- --------------- --------------- <S> <C> <C> <C> <C> Net earnings available to common stockholders (in thousands) ............................. $ 1,843 $ 1,257 $ 5,566 $ 2,851 =============== =============== =============== =============== Divided by weighted average common shares and common share equivalents: Weighted average common shares ......................... 5,309,790 4,000,000 4,991,798 4,000,000 Weighted average common share equivalents .......................................... 128,587 -- 91,185 -- --------------- --------------- --------------- --------------- Total weighted average common shares and common share equivalents ............................ 5,438,377 4,000,000 5,082,983 4,000,000 =============== =============== =============== =============== Basic earnings per common share ........................... $ 0.35 $ 0.31 $ 1.12 $ 0.71 =============== =============== =============== =============== Diluted earnings per common share ......................... $ 0.34 $ 0.31 $ 1.10 $ 0.71 =============== =============== =============== =============== </TABLE> 4. INVENTORIES Inventories consisted of the following (in thousands): JUNE 30, SEPTEMBER 30, 1998 1997 ------- ------- (unaudited) Finished goods ............................ $ 2,725 $ 3,385 Work in process ........................... 4,636 2,641 Raw materials and subcomponents ........... 11,371 9,009 ------- ------- $18,732 $15,035 ======= ======= 5. LONG-TERM DEBT In June 1998, the Company borrowed $1.0 million under the terms of a fifteen year amortizing mortgage loan collateralized by the Company's corporate office facility. The mortgage loan bears interest at a fixed rate of 7.55% per annum. In June 1998, the Company obtained from Bank of America, N.A. (the "Bank") a $10.0 million working capital line of credit (the "Credit Agreement") that expires in June 2000. Borrowings under the Credit Agreement are subject to borrowing base restrictions based on consolidated net income plus consolidated interest expense, income taxes, depreciation and amortization. Borrowings under the Credit Agreement are collateralized by the Company's accounts receivable and inventory. At the Company's option, interest on borrowings is based on the Bank's prime rate or offshore rate. The Credit Agreement prohibits the payment of cash dividends on the Company's common stock, limits capital expenditures, limits additional indebtedness to $7.5 million, requires the maintenance of certain financial amounts and contains other covenants customary in transactions of this type. As of June 30, 1998, there were no borrowings outstanding under the Credit Agreement, and the borrowing base under the Credit Agreement was $10.0 million. 8
6. ACQUISITION On February 3, 1998, the Company acquired 100% of the outstanding common stock of JRC/Concord Technologies, Inc. ("Concord") as well as certain intellectual property related to the business of Concord from Jimmy R. Cole, Jr. for a purchase price of $6.4 million, consisting, after adjustments, of cash payments totaling $3.6 million (including acquisition related costs of $0.1 million) and the issuance of 159,120 shares of the Company's common stock valued at approximately $2.8 million. The purchase price was determined through arm's-length negotiations with Mr. Cole, who had no prior relationship to the Company or any of its affiliates or directors, officers or associates thereof. The cash portion of the purchase price was funded with a portion of the net proceeds of the Company's initial public offering. Concord, located in Houston, Texas, designs and manufactures equipment used in connection with deepwater marine seismic surveys. The Company will continue the business of Concord, including the continued devotion of its plant and other assets to its business. Mr. Cole continues to serve as the president of Concord. The allocation of the total purchase price, including related expenses, for Concord based on the estimated fair value of the net assets acquired, at the date of acquisition, is as follows: Net tangible assets..................... $ 2,734 Intangible assets....................... 3,658 -------- Total purchase price allocation...... $ 6,392 ======== Intangible assets are being amortized using the straight-line method over fifteen years. 7. SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES During the nine months ended June 30, 1998, the Company increased its additional paid-in capital by approximately $1.9 million and recorded a corresponding increase in unearned compensation representing the issuance of restrictive stock awards to employees, which awards vest ratably over four years. Components of cash used for the acquisition of Concord and intellectual property related to the business of Concord, as reflected in the Consolidated Statement of Cash Flows for the nine months ended June 30, 1998 are as follows (in thousands): Fair value of current assets, net of cash acquired.. $ 2,069 Fair value of noncurrent assets..................... 1,762 Fair value of intangible assets..................... 3,658 Liabilities assumed................................. (1,996) Common stock issued at closing...................... (2,805) -------- Cash paid, net of cash acquired..................... $ 2,688 ======== 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis of the financial condition and results of operations of the Company should be read in conjunction with the Consolidated Financial Statements and Notes related thereto included elsewhere in this Form 10-Q. OVERVIEW OYO Geospace designs and manufactures instruments and equipment used in the acquisition and processing of seismic data for the oil and gas industry and for the commercial graphics industry worldwide. Demand for the Company's products used in the acquisition and processing of seismic data is dependent primarily upon the level of worldwide oil and gas exploration activity. That activity, in turn, is dependent primarily upon prevailing oil and gas prices. Historically, the markets for oil and gas have been volatile, and such markets are likely to continue to be volatile. In recent months, oil and gas prices have fallen sharply. This trend may indicate a moderation of the Company's sales in fiscal periods following June 30, 1998. However, as it is impossible to predict future oil and gas price movements with certainty, no assurance can be given as to the level of future demand for the Company's products. RESULTS OF OPERATIONS The following table sets forth for the three months and nine months ended June 30, 1998 and 1997, the percentage of certain statement of operations items to total sales: THREE MONTHS NINE MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------- --------------- 1998 1997 1998 1997 ----- ----- ----- ----- Sales .................................... 100.0% 100.0% 100.0% 100.0% Cost of sales ............................ 59.8 60.0 58.3 59.2 Gross profit ............................. 40.2 40.0 41.7 40.8 Selling, general and administrative ........................... 16.7 18.2 17.8 19.6 Research and development ................. 9.9 4.8 7.7 5.8 Income from operations ................... 13.6 17.0 16.2 15.4 Other income (expense), net .............. 0.8 (0.8) 0.9 (0.4) Income before provision for income taxes ............................. 14.4 16.2 17.1 15.0 Provision for income taxes ............... 4.4 6.1 6.0 5.7 Net income ............................... 10.0 10.1 11.1 9.4 FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997. Sales for the three months and nine months ended June 30, 1998 increased $6.0 million, or 48.4%, and $19.6 million, or 64.3%, from the corresponding periods of the prior year. The increase in sales was, in part, attributable to filling orders from the strong demand of the previous quarter and sales generated by Concord Technologies, Inc. ("Concord"), which the Company acquired on February 3, 1998. The Company expects that sales of its seismic products will return to more moderate levels in the fourth quarter. Cost of sales for the three months and nine months ended June 30, 1998 increased $3.6 million, or 48.0%, and $11.1 million, or 61.8%, from the corresponding periods of the prior year. Cost of sales decreased as a percentage of total sales to 59.8% and 58.3% in the three months and nine months ended June 30, 1998 from 60.0% and 59.2% in the corresponding periods of the prior year. This percentage decrease was generally attributable to increased efficiencies as a result of the higher sales volume during the three months and nine months ended June 30, 1998. Should sales return to more moderate levels in future quarters, the Company could experience lower gross profit margins. 10
Selling, general and administrative expenses for the three months and nine months ended June 30, 1998 increased $0.8 million, or 36.3%, and $3.0 million, or 49.7%, from the corresponding period of the prior year, primarily attributable to increased administrative expenses necessary to support higher sales and the acquisition of Concord. Selling, general and administrative expenses decreased as a percentage of total sales to 16.7% and 17.8% in the three months and nine months ended June 30, 1998 from 18.2% and 19.6% in the corresponding periods of the prior year, principally reflecting the impact of higher sales volume and the leveraging of certain fixed expenses. Research and development expenses for the three months and nine months ended June 30, 1998 increased $1.2 million, or 206.5%, and $2.1, million or 117.5%, from the corresponding periods of the prior year. Research and development expenses increased as a percentage of total sales to 9.9% and 7.7% in the three months and nine months ended June 30, 1998 from 4.8% and 5.8% in the corresponding periods of the prior year, principally resulting from an increase in expenditures targeted at new product development. Other income (expense), net increased as a percentage of total sales to 0.8% and 0.9% in the three months and nine months ended June 30, 1998 from (0.8)% and (0.4)% in the corresponding periods of the prior year. This increase was primarily attributable to a decrease in interest expense as a result of the Company using a portion of the net proceeds of the Offering to repay outstanding indebtedness and interest income earned on the temporary investment of the remainder of such proceeds. The Company's effective tax rate for the three months and nine months ended June 30, 1998 was 30.7% and 35.0% compared to 37.7% in each of the corresponding periods of the prior year. The decrease in the Company's effective tax rate is principally the result of the implementation of certain tax strategies during the three months ended June 30, 1998 designed to reduce the Company's domestic and foreign income tax expense. The larger rate reduction for the three months ended June 30, 1998 results from the cumulative adjustment required to reflect the expected annualized tax rate. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1998, the Company had $2.9 million in cash and cash equivalents. For the nine months ended June 30, 1998, cash used in operating activities was $0.8 million principally resulting from increases in accounts receivable and inventories offset by net income and an increase in accounts payable. The increases in the Company's working capital accounts are a result of continued growth in the demand for the Company's products. For the nine months ended June 30, 1998, the Company used approximately $11.9 million in investing activities, consisting of capital expenditures of $9.4 million and a business acquisition of approximately $2.7 million, net of cash acquired. The Company estimates that its capital expenditures in fiscal 1998 will be $12.0 million, including $4.0 million for the construction of an additional manufacturing facility, $1.8 million for additional rental equipment, and $1.5 million for the purchase of new office space. Financing activities for the nine months ended June 30, 1998 generated $13.2 million of cash, principally resulting from the net proceeds from the Company's initial public offering totaling $14.6 million. A portion of these proceeds were used to repay outstanding bank borrowings of $2.4 million. Prior to the Offering, the Company relied on various intercompany arrangements with OYO U.S.A. for its financing requirements. Following the Offering, OYO U.S.A. and its affiliates are no longer guaranteeing any indebtedness for the Company's benefit. The Company obtained a working capital line of credit in June 1998, under which the Company is able to borrow up to $10.0 million. The Credit Agreement expires in June 2000 and is collateralized by the Company's accounts receivable and inventory. The Credit Agreement prohibits the payment of cash dividends on the Company's common stock, limits capital expenditures, limits additional indebtedness to $7.5 million, requires the maintenance of certain financial amounts and contains other covenants customary in transactions of this type. There were no borrowings outstanding at June 30, 1998 under the Credit Agreement, and the borrowing base under the Credit Agreement was $10.0 million. 11
The Company obtained a $1.0 million mortgage loan in June 1998 secured by the Company's corporate office facility. The Company purchased this facility in December 1997 for $1.5 million in cash including renovations. The Company is considering the mortgage of additional facilities. However, there can be no assurance that the Company will be successful in obtaining such loans or that such loans will be available to the Company on terms the Company considers reasonable The Company believes that the combination of cash flow from operations, borrowing availability under the Credit Agreement and the net proceeds from the Offering should provide the Company with sufficient capital resources and liquidity to fund its operations through fiscal 1999 and support its acquisition and expansion program. However, there can be no assurance that such sources of capital will be sufficient to support an acquisition and expansion program through fiscal 1999 or in the long-term or otherwise support the Company's capital requirements, and the Company may be required to issue additional debt or equity securities in the future to meet its capital requirements. Inflation has not had a significant impact on the Company's operations to date. ACQUISITION On February 3, 1998, the Company acquired 100% of the outstanding common stock of Concord as well as certain intellectual property related to the business of Concord, for a purchase price of $6.4 million, consisting of cash payments totaling $3.6 million (including acquisition related costs of $0.1 million) and the issuance of 159,120 shares of the Company's common stock valued at approximately $2.8 million. The purchase price was determined through arm's-length negotiations with Mr. Cole, who had no prior relationship to the Company or any of its affiliates or directors, officers or associates thereof. Concord, located in Houston, Texas, designs and manufactures equipment used in connection with deepwater marine seismic surveys. The Company is continuing the business of Concord, including the continued devotion of its plant and other assets to its business. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. It requires (a) classification of the components of other comprehensive income by their nature in a financial statement and (b) the display of the accumulated balance of the other comprehensive income separate from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS 130 is effective for years beginning after December 15, 1997 and is not expected to have a material impact on the Company's financial statements. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997 and is not expected to have a material impact on the Company's financial statements. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits" ("SFAS 132). SFAS 132 standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable. It also requires additional information on changes in the benefit obligations and fair values of plan assets. SFAS 132 is effective for years beginning after December 15, 1997 and is not expected to have a material impact on the Company's financial statements. 12
YEAR 2000 ISSUES The "Year 2000 problem" is the result of computer programs being written using two digits rather than four to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations in affected computer and operational systems. The Company has initiated a program of upgrading its internal accounting and manufacturing software to make that software more efficient and compatible Company-wide (the "Upgrade"). In connection with the Upgrade, all of the Company's internal accounting and manufacturing software will become Year 2000 compliant. The Company expects that the Upgrade will be complete by the end of fiscal 1998. The Company has been informed by the suppliers of substantially all of the Company's software that all of those suppliers' software that will be used by the Company following the Upgrade is Year 2000 compliant. The software from these suppliers is used for financial and manufacturing purposes. However, there can be no assurances that Year 2000 problems will not occur with respect to the Company's computer systems. Further, the Company is in the process of reviewing the operational computers built into its manufacturing equipment to determine whether or not that equipment may be effected by the Year 2000 problem. The Company does not expect that it will incur material expenditures in discovering and addressing any Year 2000 problems it may have. However, the Year 2000 problem may impact customers, suppliers, shippers and other entities with which the Company transacts business, and the Company cannot predict the effect of the Year 2000 problem on those entities or how those entities' Year 2000 problems may indirectly effect the Company. FORWARD LOOKING STATEMENTS This Form 10-Q includes "forward-looking" statements which are subject to the "Safe Harbor" provisions of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included herein, including statements about potential future products and markets, the Company's future financial position, business strategy and other plans and objectives for future operations, are forward-looking statements. Although the Company believes the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct, and actual results may differ materially from such forward-looking statements. Additional important factors that could cause actual results to differ materially from the Company's expectations are disclosed in the Company's Registration Statement on Form S-1 (Reg. No. 333-36727), filed with the Securities and Exchange Commission, under the heading "Risk Factors" and elsewhere. Further, all written and verbal forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by such factors. 13
PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (d) The Company completed an initial public offering (the "Offering") of its common stock, par value $.01 per share ("Common Stock") pursuant to a Registration Statement on Form S-1 (Registration No. 333-36727) (the "Registration Statement"), which was declared effective by the Securities and Exchange Commission at 11:00 a.m. Eastern Standard Time on November 20, 1997. The net proceeds of the Offering to the Company were approximately $14.6 million. From the effective date of the Registration Statement through June 30, 1998, the Company used a portion of the net proceeds of the Offering to repay $4.9 million of outstanding indebtedness, including $1.5 million of which was outstanding as of September 30, 1997. The Company incurred additional indebtedness of $2.5 million from October 1, 1997 to November 26, 1997, which resulted from the Company's growing working capital needs, primarily to fund increases in accounts receivable and inventories resulting from increases in sales, as well as to pay fiscal 1997 accrued bonuses. The remaining indebtedness of $0.9 million was incurred by Concord prior to the acquisition. The Company used $3.6 million of the net proceeds of the Offering in connection with the acquisition of Concord. See "Acquisition" above. The remaining net proceeds of the Offering have been invested in working capital. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) The following exhibits are filed with this Quarterly Report. 10.1 Promissory Note, dated as of June 23, 1998, made by and between the Company and Ameritas Life Insurance Corp. 10.2 Business Loan Agreement, dated as of June 26, 1998, made by and between the Company and Bank of America. 10.3 Security Agreements, dated as of June 26, 1998, made by OYO Geospace Corporation and its Subsidiaries in favor of Bank of America. 10.4 Business Loan Continuing Guaranty Agreements, dated as of June 26, 1998, made by OYO Geospace Corporation and its Subsidiaries in favor of Bank of America. 15.1 Awareness Letter of Independent Accountants 27.1 Financial Data Schedule (b) The Company did not file any reports on Form 8-K during the quarter for which this report is filed. 14
SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OYO GEOSPACE CORPORATION Date: August 3, 1998 By: /s/ Gary D. Owens Gary D. Owens, Chairman of the Board President and Chief Executive Officer (duly authorized officer) Date: August 3, 1998 By: /s/ Thomas T. McEntire Thomas T. McEntire Chief Financial Officer (principal financial officer) 15