================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended December 31, 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 Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 12750 SOUTH KIRKWOOD, SUITE 200 STAFFORD, TEXAS 77477 (Address of Principal Executive Offices) (281) 494-8282 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 5,494,689 shares of the Registrant's Common Stock outstanding as of the close of business on February 6, 1999. ================================================================================
TABLE OF CONTENTS Page Number ----- PART I. FINANCIAL INFORMATION 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 15 Item 6. Exhibits and Reports on Form 8-K 15 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 December 31, 1998, and the related consolidated statements of operations and cash flows for the three months ended December 31, 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 such an opinion. 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, 1998, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the year then ended (not presented herein) and, in our report dated November 17, 1998, 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, 1998, 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 January 25, 1999 3
OYO GEOSPACE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) <TABLE> <CAPTION> ASSETS DECEMBER 31, 1998 SEPTEMBER 30, 1998 ------------------ ------------------- (unaudited) <S> <C> <C> Current assets: Cash and cash equivalents.............................. $ 2,153 $ 3,970 Trade accounts and notes receivable, net............... 10,504 11,946 Inventories............................................ 22,687 19,660 Deferred income tax.................................... 2,183 1,827 Prepaid expenses and other............................. 348 783 ------- ------- Total current assets................................ 37,875 38,186 Rental equipment, net.................................... 2,178 2,615 Property, plant and equipment, net....................... 19,511 16,763 Goodwill and other intangible assets, net................ 5,701 4,510 Deferred income tax...................................... 999 818 Other assets............................................. 505 396 ------- ------- Total assets........................................ $66,769 $63,288 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt and notes payable.... $ 175 $ 38 Accounts payable....................................... 6,391 5,516 Accrued expenses and other............................. 2,883 5,276 Income tax payable..................................... 486 506 ------- ------- Total current liabilities........................... 9,935 11,336 Long-term debt........................................... 4,809 956 Deferred income tax...................................... 1,823 1,613 ------- ------- Total liabilities................................... 16,567 13,905 ------- ------- Commitments and contingencies............................ - - Stockholders' equity: Preferred stock........................................ - - Common stock........................................... 55 54 Additional paid-in capital............................. 29,865 29,280 Retained earnings...................................... 22,343 22,228 Accumulated other comprehensive income................. (541) (509) Unearned compensation-restricted stock awards.......... (1,520) (1,670) ------- ------- Total stockholders' equity.......................... 50,202 49,383 ------- ------- Total liabilities and stockholders' equity.......... $66,769 $63,288 ======= ======= </TABLE> 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 THREE MONTHS ENDED ENDED DECEMBER 31, 1998 DECEMBER 31, 1997 ------------------ ------------------ <S> <C> <C> Sales........................................... $ 11,076 $ 12,535 Cost of sales................................... 6,752 7,527 ---------- ---------- Gross profit.................................... 4,324 5,008 Operating expenses: Selling, general and administrative........... 2,515 2,655 Research and development...................... 1,658 857 ---------- ---------- Total operating expenses................... 4,173 3,512 ---------- ---------- Income from operations.......................... 151 1,496 Other income (expense): Interest expense.............................. (51) (22) Interest income............................... 30 75 Other, net.................................... 47 21 ---------- ---------- Total other income, net.................... 26 74 ---------- ---------- Income before provision for income taxes........ 177 1,570 Provision for income taxes...................... 62 597 ---------- ---------- Net income...................................... $ 115 $ 973 ========== ========== Basic and diluted earnings per share............ $ 0.02 $ 0.22 ========== ========== Weighted average shares outstanding - Basic..... 5,338,096 4,423,913 Weighted average shares outstanding - Diluted... 5,420,402 4,446,150 </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> THREE MONTHS THREE MONTHS ENDED ENDED DECEMBER 31, 1998 DECEMBER 31, 1997 ------------------ ------------------ <S> <C> <C> Cash flows from operating expenses: Net income.................................................. $ 115 $ 973 Adjustments to reconcile net income to net cash used in operating activities: Deferred income tax....................................... (327) (71) Depreciation and amortization............................. 905 469 Amortization of restricted stock awards................... 150 20 Bad debt expense (recovery)............................... 323 (22) Effects of changes in operating assets and liabilities: Trade accounts and notes receivable..................... 2,100 (2,700) Inventories............................................. (1,667) (1,247) Prepaid expenses and other assets....................... 24 (186) Accounts payable........................................ (352) 1,562 Accrued expenses and other.............................. (2,783) (339) Income tax payable...................................... (20) 371 ------- ------- Net cash used in operating activities................... (1,532) (1,170) ------- ------- Cash flows from investing activities: Capital expenditures........................................ (1,827) (2,903) Purchase of business........................................ (1,000) -- Proceeds from sale of equipment............................. 317 -- ------- ------- Net cash used in investing activities................... (2,510) (2,903) ------- ------- Cash flows from financing activities: Net proceeds from initial public offering................... -- 14,643 Increase in notes payable................................... 8,000 -- Decrease in notes payable................................... (5,774) (1,500) ------- ------- Net cash provided by financing activities............... 2,226 13,143 ------- ------- Effect of exchange rate changes on cash...................... (1) (57) ------- ------- (Decrease) increase in cash and cash equivalents............. (1,817) 9,013 Cash and cash equivalents, beginning of period............... 3,970 2,488 ------- ------- Cash and cash equivalents, end of period..................... $ 2,153 $11,501 ======= ======= </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, 1998, has been derived from the Company's audited consolidated financial statements at that date. The consolidated balance sheet at December 31, 1998, and the consolidated statements of operations and cash flows for the three months ended December 31, 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 ended December 31, 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 Annual Report on Form 10-K for the year ended September 30, 1998. 2. EARNINGS PER COMMON SHARE The following table summarizes the calculation of net earnings and weighted average common shares and common equivalent shares outstanding for purposes of the computation of earnings per share: <TABLE> <CAPTION> THREE MONTHS ENDED ------------------------------------- DECEMBER 31, 1998 DECEMBER 31, 1997 ----------------- ----------------- <S> <C> <C> Net earnings available to common stockholders (in thousands) $ 115 $ 973 ========== ========== Weighted average common shares outstanding 5,338,096 4,423,913 Weighted average common share equivalents outstanding 82,306 22,237 ---------- ---------- Weighted average common shares and common share equivalents outstanding 5,420,402 4,446,150 ========== ========== Basic earnings per common share $ 0.02 $ 0.22 ========== ========== Diluted earnings per common share $ 0.02 $ 0.22 ========== ========== </TABLE> 3. COMPREHENSIVE INCOME Effective October 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income and its components in a full set of financial statements. Comprehensive income includes all changes in a company's equity, except those resulting from investments by and distributions to owners. The following table summarizes the components of comprehensive income (in thousands): 7
OYO GEOSPACE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) THREE MONTHS ENDED --------------------------------------- DECEMBER 31, 1998 DECEMBER 31, 1997 ------------------ ------------------ Net income $ 115 $ 973 Foreign currency translation adjustments (32) (180) ---- ---- Total comprehensive income $ 83 $ 793 ==== ==== 4. INVENTORIES Inventories consisted of the following (in thousands): December 31, 1998 September 30, 1998 ----------------- ------------------ Finished goods $ 3,620 $ 3,282 Work in process 3,745 3,686 Raw materials 15,322 12,692 ------- ------- $22,687 $19,660 ======= ======= 5. LONG-TERM DEBT In December 1998, the Company borrowed $3.5 million under the terms of a fifteen year amortizing mortgage loan collateralized by one of the Company's manufacturing facilities. The mortgage loan bears interest at a fixed rate of 7.0% per annum. 6. ACQUISITION On November 30, 1998, the Company acquired certain assets of LTI, Inc. and its Canadian subsidiary (together, "LTI") for approximately $3.8 million, including the assumption of approximately $1.9 million of long-term debt. In connection with the acquisition, the Company issued 55,659 shares of its common stock valued at $0.6 million. As of December 31, 1998, the Company had paid approximately $2.7 million of cash in connection with the acquisition including the repayment of $1.7 million of long-term debt. A final cash payment is to be made in February 1999 upon final determination of the value of the assets acquired and liabilities assumed. The operations of LTI include the design and manufacture of land and marine seismic connectors, which have been combined with the Company's existing seismic connector manufacturing operations. The allocation of the purchase price as of December 31, 1998, including related direct costs, for the acquisition of LTI's net assets and assumption of related debt, was as follows (in thousands): 8
Net current assets.............................. $ 1,291 Property, plant and equipment................... 1,309 Goodwill........................................ 1,184 Long-term debt.................................. (1,896) ------- Total purchase price allocation................. 1,888 Consideration: Estimated liability for final cash settlement... 300 Common stock issued............................. 588 ------- Cash used for acquisition....................... $ 1,000 ======= Goodwill is being amortized using the straight-line method over fifteen years. 7. SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES During the three months ended December 31, 1998, the Company increased its common stock and additional paid-in capital by approximately $0.6 million through the issuance of common stock in connection with the acquisition of certain assets of LTI. 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 OYO Geospace Corporation should be read in conjunction with the Consolidated Financial Statements and Notes related thereto included elsewhere in this Form 10-Q. OVERVIEW We design and manufacture instruments and equipment used in the acquisition and processing of seismic data for the oil and gas industry and for the commercial graphics industry worldwide. Demand for our products used in the acquisition and processing of seismic data is dependent primarily upon the level of worldwide oil and gas exploration activity. That activity, in turn, is dependent primarily upon 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. Oil and gas prices have fallen sharply in recent quarters and continue to be depressed. This has resulted in a decline for our land-based seismic products. If commodity prices remain low in future periods, our sales may continue to decline. 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 our products. Further, the recent decline in oil and gas prices has resulted in decreased seismic exploration budgets throughout the industry. As a result, many of our customers are experiencing lower revenues and liquidity challenges. From time to time we extend credit to certain of our customers, and our credit risks increase when our customers face a difficult business environment. As discussed below under "Liquidity and Capital Resources" and "Forward Looking Statements- Credit Risks of Customer Financing", current industry conditions could result in additional bad debt expenses in future periods. The current industry environment has resulted in, and will continue to result in, competitive pricing pressures on our land-based seismic products. We intend to respond competitively to these market forces in order to maintain, or improve, our market share. In addition, the current industry environment has resulted in, and likely will continue to result in, a greater percentage of our sales being attributable to products that historically have provided lower gross margins. Further, as overall sales decrease, our manufacturing costs per unit increase as fixed costs are allocated over fewer units. The combination of these factors may result in lower gross profit margins in future periods. RESULTS OF OPERATIONS The following table sets forth for the three months ended December 31, 1998 and 1997, the percentage of certain statement of operations items to total sales: Three Months Ended December 31, ------------------------------ 1998 1997 ---------- --------- Sales............................................ 100.0% 100.0% Cost of sales.................................... 61.0 60.0 Gross profit..................................... 39.0 40.0 Selling, general and administrative.............. 22.7 21.2 Research and development......................... 15.0 6.8 Income from operations........................... 1.4 11.9 Other income (expense), net...................... 0.2 0.6 Income before provision for income taxes......... 1.6 12.5 Provision for income taxes....................... 0.6 4.8 Net income....................................... 1.0 7.8 Fiscal Year 1999 Compared to Fiscal Year 1998. Sales for the three months ended December 31, 1998 decreased $1.5 million, or 11.6%, from the corresponding period of the prior year. The decrease in sales was primarily due to a decline in product demand and competitive 10
pricing pressures associated with our land-based seismic products, principally resulting from the decline in worldwide oil and gas exploration activity. Cost of sales for the three months ended December 31, 1998 decreased $0.8 million, or 10.3%, from the corresponding period of the prior year. Cost of sales increased as a percentage of total sales to 61.0% in the three months ended December 31, 1998 from 60.0% in the corresponding period of the prior year. This percentage increase was generally attributable to decreased manufacturing efficiencies as a result of the lower sales volume and competitive pricing pressures associated with our land-based seismic products during the three months ended December 31, 1998. This percentage increase was partially offset by higher gross profit margins on our marine products sold by Concord Technologies, Inc., which we acquired in February 1998. Should sales continue to decline in future quarters, we could experience lower gross profit margins. Selling, general and administrative expenses for the three months ended December 31, 1998 remained fairly constant, decreasing $0.1 million, or 5.3%, from the corresponding period of the prior year. Selling, general and administrative expenses increased as a percentage of total sales to 22.7% in the three months ended December 31, 1998 from 21.2% in the corresponding period of the prior year, primarily reflecting the impact of fixed operating expenses over a decline in sales. Research and development expenses for the three months ended December 31, 1998 increased $0.8 million or 93.5%, from the corresponding period of the prior year, principally resulting from an increase in expenditures targeted at new product development. Research and development expenses increased as a percentage of total sales to 15.0% in the three months ended December 31, 1998 from 6.8% in the corresponding period of the prior year, reflecting both an increase in expenditures along with a decline in sales. Our effective tax rate for the three months ended December 31, 1998 was 35.0% compared to 38.0% in the corresponding period of the prior year. The decrease in the effective tax rate is principally the result of the implementation of certain tax strategies during fiscal year 1998 designed to reduce domestic and foreign income tax expense. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1998, we had $2.2 million in cash and cash equivalents. For the three months ended December 31, 1998, cash used in operating activities was $1.5 million principally resulting from an increase in inventories and from a decrease in accrued expenses primarily attributable to the payment of fiscal 1998 incentive compensation. These uses of cash were offset by a decrease in trade accounts and notes receivable. For the three months ended December 31, 1998, we used approximately $2.5 million in investing activities, including $1.8 million in capital expenditures and $1.0 million associated with the acquisition of certain assets of LTI, Inc. and its Canadian subsidiary (together, "LTI"). We estimate that total capital expenditures in fiscal 1999 will be $5.0 million. Financing activities for the three months ended December 31, 1998 provided $2.2 million of cash, principally resulting from a $3.5 million increase in long-term mortgage notes payable offset by the repayment of $1.7 million of long-term debt assumed in connection with the LTI asset acquisition and net borrowings under our credit facility. The recent decline in oil and gas prices has increased our credit risks as our customers face a difficult business environment. At December 31, 1998, we had an outstanding receivable form one customer in the amount of approximately $768,000 that was over 120 days old and an outstanding receivable from another customer in the amount of approximately $319,000 that was over 90 days old. In the three months ended December 31, 1998, we increased our bad debt reserve by approximately $299,000 to $802,000. Although we believe this reserve is a fair representation of our credit risk with respect to outstanding receivables, we can not assure you that this reserve will be adequate to cover our potential bad debt expenses. In addition, current industry conditions could result in additional bad debt expenses in future periods. We have a working capital line of credit, under which we are able to borrow up to $10.0 million. This credit facility expires in June 2000 and is collateralized by our accounts receivable and inventory. The credit facility 11
prohibits us from paying cash dividends on our common stock, limits our capital expenditures, limits our additional indebtedness to $7.5 million, requires us to maintain certain financial ratios and contains other covenants customary in transactions of this type. There was $0.5 million outstanding at December 31, 1998 under the credit facility, leaving borrowing availability at $9.5 million. We obtained a $3.5 million mortgage loan in December 1998 collateralized by one of our manufacturing facilities. This mortgage loan bears interest at 7.0% per annum and matures in December 2013. We believe that the combination of cash flow from operations and borrowing availability under our credit facility should provide us with sufficient capital resources and liquidity to fund our planned operations through fiscal 1999. However, there can be no assurance that these sources of capital will be sufficient to support our capital requirements through fiscal 1999 or in the long-term, and we may be required to issue additional debt or equity securities in the future to meet our capital requirements. Inflation has not had a significant impact on our operations to date. ACQUISITION On November 30, 1998, we acquired substantially all of the assets of LTI for approximately $3.8 million including the assumption of approximately $1.9 million of long-term debt. In connection with that acquisition, we issued 55,659 shares of our common stock valued at $0.6 million. As of December 31, 1998, we have paid approximately $2.7 million of cash in connection with the acquisition including the repayment of $1.7 million of long-term debt. A final cash payment is to be made in February 1999 upon final determination of the value of the assets acquired and liabilities assumed. The operations of LTI include the design and manufacture of land and marine seismic connectors, which have been combined with our existing seismic connector manufacturing operations. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999 and is not expected to have a material impact on the Company's financial statements. 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. State of Readiness. We have substantially completed a program of upgrading our internal accounting software (information technology systems) to make those systems more efficient and compatible company-wide (the "Upgrade"). The suppliers of substantially all of the software we use for financial purposes following the Upgrade have informed us that all of those suppliers' software is Year 2000 compliant. Further, we are in the process of reviewing the operational computers built into certain of our manufacturing equipment, such as milling machines and lathes (non-information technology), to determine whether or not that equipment may be effected by the Year 2000 problem. We have received assurances from the manufacturers of most of this equipment that its operation will not be effected by the Year 2000. We expect this review will be completed before the end of fiscal 1999. 12
We have begun soliciting suppliers and vendors with whom we have a material relationship to determine the readiness of those suppliers and vendors for the Year 2000. Most, but not all, of those vendors have responded and indicated that they do not expect to be materially adversely impacted by Year 2000 problems. Expected Costs and Material Risks. Through December 31, 1998, we have incurred approximately $50,000 in direct expenses related to investigating our Year 2000 readiness and Year 2000 problems. We do not maintain a record of internal costs of our personnel in investigating Year 2000 issues. We do not expect that we will incur material additional expenditures in discovering and addressing any Year 2000 problems we may have. However, our review of certain of our manufacturing equipment is ongoing and could result in unexpected expense to repair Year 2000 problems or upgrade machinery. In addition, the Year 2000 problem may impact customers, suppliers, shippers and other entities with which we transact business, and we cannot predict the effect of the Year 2000 problem on those entities or how those entities' Year 2000 problems may indirectly effect us. Further, our customers use our seismic products in conjunction with data acquisition systems not manufactured by us. If those systems were to have Year 2000 problems, it is possible that some of our customers would be temporarily unable to engage in seismic data acquisition, which could result in a decrease in demand for our products. THE FOREGOING STATEMENTS ARE INTENDED TO BE AND ARE HEREBY DESIGNATED "YEAR 2000 READINESS DISCLOSURE" WITHIN THE MEANING OF THE YEAR 2000 INFORMATION AND READINESS ACT. FORWARD LOOKING STATEMENTS 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, our future financial position, business strategy and other plans and objectives for future operations, are forward- looking statements. Although we believe the expectations reflected in such forward-looking statements are reasonable, we 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 our expectations are disclosed in our Annual Report on Form 10-K for the year ended September 30, 1998. Further, all written and verbal forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by such factors. VOLATILITY OF DEMAND FOR OUR PRODUCTS; CURRENT INDUSTRY CONDITIONS Demand for our products depends primarily on the level of worldwide oil and gas exploration activity. That activity, in turn, depends primarily on prevailing oil and gas prices. Historically, the markets for oil and gas have been volatile, and those markets are likely to continue to be volatile. Oil and gas prices are subject to wide fluctuation in response to relatively minor changes in the supply of and demand for oil and gas, market uncertainty and a variety of additional factors that are beyond our control. These factors include the level of consumer demand, weather conditions, domestic and foreign governmental regulations, the price and availability of alternative fuels, political conditions in the Middle East and other significant oil-producing regions, the foreign supply of oil and gas, the price of foreign imports and overall economic conditions. Currently, oil and gas prices are significantly lower than they have been in recent history, which has decreased demand for our products. Continued low demand for our products could materially and adversely affect our results of operations and liquidity. 13
CREDIT RISKS OF CUSTOMER FINANCING We have in the past incurred significant write-offs in our accounts receivables due to customer credit problems. We are subject to credit risks as to certain of our customers, as we have found it necessary from time to time to extend trade credit to long-term customers and others where some risks of nonpayment or late payment exist. Given current industry conditions, some of our customers may experience liquidity difficulties, which increases those credit risks. We cannot assure you that sufficient aggregate amounts of uncollectible receivables and bad debt write-offs will not have a material adverse effect on our future results of operations. LIMITED MARKET AND CUSTOMER CONCENTRATION We market our products to seismic contractors and large, independent and government-owned oil and gas companies. We estimate, based on published industry sources, that fewer than 100 seismic contracting companies are currently operating worldwide (excluding those operating in Russia and the former Soviet Union, India, the People's Republic of China and certain Eastern European countries, where seismic data acquisition activity is difficult to verify). Due to these market factors, a relatively small number of customers has accounted for most of our sales. The loss of a small number of these customers could materially and adversely impact our sales. RAPID TECHNOLOGICAL EVOLUTION AND PRODUCT OBSOLESCENCE Seismic instruments and equipment are constantly undergoing rapid technological improvement. Our future success depends on our ability to continue to: . improve our existing product lines; . address the increasingly sophisticated needs of our customers; . maintain a reputation for technological leadership; . maintain market acceptance; . anticipate changes in technology and industry standards; and . respond to technological developments on a timely basis. Current competitors or new market entrants may develop new technologies, products or standards that could render our products obsolete. We cannot assure you that we will be successful in developing and marketing, on a timely and cost effective basis, product enhancements or new products that respond to technological developments, that are accepted in the marketplace or that comply with industry standards. HIGHLY COMPETITIVE MARKETS The markets for our products are highly competitive. Many of our existing and potential competitors have substantially greater marketing, financial and technical resources than we do. Additionally, one of our competitors currently offers a broader range of seismic instruments and equipment for sale and markets this equipment as a "packaged" data acquisition system. We do not now offer for sale such a complete "packaged" data acquisition system. Further, certain of our competitors offer financing arrangements to customers on terms that we may not be able to match. In addition, new competitors may enter the market and competition could intensify. We cannot assure you that sales of our products will continue at current volumes or prices if current competitors or new market entrants introduce new products with better features, performance, price or other characteristics than our products. Competitive pressures or other factors also may result in significant price competition that could have a material adverse effect on our results of operations. 14
PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On November 30, 1998, we issued an aggregate of 55,659 shares of our common stock, par value $.01 per share, to LTI in connection with our acquisition of certain assets of LTI. The issuance was exempt under Section 4(2) of the Securities Act of 1933. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) The following exhibits are filed with this Quarterly Report. 2.1 Asset Purchase Agreement, dated November 17, 1998, as amended November 30, 1998, regarding the acquisition of assets of LTI. 4.1 Promissory Note, dated as of December 30, 1998, made by and between the Company and Jefferson-Pilot Life Insurance Company. (This Instrument is not filed in reliance on Item 601 (b)(4)(iii)(A) of Regulation S-K. The Registrant agrees to furnish a copy of this agreement to the Commission upon request). 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. 15
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: February 3, 1998 By: /s/ Gary D. Owens --------------------------------- Gary D. Owens, Chairman of the Board President and Chief Executive Officer (duly authorized officer) Date: February 3, 1998 By: /s/ Thomas T. McEntire --------------------------------- Thomas T. McEntire Chief Financial Officer (principal financial officer) 16