ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Companys financial statements and notes thereto
included elsewhere in this Form 10-Q.
Forward Looking Statements
Statements other than statements of historical fact included in this Form 10-Q that relate to forecasts, estimates or
other expectations regarding future events, including without limitation, statements under Managements Discussion and Analysis of Financial Condition and Results of Operations regarding technological advancements and our financial
position, business strategy and plans and objectives of our management for future operations, may be deemed to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. When used in this Form 10-Q, words such as anticipate, believe, estimate, expect, intend, and similar expressions, as they relate to us or our management, identify
forward-looking statements. Such forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to management. Actual results could differ materially from those contemplated
by the forward-looking statements as a result of certain factors, including but not limited to the volatility of oil and natural gas prices, dependence upon energy industry spending, disruptions in the global economy, industry competition, delays,
reductions or cancellations of service contracts, high fixed costs of operations, external factors affecting our crews such as weather interruptions and inability to obtain land access rights of way, reduced utilization, whether we enter into
turnkey or term contracts, crew productivity, limited number of customers, credit risk related to our customers, the availability of capital resources and operational disruptions. A discussion of these factors, including risks and uncertainties, is
set forth under Risk Factors in our Annual Report on Form 10-K for the year ended September 30, 2012 and in our other reports filed from time to time with the Securities and Exchange Commission. These forward-looking statements
reflect our current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategies and liquidity. All subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph. We assume no obligation to update any such forward-looking statements.
Overview
We are a leading provider of onshore seismic data acquisition services in the lower 48 states of the
United States. During 2012, we entered the Canadian market by forming a new Canadian subsidiary. Substantially all of our revenues are derived from the seismic data acquisition services we provide to our clients, mainly domestic oil and natural
gas companies. Demand for our services depends upon the level of spending by these companies for exploration, production, development and field management activities, which depends, in part, on oil and natural gas prices. Significant fluctuations in
domestic oil and natural gas exploration activities and commodity prices have affected the demand for our services and our results of operations in years past, and such fluctuations continue to be the single most important factor affecting our
business and results of operations.
After a severe contraction in demand for our services beginning at the end of 2008 and
continuing into 2010 due to the global economic slowdown, we began to experience an increase in demand for our services, particularly in the oil and liquids-rich basins. Demand for our services continued to strengthen through fiscal 2011 and 2012.
In response to this demand increase, we redeployed three seismic data acquisition crews in fiscal 2010 and two seismic data acquisition crews in fiscal 2011, bringing our current crew count to fourteen crews. Our order book is currently at its
highest level since late fiscal 2008 in terms of client mix, size of projects and geographical diversity, and the majority of the projects are in oil and liquids-rich basins. Although our clients may cancel, delay or alter their service contracts on
short notice and we continue to remain subject to land access permit and weather delays, our current order book reflects commitment levels sufficient to maintain operation of fourteen crews well into fiscal 2013. The majority of our crews are
currently working in oil producing basins. However in recent years, we have experienced periods in which the services we provided were primarily to clients seeking natural gas.
While our revenues are mainly affected by the level of client demand for our services, our revenues are also affected by the pricing for
our services that we negotiate with our clients and the productivity and utilization level of our data acquisition crews. Factors impacting productivity and utilization levels include crew downtime related to inclement weather, delays in acquiring
land access permits, agricultural or hunting activity, holiday schedules, short winter days, crew repositioning or equipment failure, whether we enter into turnkey or term contracts with our clients, the number and size of crews and the number of
recording channels per crew. Consequently, our efforts to negotiate more favorable contract terms in our supplemental service agreements, to mitigate access permit delays and to improve overall crew productivity may contribute to growth in our
revenues. As demand for our services continues to be robust, we were able to negotiate more favorable contract terms during the second half of fiscal 2012 and during the first quarter of fiscal 2013.
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Currently, most of our client contracts are turnkey contracts. The percentage of revenues
derived from turnkey contracts has grown in the past few years from approximately half of our revenues in fiscal 2008 to in excess of three-quarters of our revenues in fiscal 2012. While turnkey contracts allow us to capitalize on improved crew
productivity, we also bear more risks related to weather and crew downtime. We expect the percentage of turnkey contracts to remain high as we continue to expand our operations in the mid-continent, western and southwestern regions of the United
States in which turnkey contracts are more common. However, in the first quarter of fiscal 2013 we have observed an increase in inquiries and requests for term contracts.
Over time, we have experienced continued increases in recording channel capacity on a per crew or project basis. This increase in channel count demand is driven by client needs and is necessary in order
to produce higher resolution images, increase crew efficiencies and undertake larger scale projects. Due to the increase in demand for higher channel counts, we have continued our investments in additional channels. In response to project-based
channel requirements, we routinely deploy a variable number of channels on a variable number of crews in an effort to maximize asset utilization and meet client needs. We believe we will realize the benefit of increased channel counts and
flexibility of deployment through increased crew efficiencies, higher revenues and margins.
Reimbursable third-party charges
related to our use of helicopter support services, specialized survey technologies and dynamite energy sources in areas with limited access are another important factor affecting our results. During fiscal 2011, the level of these third-party
charges as a percentage of revenue was especially high, approaching 50% of revenue, mainly as a result of our continued operations in areas with limited access in the eastern United States. However, revenues associated with third-party charges
declined as a percentage of revenue during fiscal 2012 and in the first quarter of fiscal 2013 as a result of such third-party charges falling at or below our historical average. We expect that as we continue to expand our operations in the more
open terrain of the mid-continent, western and southwestern regions of the United States, the level of these third-party charges will continue to be generally within or below our historical range of 25% to 35% of revenue.
During fiscal 2012 and to date in fiscal 2013, we purchased or leased a significant number of cable-less recording channels. We have
utilized this equipment as primarily stand-alone recording systems but on occasion in conjunction with our cable-based systems. As a result of the introduction of cable-less recording systems, we have realized increased crew efficiencies and
increased revenue on projects using this equipment. We believe we will experience continued demand for cable-less recording systems in the future. As we have replaced cable-based recording equipment with cable-less equipment on certain crews, the
cable-based recording equipment continues to be redeployed on existing crews. Of the fourteen crews currently in operation, six use the cable-less GSR recording systems, six use ARAM cable-based recording systems, and two use I/O RSR recording
systems.
During 2012, we entered into the Canadian market. This market is highly seasonal and operates primarily from late
November through March, depending upon weather conditions. We have mobilized one data acquisition crew in Canada in late January for the 20122013 winter season, and do not expect these operations to have a significant impact on our fiscal 2013
financial results.
While the markets for oil and natural gas have been very volatile and are likely to continue to be so in
the future, and we can make no assurances as to future levels of domestic exploration or commodity prices, we believe opportunities exist for us to enhance our market position by responding to our clients continuing desire for higher
resolution subsurface images. If economic conditions were to weaken, our customers reduce their capital expenditures or there is a significant sustained drop in oil and natural gas prices, it would result in diminished demand for our seismic
services, could cause downward pressure on the prices we charge and would affect our results of operations.
First Quarter Fiscal 2013
Highlights
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EBITDA for the quarter-ended December 31, 2012 increased to $14,338,000 compared to $11,028,000 for the same period of fiscal 2012, an increase of
30 percent;
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Income from operations for the quarter-ended December 31, 2012 increased to $5,194,000 compared to $3,226,000 for the quarter-ended
December 31, 2011, an increase of 61 percent;
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Net income for the quarter-ended December 31, 2012 was $2,928,000, or $0.36 per share attributable to common stock, compared to $3,231,000, or
$0.41 per share attributable to common stock, for the same period of fiscal 2012, which included the effect of an $0.18 per share one-time tax benefit recognized in the December 31, 2011 quarter related to a merger agreement terminated in
calendar 2011; excluding the impact of that one-time benefit, year-over-year net income and earnings per share increased;
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Reported revenues of $76,629,000 for the quarter-ended December 31, 2012 compared to $92,382,000 for the same period of fiscal 2012;
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Revenues net of third-party reimbursable charges increased 11 percent in the first fiscal quarter of 2013 compared to the first fiscal quarter of 2012;
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Maintained order book capable of sustaining fourteen data acquisition crews well into calendar 2013;
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Replaced an I/O RSR recording system on an existing crew with the purchase of 12,000 Geospace GSX single-channel cable-less units;
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Replaced a set of vibrator energy source units on an existing crew with the purchase of ten INOVA AHV IV vibrator energy source units;
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Purchased 2,500 channels of the Wireless Seismic RT System 2 recording system in January 2013 and deployed on a small crew in the mid-continent region
of the United States;
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Balanced portfolio of projects in the Eagle Ford Shale, Bakken Shale, Marcellus Shale, Mississippi Lime of Kansas and Oklahoma and the Permian Basin
including the Cline Shale, Avalon Shale, Bone Spring and Wolfcamp areas;
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Approximately $52 million of working capital at December 31, 2012; and
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Mobilized first crew in Canada in late January 2013.
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Results of Operations
Operating Revenues
. Our
operating revenues for the first three months of fiscal 2013 decreased 17% to $76,629,000 from $92,382,000 in the first three months of fiscal 2012. The revenue decrease in the quarter was primarily the result of a significant decrease in
third-party charges and is not indicative of declining operations. While third-party charges decreased significantly between the periods due to continued operations in the more wide open terrain of the Western United States, fee revenue net of
third-party charges in the first three months of fiscal 2013 increased 11% from the first three months of fiscal 2012. The increase in revenues net of third-party charges is a result of increased utilization, production and more favorable contract
terms between periods.
Operating Costs
. Operating expenses for the three months ended December 31, 2012
decreased 25% to $58,735,000 compared to $78,814,000 for the same period of fiscal 2012. The decrease for the three months ended December 31, 2012 compared to the three months ended December 31, 2011 was primarily due to the reduction of
reimbursed expenses during the period. Operating expenses excluding third-party charges increased by 4% for the three months ending December 31, 2012 compared to the three months ending December 31, 2011. The increase resulted primarily
from increased field personnel costs associated with higher utilization in fiscal 2013. As discussed above, reimbursed expenses have a similar impact on operating costs.
General and administrative expenses were 4.7% of revenues in the first three months of fiscal 2013 compared to 2.8% of revenues in the same period of fiscal 2012. The dollar amount of general and
administrative expenses increased to $3,596,000 during the first quarter of fiscal 2013 from $2,556,000 during the first quarter of fiscal 2012. The increase in expenses was primarily associated with the startup costs of our Canadian operation. In
addition, administrative costs also increased as employee costs rose to support our increased operating and marketing activity.
Depreciation for the three months ended December 31, 2012 totaled $9,104,000 compared to $7,786,000 for the three months ended
December 31, 2011. The increase in depreciation expense is the result of capital expenditures we made during fiscal 2012 and to-date in fiscal 2013. Our depreciation expense is expected to increase during fiscal 2013, reflecting our higher
capital expenditures during fiscal 2012 and in the quarter just ended.
Our total operating costs for the first three months
of fiscal 2013 were $71,435,000, a decrease of 20% from the first three months of fiscal 2012. The decrease in the first three months of fiscal 2013 was primarily due to the factors described above.
Taxes
. Income tax expense was $2,131,000 for the three months ended December 31, 2012 compared to income tax benefit of
$136,000 for the three months ended December 31, 2011. The effective tax rates for the three months ended December 31, 2012 and 2011 were approximately 42.1% and (4.4%), respectively. During the three months ended December 31,
2011, our effective tax rate was reduced significantly by the transaction costs related to our terminated merger agreement with TGC Industries, Inc. During fiscal 2011, these costs had been treated as permanent, non-deductible expenses. However,
these costs became fully tax deductible upon the mergers termination in October 2011 and were treated as a discrete event in the first quarter of fiscal 2012, which resulted in an income tax benefit. Our effective tax rates differ from the
statutory federal rate of 35% for certain items such as foreign operations, state and local taxes, non-deductible expenses, discrete items, expenses related to share-based compensation that were not expected to result in a tax deduction and changes
in reserves for uncertain tax positions.
Use of EBITDA (Non-GAAP measure)
We define EBITDA as net income plus interest expense, interest income, income taxes, depreciation and amortization expense. Our management
uses EBITDA as a supplemental financial measure to assess:
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the financial performance of our assets without regard to financing methods, capital structures, taxes or historical cost basis;
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our liquidity and operating performance over time in relation to other companies that own similar assets and that we believe calculate EBITDA in a
similar manner; and
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the ability of our assets to generate cash sufficient for us to pay potential interest costs.
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We also understand that such data are used by investors to assess our performance. However, the term EBITDA is not defined under
generally accepted accounting principles (GAAP), and EBITDA is not a measure of operating income, operating performance or liquidity presented in accordance with GAAP. When assessing our operating performance or liquidity, investors and
others should not consider this data in isolation or as a substitute for net income, cash flow from operating activities or other cash flow data calculated in accordance with GAAP. In addition, our EBITDA may not be comparable to EBITDA or similarly
titled measures utilized by other companies since such other companies may not calculate EBITDA in the same manner as us. Further, the results presented by EBITDA cannot be achieved without incurring the costs that the measure excludes: interest,
taxes, depreciation and amortization.
The reconciliation of our EBITDA to our net income and net cash provided (used) by
operating activities, which are the most directly comparable GAAP financial measures, are provided in the tables below:
Reconciliation of
EBITDA to Net Income
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Three Months Ended December 31,
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2012
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2011
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(in thousands)
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Net income
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$
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2,928
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$
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3,231
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Depreciation
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9,104
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7,786
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Interest expense (income), net
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175
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147
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Income tax expense (benefit)
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2,131
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(136
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)
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EBITDA
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$
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14,338
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$
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11,028
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Reconciliation of EBITDA to Net Cash Provided (Used) by Operating Activities
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Three Months Ended December 31,
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2012
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2011
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(in thousands)
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Net cash provided (used) by operating activities
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$
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9,014
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$
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(1,498
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)
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Changes in working capital and other items
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5,964
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13,087
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Noncash adjustments to income
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(640
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)
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(561
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EBITDA
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$
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14,338
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$
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11,028
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Liquidity and Capital Resources
Introduction.
Our principal sources of cash are amounts earned from the seismic data acquisition services we provide to our clients. Our principal uses of cash are the amounts used to provide these
services, including expenses related to our operations and acquiring new equipment. Accordingly, our cash position depends (as do our revenues) on the level of demand for our services. Historically, cash generated from our operations along with cash
reserves and borrowings from commercial banks have been sufficient to fund our working capital requirements and, to some extent, our capital expenditures.
Cash Flows.
Net cash provided by operating activities was $9,014,000 for the first three months of fiscal 2013 while the cash used by operating activities was $1,498,000 for the first three months
of fiscal 2012. Net cash provided by operating activities increased due to an overall improvement in operating margins between periods. In addition, our cash provided by operating activities was positively impacted by cash collected from prior
periods.
Net cash used by investing activities was $34,975,000 in the three months ended December 31, 2012 and
$9,481,000 in the three months ended December 31, 2011. The net cash used in investing activities in fiscal 2013 primarily represents capital expenditures of $29,507,000, net of non-cash capital expenditures and non-cash capital lease
obligations, made from excess cash reserves. Short-term
13
investments of $7,750,000 in certificates of deposit were also made from excess cash reserves. In addition, we reinvested the proceeds from the maturity of short-term investments in additional
certificates of deposit. In fiscal 2012, excess cash reserves were used to fund capital expenditures of $9,519,000.
Net cash
used by financing activities in the three months ended December 31, 2012 includes principal payments on our Term Note and Second Term Note of $2,147,000. In the three months ended December 31, 2011, financing activities included $1,740,000
in principal payments on our Term Note.
Capital Expenditures.
Our Board of Directors has approved a fiscal 2013
capital budget of $50,000,000. To date, $39,082,000 of the capital budget has been spent for the purchase of 12,000 GSX single-channel recording units, 900 GSR 4-channel recording units, 2,400 ARAM Aries channels, 2,500 channels of the Wireless
Seismic RT System 2, additional conventional geophones, vehicles to improve our fleet and ten INOVA vibrator energy source units. The remaining balance of the capital budget will be used for maintenance capital purposes. We believe these
expenditures will allow us to maintain our competitive position as we respond to client desire for higher resolution subsurface images.
We continually strive to supply our clients with technologically advanced 3-D seismic data acquisition recording systems and data processing capabilities. We maintain equipment in and out of service in
anticipation of increased future demand for our services.
Capital Resources.
Historically, we have primarily relied on
cash generated from operations, cash reserves and borrowings from commercial banks to fund our working capital requirements and, to some extent, our capital expenditures. Recently, we have funded some of our capital expenditures through equipment
term loans and capital leases. We have also funded our capital expenditures and other financing needs from time to time through public equity offerings.
Our revolving line of credit loan agreement is with Western National Bank. The agreement was renewed June 2, 2011 under the same terms as the previous agreement and permits us to borrow, repay and
reborrow, from time to time until June 2, 2013, up to $20.0 million based on the borrowing base calculation as defined in the agreement. Our obligations under this agreement are secured by a security interest in our accounts receivable,
equipment and related collateral. Interest on the facility accrues at an annual rate equal to either the 30-day LIBOR, plus two and one-quarter percent, or the Prime Rate, minus three-quarters percent, as we direct monthly, subject to an interest
rate floor of 4%. Interest on the outstanding amount under the loan agreement is payable monthly. The loan agreement contains customary covenants for credit facilities of this type, including limitations on disposition of assets, mergers and
reorganizations. We are also obligated to meet certain financial covenants under the loan agreement, including maintaining specified ratios with respect to cash flow coverage, current assets and liabilities and debt to tangible net worth. We were in
compliance with all covenants including specified ratios as of December 31, 2012 and January 31, 2013 and have the full line of credit available for borrowing. We have not utilized the revolving line of credit during the current fiscal
year or the fiscal years ended September 30, 2012 or 2011.
We amended our credit loan agreement with Western National
Bank on June 30, 2011 to add a Term Note provision, which provided $16,427,000 in financing for the purchase of Geospace Technologies GSR equipment. The Term Note is repayable over a period of 36 months at $485,444 per month plus any applicable
interest in excess of 4%. The Term Note bears interest at an annual rate equal to either the 30-day LIBOR, plus two and one-quarter percent, or the Prime Rate, minus three-quarters percent, as we direct monthly, subject to an interest rate floor of
4%, and otherwise has the same terms as our revolving line of credit. The Term Note is collateralized by a security interest in our accounts receivable, equipment and related collateral and matures with all outstanding balances due on June 30,
2014.
On May 11, 2012, we entered into a Second Term Note under our credit loan agreement with Western National Bank.
The Second Term Note allows us to borrow from time to time up to $15.0 million to purchase equipment. On July 5, 2012, we borrowed $9,346,000 under the Second Term Note to purchase Geospace Technologies GSR recording equipment. The outstanding
principal under the Second Term Note is amortized over 36 months. The Second Term Note bears interest at an annual rate equal to either the 30-day LIBOR, plus two and one-quarter percent, or the Prime Rate, minus three-quarters percent, as we direct
monthly, subject to an interest rate floor of 3.75%, and otherwise has the same terms as our revolving line of credit. The Second Term Note is collateralized by a security interest in our accounts receivable, equipment and related collateral and
matures with all outstanding balances due on May 2, 2015.
In the second quarter of fiscal 2012, we began leasing
vehicles from Enterprise Fleet Management under capital leases. These capital lease obligations are payable in 36 to 60 monthly installments and mature between December 2014 and November 2017. At December 31, 2012, we had leased 83 vehicles
under these capital leases.
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The following table summarizes payments due in specific periods related to our contractual
obligations with initial terms exceeding one year as of December 31, 2012.
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Payments Due by Period (in 000s)
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Contractual Obligations
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Total
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Within
1 Year
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1-2
Years
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3-5
Years
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After 5
Years
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Operating lease obligations (office space)
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$
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3,085
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$
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861
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$
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1,664
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$
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560
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$
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Capital lease obligations
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2,383
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821
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1,424
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138
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Debt obligations
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16,955
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8,802
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8,153
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Total
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$
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22,423
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$
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10,484
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$
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11,241
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$
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698
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$
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In April 2012, we filed a shelf registration statement with the SEC covering the periodic offer and sale
of up to $150.0 million in debt securities, preferred and common stock and warrants. The registration statement allows us to sell securities in one or more separate offerings with the size, price and terms to be determined at the time of sale. The
terms of any securities offered would be described in a related prospectus to be filed separately with the SEC at the time of the offering. The filing of the shelf registration statement will enable us to act quickly if and when opportunities arise.
We believe that our capital resources and cash flow from operations are adequate to meet our current operational needs. We
believe we will be able to finance our capital requirements through cash flow from operations, cash on hand, through borrowings under our revolving line of credit, additional equipment term loans and capital leases. However, our ability to satisfy
our working capital requirements and fund future capital requirements will depend principally upon our future operating performance, which is subject to the risks inherent in our business, including the demand for our seismic services from clients.
Off-Balance Sheet Arrangements
As of December 31, 2012, we had no off-balance sheet arrangements.
Critical Accounting
Policies
Information regarding our critical accounting policies and estimates is included in Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2012.
Recently Issued Accounting Pronouncements
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, to require an entity to present the total of comprehensive income,
the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components
of other comprehensive income as part of the statement of equity. This update does not change what items are reported in other comprehensive income or the requirement to report reclassification of items from other comprehensive income to net income.
However, in December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in
Accounting Standards Update No. 2011-05, that deferred the specific requirement within ASU 2011-05 to present on the face of the financial statements items that are reclassified from accumulated other comprehensive income to net income
separately with their respective components of net income and other comprehensive net income. Entities should continue to report reclassifications out of accumulated other comprehensive income using guidance in effect before ASU 2011-05 was issued.
ASU 2011-05 was effective for us as of October 1, 2012. The adoption of this guidance did not have a material impact on our financial statements.
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