Omega Geophysical Corporation.

Matthews, Robert "Chip" ; James, Joe ; Bexley, James B. 等

CASE DESCRIPTION

The OMEGA Geophysical Corporation (OMEGA) case was originally designed as a commercial lending case. The case is centered around a loan request from OMEGA to Third National Bank of San Luis Obispo. Company representatives gave the funding needed to reorganize and relocate various company operations as a purpose for the loan request. OMEGA is a multinational company engaged in manufacturing several high-technology product lines and providing related technical services in a highly competitive industry. The company provides both mature and developing products and services to both established and emerging markets. Financial statements provided for analysis include 5-year historical balance sheets, income statements, and statements of cash flows, and 5-year projected balance sheets and income statements.

CASE SYNOPSIS

The case contains sufficiently complex decisions and concepts to challenge advanced graduate students, but is flexible enough to not overwhelm junior and senior level undergraduate students if the faculty member directs the focus to the less complicated issues. In addition to the standard issues involved in commercial lending, there are production, marketing, human resources, and ethics issues that can be considered for focal points of study. Cases based upon the material included can also be developed for use in Human Resources Management, Operations Management, Marketing, and Business Ethics courses at similar levels with the same limitations. There is flexibility built into the materials and the teaching notes to allow the faculty member to adapt the case to meet instructional needs either the undergraduate or graduate level and to focus on the specific discipline of the course in which the students are enrolled. The case is designed to be taught in two to three class hours and is expected to require six to eight hours of outside preparation by students. The faculty member can choose to include all or part of the material provided. The case provides ample opportunity for faculty modification to meet individual styles and needs in commercial lending as well as the different disciplines mentioned above.

CASE INTRODUCTION

OMEGA Geophysical Corporation (OMEGA) is a multi-national corporation headquartered in San Luis Obispo, California. OMEGA is an acronym representing the various products and service areas the company provides. These business segments, and the current primary operating locations for each, are as follows:

* Overland Imaging Systems--San Luis Obispo; Chennai, India; Porto Alegre, Brazil

* Marine Imaging Systems--San Luis Obispo; Chennai; Porto Alegre

* Electronic Data Processing, Transmission, and Communication Systems--Amsterdam, Netherlands (through subsidiary Innova, BV, acquired 2005)

* Geophone Sensors--Maastricht, Netherlands (digital); San Luis Obispo (analog)

* Analysis and Interpretation Services--Menlo Park, California (through subsidiary EnergyData, Inc., acquired 2006)

OMEGA was founded in 1860 to provide equipment and services to the academic community teaching and performing research in geology and geophysics. The company experienced moderate growth for its first 100 years of operation. In the 1960s and 1970s, OMEGA developed a major market in the oil and gas exploration industry. Today sales to commercial customers for oil and gas exploration applications account for 90% of the company's sales, with the remainder going to academic and research institutions. The company established a 100%-owned Dutch subsidiary, now known as OMEGA Nederland, BV (OMEGA Nederland), in 1868, and European operations are conducted through OMEGA Nederland and its subsidiaries. This provides considerable tax advantages for operations in member countries of the European Union (EU), including oil and gas exploration operations in the North Sea.

OMEGA's initial entry into the oil and gas exploration market was through the manufacture of analog geophones, used as sensors in geological and geophysical (G&G) operations conducted by oil and gas exploration and production companies. In the early 1960s, the company expanded to include the manufacture of cable-based data acquisition systems for overland operations. OMEGA has subsequently diversified into the manufacture of a wide range of overland data acquisition systems and components. In the 1970s, the company further expanded into the manufacture of marine data acquisition systems and components. During the 1980s, the company entered into cooperative research agreements with California Polytechnic Institute, San Luis Obispo, California, and Vrije University, Amsterdam, Netherlands. In connection with these agreements the company developed and implemented a number of advanced equipment designs and, more recently, computer-based solutions for communication, management, analysis, and interpretation of G&G data. One result of this activity was the 1990s development of digital geophone systems by a subsidiary of OMEGA Netherlands, to augment the analog geophone product line. In 1998 the company commenced operations in Chennai, consisting primarily of the manufacture and assembly of both overland and marine cable systems. In order to take advantage of the rapidly expanding Brazilian energy exploration industry, OMEGA opened a Brazilian assembly plant in Porto Alegre in 2002. The Brazilian facility has grown to serve the oil and gas industry in West Africa and the South Atlantic areas. Today the company faces the following market conditions and threats:

* Declining energy exploration in the United States of America (USA) has reduced the company's domestic market.

* Areas where the company is experiencing significant demand growth include Brazil, western and southern Africa, offshore in the Indian Ocean (including the Persian/Arabian Gulf), onshore in the Middle East, China, India, Australia, and New Zealand.

* USA manufacturing operations have become less profitable, primarily due to higher labor costs and higher taxes.

The company is experiencing significant price competition in the analog geophone market from Chinese suppliers, whose prices are lower but whose quality has not yet reached the level of the company's products. The company believes that it has been the victim of industrial espionage in this area, and that while the Chinese have acquired illegally essentially all the technology involved in the analog geophone product line, they have not yet been able to achieve the necessary quality control. The company is extremely concerned about safeguarding intellectual property, particularly regarding its data library and its digital geophone product line.

The company's fastest-growing product line is digital geophones, which are more expensive than the analog geophones but deliver higher-quality results. The company is the acknowledged industry leader in quality, for both analog and digital geophones.

In response the company has proposed the following strategic changes:

Transfer the manufacture of analog geophones from the USA to the company's facilities at Porto Alegre (serving western hemisphere) and Chennai (serving eastern hemisphere). This will enable the company to realize significant savings in cost of labor and taxes over the current US operations.

Transfer manufacturing operations for overland and marine cable and other data acquisition systems currently located in the USA to Porto Alegre, and similar manufacturing operations currently located in Maastricht, to Chennai. The company believes that consolidating western hemisphere production and assembly operations in Porto Alegre, and eastern hemisphere production and assembly operations in Chennai, will increase efficiency and reduce shipping costs.

Convert the manufacturing capacity freed up at Maastricht, to the manufacture of the rapidly-growing and profitable digital geophone product line. The company has not yet experienced significant price competition in this product line. At this point the company wishes to continue manufacturing this product line in a country where adequate legal protection is afforded to intellectual property.

Convert the manufacturing capacity freed up at the company's San Luis Obispo, campus to consolidate the data analysis and interpretation operations currently conducted at Menlo Park, California (including the seismic data library repository) with those conducted at San Luis Obispo, and to create a dedicated research, development, and service facility.

* The company is requesting a loan of $55 million,
to be used as follows:

* Upgrade Brazil facility                       $10 million

* Upgrade India facility                        $10 million

* Relocate analog geophone manufacturing        $10 million

* Relocate cable manufacturing and assembly     $10 million

* Convert San Luis Obispo campus to R&D/data
repository facility                              $8 million

* Convert Maastricht facility to manufacture
of digital geophones                             $7 million

* Total Loan Proceeds                           $55 million

Additional information about the company includes:

During 2002-03 several members of the company's executive management team became involved in protracted disputes with several of the company's major shareholders, primarily regarding the decline in the company's profitability. These disputes ended with the firing or resignation of those executives who had been involved, and their replacement with a new management team that has been in place since early in 2004.

In 2004 the company was found by its auditors to have a material weakness in its revenue recognition policies and procedures for the purposes of the Sarbanes-Oxley Act. This resulted in a significant downward restatement of revenues for 2003 and prior years, on top of what were already declining financial results for the period 2001-03. The company's management has represented, and its auditors have concurred, that it has had no internal controls weaknesses that would be classified as material in subsequent years.

In an attempt to lower the cost of goods produced in the US, the company attempted to employ a number of undocumented aliens during the period 2001-03. In 2003 the company's manufacturing facility at San Luis Obispo was raided by ICE/INS agents. The company eventually paid a fine of $1 million and discontinued the practice. Since then its US manufacturing costs have risen significantly.

Primarily through a number of recent acquisitions, the company has grown significantly in the data interpretation and service segments of its business. The company intends to continue to emphasize the service area over the product area, largely because it has realized significantly greater gross margins in this area.

ABOUT THE BANK

Third National Bank of San Luis Obispo is a well-capitalized bank with a generally conservative lending philosophy. At this time, its financials indicate that it has the funds necessary to provide this loan if that is the correct decision. However, lending this much to OMEGA would challenge its ability to undertake additional projects for the short term and would require an exception to its lending concentration policy.

SAMPLE QUESTIONS

1. If you were OMEGA's banker, would you make the requested loan?

2. What factors favor making the loan?

3. What factors oppose making the loan?

4. Would you make the loan alone or with another bank?

5. If you elect not to make the loan alone, what would be the advantages to consider by participating with another bank?

6. What about the possibility of participating partners in one of the countries to which operations are being moved (Brazil, India)?

7. If you would not make the loan as requested, are there changes which could be made that would cause you to change your mind?

8. How do you as a banker achieve adequate collateral security for the repayment of the requested loan if you elect to make the loan?

Robert (Chip) Matthews, Sam Houston State University

Joe James, Sam Houston State University

James B. Bexley, Sam Houston State University

EXHIBIT 1A--BALANCE SHEET (ASSETS)

(dollar amounts in thousands)       31-Dec     31-Dec     31-Dec
                                      2004       2005       2006

Current Assets:
  Cash and cash equivalents         43,024     10,798     11,462
  Restricted cash                      815      1,151      1,108
  Gross Receivables                 24,777     44,535     87,396
  Less: Allowance for bad debts       -743     -1,336     -2,622
    Net Trade Receivables           24,034     43,199     84,775
  Current notes receivable          10,426      7,797      6,053
  Unbilled work in progress              0      5,284     10,896
  Inventories                       38,717     62,654     58,872
  Prepaid expenses/other             2,677      5,765      7,894
    Total Current Assets           119,693    136,649    181,059
Property, Plant, and Equipment
  Land                                  37         37         37
  Buildings                         12,730     17,257      7,578
  Equipment                         43,819     56,171     53,496
    Total PP&E                      56,586     73,465     61,111
Less: Accumulated depreciation     -36,626    -40,170    -40,146
Net PP&E                            19,960     33,295     20,965
Non-current receivables              4,634      2,995      4,705
Intellectual property                    0      7,248     13,734
Investments at cost                      0      2,531      2,892
Goodwill                            25,323    110,589    111,916
Other intangible assets              6,583     55,999     48,679
  Total Long-Term Assets            56,500    212,656    202,891
    Total Assets                   176,192    349,305    383,951

(dollar amounts in thousands)       31-Dec     31-Dec
                                      2007       2008

Current Assets:
  Cash and cash equivalents         12,331     26,324
  Restricted cash                      755      5,099
  Gross Receivables                121,281    135,945
  Less: Allowance for bad debts     -3,638     -4,078
    Net Trade Receivables          117,643    131,867
  Current notes receivable           4,554      3,943
  Unbilled work in progress         20,677     16,187
  Inventories                       83,521     93,239
  Prepaid expenses/other             7,124      9,194
    Total Current Assets           246,606    285,852
Property, Plant, and Equipment
  Land                                  25         18
  Buildings                         56,978     65,231
  Equipment                         16,472     15,896
    Total PP&E                      73,475     81,145
Less: Accumulated depreciation     -45,908    -54,430
Net PP&E                            27,567     26,716
Non-current receivables              3,592          0
Intellectual property               23,911     43,155
Investments at cost                  3,076      3,582
Goodwill                           112,854    110,724
Other intangible assets             47,939     36,532
  Total Long-Term Assets           218,939    220,708
    Total Assets                   465,545    506,560

EXHIBIT 1B--BALANCE SHEET (LIABILITIES AND EQUITY)

(dollar amounts in thousands)          31-Dec      31-Dec      31-Dec
                                         2004        2005        2006

Current Liabilities:
  Short-term notes payable/
    Current portion of long-term        1,943       4,746       3,185
    debt
  Accounts payable and accrued
    liabilities                        20,507      51,313      61,968
  Royalties payable                         0           0           0
  Deferred revenue                      1,489      10,904       8,632
    Total Current Liabilities          23,939      66,962      73,784
Long-Term Liabilities:
  Notes payable                        58,710      62,143      54,909
  Less: Current maturities             -1,943      -4,746      -3,185
    Net Long-Term Debt                 56,767      57,397      51,724
  Deferred income tax liability             0       4,802       5,413
  Other long-term Liabilities           2,757       1,943       3,138
  Convertible/redeemable
    preferred stock                         0           0      21,573
Total Long-term Liabilities            59,524      64,142      81,848
Total Liabilities                      83,463     131,104     155,632
Shareholders' Equity:
  Common stock                            377         575         583
  Paid-in capital                     212,914     346,570     351,188
  Retained earnings                  -117,283    -126,404    -118,611
  Accumulated other income                934       1,686        -527
  Less: Treasury stock                 -4,212      -4,225      -4,315
Total Equity                           92,729     218,201     228,319
Total Liabilities and Equity          176,193     349,306     383,951

(dollar amounts in thousands)          31-Dec      31-Dec
                                         2007        2008

Current Liabilities:
  Short-term notes payable/
    Current portion of long-term        4,747      10,752
    debt
  Accounts payable and accrued
    liabilities                        81,372     100,422
  Royalties payable                    19,663      21,663
  Deferred revenue                     27,071      15,384
    Total Current Liabilities         132,853     148,220
Long-Term Liabilities:
  Notes payable                        56,061      17,867
  Less: Current maturities             -4,747     -10,752
    Net Long-Term Debt                 51,314       7,116
  Deferred income tax liability         7,267       4,465
  Other long-term Liabilities           3,317       3,033
  Convertible/redeemable
    preferred stock                    21,681      25,305
Total Long-term Liabilities            83,579      39,919
Total Liabilities                     216,432     188,139
Shareholders' Equity:
  Common stock                            586         685
  Paid-in capital                     355,795     403,261
  Retained earnings                  -106,074     -84,713
  Accumulated other income              3,513       3,947
  Less: Treasury stock                 -4,707      -4,760
Total Equity                          249,113     318,421
Total Liabilities and Equity          465,545     506,560

EXHIBIT 2--INCOME STATEMENT

(dollar amounts in thousands)            31-Dec     31-Dec     31-Dec
                                           2004       2005       2006

Sales
  Overland systems                       35,796     41,166     47,341
  Marine systems                         29,288     35,146     42,175
  Electronic data processing/
    communication                             0     51,136     90,609
  Geophones-Analog                       23,864     25,057     26,310
  Geophones-Digital                      19,525     21,478     23,626
  Analysis and interpretation                 0          0     32,158
Net Sales                               108,474    173,983    262,219
Cost of Goods Sold
  Overland systems                       29,389     33,345     38,820
  Marine systems                         23,723     28,117     34,162
  Electronic data processing/
    communication                             0     30,682     57,083
  Geophones-Analog                       19,593     20,484     21,837
  Geophones-Digital                      15,640     16,753     18,932
  Analysis and interpretation                 0          0     20,260
Total Cost of Goods Sold                 88,345    129,381    191,094
Gross Profit                             20,129     44,602     71,125
Operating Expenses
Research, development,
  and engineering                        13,517     14,179     14,652
Marketing and sales                       9,085     16,984     23,980
General and administrative                9,851     18,908     17,718
Impairment of long-lived assets           2,298          0          0
Depreciation and amortization             3,770      4,332      4,483
Less: D&A included in COGS               -1,508     -1,733     -1,793
Total Operating Expenses                 37,013     52,671     59,040
Operating Income                        -16,884     -8,068     12,085
Interest expense                         -2,955     -4,505     -4,435
Interest income                           1,376        923        609
Other income (expense), net                 495        159        593
Gain (Loss) on disposal of assets           210      2,878        -72
Income before Taxes                     -17,758     -8,614      8,781
Less: Taxes Related to Operations
  Current                                   252        884      1,507
  Deferred                                    0       -377       -519
Income Before Minority Earnings         -18,009     -9,121      7,793
Cum. Effect of Acct Change;                   0          0          0
Net Income (Loss)                       -18,009     -9,121      7,793
Other Comp. Income (Loss)
Foreign currency gain (loss)              2,655        752     -2,212
Total Other Comp. Income (Loss)           2,655        752     -2,212
Comprehensive Income (Loss)             -15,355     -8,369      5,581

(dollar amounts in thousands)            31-Dec     31-Dec
                                           2007       2008

Sales
  Overland systems                       54,443     69,839
  Marine systems                         50,610     67,962
  Electronic data processing/
    communication                       107,942    126,829
  Geophones-Analog                       27,626     29,007
  Geophones-Digital                      25,989     28,588
  Analysis and interpretation            97,461    131,732
Net Sales                               364,071    453,957
Cost of Goods Sold
  Overland systems                       45,237     57,124
  Marine systems                         41,601     54,977
  Electronic data processing/
    communication                        68,328     79,268
  Geophones-Analog                       23,261     24,599
  Geophones-Digital                      21,130     23,045
  Analysis and interpretation            61,693     79,802
Total Cost of Goods Sold                261,250    318,815
Gross Profit                            102,821    135,142
Operating Expenses
Research, development,
  and engineering                        23,679     33,476
Marketing and sales                      29,391     31,723
General and administrative               26,813     32,408
Impairment of long-lived assets               0          0
Depreciation and amortization             4,484      5,153
Less: D&A included in COGS               -1,794     -2,061
Total Operating Expenses                 82,573    100,699
Operating Income                         20,248     34,444
Interest expense                         -4,172     -4,543
Interest income                           1,475      1,336
Other income (expense), net              -1,562       -788
Gain (Loss) on disposal of assets           -42        183
Income before Taxes                      15,947     30,632
Less: Taxes Related to Operations
  Current                                 4,431      7,131
  Deferred                                 -733      2,140
Income Before Minority Earnings          12,249     21,361
Cum. Effect of Acct Change;                 288          0
Net Income (Loss)                        12,537     21,361
Other Comp. Income (Loss)
Foreign currency gain (loss)              4,039        435
Total Other Comp. Income (Loss)           4,039        435
Comprehensive Income (Loss)              16,576     21,795