<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the Quarterly Period Ended September 30, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from __________ to __________
Commission File No. 0-27564
3-D Geophysical, Inc.
(Exact name of Registrant as a specified in its charter)
Delaware 13-3841601
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
7076 South Alton Way, Building H
Englewood, Colorado 80112
(Address/Zip Code of principal executive office)
Registrant's telephone number, including area code: (303) 290-0214
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No_____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as the latest practicable date.
The total number of shares of the Registrant's Common Stock, $.01 par value,
outstanding on November 7, 1996 was 7,600,000.
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3-D GEOPHYSICAL, INC.
FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1996
PART I. Financial Information Page
Item 1 Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1995 and September 30, 1996 3-4
Condensed Consolidated Statements of Operations
Three Months Ended September 30, 1995 and September
30, 1996 5
Nine Months Ended September 30, 1995 and September 30,
1996
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1995 and September 30, 6
1996
Notes to Condensed Consolidated Financial Statements 7-11
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-16
PART II. Other Information
Item 1 Legal Proceedings 17
Item 2 Changes in Securities 17
Item 3 Defaults Upon Senior Securities 17
Item 4 Submission of Matters to a Vote of Security 17
Holders
Item 5 Other Information 17
Item 6 Exhibits and Reports on Form 8-K 17
Financial Data Schedule 18
Signatures 19
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3
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
December September
31,1995 30,1996
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 609 $ 1,206
Accounts receivable billed, net of the
allowance for doubtful accounts of $0
and $49 as of December 31, 1995 and
September 30, 1996.............................. 1,786 13,349
Accounts receivable, unbilled ................ -- 4,129
Other receivables ............................ 158 259
Deferred income tax assets ........................ -- 68
Prepaid expenses and other ........................ 239 1,912
------- -------
Total current assets ..................... $ 2,792 $20,923
Property and equipment, net of accumulated
depreciation of $1,744 and $4,181 as
of December 31, 1995 and
September 30, 1996.............................. 1,746 26,931
Goodwill, net of accumulated amortization of
$0 and $260 as of December 31, 1995
and September 30, 1996.......................... -- 5,850
Other assets.......................................... 9 691
------- -------
Total assets ......................................... $ 4,547 $54,395
======= =======
The accompanying notes are an integral part
of these condensed consolidated
financial statements.
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4
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
December September
31, 1995 30, 1996
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and
capital leases................................ $ 182 $ 6,517
Accounts payable ................................ 1,004 9,035
Accrued liabilities ............................. 1,003 1,536
Deferred revenue ................................ -- 418
Income taxes payable ............................ -- 568
-------- --------
Total current liabilities .............. $ 2,189 $ 18,074
Long-term debt and capital leases, net of
current maturities............................... -- 8,682
Deferred income taxes .............................. 530 653
Stockholders' equity:
Common stock-predecessor ........................ 321 --
Common stock, $.01 par value, 25,000,000
shares authorized, 7,600,000 shares
issued and outstanding........................ -- 76
Preferred stock, $.01 par value,
1,000,000 shares authorized, none
issued and outstanding........................ -- --
Additional paid in capital ...................... -- 28,173
Retained earnings ............................... 4,363 1,934
Cumulative foreign currency translation
adjustment.................................... (2,856) (3,197)
-------- --------
Total stockholders' equity ......................... $ 1,828 $ 26,986
Total liabilities and
stockholders' equity.................... $ 4,547 $ 54,395
======== ========
The accompanying notes are an integral part
of these condensed consolidated
financial statements.
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5
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
For the Three For the Nine Months
Months Ended Ended
September 30, September 30,
1995 1996 1995 1996
-------- -------- -------- --------
Net Sales ...................... $ 2,310 $ 16,612 $ 7,157 $ 36,151
Expenses
Cost of data acquisition .... 919 12,111 3,759 26,563
Depreciation and
amortization ............. 88 1,139 531 2,788
General and administrative
expenses ................. 287 1,322 833 3,907
-------- -------- ------- --------
1,294 14,572 5,123 33,258
Operating income ............... 1,016 2,040 2,034 2,893
Other income (expense)
Miscellaneous ............... (64) 73 38 437
Interest expense ............ (42) (372) (562) (668)
Foreign currency
transaction gains
(losses) ........... (95) (74) (83) 7
-------- -------- -------- --------
(201) (373) (607) (224)
Income before provision for
income taxes and
extraordinary item........... 815 1,667 1,427 2,669
Provision for income taxes ..... (63) 368 81 645
-------- -------- -------- --------
Income before extraordinary item 878 1,299 1,346 2,024
Extraordinary item,net of
tax expense of $36 .......... -- -- -- 57
-------- -------- -------- --------
Net income ..................... $ 878 $ 1,299 $ 1,346 $ 2,081
======== ======== ======== ========
Income per share before
extraordinary item .17 .29
Extraordinary item per share,
net of tax expense - .01
-------- --------
Net earnings per share .17 .30
======== ========
Weighted average common
shares outstanding 7,736,036 6,926,795
The accompanying notes are an integral part
of these condensed consolidated
financial statements.
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6
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the Nine Months Ended
September 30,
1995 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash flow provided(used) by
operating activities ............................ $ 1,585 $ (2,089)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................ (123) (12,270)
Cash consideration paid to acquire
Operating Subsidiaries .......................... -- (10,328)
Cash received from sale of property and
equipment ....................................... -- 114
-------- --------
Net cash used by investing activities .............. (123) (22,484)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash paid in connection with the initial
public offering ................................. -- (3,431)
Proceeds from initial public offering,
net of the underwriting discounts ............... -- 32,085
Issuance of predecessor common stock ............... 28 --
Cash paid to retire indebtedness of the
Operating Subsidiaries .......................... -- (4,599)
Principal payments on notes payable and
capital leases .................................. (484) (8,317)
Cash proceeds of borrowings under notes
payable and capital leases ...................... -- 12,934
Cash dividend paid to owners of
predecessor company ............................. -- (3,510)
Net borrowings (payments) under factor
agreements ...................................... (207) --
-------- --------
Net cash provided (used) by financing
activities ...................................... (663) 25,162
Net increase (decrease) in cash .................... 799 589
Cash at beginning of period ........................ 242 609
Effect of change in exchange rate on cash .......... (53) 8
======== ========
Cash at end of period .............................. $ 988 $ 1,206
======== ========
The accompanying notes are an integral part
of these condensed consolidated
financial statements.
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7
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
On February 9, 1996, 3-D Geophysical, Inc. (the "Company") consummated an
initial public offering (the "Offering") and simultaneously acquired in separate
transactions, in exchange for cash, notes and shares of common stock,
Geoevaluaciones, S.A. de C.V. ("GEO"), Processos Interactivos Avanzados, S.A. de
C.V. ("PIASA"), certain assets and liabilities of the land seismic business of
Northern Geophysical of America, Inc. ("Northern"), Paragon Geophysical, Inc.
("Paragon") and Kemp Geophysical Corporation ("Kemp") (collectively referred to
as the "Operating Subsidiaries").
For accounting purposes the acquisitions of GEO and PIASA were treated as a
recapitalization of GEO and PIASA with GEO (combined with PIASA) deemed to be
the acquirer of the Company and considered the predecessor company. Accordingly,
the financial statements include the historical operating performance of only
GEO and PIASA (the "Mexican Operations") through February 8, 1996.
The acquisitions of Northern, Paragon and Kemp were treated as business
combinations accounted for by the purchase method of accounting as prescribed by
Accounting Principles Board Opinion No. 16 and SEC Staff Accounting Bulletin No.
48. Northern and Kemp are being valued at the fair market value of consideration
given. In connection with the acquisitions of Northern and Kemp, the excess of
consideration given over the fair market value of net assets acquired is being
amortized on a straight-line basis over 15 years. The acquisition of Paragon's
Common Stock in exchange for shares of the Company's common stock was accounted
for at Paragon's historical costs. The accompanying condensed consolidated
financial statements include the accounts of Northern, Kemp and Paragon from
February 9, 1996, the effective date of the acquisitions. As a result, the
Company's statements of operations for the three and nine months ended September
30, 1996 are not comparable to the statements of operations for the three and
nine months ended September 30, 1995, and the Company's balance sheet as of
September 30, 1996 is not comparable to its balance sheet as of December 31,
1995.
The consideration paid to the former owners of Northern, Kemp and Paragon and
the allocation of such consideration to the acquired assets is as follows:
Cash paid for the stock and assets of the
acquired companies $ 10,328,000
Debt payable to former owner of Northern 1,149,000
Stock issued to the former owners of Kemp at
offering price of $7.50 per share 294,000
Assumption of the liabilities in excess of
assets of Paragon (1,020,000)
Liabilities assumed:
Bank overdraft 162,000
Accounts payable 4,984,000
Accrued and other current liabilities 1,130,000
Debt assumed:
Current 8,007,000
Non-current 3,187,000
-----------
Amounts allocated to acquired assets $ 28,221,000
===========
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8
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
Allocation of the purchase price to the acquired assets:
Accounts receivable:
Trade $ 6,575,000
Other 123,000
Deferred income tax assets 108,000
Prepaid expenses and other current assets 209,000
Property and equipment 14,106,000
Goodwill 6,147,000
Other assets 953,000
=============
$ 28,221,000
=============
The year-end condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles.
In the opinion of the Company, the accompanying consolidated financial
statements include all adjustments which are of a normal recurring nature
necessary to present fairly the Company's financial position at September 30,
1996, the results of its operations for the three- and nine-month periods ended
September 30, 1995 and 1996, and its cash flows for the nine month periods ended
September 30, 1995 and 1996. All significant intercompany accounts have been
eliminated. Although the Company believes that the disclosures are adequate to
make the information presented not misleading, certain information and footnote
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. These condensed consolidated financial statements should be read in
conjunction with the financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 which was filed
pursuant to Rule 15d-2 of the Securities Exchange Act of 1934, as amended. The
results of operations for the three- and nine-month periods ended September 30,
1996 are not necessarily indicative of the results to be expected for the full
year.
PRO FORMA INFORMATION
The accompanying summarized pro forma information for the Company for the three-
and nine-month periods ended September 30, 1995 and 1996 represents the
operations of the Company as if the acquisitions of the Operating Subsidiaries
and the Company's initial public offering had occurred on January 1, 1995.
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9
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(in thousands, except (in thousands, except
per share data) per share data)
1995 1996 1995 1996
------- ------- ------- -------
Net sales $10,923 $16,612 $25,669 $39,974
======= ======= ======= =======
Extraordinary item, net of
tax expense $ - $ - $ - $ 57
======= ======= ======= =======
Net income $ 711 $ 1,299 $ 470 $ 1,832
======= ======== ======= =======
Income per share before
extraordinary item .11 .21 .08 .28
Extraordinary item per share,
net of tax expense - - - .01
-------- -------- -------- --------
Earnings per share .11 .21 .08 .29
======== ======== ========= ========
The pro forma results described above assume weighted average common shares
outstanding of 6,232,000 shares.
The summarized pro forma information is not necessarily indicative of the actual
results that would have been achieved if the public offering and acquisitions
had occurred on the date indicated or which may be realized in the future.
REVENUE RECOGNITION AND REVENUE ADJUSTMENTS
The Company generates revenue through performing seismic data acquisition and
geophysical services. Revenues from seismic data acquisition and geophysical
services are recognized as the work progresses on the percentage of completion
method.
Net sales for the nine months ended September 30, 1995 and 1996 include
contractual revenue adjustments from the Mexican Operations, for which the
related seismic data acquisition and geophysical services have been provided.
These revenue adjustments are based on independent economic data, primarily the
Mexican inflation rate as measured by the consumer price index. Certain of these
revenue adjustments recognized for the nine months ended September 30, 1996, for
which the Company has the contractual right to invoice, have not been invoiced
pending final review by the Company's major customer in Mexico. The Company,
historically, has been able to collect these revenue adjustments and,
accordingly, the Company has not recorded a valuation allowance against these
amounts as of December 31, 1995 or September 30, 1996.
2. INITIAL PUBLIC OFFERING OF COMMON STOCK
On February 9, 1996, the Company completed the offering of 4,000,000 shares of
common stock at a price to the public of $7.50 per share. Subsequently, on
February 21, 1996, the underwriters exercised their overallotment option to
purchase an additional 600,000 shares at a price to the public of $7.50 per
share. The proceeds, net of the underwriters' discounts and offering costs, were
approximately $28,654,000. Of these net proceeds, $3,510,000 was treated, for
accounting purposes, as a dividend to the former stockholders of GEO and PIASA,
approximately $10,328,000 was used to purchase the land seismic assets of
Northern and all of the capital stock of Kemp, approximately $4,599,000 was used
to retire certain indebtedness of the Operating Subsidiaries, $152,000 was used
to retire capital leases and $1,149,000 was paid subsequent to the closing of
the acquisitions as a purchase price adjustment for the purchase of the land
seismic assets of Northern. The Company recognized $57,000 of extraordinary
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10
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INITIAL PUBLIC OFFERING OF COMMON STOCK (continued)
gain, net of tax, from the retirement of a certain portion of this debt.
3. CONCENTRATIONS OF CREDIT RISK
During the nine months ended September 30, 1995, which included only the
operations of GEO and PIASA, one customer accounted for 100.0% of net sales and
during the nine months ended September 30, 1996, three customers accounted for
25.1%, 18.1%, and 16.4% of net sales, respectively.
As of December 31, 1995, which consisted only of the accounts of GEO and PIASA,
one customer accounted for 99.0% of accounts receivable and as of September 30,
1996, two customers accounted for 29.1% and 28.0% of accounts receivable,
respectively.
4. RECENT ACCOUNTING PRONOUNCEMENTS
During the fourth quarter of 1995, Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" (SFAS 123) was issued. The
Company will continue to account for future grants of common stock options using
the intrinsic value method under Accounting Principles Board Opinion NO. 25,
"Accounting for Stock issued to Employees" and will adopt the disclosure
requirements of SFAS 123.
5. EARNINGS PER SHARE
The number of shares used in the earnings per share calculation is determined as
follows:
For the Three For the Nine
Months Ending Months Ending
September 30, September 30,
1996 1996
------------- -------------
Shares issued to the Company's
stockholders giving effect to the
2,717.66 for 1 stock split 1,400,681 1,400,681
Shares deemed to have been issued
to fund cash portion of dividend
to Geoevaluaciones stockholders 468,000 468,000
Shares issued to acquire
Operating Subsidiaries 1,599,319 1,406,677
Shares sold in initial offering 4,132,000 3,515,401
Common stock equivalents,
principally common stock options 136,036 136,036
--------- ---------
Weighted average common shares outstanding 7,736,036 6,926,795
========= =========
6. INCOME TAXES
The effective income tax rates for the nine months ended September 30, 1995 and
1996 are 6% and 26%, respectively. The differences between the statutory federal
income tax rate on income before provision for income taxes and extraordinary
item, and the Company's effective income tax rate, result primarily from the tax
benefits associated with inflation adjustments with respect to the operations of
GEO for the nine months ended September 30, 1995 and the anticipated change in
the valuation allowance previously established with respect to net operating
loss carryforwards and inflation adjustments in Mexico for the nine months ended
September 30, 1996.
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11
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. COMMITMENTS AND CONTINGENCIES
GEO has a dispute, and may be threatened with litigation, in connection with
certain agreements entered it into with Capilano International Inc., a Canadian
company ("Capilano"). The dispute concerns a certain Letter of Intent and a
certain Technical Assistance Agreement, dated June 3, 1991 and June 1, 1992,
respectively (the "Capilano Agreements"). Capilano stated in its 1994 Annual
Report to Shareholders that it has had difficulty in collecting amounts owing
from a Mexican company (presumably, GEO) to which Capilano supplied technical
assistance and stated in its 1995 Annual Report to Shareholders that it had
written down accounts receivable in Mexico by approximately Canadian $1.9
million (approximately U.S. $1.4 million). GEO maintains that it is not
obligated to compensate Capilano for certain services GEO believes were either
inadequately provided or not provided at all by Capilano and the parties
disagree upon how certain profits and losses should be allocated under the
Capilano Agreements. Representatives of Capilano and GEO have had ongoing
discussions since May, 1996 in an effort to resolve this dispute. The Company is
not currently able to estimate the effect, if any, on GEO's results of
operations and financial position which may result from resolution of this
matter. Accordingly, the Company's financial statements do not reflect any
adjustment related to this matter. A portion of the amounts payable to the
former stockholders of Geoevaluaciones in connection with the acquisition by
the Company of the stock of Geoevaluaciones owned by such stockholders is held
in escrow and available to pay amounts in settlement or otherwise in connection
with the dispute with Capilano.
8. COMMON STOCK - PREDECESSOR
Common stock of the Company at December 31, 1995 consisted solely of GEO common
stock of 1,200,000 shares of N$1 par value variable capital stock. In 1993, GEO
capitalized $229,582 of earnings by issuing 229,582 shares of common stock.
GEO and PIASA are required under Mexican law to establish a legal reserve equal
to 5% of each company's earnings until such time as the reserve equals 20% of
the minimum capital of GEO and PIASA.
9. SUBSEQUENT EVENTS
On July 12, 1996, the Company executed a letter of intent to acquire J.R.S.
Exploration Company Limited ("J.R.S."), a land seismic survey company
headquartered in Calgary, Alberta. Under the contemplated terms, the Company
proposes to acquire J.R.S. for approximately Canadian $3.5 million
(approximately U.S. $2.6 million) in cash and shares of the Company's Common
Stock worth Canadian $3.35 million (approximately U.S. $2.5 million) valued on
the basis of the average closing price of the Company's Common Stock prior to
the closing. The acquisition is subject to certain conditions, including the
execution of mutually satisfactory documentation and the completion of
satisfactory due diligence by the Company. The closing of this proposed
acquisition is not anticipated to occur prior to January, 1997.
On October 8, 1996, the Company filed a Registration Statement on Form S-1 (No.
333-13665) with the Securities and Exchange Commission relating to a proposed
underwritten sale to the public of 4,000,000 shares of the Company's Common
Stock (not including an over-allotment option of 600,000 shares).
In October 1996, the Company signed four separate lease agreements for the lease
of seismic data acquisition equipment with rental terms ranging from three to
six months which contain aggregate minimum lease payments of approximately $3.8
million. Two of the leases are with Andrews Group International, a related
party. Each has a six month minimum lease term and provides that the Company has
the option to purchase the equipment being leased, with 80% of rental payments
applying towards the purchase. Minimum lease payments under these leases are
approximately $660,000 and $173,000, respectively.
The Company also entered into two lease agreements with Geco-Prakla, a division
of Schlumberger Technology Corporation. The first agreement has a three month
minimum lease term and provides that the Company has the option to purchase the
equipment being leased, with 75% of rental payments applying towards the
purchase. Minimum lease payments under this lease are approximately $338,000.
The second agreement has a three month minimum lease term and contains no option
to purchase the equipment being leased. Minimum lease payments under this lease
are approximately $2.6 million.
<PAGE>
12
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For accounting purposes, GEO (together with PIASA) is considered the predecessor
company and the financial performance of Northern, Kemp and Paragon are included
as of their acquisition date, February 9, 1996. As a result, the Company's
statements of operations for the three- and nine-month periods ended September
30, 1996 include the financial activities of the Company's operations in the
United States after February 8, 1996, and are not comparable to the statements
of operations and cash flows for the three- and nine-month periods ended
September 30, 1995. The following discussion has been divided into two sections.
The first section relates to the Company and includes the historical operating
performance of GEO and PIASA (the "Mexican Operations"). The second section
discusses the Company's liquidity and capital resources as of September 30,
1996. The Company's statements of operations for the three and nine months ended
September 30, 1996 are not comparable to the statements of operations for the
three and nine months ended September 30, 1995, and the Company's balance sheet
as of September 30, 1996 is not comparable to its balance sheet as of December
31, 1995.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1996 compared to
Three Months Ended September 30, 1995
NET SALES. Net sales for the Company increased 619.1% to $16.6 million in the
three months ended September 30, 1996 from $2.3 million in the three months
ended September 30, 1995. The increase is primarily attributable to the
inclusion of $12.5 million of net sales of the Company's operations in the
United States and a 77.4% increase to $4.1 million in the three months ended
September 30, 1996, from $2.3 million in the three months ended September 30,
1995, for the Mexican Operations. Net sales for the three months ended September
30, 1995 include $1.8 million of contractual adjustments related to increased
costs due to the devaluation of the Mexican peso which occurred in December of
1994. Net sales for the three months ended September 30, 1995 include similar
contractual adjustments of $522,000.
COST OF DATA ACQUISITION. Cost of data acquisition for the Company increased
1,217.8% to $12.1 million in the three months ended September 30, 1996 from
$919,000 in the three months ended September 30, 1995. The increase is primarily
attributable to the inclusion of $9.0 million of cost of data acquisition for
the Company's operations in the United States and a 236.1% increase to $3.1
million in the three months ended September 30, 1996, from $919,000 in the three
months ended September 30, 1995, for the Mexican Operations. The decrease in
gross margin (net sales less cost of data acquisition) for the Mexican
Operations is primarily attributable to larger contractual adjustments realized
during the third quarter of 1995 as well as the impact of the Southern Services
crew (a drilling and field services crew operating in Southern Mexico) which did
not commence work in 1995 until November
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the Company
increased 1,194.3% to $1.1 million in the three months ended September 30, 1996
from $88,000 in the three months ended September 30, 1995. The increase is
primarily attributable to the inclusion of $715,000 of depreciation and
amortization of the Company's operations in the United States, including
$102,000 of goodwill amortization attributable to the acquisitions of Northern
and Kemp, and additional depreciation relating to new equipment acquisitions.
This is in addition to a 301.1% increase to $353,000 in the three months ended
September 30, 1996, from $88,000 in the three months ended September 30, 1995,
for the Mexican Operations.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the
Company increased 360.6% to $1.3 million in the three months ended September 30,
1996 from $287,000 in the three months ended September 30, 1995. The increase is
primarily attributable to the inclusion of $975,000 of general and
administrative expenses from the Company's operations in the United States,
partially offset by a 5.6% decrease to $271,000 in the three months ended
September 30, 1996, from $287,000 in the three months ended September 30, 1995,
for the Mexican Operations. General and administrative expenses for the Company
have increased due to the added costs associated with being a publicly traded
company and increased marketing costs.
<PAGE>
13
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
OPERATING INCOME. Operating income for the Company increased 100.8% to $2.0
million in the three months ended September 30, 1996 from $1.0 million in the
three months ended September 30, 1995. The increase is primarily attributable to
the inclusion of $1.7 million of operating income from Company's operations in
the United States, partially offset by a 62.1% decrease in operating income to
$385,000 in the three months ended September 30, 1996 from $1.0 million in the
three months ended September 30, 1995 for the Mexican Operations. The decrease
in the operating income of the Mexican Operations is due to contractual revenue
adjustments of $1.8 million, which were realized during the third quarter of
1995, attributable to increased costs resulting from the devaluation of the
Mexican peso during December of 1994. Similar contractual adjustments of
$522,000 were realized during the three months ended September 30, 1996.
MISCELLANEOUS INCOME (EXPENSE). The Company recognized miscellaneous income of
$73,000 in the three months ended September 30, 1996 compared with miscellaneous
expense of $64,000 recognized in the three months ended September 30, 1995. The
increase is primarily the result of interest income in Mexico due to the high
investment interest rates available in Mexico, interest income from the
investment of the proceeds of the Company's initial public offering and interest
income from the conversion of a trade receivable to an interest-bearing note
receivable.
INTEREST EXPENSE. The Company's interest expense increased 785.7% to $372,000 in
the three months ended September 30, 1996 from $42,000 in the three months ended
September 30, 1995. The increase is due to interest charges on borrowings of
approximately $12 million under a credit facility with the Company's principal
lender during the three months ended September 30, 1996 compared to borrowings
of approximately $300,000 during the nine months ended September 30, 1995.
FOREIGN CURRENCY LOSSES. The Company recognized a foreign currency loss of
$74,000 in the three months ended September 30, 1996 compared to a foreign
currency loss of $95,000 in the three months ended September 30, 1995, a change
of 22.1%. The losses are primarily attributable to the fluctuation of the
Peso/U.S. dollar exchange rate.
INCOME TAX EXPENSE. The Company recognized income tax expense from operations of
$368,000 in the three months ended September 30, 1996 compared to an income tax
benefit of $63,000 in the three months ended September 30, 1995. The increase is
primarily attributable to earnings of the Company's operations in the United
States taxed at a 26% effective tax rate, partially offset by an 18% effective
tax rate for earnings from the Mexican Operations. The lower tax rate in Mexico
is due to inflation adjustments. The effective tax rate for the Company's
operations in the United States is lower than the statutory tax rate due to the
anticipated change in the valuation allowance previously established with
respect to the net operating loss carryforwards.
Nine Months Ended September 30, 1996 compared to
Nine Months Ended September 30, 1995.
NET SALES. Net sales for the Company increased 405.1% to $36.2 million in the
nine months ended September 30, 1996 from $7.2 million in the nine months ended
September 30, 1995. The increase is primarily attributable to the inclusion of
$27.0 million of net sales of the Company's operations in the United States and
a 27.0% increase to $9.1 million for the nine months ended September 30, 1996
from $7.2 million for the nine months ended September 30, 1995 for the Mexican
Operations. Net sales for the nine months ended September 30, 1995 include $ 2.6
million of contractual adjustments related to increased costs due to the
devaluation of the Mexican peso which occurred in December of 1994. Net sales in
the nine months ended September 30, 1996 include similar contractual adjustments
of $1.1 million.
<PAGE>
14
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
COST OF DATA ACQUISITION. Cost of data acquisition for the Company increased
606.7% to $26.6 million in the nine months ended September 30, 1996 from $3.8
million in the nine months ended September 30, 1995. The increase is primarily
attributable to the inclusion of $19.6 million of cost of data acquisition of
the Company's operations in the United States and a 86.4% increase to $7.0
million in the nine months ended September 30, 1996, from $3.8 million in the
nine months ended September 30, 1995 for the Mexican Operations. The decrease in
gross margin for the Mexican Operations is primarily attributable to larger
price adjustments realized during the nine months ended September 30, 1995 and
the impact in the nine months ended September 30, 1996 of the Southern Services
crew (a drilling and field services crew operating in Southern Mexico) which did
not commence work in 1995 until November.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the Company
increased 425.0% to $2.8 million in the nine months ended September 30, 1996
from $531,000 in the nine months ended September 30, 1995. The increase is
primarily attributable to the inclusion of $2.0 million of depreciation and
amortization of the Company's operations in the United States, including
$260,000 of goodwill amortization attributable to the acquisitions of Northern
and Kemp. This is in addition to a 27.1% increase to $675,000 for the nine
months ended September 30, 1996, from $531,000 for the nine months ended
September 30, 1995, for the Mexican Operations.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the
Company increased 368.8% to $3.9 million in the nine months ended September 30,
1996 from $833,000 in the nine months ended September 30, 1995. The increase is
primarily attributable to the inclusion of $2.9 million of general and
administrative expenses from the Company's operations in the United States, and
a 3.9% increase to $866,000 in the nine months ended September 30, 1996, from
$833,000 in the nine months ended September 30, 1995, for the Mexican
Operations. General and administrative expenses for the Company have increased
due to the added costs associated with being a publicly traded company and
increased marketing costs.
OPERATING INCOME. Operating income for the Company increased 42.2% to $2.9
million in the nine months ended September 30, 1996 from $2.0 million in the
nine months ended September 30, 1995. The operating income of the Mexican
Operations decreased 73.4% to $540,000 in the nine months ended September 30,
1996 from $2.0 million in the nine months ended September 30, 1995. The decrease
in the operating income of the Mexican Operations for the nine months ended
September 30, 1996 compared to the nine months ended September 30, 1995 is due
to contractual revenue adjustments of $ 2.6 million, which were realized during
the nine months ending September 30, 1995, attributable to increased costs
resulting from the devaluation of the Mexican peso during December of 1994. This
is contrasted with contractual adjustments of $1.1 million realized during the
nine months ended September 30, 1996. The decrease in the operating income of
the Mexican Operations was partially offset by the inclusion of $2.3 million of
operating income of the Company's operations in the United States for the nine
months ended September 30, 1996.
MISCELLANEOUS INCOME (EXPENSE). The Company recognized miscellaneous income of
$437,000 in the nine months ended September 30, 1996 compared to miscellaneous
income of $38,000 in the nine months ended September 30, 1995. The increase is
primarily the result of interest income in Mexico due to the high investment
interest rates available in Mexico, interest income from the investment of the
proceeds of the Company's initial public offering and interest income from the
conversion of a trade receivable to an interest-bearing note receivable.
INTEREST EXPENSE. The Company's interest expense increased 18.9% to $668,000 in
the nine months ended September 30, 1996 from $562,000 in the nine months ended
September 30, 1995. The increase is due to interest charges on borrowings of
approximately $12 million under a credit facility with the Company's principal
lender during the nine months ended September 30, 1996 compared to borrowings of
approximately $300,000 during the nine months ended September 30, 1995.
<PAGE>
15
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
FOREIGN CURRENCY GAINS. The Company recognized a foreign currency gain of $7,000
in the nine months ended September 30, 1996 compared to a foreign currency loss
of $83,000 in the nine months ended September 30, 1995. These gains and losses
are primarily attributable to the reduction of U.S. dollar liabilities of the
Mexican Operations and the fluctuation of the Peso/U.S. dollar exchange rate.
INCOME TAX EXPENSE. The Company recognized income tax expense from operations of
$645,000 in the nine months ended September 30, 1996 compared to income tax
expense of $81,000 in the nine months ended September 30, 1995. The increase is
primarily attributable to earnings of the Company's operations in the United
States taxed at a 26% effective tax rate, partially offset by 18% effective tax
rate for earnings from the Mexican Operations. The lower tax rate in Mexico is
due to inflation adjustments. The effective tax rate for the Company's
operations in the United States is lower than the statutory tax rate due to the
anticipated change in the valuation allowance previously established with
respect to the net operating loss carryforwards.
EXTRAORDINARY ITEM NET OF INCOME TAX EXPENSE. The Company recognized a $57,000
extraordinary item in the nine months ended September 30, 1996, net of tax
expense of $36,000. The extraordinary item is due to a gain recognized on the
early extinguishment of debt. No extraordinary items were recognized in the nine
months ended September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
From December 31, 1995 to September 30, 1996, total assets of the Company
increased from $4.5 million to $54.4 million, total liabilities increased from
$2.7 million to $27.4 million and total stockholders' equity increased from $1.8
million to $27.0 million. These increases resulted from the Company's initial
public offering, the acquisition of the Operating Subsidiaries and new capital
expenditures partially financed by a new credit line.
On February 9, 1996, the Company completed its initial public offering of
4,000,000 shares of Common Stock at a price to the public of $7.50 per share.
Subsequently, on February 21, 1996, the underwriters exercised their
over-allotment option to purchase an additional 600,000 shares at a price to the
public of $7.50 per share. The net proceeds to the Company (after deducting
underwriting discounts and commissions and offering expenses) were approximately
$28.7 million. Of this amount, approximately $3.5 million was treated, for
accounting purposes, as a dividend to the former stockholders of GEO and PIASA ,
approximately $10.3 million was used to purchase the land seismic assets of
Northern and all of the capital stock of Kemp , approximately $4.6 million was
used to repay indebtedness of the Operating Subsidiaries, $152,000 was used to
retire capital leases and $1.1 million was paid subsequent to the acquisitions
as a purchase price adjustment for the land seismic assets of Northern. The
remaining proceeds were used primarily for working capital and capital
expenditures.
At September 30, 1996, the Company had $1.2 million of cash. The Company
utilized $2.1 million net cash from operating activities in the nine months
ended September 30, 1996 compared with providing $1.6 million in the same period
of the prior year. The reduction in net cash provided by operating activities
was primarily attributable to a net increase in working capital.
<PAGE>
16
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (continued)
Net cash used in investing activities increased to $22.5 million in the nine
months ended September 30, 1996 from $123,000 in the same period in the prior
year. This increase was primarily due to the cash utilized to purchase Northern
and Kemp of $10.3 million and for capital expenditures of $12.3 million, offset
by cash proceeds of approximately $100,000 from the sale of equipment.
Net cash provided by financing activities increased to $25.2 million for the
nine months ended September 30,1996 from net cash utilized of $663,000 in the
comparable period in the prior year due to the completion of the Company's
initial public offering and the closing of the Company's credit agreement with
First Interstate Bank of Texas, N.A.
The Company used $12.3 million for capital expenditures in the nine months ended
September 30, 1996 as compared to $123,000 in the same period of the prior year.
Simultaneously with the acquisition of the Operating Subsidiaries, Northern and
Paragon exercised options to purchase equipment which had been rented. These
capital expenditures reduced the Company's reliance on leased equipment and
improved the Company's ability to meet the demand for 3-D data acquisition
services. On May 31, 1996, the Company purchased approximately $8.5 million of
equipment from Input/Output, Inc. This purchase increased the Company's
recording channel capacity from approximately 7,500 to approximately 12,000
channels. Simultaneously with the purchase of the equipment, the Company entered
into an $18 million credit facility with First Interstate Bank of Texas, N.A.
The credit facility is for three years and includes $7.5 million of financing
for the above equipment and $4.5 million of refinancing of conditional sales
agreements acquired by the Operating Subsidiaries prior to the Company's initial
public offering. The credit facility also provides $3.0 million for future
capital expenditures and a working capital facility of up to $3.0 million, of
which $2.0 million is available as of September 30, 1996. The new equipment will
be utilized to meet the requirements of a contract with a subsidiary of British
Petroleum in Alaska, increase the channel capacity of one of the Company's
Mexican crews for a new 3-D contract with PEMEX and increase the channel
capacity of the Company's two crews in the Rocky Mountain Region.
On October 1, 1996, the Company signed a termination agreement with the
Company's former Chief Financial Officer where the Company agreed to pay him
$150,000 plus $7,000 per month through December 31, 1998, to provide him with
office space in the Company's New York City facility through December 31, 1997
and to provide him with certain insurance benefits. In exchange, therefore, the
former Chief Financial Officer has agreed to render financial and advisory
services to the Company in connection with its proposed public offering. The
Company anticipates a charge to fourth quarter earnings of $400,000 related to
this agreement.
On October 8, 1996, the Company filed a Registration Statement on Form S-1 (No.
333-13665) with the Securities and Exchange Commission relating to the proposed
underwritten sale to the public of 4.0 million shares of the Company's Common
Stock (not including an over-allotment option of 600,000 shares). The Company
anticipates that the proceeds from the offering will be used to purchase
approximately $17.0 million of additional equipment, repay approximately $6.0
million of debt incurred in connection with the Company's purchase in May 1996
of two 24-bit seismic data acquisition systems, approximately $2.6 million to
pay a portion of the purchase price for J.R.S. and the balance, if any, for
working capital and other general corporate purposes.
At November 1, 1996, the Company's estimated backlog of commitments for services
totaled $41.7 million. The Company expects to complete substantially all of
these commitments during 1996 and 1997; however, commitments are subject to
cancellation at the option of the Company's customers, on short notice and
without penalty.
The Company believes that its planned capital expenditures and operating
requirements through the end of 1996 will be funded from cash from operations
and proceeds from the First Interstate Bank of Texas, N.A. credit facility and
other equipment financing if required. If other financing is required, there can
be no assurance that the Company will be able to obtain financing at all, or on
terms favorable to the Company. If the financing sources described above are
insufficient to fund the Company's planned capital expenditures and operating
requirements, and the Company is unable to obtain additional financing, it will
be unable to complete its capital expenditure program and may be materially and
adversely affected as a result.
<PAGE>
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) List of exhibits
Financial Data Schedule
Executive Employment Agreement dated September 30, 1996,
between the Registrant and Ronald L. Koons (Incorporated by
reference to Exhibit 10.5 to the Registrant's Registration
Statement on Form S-1(No. 333-13665)).
(b) The Registrant did not file any Current Reports on Form 8-K
during the three months ended September 30, 1996.
<PAGE>
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
3-D Geophysical, Inc.
Dated: November 14, 1996
By: /s/ Richard D. Davis
---------------------
Richard D. Davis
President and
Chief Executive Officer
Dated: November 14, 1996
By: /s/ Ronald L. Koons
--------------------
Ronald L. Koons
Treasurer and
Chief Financial Officer
(principal financial
and accounting officer)
<PAGE>
18
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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