<PAGE> 1
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, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
---------- ----------
Commission file number 0-27564
3-D GEOPHYSICAL, INC.
(Exact name of Registrant as Specified in its Charter)
Delaware 13-3841601
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
8226 Park Meadows Drive
Littleton, Colorado 80124
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (303) 858-0500
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 of the latest practicable date.
The total number of shares of the registrant's Common Stock, $.01 par value per
share, outstanding on November 11, 1997 was 11,777,083.
<PAGE> 2
3-D GEOPHYSICAL, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PART I. Financial Information Page
<S> <C>
Item 1 Financial Statements.
Condensed Consolidated Balance Sheets at 3 - 4
December 31, 1996 and September 30, 1997
Condensed Consolidated Statements of Operations for the 5
Three Months Ended September 30, 1996 and September 30, 1997
Nine Months Ended September 30, 1996 and September 30, 1997
Condensed Consolidated Statements of Cash Flows for the 6
Nine Months Ended September 30, 1996 and September 30, 1997
Notes to Condensed Consolidated Financial Statements 7 - 11
Item 2 Management's Discussion and Analysis of Financial Condition and Results 12 - 17
of Operations.
PART II. Other Information
Item 1 Legal Proceedings. 18
Item 2 Changes in Securities. 18
Item 3 Defaults Upon Senior Securities. 18
Item 4 Submission of Matters to a Vote of Security Holders. 18
Item 5 Other Information. 18
Item 6 Exhibits and Reports on Form 8-K. 18
Signatures
</TABLE>
2
<PAGE> 3
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,624 $ 1,504
Restricted cash 820 800
Accounts receivable billed, net of the allowance for
doubtful accounts of $83 and $111 as of December 31,
1996 and September 30, 1997 11,268 13,184
Accounts receivable, unbilled 2,933 14,683
Other receivables 282 532
Deferred income taxes 108 186
Prepaid expenses and other 999 1,727
------------ -----------
Total current assets 34,034 32,616
Property and equipment, net of accumulated depreciation of
$5,525 and $11,842 as of December 31, 1996 and
September 30, 1997 35,529 42,188
Goodwill, net of accumulated amortization of $362 and $838 as of
December 31, 1996 and September 30, 1997 6,115 8,288
Other assets 1,588 945
------------ -------------
Total assets $ 77,266 $ 84,037
============ =============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE> 4
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital leases $ 7,559 $ 9,090
Accounts payable 12,912 12,254
Accrued liabilities 1,560 1,731
Deferred revenue 1,536 492
------------ ------------
Total current liabilities 23,567 23,567
Long-term debt and capital leases, net of current maturities 4,597 5,055
Deferred income taxes 937 2,098
Stockholders' equity:
Common stock, $.01 par value, 25,000,000 shares authorized,
11,100,000 and 11,777,083 shares issued and 111 118
outstanding, respectively
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued and outstanding - -
Additional paid in capital 51,426 56,679
Retained earnings 739 631
Cumulative foreign currency translation adjustment (4,111) (4,111)
------------ ------------
Total stockholders' equity 48,165 53,317
------------ ------------
Total liabilities and stockholders' equity $ 77,266 $ 84,037
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE> 5
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1996 1997 1996 1997
----------- ----------- ------------- -------------
<S> <C> <C> <C>
Net revenues $ 16,612 $ 26,542 $ 36,151 $ 69,569
Expenses
Cost of data acquisition 12,111 19,447 26,563 55,623
Depreciation and amortization 1,139 2,642 2,788 7,282
General and administrative expenses 1,322 2,255 3,907 6,825
----------- ------------ ------------- -------------
14,572 24,344 33,258 69,730
Operating income (loss) 2,040 2,198 2,893 (161)
Other income (expense)
Rental and other miscellaneous 73 201 437 962
Interest expense (372) (363) (668) (1,061)
Foreign currency transaction/
Translation gains (losses) (74) 362 7 221
----------- ------------ ------------- -------------
(373) 200 (224) 122
Income (loss) before provision for income (39)
taxes and extraordinary item 1,667 2,398 2,669
Provision for income taxes 368 884 645 67
----------- ------------ ------------- -------------
Income (loss) before extraordinary item 1,299 1,514 2,024 (106)
Extraordinary item, net of tax expense of
$36 -- -- 57 --
----------- ------------ ------------- -------------
Net income (loss) $ 1,299 $ 1,514 $ 2,081 $ (106)
=========== ============ ============= =============
Income (loss) per share before
extraordinary item $ .17 $ .13 $ .29 $ (.01)
Extraordinary item per share, net of
tax expense -- .01 --
----------- ------------ ------------ -------------
Net income (loss) earnings per share $ .17 $ .13 $ .30 $ (.01)
=========== ============ ============= =============
Weighted average common shares outstanding 7,736,036 11,960,131 6,926,795 11,960,131
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE> 6
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
1996 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used by operating activities $ (2,089) $ (8,445)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (12,270) (9,692)
Consideration paid to acquire seismic data acquisition (2,664)
companies (10,328)
Proceeds from sale of property and equipment 114 35
------------ -----------
Net cash used by investing activities (22,484) (12,321)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash paid in connection with public offerings of common
stock (3,431) --
Proceeds from public offerings, net of underwriting
discounts 32,085 3,701
Retirement of indebtedness of acquired companies (4,599) (1,139)
Principal payments on notes payable and capital leases (8,317) (13,946)
Cash paid for debt financing costs -- (36)
Proceeds of borrowings under notes payable 12,934 15,957
Dividend paid to owners of predecessor company (3,510) --
------------ -----------
Net cash provided by financing activities 25,162 4,537
Net (decrease) increase in cash 589 (16,229)
Cash at beginning of period 609 17,624
Effect of change in exchange rate on cash 8 109
------------ -----------
Cash at end of period $ 1,206 $ 1,504
============ ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
<PAGE> 7
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 (the "Mexican
Operations") 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.
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 ("APB 16") and SEC Staff Accounting
Bulletin No. 48. Northern and Kemp are 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.
In December 1996, Paragon and Kemp were merged into Northern.
ACQUISITION OF J.R.S. EXPLORATION
On January 27, 1997 the Company consummated the purchase of J.R.S. Exploration
Company, Limited ("J.R.S. Exploration"), a Canadian seismic data acquisition
company, by acquiring all of the issued and outstanding stock of several
intermediate holding companies which existed solely as holding companies for the
stock of J.R.S. Exploration. On that same date, in a separate transaction, the
Company purchased all of the issued and outstanding stock of Siegfried &
Siegfried Resource Consultants, Limited ("Siegfried & Siegfried"), a Canadian
company owned by a key employee of J.R.S. Exploration, that leased certain
seismic data acquisition equipment to J.R.S. Exploration. These acquisitions
were effected through a newly-formed subsidiary of the Company, 3-D Geophysical
of Canada, Inc. ("3-D Canada"), whereby shares of 3-D Canada, which are
exchangeable into shares of the Company on a one-for-one basis, and cash were
exchanged for the stock of the acquired companies. These acquisitions are being
treated for accounting purposes as purchase business combinations under the
provisions of APB 16, with the excess of consideration paid to acquire these
companies over the fair market value of the assets acquired being accounted for
as goodwill, which is being amortized over a 15-year life on a straight-line
basis.
The condensed consolidated financial statements of the Company include the
operations of J.R.S. Exploration and Siegfried & Siegfried (the "Canadian
Operations") from January 1, 1997, which is the date that management of the
Company and the former shareholders of the acquired companies deem to be the
date upon which the Company assumed effective control of the operations of the
acquired companies. As of September 30, 1997, 152,083 shares of 3-D Canada were
exchanged for an equal number of shares of common stock of the Company. For
accounting purposes, the non-exchanged shares of 3-D Canada are deemed to be
outstanding shares of the Company. Due to the acquisition of the Canadian
Operations and the acquisitions of Northern, Paragon and Kemp after the end of
the first month in the nine months ended September 30, 1996, and due to the fact
that the United States Operations contain three full quarters of performance
during 1997, the Company's condensed consolidated financial statements as of and
for the three and nine month periods ended September 30, 1997 are not comparable
to the financial statements of the Company as of and for the three and nine
month periods ended September 30, 1996.
7
<PAGE> 8
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ACQUISITION OF J.R.S. EXPLORATION (continued)
The consideration paid to the former owners of the Canadian Operations and the
allocation of such consideration to the acquired assets is as follows:
<TABLE>
<CAPTION>
(in thousands)
-----------------
<S> <C>
Cash paid for the stock and assets of the acquired companies $ 2,665
Stock issued to the former owners of the Canadian Operations at a
Price of $9.00 per share 2,625
Liabilities assumed:
Bank overdraft 637
Accounts payable 2,019
Accrued and other current liabilities 420
Debt assumed:
Current 1,139
-----------------
Amounts allocated to acquired assets $ 9,505
=================
Allocation of the purchase price to the acquired assets:
Cash $ 137
Accounts receivable:
Trade 3,516
Prepaid expenses and other current assets 28
Property and equipment 3,082
Goodwill 2,742
=================
$ 9,505
=================
</TABLE>
The 1996 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 condensed 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,
1997, the results of its operations for the three and nine month periods ended
September 30, 1996 and 1997, and its cash flows for the nine month periods ended
September 30, 1996 and 1997. All significant intercompany accounts have been
eliminated. Although the Company believes that this disclosure is 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 applicable 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, 1996, which was filed
pursuant to the Securities Exchange Act of 1934, as amended. The results of
operations for the three and nine month periods ended September 30, 1997 are not
necessarily indicative of the results to be expected for the full year.
8
<PAGE> 9
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA INFORMATION
The accompanying summary pro forma information for the Company for the three and
nine month periods ended September 30, 1996 and 1997 represents the operations
of the Company as if the acquisitions of the Operating Subsidiaries and the
Canadian Operations had occurred on January 1, 1996.
<TABLE>
<CAPTION>
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)
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues $ 18,022 $ 26,542 $ 46,147 $ 69,569
=========== =========== =========== ===========
Extraordinary item, net of tax expense -- -- 57 --
=========== =========== =========== ===========
Net income (loss) $ 1,136 $ 1,514 $ 2,043 $ (106)
=========== =========== =========== ===========
Income (loss) per share before extraordinary item $ .09 $ .13 $ .16 $ (.01)
Extraordinary item per share, net of tax expense -- -- .01 --
----------- ----------- ----------- -----------
Earnings (loss) per share $ .09 $ .13 $ .17 $ (.01)
=========== =========== =========== ===========
</TABLE>
The pro forma results described above assume a weighted average number of common
shares outstanding of 11,960,000.
The summary pro forma information is not necessarily indicative of the actual
results that would have been achieved if the acquisitions of the Operating
Subsidiaries and the Canadian Operations had occurred on the date indicated or
which may be realized in the future.
REVENUE RECOGNITION AND REVENUE ADJUSTMENTS
The Company generates revenue through providing 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 revenues may include contractual revenue adjustments from the Company's
operations in Mexico, 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. Contractual revenue adjustments for the three and nine
month periods ended September 30, 1996 and 1997 are not considered by the
Company to be significant to the quarterly financial statements.
2. SECOND PUBLIC OFFERING OF COMMON STOCK
On December 17, 1996, the Company completed a second public offering of
3,500,000 shares of common stock at a price to the public of $7.50 per share.
Subsequently, on January 2, 1997, the underwriters exercised their overallotment
option to purchase an additional 525,000 shares at a price to the public of
$7.50 per share. Total proceeds to the Company, net of the underwriters'
discounts and offering costs, were approximately $27.2 million. Of these net
proceeds Company, net of the underwriters' discounts and offering costs, were
approximately $27.2 million. Of these net proceeds, $4.0 million was used to pay
the cash portion of the purchase price for the Canadian Operations and to retire
certain debt obligations of the Canadian Operations, $3.0 million was used to
retire certain debt obligations
9
<PAGE> 10
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. SECOND PUBLIC OFFERING OF COMMON STOCK (continued)
outstanding under a loan agreement with Wells Fargo Bank (Texas), N.A., and
$20.2 million has been used to purchase additional seismic data acquisition
equipment and for working capital purposes.
3. CONCENTRATIONS OF CREDIT RISK
During the nine months ended September 30, 1997, two customers accounted for
21.0% and 12.9% of net revenues, respectively, and during the nine months ended
September 30, 1996, three customers accounted for 25.1%, 18.1% and 16.4% of net
revenues, respectively.
As of September 30, 1997, three customers accounted for 24.0%, 22.3% and 12.3%
of accounts receivable, respectively, and as of December 31, 1996, two customers
accounted for 33.3% and 12.6% of accounts receivable, respectively.
4. RECENT ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board issued the following
Statements of Financial Accounting Standards: "Earnings Per Share" ("SFAS No.
128"); "Reporting Comprehensive Income" ("SFAS No. 130"); and "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No.
128 revises the computation and disclosure of earnings per share, principally
the replacement of primary earnings per share with basic earnings per share
which does not consider common stock equivalents. SFAS No. 128 also modifies
certain dilutive computations and replaces fully diluted earnings per share with
diluted earnings per share. Disclosure requirements include dual presentation of
basic and diluted earnings per share, along with a reconciliation of the
elements used in computing basic and diluted earnings per share. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components. Comprehensive income generally includes changes in separately
reported components of equity along with net income. SFAS No. 131 establishes
standards for reporting information about operating segments, along with related
disclosures about products, services, geographic areas and major customers,
based on the Company's disaggregation of an entity for internal operating
decisions. At this time, the Company does not expect the adoption of SFAS No.
128 (effective for periods ending after December 15, 1997), SFAS No. 130 and
SFAS No. 131 (effective for periods beginning after December 15, 1997) to have
material impacts on the Company's reported results.
5. EARNINGS PER SHARE
The number of shares used in the calculation of earnings per share is determined
as follows:
<TABLE>
<CAPTION>
For the Three and Nine
Months Ended
September 30, 1997
-------------------------
<S> <C>
Shares outstanding at December 31, 1996 11,100,000
Shares sold in overallotment option relating to second public
Offering 525,000
Shares of 3-D Canada exchanged for shares of the Company 152,083
Shares deemed issued to former owners of J.R.S. Exploration 139,583
Common stock equivalents, principally common stock options 43,465
-------------------------
Weighted average common shares outstanding 11,960,131
=========================
</TABLE>
10
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3-D GEOPHYSICAL, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. INCOME TAXES
The effective income tax rate for the nine months ended September 30, 1996 was
24%. This rate was lower than the United States statutory rate primarily due to
the recognition of previously reserved net operating loss carryforwards
associated with Paragon and inflation adjustments in Mexico. The Company
recognized a provision for income taxes of $67,000 despite the pre-tax loss of
$39,000 for the nine months ended September 30, 1997 due to losses generated in
Latin America where the effective tax rate was 34%, which losses were more than
offset by income earned in Canada where the effective tax rate was 45%.
7. COMMITMENTS AND CONTINGENCIES
On September 23, 1997, the Company's wholly-owned Mexican subsidiary, GEO, was
served with a notice of a lawsuit and a complaint filed in the 10th Federal
District Court in Mexico City by Kelman Technologies, Inc., the successor to
Capilano Geophysical, Ltd. ("Capilano"), claiming damages of approximately $8
million (plus interest, legal fees and other expenses) based on GEO's alleged
failure to reimburse Capilano for Capilano's outlays and expenditures under a
letter of intent between GEO and Capilano entered into in June of 1991. The
Company filed a timely response to the complaint, denying in its entirety
Capilano's right to any of the claimed damages, interest and expenses, and
contesting Capilano's complaints as either not grounded in fact or as
misconstructions of actual events. While the Company is not able to estimate the
effect, if any, on GEO's results of operations and financial position which may
result from the resolution of this matter, the Company believes that GEO has
meritorious defenses to each of Capilano's allegations. The former shareholders
of GEO have pledged 60,000 shares of common stock to provide for any costs
incurred by the Company in connection with this lawsuit.
8. SUBSEQUENT EVENTS
On October 13, 1997, the Company signed a commitment letter with a lender for a
new $30 million credit agreement which would replace the Company's existing $11
million credit agreement, provide a line of credit to fund required capital
expenditures as well as a larger revolving credit line for working capital
requirements. Although there can be no assurance that such negotiations will be
successfully completed, the Company anticipates signing a new credit agreement
in November. If these negotiations are unsuccessful or if other financing is
required, there can be no assurance that the Company will be able to obtain
financing on terms favorable to the Company, or at all. 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, the Company may be unable to complete its capital
expenditure program and may be materially and adversely affected as a result.
On October 15, 1997, the Canadian Operations entered into a noncancelable
agreement to lease 3,000 channels of seismic data equipment with a lease term of
six months and options to extend the lease for up to three years. Aggregate
payments under this lease agreement total approximately $1.2 million.
In October 1997, the Company borrowed $850,000 (the "Loans") from five persons
(collectively, the "Lenders"), including Joel Friedman, Chairman of the Board
($125,000), Ralph M. Bahna ($125,000), a Director, Wayne P. Widynowski
($100,000), Executive Vice President and a Director, and Ronald Koons
($250,000), Vice President and Chief Financial Officer. The Loans mature in
April 1998, or earlier upon the refinancing of the Company's existing loan
facility with Wells Fargo Bank, N.A., bear interest at 12% per year and are
subordinated to the Company's obligations to Wells Fargo Bank. To induce the
Lenders to make the Loans, the Company issued five year options to purchase, at
$6.50 per share, 12,500 shares of the Company's common stock for each $250,000
principal amount of the Loans. Also in October 1997, the Company issued a five
year option to purchase, at $6.50 per share, 17,500 shares of the Company's
common stock to Luis Ferran, Executive Vice President and a Director, in
consideration of Mr. Ferran's personal guarantee of a loan by the Laredo
National Bank to GEO in the principal amount of $350,000.
11
<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 February 9, 1996. In December 1996, Paragon and Kemp were merged into
Northern. The financial performance of J.R.S. Exploration and Siegfried &
Siegfried are included as of January 1, 1997. The Company's statements of
operations and cash flows for the three and nine months ended September 30, 1997
are not comparable to the statements of operations and cash flows for the three
and nine months ended September 30, 1996, and the Company's balance sheet as of
September 30, 1997 is not comparable to its balance sheet as of December 31,
1996.
The following discussion has been divided into two sections. The first section
relates to the operating performance of the Company. The second section
discusses the Company's liquidity and capital resources as of September 30,
1997. For the purposes of this discussion, the operations of GEO, PIASA and 3-D
Geophysical of Latin America, Inc. are considered the "Latin American
Operations", the operations of J.R.S. Exploration and Siegfried & Siegfried are
considered the "Canadian Operations" and the operations of Northern Geophysical
and 3-D Geophysical are considered the "United States Operations".
RESULTS OF OPERATIONS
These forward-looking statements reflect numerous assumptions, involve a number
of risks and uncertainties, and actual results may vary materially. Among the
factors that could cause actual results to differ materially are the following;
unanticipated adverse weather conditions; the level of activity in the oil and
gas industry; inflationary trends; interest and exchange rates, and the other
risks detailed from time to time in the Company's filings with the SEC.
Three Months Ended September 30, 1997 compared to Three Months Ended September
30, 1996
Net revenues. Net revenues for the Company increased 59.8% to $26.5 million in
the three months ended September 30, 1997 from $16.6 million in the three months
ended September 30, 1996. The increase is partially attributable to the
inclusion of $2.6 million of net revenues of the Canadian Operations which were
acquired in January 1997. Revenues for the United States Operations increased
39.3% to $17.0 million for the three months ended September 30, 1997 from $12.2
million for the three months ended September 30, 1996, and revenues for Latin
American Operations increased 56.3% to $6.9 million for the three months ended
September 30, 1997 from $4.4 million for the three months ended September 30,
1996. The increase in net revenues for the United States Operations is primarily
attributable to an increase of $1.7 million from a contract with a major
customer in the North Slope region of Alaska and increased revenues of $1.5
million generated from the addition of a crew in the California region. The
increase in revenues for the Latin American Operations primarily relates to an
increase of $1.3 million from a contract with a major customer in Peru and
additional contracts awarded in Mexico.
Cost of Data Acquisition. Cost of data acquisition for the Company increased
60.6% to $19.4 million in the three months ended September 30, 1997 from $12.1
million in the three months ended September 30, 1996. The increase is partially
attributable to the inclusion of $1.7 million of cost of data acquisition from
the Canadian Operations. Cost of data acquisition increased by 39.2% to $12.2
million in the three months ended September 30, 1997, from $8.8 million in the
three months ended September 30, 1996, for the United States Operations and by
64.9% to $5.5 million for the three months ended September 30, 1997 from $3.3
million for the three months ended September 30, 1996 for the Latin American
Operations. The increase in cost of data acquisition in the United States and in
Latin America is primarily due to an increase in revenues, as described in the
corresponding section above.
Gross margins (hereafter defined as revenues less cost of data acquisition) for
the Company declined slightly as a percentage of revenues, to 26.7% for the
three months ended September 30, 1997 from 27.1% for the three months ended
September 30, 1996. The Canadian Operations provided the Company with a gross
margin of 34.4% for the three months ended September 30, 1997. This performance
was partially offset by a decline in gross margins for the Latin American
Operations from 24.9% in the prior year's quarter to 20.7% in the current
quarter. Gross margins for the Company's operations in Mexico decreased from
24.6% in the quarter ended September 30, 1996 to 14.7% in the
12
<PAGE> 13
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
quarter ended September 30, 1997 notwithstanding more favorable results from the
Company's operations in Peru. The decline in gross margins in Mexico is
primarily a result of permitting delays experienced on a project that began in
December of 1996 near Poza Rica, Mexico. Gross margins for the United States
Operations declined slightly to 28.0% for the three months ended September 30,
1997 from 27.9% for the same quarter last year. The decline is primarily due to
the completion of backlog in the Ohio region, where work was historically less
profitable than work in other areas.
Depreciation and Amortization. Depreciation and amortization for the Company
increased to $2.6 million in the three months ended September 30, 1997 from $1.1
million in the three months ended September 30, 1996. The increase is
attributable to the inclusion of $181,000 of depreciation and amortization of
the Canadian Operations and to purchases of approximately $19.7 million of new
seismic data acquisition and related equipment during the past twelve months.
General and Administrative Expenses. General and administrative expenses for the
Company increased 70.6% to $2.3 million in the three months ended September 30,
1997 from $1.3 million in the three months ended September 30, 1996, but
decreased from $2.5 million in the previous quarter. The increase from the prior
year is partially attributable to the inclusion of $277,000 of general and
administrative expenses of the Canadian Operations. In addition, general and
administrative expenses for the United States Operations increased 30.2% to $1.3
million for the three months ended September 30, 1997 from $975,000 for the
three months ended September 30, 1996 due primarily to increases in costs
associated with moving Company headquarters, marketing, severance costs, and
executive search costs. General and administrative expenses for the Latin
American Operations increased to $710,000 for the three months ended September
30, 1997 from $271,000 for the three months ended September 30, 1996. The
increase in general and administrative expenses for the Latin American
Operations is due to the opening of the Company's branch offices in Peru and
Bolivia and the addition of support staff in Mexico City needed to complete
awarded contracts.
Operating Income. The Company recognized operating income of $2.2 million in the
three months ended September 30, 1997 compared to operating income of $2.0
million for the three months ended September 30, 1996. The increase is
attributable to higher revenues, partially offset by proportionately higher
costs of data acquisition and overhead costs as discussed in the corresponding
sections above.
Rental and Other Miscellaneous Income (Expense). The Company's rental and other
miscellaneous income increased by $128,000 to $201,000 for the three months
ended September 30, 1997 from $73,000 for the three months ended September 30,
1996. The increase is partially attributable to the inclusion of $41,000 of
rental and other miscellaneous income from the Canadian Operations for the three
months ended September 30, 1997.
Interest Expense. The Company's interest expense decreased slightly by 2.4% to
$363,000 for the three months ended September 30, 1997 from $372,000 for the
three months ended September 30, 1996 due to lower average borrowings for the
three months ended September 30, 1997.
Foreign Currency Gain. The Company recognized a foreign currency gain of
$362,000 in the three months ended September 30, 1997 compared to a foreign
currency loss of $74,000 in the three months ended September 30, 1996. The
inflation rate in Mexico, as measured by the consumer price index, exceeded 100%
for the three years ended December 31, 1996. Accordingly, the Company has
adopted the dollar as the functional currency for the Mexican Operations
beginning January 1, 1997 as prescribed by Statement of Financial Accounting
Standards No. 52 ("Statement 52"). Using the dollar as the functional currency
results in adjustments to the consolidated statement of operations for foreign
currency translation gains and losses. In 1996, these amounts were included in
cumulative foreign currency translation adjustments, reflected in stockholders'
equity, and were not charged to earnings.
The foreign currency gain recognized in the current quarter is attributable to
the improvement of the Peso/Dollar exchange rate during the three months ended
September 30, 1997. As of November 10, 1997, the Peso/Dollar exchange rate
declined by approximately 7.4% from September 30, 1997. In the event that this
trend continues, the Company
13
<PAGE> 14
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (continued)
could be adversely affected by foreign currency losses in the fourth quarter.
Income Tax Provision. The Company recognized income tax expense from operations
of $884,000 in the three months ended September 30, 1997 compared to income tax
expense of $368,000 in the three months ended September 30, 1996. The expense is
attributable to income earned by the United States, Latin America, and Canadian
Operations at effective tax rates of 38%, 26% and 45%, respectively. The
effective tax rate for the Latin American Operations is lower than the combined
statutory rate (35% in Mexico and 30% in Peru) due to the partial reversal of a
valuation allowance previously established for net operating losses incurred in
Peru in 1996. The Company expects to generate future income in Peru sufficient
to utilize these net operating losses.
Nine Months Ended September 30, 1997 compared to Nine Months Ended September 30,
1996
Net revenues. Net revenues for the Company increased 92.4% to $69.6 million in
the nine months ended September 30, 1997 from $36.2 million in the nine months
ended September 30, 1996. The increase is primarily attributable to the
inclusion of $8.6 million of net revenues from the Canadian Operations and a
87.5% increase to $50.1 million in the nine months ended September 30, 1997,
from $26.8 million in the nine months ended September 30, 1996, for the United
States Operations. Additionally, revenues from Latin American Operations
increased by 15.3% to $10.9 million for the nine months ended September 30, 1997
from $9.4 million for the nine months ended September 30, 1996. The increase in
net revenues for the United States Operations is primarily attributable to a
large contract with a major customer in the North Slope region of Alaska as well
as the inclusion of three full quarters of performance. The increase in revenues
for the Latin American Operations primarily relates to increased revenues in
Peru of $1.6 million from a contract that began in July 1997.
Cost of Data Acquisition. Cost of data acquisition for the Company increased
109.4% to $55.6 million in the nine months ended September 30, 1997 from $26.6
million in the nine months ended September 30, 1996. The increase is primarily
attributable to the inclusion of $6.3 million of cost of data acquisition from
the Canadian Operations and a 101.4% increase to $38.9 million in the nine
months ended September 30, 1997, from $19.3 million in the nine months ended
September 30, 1996, for the United States Operations. Cost of data acquisition
for the Latin American Operations increased 43.8% to $10.4 million for the nine
months ended September 30, 1997 from $7.2 million for the nine months ended
September 30, 1996. The increase in cost of data acquisition in the United
States and in Latin America is primarily due to an increase in revenues, as
described in the corresponding section above.
The Canadian Operations contributed gross margins of 26.8% for the nine months
ended September 30, 1997. Gross margins for the United States Operations
decreased to 22.4% in the nine months ended September 30, 1997 from 27.7% in the
nine months ended September 30, 1996 primarily due to a North Slope land-based
project and decreased productivity in the Rocky Mountain Region, offset by
improved productivity in the Company's operations in Texas and California. The
North Slope project had low margins due to the use of leased, rather than owned,
equipment, but did not result in a negative impact on the Company's return on
assets. Decreased productivity in the Rocky Mountain Region was primarily the
result of weather delays experienced in the second quarter and the completion of
smaller, less profitable jobs principally in the Ohio region. Gross margins for
the Latin American Operations decreased to 4.0% in the nine months ended
September 30, 1997 from 23.1% in the nine months ended September 30, 1996
primarily due to the additional costs incurred in transitioning from 2-D data
acquisition methods to 3-D data acquisition methods in Mexico and lower
productivity than expected on a project which began in December of 1996 near
Poza Rica, Mexico.
Depreciation and Amortization. Depreciation and amortization for the Company
increased to $7.3 million in the nine months ended September 30, 1997 from $2.8
million in the nine months ended September 30, 1996. The increase is
attributable to the inclusion of $553,000 of depreciation and amortization of
the Canadian Operations and to purchases of approximately $19.7 million of new
seismic data acquisition and related equipment during the past twelve months.
14
<PAGE> 15
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS (continued)
General and Administrative Expenses. General and administrative expenses for the
Company increased 74.7% to $6.8 million in the nine months ended September 30,
1997 from $3.9 million in the nine months ended September 30, 1996. The increase
is partially attributable to the inclusion of $938,000 of general and
administrative expenses from the Canadian Operations. In addition, general and
administrative expenses for the United States Operations increased 39.4%
to $4.1 million for the nine months ended September 30, 1997 from $2.9 million
for the nine months ended September 30, 1996 due to increases in costs
associated with moving the Company's headquarters, marketing costs, accounting
and legal fees, and costs related to the Company's 1996 annual report and annual
meeting. General and administrative expenses of the Latin American Operations
increased 89.5% to $1.8 million for the nine months ended September 30, 1997
from $956,000 for the nine months ended September 30, 1996. The increase in
general and administrative expenses for the Latin American Operations is due to
the opening of the Company's branch offices in Peru and Bolivia and the addition
of support staff in Mexico City needed to complete awarded contracts.
Operating Loss. The Company recognized an operating loss of $161,000 in the nine
months ended September 30, 1997 compared to operating income of $2.9 million for
the nine months ended September 30, 1996. The loss is attributable to the
Company's poor performance in the second quarter of 1997, partially offset by
improved margins during the first and third quarters of 1997.
Rental and Other Miscellaneous Income (Expense). The Company's rental and other
miscellaneous income increased 120.1% to $962,000 for the nine months ended
September 30, 1997 from $437,000 for the nine months ended September 30, 1996.
The increase is primarily attributable to the inclusion of $397,000 of rental
and other miscellaneous income from the Canadian Operations for the nine months
ended September 30, 1997. This income was primarily generated from rental of
idle equipment. Miscellaneous income for the Latin American Operations increased
to $234,000 for the nine months ended September 30, 1997 from $113,000 for the
nine months ended September 30, 1996. The increase in Latin America is primarily
the result of interest income earned on a $3 million advance payment received in
Mexico in December, 1996.
Interest Expense. The Company's interest expense increased 58.8% to $1.1 million
for the nine months ended September 30, 1997 from $668,000 for the nine months
ended September 30, 1996. The increase is attributable to interest charges on
weighted-average borrowings of $13.3 million for the nine months ended September
30, 1997 compared to interest charges on weighted-average borrowings of $8.1
million for the nine months ended September 30, 1996.
Foreign Currency Gain. The Company recognized a foreign currency gain of
$221,000 in the nine months ended September 30, 1997 compared to a foreign
currency gain of $7,000 in the nine months ended September 30, 1996. The
inflation rate in Mexico, as measured by the consumer price index, has exceeded
100% for the three years ended December 31, 1996. Accordingly, the Company has
adopted the dollar as the functional currency for the Mexican Operations
beginning January 1, 1997 as prescribed by Statement of Financial Accounting
Standards No. 52 ("Statement 52"). Using the dollar as the functional currency
results in adjustments to the consolidated statement of operations for foreign
currency translation gains and losses. In 1996, these amounts were included in
cumulative foreign currency translation adjustments, reflected in stockholders'
equity, and were not charged to earnings.
The foreign currency gain recognized during the nine months ended September 30,
1997 is attributable to the improvement of the Peso/Dollar exchange rate during
the current year. As of November 10, 1997, the Peso/Dollar exchange rate
declined by approximately 7.4% from September 30, 1997. In the event that this
trend continues, the Company could be adversely affected by foreign currency
losses in the fourth quarter.
Income Tax Expense. The Company provided for income tax expense from operations
of $67,000 in the nine months ended September 30, 1997 compared to $645,000 in
the nine months ended September 30, 1996. The Company
15
<PAGE> 16
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS (continued)
recognized an expense despite the pre-tax loss of $39,000 for the nine months
ended September 30, 1997 due to losses generated in Latin America where the
effective tax rate was 34%, which losses were more than offset by income earned
in Canada where the effective tax rate was 45%.
LIQUIDITY AND CAPITAL RESOURCES
From December 31, 1996 to September 30, 1997, total assets of the Company
increased from $77.3 million to $84.0 million, total liabilities increased from
$29.1 million to $30.7 million and total stockholders' equity increased from
$48.2 million to $53.3 million. These changes are primarily due to the
acquisition of the Canadian Operations and the exercise of the underwriters'
overallotment option relating to the Company's second public offering.
On December 17, 1996, the Company completed a second public offering of
3,500,000 shares of common stock at a price to the public of $7.50 per share.
Subsequently, on January 2, 1997, the underwriters exercised their overallotment
option to purchase an additional 525,000 shares at a price to the public of
$7.50 per share. The proceeds, net of the underwriters' discounts and offering
costs, were approximately $27.2 million. Of these net proceeds, $4.0 million was
used to pay the cash portion of the purchase price for the Canadian Operations
and to retire certain existing debt obligations of the Canadian Operations, $3.0
million was used to retire certain debt obligations outstanding under a loan
agreement with Wells Fargo Bank Texas, N. A., formerly First Interstate Bank of
Texas, N. A., and $20.2 million has been used to purchase additional seismic
data acquisition equipment and for working capital purposes.
At September 30, 1997 the Company had $2.3 million of cash, including $.8
million of restricted cash. The Company utilized $8.4 million net cash from
operating activities in the nine months ended September 30, 1997 compared with
utilizing $2.1 million in the nine months ended September 30, 1996. The increase
in net cash utilized from operating activities is primarily due to an increase
of $10.6 million in the Company's unbilled receivables balance to $14.7 million
at September 30, 1997 from $4.1 million at September 30, 1996. The increase in
unbilled receivables for the quarter ended September 30, 1997 is due to work in
progress for two large projects in Alaska for which the billings were completed
in October 1997. Additionally, the generation of operating losses of $161,000
during the nine months ended September 30, 1997 compared to operating income of
$2.9 million during the nine months ended September 30, 1996, contributed to
the increase in net cash utilized from operating activities.
Net cash used in investing activities decreased to $12.3 million in the nine
months ended September 30, 1997 from $22.5 million in the same period in the
prior year. The decrease reflects a decline in consideration paid for
acquisitions to $2.7 million in the nine months ended September 30, 1997
compared to $10.3 million for the nine months ended September 30, 1996.
Additionally, equipment purchases decreased to $9.7 million during the nine
months ended September 30, 1997 from $12.3 million during the nine months ended
September 30, 1996.
On August 29, 1997, the Company entered into an agreement to lease 6,000
channels of data acquisition equipment from Input/Output, Inc. with a lease term
of one year and payment commitments totaling $4.8 million. As noted in Note 7 of
the financial statements, in October 1997, the Company entered into an agreement
to lease 3,000 channels from another party with a lease term of six months with
options to extend the lease for up to three years. Total payment commitments
under this arrangement approximate $1.2 million.
Net cash provided by financing activities decreased to $4.5 million for the nine
months ended September 30, 1997 from $25.2 million in the nine months ended
September 30, 1996 due to the completion of the Company's initial and secondary
public offerings in 1996.
At October 31, 1997, the Company's estimated backlog of commitments for services
totaled $88.1 million. The Company expects to complete $64.1 million of these
commitments during 1997 and 1998, approximately $12 million during 1999, and
approximately $12 million during 2000; however, commitments are subject to
cancellation at the
16
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES (continued)
option of the Company's customers on short notice and sometimes without penalty.
The Company has signed a commitment letter with a lender for a new $30 million
credit agreement which would replace the existing $11 million credit agreement
and provide a significantly larger term loan to fund required capital
expenditures and a larger revolving credit line for working capital
requirements. Although there can be no assurance that such negotiations will be
successfully completed, the Company anticipates signing a new credit agreement
in November. The Company believes that its planned capital expenditures and
operating requirements through the end of 1997 will be funded from cash from
operations, the new credit facility, and other equipment financing if required.
However, if the negotiations with respect to the new credit agreement are
unsuccessful or if other financing is required, there can be no assurance that
the Company will be able to obtain financing on terms favorable to the Company,
or at all. 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, the Company may be unable to
complete its capital expenditure program and may be materially and adversely
affected as a result.
17
<PAGE> 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the Current Report on Form 8-K filed on September
23, 1997.
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
10.1 3-D Geophysical 1997 Long-Term Incentive Compensation
Plan (incorporated by reference to Exhibit A of the
Company's Definitive Proxy Statement on Schedule 14A,
dated April 25, 1997)
27 Financial Data Schedule
(b) The Company filed a Current Report on Form 8-K (the "Form 8-K") on
September 23, 1997, pursuant to Item 5 of Form 8-K, reporting the
notification of a lawsuit filed against the Company's wholly-owned
Mexican subsidiary, Geoevaluaciones, S.A. de C.V.
18
<PAGE> 19
SIGNATURES
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 12, 1997 /S/ JOEL FRIEDMAN
-----------------------------------
Joel Friedman
Chief Executive Officer and
Chairman of the Board
DATED: November 12, 1997 /S/ RONALD L. KOONS
-----------------------------------
Ronald L. Koons
Chief Financial Officer
(principal financial and accounting
officer)
<PAGE> 20
EXHIBIT INDEX
Exhibit Description
- ------- -----------
27 Financial Data Schedule
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