SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-9268
GEOKINETICS INC.
(Exact name of small business issuer as specified in its charter)
Delaware 94-1690082
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5555 San Felipe, Suite 780
Houston, Texas 77056
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 850-7600
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |X|
Issuer's revenues for its most recent fiscal year were $9,647,931.
As of December 31, 1997, 16,598,483 shares of the Registrant's Common
Stock were outstanding, and the aggregate market value of the Common Stock held
by non-affiliates was approximately $27,151,240 based on the last reported sales
price of such stock on that date.
DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference: Portions of the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 27, 1998, are
incorporated by reference into Part III of this Form 10-KSB/A.
<PAGE>
GEOKINETICS INC.
FORM 10-KSB/A
YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
PAGE
PART I
Item 1. Description of Business...................................... 1
Item 2. Description of Properties.....................................7
PART II
Item 6. Management's Discussion and Analysis or Plan of Operation....11
Item 7. Financial Statements.........................................14
i
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
HISTORICAL DEVELOPMENT OF BUSINESS
The predecessor of Geokinetics Inc. (the "Company") was incorporated in
1969 under the laws of California. The Company was incorporated in Delaware in
April, 1980, and the California corporation was merged into the Company.
Historically, the Company was primarily engaged in research and development of
processes to extract shale oil from oil shale deposits, and in related
activities. During 1994, the Company completely phased out its synthetic fuels
and oil shale business.
The Company acquired certain oil and gas properties from two independent
oil and gas companies located in Houston, Texas, effective August 1, 1994. The
Company completed these acquisitions by means of the merger of HOC Operating
Co., Inc. and Hale Exploration Company, each Texas corporations, into two
newly-formed subsidiaries of the Company. The Company now conducts oil and gas
development, production, and exploration through two of its wholly-owned
subsidiaries: HOC Operating Co., Inc. and Geokinetics Production Co., Inc.
On November 18, 1994, the Company began the process of entering into the
three dimensional ("3-D") seismic data acquisition business by forming a
wholly-owned subsidiary to conduct three dimensional seismic data acquisition
operations. On March 5, 1996, the Company completed initial equipment financing
arrangements for the subsidiary.
During the fiscal year ended on December 31, 1997, the Company
repositioned itself from an oil and gas exploration and production company into
a technologically advanced provider of seismic acquisition services to the
domestic land-based oil and gas industry. As a result of equipment purchases and
acquisitions of certain competitors, the Company now operates four seismic crews
in the Rocky Mountain and Gulf Coast regions of the United States.
The Company's corporate headquarters is located in Houston, Texas. The
Company's address is 5555 San Felipe, Houston, Texas 77056 and its telephone
number is (713) 850-7600.
FORWARD-LOOKING INFORMATION
This report contains forward-looking statements, including statements
regarding future financial performance and results and other statements that are
not historical facts. Such statements are included in Item 1 ("Business"), Item
2 ("Properties"), and Item 7 ("Management's Discussion and Analysis of Financial
Condition and Results of Operations"). When used in this report, words such as
"anticipate," "believe," "expect," "estimate," "intend," "may," and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Although the Company
believes that the expectations reflected in these forward-looking statements are
reasonable, there can be no assurance that actual results or developments
anticipated by the Company will be realized or, even if realized, that they will
have the expected effects on its business or operations. Actual results could
differ materially from those contemplated by the forward-looking statements as a
result of certain factors beyond the Company's control. Such factors include,
but are not limited to, dependence upon oil and gas industry spending, worldwide
prices, demand for oil and gas, technological
1
<PAGE>
changes and developments in the seismic acquisition business, operating risks,
regulatory changes, and changes in economic conditions both domestic and
international.
RECENT TRANSITIONS
On April 25, 1997, the Company obtained a $500,000 short-term financing in
the form of 12% senior notes from William R. Ziegler and Steven A. Webster (both
of whom were appointed to the Company's Board of Directors effective August 1,
1997). These notes were exchanged on July 18, 1997, in connection with the
Securities Purchase and Exchange Agreement described below, for 458,333 shares
of the Company's Common Stock, $.01 par value ("Common Stock"), 15,625 shares of
Series A Preferred Stock, $10.00 par value ("Series A Preferred Stock"), which
were converted subsequently into an aggregate of 208,333 shares of Common Stock,
and 592,009 Shadow Warrants (exercisable only if certain of the Company's then
outstanding warrants are exercised).
On July 18, 1997, the Company entered into a Securities Purchase and
Exchange Agreement (the "Purchase Agreement") with Blackhawk Investors, L.L.C.,
Mr. Ziegler and Mr. Webster (referred to collectively as the "Blackhawk Group").
Pursuant to the Purchase Agreement, the Blackhawk Group acquired from the
Company (i) 5,500,000 newly-issued shares of the Company's Common stock, (ii)
187,500 newly-issued shares of the Company's Series A Preferred Stock (which
were converted into an aggregate of 2,500,000 shares of Common Stock on November
24, 1997), and (iii) Shadow Warrants to purchase up to an additional 7,104,103
shares of Common Stock at a price of $0.20 per share, in exchange for (x) an
aggregate of $5,500,000 in cash paid to the Company and (y) the exchange of
indebtedness in the principal amount of $500,000 owed by the Company to Messrs.
Ziegler and Webster.
On July 24, 1997, Blackhawk Investors, L.L.C. ("Blackhawk") invested an
additional $1,000,000 in cash to purchase 100,000 shares of the Company's Series
B Preferred Stock, $10.00 par value per share ("Series B Preferred Stock"). The
Series B Preferred Stock was automatically converted into an aggregate of
1,333,333 shares of Common Stock on January 1, 1998.
On July 18, 1997, the Company acquired the stock of Signature Geophysical
Services, Inc., a Michigan corporation ("Signature"). Signature, based in
Houston, Texas, is engaged in the business of providing 3D seismic surveys of
oil and gas properties, focusing on the Gulf Coast of the United States, with
particular emphasis on coastal swamp operations.
On September 5, 1997, the Company organized a wholly-owned subsidiary,
Quantum Geophysical, Inc. ("Quantum"), to own all of the Company's subsidiaries
engaged in seismic data acquisition operations.
On January 26, 1998, the Company acquired the stock of Reliable
Exploration Incorporated, a Montana corporation ("Reliable"). Reliable, based in
Billings, Montana, is engaged in the business of providing 2D and 3D seismic
surveys to the oil and gas industry, specifically focusing on the Rocky Mountain
region of the United States.
BUSINESS STRATEGY
The Company's recent transactions repositioned the Company as a
technologically advanced provider of 2D and 3D seismic acquisition services to
the oil and gas industry in selected onshore domestic markets. The Company is
currently operating two state-of-the-art Input/Output, Inc. ("I/O") System
Two's, through its Quantum and Signature subsidiaries, and is operating two
additional seismic acquisition crews (a 2D system and a 3D system) through its
Reliable subsidiary.
2
<PAGE>
It is the Company's intention to field a fifth seismic crew during the
second quarter of 1998. This will be accomplished by purchasing additional
seismic acquisition equipment. Upon completion of this planned expansion, the
Company believes it will be positioned to participate in the continuing
consolidation of the seismic acquisition and seismic data industries with the
goal of becoming a significant provider of land based seismic services in the
United States. The Company intends to continue to expand by seeking additional
acquisitions of other seismic service and technology companies, as well as
benefiting from an anticipated improvement in the domestic, land-based seismic
market. The Company will also seek to establish strategic alliances with major
oil companies and large independents.
INDUSTRY OVERVIEW
Seismic surveys enable oil and gas companies to determine whether
subsurface conditions are favorable for finding new oil and gas accumulations
and assist oil and gas companies in determining the size and structure of
previously identified oil and gas fields. Seismic surveys consist of the
acquisition and processing of two dimensional ("2D") and 3D seismic data, which
is used to produce computer-generated, graphic cross-sections, maps and 3D
images of the subsurface. The resulting images are then analyzed and interpreted
by geophysicists and are used by oil and gas companies in the acquisition of new
leases, the selection of drilling locations on exploratory prospects and in
managing and developing producing reservoirs.
With the advent of modern 3D technology, the seismic industry has changed
profoundly. In the past the role of seismic, in particular 2D surveys, was
restricted to that of simply illustrating gross structural features. 3D surveys
provide detailed views of subsurface geologic structure and much higher
resolution of the structure than is available from a 2D survey. 3D surveys have
proven to be more reliable indicators of the oil and gas potential in the
surveyed area. As a result, drilling based on 3D seismic surveys has improved
the economics of discovering oil and gas by reducing risks and finding costs for
the oil and gas industry. Consequently, the demand for 3D seismic surveys has
significantly increased in the past several years. 3D seismic technology is
regularly cited in technical literature as the technology most impacting
exploration and production economics during the last five years. Additionally,
as the image quality of 3D seismic has improved, the role of 3D seismic has
expanded beyond the identification of exploration drilling prospects and into
the realm of field development and production management.
Seismic data is acquired by land, transition zone and offshore crews.
Seismic data is generated by the propagation of sound waves near the earth's
surface by controlled sources, such as dynamite or vibration equipment. The
seismic waves radiate into the earth and are reflected back to the surface with
the information collected by strategically positioned data collection devices
(geophones). This data is then input into a specialized data processing system
that (i) enhances the recorded signal by reducing noise and distortion and
improving resolution, and (ii) arranges the input data to produce an image of
the subsurface area. 3D seismic surveys collect far more information than
previously used seismic methods, generating significantly greater detail about
the underlying reservoirs. With advances in equipment and computer power
resulting in lower costs, 3D technology is now being applied to virtually all
exploration ventures as well as field development and prospect delineation.
The seismic industry is in the midst of a continuing consolidation of
seismic data acquisition providers. There is also a technology-driven trend
towards larger crews with a greater number of channels and more technologically
capable equipment. These conditions are creating a competitive advantage for
companies with state-of-the-art equipment and greater access to financial
resources. The Company believes that well capitalized companies with access to
lower costing capital will have a significant advantage in a high capital cost
business and that ongoing consolidation should ultimately improve the operating
and financial environments in the domestic land-based seismic market.
3
<PAGE>
SEISMIC ACQUISITION SERVICES
The company is engaged in land-based and transition zone seismic
acquisition services on a contract basis for its clients. As of March 31, 1998
the Company was operating four seismic crews with a total seismic recording
capacity of approximately 7,000 channels. All of the Company's crews were
operating in the United States, with two performing seismic acquisition services
in the Gulf Coast region and two performing such services in the Rocky Mountain
region.
On a typical land seismic survey, the seismic crew is supported by a
surveying crew, which lays out the lines to be recorded and identifies the sites
for shot-hole placement, and a drilling crew which creates the holes for the
explosive charges which produce the necessary acoustical impulse. The survey
crew and drill crew are typically provided by third parties and supervised by
Company personnel. A fully staffed 3D seismic crew typically consists of 25 to
50 persons, including a party manager, an observer, a head linesman and crew
laborers. The number of individuals on each crew is dependent upon the size and
nature of the seismic survey requested by the client.
The Company uses helicopters to assist its crews in seismic data
acquisition in circumstances where such use is expected to reduce overall costs
and improve productivity. These savings are achieved by deploying the crew and
its equipment more rapidly and significantly reducing surface damages.
CAPITAL EXPENDITURES
The seismic data acquisition industry is capital intensive, and the
Company will be required to raise additional capital to continue the
implementation of its business strategy. The cost of sophisticated seismic
acquisition equipment has increased significantly over the last several years.
The costs of equipping a crew with a state-of-the-art system such as an I/O
System Two, can range from approximately $4 to $10 million. The Company's
ability to expand its business operations is dependent upon the availability of
internally generated cash flow and external financing alternatives. Such
financing may consist of bank or commercial debt, forward sales of production,
equity or debt securities or any combination thereof. There can be no assurance
that the Company will be successful in obtaining additional financing when
required. Any substantial alteration or increase in the Company's capitalization
through the issuance of debt or equity securities or otherwise may significantly
decrease the financial flexibility of the Company. Due to the uncertainties
arising from the changing market for seismic acquisition services, technological
changes, and other matters associated with the Company's operations, the Company
is unable to estimate the amount of any financing that it may need to acquire,
upgrade and maintain seismic equipment and continue its diversification as a
full-scale geotechnology enterprise. If the Company is unable to obtain such
financing when needed, it will be forced to curtail its business objectives, and
to finance its business activities with only such internally generated funds as
may then be available.
OPERATING CONDITIONS
The Company's seismic acquisition activities are often conducted in
extreme weather, on difficult terrain and under other hazardous conditions. As
such, these activities are subject to risks of injury to Company personnel and
loss of seismic acquisition equipment. The Company maintains insurance against
the destruction of its seismic acquisition equipment and injury to persons and
property that may result from its operations and considers the amount of such
insurance to be adequate. However, the Company is not fully insured for all
risks, either because such insurance is unavailable or because the Company
elects not to obtain insurance coverage because of cost.
4
<PAGE>
Fixed costs, including costs associated with operating leases, labor
costs, depreciation and interest expense account for a substantial percentage of
the Company's costs and expenses. Accordingly, downtime or low productivity
resulting from weather interruptions, reduced demand, equipment failures or
other causes can result in significant operating losses.
The Company believes it will have the opportunity to generate its highest
revenues during the third quarter (July 1 through September 30) of each year
primarily because this period typically provides for more recording hours due to
longer days and less curtailment of operations due to poor weather. Although
certain seasons during the year generally provide better working conditions,
adverse conditions may impact revenues at any time during the year.
MARKETING
The Company's seismic acquisition services are marketed from its corporate
offices. While the Company relies upon the traditional utilization of Company
personnel in making sales calls, it anticipates receiving a significant amount
of work through word-of-mouth sales, repeat customer sales and the industry
reputation and presence of its personnel.
Contracts are obtained either through competitive bidding, in response to
invitations to bid, or by direct negotiation with a prospective client. A
significant portion of the Company's contracts result from competitive bidding.
Contracts are awarded primarily on the basis of price, crew experience and
availability, technological expertise and reputation for dependability and
safety.
Contracts, whether bid or negotiated, provide for payment on either a
turnkey or time basis or on a combination of both methods. A turnkey contract
provides for a fixed fee to be paid per square mile of data acquired. Such a
contract causes the Company to bear substantially all of the risk of business
interruption caused by weather delays and other hazards. Time contracts provide
for payments based on agreed rates per units of time, which may be expressed in
periods ranging from days to months. This type of contract causes the client to
bear substantially all of the risk of business interruption. When a combination
of both turnkey and time methods is used, the risk of business interruption is
shared by the Company and the client. In either case, progress payments are
usually required unless it is expected the job can be accomplished in a short
period. The Company's contracts for seismic acquisition have been predominantly
on a combination turnkey/time basis. The Company's contracts provide that the
seismic data acquired is the exclusive property of the Company's client.
Although the Company has considered opportunities to acquire a partial
ownership interest in seismic data obtained during the course of a survey for
one or more of its clients, all seismic data acquired to date has been for the
exclusive account of the Company's clients. There may be certain opportunities
in the future, however, when the Company believes it is in its best interest to
acquire an interest in seismic data in a joint venture with one or more of its
clients.
CUSTOMERS
The Company's customers include a number of major oil industry companies
and their affiliates, including Schlumberger and Marathon Oil Company, as well
as many smaller, independent oil and gas companies. The table below lists
customers that accounted for more than 10% of the Company's seismic acquisition
revenues during the fiscal year ended December 31, 1997:
5
<PAGE>
FOR THE YEAR ENDED DECEMBER 31, 1997
--------------------------------------------
REVENUES PERCENTAGE OF TOTAL REVENUES
------------ ----------------------------
Schlumberger/Geco-Prakla $ 6,891,867 77.9%
Weems Geophysical, Inc. $ 950,608 10.7%
No other customer accounted for more than 10% of the Company's seismic
acquisition revenues in 1997.
BACKLOG
At March 31, 1998, the Company's backlog of commitments for services was
approximately $17.5 million. It is anticipated that significantly all of the
March 31, 1998 backlog will be completed during the next 12 months. This backlog
consists of written orders or commitments believed to be firm. Contracts for
services are occasionally varied or modified by mutual consent and in certain
instances are cancelable by the customer on short notice without penalty. As a
result of these factors, the Company's backlog as of any particular date may not
be indicative of the Company's actual operating revenues for any succeeding
fiscal period.
COMPETITION
The acquisition of seismic data for the oil and gas exploration industry
is highly competitive. Although reliable comparative figures are not available,
the Company believes that its principal competitors have more extensive and
diversified operations and also have financial, operating and other resources
substantially in excess of those available to the Company. Competitive factors
include the type and capability of equipment used to conduct seismic surveys and
that equipment's availability. In addition to price, the performance and
dependability of a crew significantly affect a potential customer's decision to
award a contract to a company or one of its competitors.
The Company's major competitors include Western Geophysical, Veritas DGC
Inc., Geco-Prakla (a division of Schlumberger) and Eagle Geophysical Inc.
REGULATION
Seismic acquisition operations are subject to numerous federal, state and
local laws and regulations. These laws and regulations govern various aspects of
operations, including the discharge of explosive materials into the environment,
requiring removal and clean-up of materials that may harm the environment or
otherwise relating to the protection of the environment and access to private
and governmental land to conduct seismic surveys. The Company's seismic data
acquisition contracts typically require customers to obtain all necessary
permits. Failure to obtain required permits in a timely manner may result in
crew down time and operating losses. The Company believes that it has conducted
its operations in substantial compliance with applicable environmental laws and
regulations governing its activities. There can be no assurance that
environmental or other laws and regulations will not change in the future or
that the Company will not be required to incur significant costs related to its
compliance with such laws and regulations.
6
<PAGE>
TECHNOLOGY
The Company relies on certain proprietary information, trade secrets, and
confidentiality and licensing agreements (collectively, "Intellectual Property")
to conduct its current operations. The Company's future success will depend, in
part, on its ability to maintain and preserve its Intellectual Property, without
infringing the rights of any third parties. There can be no assurance that the
Company will be successful in protecting its Intellectual Property or that its
competitors will not develop technologies that are substantially equivalent or
superior to the Company's technologies. The Company has not spent any
significant amount on research and development during its last two fiscal years,
but expects that research and development expenditures will increase as the
Company's expansion into other areas of seismic operations continues.
EMPLOYEES
At March 31, 1998, the Company had approximately 138 full-time employees.
None of the Company's employees are parties to a collective bargaining
agreement. The Company considers relations with its employees to be good.
ITEM 2. DESCRIPTION OF PROPERTIES.
FACILITIES
The Company is leasing approximately 8,898 square feet of office space
under two separate leases at its corporate headquarters located at 5555 San
Felipe, Houston, Texas 77056. One lease provides for a base rent of $24,104 per
year, plus operating expenses, and the other lease provides for an annual rent
of $62,784. In 1997, the Company's rent expenses under the leases (including
base rent) were $75,964. These two leases expire on June 30, 1998 and September
30, 2002, respectively. The Company believes that its present space in Houston
is sufficient for the foreseeable future and that it will be able to negotiate a
favorable renewal of the leases or find a suitable replacement facility without
substantial difficulty. In addition, the Company owns approximately one acre of
property in Brookshire, Texas, which is serving as the Company's maintenance
facility. The property consists of a facility of approximately 5,400 square feet
where maintenance activities occur and a smaller storage facility of
approximately 1,200 square feet. The Company also leases an office and
maintenance facility of approximately 5,000 square feet in Billings, Montana.
The Company's annual rent under this lease is $36,000. The lease has an
eleven-year term that will expire in December of 2009, but may be terminated by
the Company in February 2001 under certain circumstances.
CERTAIN DEFINITIONS
As used in this Form 10-KSB, "Mcf" means thousand cubic feet, "MMcf" means
million cubic feet, "Bcf" means billion cubic feet, "Bbl" means barrel, "MBbls"
means thousand barrels, "MMBbls" means million barrels, "BOE" means equivalent
barrels of oil and "MBOE" means thousand equivalent barrels of oil. Unless
otherwise indicated in this Form 10-KSB, gas volumes are stated at the legal
pressure base of the state or area in which the reserves are located and at 60"
Fahrenheit. Barrels of oil equivalent are determined using the ratio of six Mcf
of gas to one Bbl of crude oil, condensate or natural gas liquids. The term
"gross" refers to the total acres or wells in which the Company has a working
interest. The term "net" refers to gross acres or wells multiplied by the
percentage working interest owned by the Company. Unless the context requires
otherwise, all references to the "Company" include Geokinetics Inc. and its
consolidated subsidiaries.
7
<PAGE>
ACQUISITION AND EXPLOITATION OF OIL AND GAS PROPERTIES
The Company owns working interests in 23 producing oil and gas wells
located in Texas. The Company is also the operator of each of these 23 wells.
All of the Company's wells were originally drilled and have been continuously
operated by current management and their predecessor companies. OIL AND GAS
SALES PRICES AND PRODUCTION COSTS
The following table sets forth for the Company, its subsidiaries and their
predecessors, the pro forma average sales prices per Bbl of oil (including
condensate) and per Mcf of gas produced, and the production costs (including
taxes on production and property and transportation charges) per BOE produced
for each of the last three fiscal years:
Company, Subsidiaries and their Predecessors
Year Ended
December 31
------------------------
1995 1996 1997
------ ------ ------
Weighted average sales price per Bbl of oil
produced ............................................ $16.72 $20.67 $18.98
Weighted average sales price per Mcf of gas
produced ............................................ $ 1.71 $ 2.55 $ 2.86
Weighted average production cost per BOE ............ $ 6.65 $ 5.22 $ 5.42
RESERVES
The following table sets forth, as of December 31, 1997, certain
information about the pro forma estimated developed and undeveloped proved
reserves of the Company's subsidiaries and their predecessors:
Company Subsidiaries
Pro Forma
December 31, 1997
--------------------
Proved developed:
Oil (Bbls)..................................... 264,690
Gas (Mcf)...................................... 946,879
8
<PAGE>
Company Subsidiaries
Pro Forma
December 31, 1997
--------------------
Proved undeveloped:
Oil (Bbls)..................................... 208,298
Gas (Mcf)...................................... 2,438,084
Total proved:
Oil (Bbls)..................................... 472,988
Gas (Mcf)...................................... 3,384,963
Estimated future net cash
flows, before income taxes........................... $9,007,200
Present value of estimated
future net cash flows, before
income taxes, discounted
at 10%............................................... $4,149,000
There are numerous uncertainties inherent in estimating quantities of
proved reserves, including many factors beyond the control of the Company. The
reserve data set forth in the above table represent only estimates. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in an exact manner, and the accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geologic interpretation and judgment. As a result, estimates by
different engineers often vary, sometimes significantly. In addition, physical
factors, such as the results of drilling, testing and production subsequent to
the date of an estimate, as well as economic factors, such as the results of
drilling, testing and production subsequent to the date of an estimate, as well
as economic factors, such as an increase or decrease in product prices that
renders production of such reserves more or less economic, may justify revision
of such estimates. Accordingly, reserve estimates are different from the
quantities of oil and gas that are ultimately recovered.
PRODUCTIVE WELLS AND ACREAGE
During the fiscal year ended December 31, 1997, neither the Company nor
its subsidiaries and their predecessors completed any productive or
non-productive wells, The following table sets forth the approximate number of
gross productive wells and net productive wells owned by the Company as of
December 31, 1997.
9
<PAGE>
Gross Net
----- -----
Texas Panhandle... 15 1.16
Texas Upper Gulf
Coast............. 5 2.58
Texas Lower Gulf
Coast............. 3 1.75
----- -----
Total 23 5.49
The following table shows, by geologic region, the approximate leasehold
acreage and royalty and mineral acreage of the Company as of December 31, 1997:
<TABLE>
<CAPTION>
Leasehold Acreage Royalty and Mineral Acreage
---------------------------------------- ----------------------------------------
Non-Producing/ Non-Producing/
Undeveloped Undeveloped
Producing Acreage(1) Producing Acreage(1)
----------------- -------------------- ----------------- --------------------
Region Gross Net Gross Net Gross Net Gross Net
- ------------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Texas Panhandle 5,152 317 -- -- -- -- -- --
Texas Upper ... -- -- -- -- -- -- 150(2) 12
Gulf Coast .... 2,520 1,365 -- -- -- -- 765(3) 765
TexasLower
Gulf Coast .... 440 215 1571 393 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total ..... 8,112 1,897 1,925 (5) 1,925 (5) -- -- 915 777
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- --------------
(1) Undeveloped Acreage is considered to be those lease acres on which
wells have not been drilled or completed to a point that would permit the
production of commercial quantities of oil and gas regardless of whether or not
such acreage contains proved reserves.
(2) Mineral Fee.
10
<PAGE>
(3) The Company owns an approximate 1.5% overriding royalty interest and a
6.125% after payout working interest under 765 net acres.
(4) Reflects Undeveloped Acreage.
DRILLING ACTIVITY
During 1997, the Company participated in the drilling of one exploratory
well in South Texas, which well was subsequently completed as a commercial
producer in February 1998. Through its seismic-based business, the Company has
earned a 5% interest through casing point in an exploratory well to be drilled
in Louisiana during the first quarter of 1998. The Company anticipates that it
may incur certain drilling obligations during 1998 with respect to the continued
development of its existing oil and gas leasehold position.
PRESENT DRILLING ACTIVITY
The Louisiana exploratory well, noted above, was drilled during the first
quarter of 1998. This drilling activity resulted in a dry hole. No determination
has been made whether any additional drilling will result from this activity.
PART II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
At December 31, 1997, the Company's financial position primarily reflected (i)
the Company's ongoing oil and gas operations, and (ii) commencement of the
Company's seismic acquisition operations. This was accomplished with the
acquisition of Signature in July 1997, and the activation of the Company's
Quantum crew in October, 1997. The financial requirements of the Company's oil
and gas operations and seismic acquisition operations during fiscal 1997
required the Company to utilize a substantial portion of its current assets,
incur additional indebtedness and raise additional capital in order to acquire
additional operating assets and initiate its seismic acquisition operations. The
Company expects that it will be required to raise additional capital in 1998 to
fully implement its business strategy regarding the continued expansion of the
seismic acquisition operation.
As of December 31, 1997, the Company reported a $2,292,430 asset relating to
deferred tax benefits. This asset consists of the anticipated utilization of the
Company's accumulated net operating loss for federal income tax purposes, as a
reduction of future taxable income. The value of the deferred tax benefits
reflects the amount that the Company believes to be realizable at this time. The
Company is confident of the utilization of this asset due to the anticipated
revenues to be generated from the commencement of operations by Quantum. As the
Company's operations expand and additional revenues are generated, the Company
will review its valuation of the deferred tax benefits and make adjustments when
necessary.
SEISMIC OPERATIONS
During the fiscal year ended December 31, 1997, the Company began providing
seismic acquisition services to the oil and gas industry.
On July 18, 1997, the Company acquired all of the outstanding capital stock of
Signature from Gallant Energy, Inc., a Texas corporation ("GEI"), pursuant to
the terms of a Stock Purchase Agreement (the "Signature
11
<PAGE>
Agreement") among the Company, Signature, GEI and the sole shareholder of GEI.
Signature, based in Houston, Texas, is engaged in the business of providing 2D
and 3D seismic surveys of oil and gas properties, focusing on the Permian Basin
and the Gulf Coast, with special emphasis on coastal swamp operations. Pursuant
to the Signature Agreement, the Company acquired 500 shares of the outstanding
common stock of Signature in exchange for 400,000 newly-issued shares of the
Company's common stock. The Company, through Signature, also entered into an
employment agreement with the sole shareholder of GEI granting options to
purchase up to 400,000 shares of the Company's Common Stock at an exercise price
of $.75 per share, depending upon the financial performance of Signature during
the period from July 18, 1997 to September 30, 1999.
The acquisition by the Company of Signature was accounted for as a purchase,
with results of Signature operations included in the Company's financial
statements from July 18, 1997 forward. The cost of the Company's investment in
Signature is $1,024,800 and the goodwill of $1,834,159 acquired in the purchase
is being amortized on a straight line basis over a forty-year period.
Amortization expense from the date of acquisition through December 31, 1997 was
$21,016. Operations of the Signature crew have been ongoing since July 19, 1997.
The Company's Quantum crew, the equipment for which was purchased in 1996, began
operations October 1, 1997. Its initial operations were conducted in Orange
County, Texas and consisted of performing a 3D seismic survey of approximately
40 square miles. Operations of the Quantum crew have been ongoing since October
1, 1997.
OIL AND GAS OPERATIONS
Although no longer a core business, the Company continues to conduct its oil and
gas operations by acquiring, exploring, exploiting and developing its existing
producing and non-producing oil and gas properties, with the goal of increasing
cash flow, oil and gas reserves and value for the long-term benefit of the
Company's stockholders.
LIQUIDITY AND CAPITAL SOURCES
SEISMIC ACQUISITION OPERATIONS
The seismic acquisition industry is capital intensive and the Company will
need to raise additional capital to implement its business strategy. The cost of
sophisticated seismic acquisition equipment has increased significantly over the
last several years. The costs of equipping a crew with a state-of-the-art
system, such as an I/O System Two, can range from approximately $4 to $10
million. The Company's ability to expand its business operations is dependent
upon the availability of internally generated cash flow and external financing
alternatives. Such financing may consist of bank or commercial debt, forward
sales of production, equity or debt securities or any combination thereof. There
can be no assurance that the Company will be successful in obtaining additional
financing when required. Any substantial alteration or increase in the Company's
capitalization through the issuance of debt or equity securities or otherwise
may significantly decrease the financial flexibility of the Company. Due to the
uncertainties respecting the changing market for seismic services, technological
changes, and other matters associated with the Company's operations, the Company
is unable to estimate the amount of any financing that it may need to acquire,
upgrade and maintain seismic equipment and continue its diversification as a
full-scale geotechnology enterprise. If the Company is unable to obtain such
financing when needed, it will be forced to curtail its business objectives, and
to finance its business activities with only such internally generated funds as
may then be available.
12
<PAGE>
INCREASED CURRENT ASSETS AND INCREASED CASH
At December 31, 1997, the Company's current assets were $6,809,823
compared with $1,224,254 at December 31, 1996. This increase partially reflects
the Company's initiation of its seismic acquisition operations and an increased
cash position. As a reflection of the Company's shift in business activity, the
carrying value of the Company's inventory of oil and gas leases held for resale
was $0 at December 31, 1997, compared to $597,822 at December 31, 1996. Cash on
hand at December 31, 1997 totaled $2,212,681, compared with $413,935 as of
December 31, 1996. The Company's increased cash position partially reflects the
proceeds the Company received from the closing of a private placement of
$7,000,000 in July, 1997, the exercise of certain warrants to purchase shares of
Common Stock in December 1997, and the commencement of the Company's seismic
acquisition activities.
INCREASED PROPERTY AND EQUIPMENT
At December 31, 1997, the Company's property and equipment accounts were
$17,314,325 compared with $3,881,648 at December 31, 1996. This increase
reflects the Company's continuing purchases of seismic acquisition equipment and
the acquisition of Signature.
INCREASED OTHER ASSETS
At December 31, 1997, the Company's other assets were $4,378,848, compared
with $1,898,374 at December 31, 1996. This increase partially reflects the
increase in the Company's deferred tax asset from $1,620,000 at December 31,
1996 to $2,292,430 at December 31, 1997, and the recording of $1,949,626 of
goodwill associated with the acquisition of Signature.
RESULTS OF OPERATIONS
Operating revenue during the fiscal year ended December 31, 1997 was
$9,647,931, compared with $812,850 during the fiscal year ended December 31,
1996. This increase is a result of the Company's seismic acquisition operation
which generated revenue of $8,848,842 in fiscal 1997, compared to no revenue in
fiscal 1996. Operating expenses totaled $9,994,820 during the year ended
December 31, 1997, compared with $2,810,025 during the year ended December 31,
1996. This increase partially reflects $5,563,525 of seismic operating expenses
in 1997, as compared to none in 1996, lease abandonments of $364,481 in 1997,
compared to $1,450 in 1996 and general and administrative expenses of $2,441,581
in 1997 compared to $1,297,474 during 1996. During the year ended December 31,
1997, the Company experienced a net loss of $1,772,817, compared to a net loss
of $1,115,820 during the year ended December 31, 1996.
INCREASED CURRENT LIABILITIES AND LONG-TERM DEBT
At December 31, 1997, the Company's current liabilities were $8,122,626,
compared with $3,045,760 at December 31, 1996. This increase reflects the
Company's need to continue to borrow additional funds in order to finance the
capital needs of its seismic acquisition operation and its continuing oil and
gas operations.
In December 1995, the Company conducted a private placement of (i) 332,968
shares of the Company's Common Stock at a purchase price of $1.50 per share and
(ii) warrants at a purchase price of $.01 per warrant to purchase up to 332,968
additional shares of the Company's Common Stock (the "Private Placement").
During January 1996, net proceeds received from the Private Offering were
$125,832.
13
<PAGE>
PRIVATE PLACEMENT AND STOCKHOLDERS EQUITY
In December 1995, the Company completed a private offering of 332,968
shares of its Common Stock for the purpose of raising funds for operations. Net
proceeds received from the private offering during 1996, after deduction of
associated expenses, were $125,832. The 332,968 shares were sold at $1.50 per
share and 332,968 accompanying warrants sold at $.01 per warrant.
On July 18, 1997, the Company entered into the Purchase Agreement with the
Blackhawk Group. Pursuant to the Purchase Agreement, the Company received
$5,500,000 in cash and the exchange of certain indebtedness in the principal
amount of $500,000 owed by the Company for the issuance of the following
securities to the Blackhawk Group: (i) 5,500,000 newly-issued shares of the
Company's Common Stock, (ii) 187,500 newly-issued shares of the Company's Series
A convertible preferred stock (which was converted into an aggregate of
2,500,000 shares of common stock on November 24, 1997) and (iii) Shadow Warrants
to purchase up to an additional 7,104,103 shares (subject to adjustment) of
Common Stock at a price of $.20 per share. As a result of the Purchase
Agreement, certain changes to the membership of the Company's Board of Directors
and officers were made effective July 18, 1997.
On July 24, 1997, Blackhawk invested an additional $1,000,000 in cash for
100,000 shares of the Company's newly-issued Series B Preferred Stock. The
Series B Preferred Stock was automatically converted into an aggregate of
1,333,333 shares of Common Stock on January 1, 1998.
The number of issued and outstanding shares of the Company's Common Stock
at December 31, 1997 increased to 16,598,483 from 4,953,288 at December 31,
1996. The increase in the number of outstanding shares reflects the completion
of the July 1997 private placement, the acquisition of Signature, and the
exercise of certain warrants to purchase shares of Common Stock.
TAX NET OPERATING LOSS CARRYFORWARDS
At December 31, 1997, the Company had approximately $9,244,955 of tax net
operating loss ("NOL") carryforwards and $246,000 in tax credit carryforwards
that expire from 1999 through 2012. Section 382 of the Internal Revenue Code of
1986, as amended, limits the availability of the losses and credits remaining
unused on the date of a change of ownership of more than 50% of the Company's
Common Stock. The limitation, if applied, would limit the utilization of such
carryforwards in each taxable year to an amount equal to the product of the
federal long-term tax-exempt bond rate prescribed by the Internal Revenue
Service times the fair market value of all of the Company's Common Stock at the
time of the ownership change. The Company believes that the issuances of Common
Stock in conjunction with the July 1997 Private Placement and the Signature
acquisition triggered the limitation under Section 382.
ITEM 7. FINANCIAL STATEMENTS.
See page F-0 for Index to Financial Statements. The Financial Statements
were previously filed on March 31, 1998, and are only being filed to correct a
typographical error of the number of outstanding shares as of December 31, 1997.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
GEOKINETICS INC.
Date: April 14, 1998 By: \s\ JAY D. HABER
Jay D. Haber, Chief Executive Officer
(Principal Executive Officer)
By: \s\ THOMAS J. CONCANNON
Thomas J. Concannon
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities* and on the dates indicated:
SIGNATURE TITLE DATE
\s\ JAY D. HABER Director and Chief April 14, 1998
Jay D. Haber Executive Officer
\s\ THOMAS J. CONCANNON Vice President and April 14, 1998
Thomas J. Concannon Chief Financial Officer
\s\ STEVEN A. WEBSTER Director April 14, 1998
Steven A. Webster
\s\ WILLIAM R. ZIEGLER Director April 14, 1998
William R. Ziegler
\s\ CHRISTOPHER M. HARTE Director April 14, 1998
Christopher M. Harte
15
<PAGE>
GEOKINETICS INC. AND SUBSIDIARIES
ANNUAL CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
TABLE OF CONTENTS
GEOKINETICS INC. AND SUBSIDIARIES
DECEMBER 31, 1997 AND 1996
INDEPENDENT AUDITORS' REPORT...............................................F-1
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS........................................F-2
CONSOLIDATED STATEMENTS OF OPERATIONS..............................F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)..........F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS..............................F-6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.....................F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
March 7, 1998
To the Board of Directors and Stockholders
Geokinetics Inc. and subsidiaries
We have audited the accompanying consolidated balance sheets of
Geokinetics Inc. (a Delaware corporation) and subsidiaries as of December 31,
1997 and 1996 and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Geokinetics
Inc. and subsidiaries as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Tsakopulos Brown Schott & Anchors
F - 1
<PAGE>
CONSOLIDATED BALANCE SHEETS
GEOKINETICS INC. AND SUBSIDIARIES
ASSETS
December 31, December 31,
1997 1996
------------ ------------
CURRENT ASSETS
Cash ............................................... $ 2,212,681 $ 413,935
Accounts receivable - trade ........................ 3,654,829 199,150
Accounts receivable - officers and employees ....... 182,480 --
Work in progress ................................... 380,925 --
Oil and gas leases held for resale ................. -- 597,822
Prepaid expenses ................................... 367,687 13,347
Accrued interest ................................... 11,221 --
----------- ----------
Total Current Assets ........................... 6,809,823 1,224,254
PROPERTY AND EQUIPMENT, net .......................... 17,314,325 3,881,648
OTHER ASSETS
Deferred loan cost ................................. 60,316 76,317
Deferred tax asset ................................. 2,292,430 1,620,000
Restricted investments ............................. 71,700 21,700
Deposits ........................................... 4,776 180,357
Goodwill and other intangibles, net of $87,614
amortization ................................... 1,949,626 --
----------- ----------
Total Other Assets ............................. 4,378,848 1,898,374
----------- ----------
TOTAL ASSETS .............................. $28,502,996 $7,004,276
=========== ==========
The Accompanying Notes Are an Integral Part of These Consolidated
Financial Statements
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
GEOKINETICS INC. AND SUBSIDIARIES
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ -----------
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt ................ $ 3,463,660 $ 331,825
Accounts payable - trade ............................ 2,282,037 721,535
Accrued liabilities ................................. 1,049,119 434,526
Customer deposits ................................... -- 10,000
Notes payable ....................................... 896,686 1,028,733
Due to officers and shareholders .................... 164,206 152,223
Advances for lease bank ............................. 260,500 360,500
Site restoration costs payable ...................... 6,418 6,418
------------ -----------
Total Current Liabilities ....................... 8,122,626 3,045,760
LONG-TERM LIABILITIES
Long-term debt, net of current maturities ........... 12,129,420 4,860,123
------------ -----------
TOTAL LIABILITIES .......................... 20,252,046 7,905,883
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, Series B, $10 par value, 100,000
shares authorized, issued and outstanding
at December 31, 1997, automatically convertible
into 1,333,333 shares
common stock on January 1, 1998 ................. 1,000,000 --
Common stock, $.01 par value, 100,000,000 shares
authorized, 16,598,483 shares outstanding at
December 31, 1997, and $.20 par value, 15,000,000
shares authorized, 4,953,288 outstanding at
December 31, 1996 ............................... 165,985 990,657
Additional paid-in capital .......................... 14,017,394 3,924,345
Retained deficit .................................... (6,932,429) (5,816,609)
------------ -----------
TOTAL STOCKHOLDERS'
EQUITY (DEFICIT) ....................... 8,250,950 (901,607)
------------ -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) ......... $ 28,502,996 $7,004,276
============ ===========
</TABLE>
The Accompanying Notes Are an Integral Part of These Consolidated
Financial Statements
F - 3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
GEOKINETICS INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the Years Ended
December 31,
--------------------------
1997 1996
----------- ------------
<S> <C> <C>
REVENUES
Seismic revenue ........................................ $ 8,848,842 $ --
Oil and gas sales ...................................... 431,533 560,481
Operator overhead fees ................................. 242,556 248,358
Sale of oil and gas leases ............................. 125,000 4,011
----------- -----------
Total Revenues ..................................... 9,647,931 812,850
EXPENSES
Seismic operating expenses ............................. 5,563,525 --
General and administrative ............................. 2,441,581 1,297,474
Depletion, depreciation and amortization ............... 1,207,812 91,608
Lease abandonments ..................................... 364,481 1,450
Lease operating expenses ............................... 248,686 288,992
Cost of oil and gas leases sold ........................ 168,735 61,924
Non-recovery of advances ............................... -- 494,460
Pre-operating expenses ................................. -- 327,580
Impairment of equipment and vehicles ................... -- 224,451
Delay rentals .......................................... -- 22,086
----------- -----------
Total Expenses ..................................... 9,994,820 2,810,025
----------- -----------
Loss from Operations .......................... (346,889) (1,997,175)
OTHER INCOME (EXPENSE)
Interest income ........................................ 66,309 10,545
Interest expense ....................................... (1,210,240) (606,187)
----------- -----------
Total Other Income (Expense) ....................... (1,143,931) (595,642)
----------- -----------
Net Loss Before Income Tax Expense ............ (1,490,820) (2,592,817)
=========== ===========
INCOME TAX BENEFIT
Deferred income tax benefit ............................ 375,000 820,000
----------- -----------
NET LOSS ................................................. $(1,115,820) $(1,772,817)
=========== ===========
Loss per common share .................................... $ (.14) $ (0.36)
=========== ===========
Weighted average common shares and equivalents outstanding $ 8,091,336 $ 4,949,635
=========== ===========
</TABLE>
The Accompanying Notes Are an Integral Part of These Consolidated
Financial Statements
F - 4
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
GEOKINETICS INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Stockholders' Equity (Deficit)
------------------------------------------------------------------
Preferred Common Preferred Common Additional Accumulated
Shares Issued Shares Issued Stock Stock Paid In Capital Deficit Total
--------------- ------------- ------------ ----------- ---------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 ........... -- 4,869,955 $ -- $ 973,991 $ 3,815,179 $(4,043,792) $ 745,378
Net Loss ............................. -- -- -- -- -- (1,772,817) (1,772,817)
Private placement offering ........... -- 83,333 -- 16,666 109,166 -- 125,832
-------- ---------- ----------- ----------- ------------ ----------- -----------
Balance at December 31, 1996 ......... -- 4,953,288 -- 990,657 3,924,345 (5,816,609) (901,607)
Net Loss ............................. -- -- -- -- -- (1,115,820) (1,115,820)
Private placement offerings:
July 18, 1997 ................... 187,500 5,500,000 1,875,000 1,100,000 3,025,000 -- 6,000,000
July 24, 1997 ................... 100,000 -- 1,000,000 -- -- -- 1,000,000
Costs of placements .................. -- -- -- -- (80,728) -- (80,728)
Employee stock options ............... -- 7,500 -- 1,500 7,953 -- 9,453
Acquisition of Signature
Geophysical, Inc. ............... -- 400,000 -- 80,000 944,800 -- 1,024,800
Exercise of warrants ................. -- 1,732,139 -- 132,834 2,182,756 -- 2,315,590
Exercise of non-cash warrants ........ -- 1,505,556 -- 15,056 (15,056) -- --
Purchase of warrants ................. -- -- -- -- (738) -- (738)
Reduction of common par
value ........................... -- -- -- (2,179,062) 2,179,062 -- --
Conversion of Series A
Preferred Stock ................. (187,500) 2,500,000 (1,875,000) 25,000 1,850,000 -- --
-------- ---------- ----------- ----------- ------------ ----------- -----------
Balance at December 31, 1997 ......... 100,000 16,598,483 $ 1,000,000 $ 165,985 $ 14,017,394 $(6,932,429) $ 8,250,950
======== ========== =========== =========== ============ =========== ===========
</TABLE>
The Accompanying Notes Are an Integral Part of These Consolidated
Financial Statements
F - 5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
GEOKINETICS INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
INFLOWS
CASH RECEIVED FROM CUSTOMERS ....................................... $ 6,567,888 $ 879,059
CASH RECEIVED FROM SALE OF LEASES .................................. 125,000 4,011
INTEREST AND DIVIDENDS RECEIVED .................................... 55,088 10,798
----------- -----------
6,747,976 893,868
OUTFLOWS
CASH PAID TO SUPPLIERS AND EMPLOYEES ............................... 8,607,458 2,349,037
CASH PAID FOR OIL AND GAS LEASES ................................... 16,115 101,080
INTEREST PAID ...................................................... 1,224,910 472,588
CASH PAID FOR SITE RESTORATION COSTS ............................... -- 29,767
----------- -----------
9,848,483 2,952,472
----------- -----------
NET CASH USED BY OPERATING ACTIVITIES ....................... (3,100,507) (2,058,604)
CASH FLOWS FROM INVESTING ACTIVITIES
INFLOWS
REDEMPTION OF CERTIFICATE OF DEPOSIT ............................... -- 79,639
OUTFLOWS
CASH PAYMENTS FOR THE PURCHASE OF PROPERTY ......................... 904,725 3,255,773
PURCHASE OF CERTIFICATE OF DEPOSIT ................................. 50,000 --
----------- -----------
954,725 3,255,773
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES ....................... (954,725) (3,176,134)
CASH FLOWS FROM FINANCING ACTIVITIES
INFLOWS
PROCEEDS FROM LONG-TERM DEBT ....................................... -- 5,000,000
PROCEEDS FROM SHORT-TERM DEBT ...................................... 500,000 798,732
PROCEEDS FROM PRIVATE PLACEMENT OFFERING, NET OF STOCK ISSUE
COSTS OF $80,728 ............................................ 5,419,272 125,833
PROCEEDS FROM EXERCISE OF WARRANTS ................................. 1,899,661
PROCEEDS FROM EXERCISE OF OPTIONS .................................. 9,453
ADVANCES FROM OFFICERS ............................................. -- 15,501
PROCEEDS FROM ISSUANCE OF SERIES B PREFERRED STOCK ................. 1,000,000 --
----------- -----------
8,828,386 5,940,066
OUTFLOWS
PAYMENTS ON LONG-TERM DEBT ......................................... 2,036,589 228,298
PAYMENTS ON SHORT-TERM DEBT ........................................ 778,104 --
PAYMENTS TO OFFICERS ............................................... 159,715 --
PAYMENT OF LOAN FEE ................................................ -- 80,000
----------- -----------
2,974,408 308,298
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ................... 5,853,978 5,631,768
----------- -----------
NET INCREASE IN CASH .............................................................. 1,798,746 397,030
CASH, BEGINNING OF YEAR ........................................................... 413,935 16,905
----------- -----------
CASH, END OF YEAR ................................................................. $ 2,212,681 $ 413,935
=========== ===========
</TABLE>
The Accompanying Notes Are an Integral Part of These Consolidated
Financial Statements
F - 6
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
GEOKINETICS INC. AND SUBSIDARIES
DECEMBER 31, 1997 AND 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE ORGANIZATION
Geokinetics Inc., a Delaware corporation, (the Company) is based in
Houston, Texas. The Company has repositioned itself from an oil and gas
exploration and production company into a technologically advanced
provider of three dimensional ("3-D") seismic acquisition services to
the U.S. land-based oil and gas industry. Through equipment purchases
and acquisition of other companies, the Company currently operates four
seismic crews in the Rocky Mountain region and on the Gulf Coast.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Geokinetics Inc. and its wholly-owned subsidiaries, HOC Operating Co.,
Inc. (HOC), Geokinetics Production Co., Inc. (GPCI), Quantum
Geophysical, Inc. (Quantum), Quantum Geophysical Services, Inc. (QGS)
and Signature Geophysical Services, Inc. (Signature). All inter-company
items and transactions have been eliminated in the consolidation.
BASIS OF ACCOUNTING
The consolidated financial statements of the Company have been prepared
on the accrual basis of accounting and, accordingly, reflect all
significant receivables, payables and other liabilities.
USE OF ESTIMATES IN PREPARING CONSOLIDATED FINANCIAL STATEMENTS
Management uses estimates and assumptions in preparing consolidated
financial statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and
liabilities and the reported revenues and expenses. Actual results could
vary from the estimates that were used.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts
receivable, accounts payable and notes payable. The carrying amounts
reported in the consolidated balance sheets for cash, accounts
receivable and accounts payable approximate fair values due to the short
maturity of those instruments. The fair value of debt was determined
based upon the present value of expected cash flows considering expected
maturities and using interest rates currently available to the Company
for long-term borrowings with similar terms. The carrying amount of debt
reported in the consolidated balance sheets approximates fair value.
F - 7
<PAGE>
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
WORK IN PROGRESS
In order to properly match revenue and expenses, the Company records
amounts due from customers but not invoiced at the end of each
accounting period, based upon the contractual agreement in effect with
each customer for services. These calculations are based upon daily
progress reports provided by field supervisors.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and
amortization are provided using the straight-line method over the
estimated useful lives of the respective assets. Repairs and
maintenance, which are not considered betterments and do not extend the
useful life of property, are charged to expense as incurred. When
property and equipment are retired or otherwise disposed of, the asset
and accumulated depreciation are removed from the accounts and the
resulting gain or loss is reflected in income.
The Company uses the successful efforts method of accounting for oil and
gas producing activities. Costs to acquire mineral interests in oil and
gas properties, to drill and equip exploratory wells that find proved
reserves and to drill and equip development wells are capitalized. Costs
to drill exploratory wells that do not find proved reserves, geological
and geophysical costs and costs of carrying and retaining unproved
properties are expensed.
Unproved oil and gas properties that are individually significant are
periodically assessed for impairment of value and a loss is recognized
at the time of impairment by providing an impairment allowance.
Capitalized costs of producing oil and gas properties, after considering
estimated dismantlement and abandonment costs and estimated salvage
values, are depreciated and depleted by the unit-of-production method.
On the sale or retirement of a complete unit of a proved property, the
cost and related accumulated depreciation, depletion and amortization
are eliminated from the property accounts and the resultant gain or loss
is recognized. On the retirement or sale of a partial unit of proved
property, the cost is charged to accumulated depreciation, depletion and
amortization with a resulting gain or loss recognized in income.
On the sale of an interest in an unproved property for cash or cash
equivalent, gain or loss on the sale is recognized, taking into
consideration the amount of any recorded impairment if the property had
been assessed individually.
F - 8
<PAGE>
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED LOAN COST
The deferred loan cost is the unamortized balance of bank fees that were
incurred to obtain long-term financing with a guaranty from the Farmers
Home Administration. These costs are amortized over the life of the term
loan using the effective interest rate method. The amortized amount for
the years ended December 31, 1997 and 1996 was $16,000 and $3,684,
respectively.
RESTRICTED INVESTMENTS AND SITE RESTORATION COSTS
Restricted investments represent investments carried at cost which
approximates market. Such investments are to be used in the future to
fund site restoration as required by the state of Utah. Site restoration
costs are based upon an estimate of the cost of restoration prepared by
the Utah State agency responsible for site restoration. Expenditures
made for site restoration are subtracted from the estimate.
CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents. There were no cash
equivalents at December 31, 1997 and 1996, respectively.
INCOME TAX
The Company follows Statement of Financial Accounting Standards No. 109
entitled "Accounting for Income Taxes" which requires recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the consolidated
financial statements or tax returns. Under this method, deferred tax
assets and liabilities are computed using the liability method based on
the differences between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse.
Deferred income tax is provided in the accompanying consolidated
financial statements as a result of differences related to reporting of
depreciation and depletion for income tax purposes and consolidated
financial statement purposes.
A valuation allowance account is maintained to estimate the amount of
net operating loss carryforwards and tax credit carryforwards which the
Company may not be able to use as a result of the expiration of maximum
carryover periods allowed under Internal Revenue tax codes.
F - 9
<PAGE>
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company follows Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." The Statement established accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets. There was no material
effect on the consolidated financial statements from the adoption
because the Company's prior impairment recognition practice was
consistent with the major provisions of the Statement. Under provisions
of the Statement, impairment losses are recognized when expected future
cash flows are less than the assets' carrying value. Accordingly, when
indicators of impairment are present, the Company evaluates the carrying
value of property and equipment and intangibles in relation to the
operating performance and future undiscounted cash flows of the
underlying business. The Company adjusts the net book value of the
underlying assets if the sum of expected future cash flows is less than
book value.
PRE-OPERATING COSTS
It is the Company's policy to expense non-recoverable pre-operating
costs as they are incurred.
LOSS PER COMMON SHARE
Loss per common share is computed based on the weighted average number
of common shares outstanding during the respective years. Stock warrants
and common stock subscribed have not been included in the calculation as
their effect would be antidilutive.
F - 10
<PAGE>
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 2. PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
December 31, December 31,
1997 1996
----------- ----------
Field operating equipment ......................... $18,383,515 $2,669,169
Proved oil and gas properties ..................... 919,285 1,032,509
Vehicles .......................................... 377,043 253,025
Buildings ......................................... 128,106 128,106
Furniture and equipment ........................... 80,186 26,854
----------- ----------
19,888,135 4,109,663
Less accumulated depletion, depreciation and
amortization .............................. 2,597,260 251,465
----------- ----------
17,290,875 3,858,198
Land .............................................. 23,450 23,450
----------- ----------
Net Property and Equipment ......... $17,314,325 $3,881,648
=========== ==========
NOTE 3. ACCRUED LIABILITIES
A summary of accrued liabilities follows:
December 31, December 31,
1997 1996
----------- ----------
Sales tax payable ........................... $ 398,656 $ --
Royalties payable ........................... 270,205 245,685
Accrued payroll ............................. 158,736 --
Accrued interest payable .................... 142,868 157,538
Payroll taxes payable ....................... 78,654 21,718
Other ....................................... -- 9,585
----------- ----------
$ 1,049,119 $ 434,526
=========== ==========
F - 11
<PAGE>
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 4. NOTES PAYABLE
A summary of notes payable follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Note representing an amount due under the - terms of
an agreement for payment of funds in settlement
of a claim, dated May 7, 1997, with no interest,
payable directly out of funds to be received by
an operating subsidiary in the performance of
seismic data acquisition services
under an existing contract with a customer $ 472,000 $ --
Notes representing financing of insurance
premiums for operating subsidiaries over
periods of nine to eleven months at
interest rates varying from 6.67% to
6.9% final payment due November 14,
1998 313,370 --
Notes representing refinancing arrangements
with certain suppliers of an operating
subsidiary for accounts payable invoices
outstanding beyond normal industry
payment terms 86,316 --
Note in default dated December 18, 1990 due
December 1, 1992 payable to unrelated
corporation with interest accruing at
10% per annum; secured by certain oil
and gas leases 25,000 25,000
Note to an unrelated corporation dated
January 8, 1996 with principal and
interest at 10% (18% default rate)
originally due February 5, 1996; after
default, note was extended to July 31,
1996 and then to October 1, 1997;
secured by certain oil
and gas leases -- 306,708
</TABLE>
F - 12
<PAGE>
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 4. NOTES PAYABLE (CONTINUED)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
-------------------- ---------------------
<S> <C>
Notes representing refinancing of defaulted 697,025
lease bank notes; dated March 31, 1997 with
interest at 4% plus prime due monthly and
principal and unpaid accrued interest due on
June 30, 1997; secured by certain oil and
gas leases $ -- $
-------------------- ---------------------
$ 896,686 $ 1,028,733
==================== =====================
</TABLE>
NOTE 5. LEASE BANK
The Company has a revolving credit facility to provide funds to acquire,
package and sell oil and gas properties. Total borrowings under this
facility (Lease Bank) are guaranteed by the Company and may not exceed
$1,200,000. Funds are provided from individual investors. Notes issued
under this agreement are payable upon demand one year from the date of
the individual notes. If there is no demand, the notes automatically
renew on a quarterly basis. In no event will the notes extend beyond
December 31, 1999. Interest is payable quarterly based on the prime rate
as of the first day of each quarter plus 4.0%. In addition to interest,
the depositors will receive either (a) a proportionate share of a .25%
after prospect payout overriding royalty interest in prospects acquired
through the Lease Bank and sold by the Company or (b) a common stock
purchase warrant for each full year of deposit numerically equal to the
amount of deposit with a purchase price per share equal to twenty-five
percent over the average of the daily closing high bid and low asked
quotation for the sixty (60) day period immediately preceding the yearly
anniversary date for which such warrant is issued. The outstanding
balances on the Advances for Lease Bank were $260,500 and $360,500 at
December 31, 1997 and 1996, respectively.
F - 13
<PAGE>
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 6. LONG-TERM DEBT
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, December 31,
1997 1996
-------------------- ---------------------
Note to a financial institution dated March 1,
1996 payable in 120 monthly
installments of principal and interest
adjusted quarterly based on interest at
prime plus 1.5% through March 1, 2006
when all unpaid principal and accrued
interest is due (monthly payments at
December 31, 1997 were $66,043
including principal and interest at
10.0%), secured by first security interest
in accounts receivable, inventory,
property and equipment, oil and gas
leases, intangibles, life insurance policies
on key officers, guaranty of the
Company and a $4,000,000 guaranty of
the Farmers Home Administration of the
United States Department of Agriculture $ 4,440,077 $ 4,771,702
Note to an equipment vendor dated September 30, 1997
payable in 36 monthly installments of $106,237
including principal and interest at 10%, due
September 30, 2007, secured by equipment, unpaid
principal and interest balances subject to
certain mandatory prepayment amounts if the
Company receives proceeds from the sale of
common stock other than under employee benefit
plans or currently outstanding warrants 3,054,050 --
</TABLE>
F - 14
<PAGE>
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 6. LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
-------------------- ---------------------
<S> <C>
Note to an equipment vendor dated August 31,
1997 payable in 4 installments of
$360,000 including principal and
interest at 12%, beginning August 31,
1997, and 45 monthly installments of
$220,599 including principal and
interest at 12%, beginning December 31,
1997, due August 31, 2001, secured by
equipment, and corporate guaranty of the
parent company, unpaid principal and
interest balances subject to certain
mandatory prepayment amounts if the
Company receives proceeds from the sale
of common stock other than under
employee benefit plans or currently
outstanding warrants $ 8,098,953 --
Notes dated March 15, 1995 payable to
individuals for purchase of oil and gas
interests with 8% interest payable
quarterly, principal and unpaid accrued
interest due September 30, 1999;
collateralized by guarantee agreement
with the Company -- 420,246
-------------------- --------------
15,593,080 5,191,948
Less Current Maturities 3,463,660 331,825
-------------------- --------------
$ 12,129,420 $ 4,860,123
==================== ==============
A summary of long-term debt principal maturities follows:
FOR THE YEARS ENDING DECEMBER 31, Amount
------------
1998 $ 3,463,660
1999 3,560,111
2000 3,655,967
2001 2,180,227
2002 543,841
Thereafter 2,189,274
------------
$ 15,593,080
============
</TABLE>
F - 15
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. IMPAIRMENT OF EQUIPMENT AND VEHICLES
As a result of improper unauthorized actions exercised by former Company
personnel, an accumulation of costs in excess of the amount originally
expected to acquire field equipment and vehicles was experienced during
1996. Management has physically examined the acquisitions and determined
their fair market value based on current market prices and on recent
arms-length transactions involving similar assets. The write-down to
fair market value resulted in a charge to income of $224,451 for the
year ended December 31, 1996.
NOTE 8. INCOME TAX
Income tax benefit is deferred tax arising from temporary differences
between income for financial reporting and income for tax purposes.
For the Years Ended
---------------------------
December 31, December 31,
1997 1996
----------- -----------
Income tax benefit at statutory rate ........... $ 3,308,145 $ 2,591,850
Valuation allowance ............................ (1,015,715) (971,850)
----------- -----------
Deferred Tax Asset ..................... $ 2,292,430 $ 1,620,000
=========== ===========
Deferred tax asset, beginning of year .......... $ 1,620,000 $ 800,000
Deferred tax asset, subsidiary acquired ........ 297,430 --
Deferred tax asset, end of year ................ 2,292,430 1,620,000
----------- -----------
Deferred Tax Benefit ................... $ (375,000) $ (820,000)
=========== ===========
Deferred tax assets at December 31, 1997 and 1996 are comprised
primarily of net operating loss carryfoward and differences in reporting
pre-operating expenses and amortization. A valuation allowance has been
provided for deferred tax assets that the Company has not yet determined
to be more likely than not to be realizable at this time. The Company
will continue to review this valuation allowance and make adjustments
when deemed appropriate.
At December 31, 1997, the Company had net operating loss carryforwards
of $9,244,955 and tax credit carryforwards of $245,769 that expire in
1999 through 2012.
F - 16
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. RELATED PARTY TRANSACTIONS
The Chairman of the Company has made advances totaling $88,500 to the
Company at December 31, 1997. The advances are payable upon demand.
Interest is payable quarterly based on the prime rate as of the first
day of each quarter plus 4%. Included in accrued interest at December
31, 1997 is $2,503 interest payable on the officer advances.
The father of a Vice-President of the Company is a participant in the
Lease Bank with a note balance of $110,500 at December 31, 1997.
Included in long-term debt at December 31, 1996 are notes payable
totaling $47,357 to a member of the board directors who resigned on July
18, 1997. The notes were paid in full during October 1997. Interest of
$2,844 and $3,799 was paid to this director in 1997 and 1996,
respectively, on the notes payable. In addition to the notes, this
former director exercised 107,231 stock warrants to purchase common
stock of the Company at an exercise price of $1.50 per warrant, for a
total purchase price of $160,846.
Another former member of the board of directors who resigned on July 18,
1997 held a total of 852,959 warrants to purchase common stock of the
Company at prices ranging from $.415 to $1.25 per share. On December 31,
1997, this individual entered into an agreement with the Company to
exchange these warrants for 635,000 warrants to acquire common stock of
the Company at no cost, exercised the 635,000 warrants and was issued
635,000 shares of common stock.
On April 25, 1997, the Company obtained a $500,000 private short-term
financing from two individuals who were subsequently elected directors
at the annual shareholders meeting on November 20, 1997. The Company
issued 12% senior notes to the individuals, which were exchanged on July
18, 1997, in connection with the Securities Purchase and Exchange
Agreement described in Note 12, for 458,333 shares of the Company's
common stock, 15,625 shares of Series A preferred stock and 592,009
shadow warrants. As part of this financing transaction, the Company
entered into a consulting agreement with one of the individuals,
pursuant to which, in consideration of certain strategic planning and
other consulting services to be provided to the Company and its
subsidiaries by that individual, he will be paid a quarterly consulting
fee equal to one half of 1% of the total investment made by him and
certain other persons in debt and equity securities of the Company that
is outstanding as of the end of each quarter during the three-year term
of such agreement. As of December 31, 1997, the Company owed the
director $63,207 in consulting fees under the terms of the agreement,
which is included as an amount due to officers and shareholders in the
Company's balance sheet. In addition, pursuant to the purchase agreement
and in satisfaction of the Company's obligation under the consulting
agreement, the Company and the director entered into an option agreement
providing for the grant of options to purchase 50,000 shares of common
stock of the Company to the Director.
F - 17
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. RELATED PARTY TRANSACTIONS (CONTINUED)
Inconnection with the private placement offering described in Note 12 to
the consolidated financial statements, the Company entered into an
investment monitoring agreement, under which the Company will pay the
investment group an annual fee of $25,000. A director of the Company is
one of two partners of the sole managing member of the investment group.
The Company owed the investment group $12,500 as of December 31, 1997
under the terms of the agreement, which is included as an amount due to
officers and shareholders on the Company's balance sheet.
NOTE 10.ACQUISITION OF WHOLLY-OWNED SUBSIDIARIES
A wholly-owned subsidiary corporation was formed under the name of
Quantum Geophysical, Inc. (Quantum) in November 1994. Quantum was formed
to provide 3-D geophysical data acquisition services and business
operations commenced in October 1997.
Since the inception of Quantum through September 30, 1997, the Company
has expensed $673,959 for non-recoverable pre-operating costs. It is the
Company's policy to expense non-recoverable pre-operating costs as
incurred. In addition, interest expense of $463,417 and $403,492 for the
nine months ended September 30, 1997 and for the year ended December 31,
1996, respectively, has been incurred.
A new wholly-owned subsidiary, Quantum Geophysical, Inc. was formed in
September 1997 to conduct the field operations for 3-D seismic data
acquisition commencing October 1, 1997. The name of the original Quantum
was simultaneously changed to Quantum Geophysical Services, Inc.
On July 18, 1997, the Company acquired all of the outstanding capital
stock of Signature Geophysical Services, Inc. (SGS), a Michigan
corporation, from Gallant Energy, Inc. (GEI), a Texas corporation,
pursuant to the terms of a Stock Purchase Agreement (the SGS Agreement)
among the Company, SGS, GEI and the sole shareholder of GEI. SGS, based
in Houston, Texas, is engaged in the business of providing 2-D and 3-D
seismic surveys of oil and gas properties, focusing on the Permian Basin
and the U.S. Gulf Coast, with special emphasis on coastal swamp
operations. Pursuant to the SGS Agreement, the Company acquired 500
shares of the outstanding common stock of SGS in exchange for 400,000
newly-issued shares of the Company's common stock. The Company also
entered into an Employment Agreement with the sole shareholder of GEI
granting options to purchase up to 400,000 shares of the Company's
common stock at an exercise price of $.75 per share depending on the
financial performance of SGS during the period from July 18, 1997 to
September 30, 1999.
F - 18
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. ACQUISITION OF WHOLLY-OWNED SUBSIDIARIES (CONTINUED)
The acquisition by the Company of Signature Geophysical Services, Inc.
is accounted for as a purchase, with results of SGS operations included
in the Company's financial statements from July 18, 1997 forward. The
cost of the Company's investment in SGS is $1,024,800 and the goodwill
of $1,834,159 acquired in the purchase is being amortized on a straight
line basis over a forty-year period. Amortization expense from the date
of acquisition through December 31, 1997 was $21,016.
NOTE 11. STOCK OPTION PLANS
The 1995 Stock Option Plan (the "Plan") was approved by stockholders of
the Company on August 9, 1995 with an effective date of August 1, 1994.
On August 1, 1997, the Board approved amendments to the plan (Option
Amendment), which were approved by the stockholders of the Company on
November 20, 1997 in order to increase the total number of shares of
common stock available for grant under the 1995 Plan from 500,000 to
2,687,500, to increase the period in which a non-qualified stock option
under the 1995 Plan can be exercisable from five years to ten years
after the date of grant and to extend the date on which the 1995 Plan
will automatically terminate from July 31, 2004 to July 31, 2007. The
purpose of the Option Amendment is to allow the Company to meet
contractual commitments to certain directors, key management employees
and persons affiliated with the Company. The purpose of the 1995 Plan is
to secure for the Company and its stockholders the benefits that flow
from providing certain directors, key management employees and persons
affiliated with the Company (the "Participants") with additional
incentive to further the business of the Company by increasing their
proprietary interest in the success of the Company. The 1995 Plan
provides for the granting of options to purchase shares of the Company's
common stock. Under the 1995 Plan, the Participants may be granted
Nonqualified Stock Options, Nonqualified Stock Options with Stock
Appreciation Rights, Incentive Stock Options and Incentive Stock Options
with Stock Appreciation Rights.
Stock options may be granted for the purchase of common stock at a price
determined by the Stock Option Committee. Incentive stock options may be
granted for the purchase of common stock at a price not less than the
fair market value of the stock on the date of grant.
At December 31, 1997, 2,687,500 stock options have been awarded under
the Plan, 2,672,500 are outstanding, 7,500 have been exercised and 7,500
have been forfeited and are again available for grant under the Plan.
F - 19
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. STOCK OPTION PLANS (CONTINUED)
On August 1, 1997, the Board authorized the adoption of the Company's
1997 Stock Awards Plan (the "1997 Plan"), which was approved by the
stockholders of the Company on November 20, 1997, because the shares
available under the 1995 Plan would become depleted once the Company met
its contractual commitments to certain directors, key management
employees and persons affiliated with the Company, and certain directors
of the Company are not eligible to receive awards under the 1995 Plan.
Unlike the 1995 Plan, however, the 1997 Plan permits directors who are
not employees or consultants of the Company or of a subsidiary to be
eligible to participate and takes advantage of recent amendments to Rule
16b-3.
A total of 5,000,000 shares of common stock are reserved for issuance
under the 1997 Plan, which will be used primarily to grant stock options
in the future to certain employees, members of the Board or any persons
affiliated with the Company.
The purpose of the 1997 Plan is to provide a means by which the Company
and its subsidiaries may attract, retain and motivate employees, members
of the Board or other persons affiliated with the Company (the "1997
Plan Participants") and to provide a means whereby such 1997 Plan
Participants can acquire and maintain stock ownership, thereby
strengthening their concern for the welfare of the Company. Accordingly,
the 1997 Plan provides for granting Incentive Stock Options,
Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock
Awards, Phantom Stock Awards or any combination of the foregoing, as is
best suited to the particular circumstances.
The 1997 Plan is to be administered by the Board or, in the discretion
of the Board, a committee appointed by the Board (the "1997 Plan
Committee"), which will have sole authority, to determine which 1997
Plan Participant shall receive an Award, the time or times when such
Award shall be made, the number of shares of common stock which may be
issued under each Incentive Stock Option, Nonqualified Stock Option,
Stock Appreciation Right or Restricted Stock Award and the value of each
Phantom Stock Award.
Incentive Stock Options may only be granted to employees of the Company
and its affiliates at a price which shall be determined by the Board or
the 1997 Plan Committee, but such purchase price shall not be less than,
in the case of Incentive Stock Options, the fair market value of common
stock subject to the stock options on the date the stock option is
granted. At December 31, 1997, 210,000 stock options have been awarded
and are outstanding under the plan.
F - 20
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. PRIVATE PLACEMENT OFFERINGS
In December 1995, the Company completed a private offering of 332,968
shares of its common stock for the purpose of raising funds for
operations. Net proceeds received from the private offering during 1996,
after deduction of associated expenses, were $125,832. The 332,968
shares were sold at $1.50 per share and with 332,968 accompanying
warrants sold at $.01 per warrant.
On July 18, 1997, the Company entered into a Securities Purchase and
Exchange Agreement (the Purchase Agreement) with an investment limited
liability company (Investment Group). Pursuant to the Purchase
Agreement, the Company received $5,500,000 in cash and the exchange of
certain indebtedness in the principal amount of $500,000 owed by the
Company for the issuance of the following securities to the Investment
Group: (i) 5,500,000 newly-issued shares of the Company's common stock,
par value $.20 per share, (ii)187,500 newly-issued shares of the
Company's Series A convertible preferred stock, (which was converted
into an aggregate of 2,500,000 shares of common stock on November 20,
1997) and (iii) shadow warrants to purchase up to an additional
7,104,103 shares (subject to adjustment) of common stock at a price of
$.20 per share. As a result of the Purchase Agreement, certain changes
to the membership of the Company's board of directors and officers were
made effective July 18, 1997.
Pursuant to a Letter Agreement, the Investment Group invested an
additional $1,000,000 in cash for 100,000 shares of the Company's
newly-issued Series B preferred stock on July 24, 1997. The Series B
preferred stock is automatically convertible into an aggregate of
1,333,333 shares of common stock on January 1, 1998.
As set forth in Note 9, the Investment Group will oversee its
investments in the Company pursuant to an Investment Monitoring
Agreement agreed to by both parties. The Company will pay the Investment
Group $25,000 annually under the Investment Monitoring Agreement.
F - 21
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. OUTSTANDING OPTIONS AND WARRANTS
A summary of outstanding options and warrants issued in connection with
notes payable, private placement offerings, the 1995 Stock Option Plan
and the 1997 Stock Awards Plan are as follows:
EMPLOYEE STOCK OPTIONS
Shares Exercise Price
---------- -------------
1995 Stock Option Plan:
Outstanding at December 31, 1996 ....... 212,500 $0.875-$2.26
Employee stock options forfeited ....... (7,500) $ 1.03125
Employee stock options exercised ....... (7,500) $0.875-$1.875
Employee stock options granted ......... 2,475,000 $0.75-$1.00
-------------
Outstanding at December 31, 1997 ....... 2,672,500 $0.75-$1.875
=============
1997 Stock Awards Plan:
Employee stock options granted ......... 210,000 $0.75-$2.25
-------------
Outstanding at December 31, 1997 ....... 210,000 $0.75-$2.25
=============
WARRANTS
Outstanding at December 31, 1996 ............... 1,486,626 $1.50-$2.26
Warrants issued ................................ 5,660,589 $0.26-$2.26
Warrants exercised, surrendered or called ...... (3,521,470) $0.00-$1.50
-------------
Outstanding at December 31, 1997 ............... 3,625,745 $0.26-$2.26
=============
SHADOW WARRANTS
Outstanding at December 31, 1997 ............... 7,497,832 $ 0.20
=============
Exercisable at December 31, 1997 ............... 6,100,692
=============
F - 22
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. COMMITMENTS
OPERATING LEASES
The Company leases office space for its corporate headquarters under a
lease which expires July 30, 1998. The lease provides for a base rental
of $24,104 per year. In addition, the Company pays for its share of the
basic operating costs of the building. The Company's share of these
costs has averaged $41,357 for the past three years. Additional space
has been leased under a lease which expires November 30, 2002 at a base
rental of $37,080 per year, plus its share of basic operating costs,
currently $24,120 per year. Rental expense under these leases recorded
in the consolidated financial statements amounted to $65,578 and $60,338
for the years ended December 31, 1997 and 1996. Aggregate future minimum
rentals under the lease agreements including the base rent and the
average operating cost follows:
FOR THE YEARS ENDING DECEMBER 31, AMOUNT
-------------
1998 $ 99,386
1999 61,200
2000 61,200
2001 61,200
2002 56,100
-------------
$ 339,086
=============
EMPLOYMENT AGREEMENTS
Beginning June 19, 1997, the Company entered into new employment
agreements with officers of the Company. The compensation payable under
these agreements consists of: (1) annual base salaries, (2) an incentive
cash bonus in accordance with the Company's bonus plan to be established
for its senior executives, (3) the Company's agreement to grant options
to purchase shares of common stock under stock option plans adopted by
the Company for the benefit of its directors, officers and employees and
(4) eligibility to participate in the Company's employee benefits plans
which may be adopted. The employment agreements have terms of three to
five years and are terminable by the Company upon its good faith
determination that there has been a willful violation of the terms of
the agreements.
Under the 1995 Stock Option Plan, there were 2,410,000 and 130,000 stock
options granted to officers which were outstanding and exercisable at
December 31, 1997 and 1996, respectively.
F - 23
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. COMMITMENTS (CONTINUED)
Under the 1997 Stock Awards Plan, a total of 5,000,000 shares of the
Company's common stock has been reserved for issuance to certain
directors and key management employees. There were 50,000 stock options
outstanding for officers or directors of the Company at December 31,
1997 under the 1997 Stock Awards Plan.
NOTE 15. MAJOR CUSTOMERS
Revenues from major customers which exceeded ten percent of total
revenues are as follows:
For the Years Ended
---------------------------------------------
December 31, December 31,
1997 1996
-------------------- ---------------------
Customer A $ 6,891,867 $ --
==================== =====================
Customer B $ 950,608 $ --
==================== =====================
Customer C $ -- $ 137,885
==================== =====================
NOTE 16. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentration of credit risk consist primarily of unsecured trade
receivables. In the normal course of business, the
Company provides credit terms to its customers. Accordingly, the Company
performs ongoing credit evaluations of its customers and maintains
allowances for possible losses which, when realized, have been within
the range of management's expectations. The Company's customer base
consists primarily of oil and gas companies. Although the Company is
directly affected by the well-being of the oil and gas industry,
management does not believe significant credit risk exists at December
31, 1997.
The Company has cash in bank and short-term investments which, at times,
may exceed federally insured limits. The Company has not experienced any
losses in such accounts. The Company believes it is not exposed to any
significant credit risk on cash and short-term investments.
F - 24
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. SUBSEQUENT EVENTS
On January 26, 1998, the Company acquired, effective January 1, 1998,
all of the outstanding capital stock of Reliable Exploration
Incorporated, a Montana corporation ("Reliable"), pursuant to the terms
of a Stock Purchase Agreement dated as of December 3, 1997, by and among
the Company, Reliable and the holders of all of the outstanding capital
stock of Reliable. Reliable, based in Billings, Montana, is engaged in
the business of providing 2-D and 3-D seismic surveys to the oil and gas
industry, specifically focusing on the Rocky Mountain region of the
United States.
The consideration paid by the Company for the Reliable acquisition
included $1,300,000 in cash and 375,000 newly-issued shares of the
Company's common stock. On the closing date, Reliable restructured
$1,487,500 of indebtedness to a former stockholder of Reliable by paying
$900,000 in cash and refinancing the balance of $587,500 in a promissory
note, which bears interest at the rate of 10% per annum beginning on
January 8, 1998. The promissory note matures on January 8, 2001. The
Company has guaranteed payment of Reliable's indebtedness due under the
promissory note and advanced Reliable $900,000 on the closing date in
order to permit the refinancing. The Company also entered into two-year
employment agreements with the three former stockholders of Reliable.
F - 25
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. CASH FLOWS
A reconciliation of net loss to net cash used by operating activities as
follows:
For the Years Ended
-------------------------
December 31, December 31,
1997 1996
----------- -----------
Net Loss ......................................... $(1,115,820) $(1,772,817)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depletion, depreciation and amortization ......... 1,207,812 91,608
Loss on disposal of property ..................... 511,735 --
Deferred income tax benefit ...................... (375,000) (820,000)
(Increase) decrease in current assets, net of
effects of acquisition of Signature
Accounts receivable - trade .............. (2,955,672) 60,220
Work in progress ......................... 347,414 --
Oil and gas leases held for resale ....... -- (15,620)
Prepaid expenses ......................... (233,252) (572)
Interest ................................. (11,221) --
Increase (decrease) in current liabilities, net of
effects of acquisition of Signature
Accounts payable - trade ................. (522,132) 179,024
Accrued liabilities ...................... 55,629 235,636
Site restoration costs payable ........... -- (29,767)
Customer deposits ........................ (10,000) 10,000
----------- -----------
Net Cash Used by Operating Activities .... $(3,100,507) $(2,062,288)
=========== ===========
F - 26
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial
instruments are determined as described in Note 1, Summary of
Significant Accounting Policies, Fair Values of Financial Instruments
and are summarized as follows:
December 31, 1997 December 31, 1996
-------------------------- ------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
----------- ----------- ---------- ----------
Cash ................. $ 2,212,681 $ 2,212,681 $ 413,935 $ 413,935
Accounts receivable .. 3,654,829 3,654,829 199,150 199,150
Accounts payable ..... 2,282,037 2,282,037 721,535 721,535
Indebtedness ......... 16,914,472 16,914,472 6,733,404 6,733,404
NOTE 20. SUPPLEMENTAL OIL AND GAS INFORMATION
Information with respect to the Company's oil and gas producing
activities is presented in the following tables. Estimates of reserve
quantities, as well as future production and discounted cash flows, were
determined by R. T. Garcia & Co., Inc., Petroleum Engineering-
Management Consulting, as of December 31, 1997.
OIL AND GAS RELATED COSTS
The following table sets forth information concerning costs related to
the Company's oil and gas property acquisition, exploration and
development activities in the United States during the years ended
December 31, 1997 and 1996:
For the Years Ended
-------------------------------
December 31, December 31,
1997 1996
----------- ----------
Property acquisition costs ....... $ 91,162 $ --
Exploration costs, net ........... -- --
Development costs, net ........... -- --
F - 27
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20. SUPPLEMENTAL OIL AND GAS INFORMATION (CONTINUED)
RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES
The following table sets forth the Company's results of operations from
oil and gas producing activities:
For the Years Ended
------------------------
December 31, December 31,
1997 1996
--------- ---------
Revenues ........................................ $ 431,533 $ 560,481
Production costs and taxes ...................... (248,686) (288,992)
Depletion, depreciation and amortization ........ (14,763) (91,608)
--------- ---------
Results of operations from oil and gas
producing activities .................... $ 168,084 $ 179,881
========= =========
In the presentation above, no deduction has been made for direct costs
such as corporate overhead or interest expense. No income taxes are
reflected due to the fact that the Company is not currently in a
taxpaying position. The depletion, depreciation and amortization rate
per barrel of oil equivalent of production was $.57 and $2.33 for the
years ended December 31, 1997 and 1996, respectively.
F - 28
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20. SUPPLEMENTAL OIL AND GAS INFORMATION (CONTINUED)
OIL AND GAS RESERVES (UNAUDITED)
The following table sets forth the Company's net proved oil and gas
reserves at December 31, 1997 and 1996 and the changes in net proved oil
and gas reserves for the years then ended. Proved reserves represent the
estimated quantities of crude oil and natural gas which geological and
engineering data demonstrate with reasonable certainty to be recoverable
in future years from known reservoirs under existing economic and
operating conditions. The reserve information indicated below requires
substantial judgement on the part of the reserve engineers, resulting in
estimates which are not subject to precise determination. Accordingly,
it is expected that the estimates of reserves will change as future
production and development information becomes available and that
revisions in these estimates could be significant.
Oil (BBLS) Gas (MCF)
-------- ----------
Proved reserves:
Balance at December 31, 1996 ................. 533,000 3,438,000
Change in previous estimates .......... (43,000) 21,000
Production ............................ (17,000) (74,000)
-------- ----------
Balance at December 31, 1997 ................. 473,000 3,385,000
======== ==========
Oil (BBLS) Gas (MCF)
-------- ----------
Proved developed reserves at December 31:
1996 ............................... 323,000 1,061,000
======== ==========
1997 ............................... 265,000 947,000
======== ==========
All of the Company's reserves are located in Texas.
F - 29
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20. SUPPLEMENTAL OIL AND GAS INFORMATION (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)
The standardized measure of discounted future net cash flows from the
Company's proved oil and gas reserves is presented in the following
table:
December 31, December 31,
1997 1996
------------ ------------
Future cash inflows ............................ $ 14,717,000 $ 23,069,000
Future production costs and taxes .............. (3,898,000) (5,315,000)
Future development costs ....................... (1,812,000) (1,750,000)
Future income tax expense ...................... -- --
------------ ------------
Net Future Cash Flows .................. 9,007,000 16,004,000
Discounted at 10% for timing of cash flows ..... (4,813,000) (8,913,000)
------------ ------------
Discounted future net cash flows from proved
reserves at December 31 ................ $ 4,194,000 $ 7,091,000
============ ============
The following table sets forth the changes in the standardized measure
of discounted future net cash flows from proved reserves:
For the Years Ended
---------------------------
December 31, December 31,
1997 1996
----------- -----------
Balance at beginning of year ................... $ 7,091,000 $ 3,286,000
Sales, net of production costs and taxes ....... (183,000) (171,000)
Net changes in prices, production costs and
previous estimates ..................... (2,714,000) 3,976,000
Purchase of reserves in place .................. -- --
----------- -----------
Balance at end of year ......................... $ 4,194,000 $ 7,091,000
=========== ===========
F - 30
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20. SUPPLEMENTAL OIL AND GAS INFORMATION (CONTINUED)
Estimated future net cash flows represent an estimate of future net
revenues from the production of proved reserves using current sales
prices, along with estimates of the production costs, ad valorem and
production taxes and future development (and abandonment) costs
necessary to produce such reserves. The average prices used at December
31, 1997 and 1996 were $15.68 and $24.25, respectively, per barrel of
oil and $2.07 and $2.98, respectively, per mcf of gas. No deduction has
been made for depletion, depreciation or any indirect costs such as
general corporate overhead or interest expense.
Operating costs and ad valorem and production taxes are estimated based
on current costs with respect to producing oil and gas properties.
Future development costs are based on the best estimate of such costs
assuming current economic and operating conditions.
Income tax expense is computed based on applying the appropriate
statutory tax rate to the excess of future cash inflows less future
production and development costs over the current tax basis of the
properties involved, less applicable net operating loss and tax credit
carryforwards, for both regular and alternative minimum tax (AMT). On
such bases, no regular tax or AMT results.
The future net revenues information assumes no escalation of costs or
prices, except for gas sales made under terms of contracts which include
fixed and determinable escalation. Future costs and prices could
significantly vary from current amounts and, accordingly, revisions in
the future could be material.
F - 31
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,212,681
<SECURITIES> 71,700
<RECEIVABLES> 4,218,234
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,809,823
<PP&E> 19,911,585
<DEPRECIATION> 2,597,260
<TOTAL-ASSETS> 28,502,996
<CURRENT-LIABILITIES> 8,122,626
<BONDS> 0
0
1,000,000
<COMMON> 165,985
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 28,502,996
<SALES> 0
<TOTAL-REVENUES> 9,647,931
<CGS> 0
<TOTAL-COSTS> 9,994,820
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,210,240
<INCOME-PRETAX> (1,490,820)
<INCOME-TAX> 375,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,115,820)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> 0
</TABLE>
