SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
January 26, 1998
GEOKINETICS INC.
(Exact name of Registrant as specified in charter)
DELAWARE 0-9268 94-1690082
(State or other jurisdiction of (Commission (IRS Employer
incorporation) File Number) 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
<PAGE>
GEOKINETICS INC.
FORM 8-K/A
INDEX
PAGE
Item 7. Financial Statements, Pro Forma Financial Statements
(a) Financial Statements of Business Acquired.............F-1
(b) Pro Forma Financial Information. The Registrant has
determined that it is not required to provide the
financial information required by this Item 7(b).
<PAGE>
RELIABLE EXPLORATION,
INCORPORATED
ANNUAL FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
TABLE OF CONTENTS
RELIABLE EXPLORATION, INCORPORATED
DECEMBER 31, 1997
INDEPENDENT AUDITORS' REPORT.................................................F-1
FINANCIAL STATEMENTS
BALANCE SHEET........................................................F-2
STATEMENT OF INCOME AND RETAINED DEFICIT.............................F-4
STATEMENT OF CASH FLOWS..............................................F-5
NOTES TO THE FINANCIAL STATEMENTS....................................F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
March 31, 1998
To the Board of Directors and Stockholders
Reliable Exploration, Incorporated
We have audited the accompanying balance sheet of Reliable Exploration,
Incorporated (a Montana corporation) as of December 31, 1997 and the related
statement of income and retained deficit equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Reliable
Exploration, Incorporated as of December 31, 1997 and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
Tsakopulos Brown Schott & Anchors
F - 1
<PAGE>
BALANCE SHEET
RELIABLE EXPLORATION, INCORPORATED
DECEMBER 31, 1997
ASSETS
CURRENT ASSETS
Cash ................................................... $ 94,569
Accounts receivable - trade ............................ 1,212,122
Accounts receivable - officers and employees ........... 6,160
Work in progress ....................................... 310,805
Prepaid expenses ....................................... 13,440
----------
Total Current Assets ............................ 1,637,096
PROPERTY AND EQUIPMENT, net of $1,728,274 accumulated
depreciation ........................................... 306,474
OTHER ASSETS
Deposits ............................................... 65,344
Restricted investments ................................. 50,000
Noncompetition fees .................................... 29,167
Patronage stock ........................................ 7,123
----------
Total Other Assets .............................. 151,634
----------
TOTAL ASSETS ............................. $2,095,204
==========
The Accompanying Notes Are an Integral Part of These Financial Statements
F - 2
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BALANCE SHEET
RELIABLE EXPLORATION, INCORPORATED
DECEMBER 31, 1997
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current maturities of long-term debt .................. $ 1,073,836
Accounts payable - trade .............................. 725,768
Customer deposits ..................................... 35,000
Accrued liabilities ................................... 312,135
-----------
Total Current Liabilities ...................... 2,146,739
LONG-TERM LIABILITIES
Long-term debt, net of current maturities ............. 426,219
DEFERRED TAX LIABILITIES ...................................... 290,946
-----------
TOTAL LIABILITIES ....................... 2,863,904
STOCKHOLDERS' DEFICIT
Common stock, $.10 par value, 500,000 shares
authorized, 600 shares issued and outstanding ..... 60
Retained deficit ...................................... (768,760)
-----------
TOTAL STOCKHOLDERS' DEFICIT ............. (768,700)
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT ............ $ 2,095,204
===========
The Accompanying Notes Are an Integral Part of These Financial Statements
F - 3
<PAGE>
STATEMENT OF INCOME
AND RETAINED DEFICIT
RELIABLE EXPLORATION, INCORPORATED
FOR THE YEAR ENDED DECEMBER 31, 1997
REVENUES ...................................................... $ 6,723,157
EXPENSES
Seismic operating expenses ............................ 5,242,369
General and administrative expenses ................... 808,774
Depreciation and amortization ......................... 136,876
-----------
Total Expenses ................................. 6,188,019
-----------
Income from Operations ................................ 535,138
OTHER INCOME .................................................. 14,739
-----------
Income Before Income Tax Expense ........ 549,877
INCOME TAX EXPENSE
Current ............................................... 65,156
Deferred .............................................. 279,611
-----------
Total Income Tax Expense ....................... 344,767
-----------
NET INCOME .................................................... 205,110
RETAINED DEFICIT, beginning of year ........................... (973,870)
-----------
RETAINED DEFICIT, end of year ................................. $ (768,760)
===========
The Accompanying Notes Are an Integral Part of These Financial Statements
F - 4
<PAGE>
STATEMENT OF CASH FLOWS
RELIABLE EXPLORATION, INCORPORATED
FOR THE YEAR ENDED DECEMBER 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES
INFLOWS
CASH RECEIVED FROM CUSTOMERS ..................... $ 5,955,140
OUTFLOWS
CASH PAID TO SUPPLIERS AND EMPLOYEES ............. 5,771,790
INCOME TAXES PAID ................................ 98,658
-----------
5,870,448
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES . 84,692
CASH FLOWS FROM INVESTING ACTIVITIES
OUTFLOWS
CASH PAYMENTS FOR THE PURCHASE OF PROPERTY ....... 269,555
CASH PAYMENTS FOR RESTRICTED INVESTMENTS ......... 35,000
-----------
NET CASH USED BY INVESTING ACTIVITIES ..... (304,555)
CASH FLOWS FROM FINANCING ACTIVITIES
OUTFLOWS
PRINCIPAL PAYMENTS ON LONG-TERM DEBT ............. 284,200
-----------
NET CASH USED BY FINANCING ACTIVITIES ..... (284,200)
-----------
NET DECREASE IN CASH ............................................ (504,063)
CASH, BEGINNING OF YEAR ......................................... 598,632
-----------
CASH, END OF YEAR ............................................... $ 94,569
===========
The Accompanying Notes Are an Integral Part of These Financial Statements
F - 5
<PAGE>
NOTES TO THE
FINANCIAL STATEMENTS
RELIABLE EXPLORATION, INCORPORATED
DECEMBER 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE ORGANIZATION
Reliable Exploration, Incorporated, a Montana corporation (the Company)
is located in Billings, Montana. The Company provides seismic
exploration services in various states throughout the Rocky Mountain
region of the Western United States.
BASIS OF ACCOUNTING
The 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 FINANCIAL STATEMENTS
Management uses estimates and assumptions in preparing 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 a note payable. The carrying amounts
reported in the 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 balance sheets approximates fair value.
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.
F - 6
<PAGE>
NOTES TO THE
FINANCIAL STATEMENTS
RELIABLE EXPLORATION, INCORPORATED
DECEMBER 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
RESTRICTED INVESTMENTS AND REFUNDABLE BONDS
Restricted investments represent certificates of deposit required by
the state of North Dakota as security for operational performance
within the state, carried at cost which approximates market.
Various governmental agencies require the purchase of bonds as security
for operational performance, which are refundable to the Company upon
completion of specific jobs and approval of the appropriate agency.
These bonds are shown as deposits and carried at cost which
approximates market value.
CASH EQUIVALENTS
For purposes of the statement 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.
NONCOMPETITION AGREEMENT
The Company entered into a noncompetition agreement with the previous
majority stockholder, for a period of three years beginning July 27,
1995. The cost is being amortized over the term of the agreement on a
straight-line basis and the amortization period and related charges to
operations will be adjusted beginning in January 1998 as a result of an
extension of the term of the agreement for an additional two years.
F - 7
<PAGE>
NOTES TO THE
FINANCIAL STATEMENTS
RELIABLE EXPLORATION, INCORPORATED
DECEMBER 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
NOTE 2. CERTIFICATES OF DEPOSIT
The Company owns two certificates of deposit which are being held as
security for operational performance as required by the state of North
Dakota.
One certificate of deposit for $15,000, which was purchased in December
1993, is currently earning interest at an annual rate of 5.45% and
matures December 22, 1998. The other certificate of deposit for
$35,000, which was purchased July 15, 1997, is currently earning
interest at an annual rate of 5.65% and matures July 15, 1998.
NOTE 3. REFUNDABLE BONDS
Various governmental agencies require purchase of bonds as security for
operational performance of jobs. The bonds are returnable to the
Company upon approval by the governmental agency at completion of the
job. Refundable bonds at December 31, 1997 totaled $65,000.
F - 8
<PAGE>
NOTES TO THE
FINANCIAL STATEMENTS
RELIABLE EXPLORATION, INCORPORATED
DECEMBER 31, 1997
NOTE 4. PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, 1997 is as follows:
Equipment ....................................... $1,586,667
Vehicles ........................................ 412,618
Furniture and equipment ......................... 29,027
Leasehold improvements .......................... 6,436
----------
2,034,748
Less accumulated depreciation ................... 1,728,274
----------
$ 306,474
==========
NOTE 5. ACCRUED LIABILITIES
A summary of accrued liabilities at December 31, 1997 is as follows:
Income taxes ................................. $181,596
Sales taxes .................................. 120,708
Payroll taxes ................................ 9,831
--------
$312,135
========
NOTE 6. LONG-TERM DEBT
A summary of long-term debt at December 31, 1997 follows:
Original note dated July 27, 1995 and a new
note dated January 8, 1998, executed January
26, 1998, payable $12,555 on January 8, 1998,
$900,000 on January 26, 1998, and 36 monthly
installments of $18,957 including principal
and interest at 10% beginning February 8, 1998;
secured by equipment and a corporate guaranty
of Geokinetics Inc.; and subject to default
provisions in the event of default under the
terms of the Restated Redemption Agreement
dated January 26, 1998........................ $1,500,055
Less Current Maturities .............................. 1,073,836
----------
$ 426,219
==========
F - 9
<PAGE>
NOTES TO THE
FINANCIAL STATEMENTS
RELIABLE EXPLORATION, INCORPORATED
DECEMBER 31, 1997
NOTE 6. LONG-TERM DEBT (CONTINUED)
A summary of long-term debt principal maturities follows:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998............................. $ 1,073,836
1999............................. 193,574
2000............................. 213,844
2001............................. 18,801
-----------
$ 1,500,055
===========
NOTE 7. RESTATED REDEMPTION AGREEMENT
On July 27, 1995, the Company entered into a stock Redemption Agreement
with its then majority stockholder to repurchase 55,050 shares of its
common stock from him for $2,048,400, a complete redemption of his
stock.
Concurrent with the stock Redemption Agreement, the Company entered
into a noncompetition agreement (Note 1) and a consulting agreement
with this stockholder.
In connection with the sale of the Company's stock to Geokinetics Inc.
on January 26, 1998, the Redemption Agreement was amended in its
entirety, and replaced by the Restated Redemption Agreement. This
Restated Redemption Agreement reaffirmed the noncompetition agreement
and extended it for an additional two years until January 26, 2000. The
total original cost of the agreement paid on July 27, 1995 was
$150,000, and the remaining unamortized balance as of December 31, 1997
is $29,167. The charge to operations for the cost of the agreement for
1997 was $50,000, and the charge to operations for 1998 will be $14,000
as a result of the extension.
The Consulting Agreement was terminated January 26, 1998 without
obligation for repayment by the former stockholder of any money
received under the agreement. The original prepaid consulting fee of
$150,000 paid on July 27, 1995 had been amortized by the Company over a
five-year period at an annual charge against operations of $30,000. The
remaining unamortized balance of $77,500 was written off as of December
31, 1997, resulting in a total charge of $107,500 against operations
for 1997.
F - 10
<PAGE>
NOTES TO THE
FINANCIAL STATEMENTS
RELIABLE EXPLORATION, INCORPORATED
DECEMBER 31, 1997
NOTE 8. INCOME TAX
Income tax liability is deferred tax arising from temporary differences
between income for financial reporting and income for tax purposes.
Deferred tax liability, beginning of year ........... $ 11,335
Deferred tax liability, end of year ................. 290,946
--------
Deferred Tax Cost .............................. $279,611
========
Deferred tax liabilities of the Company arise from the timing
differences in 1) utilizing the cash method of accounting for income
tax purposes and the accrual method for financial statements, 2)
amortization of noncompetition fees over fifteen years for income tax
purposes and three years for financial statements and 3) depreciation
for income tax purposes and financial statement purposes.
The taxable income of the Company on the cash basis for the year ended
December 31, 1997 was $363,372.
NOTE 9. LEASES
During 1997, the Company leased its office and shop facility from a
trust, the trustee of which is the stockholder who entered the stock
redemption agreement discussed in Note 7. Under the terms of the stock
redemption agreement, the Company is required to continue renting the
building until such time as the note issued for the stock is fully
paid. During 1997 the Company paid $36,000 under the terms of the
lease.
In connection with the purchase of the Company by Geokinetics Inc. at
January 26, 1998, as described in Note 13, the Company entered into a
new lease agreement with the trust for a period of eleven years
commencing on February 1, 1998 at the initial rate of $3,450 per month,
increased by 15% at each three-year interval during the term. The lease
is renewable at the Company's option for a five-year term, and may be
terminated by the Company with sixty-days notice, if all of its
obligations under the terms of the Redemption Agreement and Restated
Redemption Agreement, dated January 26, 1998, as described in Note 13,
have been fully satisfied.
F - 11
<PAGE>
NOTES TO THE
FINANCIAL STATEMENTS
RELIABLE EXPLORATION, INCORPORATED
DECEMBER 31, 1997
NOTE 9. LEASES (CONTINUED)
A summary of future minimum rentals under the lease agreement follows:
FOR THE YEARS ENDING DECEMBER 31, Amount
--------------------------------- ------------
1998......................... $ 40,950
1999......................... 41,400
2000......................... 41,400
2001......................... 47,092
2002......................... 47,610
------------
$ 218,452
============
NOTE 10. CASH FLOWS
A reconciliation of net income to net cash provided by operating
activities for the year ended December 31, 1997 follows:
Net Income ........................................... $ 205,110
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ........................ 136,876
Deferred income taxes ................................ 279,611
Loss on disposal of property and equipment ........... 6,021
(Increase) decrease in current assets
Accounts receivable .......................... (310,006)
Work in progress ............................. (229,050)
Prepaid expenses ............................. (5,217)
Other assets ................................. 107,089
Increase (decrease) in current liabilities
Accounts payable ............................. 54,776
Accrued liabilities .......................... 89,203
Unearned revenue ............................. (249,721)
---------
Net Cash Provided by Operating Activities .... $ 84,692
=========
F - 12
<PAGE>
NOTES TO THE
FINANCIAL STATEMENTS
RELIABLE EXPLORATION, INCORPORATED
DECEMBER 31, 1997
NOTE 11. 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:
Carrying Amount Fair Value
--------------- ----------
Cash .............................. $ 94,569 $ 94,569
Accounts receivable ............... 1,218,282 1,218,282
Accounts payable .................. 725,768 725,768
Indebtedness ...................... 1,500,055 1,500,055
NOTE 12. MAJOR CUSTOMER
Revenues from major customers which exceeded ten percent of the total
revenues for the year ended December 31, 1997 follows:
Customer A ................................ $ 1,496,003
Customer B ................................ 687,649
NOTE 13. SUBSEQUENT EVENTS
On December 5, 1997, the Company's stockholders entered into an
agreement to sell all of the Company stock to Geokinetics Inc.
On January 26, 1998, Geokinetics Inc. acquired all of the common stock
from the stockholders pursuant to the terms of the stock purchase
agreement effective January 1, 1998. Pursuant to the purchase
agreement, Geokinetics Inc. acquired 600 shares of outstanding common
stock of the Company in exchange for the consideration listed below.
F - 13
<PAGE>
NOTES TO THE
FINANCIAL STATEMENTS
RELIABLE EXPLORATION, INCORPORATED
DECEMBER 31, 1997
NOTE 13. SUBSEQUENT EVENTS (CONTINUED)
The consideration paid to the shareholders of the Company from
Geokinetics Inc. acquisition included $1,300,000 in cash and 375,000
newly-issued shares of Geokinetics Inc. common stock. On the closing
date, the Company restructured $1,487,500 of indebtedness to a former
stockholder of the Company 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. Geokinetics Inc. has guaranteed
payment of the Company's indebtedness due under the promissory note and
advanced the Company $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.
NOTE 14. PROPOSED ASSESSMENT BY THE INTERNAL REVENUE SERVICE
As a result of an audit of the Company's federal tax return for a prior
period, the Internal Revenue Service has proposed an assessment of
backup withholding tax, penalties, and interest on payments made during
the years 1994 through 1996 in connection with the amounts the Company
paid landowners to conduct operations on their properties, and for
which the Company did not file annual forms 1099. The Company disagrees
with the Internal Revenue Service position, and the matter is currently
being negotiated by the Company's counsel. No provision has been in the
financial statements for any potential cost since the liability cannot
be reasonably estimated.
In connection with the sale of the Company to Geokinetics, Inc. as
described in footnote 13, the former shareholders of the Company had
$225,000 reserved from the sale proceeds and placed in an escrow
account to pay one-half the cost of any contingent liability up to that
maximum liability. The balance of any cost would be borne by the
Company.
NOTE 15. CONTINGENCIES
The Company conducts field operations in states under whose statutes
certain of the services provided by the Company may by subject to state
sales tax. The Company is currently conducting an internal audit of its
activities in these states to determine the extent to which additional
state taxes may be due. As of December 31, 1997 accrued liabilities
include $120,700 which represent the amount of such taxes the Company
estimated is due for operations during 1997.
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 banks 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 - 14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned herein to duly authorized.
Dated: April 10, 1998
GEOKINETICS INC.
By: Jay D. Haber
Chief Executive Officer
