SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________________
Commission File Number 0-9268
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 Identification
incorporation or organization) Number)
5555 SAN FELIPE, SUITE 780 HOUSTON, TEXAS 77056
(Address of principal executive offices) (Zip Code)
Small Business Issuer's telephone number, including area code (713) 850-7600
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 [ ]
On September 30, 1998, there were 19,332,480 shares of Registrant's common stock
($.01 par value) outstanding.
<PAGE>
GEOKINETICS INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements .......................... 3
Condensed Statements of Financial Position
September 30, 1998 and December 31, 1997... 3
Condensed Statements of Operations
Three Months and Nine Months Ended
September 30, 1998 and 1997................ 5
Condensed Statements of Cash Flow
Three Months Ended September 30, 1998 and
1997 ..................................... 6
Notes to Interim Financial Statements ........... 7
Item 2. Management's Discussion and
Analysis or Plan of Operation ............. 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............. 11
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GEOKINETICS INC.
Condensed Statements of Financial Position
ASSETS
September 30 December 31
1998 1997
Unaudited (*)
----------- -----------
Current Assets:
Cash ........................................ $ 2,941,524 $ 2,055,564
Cash-restricted ............................. 49,145 157,117
Receivables ................................. 12,984,960 4,218,234
Prepaid expenses ............................ 250,660 367,687
Accrued interest ............................ 0 11,221
----------- -----------
Total Current Assets ................... 16,226,289 6,809,823
Property and Equipment:
Proved oil and gas properties (net of
depletion)(successful efforts method
for oil and gas properties) ............. 696,824 708,353
Equipment (net of depreciation) ............ 27,807,394 16,454,416
Buildings (net of depreciation) ............ 283,720 128,106
Land ....................................... 23,450 23,450
----------- -----------
Total Property and Equipment .......... 28,811,388 17,314,325
Other Assets:
Deferred tax benefit ....................... 0 2,292,430
Deferred charges ........................... 311,141 60,316
Restricted investments ..................... 106,700 71,700
Deposits ................................... 94,720 4,776
Other ...................................... 9,028 0
Goodwill ................................... 31,691,497 1,949,626
----------- -----------
Total Other Assets ..................... 32,213,086 4,378,848
----------- -----------
Total Assets ....................... $77,250,763 $28,502,996
=========== ===========
3
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30 December 31
1998 1997
Unaudited (*)
------------ ------------
Current Liabilities:
Current maturities of long-term debt ..... $ 4,320,190 $ 3,463,660
Accounts payable ......................... 7,328,414 2,282,037
Accrued liabilities ...................... 4,220,408 1,049,119
Customer deposit ......................... 30,000 0
Notes payable ............................ 402,835 896,686
Due to officer and shareholders .......... 229,642 164,206
Advances for lease bank .................. 260,500 260,500
Site restoration costs ................... 6,418 6,418
------------ ------------
Total Current Liabilities ............ 16,798,407 8,122,626
Long -Term Liabilities:
Long - term debt (Net of OID of $8,726,265).. 41,447,097 12,129,420
Deferred income tax ........................ 222,045 0
------------ ------------
Total Long-Term Liabilities ......... 41,669,142 12,129,420
Total Liabilities ................... 58,467,549 20,252,046
Stockholders' Equity:
Preferred stock, Series B, $10 par value,
100,000 shares authorized, issued and
outstanding at 12/31/97, converted into
1,333,333 shares of common stock on
01/01/98 .................................... 0 1,000,000
Common stock, $.01 par value,
100,000,000 shares authorized,
19,332,480 shares outstanding at 9/30/98,
and 18,326,816 shares outstanding at
12/31/97 .................................... 193,325 165,985
Additional paid in capital ................... 29,112,344 14,017,394
Accumulated deficit .......................... (10,522,455) (6,932,429)
------------ ------------
Total Stockholders' Equity ........... 18,783,214 8,250,950
------------ ------------
Total Liabilities and
stockholders' equity ............ $ 77,250,763 $ 28,502,996
============ ============
* CONDENSED FROM AUDITED FINANCIAL STATEMENTS
4
<PAGE>
<TABLE>
<CAPTION>
GEOKINETICS INC.
Condensed Statement of Operations
Three Months Ended Nine Months Ended
September 30 September 30
(unaudited) (unaudited)
-------------------------------- --------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Seismic revenues ............................... $ 5,910,429 $ 3,015,635 $ 17,502,463 $ 3,015,635
Data processing operations ..................... 3,637,733 0 6,037,970 0
Oil and gas sales .............................. 40,818 117,872 147,776 342,219
Operating fees ................................. 59,593 57,444 174,671 174,099
Gain (loss) on sale of asset ................... 0 0 0 (73,441)
------------ ------------ ------------ ------------
Total Revenues ............................. 9,648,573 3,190,951 23,862,880 3,458,512
Expenses:
General and administrative ..................... $ 1,354,720 $ 975,539 $ 3,723,127 $ 1,453,590
Seismic operating expenses ..................... 4,921,581 1,989,565 11,487,582 1,989,565
Data processing expense ........................ 1,190,786 0 1,826,995 0
Lease operating expenses ....................... 94,620 61,701 244,826 175,581
Amortization expense ........................... 920,796 15,266 1,604,091 25,231
Depletion expense .............................. 3,843 14,598 11,529 43,795
Depreciation expense ........................... 1,321,410 340,079 3,140,927 341,418
------------ ------------ ------------ ------------
Total Expenses ............................. 9,807,756 3,396,748 22,039,077 4,029,180
------------ ------------ ------------ ------------
Income (Loss) from operations ...................... $ (159,183) $ (205,797) $ 1,823,803 $ (570,668)
Other Income:
Interest income ............................... 75,511 31,871 169,028 32,041
Other income .................................. 800 0 810 0
Interest expense .............................. (1,616,428) (392,538) (3,347,590) (761,187)
------------ ------------ ------------ ------------
Total Other Income
(Expense) ............................... (1,540,117) (360,667) (3,177,752) (729,146)
Income (Loss) before provision
for income tax ................................... (1,699,300) (566,464) (1,353,949) (1,299,814)
Provision for income tax ........................... 2,236,077 (150,000) 2,236,077 (375,000)
------------ ------------ ------------ ------------
Net Income (Loss) .................................. $ (3,935,377) (416,464) $ (3,590,026) (924,814)
============ ============ ============ ============
Earnings (Loss) per Common
Share ............................................. $ (0.20) $ (0.04) $ (0.19) $ (0.14)
============ ============ ============ ============
Earnings (Loss) per
Share-assuming dilution ............................ $ (0.09) $ (0.02) $ (0.09) $ (0.06)
============ ============ ============ ============
Weighted average Common Shares
outstanding ...................................... 19,328,047 9,764,402 18,855,528 6,574,616
============ ============ ============ ============
Fully Diluted Common Shares ........................ 43,469,085 24,028,818 38,795,557 15,198,058
============ ============ ============ ============
</TABLE>
5
<PAGE>
GEOKINETICS INC.
Condensed Statements of Cash Flows
Three Months Ended
September 30
(unaudited)
--------------------------
1998 1997
----------- -----------
Cash flows from operating activities:
Cash received from customers ................. $ 6,453,658 $ 2,385,352
Interest and dividends received .............. 75,905 31,871
Cash paid to suppliers and employees ......... (5,613,091) (3,810,558)
Interest paid ................................ (407,730) (411,756)
----------- -----------
Net cash provided (used) by operating
activities .............................. 508,742 (1,805,091)
----------- -----------
Cash flows from investing activities:
Payments for purchase of property and
equipment .................................... (1,957,984) (4,042,378)
Cash flows from financing activities:
Proceeds from issuance of stock, net ......... 0 6,481,160
Proceeds from issuance of long-term debt .... 0 3,292,427
Principal payments on long-term debt ......... (1,002,551) (520,487)
Principal payments on short-term debt ........ (1,141,099) (939,453)
Lease bank payments .......................... 0 (655,593)
Principal payments on loan from officers ..... (20,041) (31,130)
----------- -----------
Net cash provided (used) by financing
activities .............................. (2,163,691) 7,626,924
----------- -----------
Net increase (decrease) in cash .................. (3,612,933) 1,779,455
Cash, beginning of period ........................ 6,603,602 268,805
Cash deficit from acquired subsidiary ............ 0 (18,404)
----------- -----------
Cash, end of period .............................. $ 2,990,669 $ 2,029,856
=========== ===========
6
<PAGE>
NOTES TO INTERIM FINANCIAL STATEMENTS
1. METHOD OF PRESENTATION.
The interim financial statements contained herein have been prepared in
accordance with the instructions to Form 10-QSB and include all adjustments
which are, in the opinion of management, necessary to provide a fair statement
of the financial position and results of operations for the interim period
reported. The financial statements are condensed and should be read in
conjunction with the financial statements and related notes included in the
Registrant's Form 10-KSB filed with the Securities and Exchange Commission for
the fiscal year ended December 31, 1997. A summary of accounting policies and
other significant information is included therein.
2. LONG-TERM DEBT
At September 30, 1998, the Company's long-term debt was $45,767,287,
including $4,320,190 which represents current maturities. Long-term debt is
presented net of unamortized Original Issue Discount, totaling $8,726,265.
Long-term debt consists primarily of (i) 12% senior subordinated notes, in the
amount of $40,000,000, (ii) a note to a financial institution, bearing interest
at prime plus 1 1/2 %, in the amount of $4,134,762, (iii) a note to Input/Output
Inc., bearing interest at 12%, in the amount of $6,487,432, (iv) a note to
Input/Output, Inc. bearing interest at 10%, in the amount of $2,302,254 and (v)
a note to a financial institution bearing interest at prime, in the amount of
$1,081,103.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
At September 30, 1998, the Company's financial position reflects (i) the
seismic acquisition services being conducted by Quantum Geophysical, Inc.,
Signature Geophysical Services, Inc. and Reliable Exploration, Inc., (ii) the
seismic data processing, software and consultation services being provided by
Geophysical Development Corporation, and (iii) the Company's ongoing oil and gas
operations.
The company added an additional seismic acquisition crew to its fleet
during the quarter. This additional crew consists of Input/Output RSR equipment
with recording capacity of 3,000 channels and was deployed in the Rocky Mountain
region of the United States. As a result, at September 30, 1998, the Company was
operating five seismic acquisition crews consisting of three Input/Output System
Two's and two Texas Instrument DFSV crews, with a total seismic recording
capacity of approximately 10,200 channels. All of the Company's crews are
operating in the United States, with one performing seismic acquisition services
in the Gulf Coast region and four performing such services in the Rocky Mountain
region.
RESULTS OF OPERATIONS
Revenues for the three months ended September 30, 1998 were $9,648,573 as
compared to $3,190,151 for the three months ended September 30, 1997. This
increase is attributable to revenues generated by the Company's ongoing seismic
acquisition operations and seismic data processing operations. The Company was
not in the seismic data processing business during the quarter ended September
30, 1997. Revenues generated by seismic data processing during the three month
period ending September 30, 1998 totaled $3,637,733.
Operating expenses for the three month period increased from $2,051,266 in
1997 to $6,206,987 in 1998. This increase is attributable to an increased number
of seismic acquisition crews being operational and the operating expenses
associated with the seismic data processing business which was not reflected in
the September 30, 1997 quarter. Operating expenses as a percentage of revenue
were 64% during the period ended September 30, 1998.
General and administrative expenses for the three months ended September
30, 1998 totaled $1,354,720 as compared to $975,539 for the three months ended
September 30, 1997. This increase is due primarily to increased activity
associated with the Company's seismic acquisition operations and expenses
related to the Company's seismic data processing business which is not reflected
in the September 30, 1997 period.
Depreciation and amortization expense for the three months ended September
30, 1998 was $2,246,049 as compared to $369,943 for the period ended September
30, 1997. This increase is due to depreciation expense associated with the
Company's seismic acquisition equipment for its five crews and amortization of
goodwill generated by the Company's recent acquisitions. In the same period
ending in 1997, depreciation and amortization expense applied to only one
seismic acquisition crew and the Company's oil and gas operations.
Interest expense (net of interest income) for the three months ended
September 30, 1998 was $1,540,117 as compared to $360,667 for the period ended
September 30, 1997. This increase is a result of additional equipment financing
required for the growth of the Company's seismic acquisition operations and the
Company's closing a $40,000,000 12% senior subordinated debt
<PAGE>
financing, due 2005, during April of this year. The proceeds from this financing
were utilized by the Company to acquire Geophysical Development Corporation and
purchase additional seismic acquisition equipment which allowed the Company to
field a fifth seismic acquisition crew during the three month period ending
September 30, 1998.
Income tax expense for the three months ended September 30, 1998 was
$2,236,077, compared to an income tax benefit of $150,000 for the three-month
period ended September 30, 1997. See Item 5 below regarding the Company's
decision to increase the valuation allowance against the deferred tax benefit
which the Company carried on its balance sheet as of December 31, 1997.
The Company had a net loss of $3,935,377, or ($0.20) per share, for the
three months ended September 30, 1998 as compared to a net loss of $416,464, or
($0.04) per share for the three month period ended September 30, 1997, resulting
primarily from increased interest costs and goodwill associated with the
Company's recent acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
On April 30, 1998, the Company completed a private offering of $40,000,000
12% senior subordinated debt financing from an investment group led by DLJ
Investment Partners, L.P., an affiliate of Donaldson Lufkin and Jenrette
Securities Corporation. Additionally, the Company (i) granted warrants to the
Investment Group entitling them to purchase up to an aggregate of 7,618,594
shares of common stock at a price of $2.00 per share, (ii) caused certain of its
wholly owned subsidiaries to execute guarantees of the notes pursuant to an
Indenture executed by the parties and (iii) granted certain registration rights
in favor of the note holders with respect to the notes. The notes call for
semi-annual interest payments and principal due at maturity.
At September 30, 1998, the Company had a working capital deficiency of
$572,118, which includes the current portion of long-term debt of $4,320,190. At
September 30, 1997 the Company had a working capital deficiency of $2,452,590.
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 Company's ability to expand its business operations is
dependent upon the availability of internally generated cash flow and external
financing activities. 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 uncertainties regarding 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 it
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.
A customer of a subsidiary of the Company has defaulted on payment of a
$2.8 million obligation to such subsidiary. The Company has filed suit against
the customer and certain related parties and believes that it will collect a
significant portion of the obligation owed. The Company is negotiating to obtain
a line of credit which will be secured by the accounts receivable and equipment
of certain of its subsidiaries. The Company believes that the line of credit
will be
<PAGE>
completed by November 30, 1998, and will substantially improve the Company's
short-term liquidity.
On September 30, 1998, the Company had cash balances of $2,990,669. The
Company feels this cash, anticipated cash flow from its seismic acquisition and
data processing operations, and the proceeds from the line of credit will be
sufficient to meet the working capital requirements of its seismic acquisition
and data processing operations for the foreseeable future.
ITEM 5. OTHER INFORMATION
The Company conducts field operations in states under whose statutes
certain of the services provided by the Company may be subject to state sales
tax. The Company's financial statements currently reflect a liability of
$142,734 for such taxes arising from prior operations of a subsidiary. The
Company has determined that its subsidiary collected sales taxes from customers
and failed, in certain instances, to remit such taxes to the appropriate taxing
authorities. The Company is in the process of making the necessary tax filings
and intends to poursue the former owners of the subsidiary for the entire
liability which the subsidiary is obligated to pay.
The Company is evaluating the impact of the year 2000 on its computer
systems in both operating and financial applications and has developed an action
plan which includes a task force to evaluate the Company's major vendors' year
2000 compliance. The Company is in the process of installing a new, previously
planned general ledger system that will be year 2000 compliant. The Company
believes the impact of the year 2000 and related costs of compliance will not
have any material impact on its operations or liquidity.
The Company has evaluated the deferred tax benefit of $2,236,077 which has
been reflected on its balance sheet in accordance with the provisions of FASB
109. As of December 31, 1997, the Company had $8,630,714 of net operating losses
available to carryforward against taxable income in future years. The computed
benefit of such losses at the statutory tax rate, including tax credits
available at December 31, 1997, was $3,180,211. A valuation allowance of
$944,134 was established to reflect the tax benefit of the loss carryforward
which would expire if no taxable income was recognized through the year ending
December 31, 2001. Because of the current conditions in the Company's sector of
the oil industry, and because the Company does not expect taxable income for the
fiscal year ending December 31, 1998, the Company's management believes that,
based upon the weight of currently available evidence, the Company should
increase the valuation allowance to the full amount of the computed tax benefit.
This results in a current period income tax expense of $2,236,077, or $.012 per
share.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
On August 31, 1998, The Registrant filed the financial
statements to its current report on Form 8-K regarding the acquisition of
Geophysical Development Corporation.
<PAGE>
SIGNATURE
Pursuant to the requirement 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.
(Registrant)
Date: November 16, 1998 /s/ JAY D. HABER
Jay D. Haber
Chairman and Chief Executive Officer
/s/ THOMAS J. CONCANNON
Thomas J. Concannon
Vice President and Chief Financial
Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,941,524
<SECURITIES> 0
<RECEIVABLES> 12,984,960
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,226,239
<PP&E> 28,811,388
<DEPRECIATION> 0
<TOTAL-ASSETS> 77,250,763
<CURRENT-LIABILITIES> 16,798,407
<BONDS> 0
0
0
<COMMON> 193,325
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 77,250,763
<SALES> 0
<TOTAL-REVENUES> 23,862,880
<CGS> 0
<TOTAL-COSTS> 22,035,077
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,347,590
<INCOME-PRETAX> (1,353,949)
<INCOME-TAX> 2,236,077
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,590,026)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.09)
</TABLE>
