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 MARCH 31, 1999
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 March 31, 1999, 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
March 31, 1999 and December 31, 1998................ 3
Condensed Statements of Operations
Three Months Ended
March 31, 1999 and 1998.............................. 5
Condensed Statements of Cash Flows
Three Months Ended
March 31, 1999 and 1998............................. 6
Pro forma Financial Statement Information.................. 8
Notes to Interim Financial Statements...................... 9
Item 2. Management's Discussion and
Analysis or Plan of Operation........................ 10
PART II. OTHER INFORMATION
Item 5. Other Information....................................... 13
Item 6. Exhibits and Reports on Form 8-K........................ 13
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GEOKINETICS INC.
Condensed Statements of Financial Position
ASSETS
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
Unaudited Unaudited
----------- ------------
<S> <C> <C>
Current Assets:
Cash ................................................. $ 3,168,168 $ 2,705,581
Receivables .......................................... 4,533,269 7,385,425
Prepaid expenses ..................................... 321,642 490,098
----------- ------------
Total Current Assets ............................. 8,023,079 10,581,104
Property and Equipment:
Proved oil and gas Properties (net of depletion) ..... 697,986 695,439
(successful efforts method for oil and gas properties)
Equipment (net of depreciation) ...................... 24,742,904 26,376,730
Buildings (net of depreciation) ...................... 281,143 279,893
Land ................................................. 23,450 23,450
----------- ------------
Total Property and Equipment .................... 25,745,483 27,375,512
Other Assets:
Deferred charges ..................................... 401,514 417,938
Restricted investments ............................... 106,700 106,700
Other assets ......................................... 79,633 99,632
Goodwill ............................................. 30,222,694 30,957,183
----------- ------------
Total Other Assets ............................... 30,810,541 31,581,453
----------- ------------
Total Assets ................................. $64,579,103 $ 69,538,069
=========== ============
</TABLE>
3
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31 December 31
1999 1998
Unaudited Unaudited
------------ ------------
Current Liabilities:
Current maturities of long-term debt ....... $ 2,708,528 $ 5,210,380
Accounts payable ........................... 2,650,147 4,822,802
Accrued liabilities ........................ 5,575,827 4,352,380
Notes payable .............................. 2,504,228 2,151,405
Advances for lease bank .................... 260,500 260,500
Other current liabilities .................. 40,979 51,848
------------ ------------
Total Current Liabilities .............. 13,740,209 16,849,315
Long-Term Liabilities:
Long-term debt, net of current maturities .. 42,472,418 40,062,071
Deferred income tax ........................ 222,045 222,045
------------ ------------
Total Liabilities ..................... 56,434,672 57,133,431
Common stock, $.01 par value,
100,000,000 shares authorized,
19,332,480 outstanding .................. 193,325 193,325
Additional paid in capital ................. 29,112,344 29,112,344
Accumulated deficit ........................ (21,161,238) (16,901,031)
------------ ------------
Total Stockholders' Equity ............. 8,144,431 12,404,638
------------ ------------
Total Liabilities and
Stockholders' Equity ............. $ 64,579,103 $ 69,538,069
============ ============
4
<PAGE>
GEOKINETICS INC.
Condensed Statements of Operations
Three Months Ended
March 31
(unaudited)
-------------------------------
1999 1998
------------ ------------
Revenues:
Seismic revenues ..................... $ 1,973,041 $ 5,691,339
Data processing operations ........... 3,009,531 0
Oil and gas sales .................... 39,661 49,745
Operating fees ....................... 58,693 57,424
------------ ------------
Total Revenues ................... 5,080,926 5,798,508
Expenses:
General and administrative ........... 873,157 1,124,093
Seismic operating expenses ........... 2,582,685 2,876,523
Data processing expenses ............. 1,617,176 0
Lease operating expenses ............. 76,236 80,432
Amortization expense ................. 931,183 47,769
Depletion expense .................... 3,843 3,843
Depreciation expense ................. 1,657,348 846,100
------------ ------------
Total Expenses ................... 7,741,628 4,978,760
------------ ------------
Income (Loss) from operations ........ (2,660,702) 819,748
Other Income (Expense):
Interest income ..................... 30,251 17,002
Other income ........................ 2,768 4,900
Interest expense .................... (1,632,524) (459,797)
------------ ------------
Total Other Income ............... (1,599,505) (437,895)
Income (Loss) before provision
for income tax ......................... $ (4,260,207) $ 381,853
Provision for income tax ................. 0 0
------------ ------------
Total income tax ..................... 0 0
------------ ------------
Net Income (Loss) ....................... $ (4,260,207) $ 381,853
============ ============
Earnings (Loss) per share ................ $ (0.22) $ 0.02
============ ============
Weighted average common shares
and equivalents outstanding ............ 19,332,480 18,326,816
============ ============
5
<PAGE>
GEOKINETICS INC.
Condensed Statements of Cash Flows
Three Months Ended
March 31
(unaudited)
--------------------------
1999 1998
----------- -----------
Cash flows from operating activities:
Cash received from customers ................. $ 7,930,851 $ 6,854,232
Interest and dividends received .............. 30,251 27,828
Cash paid to suppliers and employees ......... (7,046,880) (4,366,208)
Interest paid ................................ (492,448) (501,166)
----------- -----------
Net cash provided (used) by operating
activities ............................. 421,774 2,014,686
----------- -----------
Cash flows from investing activities:
Net deposits paid out ........................ 0 (4,700)
Payments for purchase of property and
equipment .................................. (36,988) (164,305)
Acquisition of Reliable Exploration,
Incorporated ............................... 0 (1,190,430)
Earnest Money for acquisition of GDC ......... 0 (1,000,000)
----------- -----------
Net cash provided (used) by investing
activities ............................. (36,988) (2,359,435)
----------- -----------
Cash flows from financing activities:
Proceeds from short-term debt ................ 699,341 1,500,000
Principal payments on long-term debt ......... (259,895) (2,018,621)
Principal payments on short-term debt ........ (361,645) (224,404)
Principal payments on loans from officers .... 0 (13,577)
----------- -----------
Net cash provided (used) by financing
activities ............................. 77,801 (756,602)
----------- -----------
Net increase (decrease) in cash ................. 462,587 (1,101,351)
Cash, beginning of period ........................ 2,705,581 2,212,681
----------- -----------
Cash, end of period .............................. $ 3,168,168 $ 1,111,330
=========== ===========
6
<PAGE>
GEOKINETICS INC.
PRO FORMA FINANCIAL STATEMENT INFORMATION
Acquisitions
On April 30, 1998, the Company completed the acquisition of Geophysical
Development Corporation (GDC) pursuant to the terms of a Stock Purchase
Agreement, whereby the Company acquired 100% of the shares of the outstanding
common stock of GDC in exchange for $26,000,000 in cash and 1,000,000
newly-issued shares of the Company's common stock. GDC is engaged in the
business of providing seismic data processing, software and consultation
services to the oil and gas industry.
The acquisition is accounted for as a purchase and the results of operations of
GDC are included in the consolidated financial statements from the date of
acquisition. The following represents the unaudited pro forma results of
operations as if the acquisition had occurred at the beginning of the quarter
ended March 31, 1998. In addition to combining the historical results of
operations of the two companies, the pro forma calculations include amortization
of goodwill. Excess of cost over the fair value of net assets acquired of
$27,961,807 is being amortized on a straight-line basis over 10 years.
Debt Structure
In connection with the acquisition of GDC, the Company completed a private
offering of $40,000,000 designated as its 12% Senior Subordinated Notes due
April 15, 2005. In addition to the notes, the Company granted warrants to
purchase up to 7,618,594 shares of common stock resulting in original issue
discount in the amount of $9,020,415. The notes are included on the balance
sheet, net of the unamortized discount, as long-term debt in the amount of
$30,979,585. The amortization of the discount included in interest expense on
the pro forma income statement for the quarter ended March 31, 1998 is $173,340.
Cost of Private Offering
The cost incurred to complete the private offering was $221,927 and is included
as other assets on the Company's balance sheet. The deferred cost is being
amortized on a straight-line basis over the life of the notes. The amortization
of this cost included in depreciation and amortization on the pro forma income
statement for the quarter ended March 31, 1998 is $7,926.
7
<PAGE>
<TABLE>
<CAPTION>
For the Quarter Ended March 31, 1998
----------------------------------------------------------------
Geophysical
Development Pro Forma
Geokinetics Inc. Corporation Adjustments Combined
---------------- ------------ ------------ ------------
<S> <C> <C> <C>
Revenues ......................... $ 5,798,508 $ 3,910,501 -- $ 9,709,009
Expenses:
Seismic operations ............... (2,876,523) -- -- (2,876,523)
General and Administrative ....... (1,124,093) (276,850) -- (1,400,943)
Data processing expenses ......... -- (1,576,172) -- (1,576,172)
Amortization, depreciation
and depletion expense ........... (897,712) (165,123) (706,971) (1,769,806)
Interest expense ................. (459,797) (20,137) (1,373,340) (1,853,274)
Income tax (expense) benefit ..... -- (645,852) 425,000 (220,852)
Lease operating expenses ......... (80,432) -- -- (80,432)
Interest income .................. 21,902 27,346 -- 49,248
---------------- ------------ ------------ ------------
NET INCOME (LOSS) ................ $ 381,853 $ 1,253,713 $ (1,655,311) $ (19,745)
================ ============ ============ ============
Earnings (Loss) per Common Share . $ 0.02 -- -- $ (0.001)
================ ============ ============ ============
Earnings (Loss) per Share -
Assuming Dilution ................ $ 0.01 -- -- $ (0.000)
================ ============ ============ ============
Weighted Average Common
Shares Outstanding .............. 18,218,205 -- 1,000,000 19,218,205
================ ============ ============ ============
Fully Diluted Common Shares ...... 32,967,283 -- 1,000,000 33,967,283
================ ============ ============ ============
</TABLE>
8
<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 company is working to complete its audit for the fiscal year ended
December 31, 1998. When completed, audited financial statements will be included
in an amendment to the Company's Form 10-KSB filed for the fiscal year ended
December 31, 1998. A summary of accounting policies and other significant
information is included therein.
2. LONG TERM DEBT
At March 31, 1999, the Company's long-term debt was $45,180,946 including
$2,708,528 which represents current maturities. Long-term debt is presented net
of unamortized Original Issue Discount, totaling $8,344,528. 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 $3,974,310, (iii) a note to Input/Output, Inc.,
bearing interest at 12%, in the amount of $6,174,430, (iv) a note to
Input/Output, Inc., bearing interest at 10%, in the amount of $2,127,425 and (v)
a note to a financial institution bearing interest at prime, in the amount of
$750,347.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
GENERAL
At March 31, 1999, 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's financial results have been severely impacted by the
unprecedented downturn in the oil service industry. This downturn is a direct
result of the significant deterioration of the price of oil which began
occurring in mid 1998. While there has been a recent upturn in the price of oil,
the demand for the services which the Company provides has not as yet been
positively affected. The Company has taken steps to reduce its operating
expenses and continues to evaluate additional cost reduction measures in
response to weakened demand for its services. During the quarter ended March 31,
1999, the Company reduced its number of seismic acquisition crews from five to
two. The Company anticipates demand for its seismic acquisition and seismic data
processing services to continue to weaken during the second fiscal quarter.
RESULTS OF OPERATIONS
Revenues for the three months ended March 31, 1999 were $5,080,926 as
compared to $5,798,508 for the same period of fiscal 1998, a decrease of 12%.
However, the Company was not engaged in the seismic data processing business
during the quarter ended March 31, 1998. The Company entered the seismic data
processing business by acquiring Geophysical Development Corporation (GDC) on
April 30, 1998. First quarter 1998 revenues, on a pro forma basis, would have
been $9,709,009 had the Company acquired GDC at the beginning of the quarter
ended March 31, 1998. On this basis, 1999 revenues decreased 48% from the levels
attained during the same period of fiscal 1998.
Operating expenses for the three month period were $4,276,097, an increase
of 45% from the same period of fiscal 1998. First quarter 1998 operating
expenses, on a pro forma basis, would have been $4,533,127 had the GDC
acquisition occurred on January 1, 1998. On this basis, 1999 operating expenses
decreased 6%. The Company took steps during this quarter to reduce its operating
costs including employee layoffs and reduction in third party expenditures. The
Company anticipates additional cost reduction measures will be implemented
during the fiscal quarter ending June, 1999.
10
<PAGE>
General and Administrative expenses for the three months ended March 31,
1999 totaled $873,157 as compared to $1,124,093 for the same period of fiscal
1998, a decrease of 22%. During the fourth quarter of 1998, the Company
reclassified certain costs previously recorded as General and Administrative
expenses, to better reflect seismic industry standards. If this reclassification
had been undertaken at the beginning of the fiscal quarter ended March 31, 1998,
General and Administrative expenses would have been 702,565. First quarter 1998
General and Administrative expenses, on a pro forma basis, would have been
979,415 had the GDC acquisition occurred on January 1, 1998. On this basis, 1999
General and Administrative expenses decreased 11%.
Depreciation and Amortization expense for the quarter ended March 31, 1999
totaled $2,592,374, an increase of $1,694,662 from the same period of fiscal
1998. This increase is a result of continuing seismic acquisition equipment
purchases during 1998 and the purchase of GDC in April of 1998, which created
significant additional amortization of goodwill.
Interest expense (net of interest income) for the three months ended March
31, 1999 was $1,599,505 as compared to $437,895 for the period ending March 31,
1998. This increase is a result of the Company's closing a $40,000,000 12%
senior subordinated financing, due 2005, during April of 1998. The proceeds from
this financing were utilized by the Company to acquire GDC and purchase
additional seismic acquisition equipment.
The Company had a net loss of $4,260,207, or ($.22) per share, for the
three months ended March 31, 1999 as compared to net income of $381,853, or
$0.02 per share, for the three month period ended March 31, 1998. This result is
due primarily to the current weak demand for the Company's services as well as
increased interest costs, depreciation expense and amortization of goodwill
associated with the Company's 1998 acquisitions and expansion of its seismic
acquisition fleet.
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. The notes call for semi-annual interest payments, due
April 15 and October 15 of each year, and principal due at maturity. The Company
recently reached an agreement with the senior subordinated noteholders to extend
the period for making the semi-annual interest payment due on April 15, 1999 to
May 21, 1999. The Company is also negotiating a restructuring agreement with the
senior subordinated noteholders and is seeking to secure a private placement of
senior secured debt. Completion of these transactions will allow the Company to
continue its seismic data processing and seismic acquisition operations.
11
<PAGE>
The Company currently has three notes due to Input/Output, Inc. totaling
$9,923.637, with various maturities and interest rates. The Company is currently
paying only the interest due on these notes and has reached an informal
agreement with Input/Output, Inc. to continue to pay interest only through
September of 1999.
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 but is unable to estimated how much, if
any, of this obligation it will ultimately collect. The Company has established
a reserve against the collection of this obligation.
At March 31, 1999, the Company had a working capital deficiency of
$5,717,130, which includes the current portion of long-term debt of $2,708,528.
At March 31, 1998, the Company had a working capital deficiency of $2,816,206.
On March 31, 1999, the Company had cash balances of $3,168,168. The
Company feels this cash, anticipated cash flow from its seismic acquisition and
data processing operations, and the proceeds from the private placement of
senior secured debt will be sufficient to meet the working capital requirements
of its seismic acquisition and data processing operations for the foreseeable
future.
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,
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 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>
PART II OTHER INFORMATION
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 pursue the former owners of the subsidiary for the entire
liability which the subsidiary is obligated to pay.
The Company is in the process of discontinuing its oil and gas operations.
In this regard, the Company is presently negotiating with a third party to sell
its oil and gas properties.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
None.
13
<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: May 17, 1999 Thomas J. Concannon
Vice President and Chief Financial
Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,168,168
<SECURITIES> 0
<RECEIVABLES> 4,533,269
<ALLOWANCES> 0
<INVENTORY> 697,986
<CURRENT-ASSETS> 8,023,079
<PP&E> 25,047,497
<DEPRECIATION> 0
<TOTAL-ASSETS> 64,579,103
<CURRENT-LIABILITIES> 13,740,209
<BONDS> 0
0
0
<COMMON> 193,325
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 64,579,103
<SALES> 0
<TOTAL-REVENUES> 5,080,926
<CGS> 0
<TOTAL-COSTS> 7,741,628
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,632,524
<INCOME-PRETAX> (4,260,207)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,260,207)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> (.10)
</TABLE>
