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, 1998
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
Check whether the issuer (1) 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 [ ].
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B not contained in this form, and no disclosure will 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 $33,044,271.
As of December 31, 1998, 19,332,480 shares of the Registrant's Common
Stock were outstanding, and the aggregate market value of the Common Stock held
by non-affiliates was approximately $3,861,886 based on the last reported sales
price of such stock on that date.
DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference: None.
<PAGE>
GEOKINETICS INC.
FORM 10-KSB/A
YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PAGE
PART II
Item 6. Management's Discussion and Analysis or Plan of Operation.....2
Item 7. Financial Statements..........................................6
Independent Auditors' Report
Consolidated Financial Statements
Consolidated Balance Sheets.......................... F-1
Consolidated Statements of Operations................ F-3
Consolidated Statements of Stockholders' Equity
(Deficit)............................................ F-4
Consolidated Statements of Cash Flows................ F-5
Notes to the Consolidated Financial Statements....... F-6
PART III
Item 13. Exhibits and Reports on Form 8-K..............................6
1
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PART II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
On January 26, 1998, the Company acquired all of the outstanding capital
stock of Reliable Exploration, Incorporated, a Montana corporation (Reliable),
pursuant to the terms of a Stock Purchase Agreement, 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.
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 of GDC was recorded using
the purchase method of accounting and the results of operations of GDC are
included in the Company's consolidated financial statements from the date of
acquisition.
At December 31, 1998, the Company's financial position reflects, (i) the
seismic acquisition services being conducted by Quantum Geophysical, Inc.
(Quantum), Signature Geophysical Services, Inc. (Signature), and Reliable, (ii)
the seismic data processing, software and consultation services being provided
by GDC and (iii) the Company's oil and gas operations. The Company anticipates
that the demand for its seismic acquisition and seismic data processing services
will weaken in 1999 as a result of a significant decline of the price of oil
which occurred in mid 1998.
RESULTS OF OPERATIONS
Revenues for the 12 months ended December 31, 1998 were $33,044,271, as
compared to $9,647,931 for the same period of 1997, an increase of 242%. The
Company initiated seismic acquisition operations in July of 1997 utilizing one
crew, an Input/Output System II RSR. In October of 1997, a second crew, an
Input/Output System II MRX, was put into service. During 1998, the Company
operated as many as five seismic crews at any one time. This increase in crews
was the result of the January, 1998, acquisition of Reliable which added two
crews, Texas Instruments DFSV's, to the Company's acquisition business and the
purchase of a new 3,000 channel Input/Output System II RSR which became
operational in August of 1998. These fleet additions increased the Company's
production capacity and resulted in an increase of 164% in seismic acquisition
revenue from 1997 to 1998. The Company's 1998 revenues were also positively
impacted by the acquisition of GDC in April of 1998. Seismic data processing
revenue totaled $9,257,500 in 1998. The Company's 1997
2
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results reflected no revenue attributable to seismic data processing services.
The Company's revenues from all sources for 1998, on a pro forma basis, would
have been $39,051,810 had the Company acquired GDC on January 1, 1998.
Operating expenses for the 12 months ended December 31, 1998 were
$25,452,468 as compared to $6,345,427 for the same period of 1997, an increase
of 301%. This increase is attributable to an increased number of seismic
acquisition crews being operational in 1998 and the operating expenses
associated with the Company's seismic data processing business (which was not
part of the Company's operations during 1997). Operating expenses associated
with the Company's seismic data processing operation totaled $3,699,989 in 1998.
General and administrative expenses for 1998 totaled $3,402,398, an
increase of $960,817 from 1997. This increase is due to additional expenditures
necessary to support the Company's expanding seismic acquisition operations and
expenses related to the Company's seismic data processing business, which were
not reflected in the Company's 1997 results. During the fourth quarter of 1998,
the Company reclassified $1,573,129 of costs previously recorded as General and
Administrative expenses, to better reflect seismic industry standards. If this
reclassification had not occurred in 1998, General and Administrative expense
would have increased by $2,533,946 as compared to 1997.
Depletion, depreciation and amortization expense for 1998 totaled
$7,144,854 as compared to $1,207,812 for the same period of 1997, an increase of
492%. This increase is primarily the result of the expansion of the Company's
inventory of seismic acquisition equipment and the amortization of goodwill
associated with the acquisitions of GDC and Reliable.
Interest expense (net of interest income) for the 12 months ended December
31, 1998 totaled $4,777,075 as compared to $1,143,931 for the same period of
1997, an increase of 318%. The increase in interest expense is a result of the
Company's closing a $40,000,000 12% Senior Subordinated Debt financing, due
2005, on April 30,1998. The proceeds from this financing were utilized to
acquire GDC and purchase additional seismic acquisition equipment.
The Company had a net loss of $9,968,602, or ($0.53) per share, for the 12
months ended December 31, 1998, as compared to a net loss of $1,115,820, or
($0.14) per share, for the same period of 1997. This increase is the result of
significant increases in depletion, depreciation, and amortization expense and
interest expense, as outlined above, the recognition of $2.8 million of bad debt
expense due to the determination that a particular account of a subsidiary of
the Company was uncollectable, and income tax expense of $2,236,078 that
resulted from an increase in the Company's tax valuation allowance. Management
felt it was appropriate to increase the Company's valuation allowance during
1998 due to continuing weakness in industry conditions and because the Company
did not have taxable income for the year ending December 31, 1998.
3
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LIQUIDITY AND CAPITAL RESOURCES
The Company completed a private offering of $40,000,000 of 12% Senior
Subordinated Notes (Notes) to DLJ Investment Partners, L.P. and certain
additional investors (Purchasers) pursuant to the terms of a Securities Purchase
Agreement dated April 30, 1998, by and among the Company and the Purchasers. In
addition, the Company (i) caused certain of its wholly-owned subsidiaries to
execute guarantees of the Notes pursuant to an Indenture executed by each of
them, (ii) granted warrants (Warrants) to the Purchasers entitling them to
purchase up to an aggregate of 7,618,594 shares of Common Stock at a price of
$2.00 per share, subject to certain adjustments, and (iii) granted certain
registration rights in favor of the Purchasers with respect to the Notes, the
Warrants and the shares of Common Stock which may be acquired upon exercise of
the Warrants. The proceeds from this financing were utilized to acquire GDC and
purchase additional seismic acquisition equipment. The Company restructured this
financing in October 1999.
In December of 1998, the Company temporarily suspended principal payments
on approximately $9.9 million of indebtedness owed to its principal equipment
supplier. The Company completed a restructuring of this debt on October 1, 1999.
A customer of a subsidiary of the Company has defaulted on payment of a
$2.8 million obligation. As a result of that customer's involuntary bankruptcy
proceedings, the Company determined that this obligation was uncollectable and
charged the total amount against earnings during the fourth quarter of 1998.
At December 31, 1998, the Company had cash balances of $2,705,581. The
Company believes this cash and anticipated cash flow from its seismic
acquisition and seismic data processing operations will be sufficient to meet
its current working capital requirements.
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.
4
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YEAR 2000
The Company utilizes software and technologies throughout its operations
and administration that may be vulnerable to the date change in the year 2000.
Identification, assessment, and in some cases, replacement of equipment that may
be affected by the year 2000 is underway. Software controlled by the Company,
including proprietary seismic processing, has been tested successfully.
Replacements and upgrades have not been accelerated by the year 2000 issue and
do not represent costs in addition to normal operating expenditures. The Company
has communicated with its significant suppliers to determine if those parties
have appropriate plans to remedy year 2000 issues when their systems interface
with the Company's systems or may otherwise impact operations of the Company.
However, there can be no guarantee that the systems of other companies, on which
the Company's systems rely, will be timely converted or that a failure to
convert by another company or a conversion that is incompatible with the
Company's systems would not have a material adverse effect on the Company.
Assessment continues by technical staff on an ongoing basis. Although the
Company is not aware of any material operational issues, there can be no
assurance that there will not be a delay in, or increased costs associated with,
the implementation of the necessary systems and changes to address the year
2000. A potential source of risk includes, but is not limited to, the inability
of principal suppliers to be year 2000 compliant, which could result in an
interruption of the Company's services. The Company currently does not have a
formal contingency plan. If unforeseen problems are encountered that relate to
the year 2000, possible solutions will be evaluated and the most efficient will
be enacted.
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.
PRO FORMA FINANCIAL STATEMENT INFORMATION
On April 30, 1998, the Company completed the acquisition of GDC. The
acquisition has been accounted for as a purchase and the results of operations
of GDC are included in the consolidated financial statements from the date of
acquisition, April 30, 1998. The following represents the unaudited pro forma
results of operations as if the acquisition had occurred at the beginning of the
first quarter of 1998, and therefore includes the results of operations of GDC
during the period January 1, 1998 through April 30, 1998. In addition to
combining the historical results of operations of the two companies, the pro
forma
5
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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.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------
GEOPHYSICAL
GEOKINETICS DEVELOPMENT PRO-FORMA
INC CORPORATION ADJUSTMENTS COMBINED
----------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
SEISMIC REVENUES ............. 23,369,624 23,369,624
OIL AND GAS SALES ............ 184,033 184,033
OPERATOR OVERHEAD FEES ....... 233,064 233,064
DATA PROCESSING REVENUES ..... 9,257,550 6,007,539 15,265,089
----------------------------------------------------------
TOTAL REVENUES ....... 33,044,271 6,007,539 0 39,051,810
EXPENSES
SEISMIC OPERATING EXPENSES ... (21,396,903) (21,396,903)
GENERAL AND ADMINISTRATIVE ... (3,402,398) (369,133) (3,771,531)
DEPL, DEPR AND AMORT ......... (7,144,854) (220,164) (942,628) (8,307,646)
LEASE OPERATING EXPENSES ..... (355,576) (355,576)
DATA PROCESSING EXPENSES ..... (3,699,989) (2,257,435) (5,957,424)
INTEREST INCOME .............. 207,449 43,460 250,909
INTEREST EXPENSE ............. (4,984,524) (29,932) (1,834,532) (6,848,988)
INCOME TAX (EXPENSE) BENEFIT . (2,236,078) 0 0 (2,236,078)
----------------------------------------------------------
NET INCOME (LOSS) ..... (9,968,602) 3,174,335 (2,777,160) (9,571,427)
==========================================================
BASIC (LOSS) PER COMMON SHARE (0.53) (0.50)
========== ==========
WEIGHTED AVERAGE COMMON
SHARES AND EQUIVALENTS
OUTSTANDING ................. 18,975,746 18,975,746
========== ==========
</TABLE>
ITEM 7. FINANCIAL STATEMENTS.
See page F-0 for Index to Financial Statements.
PART III.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are included as exhibits to this Form 10-KSB/A.
Exhibits incorporated by reference are indicated as such by the information
supplied thereafter. No exhibits are being filed herewith.
(A) EXHIBITS
3.1 Certificate of Incorporation of the Company (incorporated by
reference from Exhibit 3(a) to Amendment No. 1 to the Company's
Registration Statement on Form S-3, filed with the Securities and
Exchange Commission on March 25, 1980 (file no. 000-09268)).
3.2 Certificate of Amendment of Certificate of Incorporation of the
Company (incorporated by reference from Exhibit 3.2 to Form 10-KSB
filed with the Securities and Exchange Commission on April 24, 1996
(file no. 000- 09268)).
3.3 Certificate of Amendment of Certificate of Incorporation of the
Company filed with the Secretary of State of Delaware on July 14,
1997 (incorporated by reference from Exhibit 3.3 to Form 10-KSB
filed with the Securities and Exchange Commission on March 31, 1998
(file no.000- 09268))
3.4 Certificate of Amendment of Certificate of Incorporation of the
Company filed with the Secretary of State of Delaware on November
24, 1997 (incorporated by reference from Exhibit 3.4 to Form 10-KSB
filed with the Securities and Exchange Commission on March 31, 1998
(file no.000- 09268)).
6
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3.5 Amended and Restated Bylaws of the Company (incorporated by
reference from Exhibit 3.5 to Form 10-KSB filed with the Securities
and Exchange Commission on March 31, 1998 (file no.000-09268)).
4.1 Statement of Designations of the Company's Series A Preferred Stock
(incorporated by reference from Exhibit 4 to Form 8-K filed with the
Securities and Exchange Commission on August 5, 1997 (file no.000-
09268)).
4.2 Indenture dated as of April 30, 1998, executed by the Company, HOC
Production Co., Inc., Geokinetics Production Co., Inc., Quantum
Geophysical, Inc., Geoscience Software Solutions, Inc., Signature
Geophysical Services, Inc., Reliable Exploration, Incorporated, and
Geophysical Development Corporation (incorporated by reference from
Exhibit (4.4) to Form 8-K filed with the Securities and Exchange
Commission on May 15, 1998 (file no.000-09268)).
4.3 Indenture dated as of October 1, 1999, executed by the Company,
Geokinetics Production Co., Inc., Quantum Geophysical, Inc.,
Geoscience Software Solutions, Inc., Signature Geophysical Services,
Inc., Reliable Exploration, Incorporated, and Geophysical
Development Corporation (incorporated by reference from Exhibit 4.3
to Form 8-K filed with the Securities and Exchange Commission on
October 18, 1999 (file no. 000- 09268)).
8.1 Tax Opinion of David E. Hammer, P.C. concerning the deductibility of
the Company's net operating loss carryforwards following the
Company's acquisition of certain oil and gas properties effective
August 1, 1994 (incorporated by reference from Exhibit 8.1 to Form
10-KSB filed with the Securities and Exchange Commission on May 19,
1995 (file no.000- 09268)).
10.1 Securities Purchase Agreement dated as of April 25, 1997 among the
Company and each of William R. Ziegler and Steven A. Webster.
(incorporated by reference from Exhibit II to the Schedule 13D filed
with the Securities and Exchange Commission by William R. Ziegler on
May 5, 1997 (file no. 005-32355)).
10.2 Form of 12% Senior Secured Promissory Note dated as of April 25,
1997 in the principal amount of $250,000 executed by the Company to
each of William R. Ziegler and Steven A. Webster (incorporated by
reference from Exhibit III to the Schedule 13D filed with the
Securities and Exchange Commission by William R. Ziegler on May 5,
1997 (file no. 005-32355)).
7
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10.3 Registration Rights Agreement dated as of April 25, 1997 executed by
the Company and each of the William R. Ziegler and Steven A. Webster
(incorporated by reference from Exhibit V to the Schedule 13D filed
with the Securities and Exchange Commission by William R. Ziegler on
May 5, 1997 (file no. 005-32355)).
10.4 Form of Warrant to Purchase Common Stock dated as of April 25, 1997
issued by the Company to each of William R. Ziegler and Steven A.
Webster (incorporated by reference from Exhibit IV to the Schedule
13D filed with the Securities and Exchange Commission by William R.
Ziegler on May 5, 1997 (file no. 005-32355)).
10.5 Consulting Agreement dated as of April 25, 1997 executed by the
Company and William R. Ziegler (incorporated by reference from
Exhibit VI to the Schedule 13D filed with the Securities & Exchange
Commission by William R. Ziegler on May 5, 1997 (file no.
005-32355)).
10.6 Securities Purchase and Exchange Agreement dated as of July 18, 1997
among the Company, Blackhawk Investors, L.L.C., William R. Ziegler,
and Steven A. Webster (incorporated by reference from Exhibit (2.1)
to Form 8-K filed on August 5, 1997 (file no.000-09268)).
10.7 Investment Monitoring Agreement dated July 18, 1997, between the
Company and Blackhawk Capital Partners, L.P. (incorporated by
reference from Exhibit 10.2 to Form 8-K filed August 5, 1997 (file
no.000-09268)).
10.8 Letter Agreement re Additional Investment dated July 24, 1997,
between the Company and Blackhawk Investors, L.L.C. (incorporated by
reference from Exhibit (2.3) to Form 8-K filed on August 5, 1997
(file no.000- 09268)).
10.9 Stock Purchase Agreement dated as of June 25, 1997 among the
Company, Signature Geophysical Services, Inc., Gallant Energy, Inc.
and James Gallant (incorporated by reference from Exhibit (2.2) to
Form 8-K filed on August 5, 1997 (file no.000-09268)).
10.10 Stock Purchase Agreement dated December 3, 1997, by and among the
Company, Reliable Exploration, Incorporated, Allen Rein, Scott
Schmitt, and Kim Nordberg. (incorporated by reference from Exhibit
(2) to Form 8- K filed with the Securities and Exchange Commission
on February 10, 1998 (file no.000-09268)).
8
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10.11 Stock Purchase Agreement dated as of March 24, 1998, among the
Company, Geophysical Development Corporation and the holders of all
of the capital stock of Geophysical Development Corporation
(incorporated by reference from Exhibit 2.1 to Form 8-K filed with
the Securities and Exchange Commission on May 15, 1998 (file
no.000-09268)).
10.12 Employment Agreement dated as of July 15, 1997 between the Company
and Lynn A. Turner (incorporated by reference from Exhibit 10.5 to
Form 10-KSB filed with the Securities and Exchange Commission on
March 31, 1998 (file no.000-09268)).
10.13 Employment Agreement dated as of July 15, 1997 between the Company
and Michael A. Dunn (incorporated by reference from Exhibit 10.6 to
Form 10-KSB filed with the Securities and Exchange Commission on
March 31, 1998 (file no.000-09268)).
10.14 Employment Agreement dated as of July 15, 1998 between the Company
and Thomas J. Concannon (incorporated by reference from Exhibit 10.7
to Form 10-KSB filed with the Securities and Exchange Commission on
March 31, 1998 (file no.000-09268)).
10.15 Securities Purchase Agreement dated as of April 30, 1998, among the
Company, DLJ Investment Partners, L.P. and certain additional
investors (incorporated by reference from Exhibit (4.1) to Form 8-K
filed with the Securities and Exchange Commission on May 15, 1998
(file no.000- 09268)).
10.16 Warrant Agreement dated as of April 30, 1998, among the Company, DLJ
Investment Partners, L.P. and certain additional investors
(incorporated by reference from Exhibit (4.2) to Form 8-K filed with
the Securities and Exchange Commission on May 15, 1998 (file
no.000-09268)).
10.17 Note Registration Rights Agreement dated as of April 30, 1998, among
the Company, DLJ Investment Partners, L.P. and certain additional
investors (incorporated by reference from Exhibit (4.3) to Form 8-K
filed with the Securities and Exchange Commission on May 15, 1998
(file no.000- 09268)).
10.18 Tag Along-Drag Along Agreement dated as of April 30, 1998 among the
Company, DLJ Investment Partners, L.P. and certain additional
investors (incorporated by reference from Exhibit (4.5) to Form 8-K
filed with the Securities and Exchange Commission on May 15, 1998
(file no.000- 09268)).
9
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10.19 Stock Purchase Agreement, dated July 28, 1999, among Halex Oil
Corporation, HOC Operating Co., Inc. and the Company (without
exhibits) (incorporated by reference from Exhibit (2.1) to Form 8-K
filed with the Securities and Exchange Commission on August 12, 1999
(file no. 000-09268)).
10.20 Securities Purchase Agreement dated as of October 1, 1999, among the
Company, DLJ Investment Partners, L.P. and certain additional
investors (incorporated by reference from Exhibit 4.1 to Form 8-K
filed with the Securities and Exchange Commission on October 18,
1999 (file no. 000- 09268)).
10.21 Amended and Restated Warrant Agreement dated as of October 1, 1999,
among the Company, DLJ Investment Partners, L.P. and certain
additional investors (incorporated by reference from Exhibit 4.2 to
Form 8-K filed with the Securities and Exchange Commission on
October 18, 1999 (file no. 000-09268)).
10.22 Amended and Restated Tag Along-Drag Along Agreement dated as of
September 30, 1999, among the Company, DLJ Investment Partners, L.P.
and certain additional investors (incorporated by reference from
Exhibit 4.4 to Form 8-K filed with the Securities and Exchange
Commission on October 18, 1999 (file no. 000-09268)).
10.23 Restructure Agreement dated October 1, 1999, among the Company,
Geophysical Services, Inc., Quantum Geophysical Services, Inc.,
Input/Output, Inc. and Global Charter Corporation (incorporated by
reference from Exhibit 99 to Form 8-K filed with the Securities and
Exchange Commission on October 18, 1999 (file no. 000-09268)).
16 Letter dated March 1, 1999 by Tsakopulos Brown Schott & Anchors to
the Securities and Exchange Commission (incorporated by reference
from Exhibit (16) to Form 8-K filed with the Securities and Exchange
Commission on March 4, 1999 (file no. 000-09268)).
22 Following is a list of the Company's Subsidiaries:
OTHER NAME UNDER
WHICH SUBSIDIARY JURISDICTION OF
NAME OF SUBSIDIARY CONDUCTS BUSINESS INCORPORATION
------------------ ----------------- ---------------
Geokinetics Production Co., Inc. None Texas
(formerly HLX Acquisition Corp.)
10
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Quantum Geophysical Services, Inc.
(formerly Quantum Geophysical, Inc.) None Texas
Quantum Geophysical, Inc. None Texas
Geophysical Development Corporation None Texas
Geoscience Software Solutions, Inc. None Texas
Following is a list of the subsidiaries of Quantum Geophysical,
Inc.:
OTHER NAME UNDER
WHICH SUBSIDIARY JURISDICTION OF
NAME OF SUBSIDIARY CONDUCTS BUSINESS INCORPORATION
------------------ ----------------- ---------------
Signature Geophysical, Inc. None Michigan
Reliable Exploration, Incorporated None Montana
(B) REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF THE PERIOD COVERED BY
THIS FORM 10-KSB.
None.
11
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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: January 7, 2000 By: /s/ LYNN A. TURNER
-----------------------------
Lynn A. Turner, President and
Chief Operating 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/ LYNN A. TURNER President and Chief Operating January 7, 2000
- ------------------------ Officer
Lynn A. Turner
/S/ THOMAS J. CONCANNON Vice President and January 7, 2000
- ------------------------ Chief Financial Officer
Thomas J. Concannon
/S/ WILLIAM R. ZIEGLER Director and Chairman January 7, 2000
- ------------------------
William R. Ziegler
Director
- ------------------------
Steven A. Webster
/S/ CHRISTOPHER M. HARTE Director January 7, 2000
- ------------------------
Christopher M. Harte
12
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===========================
| |
| GEOKINETICS INC. AND |
| SUBSIDIARIES |
| |
| ANNUAL CONSOLIDATED |
| FINANCIAL STATEMENTS |
| |
| |
| DECEMBER 31, 1998 |
| |
===========================
<PAGE>
FITTSROBERTS & CO., P.C.
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Geokinetics Inc. and Subsidiaries
Houston, Texas
We have audited the accompanying consolidated balance sheet of Geokinetics Inc.
and Subsidiaries as of December 31, 1998, and the related statements of
operations, stockholders' 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. The financial statements of Geokinetics Inc. and Subsidiaries for the
year ended December 31, 1997 were audited by other auditors whose report dated
March 7, 1998, expressed an unqualified opinion on those financial statements.
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 1998 financial statements referred to above present fairly,
in all material respects, the financial position of Geokinetics Inc. and
Subsidiaries as of December 31, 1998, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
As discussed in Note A to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 131, Disclosure about Segments
of an Enterprise and Related Information, in 1998. We audited the adjustments
necessary to restate the 1997 segment information provided in Note 19. In our
opinion, such adjustments are appropriate and have been properly applied.
/s/ Fitts, Roberts & Co., P.C.
Houston, Texas
October 1, 1999
<PAGE>
TABLE OF CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS............................................F-1
CONSOLIDATED STATEMENTS OF OPERATIONS..................................F-3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY........................F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS..................................F-5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.........................F-6
<PAGE>
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, DECEMBER 31,
1998 1997
----------- -----------
CURRENT ASSETS
Cash ............................................ $ 2,705,581 $ 2,212,681
Accounts receivable - trade, net ................ 6,831,765 3,654,829
Accounts receivable - officers and employees .... 39,493 182,480
Work in progress ................................ 514,167 380,925
Prepaid expenses ................................ 490,098 367,687
Accrued interest ................................ -- 11,221
----------- -----------
Total Current Assets ........................ 10,581,104 6,809,823
----------- -----------
PROPERTY AND EQUIPMENT, net ......................... 27,375,512 17,314,325
----------- -----------
OTHER ASSETS
Deferred charges ................................ 419,077 60,316
Deferred tax asset .............................. -- 2,292,430
Restricted investments .......................... 106,700 71,700
Deposits and other assets ....................... 98,493 4,776
Goodwill and other intangibles, net of $2,091,170
amortization in 1998, and $87,614 in 1997 ... 30,957,183 1,949,626
----------- -----------
Total Other Assets .......................... 31,581,453 4,378,848
----------- -----------
TOTAL ASSETS ............................. $69,538,069 $28,502,996
=========== ===========
The accompanying notes are an integral part of these Consolidated Financial
Statements
Page F-1
<PAGE>
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt ............ $ 4,648,110 $ 3,463,660
Accounts payable - trade ........................ 4,822,802 2,282,037
Accrued Income Tax Payable ...................... 935,000 --
Accrued liabilities ............................. 3,176,673 1,049,119
Customer deposits ............................... 35,000 --
Notes payable ................................... 2,151,405 896,686
Due to officers and stockholders ................ 251,137 164,206
Advances for lease bank ......................... 260,500 260,500
Site restoration costs payable .................. 6,418 6,418
------------ ------------
Total Current Liabilities ................... 16,287,045 8,122,626
------------ ------------
LONG-TERM LIABILITIES
Long-term debt, net of current maturities, net of
OID ........................................... 40,624,341 12,129,420
Deferred Income Tax ............................. 222,045 --
------------ ------------
Total Long Term Liabilities ............ 40,846,386 12,129,420
------------ ------------
TOTAL LIABILITIES ........................ 57,133,431 20,252,046
------------ ------------
STOCKHOLDERS' EQUITY
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, 19,332,480 shares outstanding at
December 31, 1998 and 16,598,483 shares
outstanding at December 31, 1997 ............ 193,325 165,985
Additional paid-in capital ...................... 29,112,344 14,017,394
Retained deficit ................................ (16,901,031) (6,932,429)
------------ ------------
TOTAL STOCKHOLDERS'
EQUITY ............................... 12,404,638 8,250,950
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ................. $ 69,538,069 $ 28,502,996
============ ------------
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements
Page F-2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
-----------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
REVENUES
Seismic revenue .......................... $ 23,369,624 $ 8,848,842
Data processing revenues ................. 9,257,550 --
Oil and gas sales ........................ 184,033 431,533
Operator overhead fees ................... 233,064 242,556
Sale of oil and gas leases ............... -- 125,000
------------ ------------
Total Revenues ....................... 33,044,271 9,647,931
EXPENSES
Seismic operating expenses ............... 21,396,903 5,563,525
General and administrative ............... 3,402,398 2,441,581
Depletion, depreciation and amortization . 7,144,854 1,207,812
Lease abandonments ....................... -- 364,481
Lease operating expenses ................. 355,576 248,686
Cost of oil and gas leases sold .......... -- 168,735
Data processing expenses ................. 3,699,989 --
------------ ------------
Total Expenses ....................... 35,999,720 9,994,820
------------ ------------
Loss from Operations .............. (2,955,449) (346,889)
OTHER INCOME (EXPENSE)
Interest income .......................... 207,449 66,309
Interest expense ......................... (4,984,524) (1,210,240)
------------ ------------
Total Other Income (Expense) ......... (4,777,075) (1,143,931)
------------ ------------
Net Loss Before Income Tax Expense (7,732,524) (1,490,820)
INCOME TAX BENEFIT
Deferred income tax benefit (expense) .... (2,236,078) 375,000
------------ ------------
NET LOSS ..................................... $ (9,968,602) $ (1,115,820)
============ ============
Basic earnings (loss) per common share ....... $ (.53) $ (.14)
------------ ------------
Weighted average common shares outstanding ... 18,975,746 8,091,336
============ ------------
The accompanying notes are an integral part of these Consolidated Financial
Statements
Page F-3
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED SHARES COMMON SHARES
ISSUED ISSUED
------------ ------------
Balance at January 1, 1997 ..................... -- 4,953,288
Net Loss ....................................... -- --
Private placement offerings:
July 18, 1997 ................................ 187,500 5,500,000
July 24, 1997 ................................ 100,000 --
Costs of placements ............................ -- --
Employee stock options ......................... -- 7,500
Acquisition of Signature Geophysical, Inc. ..... -- 400,000
Exercise of warrants ........................... -- 1,732,139
Exercise of non-cash warrants .................. -- 1,505,556
Purchase of warrants ........................... -- --
Reduction of common par value .................. -- --
Conversion of Series A Preferred Stock ......... (187,500) 2,500,000
------------ ------------
Balance at December 31, 1997 ................... 100,000 16,598,483
Net Loss ....................................... -- --
Conversion of Series B Preferred .............. (100,000) 1,333,333
Acquisition of Reliable Exploration Incorporated -- 375,000
Stock Issued to Vendor in Lieu of Cash ......... -- 20,000
Acquisition of Geophysical Development Corp. ... -- 1,000,000
Warrants Issued Associated with
Subordinated Debt ............................ -- --
Exercise of warrants ........................... -- 5,664
------------ ------------
Balance at December 31, 1998 ................... -- 19,332,480
============ ============
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
ADDITIONAL
PREFERRED COMMON PAID IN RETAINED
STOCK STOCK CAPITAL DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 ..................... $ -- $ 990,657 $ 3,924,345 $ (5,816,609) $ (901,607)
Net Loss ....................................... -- -- -- (1,115,820) (1,115,820)
Private placement offerings:
July 18, 1997 ................................ 1,875,000 1,100,000 3,025,000 -- 6,000,000
July 24, 1997 ................................ 1,000,000 -- -- -- 1,000,000
Costs of placements ............................ -- -- (80,728) -- (80,728)
Employee stock options ......................... -- 1,500 7,953 -- 9,453
Acquisition of Signature Geophysical, Inc. ..... -- 80,000 944,800 -- 1,024,800
Exercise of warrants ........................... -- 132,834 2,182,756 -- 2,315,590
Exercise of non-cash warrants .................. -- 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 ......... (1,875,000) 25,000 1,850,000 -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 ................... 1,000,000 165,985 14,017,394 (6,932,429) 8,250,950
Net Loss ....................................... -- -- -- (9,968,602) (9,968,602)
Conversion of Series B Preferred .............. (1,000,000) 13,333 986,667 -- --
Acquisition of Reliable Exploration Incorporated -- 3,750 980,625 -- 984,375
Stock Issued to Vendor in Lieu of Cash ......... -- 200 54,800 -- 55,000
Acquisition of Geophysical Development Corp. ... -- 10,000 4,052,500 -- 4,062,500
Warrants Issued Associated with
Subordinated Debt ............................ -- -- 9,020,415 -- 9,020,415
Exercise of warrants ........................... -- 57 (57) -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 ................... $ -- $ 193,325 $ 29,112,344 $(16,901,031) $ 12,404,638
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements
Page F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-----------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Inflows
Cash received from customers ......................... $ 32,138,023 $ 6,567,888
Cash received from sale of leases .................... -- 125,000
Interest and dividends received ...................... 210,823 55,088
------------ ------------
32,348,846 6,747,976
------------ ------------
Outflows
Cash paid to suppliers and employees ................. 23,609,091 8,607,458
Cash paid for oil and gas leases ..................... -- 16,115
Interest paid ........................................ 3,894,627 1,224,910
------------ ------------
27,503,718 9,848,483
------------ ------------
Net Cash Provided (Used) by Operating Activities ... 4,845,128 (3,100,507)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Outflows
Cash paid for the purchase of Reliable
Exploration Incorporated ........................... 1,300,000 --
Cash paid for the purchase of Geophysical
Development Corporation ............................ 26,000,000 --
Cash payments for the purchase of property ........... 12,477,237 904,725
Purchase of certificate of deposit ................... -- 50,000
Payments for deposits ................................ 4,700 --
------------ ------------
Net Cash (Used) by Investing Activities ............ (39,781,937) (954,725)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Inflows
Proceeds from long-term debt ......................... 40,000,000 --
Proceeds from short-term debt ........................ 3,435,302 500,000
Proceeds from private placement offering, net of stock
issue costs of $80,728 ............................. -- 5,419,272
Proceeds from exercise of warrants ................... -- 1,899,661
Proceeds from exercise of options .................... -- 9,453
Proceeds from issuance of Series B preferred stock ... -- 1,000,000
------------ ------------
43,435,302 8,828,386
------------ ------------
Outflows
Payments on long-term debt ........................... 4,760,475 2,036,589
Payments on short-term debt .......................... 3,213,491 778,104
Payments on officers loan ............................ 82,432 159,715
------------ ------------
8,056,398 2,974,408
------------ ------------
Net Cash Provided by Financing Activities .......... 35,378,904 5,853,978
------------ ------------
NET INCREASE IN CASH ..................................... 442,095 1,798,746
CASH, acquired in acquisitions ........................... 50,805 --
CASH, beginning of year .................................. 2,212,681 413,935
------------ ------------
CASH, end of year ........................................ $ 2,705,581 $ 2,212,681
============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements
Page F-5
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE ORGANIZATION
Geokinetics Inc., a Delaware corporation, founded in 1980, (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 and data processing services to clients involved in both
on-shore and off-shore operations. Through equipment purchases and
acquisition of other companies, the Company currently has the
capability of operating five 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), Reliable Exploration Incorporated (Reliable), Geophysical
Development Corporation (GDC) 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
Consolidated Financial Statements
Page F-6
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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.
Consolidated Financial Statements
Page F-7
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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, 1998 and 1997 was
$7,782 and $16,000.
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. The amount of restricted investments was $106,700
at December 31, 1998 and $71,700 at December 31, 1997.
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, 1998 and 1997.
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 basis 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 timing
differences in reporting of depreciation and depletion for income
tax purposes and consolidated financial statement purposes.
Consolidated Financial Statements
Page F-8
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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
Basic loss per common share is computed based on the weighted
average number of common shares outstanding during the respective
years. Stock options and stock warrants have not been included in
the calculation of diluted earnings per share as their effect would
be antidilutive.
ACCOUNTING STANDARDS ADOPTED
In June 1997, Statement of Financial Accounting Standards No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
("SFAS 131") was issued. SFAS 131 requires that companies report
financial and descriptive information about their reportable
operating segments. Segment information to be reported is to be
based upon the way management organizes the segments for making
operating decisions and assessing performance. The Company adopted
SFAS 131 in the fourth quarter of 1998 and has made the appropriate
disclosures.
Consolidated Financial Statements
Page F-9
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Effective for fiscal years beginning after December 15, 1995,
Statement of Financial Accounting Standards No. 123 establishes
accounting and reporting standards for stock-based compensation
plans. SFAS No. 123 encourages entities to use a "fair value based
method" in accounting for employee stock-based compensation plans
but allows the "intrinsic value based method" prescribed by APB
Opinion No. 25. SFAS No. 123 amends Opinion No. 25 to require pro
forma disclosures of net income and earnings per share as if the
"fair valued based method" was used. The Company has elected to
remain on its current method of accounting as described in Note 12,
and has adopted the disclosure requirements of SFAS No. 123.
NOTE 2. PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
DECEMBER 31, DECEMBER 31,
1998 1997
----------- -----------
Field operating equipment .................... $19,124,739 $18,383,515
Proved oil and gas properties ................ 919,285 919,285
Vehicles ..................................... 867,506 377,043
Buildings and improvements ................... 279,893 128,106
Software ..................................... 167,830
Data processing equipment .................... 16,355,278
Furniture and equipment ...................... 264,988 80,186
----------- -----------
37,979,519 19,888,135
Less accumulated depletion, depreciation
and amortization ....................... 10,627,457 2,597,260
----------- -----------
27,352,062 17,290,875
Land ......................................... 23,450 23,450
----------- -----------
Net Property and Equipment ....... $27,375,512 $17,314,325
=========== ===========
Consolidated Financial Statements
Page F-10
<PAGE>
NOTE 3. ACCRUED LIABILITIES
A summary of accrued liabilities follows:
DECEMBER 31, DECEMBER 31,
1998 1997
---------- ----------
Sales tax payable ...................... $ 681,505 $ 398,656
Royalties payable ...................... 282,796 270,205
Accrued payroll ........................ 816,488 158,736
Accrued interest payable ............... 1,178,440 142,868
Payroll taxes payable .................. 9,056 78,654
Accrued operating expense .............. 208,388 --
---------- ----------
$3,176,673 $1,049,119
========== ==========
Consolidated Financial Statements
Page F-11
<PAGE>
NOTE 4. NOTES PAYABLE
A summary of notes payable follows:
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
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 .................................... $ 158,524 $ 472,000
Notes representing financing of
insurance premiums for operating
subsidiaries over periods of nine to
eleven months at interest rates varying
from 7.9% to 8.2% ............................. 315,908 313,370
Notes representing refinancing
arrangements with certain suppliers of
an operating subsidiary for accounts
payable invoices outstanding beyond
normal industry payment terms ................. 30,191 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 equipment vendor dated
November 11, 1998 secured by seismic
equipment, with interest at 9.5%, payable
interest only monthly through May 11,
1999, principal and interest through
October 11, 1999 and all remaining
principal and interest due November 11, 1999.... 1,621,782 --
------------ ------------
$ 2,151,405 $ 896,686
============ ============
Consolidated Financial Statements
Page F-12
<PAGE>
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 (the "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 balance on the advances for Lease Bank was
$260,500 at December 31, 1998 and 1997.
NOTE 6. LONG-TERM DEBT
DECEMBER 31, DECEMBER 31,
1998 1997
---------- ----------
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, 1998 were $65,485 including
principal and interest at 9.75%), secured by
first security interest in accounts
receivable, inventory, property and
equipment, oil and gas leases, intangibles,
guaranty of the Company and a $4,000,000
guaranty of the Farmers Home Administration
of the United States Department of Agriculture ... $4,073,573 $4,440,077
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 ................... $2,127,425 3,054,050
Consolidated Financial Statements
Page F-13
<PAGE>
NOTE 6. LONG-TERM DEBT
DECEMBER 31, DECEMBER 31,
1998 1997
----------- -----------
Note dated June 9, 1998, payable to a
financial institution in 11 monthly
installments of principal in the amount of
$53,544 plus accrued interest at prime
beginning July 2, 1998 with a final payment
of the unpaid principal balance plus accrued
interest due on June 2, 1999. The note is
secured by equipment inventory, accounts
receivable, fixtures and a corporate guaranty .... $ 910,979
Note dated January 8, 1998 payable to an
individual in 36 monthly installments of $18,957
including principal and interest at 10% beginning
February 8, 1998, secured by equipment, accounts
receivable and a corporate guaranty............... $ 501,356
Notes to financial institutions for the
purchase of Company vehicles used by
marketing and sales personnel, secured by
vehicles, principal and interest payable
monthly .......................................... $ 22,479
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 .......... $6,174,430 $8,098,953
12% Senior Subordinated Notes dated April 30,
1998 in the aggregate principal amount of
$40,000,000, to certain investors due and
payable on April 15, 2005, and interest of 12%
per annum is payable on each April 15 and
October 15, commencing October 15, 1998. The notes
are guaranteed by all subsidiaries of the Company
(except Quantum Geophysical Services, Inc.)
and the notes and guaranty are subordinated in
right of payment to certain senior debt of the
company and the subsidiaries which have guaranteed
the 12% Senior Subordinated Notes. Pursuant
to the terms of a warrant agreement, the
Company issued to the investors warrants to
purchase up to an aggregate of 7,618,594
shares of the Company's Common Stock. The warrants
have an exercise price of $2.00 per share and are
exercisable at any time on or prior to April
30, 2005. For financial statement purposes,
the notes are presented net of original
issue discount .................................... $31,462,209
----------- -----------
$45,272,451 15,593,080
----------- -----------
Less Current Maturities ............... 4,648,110 3,463,660
----------- -----------
$40,624,341 $12,129,420
=========== ===========
Consolidated Financial Statements
Page F-14
<PAGE>
NOTE 6. LONG-TERM DEBT
A summary of long-term debt principal maturities follows:
FOR THE YEARS ENDING DECEMBER 31, AMOUNT
--------------------------------- -----------
1999 $ 4,648,110
2000 3,921,769
2001 2,199,027
2002 543,841
2003 599,504
Thereafter 33,360,200
-----------
$45,272,451
===========
NOTE 7. INCOME TAX
Pretax (loss) from continuing operations for the years ended
December 31, 1998 and 1997 was taxed by the following jurisdictions:
1998 1997
----------- -----------
Domestic ....................... $(7,179,391) $(2,191,002)
Foreign ........................ -- --
----------- -----------
Total .................... $(7,179,391) $(2,191,002)
=========== ===========
Consolidated Financial Statements
Page F-15
<PAGE>
NOTE 7. INCOME TAX
The income tax benefit (expense) charged to continuing operations for the years
ended December 31, 1998 and 1997 was as follows:
1998 1997
----------- -----------
Current:
U.S. Federal ............................ $ 1,940,000 $ 493,000
State and Local ......................... -- --
Foreign ................................. -- --
----------- -----------
Total Current ........................ 1,940,000 493,000
----------- -----------
Deferred:
U.S. Federal ............................ 429,376 255,000
State and Local ......................... -- --
Foreign ................................. -- --
----------- -----------
Total Deferred ....................... 429,376 255,000
----------- -----------
Other:
Adjustment to valuation allowance ....... (4,605,454) (373,000)
----------- -----------
Total ................................ $(2,236,078) $ 375,000
=========== ===========
The income tax provision differs from the amount of income tax determined by
applying the U.S. Federal Income Tax Rate to pre-tax income from continuing
operations for the years ended December 31, 1998 and 1997 due to the following:
1998 1997
----------- -----------
Computed "Expected" tax benefit (expense)..... $ 2,369,376 $ 748,000
Increase decrease in income tax resulting
from:
Change in valuation allowance ...... (4,605,454) (373,000)
----------- -----------
Income tax benefit (expense) ................. $(2,236,078) $ 375,000
=========== ===========
Consolidated Financial Statements
Page F-16
<PAGE>
NOTE 7. INCOME TAX
Net deferred tax liabilities consist of the following components as
of December 31, 1998 and 1997:
Deferred tax liabilities:
Property and equipment ........ $ 222,045 $ --
----------- -----------
Deferred tax assets:
Loss carry forwards ........... 5,375,400 3,062,376
Tax credits ................... 245,769 245,769
----------- -----------
5,621,169 3,308,145
Less valuation allowance ......... (5,621,169) (1,015,715)
----------- -----------
Total ...................... -- 2,292,430
----------- -----------
Net deferred tax liability . $ 222,045 $ --
=========== ===========
Deferred tax assets at December 31, 1998 and 1997 are comprised
primarily of net operating loss carryforward 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, 1998, the Company had net operating loss
carryforwards of $15,810,105 and tax credit carryforwards of
$245,769 that expire in 1999 through 2013.
The Company has evaluated the deferred tax benefit of $2,236,078
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 carry forward
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 $3,308,145. A valuation allowance of
$1,015,715 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 did not have taxable income for the 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
$2,236,078. The computed tax benefit at December 31, 1998 is
$5,621,169 and the valuation allowance has been increased to
$5,621,169.
Consolidated Financial Statements
Page F-17
<PAGE>
NOTE 7. INCOME TAX
The amounts and expiration dates of the carryforwards are as
follows:
NET OPERATING TAX CREDIT
EXPIRATION DATE LOSS AMOUNT AMOUNT
--------------- ----------- -----------
1999 $ $ 113,531
2000 257,107 118,936
2001 206,140 74
2002 1,502,500
2003 142,273
2004 94,586
2005 1,134
2006 141,998
2007 46,928 13,228
2008 304,632
2009 249,844
2010 879,151
2011 2,613,419
2012 2,191,002
2013 7,179,391
----------- -----------
Totals $15,810,105 $ 245,769
=========== ===========
NOTE 8. RELATED PARTY TRANSACTIONS
The former Chairman of the Company has made advances totaling
$88,500 to the Company. Of this amount, $9,871 remains outstanding
at December 31, 1998. 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,
1998 and 1997, respectively is $319 and $2,503 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, 1998.
During 1997 notes payable totaling $47,357 were due to a member of
the board of directors who resigned on July 18, 1997. The notes were
paid in full during October 1997. Interest of $2,844 was paid to
this director in 1997 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
Consolidated Financial Statements
Page F-18
<PAGE>
NOTE 8. RELATED PARTY TRANSACTIONS
entered into an agreement with the Company to exchange these
warrants for 635,000 shares of common stock of the Company at no
cost, and was issued 635,000 shares of common stock.
On April 25, 1997, the Company obtained a $500,000 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 11, 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, 1998 and 1997, respectively,
the Company owed the director $203,207 and $63,207 in consulting
fees under the terms of the agreement, which are included as amounts
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 at $0.75 per share.
In connection with the private placement offering described in Note
11 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. Two
directors of the Company are the two partners of the sole managing
member of the investment group. The Company owed the investment
group $37,500 and $12,500 as of December 31, 1998 and 1997,
respectively, under the terms of the agreement, which are included
as amounts due to officers and shareholders on the Company's balance
sheet.
On March 27, 1998, the Company obtained a $1,500,000 short-term
financing from a group of individuals. Three of the Company's
directors and several related family members provided $1,000,000 of
this financing. The Company issued promissory notes, with interest
at prime plus 2%, to these individuals. Additionally, one director
and the related family members were granted warrants to purchase
150,000 shares of common stock of the Company at a purchase price of
$2.00 per share. The Company paid these notes in full with interest
due on May 1, 1998. The above noted related parties received
interest payments of $11,083.
A director of the Company is a partner of a law firm which provides
legal services to the Company related to financing and private
placement offering activities. In
Consolidated Financial Statements
Page F-19
<PAGE>
NOTE 8. RELATED PARTY TRANSACTIONS
connection with these activities the Company incurred legal costs
from the director's law firm during the year ended December 31, 1998
and 1997, respectively of $204,283 and $110,112.
NOTE 9. 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 for the nine months ended September 30, 1997 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.
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, 1998 was $73,484.
Consolidated Financial Statements
Page F-20
<PAGE>
NOTE 9. ACQUISITION OF WHOLLY-OWNED SUBSIDIARIES
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.
The acquisition by the Company of Reliable Exploration Incorporated
is accounted for as a purchase, with results of Reliable's
operations included in the Company's financial statements from
January 1, 1998 forward. The cost of the Company's investment in
Reliable is $2,284,375 and the goodwill of $3,053,075 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, 1998 was $68,858.
On April 30, 1998, the Company acquired all of the outstanding
capital stock of Geophysical Development Corporation, a Texas
corporation (GDC) pursuant to the terms of a Stock Purchase
Agreement (GDC Agreement) among the Company, GDC and the holders of
all of the outstanding capital stock of GDC. GDC is a Houston,
Texas-based provider of seismic data processing, software and
consultation services.
Pursuant to the GDC Agreement, the Company acquired 6,750 shares of
GDC's common stock (GDC shares), representing 100% of the
outstanding capital stock of GDC from the shareholders of GDC in
exchange for (i) cash in the amount of $26,000,000 and (ii)
1,000,000 newly-issued shares of the Company's common stock. In
addition, the Company granted options entitling certain employees of
GDC to purchase up to an aggregate of 1,000,000 shares of common
stock at an exercise price of $3.00 per share. Effective April 30,
1998, the Company also entered into employment agreements with
certain of the former GDC shareholders, pursuant to which such
former GDC shareholders were granted options to purchase up to an
aggregate of 400,000 shares of common stock at an exercise price
equal to the closing price per share of the common stock on April
30, 1998. The amount of consideration paid by the Company to the
former GDC shareholders for the
Consolidated Financial Statements
Page F-21
<PAGE>
NOTE 9. ACQUISITION OF WHOLLY-OWNED SUBSIDIARIES
acquisition of the GDC Shares was determined as a result of
arms-length negotiations and agreement between unrelated parties.
The acquisition by the Company of GDC is accounted for as a
purchase, with results of GDC's operations included in the Company's
financial statements from May 1, 1998 forward. The cost of the
Company's investment in GDC is $30,062,500 and the goodwill of
$27,961,807 acquired in the purchase is being amortized on a
straight line basis over a ten-year period. Amortization expense
from the date of acquisition through December 31, 1998 was
$1,864,120.
The Company's consolidated results of operations have incorporated
activity from the effective date of the acquisitions of the above
subsidiaries. The unaudited pro forma information below presents
combined results of operations as if the acquisitions had occurred
at the beginning of the respective years presented. The unaudited
pro forma information is not necessarily indicative of the results
of operations of the combined company had the acquisition occurred
at the beginning of the years presented, nor is it necessarily
indicative of future results.
1998 1997
------------ ------------
Revenues ....................... $ 39,051,810 $ 40,076,593
Net Income (Loss) .............. (9,571,427) 968,918
Earnings (Loss) per share....... (0.50) 0.12
NOTE 10. STOCK OPTION PLANS
The 1995 Stock Option Plan (1995 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 1995
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 (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
Consolidated Financial Statements
Page F-22
<PAGE>
NOTE 10. STOCK OPTION PLANS
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, 1998, 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. These options vest over periods ranging from three
to five years.
On August 1, 1997, the Board authorized the adoption of the
Company's 1997 Stock Awards Plan (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 (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 (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
Consolidated Financial Statements
Page F-23
<PAGE>
NOTE 10. STOCK OPTION PLANS
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, 1998 a total of 2,917,500 stock options have been
awarded under the plan, 2,634,500 are outstanding, and 283,000 have
been forfeited and are again available for grant under the plan.
These options vest over periods ranging from three to five years.
NOTE 11. PRIVATE PLACEMENT OFFERINGS
On July 18, 1997, the Company entered into a Securities Purchase and
Exchange Agreement (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, (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 was converted into an aggregate of 1,333,333 shares
of common stock on January 1, 1998.
As set forth in Note 8, 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.
In order to finance the acquisition of GDC, the Company completed a
private offering in the amount of $40,000,000 of certain securities
designated as its 12.0% Senior subordinated Notes (Notes) to DLJ
Investment Partners, L.P. (DLJ) and certain additional investors
(DLJ and certain other investors being referred to herein
collectively as the "Purchasers") pursuant to the terms of a
Securities Purchase Agreement dated as of April 30, 1998, by and
among the Company and the Purchasers. In addition, the Company (i)
caused certain of its wholly-owned subsidiaries to execute
guarantees of the Notes pursuant to an Indenture executed by
Consolidated Financial Statements
Page F-24
<PAGE>
NOTE 11. PRIVATE PLACEMENT OFFERINGS
each of them, (ii) granted warrants (Warrants) to the Purchasers
entitling them to purchase up to an aggregate of 7,618,594 shares of
Common stock at a price of $2.00 per share, subject to certain
adjustments, and (iii) granted certain registration rights in favor
of the Purchasers with respect to the Notes, the Warrants and the
shares of Common Stock which may be acquired upon exercise of the
Warrants.
NOTE 12. OUTSTANDING OPTIONS AND WARRANTS
Under two plans, the Company may grant stock options and other
awards to key executive, management and other personnel at exercise
prices equal to or exceeding the market value at the date of grant.
In general, options become exercisable over a three to five year
period from the date of grant and expire five to seven years after
the date of grant. Shares available for future option grants at
December 31, 1998, totaled 2,380,500.
The following table summarizes information about stock option
transactions:
1998 1997
------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------- ---------- ---------- ----------
Outstanding at
Beginning of year ..... 2,882,500 $ .96 212,500 $ 1.43
Awards:
Granted ............ 2,707,500 2.61 2,685,000 .92
Exercised .......... -- (7,500) 1.26
Forfeited .......... (283,000) 3.18 (7,500) 1.03
---------- ----------
Outstanding at
December 31 ........... 5,307,000 $ 1.69 2,882,500 $ .96
---------- ----------
Exercisable at
December 31 ........... 1,126,653 $ .95 197,500 $ 1.46
---------- ----------
Consolidated Financial Statements
Page F-25
<PAGE>
NOTE 12. OUTSTANDING OPTIONS AND WARRANTS
The following table summarizes information about stock options
outstanding at December 31, 1998:
WEIGHTED WEIGHTED
RANGE OF NUMBER OF AVERAGE NUMBER OF AVERAGE
EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING PRICE EXERCISABLE PRICE
----------- ----------- ------------ ----------- -----------
$0-$1 2,970,000 $ .83 920,820 $ .82
$1-$2 347,500 1.72 152,500 1.63
$2-$3 649,500 2.34 53,333 2.75
$3-$4 1,040,000 3.03 -
$4-$5 300,000 4.06 -
----------- -----------
5,307,000 1,126,653
=========== ===========
As permitted under generally accepted accounting principles,
stock-based awards granted to employees are accounted for following
APB 25. Accordingly, the Company has not recognized compensation
expense for its stock-based awards to employees. Outlined below are
pro forma results had compensation costs for the Company's
stock-based compensation plans been determined based on the fair
value approach of SFAS 123.
The weighted average fair value of options granted during 1997 is
$0.55. The weighted average fair value of options granted during
1998 is $1.19. The fair value of each option granted is estimated on
the date of grant, using the Black-Scholes option-pricing model. The
model assumed expected volatility of 50% and risk-free interest rate
of 6.0% in 1997 and volatility of 50% and risk-free interest rate of
5.4% in 1998. As the Company has not declared dividends since it
became a public entity, no dividend yield was used. The expected
life of the options granted ranges from five to seven years.
Consolidated Financial Statements
Page F-26
<PAGE>
NOTE 12. OUTSTANDING OPTIONS AND WARRANTS
The following table reflects pro forma net income and
earnings per share had the Company elected to adopt the fair value
approach of SFAS 123:
1998 1997
----------- -----------
Net Loss:
As reported ........................... $(9,968,602) $(1,115,820)
Pro Forma ............................. (10,332,681) (1,290,315)
Earnings per share:
As reported ........................... $ (.53) $ (.14)
Pro Forma ............................. (.54) (.16)
These pro forma amounts may not be representative of future
disclosures since the estimated fair value of stock options is
amortized to expense over the vesting period and additional options
may be granted in future years.
A summary of outstanding warrants issued in connection with notes
payable and private placement offerings is as follows:
WARRANTS EXERCISE
SHARES PRICE
---------- -----------
Outstanding at December 31, 1997 .......... 3,625,745 $0.26-$2.26
Warrants issued ........................... 8,324,945 $0.75-$2.86
Warrants exercised, surrendered or
called .................................. (7,194) $0.33-$0.46
----------
Outstanding at December 31, 1998 .......... 11,943,496 $0.26-$2.86
==========
SHADOW WARRANTS
Outstanding at December 31, 1998 .......... 7,543,180 $ 0.20
==========
Exercisable at December 31, 1998 .......... 6,111,365 $ 0.20
==========
Consolidated Financial Statements
Page F-27
<PAGE>
NOTE 13. COMMITMENTS
OPERATING LEASES
The Company leases office space for its corporate headquarters under
a lease, which expires June 30, 2003. The lease provides for a base
rental of $65,889 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 for the initial year is $45,739. Additional
space has been leased under a lease which expires June 30, 2003 at a
base rental of $73,371 per year, plus its share of basic operating
costs, currently $37,877 per year.
Certain of the Company's operating subsidiaries also lease office,
maintenance, and warehouse facilities under various lease agreements
ranging in terms from one month to five years. The current base
rental for these leases is $284,556 per year.
The Company's data processing subsidiary, Geophysical Development
Corporation, entered in to a lease agreement for computer software
and hardware for a thirty-six month period beginning January 1,
1999, with annual lease payments of $628,764 for the initial two
years and a $157,068 annual payment in the final year.
The Company's seismic acquisition subsidiaries lease vehicles for
use in field operations under various forty-eight month leases which
expire beginning in the year 2000. Rental expense under these leases
amounted to $220,258 for the year ended December 31, 1998.
Rental expense under the leases recorded in the consolidated
financial statements amounted to $727,690 and $107,482 for the years
ended December 31, 1998 and 1997. Aggregate future minimum rentals
under the various lease agreements including the base rent and the
average operating cost are as follows:
FOR THE YEARS ENDING DECEMBER 31, AMOUNT
--------------------------------- ----------
1999 $1,431,422
2000 1,409,377
2001 718,067
2002 466,989
2003 249,624
----------
$4,275,479
==========
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
Consolidated Financial Statements
Page F-28
<PAGE>
NOTE 13. COMMITMENTS
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 can be terminated 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 stock options
granted to officers, which were outstanding and exercisable at
December 31, 1998 and 1997, respectively.
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, 1998 under the 1997 Stock Awards Plan.
NOTE 14. MAJOR CUSTOMERS
Revenues from major customers, which exceeded ten percent of total
revenues, are as follows:
FOR THE YEARS ENDED
-------------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
---------- ----------
Customer A ................. $7,971,545 $6,891,867
Customer B ................. $5,336,732 $ 950,608
NOTE 15. 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 generally provides services to a relatively small group
of key customers that account for a significant percentage of the
accounts receivable of the Company at any given time. The Company's
key customers vary over time. The Company extends credit to various
companies in the oil and gas industry, including its key customers,
for the acquisition of seismic data, which results in a
concentration
Consolidated Financial Statements
Page F-29
<PAGE>
NOTE 15. CONCENTRATION OF CREDIT RISK
of risk. This concentration of credit risk may be affected by
changes in the economic or other conditions of the Company's key
customers and may accordingly impact the Company's overall credit
risk. The Company wrote off a receivable from a customer of
approximately $2.8 million during 1998 as a result of that company's
involuntary bankruptcy proceedings. Historical credit losses
incurred on receivables by the Company, except for the above, have
been immaterial.
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.
NOTE 16. CASH FLOWS
A reconciliation of net loss to net cash used by operating
activities as follows:
FOR THE YEARS ENDED
---------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
----------- -----------
Net Loss ....................................... $(9,968,602) $(1,115,820)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depletion, depreciation and amortization ....... 7,144,854 1,207,812
(Gain) Loss on disposal of property ............ (600) 511,735
Deferred income tax (benefit) expense .......... 2,236,078 (375,000)
(Increase) decrease in current assets,
net of effects of acquisitions
Accounts receivable - trade .............. 1,636,771 (2,955,672)
Work in progress ......................... 177,563 347,414
Prepaid expenses ......................... (47,546) (233,252)
Interest ................................. 11,221 (11,221)
Increase (decrease) in current liabilities, net
of effects of acquisitions
Accounts payable - trade ................. 1,814,997 (522,132)
Accrued liabilities ...................... 1,840,392 55,629
Customer deposits ........................ 0 (10,000)
----------- -----------
Net Cash Provided (Used) by
Operating Activities ..................... $ 4,845,128 $(3,100,507)
=========== ===========
Consolidated Financial Statements
Page F-30
<PAGE>
NOTE 17. 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, 1998 DECEMBER 31, 1997
----------------------- -----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
Cash $2,705,581 $2,705,581 $2,212,681 $2,212,681
Accounts receivable 6,831,765 6,831,765 3,654,829 3,654,829
Accounts payable 4,822,802 4,822,802 2,282,037 2,282,037
Indebtedness 47,935,493 47,935,493 16,914,472 16,914,472
NOTE 18. SUBSEQUENT EVENTS
On July 28, 1999, the Company sold all of the outstanding capital
stock of HOC Operating Co., Inc. (HOC), a wholly-owned subsidiary of
the Company, to Halex Oil Corporation, a Texas Corporation, pursuant
to the terms of a Stock Purchase Agreement (HOC Agreement). Pursuant
to the HOC Agreement, Halex acquired all of the capital stock of HOC
in exchange for the assumption by Halex of certain debt obligations
and accounts payable of HOC and Geokinetics Production Company,
Inc., a Texas Corporation and wholly-owned subsidiary of the
Company. This transaction completes the discontinuance of the
Company's oil and gas operations. The Company recognized a charge to
earnings during the third quarter of 1999 in the amount of $565,345
as a result of the transaction.
On October 1, 1999 the Company entered into a Securities Purchase
Agreement (Purchase Agreement) with DLJ Partners, L. P. (DLJ) and
certain additional investors (collectively, the "Purchasers"),
pursuant to which the Company completed a restructuring of its
$40,000,000 12% Senior Subordinated Notes due April 2005 (Prior
Notes) and received and additional $4,000,000 from the Purchasers,
the holders of the Prior Notes, and $1,000,000 from other sources.
The restructuring involved the Company exchanging the Prior Notes
for its 13.5% Senior Secured Notes due 2005 in the aggregate
principal amount of $45,358,000 (the 2005 Notes) and the Company
issued $5,000,000 of its 13.5% Senior Secured Notes due 2002 (the
2002 Notes) for the additional funding received on October 1, 1999.
The Company granted security interest covering substantially all of
its assets as security for the 2005 Notes and 2002 Notes and caused
certain of its wholly-owned subsidiaries to execute guaranties of
the 2005 Notes and 2002 Notes. As additional consideration, the
Company issued warrants to the Purchasers to acquire 50,068,594
shares of the Company's common stock at an exercise price of $.56
per share. The warrants expire on September 15, 2006. The Company
also recognized additional interest expense of $758,000 upon
completion of the restructuring as a result of the interest rate
increasing from 12% to 13.5% on accrued unpaid interest. As a result
of the issuance
Consolidated Financial Statements
Page F-31
<PAGE>
NOTE 18. SUBSEQUENT EVENTS
of the warrants, the Purchasers, collectively, have the right to
acquire 51.6% of the Company's outstanding common stock on a fully
diluted basis.
Concurrently with the transactions contemplated by the Purchase
Agreement, the Company completed a refinancing of its debt
obligations to the principal equipment supplier for the Company's
seismic acquisition operations.
NOTE 19. SEGMENT DISCLOSURES AND RELATED INFORMATION
DESCRIPTION OF REPORTABLE SEGMENTS
The Company has two reportable segments, seismic acquisition and
data processing, but also presents information for its oil and gas
exploration and production segment. The seismic acquisition segment
acquires data for clients by conducting seismic shooting operations
in the Rocky Mountain and Gulf Coast regions of North America. The
data processing segment operates a processing center in Houston,
Texas which processes seismic data for oil and gas exploration
companies. The oil and gas exploration and production segment
operates oil and gas properties in Texas.
MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS
The accounting policies of the segments are the same as those
described in the Summary of Significant Accounting Policies. The
Company evaluates performance based on earnings or loss from
operations before interest, taxes, depreciation and amortization.
There are no inter-segment sales or transfers.
Investment in acquired subsidiaries, amortization of related
goodwill, and interest expenses related to financing of acquired
business units are accounted for at the Parent Company.
FACTORS MANAGEMENT USED TO IDENTIFY REPORTABLE SEGMENTS
The Company's reportable segments are strategic business units that
offer different services to clients. Each segment is managed
separately, has a different client base, and requires unique and
sophisticated technology.
The following table sets forth the Company's significant information
from reportable segments:
Consolidated Financial Statements
Page F-32
<PAGE>
NOTE 19. SEGMENT DISCLOSURES AND RELATED INFORMATION
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------------
SEISMIC DATA OIL & GAS
ACQUISITION PROCESSING PRODUCTION TOTALS
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues from external
customers ........... $ 23,369,624 $ 9,257,550 $ 417,097 $ 33,044,271
Segment earnings before
interest, taxes,
depreciation and
amortization ........ 851,950 5,015,614 (222,698) 5,644,866
Interest Revenue ...... 38,856 750 1,615 41,221
Interest Expense ...... 1,634,945 85,276 46,652 1,766,873
Depreciation and
Amortization ........ 4,059,161 578,753 16,260 4,654,174
Segment Profit (Loss) . (4,803,300) 4,352,335 (283,995) (734,960)
Segment Assets ........ 36,911,140 8,823,741 2,483,048 48,217,929
Expenditures for
Segment Assets ...... 12,376,470 100,767 -- 12,477,237
</TABLE>
Consolidated Financial Statements
Page F-33
<PAGE>
NOTE 19. SEGMENT DISCLOSURES AND RELATED INFORMATION
The following table sets forth the Company's significant information
from reportable segments:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------
SEISMIC DATA OIL & GAS
ACQUISITION PROCESSING PRODUCTION TOTALS
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues from external
customers ............ $ 8,848,842 -- $ 799,089 $ 9,647,931
Segment earnings before
interest, taxes,
depreciation and
amortization ......... 2,334,238 -- (430,796) 1,903,442
Interest Revenue ....... 8,037 -- 1,678 9,715
Interest Expense ....... 1,001,016 -- 113,710 1,114,726
Depreciation and
Amortization ......... 1,147,411 -- 16,775 1,164,186
Income Taxes ........... 350,000 -- -- 350,000
Segment Profit
(Loss) ................. (156,152) -- (559,603) (715,755)
Segment Assets ......... 21,319,039 -- 2,488,131 23,807,170
Expenditures for
Segment Assets ....... 904,725 -- -- 904,725
</TABLE>
Consolidated Financial Statements
Page F-34
<PAGE>
NOTE 19. SEGMENT DISCLOSURES AND RELATED INFORMATION
Annual Revenues from major customers, which exceed ten percent of a
segment's total revenues are as follows:
SEISMIC DATA OIL & GAS
ACQUISITION PROCESSING PRODUCTION
----------- ---------- ----------
December 31, 1998: ................... $7,971,545
Customer A ...................... 5,336,732 -- --
Customer B ...................... -- -- --
Customer C ...................... -- $2,375,200 --
December 31, 1997:
Customer A ...................... $6,891,867 -- --
Customer B ...................... 950,608 -- --
The Company's geographic revenue and asset locations is as follows:
All of the Company's revenue and asset locations of long-lived
assets were geographically within the United States during 1998 and
1997.
Consolidated Financial Statements
Page F-35
<PAGE>
NOTE 19. SEGMENT DISCLOSURES AND RELATED INFORMATION
RECONCILIATIONS OF REPORTABLE SEGMENT REVENUES, PROFIT
OR LOSS AND ASSETS
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
REVENUES
Total revenues for reportable segments .................. $ 33,044,271 $ 9,647,931
Adjustments ............................................. -- --
------------ ------------
Total consolidated revenues ....................... $ 33,044,271 $ 9,647,931
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND
AMORTIZATION
Total for reportable segments ........................... $ 5,644,866 $ 1,903,442
Unallocated corporate expenses .......................... (1,455,461) (1,042,519)
------------ ------------
Total consolidated earning before interest, taxes,
depreciation and amortization .................. $ 4,189,405 $ 860,923
============ ============
PROFIT OR LOSS
Total profit or loss for reportable segments ............ ($ 734,960) ($ 715,755)
Unallocated amounts:
Corporate expenses net of interest earnings ...... (1,289,233) (985,926)
Interest expense on acquisitions indebtedness .... (3,217,651) (95,514)
Depreciation and amortization of goodwill ........ (2,490,680) (43,625)
Deferred tax benefit (cost) ...................... (2,236,078) 725,000
------------ ------------
Total consolidated loss ................. $ (9,968,602) $ (1,115,820)
============ ============
INTEREST REVENUE
Total revenue expense for reportable segments ........ 41,221 9,715
Unallocated amounts:
Corporate consolidated cash management ........ 166,228 56,594
------------ ------------
Total consolidated interest revenue ..... 207,449 66,309
============ ============
INTEREST EXPENSE
Total interest expense for reportable segments ....... 1,766,873 1,114,726
Unallocated amounts:
Corporate interest expense .................... 17,651 95,514
Interest expense on acquisitions indebtedness . 3,200,000 --
------------ ------------
Total consolidated interest expense ..... 4,984,524 1,210,240
============ ============
</TABLE>
Consolidated Financial Statements
Page F-36
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
DEPRECIATION AND AMORTIZATION
Total depreciation and amortization for reportable
segments: ......................................... 4,654,174 1,164,186
Unallocated amounts:
Depreciation and amortization ................ 485,302 2,678
Amortization of goodwill ..................... 2,005,378 40,948
------------ ------------
Total Depreciation and Amortization ..... 7,144,854 1,207,812
============ ============
ASSETS
Total assets for reportable segments ................ $ 48,217,929 $ 23,807,170
Unallocated corporate assets ........................ 2,765,468 4,696,499
Elimination of net receivable from corporate ........ (12,402,511) (1,948,351)
Goodwill not allocated to segments .................. 30,957,183 1,947,678
------------ ------------
Total consolidated assets ................... $ 69,538,069 $ 28,502,996
============ ============
</TABLE>
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, 1998.
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, 1998 and 1997:
FOR THE YEARS ENDED
--------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
----------- -----------
Property acquisition costs ....................... -- $ 91,162
Exploration costs, net ........................... -- --
Development costs, net ........................... -- --
Consolidated Financial Statements
Page F-37
<PAGE>
NOTE 20. SUPPLEMENTAL OIL AND GAS INFORMATION
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,
1998 1997
--------- ---------
Revenues ....................................... $ 184,033 $ 431,533
Production costs and taxes ..................... (355,576) (248,686)
Depletion, depreciation and amortization ....... (15,327) (14,763)
--------- ---------
Results of operations from oil and gas
producing activities ..................... $(186,870) $ 168,084
========= =========
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
$.60 and $.57 for the years ended December 31, 1998 and 1997,
respectively.
OIL AND GAS RESERVES (UNAUDITED)
The following table sets forth the Company's net proved oil and gas
reserves at December 31, 1998 and 1997 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 judgment 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.
Consolidated Financial Statements
Page F-38
<PAGE>
NOTE 20. SUPPLEMENTAL OIL AND GAS INFORMATION
Oil (BBLS) Gas (MCF)
----------- ---------
Proved reserves:
Balance at December 31, 1997 473,000 3,385,000
Change in previous estimates (207,500) (88,000)
Production (9,500) (73,000)
----------- ---------
Balance at December 31, 1998 256,000 3,224,000
=========== =========
Proved developed reserves at December 31:
1997 265,000 947,000
=========== =========
1998 58,000 679,000
=========== =========
All of the Company's reserves are located in Texas.
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,
1998 1997
------------ ------------
Future cash inflows .......................... $ 8,524,000 $ 14,717,000
Future production costs and taxes ............ (2,073,000) (3,898,000)
Future development costs ..................... (1,599,000) (1,812,000)
Future income tax expense .................... -- --
------------ ------------
Net Future Cash Flows .................. 4,852,000 9,007,000
Discounted at 10% for timing of cash flows ... (2,241,000) (4,813,000)
------------ ------------
Discounted future net cash flows from
proved reserves at December 31 ......... $ 2,611,000 $ 4,194,000
============ ============
Consolidated Financial Statements
Page F-39
<PAGE>
NOTE 20. SUPPLEMENTAL OIL AND GAS INFORMATION (CONTINUED)
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,
1998 1997
----------- -----------
Balance at beginning of year ..................$ 4,194,000 $ 7,091,000
Sales, net of production costs and taxes ...... (75,000) (183,000)
Net changes in prices, production costs
and previous estimates .................. (1,508,000) (2,714,000)
Purchase of reserves in place ................. -- --
----------- -----------
Balance at end of year ........................$ 2,611,000 $ 4,194,000
=========== ===========
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, 1998 and 1997 were $9.53 and $15.68, respectively, per
barrel of oil and $1.87 and $2.07, 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.
Consolidated Financial Statements
Page F-40
<PAGE>
NOTE 21. YEAR 2000
The Company utilizes software and technologies throughout its
operations and administration that may be vulnerable to the date
change in the year 2000. Identification, assessment, and in some
cases, replacement of equipment that may be affected by the year
2000 is underway. Software controlled by the Company, including
proprietary seismic processing, has been tested successfully.
Replacements and upgrades have not been accelerated by the year 2000
issue and do not represent costs in addition to normal operating
expenditures. The Company has communicated with its significant
suppliers to determine if those parties have appropriate plans to
remedy year 2000 issues when their systems interface with the
Company's systems or may otherwise impact operations of the Company.
However, there can be no guarantee that the systems of other
companies, on which the Company's systems rely, will be timely
converted or that a failure to convert by another company or a
conversion that is incompatible with the Company's systems would not
have a material adverse effect on the Company. Assessment continues
by technical staff on an ongoing basis. Although the Company is not
aware of any material operational issues, there can be no assurance
that there will not be a delay in, or increased costs associated
with, the implementation of the necessary systems and changes to
address the year 2000. A potential source of risk includes, but is
not limited to, the inability of principal suppliers to be year 2000
compliant, which could result in an interruption of the Company's
services. The Company currently does not have a formal contingency
plan. If unforeseen problems are encountered that relate to the year
2000, possible solutions will be evaluated and the most efficient
will be enacted.
NOTE 22. SIGNIFICANT FOURTH QUARTER ADJUSTMENT
As previously disclosed in the Company's public filings, a customer
of a subsidiary of the Company has defaulted on payment of a $2.8
million obligation. As a result of that customer's involuntary
bankruptcy proceedings, the Company has determined that the amount
of this obligation is not collectible and has charged the amount
against earnings during the fourth quarter of 1998.
Consolidated Financial Statements
Page F-41
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,705,581
<SECURITIES> 0
<RECEIVABLES> 6,831,765
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,581,104
<PP&E> 27,375,512
<DEPRECIATION> 0
<TOTAL-ASSETS> 69,538,069
<CURRENT-LIABILITIES> 16,287,045
<BONDS> 0
0
0
<COMMON> 193,325
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 69,538,069
<SALES> 33,044,271
<TOTAL-REVENUES> 33,044,271
<CGS> 0
<TOTAL-COSTS> 35,999,720
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,984,524
<INCOME-PRETAX> (7,732,524)
<INCOME-TAX> 2,236,078
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,968,602)
<EPS-BASIC> (0.53)
<EPS-DILUTED> 0
</TABLE>
