SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(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, 1999
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.)
8401 Westheimer, Suite 150
Houston, Texas 77063
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 850-7600
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Registrant's revenues for its most recent fiscal year were $14,194,126.
As of December 31, 1999, 19,367,156 shares of the Registrant's Common
Stock were outstanding, and the aggregate market value of the Common Stock held
by non-affiliates was approximately $3,115,157 the last reported sales price of
such stock on that date.
DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference: None.
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GEOKINETICS INC.
FORM 10-KSB
YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
PAGE
PART I
Item 1. Description of Business.......................................1
Item 2. Description of Property.......................................9
Item 3. Legal Proceedings............................................10
Item 4. Submission of Matters to a Vote of Security Holders..........10
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.....10
Item 6. Management's Discussion and Analysis or Plan of Operation....11
Item 7. Financial Statements.........................................14
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.....................................14
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act............15
Item 10. Executive Compensation.......................................17
Item 11. Security Ownership of Certain Beneficial Owners and
Management...................................................19
Item 12. Certain Relationships and Related Transactions...............22
Item 13. Exhibits and Reports on Form 8-K.............................25
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
DEVELOPMENT OF CURRENT BUSINESS OPERATIONS
The predecessor corporation of Geokinetics Inc. ("Geokinetics" or the
"Company") was organized in 1969 under the laws of California. The Company was
incorporated in Delaware in April 1980, and the California corporation was
merged into the Company. During 1994, the Company acquired certain oil and gas
properties from two independent oil and gas companies located in Houston, Texas.
The Company completed these acquisitions by means of a merger of HOC Operating
Co., Inc. and Hale Exploration Company, each Texas corporations, into two
newly-formed subsidiaries of the Company.
Since April 1997, the Company has repositioned itself from an oil & gas
exploration and production company into a technologically advanced provider of
seismic acquisition and high-end seismic data processing services to the oil and
gas industry. Through equipment purchases, acquisitions of certain competitors
and the completion of a series of private equity transactions, the Company now
has the capacity to operate three seismic crews in the Rocky Mountain and Gulf
Coast regions of the United States ("US"). As previously disclosed, the Company
divested its interests in its oil and gas properties during 1999.
o On April 25, 1997, the Company obtained $500,000 in short-term
financing in the form of 12% senior notes from William R. Ziegler
and Steven A. Webster (both of whom were appointed to the
Company's Board of Directors effective August 1, 1997). As
additional consideration for providing this financing, the Company
issued warrants entitling each of Messrs. Ziegler and Webster to
purchase 500,000 shares (subject to anti-dilution provisions
contained therein) of the Company's Common Stock, par value $.01
per share (the "Common Stock") at a price of $0.75 per share. On
July 18, 1997, pursuant to the Securities Purchase and Exchange
Agreement, described below, these notes were exchanged for (i)
458,333 newly-issued shares of the Company's Common Stock, (ii)
15,625 newly-issued shares of the Company's Series A Preferred
Stock and (iii) Shadow Warrants to purchase an additional 592,009
shares of the Company's Common Stock at a price of $0.20 per
share.
o On July 18, 1997, the Company entered into a Securities Purchase
and Exchange Agreement (the "Purchase Agreement") with Blackhawk
Investors, L.L.C., William R. Ziegler and Steven A. Webster
(referred to collectively as the "Blackhawk Group"). Pursuant to
the Purchase Agreement, the Blackhawk Group acquired from the
Company (i) 5,500,000 newly-issued shares of the Company's Common
Stock, (ii) 187,500 newly-issued shares of the Company's Series A
Preferred Stock (which were converted into an aggregate of
2,500,000 shares of Common Stock on November 24, 1997), and (iii)
Shadow Warrants to purchase up to an additional 7,104,103 shares
of Common Stock at a price of $0.20 per share, in exchange for (x)
an aggregate of $5,500,000 in cash paid to the Company and (y) the
exchange of certain indebtedness in the principal amount of
$500,000 owed by the Company to Messrs. Ziegler and Webster.
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o On July 24, 1997, Blackhawk Investors, L.L.C. acquired 100,000
shares of the Company's newly-issued Series B Preferred Stock for
$1 million in cash. The Series B Preferred Stock was automatically
converted into an aggregate of 1,333,333 shares of Common Stock on
January 1, 1998.
o On July 18, 1997, the Company acquired Signature Geophysical
Services, Inc., a Michigan corporation ("Signature"). Signature,
based in Houston, Texas, is engaged in the business of providing
3D seismic surveys of oil and gas properties, focusing primarily
on the Gulf Coast of the United States, with particular emphasis
on coastal swamp operations.
o On January 26, 1998, the Company acquired Reliable Exploration
Incorporated, a Montana corporation ("Reliable"). Reliable, based
in Billings, Montana, is engaged in the business of providing 2D
and 3D seismic surveys to the oil & gas industry, focusing on the
Rocky Mountain region of the United States.
o On April 30, 1998, the Company completed the acquisition of
Geophysical Development Corporation, a Texas corporation ("GDC").
GDC, based in Houston, Texas is a high-end provider of seismic
data processing, software and consultation services to the oil and
gas industry.
o On April 30, 1998, the Company completed a private offering of
$40,000,000 of certain securities designated as its 12% Senior
Subordinated Notes (the "1998 Notes") to DLJ Investment Partners,
L.P. and certain additional investors (the "1998 Purchasers")
pursuant to the terms of a Securities Purchase Agreement by and
among the Company and the 1998 Purchasers. Additionally, the
Company (i) caused certain of its wholly-owned subsidiaries to
execute guarantees of the 1998 Notes pursuant to an Indenture
executed by each of them, (ii) granted warrants (the "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
1998 Notes, the Warrants and the shares of Common Stock which may
be acquired upon exercise of the Warrants. The completion of this
offering enabled the Company to purchase an additional 3,000
channel I/O RSR System Two and complete the acquisition of GDC.
o On July 28, 1999, the Company sold HOC Operating Co., Inc., a
wholly owned subsidiary of the Company ("HOC"), to Halex Oil
Corporation ("Halex"). Immediately prior to the sale of HOC to
Halex, Geokinetics Production Company, Inc., a wholly owned
subsidiary of the Company, conveyed to HOC various interests in
certain oil and gas properties. These transactions completed the
Company's divestment of its oil and gas operations.
o On October 1, 1999, the Company completed a restructuring of its
1998 Notes and received an additional $4,000,000 from the holders
of the 1998 Notes and $1,000,000 from other investors. On November
30, 1999, the Company received an additional $895,000 from other
investors. The restructuring involved the company exchanging the
1998 Notes in the aggregate principal amount of $45,358,000 (the
"2005 Notes")
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and the Company issued $5,895,000 of its 13.5% Senior Secured
Notes due 2002 (the "2002 Notes") for the additional funding
received on October 1 and November 30, 1999. The company granted
security interests 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 the 2002 Notes. Concurrently, the Company also completed
a restructuring of its debt obligations to its principal equipment
supplier for the Company's seismic acquisition operations.
o On February 23, 2000, the Company sold Reliable Exploration,
Incorporated, a wholly-owned subsidiary of the Company
("Reliable"), to RNS, LLC, a Montana limited liability company.
RNS, LLC is wholly-owned by Allen Rein, Kim Nordberg and Scott
Schmitt, the persons from whom the Company had previously acquired
Reliable in January of 1998. In addition, as a condition to the
closing of the sale of Reliable, the Company obtained a release of
its guaranty of Reliable's indebtedness to a former shareholder of
Reliable.
As a result of these transactions, the Company has evolved into a
technologically focused provider of 3D seismic services to the oil and gas
industry. By completing the transactions described above, the Company has been
able to expand its seismic acquisition capabilities and significantly increase
its overall capabilities by being able to provide high-end seismic data
processing services.
The industry downturn which began in mid-1998 worsened during 1999. Demand
for the Company's seismic acquisition and seismic data processing services
weakened significantly in 1999. Although the downturn continues to negatively
affect the Company's operating and financing results, the Company will continue
to evaluate opportunities which would allow the Company to expand its
capabilities and become a significant provider of land-based seismic acquisition
services as well as continuing to increase the high-end services provided by its
seismic data processing and interpretation business.
The Company's corporate headquarters is located in Houston, Texas. The
Company's address is 8401 Westheimer, Suite 150, Houston, Texas 77063 and its
telephone number is (713) 850-7600.
FORWARD-LOOKING INFORMATION
This report contains forward-looking statements, including statements
regarding future financial performance and results and other statements that are
not historical facts. Such statements are included in Item 1 ("Business"), Item
2 ("Property"), and Item 6 ("Management's Discussion and Analysis of Financial
Condition and Results of Operations"). When used in this report, words such as
"anticipate," "believe," "expect," "estimate," "intend," "may," and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Although the Company
believes that the expectations reflected in these forward-looking statements are
reasonable, there can be no assurance that actual results or developments
anticipated by the Company will be realized or, even if realized, that they will
have the expected effects on its business or operations. Actual results could
differ materially from those contemplated by the forward-looking statements as a
result of certain factors beyond the Company's control. Such factors include,
but are not limited to, dependence upon oil and gas industry spending, worldwide
prices, demand for oil and gas, technological changes and
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developments in the seismic acquisition business, operating risks, regulatory
changes, and changes in economic conditions both domestic and international.
INDUSTRY OVERVIEW
Seismic surveys enable oil and gas companies to determine whether
subsurface conditions are favorable for finding new oil and gas accumulations
and assist oil and gas companies in determining the size and structure of
previously identified oil and gas fields. Seismic surveys consist of the
acquisition and processing of two dimensional ("2D") and three dimensional
("3D") seismic data, which is used to produce computer generated graphic
cross-sections, maps and 3D images of the subsurface. These resulting images are
then analyzed and interpreted by geophysicists and are used by oil and gas
companies in the acquisition of new leases, the selection of drilling locations
on exploratory prospects and in managing and developing producing reservoirs.
With the advent of modern 3D technology, the seismic industry has changed
profoundly. In the past the role of seismic, in particular 2D surveys, was
restricted to that of simply illustrating gross structural features. In
contrast, 3D surveys provide detailed views of subsurface geologic structures
and much higher resolution of the structures than is available from a 2D survey.
Moreover, 3D surveys have proven to be more reliable indicators of the oil and
gas potential in the surveyed area than 2D surveys. As a result, drilling based
on 3D seismic surveys has improved the economics of discovering oil and gas by
reducing risks and finding costs for the oil and gas industry. Consequently, the
demand for 3D seismic surveys has significantly increased in the past several
years. In technical literature, it is 3D seismic technology that is cited time
and again as the technology most impacting exploration and production economics
over the last five years. Additionally, as the image quality of 3D seismic has
improved, the role of 3D seismic has expanded beyond the identification of
exploration drilling prospects and into the realm of field development and
production management.
Seismic data is acquired by land, transition zone and offshore crews.
Seismic data is generated by the propagation of sound waves near the earth's
surface by controlled sources, such as dynamite or vibration equipment. The
seismic waves radiate into the earth and are reflected back to the surface with
the information collected by strategically positioned data collection devices
known in the industry as "geophones". This data is then input into a specialized
data processing system that enhances the recorded signal by reducing noise and
distortion and improving resolution and arranges the input data to produce an
image of the subsurface. Practically speaking, 3D seismic surveys collect far
more information than previously used seismic methods, generating significantly
greater detail about the underlying reservoirs. With advances in equipment and
computer power resulting in lower costs, 3D technology is now being applied to
virtually all exploration ventures as well as field development and prospect
delineation.
Since 1988 the offshore seismic data acquisition market has changed from a
market that was roughly 50-60% proprietary 3D seismic surveys to one that is
predominately multi-client or "spec surveys". The major difference between a
proprietary survey and a multi-client survey is the data acquired from a
proprietary survey is exclusively owned by the customer whereas the data
acquired from a multi-client survey is owned by the contractor and can be
resold. The reduced cost which customers generally enjoy from participating in a
multi-client survey more than offset the loss of exclusive data ownership. This
fact and the general industry perception that seismic acquisition is a commodity
business have been the primary reasons for the rapid expansion of multi-client
data in the offshore. Most exploration companies use processing, interpretation
or other in-house technology as a means of
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differentiation rather than acquired data. This same circumstance is now
occurring on land. In the next few years, as small onshore oil and gas companies
become more comfortable with a multi-client business model, it will become the
preferred method of acquiring 3D seismic data causing a reduction in proprietary
surveys.
In the past several years, the seismic service industry has undergone a
significant change. 1998 began with an abundance of work, attractive gross
margins (20-30%) and a solid oil and gas price premise. However, with the
deterioration of the price of oil which began in mid-1998 and continued into
early 1999, the industry has experienced a significant downturn. Margins have
been reduced significantly, the number of 3D proprietary seismic surveys to be
acquired has been greatly reduced, seismic crews have been stacked and a number
of seismic service companies are experiencing financial difficulties. Couple
this with a continuing trend towards larger crews with a greater number of
channels and more technologically capable equipment and it is clear that
properly capitalized companies with access to lower costing capital will have a
significant advantage in a high capital cost business. These conditions also
apply to the seismic data processing segment of the industry. Margins have
deteriorated, although not to the levels seen in acquisition, and the number of
processing opportunities also has decreased. Seismic data processing companies
with proprietary processing techniques, large computing infrastructure and
industry recognized staffs will have a significant advantage going forward.
While the price of oil has steadily increased during the second half of 1999 and
continues to increase in early 2000, demand for the services provided by the
Company has not as yet been positively affected.
SEISMIC ACQUISITION SERVICES
The Company is engaged in land-based and transition zone seismic
acquisition services on a contract basis for its clients. The Company's
equipment is capable of collecting both 2D and 3D seismic acquisition data, has
a combined recording capacity of approximately 9,000 channels and can be
configured to operate up to 3 crews. A majority of the Company's land and
transition zone acquisition services involve 3D surveys. The Company is
currently operating one crew in the Gulf Coast region.
On a typical land seismic survey, the seismic crew is supported by a
surveying crew which lays out the lines to be recorded and identifies the sites
for shot-hole placement, a drilling crew which creates the holes for the
explosive charges which produce the necessary acoustical impulse or a mechanical
vibrating unit in areas where explosives are not utilized. The seismic crew lays
out the geophones and recording instruments, directs shooting operations and
records the acoustical signal reflected from subsurface strata. The survey crew
and drill crew are typically provided by third parties and supervised by Company
personnel. A fully staffed 3D seismic crew typically consists of twenty-five to
fifty persons, including a party manager, an observer, a head linesman and crew
laborers. The number of individuals on each crew is dependent upon the size and
nature of the seismic survey requested by the customer.
The Company uses helicopters to assist its crews in seismic data
acquisition in circumstances where such use will reduce overall costs and
improve productivity. These savings are achieved by deploying the crew and its
equipment more rapidly and significantly reducing surface damages.
SEISMIC DATA PROCESSING
The Company currently operates one seismic data processing center in
Houston, Texas capable of processing 2D and 3D seismic data acquired from its
own crews as well as data acquired by other
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geophysical crews. A majority of the Company's data processing services is
performed on 3D seismic data. Seismic data is processed to produce an image of
the earth's subsurface using proprietary computer software and techniques
developed by the Company. The Company also reprocesses older seismic data using
new techniques designed to enhance the quality of the data.
The Company's data processing center operates high capacity, advanced
technology data processing systems based primarily on Sun(R) computer systems
using high-speed networks. These systems utilize the Company's proprietary data
processing software. The Company processes both land and marine seismic data.
The geophysical industry is highly technical, and the technological
requirements for the acquisition and processing of seismic data have increased
continuously over time. Thus, the Company must continually take steps to ensure
that its technological capabilities are comparable or superior to those of its
competitors, whether through continuing research and development, strategic
alliances with equipment manufacturers or by acquiring technology under license
from others. The Company has introduced several technological innovations that
have become industry-standard products in the seismic data processing business.
The Company significantly expanded its capability to provide pre-stack
time and pre-stack depth migration by recently entering into an alliance with a
Texas-based hardware infrastructure and software company. The alliance provides
the Company with additional computer capacity to deliver more than 400 OCS
blocks of pre-stacked depth migration per year.
The Company's seismic data processing operations are conducted by
Geophysical Development Corporation ("GDC"), its wholly-owned subsidiary. GDC,
which was founded in 1981 to provide geophysical processing, interpretation,
software and consultation services to the oil and gas industry, was acquired by
the Company in April 1998.
CAPITAL EXPENDITURES
The seismic service industry is capital intensive, and the Company will
need to raise additional capital to continue to expand its seismic service
capabilities. The cost of sophisticated seismic acquisition equipment has
increased significantly over the last several years. The cost of equipping a
crew with a state-of-the-art system such as an I/O System Two, can range from $4
to $10 million. The Company's ability to expand its business operations is
dependent upon the availability of internally generated cash flow and financing
alternatives. 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 if and when
required. Any substantial alteration or increase in the Company's capitalization
through the issuance of debt or equity securities or otherwise may significantly
increase the leverage and decrease the financial flexibility of the Company. Due
to the uncertainties surrounding the changing market for seismic services,
increases in technological requirements, 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 if and 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.
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OPERATING CONDITIONS
The Company's seismic acquisition activities are often conducted under
extreme weather, in difficult terrain and under other hazardous conditions. As a
result, these activities are subject to risks of injury to Company personnel and
loss of seismic acquisition equipment. The Company maintains insurance against
the destruction of its seismic acquisition equipment and injury to person and
property that may result from its operations and considers the amount of such
insurance to be adequate. However, the Company is not fully insured for all
risks, either because such insurance is not available or because the Company
elects not to obtain insurance coverage because of cost.
Fixed costs, including costs associated with operating leases, labor
costs, depreciation and interest expense account for a substantial percentage of
the Company's costs and expenses. Accordingly, downtime or low productivity
resulting from weather interruptions, reduced demand, equipment failures or
other causes can result in significant operating losses.
The Company believes it will have the opportunity to generate its highest
revenues during the third quarter (July 1 through September 30) primarily
because this period typically provides for more recording hours due to longer
days and less curtailment of operations due to poor weather. Although certain
seasons generally provide better working conditions, adverse conditions may
impact revenues at any time throughout the year.
MARKETING
The Company's seismic acquisition and seismic data processing services are
marketed from its Houston office. While the Company relies upon the traditional
utilization of Company personnel in making sales calls, it anticipates receiving
a significant amount of work through word-of-mouth referrals and sales, repeat
customer sales and the Company's industry reputation and presence of its
personnel.
Contracts are obtained either through competitive bidding, in response to
invitations to bid, or by direct negotiation with a prospective client. A
significant portion of the Company's contracts result from competitive bidding.
Contracts are awarded primarily on the basis of price, crew experience and
availability, technological expertise and reputation for dependability and
safety.
Seismic acquisition contracts, whether bid or negotiated, provide for
payment on either a turnkey or a time basis or on a combination of both methods.
A turnkey contract provides for a fixed fee to be paid per square mile of data
acquired. Such a contract causes the Company to bear substantially all the risks
of business interruption caused by weather delays and other hazards. Time
contracts provide for payments based on agreed rates per units of time, which
may be expressed in periods ranging from days to months. This type of contract
causes the client to bear substantially all of the business interruption risks.
When a combination of both turnkey and time methods is used, the risk of
business interruption is shared by the Company and the client. In either case,
progress payments are usually required unless it is expected the job can be
accomplished in a short period. The Company's contracts for seismic acquisition
have been predominantly on a turnkey or combination of turnkey/time basis. The
Company's contracts currently provide that the seismic data acquired by the
Company is the exclusive property of the Company's client. Substantially all of
the Company's data processing contracts are on a turnkey basis.
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CUSTOMERS
The Company's customers include a number of major oil industry companies
and their affiliates, including Mobil, Seitel, Marathon, Texaco and Phillips as
well as many smaller, independent oil and gas companies. The table below sets
forth customers that accounted for more than 10% of the Company's revenues
during the fiscal year ended December 31, 1999:
FOR THE YEAR ENDED
DECEMBER 31, 1999
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REVENUES PERCENTAGE OF TOTAL REVENUES
Phillips Petroleum Company $2,073,262 14.6%
Mobil $1,642,600 11.6%
No other customer accounted for more than 10% of the Company's revenues in
1999.
BACKLOG
At March 31, 2000, the Company's backlog of commitments for services was
$7.5 million. It is anticipated that significantly all of the March 31, 2000
backlog will be completed in the next 12 months. This backlog consists of
written orders or commitments believed to be firm. Contracts for services are
occasionally varied or modified by mutual consent and in certain instances are
cancelable by the customer on short notice without penalty. As a result of these
factors, the Company's backlog as of any particular date may not be indicative
of the Company's actual operating results for any succeeding fiscal period.
COMPETITION
The acquisition and processing of seismic data for the oil and gas
industry is highly competitive. Although reliable comparative figures are not
available, the Company believes its principal competitors have more extensive
and diversified operations and also have financial, operating and other
resources substantially in excess of those available to the Company. Competitive
factors include the type and capability of equipment used to conduct seismic
surveys and that equipment's availability. In addition to price, the performance
and dependability of a crew significantly affect a potential customer's decision
to award a contract to a company or one of its competitors.
The Company's major competitors include Western Geophysical (a division of
Baker Hughes), Veritas DGC, Geco-Prakla (a division of Schlumberger Ltd.), Eagle
Geophysical, Inc., Dawson Geophysical Company and PGS, Inc.
REGULATION
The Company's operations are subject to numerous federal, state and local
laws and regulations. These laws and regulations govern various aspects of
operations, including the discharge of explosive materials into the environment,
requiring removal and clean-up of materials that may harm the environment or
otherwise relating to the protection of the environment and access to private
and
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governmental land to conduct seismic surveys. The Company believes it has
conducted its operations in substantial compliance with applicable environmental
laws and regulations governing its activities.
TECHNOLOGY
The Company relies on certain proprietary information, trade secrets, and
confidentiality and licensing agreements (collectively, "Intellectual Property")
to conduct its current operations. The Company's future success will depend, in
part, on its ability to maintain and preserve its Intellectual Property, without
infringing the rights of any third parties. There can be no assurance that the
Company will be successful in protecting its Intellectual Property or that its
competitors will not develop technologies that are substantially equivalent or
superior to the Company's technologies. The Company continues to incur expenses
associated with research and development and expects that research and
development expenditures will increase as the Company's expansion into other
areas of seismic operations develops.
EMPLOYEES
At March 31, 2000, the Company had approximately 100 full-time employees.
None of the Company's employees are parties to a collective bargaining
agreement. The Company considers the relations with its employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY.
In October of 1999, the Company consolidated all of its office operations
to what formerly had been its geophysical data processing center, located at
8401 Westheimer, Houston, Texas 77063. Prior to this consolidation, the
Company's headquarters and seismic acquisition operations had been located at
5555 San Felipe, Houston, Texas 77056. The Company leases 26,956 square feet of
office space at its current headquarters under a lease expiring April 30, 2001.
The Company's annual rent under this lease is $243,156. In addition, the Company
owns approximately one acre of property in Brookshire, Texas, which is serving
as the Company's maintenance facility for its seismic acquisition operations.
The Brookshire, Texas property consists of a facility of approximately 5,400
square feet where maintenance activities are conducted and a smaller storage
facility of approximately 1,200 square feet. The Brookshire facility is subject
to a Deed of Trust, Security Agreement and Fixtures Financing Statement dated
March 1, 1996 from Quantum Geophysical, Inc. (now Quantum Geophysical Services,
Inc.), Mortgagor, to Benefit Life Insurance Company, Mortgagee. The Company also
leases an office and maintenance facility of approximately 5,000 square feet in
Billings, Montana. The Company's annual rent under this lease is $41,400. The
lease has an eleven-year term that will expire in December of 2009, but may be
terminated by the Company in February 2001 under certain circumstances. The
Company currently has no plans to renovate, improve or develop any of its
forgoing properties, and believes each of the properties is adequately covered
by insurance. The Company also believes that its present facilities are
sufficient for the foreseeable future and that it will be able to negotiate
favorable lease renewals of the leased facilities or find suitable replacement
facilities without substantial difficulty.
The Company does not invest in real estate, interests in real estate or
real estate mortgages and does not acquire assets primarily for capital gain or
primarily for income.
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ITEM 3. LEGAL PROCEEDINGS.
On September 9, 1998 the Company filed suit in Smith County, Texas against
SMK Energy Corporation ("SMK") to collect approximately $2.8 million due for
seismic data acquisition services performed by one of the Company's
subsidiaries. On January 13, 1999, the Company obtained a judgment against SMK
for approximately $3 million, including interest and attorneys' fees. SMK is
currently the subject of involuntary bankruptcy proceedings that were brought
against SMK in March 1999. On February 17, 2000, the Company entered into a
final compromise and settlement of any and all claims it had against SMK and any
other involved parties. The Company had previously entered into and agreed to
the terms of a Settlement Term Sheet approved by the United States Bankruptcy
Court for the Southern District of Texas and made effective on December 6, 1999.
As part of the settlement agreement, the Company received an ownership interest
in 200 miles of previously recorded seismic data located in the Atchafalaya
Basin of Louisiana.
Except for the proceedings discussed above, neither the Company nor any of
its subsidiaries is a party to any pending legal proceedings. Moreover, the
Company is not aware of any such legal proceedings that are contemplated by
governmental authorities with respect to the Company, any of its subsidiaries,
or any of their respective properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock, $.01 par value per share (the "Common Stock")
is traded on the Nasdaq OTC Bulletin Board under the trading symbol "GEOK." As
of December 31, 1999, the Company had 378 stockholders of record.
The following table sets forth the high and low closing prices for the
Common Stock during the Company's most recent fiscal quarter and its last two
fiscal years as reported by the National Association of Security Dealers on the
Nasdaq OTC Bulletin Board.
HIGH LOW
------ ------
Twelve Months Ended December 31, 1999
Quarter Ended March 31, 1999 5/8 1/5
Quarter Ended June 30, 1999 25/32 17/32
Quarter Ended September 30, 1999 1 1/8 9/32
Quarter Ended December 31, 1999 1 7/32 7/32
10
<PAGE>
HIGH LOW
------ ------
Twelve Months Ended December 31, 1998
Quarter Ended March 31, 1998 4 1/16 2 1/2
Quarter Ended June 30, 1998 4 3/8 3 3/8
Quarter Ended September 30, 1998 3 3/8 1 13/16
Quarter ended December 31, 1998 1 13/16 11/32
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
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 ("Halex"), a Texas corporation owned by a former officer
of the Company, pursuant to the terms of a Stock Purchase Agreement ("HOC
Agreement"). Under 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. ("Geokinetics
Production"), a wholly-owned subsidiary of the Company. Immediately prior to the
sale of HOC's Stock to Halex, Geokinetics Production conveyed to HOC various
interests in certain oil and gas properties, as well as certain liabilities.
This transaction completed the discontinuance of the Company's oil and gas
operations and has been accounted for as a discontinued operation.
On February 23, 2000, the Company sold all of the outstanding capital
stock of Reliable Exploration, Incorporated ("Reliable"), a wholly-owned
subsidiary of the Company, to RNS, LLC, a Montana limited liability company
("RNS"). RNS is wholly-owned by Allen Rein, Kim Nordberg and Scott Schmitt (the
"Former Shareholders"), current officers of Reliable and the persons from whom
the Company had previously acquired Reliable in January 1998. The transaction
("Reliable Sale") was completed pursuant to the terms of a Stock Purchase
Agreement, by and among the Company, RNS, and the Former Shareholders. The
consideration received by the Company in the Reliable Sale consisted of (i) a
$250,000 promissory note of RNS, payable in 36 monthly installments and bearing
interest at a fixed rate of 8% per annum and (ii) 375,000 shares of the
Company's Common Stock, $0.01 par value per share. In addition, as a condition
to the closing of the Reliable Sale, the Company obtained a release of its
guaranty of Reliable's indebtedness, in the amount of $501,356, to a former
shareholder of Reliable.
At December 31, 1999, the Company's financial position reflects (i) the
seismic acquisition services being conducted by Quantum Geophysical, Inc.
("Quantum") and (ii) the seismic data processing, software and consultation
services being provided by Geophysical Development Corporation ("GDC"). The oil
service industry downturn, which began in 1998, worsened during 1999. This
downturn resulted from the deterioration of the price of oil which occurred in
mid 1998 and continued into early 1999. Demand for the Company's seismic
acquisition and seismic data processing services weakened significantly in 1999.
This unprecedented downturn severely constrained the Company's working capital
position. While there has been a continuing increase in the price of oil, in
relation to where it was in early 1999, the demand for services provided by the
Company has not yet been positively affected. The Company anticipates that the
demand for its seismic acquisition and seismic data processing services will
remain weak during the first half of 2000.
11
<PAGE>
RESULTS OF OPERATIONS
Revenues for the 12 months ended December 31, 1999 were $14,194,126, as
compared to $32,627,174 for the same period of 1998, as adjusted for the
discontinuance of the Company's oil and gas operations, a decrease of 57%. This
decrease is a direct result of the weakened demand for the Company's seismic
acquisition and seismic data processing services which occurred in 1999. During
1998, the Company operated as many as five seismic acquisition crews. During
1999, the Company did not operate more than two crews at any one time and had
periods where no crews were operational. The Company also saw weakness in its
seismic data processing operations. Seismic data processing revenue totaled
$9,257,500 in 1998. This revenue was generated over an eight month period as
revenue was recognized from the date of acquisition of GDC, April 30, 1998, to
December 31, 1998. Revenue in 1999 totaled $8,786,231 but was generated over a
twelve month period.
Operating expenses for the 12 months ended December 31, 1999 were
$13,922,368, as compared to $25,096,892 for the same period of 1998, as adjusted
for the discontinuance of the Company's oil and gas operations, a decrease of
45%. This decrease is directly attributable to the weakened demand for the
Company's seismic data acquisition and seismic data processing services.
General and Administrative expenses for 1999 totaled $2,817,885, a
decrease of $300,294 from 1998, as adjusted for the discontinuance of the
Company's oil and gas operations. The decrease in General and Administrative
expenses is attributable to manpower reductions and other measures instituted to
reduce costs during this period of weakened demand.
Depletion, depreciation and amortization expense for 1999 totaled
$9,907,917, as compared to $7,128,594 for the same period of 1998 and as
adjusted for the discontinuance of the Company's oil and gas operations, an
increase of 39%. This increase is primarily the result of the previous expansion
of the Company's inventory of seismic acquisition equipment and the amortization
of goodwill associated with the acquisition of GDC.
During 1999, a decision was made to dispose of Reliable. An impairment
reserve of $2,143,635 was recorded during 1999 to provide for the loss on the
ultimate disposal of Reliable. Reliable was subsequently sold on February 23,
2000.
Interest expense (net of interest income) for the 12 months ended December
31, 1999 totaled $7,331,600, as compared to $4,732,038 for the same period of
1998, as adjusted for the discontinuance of the Company's oil and gas
operations, an increase of 55%. The increase in interest expense is a result of
(i) the Company's closing of a $40,000,000 12% Senior Subordinated Debt
financing on April 30, 1998, (ii) the restructuring of that financing on October
1, 1999 in exchange for 13.5% Senior Secured Notes in the amount of $45,358,000,
inclusive of accrued unpaid interest of $5,358,000, and (iii) the Company's
closing of a $5,895,000 in 13.5% Senior Secured debt financing on October 1 and
November 30, 1999. The proceeds from these financings were utilized to acquire
GDC, purchase additional seismic acquisition equipment and provide the Company
with additional working capital to meet its current obligations.
On July 28, 1999, the Company sold all of the outstanding capital stock of
HOC to Halex. As a result of this transaction, the Company recognized a loss on
the disposal in the amount of $563,375. In addition, the loss for 1999 from the
Company's oil and gas operations, prior to the sale, totaled $71,494. This
transaction completed the discontinuance of the Company's oil and gas
exploration and production operations and has been accounted for as a
discontinued operation.
12
<PAGE>
The Company had a net loss of $30,419,897, or ($1.57) per share, for the
12 months ended December 31, 1999, as compared to a net loss of $9,968,602, or
($0.53) per share, for the same period of 1998. This increase in net loss is the
result of (i) a significant decrease in the Company's revenues, attributable to
a significant industry downturn, (ii) increases in depletion, depreciation and
amortization expense and interest expense, as outlined above, (iii) the
recognition of an $8.3 million loss associated with the extinguishment and
restructuring of the Company's Senior Subordinated debt and (iv) a $563,000 loss
on the disposition of the Company's oil and gas operations.
LIQUIDITY AND CAPITAL RESOURCES
During 1999, the seismic service industry experienced an unprecedented
downturn which severely constrained the Company's working capital position.
During this period, management developed a financial and operational plan to
carry the Company's operations through the year 2000. One component of this plan
included a restructuring of the Company's long term debt. The plan also included
disposing of the Company's oil and gas operations as well as one of its seismic
acquisition subsidiaries.
As a result of the conditions and plan implementation outlined above, the
Company incurred a loss of approximately $30.4 million during 1999, and a loss
of approximately $10 million incurred in 1998, leaving the Company with an
equity deficit of approximately $14.1 million at December 31, 1999.
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 an additional $4,000,000 from
the Purchasers, the holders of the Prior Notes, and $1,000,000 from other
sources. On November 30, 1999, the Company received an additional $895,000 from
other investors. 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 issuing $5,895,000 of
its 13.5% Senior Secured Notes due 2002 (the "2002 Notes") for the additional
funding received on October 1, 1999 and November 30, 1999. This transaction
provided the Company with the option, during 2000, to make interest payments due
on the 13.5% Senior Secured Notes either in cash or by issuing additional notes.
Concurrently with the transactions contemplated by the Purchase Agreement,
the Company completed a restructuring of its debt obligations to the principal
equipment supplier for the Company's seismic acquisition operations.
At December 31, 1999, the Company had cash balances of $2,677,996. The
Company believes this cash, anticipated cash flow from its seismic acquisition
and seismic data processing operations, continued adherence to the financial and
operational plan noted above and the deferral of certain accrued expenses will
provide sufficient liquidity to continue operations through 2000. As noted
above, the Company has the option to avoid making cash interest payments on its
13.5% Senior Secured Notes during 2000. As presently structured, the Company
will be required to make a cash interest payment of approximately $3.9 million
on March 15, 2001. Under current conditions, continued operations by the Company
through this payment will be dependent upon a continued forbearance by the
holders of the Company's 13.5% Senior Secured Notes.
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
13
<PAGE>
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.
YEAR 2000
As of March 30, 2000, the Company had not experienced any materially
important business disruptions or system failures as a result of year 2000
issues nor was it aware of any year 2000 issues that impacted its suppliers or
other third parties to an extent significant to the Company. However, year 2000
compliance has many elements and potential consequences, some of which may not
be foreseeable or may be realized in future periods. Consequently, there can be
no assurance that unforeseen circumstances may not arise, or that the Company
will not in the future identify equipment or systems which are not year 2000
compliant.
OTHER INFORMATION
During 1998, a customer of a subsidiary of the Company defaulted on
payment of $2.8 million due the Company for seismic data acquisition services
performed by its subsidiary. The Company obtained a judgment against the
customer in the amount of the outstanding obligation plus interest and
attorney's fees. As a result of the customer's subsequent bankruptcy
proceedings, the Company determined that the obligation was not collectible and
charged the amount against earnings during the fourth quarter of 1998. On
February 17, 2000, the Company entered into a compromise and settlement of all
claims it had against the customer and any other involved party. As part of the
settlement agreement, the Company received an ownership interest in
approximately 200 miles of previously recorded seismic data located in the
Atchafalaya Basin of Louisiana. No value has been assigned to the data and
income will be recognized upon any subsequent sale.
ITEM 7. FINANCIAL STATEMENTS.
The Company's Annual Consolidated Financial Statements, Notes to
Consolidated Financial Statements and the report of Fitts, Roberts & Co., Inc.,
independent certified public accountants, with respect thereto, referred to in
the Table of Contents to Consolidated Financial Statements, appear elsewhere in
this report beginning on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
14
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND OFFICERS
Set forth below are the names, ages and positions of the directors and
executive officers of the Company. Each of the directors named below were
elected at the Company's 1998 Annual Meeting of the Stockholders for a term of
one year or until their successors were elected. Each of the directors named
below will be nominated at the 2000 Annual Meeting of Stockholders to serve on
the Company's Board of Directors for additional one year terms or until their
successors are elected.
<TABLE>
<CAPTION>
OFFICE HELD
NAME AGE POSITION WITH THE COMPANY SINCE
---- --- ------------------------- -----------
<S> <C> <C> <C>
William R. Ziegler 57 Chairman (non executive) (since 1997
February 2, 1999) and Director
Lynn A. Turner 50 President and Chief Operating Officer 1997
Michael A. Dunn 45 Vice President and 1997
Chief Technology Officer
Thomas J. Concannon 46 Vice President and 1997
Chief Financial Officer
Michael A. Schott 55 Vice President of Financial 1998
Reporting and Compliance
Christopher M. Harte 51 Director 1997
Steven A. Webster 47 Director 1997
</TABLE>
There are no family relationships between any of the directors or
executive officers of the Company.
WILLIAM R. ZIEGLER, age 57, was appointed as the Company's Chairman
(non-executive) on February 2, 1999 succeeding Mr. Jay D. Haber. Mr. Ziegler is
a partner of the law firm of Satterlee Stephens Burke & Burke, LLP, located in
New York, New York. Since June 1994, Mr. Ziegler served as Chairman of the New
York law firm of Parson & Brown, L.L.P. which merged with Satterlee Stephens
Burke & Burke, LLP effective September 1, 1999. Mr. Ziegler was formerly a
partner of Whitman Breed Abbott & Morgan, located in New York, New York (1993 -
May 1994), and a predecessor law firm, Whitman & Ransom (since 1976), where he
was Co-Chairman of its Corporate Department. Mr. Ziegler is a director of R&B
Falcon Corporation, a director and Vice Chairman of Grey Wolf, Inc., a director
of Ponder Industries, Inc., a director of Flotek Industries Inc. (an oil
services equipment supplier), a general partner of Somerset Capital Partners,
and a general partner of Blackhawk Capital Partners, the managing member of
Blackhawk Investors, L.L.C. Mr. Ziegler has served as a member of the Company's
Board of Directors since August 1, 1997.
LYNN A. TURNER, age 50, has served as the President and Chief Operating
Officer of the Company since July 28, 1997. Prior to joining the Company, Mr.
Turner was employed for six years by Fairfield
15
<PAGE>
Industries, Inc., a provider of seismic acquisition services, most recently as
Senior Vice President and Manager of Data Acquisition. Mr. Turner has more than
20 years of experience in the seismic data acquisition business.
MICHAEL A. DUNN, age 45, has served as a Vice President and the Chief
Technology Officer of the Company since August 18, 1997. On August 1, 1999, Mr.
Dunn was appointed President of Geophysical Development Corporation, a
wholly-owned subsidiary of the Company. Prior to joining the Company, Mr. Dunn
was employed for 18 years by Shell Oil Company, most recently as Technology
Manager at its Exploration and Production Research Center. Mr. Dunn has over 20
years background in all aspects of geoscience, including seismic acquisition,
seismic processing, exploration and research.
THOMAS J. CONCANNON, age 46, has served as a Vice President and the Chief
Financial Officer of the Company since July 15, 1997. Prior to joining the
Company, he worked for four years as a private consultant for various energy
companies. Prior to that time, he served as President of NJR Energy, an
exploration company and as a director of its parent company, NJ Resources, Inc.
Mr. Concannon has over 15 years of energy industry experience.
MICHAEL A. SCHOTT, age 55, has served as Vice President of Financial
Reporting and Compliance and Secretary since August 5, 1998. Prior to joining
the Company, Mr. Schott served eight years as a Vice President and shareholder
of a public accounting firm in San Antonio, Texas. Prior to that time Mr. Schott
served as Controller, then Senior Vice President and Treasurer of Venus Oil
Company. Mr. Schott is a Certified Public Accountant with more than 30 years of
experience, including 10 years in the oil and gas exploration industry and 20
years in the practice of public accounting. Mr. Schott is a member of the Texas
Society of Public Accountants and the American Institute of CPAs.
CHRISTOPHER M. HARTE, age 51, is a private investor. From 1992 to 1994,
Mr. Harte was the President of Portland Newspapers, Inc. Mr. Harte is a director
of several corporations, including Harte-Hanks Communications, Inc. (a direct
marketing and shopper publishing company), Wildfire Fire Equipment Inc. (a
forest fire pump manufacturer) and Hi-Port Inc. (a petroleum product contract
packaging company), and is an investor member of Blackhawk Investors, L.L.C. Mr.
Harte has served as a member of the Company's Board of Directors since August 1,
1997.
STEVEN A. WEBSTER, age 47, is the Vice Chairman of R&B Falcon Corporation,
an international oil and gas drilling contractor which is listed on the New York
Stock Exchange. From January 1998 to June 1999, Mr. Webster served as the
President and Chief Executive Officer of R&B Falcon Corporation, and from
November 1991 to December 31, 1997, was the Chairman, Chief Executive Officer
and Treasurer of Falcon Drilling Company, Inc., a marine oil and gas drilling
contractor that, prior to becoming a wholly- owned subsidiary of R&B Falcon
Corporation on January 1, 1998, was listed on the New York Stock Exchange. Mr.
Webster is a Managing director of Global Energy Partners, a wholly-owned
affiliate of the Merchant Banking division of Donaldson Lufkin & Jenrette. Mr.
Webster serves as a director of R&B Falcon Corporation, Grey Wolf, Inc.
(formerly DI Industries, Inc.) (an international land drilling company), Crown
Resources Corporation (a precious metals mining company), Carrizo Oil & Gas,
Inc. (an independent oil and gas company), and as a trust manager of Camden
Property Trust (a real estate investment trust). Mr. Webster is Chairman of the
Board of Directors of Carrizo Oil & Gas, Inc. Mr. Webster is also a general
partner of Equipment Asset Recovery Fund (an investment fund), a general partner
of Somerset Capital Partners, and a general partner of Blackhawk Capital
Partners, the managing member of Blackhawk Investors, L.L.C. Mr. Webster has
served as a member of the Company's Board of Directors since August 1, 1997.
16
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company under Rule 16(a)-3(e) during the fiscal year ended
December 31, 1999 and Form 5 and amendments thereto furnished to the Company
with respect to such period, the Company is not aware of any director, officer,
or beneficial owner of more 10% of any class of equity securities of the Company
registered pursuant to Section 12 of the Securities Exchange Act of 1934 (the
"Exchange Act") that has failed to file on a timely basis, as disclosed in the
above forms, reports required by Section 16(a) of the Exchange Act during the
Company's most recent fiscal year or prior years.
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table reflects all forms of compensation paid to the
Company's chief executive officer and its other executive officers for each of
the Company's last three completed fiscal years. No other director or executive
officer received compensation which exceeded $100,000 during any of such
periods.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
---------------------------------------- ---------------------------------------------------------
AWARDS PAYOUTS
--------------------------- -----------------------------
OTHER RESTRICTED SECURITIES
NAME AND ANNUAL STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS OPTIONS/SARS LTIP PAYOUTS COMPENSATION
($) ($) ($) ($) (#) ($) ($)
(A) (B) (C) (D) (E) (F) (G) (H) (I)
- --------------------------------- ---------- -------------- -------------- --------------------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Lynn A. Turner, 1999 $135,000 -- - - - -- -
President and Chief 1998 $135,000 -- - - - - -
Operating Officer (since 1997 -- $156,780(1) $1,200 - 500,000(2) - --
July 28, 1997)
Michael A. Dunn, Vice 1999 $150,000 - - - - - -
President and Chief 1998 $150,000 - - - - - -
Technology Officer 1997 - $90,000(3) - - 550,000(4) - --
(since August 18, 1997)
Thomas J. 1999 $120,000 - - - - - -
Concannon(4) Vice 1998 $120,000 - - - 300,000(5) - -
President and 1997 - - - - - - --
Chief Financial Officer
Michael A. Schott 1999 $105,000 - - - - - -
Vice President of 1998 - - - - 200,000(6) - -
Financial Reporting and 1997 - - - - - - --
Compliance and
Secretary
Jay D. Haber, 1999 $165,000 - - - - - -
Chairman and Chief 1998 $165,000 - - - - - -
Executive Officer (from 1997 $156,250 - - - 600,000(7) - --
August 1, 1997 until
February 2, 1999)
Michael Hale, 1999 $ 60,000 - - - - - -
Vice President and 1998 $120,000 - - - -
Secretary 1997 $111,249 - - - 300,000(8)
================================= ========== ============== ============== =========================== ============== ==============
</TABLE>
(1) Refers to a $156,780 bonus paid to Mr. Turner on February 13, 1998, in
accordance with the employment agreement between Mr. Turner and the
Company (See "Certain Relationships and Related Transactions--Employment
Agreements" below).
17
<PAGE>
(2) Refers to non-qualified stock options to purchase 500,000 shares of Common
Stock granted to Mr. Turner under the Company's 1995 Stock Option Plan, in
accordance with the employment agreement between Mr. Turner and the
Company (See "Certain Relationships and Related Transactions--Employment
Agreements" below).
(3) Refers to a $90,000 bonus paid to Mr. Dunn in August 1997, in accordance
with the employment agreement between Mr. Dunn and the Company (See
"Certain Relationships and Related Transactions --Employment Agreements"
below).
(4) Refers to non-qualified stock options to purchase 550,000 shares of Common
Stock granted to Mr. Dunn under the Company's 1995 Stock Option Plan, in
accordance with the employment agreement between Mr. Dunn and the Company
(See "Certain Relationships and Related Transactions--Employment
Agreements" below).
(5) Refers to incentive stock options entitling Mr. Concannon to purchase
300,000 shares of Common Stock under the Company's 1995 Stock Option Plan
in accordance with the employment agreement between Mr. Concannon and the
Company. (See "Certain Relationships and Related Transactions--Employment
Agreements" below).
(6) Refers to incentive stock options to purchase 200,000 shares of Common
Stock granted to Mr. Schott under the Company's 1997 Stock Awards Plan, in
accordance with the employment agreement between Mr. Schott and the
Company (See "Certain Relationships and Related Transactions--Employment
Agreements" below).
(7) Refers to incentive stock options to purchase 600,000 shares of Common
Stock issued to Mr. Haber under the Company's 1995 Stock Option Plan.
However, as a result of Mr. Haber's resignation from the Company effective
February 2, 1999, stock options to purchase an aggregate of 240,000 of
such shares of Common Stock were vested and are currently exercisable.
(See "Certain Relationships and Related Transactions--Other Related
Transactions" below).
(8) Refers to incentive stock options to purchase 300,000 shares of Common
Stock granted to Mr. Hale under the Company's 1995 Stock Option Plan, in
accordance with the new employment agreement between Mr. Hale and the
Company. As a result of Mr. Hale's resignation from the Company effective
July 1, 1999, stock options to purchase an aggregate of 200,000 shares
were vested and remain exercisable. (See "Certain Relationships and
Related Transactions--Other Related Transactions" below).
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The Company did not grant any stock options or stock appreciation rights
("SARs") to any of its executive officers during the fiscal year ended December
31, 1999.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
None of the Company's executive officers exercised any options during the
fiscal year ended December 31, 1999. The Company did not issue any SARs during
the fiscal year ended December 31, 1999. As of December 31, 1999, none of the
stock options held by the executive officers named above had a value that
exceeded the exercise price of any such options. The following table sets forth
the number of shares underlying the unexercised options of each of the Company's
executive officers as of December 31, 1999:
18
<PAGE>
NAME EXERCISABLE UNEXERCISABLE
---- ----------- -------------
Lynn A. Turner 200,000 300,000
Michael A. Dunn 250,000 300,000
Thomas J. Concannon 250,000 50,000
Michael A. Schott 80,000 120,000
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
None of the Company's executive officers were granted awards under any
long-term incentive plan during the fiscal year ended December 31, 1999.
COMPENSATION OF DIRECTORS
Directors of the Company who are not employees are entitled to receive
$2,500 per year for their services as directors and $250 per meeting attended.
Directors, who are not employees or officers of the Company, are reimbursed for
their actual expenses incurred in attending meetings of the Board of Directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of December 31, 1999, the number of
shares of the Company's Common Stock beneficially owned by (i) each person known
by the Company (based on filings under Section 13(d) or 13(g) of the Exchange
Act) to be the holder of more than five percent of its voting securities, (ii)
each director or nominee for election as a director, and (iii) all of the
Company's directors and officers as a group. Unless otherwise indicated, each
holder has sole voting and investment power with respect to the shares of Common
Stock owned by such holder.
NAME AND ADDRESS
OF BENEFICIAL OWNER AMOUNT AND NATURE OF PERCENT OF
OF GROUP TITLE OF CLASS BENEFICIAL OWNERSHIP CLASS (1)
-------- -------------- -------------------- ---------
Jay D. Haber Common 1,191,734 shares (2) 6.08%
2310C Nantucket
Houston, TX 77057
Steven A. Webster Common 19,791,025 shares (3) 65.62%
R&B Falcon Corporation
901 Threadneedle, Suite
200
Houston, TX 77079
William R. Ziegler Common 19,841,048 shares (4) 65.68%
Satterlee Stevens Burke
& Burke, LLP
230 Park Avenue
New York, NY 10169
19
<PAGE>
NAME AND ADDRESS
OF BENEFICIAL OWNER AMOUNT AND NATURE OF PERCENT OF
OF GROUP TITLE OF CLASS BENEFICIAL OWNERSHIP CLASS (1)
-------- -------------- -------------------- ---------
Christopher M. Harte Common 479,902 shares (5) 2.42%
217 Commercial Street,
Suite 200
Portland, ME 04101
Blackhawk Investors, Common 14,402,178 shares (6) 57.37%
L.L.C.
1013 Centre Road
Wilmington, DE 19805-
1297
Blackhawk Capital Common 14,402,178 shares (7) 57.37%
Partners
3711 San Felipe, #5G
Houston, TX 77027
All Directors and Common 23,728,983 shares (8) 70.28%
Executive Officers as a
Group
DLJ Funds Common 22,362,204(9) 53.59%
Chase Equity Associates, Common 10,648,669(10) 35.48%
L.P.
Spindrift Partners, L.P. Common 5,324,334(11) 21.56%
MHR Capital Partners, Common 3,194,601(12) 14.16%
L.P.
- ------------------
(1) These percentages are calculated on the basis of 19,367,156 shares
of Common Stock, that were issued and outstanding on December 31,
1999, plus, with respect to each person, group or entity listed,
such number of shares of Common Stock as such person or entity has
the right to acquire within 60 days pursuant to options, warrants,
conversion privileges or other rights held by such person or
entity. Certain shares are deemed beneficially owned by more than
one person or entity listed in the table.
(2) Includes 240,000 shares of Common Stock purchasable pursuant to
options granted to Mr. Haber under the Company's 1995 Stock Option
Plan.
(3) Includes (i) 2,074,115 shares of Common Stock issuable pursuant to
warrants held by Mr. Webster, (ii) 333,326 shares owned of record
by Mr. Webster, (iii) (A) 8,666,667 shares of Common Stock owned
of record by Blackhawk Investors, L.L.C. ("Blackhawk") and (B)
5,735,511 shares of Common Stock presently exercisable pursuant to
the Shadow Warrant issued to Blackhawk, since Mr. Webster is one
of two partners of Blackhawk Capital Partners ("BCP"), the
managing member of Blackhawk and excludes 610,740 shares of Common
Stock not presently exercisable pursuant to the Shadow Warrant
issued
20
<PAGE>
to Blackhawk, (iv) 220,592 shares of Common Stock presently
exercisable pursuant to the Shadow Warrant issued to Mr. Webster,
and excludes 23,489 shares not presently exercisable pursuant to
the Shadow Warrant issued to Mr. Webster, and (v) 2,760,814 shares
of Common Stock issuable pursuant to warrants held by Somerset
Capital Partners ("SCP"), since Mr. Webster is one of three
general partners of SCP.
(4) Includes (i) 2,074,115 shares of Common Stock issuable pursuant to
warrants held by Mr. Ziegler, (ii) 333,340 shares owned of record
by Mr. Ziegler, (iii) (A) 8,666,667 shares of Common Stock owned
of record by Blackhawk (B) 5,735,511 shares of Common Stock
presently exercisable pursuant to the Shadow Warrant issued to
Blackhawk, since Mr. Ziegler is one of two partners of BCP, the
managing member of Blackhawk, and excludes 610,740 shares of
Common Stock not presently exercisable under the Shadow Warrant
issued to Blackhawk , (iv) 50,000 shares of Common Stock issuable
pursuant to stock options held by Mr. Ziegler, (v) 220,601 shares
of Common Stock presently exercisable pursuant to the Shadow
Warrant issued to Mr. Ziegler, and excludes 23,490 shares not
presently exercisable under the Shadow Warrant issued to Mr.
Ziegler, and (vi) 2,760,814 shares of Common Stock issuable
pursuant to warrants held by SCP, since Mr. Ziegler is one of
three general partners of SCP.
(5) Includes (i) 85,500 shares of Common Stock issuable pursuant to
warrants held by Mr. Harte, which warrants were issued in
accordance with the terms of that certain promissory note dated
March 24, 1998 of the Company payable to Mr. Harte, and (ii)
394,402 shares of Common Stock issuable pursuant to warrants held
by Spicewood Family Partners of which Mr. Harte is the general
partner.
(6) Includes (i) 8,666,667 shares owned of record by Blackhawk and
(ii) 5,735,511 shares of Common Stock presently exercisable
pursuant to the Shadow Warrant issued to Blackhawk; excludes
979,607 shares of Common Stock not presently exercisable under the
Shadow Warrant issued to Blackhawk.
(7) Includes (i) 8,666,667 shares owned of record by Blackhawk and
(ii) 5,735,511 shares of Common Stock presently exercisable
pursuant to the Shadow Warrant issued to Blackhawk, which are
deemed beneficially owned by BCP as the managing member of
Blackhawk; excludes 979,607 shares of Common Stock not presently
exercisable under the Shadow Warrant issued to Blackhawk.
(8) Includes an aggregate of (i) 9,333,333 issued and outstanding
shares beneficially owned by the directors and executive officers
as a group, (ii) 14,395,650 shares of Common Stock that such
persons have the right to acquire within 60 days pursuant to
options, warrants, conversion privileges or other rights held by
such persons (inclusive of 6,111,364 shares of Common Stock
presently exercisable pursuant to the Shadow Warrants issued to
Blackhawk and Messrs. Webster and Ziegler); excludes 1,054,961
shares of Common Stock not presently exercisable under the Shadow
Warrants issued to Blackhawk and Messrs. Webster and Ziegler.
(9) Refers to shares of Common Stock issuable pursuant to warrants
beneficially owned by each of DLJ Investment Partners, L.P., DLJ
Investment Funding, Inc., DLJ LBO Plans Management Corporation,
and DLJ Capital Investors, Inc. Pursuant to a
21
<PAGE>
Schedule 13D filed October 18, 1999, each of the following has
expressly disclaimed beneficial ownership with respect to these
shares: Donaldson Lufkin & Jenrette, Inc., AXA Financial, Inc.,
AXA, Finaxa, AXA Assurances I.A.R.D. Mutuelle, AXA Assurances Vie
Mutuelle, AXA Courtage Assurance Mutuelle, AXA Conseil Vie
Assurance Mutuelle, and Claude Bebear, Patrice Garnier and Henri
deClermonte- Tonnerre ("AXA Voting Trustees"), trustees of a
voting trust established pursuant to a Voting Trust Agreement by
and among AXA and the AXA Voting Trustees, dated as of May 12,
1999, as amended January 22, 1997.
(10) Refers to shares of Common Stock issuable pursuant to warrants
held by Chase Equity Associates, L.P.
(11) Refers to shares issuable pursuant to warrants held by Spindrift
Partners, L.P.
(12) Refers to shares issuable pursuant to warrants held by MHR Capital
Partners.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
EMPLOYMENT AGREEMENTS
The Company is a party to an employment agreement with Lynn A. Turner,
dated July 15, 1997, pursuant to which Mr. Turner serves as the President and
Chief Operating Officer of the Company, with overall responsibility for
geophysical operations. The compensation payable to Mr. Turner under the
employment agreement consists of: (i) a "sign-on" bonus of $156,780 paid on
February 13, 1998, (ii) an annual base salary of $135,000 per year, (iii) an
annual incentive cash bonus equal to 100% of base salary if the Company's
geophysical operations meet certain goals set forth in a plan to be established
by the Board of Directors after consultation with Mr. Turner, plus an additional
bonus in excess of annual base salary if the financial results of the Company's
geophysical operations exceed such goals, and (iv) an option to acquire 500,000
shares of Common Stock, at an exercise price of $0.75 per share, which option
vests in equal one-fifth increments of 100,000 shares each on each of July 15,
1998, 1999, 2000, 2001 and 2002, provided that he continues to be employed by
the Company on such dates, and he exercises such option prior to or on July 15,
2004. Mr. Turner's employment agreement has a term of five years and is
terminable by the Company upon its good faith determination that there has been
a willful violation of the terms of the agreement and in certain other events.
The Company is a party to an employment agreement with Michael A. Dunn,
dated July 15, 1997, pursuant to which Mr. Dunn serves as a Vice President and
the Chief Technical Officer of the Company. The compensation payable to Mr. Dunn
under the employment agreement consists of: (i) a "sign on" bonus of $90,000,
paid upon commencement of employment, (ii) an annual base salary of $150,000 per
year, (iii) an annual incentive cash bonus commensurate with his position at the
Company in accordance with a plan to be established by the Board of Directors
after consultation with Mr. Dunn, and (iv) stock options to acquire (A) 50,000
shares of Common Stock, at an exercise price of $0.75 per share, which option
became exercisable on August 18, 1997 and has an expiration date of July 15,
2002, and (B) an additional 500,000 shares of Common Stock, at an exercise price
of $0.75 per share, which option vests in equal one-fifth increments of 100,000
shares each on each of July 15, 1998, 1999, 2000, 2001 and 2002, provided that
he continues to be employed by the Company on such dates, and he exercises such
option prior to or on July 15, 2004. Mr. Dunn's employment agreement has a term
of five
22
<PAGE>
years and is terminable by the Company upon its good faith determination that
there has been a willful violation of the terms of the agreement and in certain
other events.
The Company is a party to an employment agreement with Thomas J. Concannon
dated July 15, 1997, pursuant to which Mr. Concannon serves as a Vice President
and the Chief Financial Officer of the Company. The compensation payable to Mr.
Concannon under the employment agreement consists of: (i) an annual base salary
of $120,000 per year, (ii) participation in any and all current and future
employee/officer incentive plans, employee/officer stock plans, employee/officer
stock option plans and any and all other employee/officer benefit/compensation
plans of the Company, (iii) stock options to acquire (A) an aggregate of 150,000
shares of Common Stock, at an exercise price of $0.75 per share, which option
became exercisable on July 15, 1997 and has an expiration date of July 15, 2002,
and (B) an additional 150,000 shares of Common Stock, at an exercise price of
$0.75 per share, which option vests in equal one-third increments of 50,000
shares each on each of July 15, 1998, 1999 and 2000, provided that he continues
to be employed by the Company on such dates, and he exercises such option prior
to or on July 15, 2002. Mr. Concannon's employment agreement has a term of three
years and is terminable by the Company upon its good faith determination that
there has been a willful violation of the terms of the agreement and in certain
other events.
The Company is a party to an employment agreement with Michael A. Schott
dated August 5, 1998, pursuant to which Mr. Schott serves as a Vice President of
Financial Reporting and Compliance. The compensation payable to Mr. Schott under
the employment agreement consists of: (i) an annual base salary of $105,000 per
year, (ii) participation in any and all current and future employee/officer
incentive plans, employee/officer stock plans, employee/officer stock option
plans and any and all other employee/officer benefit/compensation plans of the
Company, (iii) a stock option to acquire an aggregate of 200,000 shares of
Common Stock at an exercise price of $2.625 per share, which option vests in
equal one-fifth increments of 40,000 shares on each of August 5, 1998 and August
5, 1999, 2000, 2001 and 2002, provided that he continues to be employed by the
Company on such dates, and he exercises such option prior to or on August 5,
2004. Mr. Schott's employment agreement has a term of four years and is
terminable by the Company upon its good faith determination that there has been
a willful violation of the terms of the agreement and in certain other events.
OTHER RELATED TRANSACTIONS
The father of a former Vice-President of the Company is a participant in
the Company's lease acquisition program with a note balance of $35,500 at
December 31, 1999.
In connection with certain financing transactions that were completed in
April and July of 1997, the Company entered into a three-year consulting
agreement (beginning April 25, 1997) with William R. Ziegler, pursuant to which
Mr. Ziegler agreed to provide the Company certain strategic planning and other
consulting services. Under Mr. Ziegler's consulting agreement, Mr. Ziegler is
entitled to receive a quarterly consulting fee equal to one-half of 1% of the
total investment made by him and certain other persons or before July 31, 1997
in debt and equity securities of the Company that are outstanding as of the end
of each quarter during the term of the consulting agreement. As of December 31,
1999 and 1998, respectively, the Company owed Mr. Ziegler $343,207 and $203,207
in consulting fees pursuant to the agreement. In addition, pursuant to the
consulting agreement, the Company granted Mr. Ziegler options to purchase 50,000
shares of Common Stock of the Company at a price of $0.75 per share.
23
<PAGE>
On March 27, 1998, the Company obtained a $1,500,000 private short-term
financing from a group of investors, including William R. Ziegler, Steven A.
Webster and Christopher M. Harte and several related family members who
collectively provided $1,000,000 of this financing. The Company issued
promissory notes, with interest at prime plus 2% to these individuals.
Additionally, Christopher M. Harte 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 on
May 1, 1998 including interest payments of $11,083 to the related parties and
family members.
On April 30, 1998, the Company completed a private offering of $40,000,000
of certain securities designated as its 12% Senior Subordinated Notes (the "1998
Notes") to DLJ Investment Partners, L.P. and certain additional investors ("1998
Purchasers") pursuant to the terms of a Securities Purchase Agreement by and
among the Company and the Purchasers. Additionally, the Company (i) caused
certain of its wholly-owned subsidiaries to execute guarantees of the 1998 Notes
pursuant to an Indenture executed by each of them, (ii) granted warrants (the
"Warrants") to the 1998 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 1998 Notes, the Warrants and the shares of
Common Stock which may be acquired upon exercise of the Warrants. The completion
of this offering enabled the Company to purchase an additional 3,000 channel I/O
System Two RSR System and complete the acquisition of GDC.
On July 28, 1999, the Company sold all of the outstanding capital stock of
HOC Operating Co., Inc., a Texas corporation and wholly-owned subsidiary of the
Company ("HOC"), to Halex Oil Corporation ("Halex"), a Texas corporation
controlled by Michael Hale, the Company's Vice President and Secretary until
June 30, 1999, pursuant to the terms of a Stock Purchase Agreement (the "HOC
Agreement") among the Company, HOC and Halex. Pursuant to the HOC Agreement,
Halex acquired 1,000 shares of the common stock of HOC (the "HOC shares"),
representing 100% of the outstanding capital stock of HOC from the Company in
exchange for the assumption by Halex of (i) $75,000 of the Company's obligations
under that certain Lease Bank Facility Promissory Note in the principal amount
of $110,000 payable by Geokinetics Production Company, Inc., a Texas corporation
and wholly-owned subsidiary of the Company ("Geokinetics Production"), to the
Dan C. Hale and Donna Jane Hale Trust dated January 17, 1995 (the "Trust"); and
(ii) approximately $58,500 of HOC's and Geokinetics Production's accounts
payable (as defined in the HOC Agreement). The value of the proved producing oil
and gas reserves owned by HOC on the date of the transaction was approximately
$136,000. Immediately prior to the sale of HOC's stock to Halex, Geokinetics
Production conveyed to HOC various interests in certain oil and gas properties.
Further, the Company issued to the Trust a Common Stock Purchase Warrant
entitling the Trust to purchase from the Company all or any part of 35,000
shares of fully paid and non-assessable Common Stock at a purchase price of
$0.656 per share. The expiration date of this warrant is June 30, 2004. The
Company also entered into a Promissory Note with the Trust for $35,000, with an
effective interest rate based on the Citibank, N.A. prime rate plus four
percent, due on or before December 31, 2000.
On October 1, 1999, the Company restructured its obligations to the
holders of the 1998 Notes and entered into a Securities Purchase Agreement (the
"1999 Purchase Agreement") with the holders of the 1998 Notes and certain
additional investors, including Steven A. Webster and William R. Ziegler, two of
the Company's directors (collectively, the "1999 Purchasers"), pursuant to which
the Company completed a restructuring of the 1998 Notes, and received $4,000,000
in additional senior secured debt financing from the holders of the 1998 Notes
and $1,000,000 from three other investors, including Messrs. Webster and Ziegler
(the "Secured Loan"). Pursuant to the 1999 Purchase Agreement, the Company (i)
exchanged the
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<PAGE>
1998 Notes for its 13.5% Senior Secured Notes due 2005 in the aggregate
principal amount of $45,358,000 issued to the 1999 Purchasers (the "2005
Notes"), (ii) issued the 1999 Purchasers its 13.5% Senior Secured Notes due 2002
in the aggregate principal amount of up to $6,000,000 (the "2002 Notes"), (iii)
granted security interests covering substantially all of the Company's assets as
security for the 2005 Notes and the 2002 Notes, (iv) caused certain of the
Corporation's wholly-owned subsidiaries to execute guarantees of the 2005 Notes
and the 2002 Notes, (v) issued warrants to the 1999 Purchasers of the 2002 Notes
(the "2002 Warrants") to purchase 23,250,000 shares of the Common Stock at a
price of $0.56 per share, and (vi) issued warrants to the 1999 Purchasers of the
2005 Notes (the "2005 Warrants") to purchase 26,818,594 shares of Common Stock
at a price of $0.56 per share (the 2005 Warrants, together with the 2002
Warrants, being the "New Warrants"). The Company issued 7,618,594 of the 2005
Warrants in exchange for 7,618,594 warrants issued to the holders of the 1998
Notes. The New Warrants were issued in accordance with an Amended and Restated
Warrant Agreement executed among the Company and the 1999 Purchasers. As a
result of the issuance of the New Warrants, the 1999 Purchasers, collectively,
have the right to acquire 66.5% of the Company's outstanding Common Stock on a
fully diluted basis.
On November 30, 1999, the Company completed an additional $895,000 in
financing by issuing the remaining $895,000 of the 2002 Notes in accordance with
the 1999 Purchase Agreement to certain private investors, including Spicewood
Family Partnership of which Christopher M. Harte, one of the Company's
directors, is the general partner. In exchange for providing $100,000 in
financing to the Company, the Company issued Spicewood Family Partnership (i)
2002 Notes in the aggregate principal amount of $100,000, and (ii) 2002 Warrants
to purchase 394,402 shares of the Common Stock, all in accordance with the 1999
Purchase Agreement.
William R. Ziegler is a partner of the New York-based law firm of
Satterlee Stephens Burke & Burke, LLP, the successor in interest of Parson &
Brown, L.L.P. of which Mr. Ziegler was also a partner. During the fiscal years
ended December 31, 1998 and December 31, 1999, those firms billed the Company
$204,282.72 and $123,217.80 respectively, for services rendered.
On March 5, 1999, the Company and Jay D. Haber entered into a Severance
Agreement and Release terminating the Company's employment agreement with Mr.
Haber and confirming certain agreements and effecting mutual releases relating
to Mr. Haber's resignation as a director, officer and employee of the Company.
This agreement provided, among other things, that the Company pay Mr. Haber a
severance payment of $165,000 in twelve (12) equal monthly installments (which
amounts were paid in full in February 2000). In addition, effective February 2,
1999, stock options entitling Mr. Haber to purchase an aggregate of 240,000
shares of Common Stock at a price of $1.00 per share were deemed vested and
exercisable until June 2002.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS AND REPORTS ON FORM 8-K.
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)).
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<PAGE>
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)).
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)).
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
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<PAGE>
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)).
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)).
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<PAGE>
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)).
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)).
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<PAGE>
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.)
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
(b) Reports on Form 8-K filed during the last quarter of the period covered by
this Form 10-KSB.
(1) On October 18, 1999, the Company filed a Current Report on Form
8-K under (i) Item 1 concerning a change in control of the Company
pursuant to a restructuring of its $40,000,000 in 12% Senior
Subordinated Notes due April 2005 and the completion of up to
%6,000,000 in additional secured debt financing, and (ii) Item 5
concerning a refinancing of the Company's debt obligations to a
supplier and the election of Steven A. Webster as a non-executive
Chairman of the Executive Committee of the Company's Board of
Directors.
(2) On November 17, 1999, the Company filed a Current Report on Form
8-K under Item 5 thereof concerning the resignation of Antony T.
F. Lundy as a member of the Board of Directors of the Company.
29
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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: April 14, 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 April 14, 2000
Lynn A. Turner Officer
/s/Thomas J. Concannon Vice President and April 14, 2000
Thomas J. Concannon Chief Financial Officer
/s/William R. Ziegler Director and Chairman April 14, 2000
William R. Ziegler
/s/Steven A. Webster Director April 14, 2000
Steven A. Webster
30
<PAGE>
GEOKINETICS INC. AND
SUBSIDIARIES
ANNUAL CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 1999
<PAGE>
TABLE OF CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITOR'S REPORT..........................................F-2
CONSOLIDATED BALANCE SHEETS...........................................F-3
CONSOLIDATED STATEMENTS OF OPERATIONS.................................F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY.......................F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS.................................F-7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS........................F-8
Page F-1
<PAGE>
[FITTS, ROBERTS & CO., P.C. LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Geokinetics Inc. and Subsidiaries
Houston, Texas
We have audited the accompanying consolidated balance sheets of
Geokinetics Inc. and Subsidiaries as of December 31, 1999 and 1998, and
the related statements of operations, stockholders' equity, and cash flows
for the years 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 audits.
We conducted our audits 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 audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Geokinetics Inc. and
Subsidiaries as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
As described in Note 7 to the financial statements, a cash interest
payment of approximately $3.9 million is required on March 15, 2001.
/s/ FITTS, ROBERTS & CO., P.C.
Houston, Texas
April 7, 2000
Page F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash ............................................ $ 2,677,996 $ 2,705,581
Accounts receivable - trade, net ................ 2,010,381 6,831,765
Accounts receivable - officers and employees .... 19,930 39,493
Work in progress ................................ 1,225,799 514,167
Prepaid expenses ................................ 411,489 490,098
Accrued income tax refund ....................... 16,000 --
----------- -----------
Total Current Assets ........................ 6,361,595 10,581,104
----------- -----------
PROPERTY AND EQUIPMENT, net ......................... 11,877,927 27,375,512
----------- -----------
OTHER ASSETS
Deferred charges ................................ 44,534 419,077
Restricted investments .......................... 106,700 106,700
Deposits and other assets ....................... 78,097 98,493
Goodwill and other intangibles, net of $4,923,964
amortization in 1999, and $2,091,170 in
1998 and net of impairment reserve of
$2,143,635 in 1999 .......................... 25,781,443 30,957,183
----------- -----------
Total Other Assets .......................... 26,010,774 31,581,453
----------- -----------
TOTAL ASSETS ............................. $44,250,296 $69,538,069
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these Consolidated Financial Statements
Page F-3
<PAGE>
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt ............ $ 713,280 $ 4,648,110
Accounts payable - trade ........................ 1,182,144 4,822,802
Accrued income tax payable ...................... 146,327 935,000
Accrued liabilities ............................. 3,599,099 3,176,673
Customer deposits ............................... 15,000 35,000
Notes payable ................................... 398,109 2,151,405
Due to officers and stockholders ................ 410,268 251,137
Advances for lease bank ......................... 185,500 260,500
Site restoration costs payable .................. 6,418 6,418
Deferred revenue ................................ 74,188 --
------------ ------------
Total Current Liabilities ................... 6,730,333 16,287,045
------------ ------------
LONG-TERM LIABILITIES
Long-term debt, net of current maturities, net of
OID ............................................. 51,267,997 40,624,341
------------ ------------
OTHER LIABILITIES
Deferred income tax ............................. -- 222,045
Deferred gain ................................... 359,974 --
------------ ------------
Total Other Liabilities .................... 359,974 222,045
------------ ------------
TOTAL LIABILITIES ........................ 58,358,304 57,133,431
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, Series B, $10.00 par value,
100,000 shares authorized, none outstanding ..... -- --
Common stock, $.01 par value, 100,000,000 shares
authorized, 19,367,156 shares outstanding at
December 31, 1999 and 19,332,480 shares
outstanding at December 31, 1998 ........... 193,672 193,325
Additional paid-in capital ...................... 33,019,248 29,112,344
Retained deficit ................................ (47,320,928) (16,901,031)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ............... (14,108,008) 12,404,638
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ................... $ 44,250,296 $ 69,538,069
============ ============
</TABLE>
The accompanying notes are an integral part of
these Consolidated Financial Statements
Page F-4
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-----------------------------
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
REVENUES
Seismic revenue ........................................ $ 5,407,895 $ 23,369,624
Data processing revenues ............................... 8,786,231 9,257,550
------------ ------------
Total Revenues ..................................... 14,194,126 32,627,174
------------ ------------
EXPENSES
Seismic operating expenses ............................. 7,513,734 21,396,903
Data processing expenses ............................... 6,408,634 3,699,989
General and administrative ............................. 2,817,885 3,118,179
Depletion, depreciation and amortization ............... 9,907,917 7,128,594
Provision for disposition of subsidiary ................ 2,143,635 --
------------ ------------
Total Expenses ..................................... 28,791,805 35,343,665
------------ ------------
Loss from Continuing Operations before Income Tax (14,597,679) (2,716,491)
OTHER INCOME (EXPENSE)
Interest income ........................................ 128,698 205,834
Interest expense ....................................... (7,460,298) (4,937,872)
------------ ------------
Total Other Income (Expense) ....................... (7,331,600) (4,732,038)
------------ ------------
Loss Before Income Tax, Discontinued
Operations and Extraordinary Item ............... (21,929,279) (7,448,529)
INCOME TAX BENEFIT (EXPENSE)
Current income tax benefit ............................. 197,596 --
Deferred income tax benefit (expense) .................. 222,045 (2,236,078)
------------ ------------
Total income tax benefit (expense) ................. 419,641 (2,236,078)
------------ ------------
Loss before Discontinued Operations and
Extraordinary Item .............................. (21,509,638) (9,684,607)
LOSS FROM DISCONTINUED OPERATIONS
Loss from oil and gas operations ....................... (71,494) (283,995)
Loss on disposition of oil and gas operations .......... (563,375) --
------------ ------------
Total loss from discontinued operations ............ (634,869) (283,995)
------------ ------------
Loss before Extraordinary Item .................. (22,144,507) (9,968,602)
------------ ------------
EXTRAORDINARY ITEM
Loss on extinguishment of debt ......................... (8,275,390) --
------------ ------------
NET LOSS ................................................... $(30,419,897) $ (9,968,602)
============ ============
NET EARNINGS (LOSS) PER COMMON SHARE-BASIC
Loss from Continuing Operations ........................ $ (1.11) $ (.51)
Loss from Discontinued Operations ...................... (.03) (.02)
Extraordinary loss on extinguishment of debt ........... (.43) --
------------ ------------
Net Loss ....................................... $ (1.57) $ (.53)
============ ============
Weighted average common shares outstanding ........ 19,348,155 18,975,746
============ ============
</TABLE>
The accompanying notes are an integral part of
these Consolidated Financial Statements
Page F-5
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
--------------- --------------- -----------------------------------
PREFERRED SHARES COMMON SHARES
ISSUED ISSUED PREFERRED STOCK COMMON STOCK
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 ..................... 100,000 16,598,483 $ 1,000,000 $ 165,985
Net Loss .......................................
Conversion of Series B Preferred .............. (100,000) 1,333,333 (1,000,000) 13,333
Acquisition of Reliable Exploration Incorporated 375,000 3,750
Stock Issued to Vendor in Lieu of Cash ......... 20,000 200
Acquisition of Geophysical Development Corp. ... 1,000,000 10,000
Warrants Issued Associated with
Subordinated Debt ............................
Exercise of Warrants ........................... 5,664 57
--------------- --------------- --------------- ---------------
Balance at December 31, 1998 ................... -- 19,332,480 -- 193,325
Net Loss .......................................
Warrants Issued Associated with
Senior Secured
Debt
Notes due 2002 ............................
Notes due 2005 ............................
Exercise of Warrants ........................... 34,676 347
--------------- --------------- --------------- ---------------
Balance at December 31, 1999 ................... -- 19,367,156 $ -- $ 193,672
=============== =============== =============== ===============
<CAPTION>
STOCKHOLDERS' EQUITY
------------------------------------------------------
ADDITIONAL PAID RETAINED
IN CAPITAL DEFICIT TOTAL
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance at January 1, 1998 ..................... $ 14,017,394 $ (6,932,429) $ 8,250,950
Net Loss ....................................... (9,968,602) (9,968,602)
Conversion of Series B Preferred .............. 986,667 --
Acquisition of Reliable Exploration Incorporated 980,625 984,375
Stock Issued to Vendor in Lieu of Cash ......... 54,800 55,000
Acquisition of Geophysical Development Corp. ... 4,052,500 4,062,500
Warrants Issued Associated with
Subordinated Debt ............................ 9,020,415 9,020,415
Exercise of Warrants ........................... (57) --
--------------- --------------- ---------------
Balance at December 31, 1998 ................... 29,112,344 (16,901,031) 12,404,638
Net Loss ....................................... (30,419,897) (30,419,897)
Warrants Issued Associated with
Senior Secured
Debt
Notes due 2002 ............................ 1,860,000 1,860,000
Notes due 2005 ............................ 2,038,213 2,038,213
Exercise of Warrants ........................... 8,691 9,038
--------------- --------------- ---------------
Balance at December 31, 1999 ................... $ 33,019,248 $ (47,320,928) $ (14,108,008)
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of
these Consolidated Financial Statements
Page F-6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-----------------------------
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss...................................................... $(30,419,897) $ (9,968,602)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities
Depreciation and Amortization ................................ 9,916,418 7,144,854
(Gain) Loss on disposal of assets
Operating assets ........................................ 7,348 (600)
Oil and gas operations .................................. 563,375 --
Reserve for disposition of subsidiary ........................ 2,143,635 --
Extinguishment of debt, net .................................. 7,818,756 --
Current & deferred tax (benefit) expense ..................... (419,641) 2,236,078
Changes in operating assets and liabilities
Accounts receivable ..................................... 4,840,857 1,636,771
Work in progress ........................................ (711,632) 177,563
Prepaid expenses and other assets ....................... 62,609 (36,325)
Accounts payable ........................................ (3,640,658) 1,814,997
Accrued liabilities and deferred revenue ................ (152,928) 1,840,392
------------ ------------
Net cash provided (used) in operating activities .................. (9,991,758) 4,845,128
INVESTING ACTIVITIES
Purchase of Reliable Exploration Incorporated ................ -- (1,300,000)
Purchase of Geophysical Development
Corporation ....................................................... -- (26,000,000)
Proceeds from insurance ...................................... 21,504 --
Purchases of capital assets .................................. (945,083) (12,477,237)
Proceeds from sale of capital assets ......................... 9,999,337 --
Payments for deposits ........................................ -- (4,700)
------------ ------------
Net cash provided (used) in investing activities .................. 9,075,758 (39,781,937)
FINANCING ACTIVITIES
Proceeds from long-term debt ................................. 51,253,000 40,000,000
Proceeds from short-term debt ................................ 1,043,582 3,352,870
Proceeds from software financing ............................. 795,997 --
Principal paid on long-term debt ............................. (49,399,690) (4,760,475)
Principal paid on short-term debt ............................ (2,813,512) (3,213,491)
Proceeds from issuance of common stock ....................... 9,038 --
------------ ------------
Net cash provided from financing activities ....................... 888,415 35,378,904
Net increase (decrease) in cash ................................... (27,585) 442,095
Cash acquired in acquisitions ..................................... -- 50,805
Cash at beginning of period ....................................... 2,705,581 2,212,681
------------ ------------
Cash at end of period ............................................. $ 2,677,996 $ 2,705,581
============ ============
</TABLE>
SUPPLEMENTAL DISCLOSURE RELATED TO CASH FLOWS:
Income taxes of $935,000 were paid in 1999.
Interest expense of $5,851,653 and $3,894,627 was paid in 1999 and 1998.
Change in accounts receivable is net of a bad debt of $2.8 million in 1998.
The accompanying notes are an integral part of
these Consolidated Financial Statements
Page F-7
<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 three 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
amounts reported in these financial statements and accompanying
notes. The more significant areas requiring the use of management
estimates relate to the percentage of work completed in determining
work in process, evaluating the outcome of uncertainties involving
claims against or on behalf of the Company, useful lives for
depreciation and amortization and cash flow projections used in the
determination of asset impairment. Actual results could differ
materially from these estimates.
Consolidated Financial Statements
Page F-8
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts
receivable, accounts payable and notes payable. The carrying amounts
reported in the consolidated balance sheets for cash, accounts
receivable and accounts payable approximate fair values due to the
short maturity of those instruments. The fair value of debt was
determined based upon the present value of expected cash flows
considering expected maturities and using interest rates currently
available to the Company for long-term borrowings with similar
terms. The carrying amount of debt reported in the consolidated
balance sheets approximates fair value.
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.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, the Company records impairment losses on long-lived
assets and related intangibles and goodwill related to those assets
that are used in operations, when events and circumstances indicate
that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying
amounts of those assets. The Company has significant investments in
seismic acquisition equipment and in the goodwill of subsidiaries
acquired, as described in Note 10. The downturn in the seismic
service industry caused the Company to review the carrying value of
these assets in accordance with FASB 121. The Company's estimate of
undiscounted cash flows currently indicates that such carrying
amounts are expected to be recovered. However, actual results could
vary materially from these estimates should the current downturn in
the industry continue.
Consolidated Financial Statements
Page F-9
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill represents the aggregate excess cost of companies acquired
over the fair value of their net assets at dates of acquisition.
Goodwill is amortized using the straight-line method over a period
of 40 years for subsidiaries providing seismic acquisition services
and 10 years for subsidiaries providing seismic data processing
services. In accordance with APB 17, Intangible Assets, the Company
continues to evaluate the amortization period to determine whether
events or circumstances warrant revised amortization periods.
Additionally, the Company considers whether the carrying value of
such assets should be reduced based on the future benefits of its
intangible assets. Goodwill amortization expense totaled $2,927,293
and $2,005,196 during 1999 and 1998.
DEBT ISSUANCE COSTS
The value of detachable warrants issued in relation to debt
obligations is reflected as discount which is netted against the
face amount of the obligation and is amortized to expense over the
term of the obligation. Discount amortization expense totaled
$603,700 and $482,624 in 1999 and 1998, respectively.
PRE-OPERATING COSTS
It is the Company's policy to expense non-recoverable pre-operating
costs as they are incurred.
RESTRICTED INVESTMENTS AND SITE RESTORATION COSTS
Restricted investments represent investments carried at cost, which
approximates market. Such investments represent amounts of
certificates of deposit or other deposit accounts required by
various state and federal agencies in connection with the
performance of field operations by the Company and its subsidiaries.
The amount of restricted investments was $106,700 at December 31,
1999 and 1998.
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, 1999 and 1998.
INCOME TAX
The Company follows Statement of Financial Accounting Standards No.
109, 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
Consolidated Financial Statements
Page F-10
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
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.
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.
Consolidated Financial Statements
Page F-11
<PAGE>
NOTE 2. FINANCIAL RESULTS, LIQUIDITY AND BASIS OF PRESENTATION
These financial statements are prepared assuming that the Company
will continue as a going concern. They do not include any
adjustments relating to the recoverability and classification of
recorded assets or the amounts and classification of liabilities
that would be necessary in the event the Company cannot continue in
existence.
During 1999, the seismic service industry experienced an
unprecedented downturn which severely constrained the Company's
working capital position. During this period, management developed a
financial and operational plan to carry the Company's operations
through the year 2000. One component of this plan included a
restructuring of the Company's long term debt as further outlined in
Note 11. The restructuring provided the Company with additional
funding, in the amount of $5,895,000, and the option, during 2000,
to make interest payments due on its 13.5% Senior Secured Notes
either in cash or by issuing additional notes. The plan also
included disposing of the Company's oil and gas operations as well
as one of its seismic acquisition subsidiaries, as further discussed
in Notes 18 and 19.
As a result of the above outlined conditions and plan
implementation, the Company incurred a loss of approximately $30.4
million during 1999 in addition to a loss of approximately $10
million incurred in 1998, leaving the Company with a deficit equity
position of approximately $14.1 million at December 31, 1999.
Management believes that this plan, along with the deferral of
certain accrued expenses, will provide sufficient liquidity to
continue operations through 2000. As noted above, the Company has
the option to avoid making cash interest payments on its 13.5%
Senior Secured Notes during 2000. As presently structured, the
Company will be required to make a cash interest payment of
approximately $3.9 million on March 15, 2001. Under current
conditions, continued operations by the Company through this payment
will be dependent upon a continued forbearance by the holders of the
Company's 13.5% Senior Secured Notes.
Consolidated Financial Statements
Page F-12
<PAGE>
NOTE 3. PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
December 31, December 31,
1999 1998
----------- -----------
Field operating equipment ...................... $17,213,247 $32,401,674
Proved oil and gas properties .................. -- 919,285
Vehicles ....................................... 735,994 867,506
Buildings and improvements ..................... 287,429 279,893
Software ....................................... 977,913 167,830
Data processing equipment ...................... 3,219,272 3,106,399
Furniture and equipment ........................ 228,050 236,932
----------- -----------
22,661,905 37,979,519
Less accumulated depletion, depreciation and ... 10,807,428 10,627,457
----------- -----------
Amortization ........................ 11,854,477 27,352,062
Land ........................................... 23,450 23,450
----------- -----------
Net Property and Equipment ......... $11,877,927 $27,375,512
=========== ===========
NOTE 4. ACCRUED LIABILITIES
A summary of accrued liabilities follows:
December 31, December 31,
1999 1998
----------- -----------
Sales tax payable .............................. $ 189,377 $ 681,505
Royalties payable .............................. -- 282,796
Accrued payroll ................................ 647,406 816,488
Accrued interest payable ....................... 1,769,687 1,178,440
Payroll taxes payable .......................... -- 9,056
Accrued operating expense ...................... 992,629 208,388
----------- -----------
$ 3,599,099 $ 3,176,673
=========== ===========
Consolidated Financial Statements
Page F-13
<PAGE>
NOTE 5. NOTES PAYABLE
A summary of notes payable follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Note representing an amount due under
the terms of an agreement for payment of
funds in settlement of a claim, dated
May 7, 1997, with no interest $ 158,524 $ 158,524
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% 237,037 315,908
Notes representing refinancing
arrangements with certain suppliers of
an operating subsidiary for accounts
payable invoices outstanding beyond
normal industry payment terms 30,191
Note 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
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. Obligation was
satisfied on October 1, 1999 1,621,782
Notes to financial institutions for the
purchase of Company vehicles used by
marketing and sales personnel secured by
vehicles, principal and interest payable
monthly. 2,548
------------ ------------
$ 398,109 $ 2,151,405
============ ============
</TABLE>
Consolidated Financial Statements
Page F-14
<PAGE>
NOTE 6. LEASE BANK
The Company had previously utilized a revolving credit facility to
provide funds to acquire, package and sell oil and gas properties.
Notes issued under this facility 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. The Notes matured on
December 31, 1999. The outstanding balance on the advances for Lease
Bank was $185,500 at December 31, 1999 and $260,500 at December 31,
1998. The Company intends to continue to meet its quarterly interest
obligation of prime plus 4%.
NOTE 7. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
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, 1999 were $64,104 including
principal and interest at 9.75%),
secured by first security interest in a
subsidiary's 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 $ 3,616,758 $ 4,073,573
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. Obligation was satisfied on
October 1, 1999. (See Note 11) $ 2,127,425
</TABLE>
Consolidated Financial Statements
Page F-15
<PAGE>
NOTE 7. LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Note originally dated June 9, 1998,
extended on September 2, 1999, payable
to a financial institution in 7 monthly
installments of principal in the amount
of $53,544 plus accrued interest at
prime beginning October 2, 1999 with a
final payment of the unpaid principal
balance plus accrued interest due on May
2, 2000. The Note is secured by
equipment, inventory, accounts
receivable, fixtures and a guaranty of
the Company $ 268,451 $ 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 certain equipment, accounts
receivable and a guaranty of the
Company. The subsidiary company with
this obligation was sold on February 23,
2000 and the Company's guaranty was
released. (See Note 19) $ 501,356 $ 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 a guaranty of the
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. Obligation was satisfied on
October 1, 1999. (See Note 11) $ 6,174,430
</TABLE>
Consolidated Financial Statements
Page F-16
<PAGE>
NOTE 7. LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
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 guarantees 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 unamortized
original issue discount of $8,537,791.
Obligation was satisfied on October 1,
1999. (See Note 11) $ 31,462,209
13.5% Senior Secured Notes dated October
1, 1999 in the aggregate principal
amount of $45,358,000, to certain
investors due and payable on September
15, 2005, and interest of 13.5% per
annum is payable on each March 15 and
September 15, commencing March 15, 2000.
The Company granted security interests
covering substantially all of the
Company's assets as security for the
Notes and caused certain of its
wholly-owned subsidiaries to execute
guarantees of the Notes. The Company
issued to the investors warrants to
purchase 26,818,594 shares of the
Company's Common Stock at a price of
$0.56 per share. The Company issued
7,618,594 of these warrants in exchange
for 7,618,594 warrants previously issued
to the investors. For financial
statement purposes, the notes are
presented net of unamortized discount of
$1,953,289 $ 43,404,711
</TABLE>
Consolidated Financial Statements
Page F-17
<PAGE>
NOTE 7. LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
13.5% Senior Secured Notes dated October
1 and November 30, 1999 in the aggregate
principal amount of $5,895,000, to
certain investors due and payable on
September 15, 2002 and interest of 13.5%
per annum is payable on each March 15,
and September 15, commencing March 15,
2000. The Company granted security
interests covering substantially all of
the Company's assets as security for the
Notes and caused certain of its
wholly-owned subsidiaries to execute
guarantees of the Notes. The Company
issued to the investors warrants to
purchase 23,250,000 shares of the
Company's Common Stock at a price of
$0.56 per share. For financial statement
purposes, the Notes are presented net of
unamortized original issue discount of
$1,704,999 $ 4,190,001
------------ ------------
$ 51,981,277 $ 45,272,451
Less Current Maturities 713,280 4,648,110
------------ ------------
$ 51,267,997 $ 40,624,341
============ ============
A summary of long-term debt principal maturities follows:
FOR THE YEARS ENDING DECEMBER 31, AMOUNT
--------------------------------- ------------
2000 $713,280
2001 486,914
2002 4,726,569
2003 591,286
2004 651,520
Thereafter 44,811,708
------------
$ 51,981,277
============
</TABLE>
Consolidated Financial Statements
Page F-18
<PAGE>
NOTE 7. LONG-TERM DEBT (CONTINUED)
The 13.5% Senior Secured Notes due 2002 and 2005, as outlined above,
have interest payments due and payable on each March 15 and
September 15, commencing March 15, 2000. Interest payments of
$3,151,142 and $3,672,280 are due on March 15, 2000 and September
15, 2000 respectively. The Company has the option of making these
interest payments in cash or by the issuance of additional notes
(payment in kind). The interest payment of $3,920,158 due March 15,
2001 currently calls for a cash payment.
NOTE 8. INCOME TAX
The income tax benefit (expense) charged to continuing operations
for the years ended December 31, 1999 and 1998 was as follows:
1999 1998
----------- -----------
Current:
U.S. Federal ............................. $ 197,596 $ 1,940,000
State and Local .......................... -- --
Foreign .................................. -- --
----------- -----------
Total Current ......................... 197,596 1,940,000
----------- -----------
Deferred:
U.S. Federal ............................. 222,045 429,376
State and Local .......................... -- --
Foreign .................................. -- --
----------- -----------
Total Deferred ........................ 222,045 429,376
----------- -----------
Other:
Adjustment to valuation allowance ........ -- (4,605,454)
----------- -----------
Total ................................. $ 419,641 $(2,236,078)
=========== ===========
Consolidated Financial Statements
Page F-19
<PAGE>
NOTE 8. INCOME TAX (CONTINUED)
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,
1999 and 1998 due to the following:
1999 1998
------------ ------------
Computed "expected" tax benefit .............. $ 10,485,445 $ 3,292,765
Non deductible expenses:
Goodwill .............................. (995,280) (692,405)
High yield interest, current .......... (2,063,000)
Adjust prior year high yield interest . (340,000)
Amortization and write off of OID ..... (2,902,850) (164,092)
Non deductible capital loss ............. (920,380)
Adjustment of prior year subsidiary
tax liabilities ....................... 419,641
Establish deferred tax for depreciation . (1,438,967)
Other adjustments ....................... (238,381) (66,892)
Change in valuation allowance ........... (1,586,587) (4,605,454)
------------ ------------
Income tax benefit (expense) ............ $ 419,641 $ (2,236,078)
============ ============
Deferred tax assets at December 31, 1999 and 1998 are comprised
primarily of net operating loss carryforwards. Deferred tax
liabilities consist primarily of the difference between book and tax
basis depreciation. A valuation allowance has been provided for net
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. Following is a summary of deferred tax
assets and liabilities.
1999 1998
----------- -----------
Deferred tax assets:
Loss carryforwards ................. $ 8,514,485 $ 5,375,400
Tax credits ........................ 132,238 245,769
----------- -----------
8,646,723 5,621,169
Deferred tax liabilities
Depreciation ...................... (1,438,967) (222,045)
----------- -----------
Net deferred tax assets ........... $ 7,207,756 $ 5,399,124
=========== ===========
Valuation allowance .................... $ 7,207,756 $ 5,621,169
=========== ===========
At December 31, 1999, the Company had net operating loss
carryforwards of $25,042,604 and tax credit carryforwards of
$132,238 that expire in 2000 through 2014.
Consolidated Financial Statements
Page F-20
<PAGE>
NOTE 8. INCOME TAX (CONTINUED)
The Company evaluated the deferred tax benefit of $2,236,078 which
had been reflected on its balance sheet in accordance with the
provisions of FASB 109. Because of the 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 believed 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
resulted in a 1998 income tax expense of $2,236,078. The computed
tax benefit at December 31, 1999 was $7,207,756 and at December 31,
1998 was $5,621,169.
The amounts and expiration dates of the carryforwards are as
follows:
NET OPERATING TAX CREDIT
EXPIRATION DATE LOSS AMOUNT AMOUNT
--------------- ----------- -----------
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
2014 9,232,499
----------- -----------
Totals $25,042,604 $ 132,238
=========== ===========
NOTE 9. RELATED PARTY TRANSACTIONS
The father of a former Vice-President of the Company is a
participant in the Company's Lease Bank with a note balance of
$35,500 at December 31, 1999. 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
Consolidated Financial Statements
Page F-21
<PAGE>
NOTE 9. RELATED PARTY TRANSACTIONS (CONTINUED)
entered into a consulting agreement with a director on July 18,
1997, 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, 1999 and
1998, respectively, the Company owed the director $343,207 and
$203,207 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. 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 with an investment group,
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 $62,500 and $37,500 as of December 31, 1999 and
1998, 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 connection with these activities
the Company incurred legal costs from the director's law firm during
the years ended December 31, 1999 and 1998, respectively of $123,218
and $204,283.
NOTE 10. 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
Consolidated Financial Statements
Page F-22
<PAGE>
NOTE 10. ACQUISITION OF WHOLLY-OWNED SUBSIDIARIES (CONTINUED)
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
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, 1999 was $137,716.
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 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, 1999 was
$4,660,301.
Consolidated Financial Statements
Page F-23
<PAGE>
NOTE 10. ACQUISITION OF WHOLLY-OWNED SUBSIDIARIES (CONTINUED)
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 acquisition of GDC had
occurred at the beginning of 1998. 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 year presented, nor is it necessarily
indicative of future results. Pro forma information is not provided
for 1999 because twelve months of financial results for all
subsidiaries are included in the Consolidated Financial Statements
for 1999.
1998
------------
Revenues ................................ $ 39,051,810
Net Income (Loss) ....................... (9,571,427)
Earnings (Loss) per share ............... (0.50)
NOTE 11. PRIVATE PLACEMENT OFFERINGS & RESTRUCTURING OF DEBT
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 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 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 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.
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 an additional $4,000,000 from the Purchasers,
the holders of the Prior Notes, and $1,000,000 from other sources.
On November 30, 1999, the Company received an additional $895,000
from other investors. 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 $5,895,000 of its 13.5% Senior Secured
Notes due 2002 (the 2002 Notes) for the additional funding received
on October 1, 1999 and November
Consolidated Financial Statements
Page F-24
<PAGE>
NOTE 11. PRIVATE PLACEMENT OFFERINGS & RESTRUCTURING OF DEBT (CONTINUED)
30, 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 Company issued 7,618,594 of
these warrants in exchange for 7,618,594 warrants previously issued
to the Purchasers. 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 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.
As a consequence of the extinguishment of the Prior Notes, the
original issue discount and other loan costs associated with the
Prior Notes have been expensed and resulted in an extraordinary loss
of $8,275,390.
Concurrently with the transactions contemplated by the Purchase
Agreement, the Company completed a restructuring of its debt
obligations to the principal equipment supplier for the Company's
seismic acquisition operations through a sale leaseback transaction.
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, 1999, totaled 3,564,001.
Consolidated Financial Statements
Page F-25
<PAGE>
NOTE 12. OUTSTANDING OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes information about stock option
transactions:
1999 1998
------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------- ---------- ---------- ----------
Outstanding at
Beginning of year ...... 5,307,000 $ 1.69 2,882,500 $ .96
Awards:
Granted ............. 100,000 .50 2,707,500 2.61
Exercised ........... -- --
Forfeited ........... (1,291,001) 1.89 (283,000) 3.18
---------- ----------
Outstanding at
December 31 ............ 4,115,999 $ 1.59 5,307,000 $ 1.69
---------- ----------
Exercisable at
December 31 ............ 2,538,999 $ 1.36 1,126,653 $ .95
---------- ----------
The following table summarizes information about stock options
outstanding at December 31, 1999:
WEIGHTED WEIGHTED
RANGE OF NUMBER OF AVERAGE NUMBER OF AVERAGE
EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING PRICE EXERCISABLE PRICE
----------- ----------- -------- ----------- --------
$0-$1 2,490,000 $0.78 1,740,000 $0.81
$1-$2 152,500 1.63 152,500 1.63
$2-$3 487,498 2.41 309,165 2.35
$3-$4 779,335 3.01 290,668 3.01
$4-$5 206,666 4.07 46,666 4.09
----------- -----------
4,115,999 2,538,999
=========== ===========
Consolidated Financial Statements
Page F-26
<PAGE>
NOTE 12. OUTSTANDING OPTIONS AND WARRANTS (CONTINUED)
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 1999 is
$0.38. 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 5.1% in 1999 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.
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:
1999 1998
------------ -----------
Net Loss:
As reported $(30,419,897) $(9,968,602)
Pro Forma (30,787,776) (10,332,681)
Basic Earnings per share:
As reported $(1.57) $(.53)
Pro Forma (1.59) (.54)
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.
Consolidated Financial Statements
Page F-27
<PAGE>
NOTE 12. OUTSTANDING OPTIONS AND WARRANTS (CONTINUED)
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, 1998 ................ 11,943,496 $0.26-2.86
Warrants issued ................................. 42,490,000 0.56-3.30
Warrants exercised, surrendered or called ....... (415,820) 0.26-2.26
Outstanding at December 31, 1999 ................ 54,017,676 0.26-3.30
SHADOW WARRANTS
Outstanding at December 31, 1999 ................ 6,834,423 $ 0.20
Exercisable at December 31, 1999 ................ 6,176,704 $ 0.20
NOTE 13. COMMITMENTS
OPERATING LEASES
In October of 1999, the Company consolidated all of its office
operations to what formerly had been its geophysical data processing
center, located at 8401 Westheimer, Houston, Texas. Prior to this
consolidation, the Company's corporate headquarters and seismic
acquisition operations had been located at 5555 San Felipe, Houston,
Texas. The Company leased office space under two leases which were
to expire on June 30, 2003. The Company was able to exercise an
option to cancel one of these leases on November 30, 1999 and has
successfully sub-leased a significant portion of the remaining
lease. The Company's yearly rent on the remaining lease totals
$54,320 net of sub-lease income of approximately $60,000.
The Company currently leases office space for its headquarters and
subsidiary operations under a lease which expires April 2001. The
current annual base rent for this lease is $243,156.
The Company's data processing subsidiary, Geophysical Development
Corporation (GDC), entered into a lease agreement for computer
hardware and software for a thirty-three month period beginning
January 1, 1999. Lease payments of $650,580 are due in 2000 and
$152,736 in 2001. GDC has entered into several additional leases for
computer hardware and software. The leases vary in length from 12 to
36 months. Annual lease payments total $120,848.
Consolidated Financial Statements
Page F-28
<PAGE>
NOTE 13. COMMITMENTS (CONTINUED)
The Company's seismic acquisition subsidiary leased vehicles for use
in field operations under various forty-eight month leases which
expire beginning in the year 2001. Rental expense under these leases
amounted to $226,571 for the year ended December 31, 1999.
The Company entered into a lease agreement for seismic acquisition
equipment for a thirty-six month term beginning October 1, 1999.
Lease payments of $2,100,000 are due in 2000 and $3,360,000 in 2001.
Rental expense under the leases recorded in the consolidated
financial statements amounted to $2,142,759 and $727,690 for the
years ended December 31, 1999 and 1998. 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
--------------------------------- -----------
2000 $ 3,391,823
2001 3,977,878
2002 2,727,361
2003 27,160
2004 -
$10,124,222
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,
1999 1998
------------ -------------
Customer A - $ 7,971,545
============ =============
Customer B - $ 5,336,732
============ =============
Customer C $ 1,642,000 -
============ =============
Customer D $ 2,073,262 -
============ =============
Consolidated Financial Statements
Page F-29
<PAGE>
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 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. 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, 1999 December 31, 1998
-------------------------- --------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
----------- ----------- ----------- -----------
Cash ............... $ 2,677,996 $ 2,677,996 $ 2,705,581 $ 2,705,581
Accounts receivable 2,010,381 2,010,381 6,831,765 6,831,765
Accounts payable ... 1,182,144 1,182,144 4,822,802 4,822,802
Indebtedness ....... 52,975,154 52,975,154 47,935,493 47,935,493
Consolidated Financial Statements
Page F-30
<PAGE>
NOTE 17. SUBSEQUENT EVENTS
During 1998, a customer of a subsidiary of the Company defaulted on
payment of $2.8 million due the Company for seismic data acquisition
services performed by its subsidiary. The Company obtained a
judgment against the customer in the amount of the outstanding
obligation plus interest and attorney's fees. As a result of the
customers' subsequent bankruptcy proceedings, the Company determined
that the obligation was not collectible and charged the amount
against earnings during the fourth quarter of 1998. On February 17,
2000, the Company entered into a final compromise and settlement of
any and all claims it had against the customer and any involved
party. As part of the settlement agreement, the Company received an
ownership interest in approximately 200 miles of previously recorded
seismic data located in the Atchafalaya Basin of Louisiana. No value
has been assigned to the data and income will be recognized upon any
subsequent sale.
NOTE 18. DISCONTINUED OPERATIONS
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 (Halex), a Texas Corporation
owned by a former officer of the Company, 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
wholly-owned subsidiary of the Company (Geokinetics Production).
Immediately prior to the sale of HOC's stock to Halex, Geokinetics
Production conveyed to HOC various interests in certain oil and gas
properties as well as certain liabilities. This transaction
completes the discontinuance of the Company's oil and gas
operations. The Company recognized a charge to earnings (before and
after tax) during 1999 in the amount of $563,375 as a result of the
transaction. This sale represented all of the Company's oil and gas
exploration and production activities and has been accounted for as
a discontinued operation. Accordingly, operating results are
segregated and reported as discontinued operations in the
accompanying consolidated statements of operations and cash flows.
Information related to the discontinued oil and gas operations of
HOC and Geokinetics Production are as follows:
1999 1998
--------- ---------
Revenue from oil and gas operations .............. $ 219,096 $ 417,097
Operating and other expenses ..................... (333,875) (702,707)
Other income ..................................... 43,284 1,615
--------- ---------
Loss before and after income taxes .... $ (71,495) $(283,995)
========= =========
Consolidated Financial Statements
Page F-31
<PAGE>
NOTE 18. DISCONTINUED OPERATIONS (CONTINUED)
The assets and the liabilities of the discontinued operations
included in the accompanying consolidated balance sheet at December
31, 1998 are as follows:
ASSETS
Cash ................................................. $ 86,810
Accounts receivable .................................. 319,134
Prepaid expenses ..................................... 9,013
-----------
Total Current Assets ............................ 414,957
Restricted cash ...................................... 21,700
Property and equipment (net) ......................... 698,775
-----------
Total Assets .................................... 1,135,432
LIABILITIES
Accounts payable ..................................... 237,797
Accrued expenses ..................................... 316,682
Notes payable (i) .................................... 285,500
Advances from affiliates (net) ....................... 2,183,517
-----------
Total Liabilities .............................. 3,023,496
-----------
Liabilities in excess of assets ................ $(1,888,064)
===========
(i) Notes payable of $100,000 were assumed
by the Purchaser.
NOTE 19. IMPAIRMENT RESERVE - DISPOSAL OF SUBSIDIARY
During 1999, a decision was made that it was in the best interests
of the Company to dispose of its wholly-owned subsidiary, Reliable
Exploration, Incorporated (Reliable). On February 23, 2000, the
Company sold all of the outstanding capital stock of Reliable to
RNS, LLC, a Montana limited liability company (RNS). RNS is
wholly-owned by Allen Rein, Kim Nordberg and Scott Schmitt (the
Former Shareholders), the persons from whom the Company had
previously acquired such Reliable stock in January, 1998. The
transaction (the Reliable Sale) was completed pursuant to the terms
of a Stock Purchase Agreement, by and among the Company, RNS and the
Former Shareholders.
The consideration received by the Company in the Reliable Sale
consisted of (i) a $250,000 promissory note, payable in 36 monthly
installments and bearing interest at a fixed rate of 8% per annum
and (ii) 375,000 shares of the Company's Common Stock, $0.01 par
value per share. In addition, as a condition to the closing of the
Reliable Sale, the Company obtained a release of its guaranty of
Reliable's indebtedness, in the amount of $501,356, to a former
shareholder of Reliable.
Consolidated Financial Statements
Page F-32
<PAGE>
NOTE 19. IMPAIRMENT RESERVE - DISPOSAL OF SUBSIDIARY (CONTINUED)
An impairment reserve of $2,143,635 was recorded during 1999 to
provide for the loss on the disposal of Reliable. The impairment
reserve is reflected as a reduction of goodwill. Following is a
summary of the results of operations and assets and liabilities of
Reliable included in the accompanying consolidated balance sheet and
statements of operations as of December 31, 1999 and 1998 and for
the years then ended.
1999 1998
----------- -----------
Revenue from seismic operations ................ $ 1,662,119 $ 4,900,755
Operating and other expenses ................... (2,281,980) (5,130,331)
Other income (expense) ......................... 2,986 13,612
----------- -----------
(Loss) before income taxes ......... (616,875) (215,964)
Deferred income tax benefit ........ 488,542 --
----------- -----------
Net (Loss) .................... $ (128,333) $ (215,964)
=========== ===========
ASSETS
Cash ...................................... $ (10,859) $ 57,279
Accounts receivable-trade ................. 449,818 270,517
Accounts receivable-officers and employees 8,145 8,230
Work-in-process ........................... -- 152,629
Prepaid expenses .......................... 37,142 43,069
----------- -----------
Total current assets ................. 484,246 531,724
Restricted cash ........................... 35,000 35,000
Property and equipment (net) .............. 147,831 225,565
Deposits and other assets ................. 42,780 52,423
Deferred tax assets ....................... -- (68,901)
----------- -----------
Total Assets ......................... 709,857 775,811
----------- -----------
LIABILITIES
Accounts payable .......................... 203,965 197,053
Current portion of long-term debt ......... -- 310,732
Accrued expenses and other liabilities .... 329,903 506,626
Notes payable ............................. -- 42,021
Long-term debt ............................ 501,356 190,623
Deferred income tax ....................... -- 222,045
Advances from affiliates (net) ............ -- 291,375
----------- -----------
Total Liabilities .................... 1,035,224 1,760,475
----------- -----------
LIABILITIES IN EXCESS OF ASSETS . $ (325,367) $ (984,664)
=========== ===========
Consolidated Financial Statements
Page F-33
<PAGE>
NOTE 20. 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 oil and gas exploration and
production segment was sold in July of 1999 and has been reflected
as a discontinued operation as more fully described in Note 18. 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.
Consolidated Financial Statements
Page F-34
<PAGE>
NOTE 20. SEGMENT DISCLOSURES AND RELATED INFORMATION (CONTINUED)
The following table sets forth the Company's significant information
from reportable segments (See Note 18 for disposal of the oil and
gas production segment):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------------
SEISMIC DATA OIL & GAS
ACQUISITION PROCESSING PRODUCTION TOTALS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues from external
customers .......... $ 5,407,895 $ 8,786,231 $ 219,096 $14,413,222
Segment earnings before
interest, taxes,
depreciation and
amortization ....... (2,821,076) 1,567,598 (68,740) (1,322,218)
Interest and Other
Revenue ............ 21,618 1,990 43,284 66,892
Interest Expense ..... 1,229,869 162,277 37,537 1,429,683
Depreciation and
Amortization ....... 5,495,494 637,454 8,501 6,141,449
Income Tax Benefit ... 197,596 -- -- 197,596
Segment Profit (Loss) (9,327,225) 769,857 (71,494) (8,628,862)
Segment Assets ....... 22,389,476 15,964,508 -- 38,353,984
Expenditures for
Segment Assets ..... 18,151 922,348 -- 940,499
</TABLE>
Consolidated Financial Statements
Page F-35
<PAGE>
NOTE 20. SEGMENT DISCLOSURES AND RELATED INFORMATION (CONTINUED)
The following table sets forth the Company's significant information
from reportable segments (See Note 18 for disposal of the oil and
gas production segment):
<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>
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, 1999:
Customer A ...................... $ 820,506 $1,252,756 --
Customer B ...................... -- 1,642,600 --
Customer C ...................... 769,500 -- --
December 31, 1998:
Customer A ...................... $7,971,545 -- --
Customer B ...................... 5,336,732 -- --
Customer C ...................... -- $2,375.200 --
Consolidated Financial Statements
Page F-36
<PAGE>
NOTE 20. SEGMENT DISCLOSURES AND RELATED INFORMATION (CONTINUED)
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 1999 and
1998.
RECONCILIATIONS OF REPORTABLE SEGMENT REVENUES, PROFIT
OR LOSS AND ASSETS
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
REVENUES
Total revenues for reportable segments .................. $ 14,413,222 $ 33,044,271
Revenue included with discontinued oil and gas segment .. (219,096) (417,097)
------------ ------------
Total consolidated revenues ........................ $ 14,194,126 $ 32,627,174
============ ============
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND
AMORTIZATION, DISCONTINUED OPERATIONS AND
EXTRAORDINARY ITEM
Total for reportable segments ........................... $ (1,322,218) $ 5,644,866
Loss from oil and gas operations ........................ 68,740 222,698
Provision for disposition of subsidiary ................. (2,143,635)
Unallocated corporate expense ........................... (1,292,649) (1,455,461)
------------ ------------
Total consolidated earnings before interest, taxes, $ (4,689,762) $ 4,412,103
depreciation and amortization
============ ============
PROFIT OR LOSS
Total profit or loss for reportable segments ............ $ (8,628,862) $ (734,960)
Unallocated amounts:
Corporate expenses net of interest earnings ........... (1,187,557) (1,289,233)
Interest expense on acquisitions indebtedness ......... (6,068,153) (3,217,651)
Depreciation and amortization of goodwill ............. (3,774,969) (2,490,680)
Loss on disposition of oil and gas segment .............. (563,375)
Loss on extinguishment of debt .......................... (8,275,391)
Provision for disposition of subsidiary ................. (2,143,635)
Deferred tax benefit (cost) .......................... 222,045 (2,236,078)
------------ ------------
Total consolidated loss .................... $(30,419,897) $ (9,968,602)
============ ============
INTEREST REVENUE
Total revenue expense for reportable segments ........... $ 66,892 $ 41,221
Revenue included with discontinued oil and gas segment .. (43,284) (1,615)
Unallocated amounts:
Corporate consolidated cash management ......... 105,090 166,228
------------ ------------
Total consolidated interest revenue ............ $ 128,698 $ 205,834
============ ============
</TABLE>
Consolidated Financial Statements
Page F-37
<PAGE>
NOTE 20. SEGMENT DISCLOSURES AND RELATED INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
INTEREST EXPENSE
Total interest expense for reportable segments ............ $ 1,429,683 $ 1,766,873
Interest included with discontinued oil and gas segment ... (37,537) (46,652)
Unallocated amounts:
Corporate interest expense ........................... 501 17,651
Interest expense on acquisitions indebtedness ....... 6,067,651 3,200,000
------------ ------------
Total consolidated interest expense ............ $ 7,460,298 $ 4,937,872
============ ============
DEPRECIATION AND AMORTIZATION
Total depreciation and amortization for reportable segments $ 6,141,449 $ 4,654,174
Depreciation included with discontinued oil and gas segment (8,501) (16,260)
Unallocated amounts:
Depreciation and amortization ........................ 847,502 485,302
Amortization of goodwill ............................. 2,927,467 2,005,378
------------ ------------
Total consolidated depreciation and amortization $ 9,907,917 $ 7,128,594
============ ============
ASSETS
Total assets for reportable segments ..................... $ 38,353,984 $ 48,217,929
Unallocated corporate assets ............................. 2,736,228 2,765,468
Elimination of net receivable from corporate ............. (22,621,359) (12,402,511)
Impairment reserve for disposal of subsidiary ............ (2,143,635)
Goodwill not allocated to segments ....................... 27,925,078 30,957,183
------------ ------------
Total consolidated assets ........................ $ 44,250,296 $ 69,538,069
============ ============
</TABLE>
<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
Consolidated Financial Statements
Page F-38
<PAGE>
NOTE 21. YEAR 2000 (CONTINUED)
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.
As of March 30, 2000, the Company has not experienced any materially
important business disruptions or system failures as a result of
year 2000 issues nor is it aware of any year 2000 issues that have
impacted its suppliers or other significant third parties to an
extent significant to the Company. However, year 2000 compliance has
many elements and potential consequences, some of which may not be
foreseeable or may be realized in future periods. Consequently,
there can be no assurance that unforeseen circumstances may not
arise, or that the Company will not in the future identify equipment
or systems which are not year 2000 compliant.
Consolidated Financial Statements
Page F-39
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,677,996
<SECURITIES> 0
<RECEIVABLES> 2,010,381
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,361,595
<PP&E> 11,877,927
<DEPRECIATION> 0
<TOTAL-ASSETS> 44,250,296
<CURRENT-LIABILITIES> 6,730,333
<BONDS> 0
0
0
<COMMON> 193,672
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 44,250,296
<SALES> 14,194,126
<TOTAL-REVENUES> 14,194,126
<CGS> 0
<TOTAL-COSTS> 28,791,805
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,331,600
<INCOME-PRETAX> (21,929,279)
<INCOME-TAX> (419,641)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,419,897)
<EPS-BASIC> (1.57)
<EPS-DILUTED> 0
</TABLE>
