<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 1998
REGISTRATION NO. 333-43219
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
GRANT GEOPHYSICAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 1382 76-0548468
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>
------------------------
16850 PARK ROW
HOUSTON, TEXAS 77084
(281) 398-9503
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
<TABLE>
<S> <C>
LARRY E. LENIG, JR. JONATHAN D. POLLOCK
PRESIDENT AND CHIEF EXECUTIVE OFFICER ELLIOTT ASSOCIATES, L.P.
GRANT GEOPHYSICAL, INC. 712 FIFTH AVE.
16850 PARK ROW NEW YORK, NEW YORK 10011
HOUSTON, TEXAS 77084 (212) 506-2999
(281) 398-9503
</TABLE>
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENTS FOR SERVICE)
------------------------
COPY TO:
CHRISTOPHER M. KELLY, ESQ.
JONES, DAY, REAVIS & POGUE
901 LAKESIDE AVENUE
CLEVELAND, OHIO 44114-1116
(216) 586-3939
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE
AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY
SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 4, 1998
SUBSCRIPTION OFFERING PROSPECTUS
3,459,414 SHARES
[GRANT GEOPHYSICAL, INC. LOGO]
COMMON STOCK
------------------------
THE RIGHT TO SUBSCRIBE FOR SHARES OF COMMON STOCK PURSUANT TO THIS SUBSCRIPTION
OFFERING
WILL EXPIRE AT 5:00 P.M., EASTERN STANDARD TIME, ON , 1998.
------------------------
Elliott Associates, L.P. ("Elliott") and Westgate International, L.P.
("Westgate," and together with Elliott, the "Selling Stockholders") are hereby
offering for sale 3,459,414 shares of Common Stock, par value $.001 per share
(the "Common Stock"), of Grant Geophysical, Inc. (the "Company") in a
subscription offering (the "Subscription Offering") to Eligible Subscribers. The
Subscription Offering is being made pursuant to the Second Amended Plan of
Reorganization (the "Plan") of the Company's predecessor, GGI Liquidating
Corporation ("GGI"). The Company will not receive any proceeds from the sale of
Common Stock offered pursuant to the Subscription Offering.
PURSUANT TO THE PLAN, THE COMPANY IS REQUIRED (IN MOST CIRCUMSTANCES) TO
OFFER 4,750,000 SHARES OF COMMON STOCK TO CERTAIN HOLDERS OF CLAIMS AND OTHER
INTERESTS UNDER THE PLAN FOR AN AGGREGATE PURCHASE PRICE OF $23,750,000. THE
PLAN ALSO AUTHORIZED THE OFFERING OF SHARES OF COMMON STOCK OF A SUCCESSOR
COMPANY ON ECONOMICALLY EQUIVALENT TERMS. THE PLAN PROVIDES, HOWEVER, THAT
ELLIOTT OR ITS AFFILIATES MAY PAY THE ENTIRE PURCHASE PRICE TO GGI, REPRESENTING
THE TOTAL ANTICIPATED PROCEEDS OF SUCH OFFERING, AND THEN CONDUCT A SUBSCRIPTION
OFFERING AND RETAIN THE PROCEEDS THEREFROM, WHICH ELLIOTT HAS ELECTED TO DO. SEE
"SUBSCRIPTION PROCEDURES -- SUBSCRIPTION RIGHTS; ELIGIBLE SUBSCRIBERS." BECAUSE
ELLIOTT AND CERTAIN OF ITS AFFILIATES, AS INTEREST HOLDERS UNDER THE PLAN, WERE
ENTITLED TO PURCHASE 1,290,586 SHARES OF COMMON STOCK IN AN OFFERING BY THE
COMPANY, THE SELLING STOCKHOLDERS ARE OFFERING THE BALANCE OF SUCH SHARES OF
COMMON STOCK TO THE ELIGIBLE SUBSCRIBERS PURSUANT TO THIS SUBSCRIPTION OFFERING.
Rights to subscribe for shares of Common Stock are nontransferable and will
expire if not exercised on or prior to 5:00 p.m., Eastern Standard Time, on
, 1998 (such time on such date being hereinafter called the
"Expiration Date"). Subscribers must make payment for shares prior to the
Expiration Date.
Eligible Subscribers may subscribe in the Subscription Offering at $5.00 per
share (the "Subscription Purchase Price") only for such number of shares as such
Eligible Subscriber is entitled to purchase in the Subscription Offering
pursuant to the Plan. NO PERSON IS REQUIRED TO SUBSCRIBE FOR SHARES OF COMMON
STOCK IN THE SUBSCRIPTION OFFERING.
A Subscription Exercise Notice accompanies this Subscription Offering
Prospectus. Each Eligible Subscriber who wishes to subscribe for shares of
Common Stock in the Subscription Offering must complete and execute a
Subscription Exercise Notice, indicating the number of shares of Common Stock
subscribed for. The Subscription Exercise Notice delivered to each Eligible
Subscriber sets forth the maximum number of shares of Common Stock that such
Eligible Subscriber is entitled to purchase in the Subscription Offering. Each
Eligible Subscriber must remit full payment with the Subscription Exercise
Notice by certified check or bank draft drawn upon a United States bank or wire
transfer in an amount equal to the product of the Subscription Purchase Price
and the number of shares of Common Stock subscribed for. See "Subscription
Procedures -- Exercise of Rights to Purchase Common Stock."
Eligible Subscribers must deliver the Subscription Exercise Notice, together
with payment, in person, to the Subscription Agent, or by using the enclosed
return envelope. Subscription Exercise Notices, once delivered, may not be
amended, modified or rescinded, unless permitted by the Selling Stockholders in
their sole discretion, to correct immaterial irregularities. Each Eligible
Subscriber will receive as many shares of Common Stock as are permitted to be
purchased by such Eligible Subscriber as set forth in the Plan provided that
such subscriber complies with the terms and conditions set forth herein. See
"Subscription Procedures."
In connection with the Subscription Offering, the Company has not made an
application to list the Common Stock on any securities exchange or to admit the
Common Stock for trading in the National Association of Securities Dealers
Automated Quotation System. See "Risk Factors -- No Public Market."
Any questions regarding the procedures for subscribing for Common Stock may
be directed to the Subscription Agent, ( ) - .
------------------------
SEE "RISK FACTORS" ON PAGE 9 FOR A DISCUSSION OF
CERTAIN MATTERS THAT SHOULD BE CONSIDERED BY ELIGIBLE SUBSCRIBERS.
------------------------
THIS SUBSCRIPTION OFFERING PROSPECTUS AND THE RELATED SUBSCRIPTION EXERCISE
NOTICE CONTAIN IMPORTANT INFORMATION. ELIGIBLE SUBSCRIBERS ARE URGED TO READ
THIS SUBSCRIPTION OFFERING PROSPECTUS AND THE RELATED SUBSCRIPTION EXERCISE
NOTICE CAREFULLY BEFORE DECIDING WHETHER TO EXERCISE THEIR RIGHTS TO SUBSCRIBE
FOR SHARES OF COMMON STOCK PURSUANT TO THE SUBSCRIPTION OFFERING.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS SUBSCRIPTION OFFERING PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
SUBSCRIPTION PROCEEDS TO SELLING
PURCHASE PRICE STOCKHOLDERS(1)
---------------------- ----------------------
<S> <C> <C>
Per Share................................................................... $5.00 $5.00
Total(2).................................................................... $17,297,070.00 $17,297,070.00
</TABLE>
- ---------------
(1) All expenses of issuance and distribution, estimated to be $ , will
be paid by the Company.
(2) Assumes all Eligible Subscribers exercise their subscription rights in full.
, 1998
<PAGE> 3
[THIS PAGE INTENTIONALLY LEFT BLANK]
2
<PAGE> 4
SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Subscription Offering
Prospectus. Unless otherwise indicated, the information set forth herein
reflects the recent acquisition (the "Acquisition") of Solid State Geophysical
Inc., together with its consolidated subsidiaries ("Solid State"), by Grant. As
used herein, the term "GGI" refers to GGI Liquidating Corporation; the term
"Grant" refers to Grant Geophysical, Inc., a newly formed corporation that
purchased substantially all of the assets and assumed certain liabilities of GGI
in connection with the consummation of the Plan, together with Grant's
consolidated subsidiaries; and the term "Company" refers to the combined
operations of Grant and Solid State and their respective consolidated
subsidiaries. Unless the context otherwise requires, the pro forma information
contained herein gives effect to the consummation of the Plan and certain
related transactions, the issuance of the Subordinated Note (as defined herein)
and the Acquisition as if they were completed as of January 1, 1996 for the
statement of operations data and at September 30, 1997 for the balance sheet
data. All currency amounts contained herein are, unless otherwise specifically
indicated, stated in U.S. dollars and conform to United States generally
accepted accounting principles. Eligible Subscribers (as defined herein) should
carefully consider the information set forth under "Risk Factors."
THE COMPANY
The Company is a leading provider of seismic data acquisition services in
land and transition zone environments in selected markets, including the United
States, Canada, Latin America and the Far East. Through its predecessors,
including GGI and Solid State, the Company has participated in the seismic data
acquisition services business in the United States and Latin America since the
1940s, the Far East since the 1960s and Canada since the 1970s. The Company has
conducted operations in each of these markets, as well as in the Middle East and
Africa, in the past three years. The Company's seismic data acquisition services
typically are provided on an exclusive contract basis to domestic and
international oil and gas companies and seismic data marketing companies. The
Company also owns interests in certain multi-client seismic data covering
selected areas in the United States and Canada that is marketed broadly on a
non-exclusive basis to oil and gas companies.
According to industry sources, as of December 31, 1997, the Company is the
third largest land seismic data acquisition company operating in the western
hemisphere, based on the number of seismic data acquisition crews in operation.
As of December 31, 1997, the Company was operating or mobilizing 21 seismic data
acquisition crews, consisting of 17 land and four transition zone crews,
utilizing approximately 26,000 seismic recording channels. All of the Company's
seismic data acquisition crews are capable of performing three dimensional
("3D") and two dimensional ("2D") seismic surveys in land environments, and four
crews are equipped to perform surveys in transition zone environments.
Transition zone environments include swamps, marshes and shallow water areas
that require specialized equipment and must be surveyed with minimal disruption
to the natural environment. Three transition zone crews employ remote digital
seismic data recording systems, which are used primarily to perform surveys in
certain logistically challenging areas, such as highly populated regions where
cable-based recording systems are impractical. The Company has over 20 years of
experience operating in transition zone environments.
As of December 31, 1997, the Company was operating or mobilizing a total of
six crews in the United States, consisting of four land and two transition zone
crews, six land crews in Latin America, six land crews in Canada and three crews
in the Far East, consisting of one land and two transition zone crews. An
additional transition zone crew is scheduled to begin operations in the Far East
during February 1998. For the nine months ended September 30, 1997, on a pro
forma basis, the Company's total revenues were $136.0 million, with 39.6% from
Latin America, 36.2% from the United States, 11.1% from Canada, 6.6% from Africa
and the Middle East and 6.5% from the Far East. As of December 31, 1997, the
Company estimates that its total backlog was approximately $144.4 million, with
approximately 92% of such amount expected to be completed in 1998. The Company
committed approximately $11 million of capital expenditures during the fourth
quarter of 1997 and has budgeted approximately $21 million of capital
expenditures in 1998 to upgrade and expand its seismic data acquisition
equipment.
3
<PAGE> 5
THE REORGANIZATION AND THE ACQUISITION
In December 1996, GGI filed a voluntary petition for relief under chapter
11 of the United States Bankruptcy Code (the "Bankruptcy Code"). In connection
with its reorganization, GGI replaced its senior management, disposed of
unprofitable operations and developed the Plan, which was consummated on
September 30, 1997 (the "Effective Date") with Grant's purchase of substantially
all of the assets and assumption of certain liabilities of GGI.
On December 23, 1997, Grant completed the acquisition of Solid State, a
leading provider of land seismic data acquisition services in Canada. The
Company believes that the combined operations of Grant and Solid State will
expand its market presence and enhance the Company's ability to compete more
effectively for projects in its selected markets. The Company also believes that
the Acquisition will increase management and operating depth, mitigate the
effects of seasonality and create operating efficiencies by consolidating
operations, increasing overall crew utilization and reducing capital
expenditures. As of December 31, 1997, Solid State was operating or mobilizing
nine land seismic data acquisition crews, consisting of six crews in Canada, two
crews in the United
States and one crew in Bolivia, utilizing approximately 9,200 seismic recording
channels.
THE INDUSTRY
Oil and gas companies regularly use seismic data acquisition services to
image and identify underground geological structures likely to trap
hydrocarbons, both to aid in the exploration for and development of new
hydrocarbon reservoirs and to enhance production from existing reservoirs.
Seismic data has been used in the exploration for oil and gas since the late
1920s, and the application of seismic technology frequently has led to
significant discoveries of new oil and gas reservoirs. Seismology encompasses
the generation and recording of reflected or refracted seismic energy that, when
computer processed, produces 3D images or 2D cross sections of the earth's
subsurface structures. The computer processed seismic data is used by
geoscientists to identify geological structures favorable for the accumulation
of oil and gas and to evaluate the potential for commercial production of oil
and gas. More recently, seismic data has been used to monitor and optimize the
production of existing oil and gas reservoirs.
Technical advances in the seismic services industry have increased the
probability of oil and gas exploration success and improved the delineation of
subsurface geological structures, which have in turn lowered overall exploration
and development costs and increased worldwide demand for seismic services. In
addition, the industry is experiencing growing demand for non-exclusive
multi-client seismic data due to the high cost and risk of drilling exploration
wells and the relatively high cost of acquiring and processing 3D seismic data.
Multi-client data allows numerous oil and gas companies to purchase the same
seismic data, thereby expanding the overall market for such data while lowering
the price charged to each customer.
THE SUBSCRIPTION OFFERING
Common Stock Offered by the
Selling Stockholders..... 3,459,414 shares
Common Stock Outstanding
after the Subscription
Offering................. 14,390,055 shares
Use of Proceeds............ The Company will not receive any proceeds from the
sale of the Common Stock offered hereby.
SUBSCRIPTION PROCEDURES
The Subscription Offering is being effected pursuant to the Plan, which was
confirmed by the United States Bankruptcy Court for the District of Delaware
(the "Bankruptcy Court") on September 15, 1997 and became effective on the
Effective Date.
4
<PAGE> 6
SUBSCRIPTION RIGHTS; ELIGIBLE SUBSCRIBERS
This Subscription Offering Prospectus and a Subscription Exercise Notice,
which contain information concerning the Subscription Offering, are being mailed
to each Eligible Subscriber.
The Plan provides that only Eligible Subscribers have the right to
participate in the Subscription Offering. Eligible Subscribers' rights to
purchase Common Stock are nontransferable, will not be evidenced by
certificates, and will expire on the Expiration Date. NO PERSON IS REQUIRED TO
PURCHASE ANY SHARES OF COMMON STOCK IN THE SUBSCRIPTION OFFERING.
EXERCISE OF RIGHTS TO PURCHASE COMMON STOCK
Each Eligible Subscriber who wishes to exercise rights to purchase shares
of Common Stock must properly complete, duly execute and deliver the
accompanying Subscription Exercise Notice indicating the number of shares of
Common Stock subscribed for, together with a certified check or bank draft drawn
upon a United States bank or wire transfer in an amount equal to the product of
the Subscription Purchase Price and the number of shares sought to be
subscribed. The Subscription Exercise Notice delivered to each Eligible
Subscriber sets forth the maximum number of shares of Common Stock that such
Eligible Subscriber is entitled to purchase in the Subscription Offering. The
Subscription Exercise Notice, together with full payment for shares subscribed
for, may be delivered, in person, to the Subscription Agent or be mailed in the
enclosed return envelope. Unless withdrawn, Subscription Exercise Notices, once
delivered, may not be amended or modified, unless permitted by the Selling
Stockholders in their sole discretion, to correct immaterial irregularities.
WHETHER HAND DELIVERED OR MAILED, SUBSCRIPTION EXERCISE NOTICES AND PAYMENT
MUST BE RECEIVED BY 5:00 P.M. EASTERN STANDARD TIME ON , 1998.
Failure of such receipt by the expiration time for any reason, will be deemed a
waiver and release by the Eligible Subscriber of any rights the Eligible
Subscriber may have to purchase shares of Common Stock in the Subscription
Offering. An executed Subscription Exercise Notice, once delivered cannot be
amended, modified or rescinded by an Eligible Subscriber. Subscription Exercise
Notices may be withdrawn prior to the Expiration Date. To withdraw a
Subscription Exercise Notice, a written notice of withdrawal must be received by
the Subscription Agent prior to the Expiration Date. Any notice of withdrawal
must (i) specify the name of the Eligible Subscriber, (ii) indicate the number
of shares of Common Stock subscribed for and (iii) be signed by the Eligible
Subscriber in the same manner as the original signature on the Subscription
Exercise Notice. All determinations as to proper completion, due execution,
timeliness, eligibility and other matters affecting the validity or
effectiveness of any attempted exercise of rights to purchase shares of Common
Stock shall be made by the Selling Stockholders, whose determination shall be
final and binding. The Selling Stockholders, in their sole discretion, may waive
any defect or irregularity, or permit a defect or irregularity to be corrected
within such time as they may determine or reject the purported exercise of any
rights to purchase shares of Common Stock subject to any such defect or
irregularity. Deliveries required to be received by the Subscription Agent in
connection with a purported exercise of rights to purchase shares of Common
Stock will not be deemed to have been so received or accepted until actual
receipt thereof by the Subscription Agent shall have occurred and any defects or
irregularities shall have been waived or cured within such time as the Selling
Stockholders may determine in their sole discretion. Neither the Selling
Stockholders nor the Subscription Agent will have any obligation to give notice
to any Eligible Subscriber of any defect or irregularity in connection with any
purported exercise thereof or incur any liability as a result of any failure to
give such notice.
Questions regarding subscription procedures may be directed to the
Subscription Agent, ( ) - .
SUBSCRIPTION AGENT
The Subscription Agent with respect to the Subscription Offering is
(the "Subscription Agent"). The address and telephone number of the
Subscription Agent are set forth in "Subscription Procedures -- Subscription
Agent" and in the Subscription Exercise Notice.
5
<PAGE> 7
PURCHASE PRICE
The Subscription Purchase Price will be $5.00 per share.
THE SUBSCRIPTION PURCHASE PRICE IS NOT INTENDED, AND MUST NOT BE CONSTRUED,
AS AN APPRAISAL OR RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF
PURCHASING SHARES OF COMMON STOCK. THE SUBSCRIPTION PURCHASE PRICE WAS
DETERMINED IN CONNECTION WITH THE CONFIRMATION OF THE PLAN BY THE BANKRUPTCY
COURT AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE CURRENT LIQUIDATION
VALUE OF THE COMPANY OR THE PRICE AT WHICH THE COMMON STOCK WILL TRADE AFTER
COMPLETION OF THE SUBSCRIPTION OFFERING, AND THE SUBSCRIPTION PURCHASE PRICE IS
NOT INTENDED, AND MUST NOT BE CONSTRUED, TO EXPRESS AN OPINION AS TO THE VALUE
OF COMMON STOCK OFFERED HEREBY.
SETTLEMENT FOR SHARES; DELIVERY OF CERTIFICATES
As promptly as practicable following the Expiration Date, the Subscription
Agent will mail, or cause to be mailed, to each Eligible Subscriber that has
sought to exercise such rights to purchase shares of Common Stock, a written
statement specifying the number of shares of Common Stock validly and
effectively subscribed for, together with a stock certificate representing the
shares of Common Stock so purchased.
RISK FACTORS
An investment in the Common Stock involves certain risks that Eligible
Subscribers should carefully evaluate prior to exercising their subscription
rights. See "Risk Factors."
6
<PAGE> 8
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary statement of operations data for GGI is presented below for
each of the years in the three-year period ended December 31, 1996 and for the
nine months ended September 30, 1996 and September 30, 1997 and is derived from
the consolidated financial statements of GGI. The summary balance sheet data of
Grant at September 30, 1997 is derived from the consolidated financial
statements of Grant.
The summary pro forma statement of operations data for the Company for the
year ended December 31, 1996 and for the nine months ended September 30, 1997
give effect to the consummation of the Plan and certain related transactions,
the issuance of the Subordinated Note and the Acquisition as if they were
completed as of January 1, 1996. The summary pro forma selected balance sheet
data at September 30, 1997 gives effect to the consummation of the Plan and
certain related transactions, the issuance of the Subordinated Note and the
Acquisition as if they were completed at September 30, 1997. The summary pro
forma financial data does not purport to represent what the financial position
or results of operations of the Company would actually have been if the
transactions and events assumed therein in fact occurred on the dates indicated
or to project the financial position or results of operations of the Company for
any future date or period.
The summary historical and pro forma financial data should be read in
conjunction with the unaudited pro forma financial information and the notes
thereto, together with the selected consolidated historical financial data, and
the consolidated financial statements of GGI, Grant and Solid State and the
notes thereto, included elsewhere in this Subscription Offering Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------- -----------------------------------
GGI THE COMPANY GGI THE COMPANY
----------------------------- PRO FORMA -------------------- PRO FORMA
1994 1995 1996(1) 1996(2) 1996(3)(4) 1997 1997(2)
-------- ------- -------- ----------- -------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................... $ 73,691 $91,996 $105,523 $ 138,155 $ 80,925 $92,705 $ 135,997
Expenses:
Operating expenses......... 53,132 69,046 136,326 169,563 83,243 71,006 107,438
Selling, general and
administrative
expenses................. 7,810 8,527 17,865 20,638 8,948 6,473 8,872
Depreciation and
amortization............. 12,079 9,424 11,500 17,522 8,237 8,432 14,785
Asset impairment........... 9,911 -- 5,802 5,802 -- -- --
-------- ------- -------- ------- -------- ------- -------
Total expenses........... 82,932 86,997 171,493 213,525 100,428 85,911 131,095
-------- ------- -------- ------- -------- ------- -------
Operating income
(loss)................. (9,241) 4,999 (65,970) (75,370) (19,503) 6,794 4,902
Other income (deductions):
Interest expense, net...... (3,384) (3,522) (7,522) (8,022) (4,426) (3,758) (5,084)
Reorganization costs....... -- -- (412) -- -- (3,543) --
Other...................... 1,380 2,076 (502) (152) 26 2,266 2,077
-------- ------- -------- ------- -------- ------- -------
Total other income
(deductions)........... (2,004) (1,446) (8,436) (8,174) (4,400) (5,035) (3,007)
-------- ------- -------- ------- -------- ------- -------
Income (loss) before
income taxes........... (11,245) 3,553 (74,406) (83,544) (23,903) 1,759 1,895
Income tax expense........... 193 391 1,621 1,025 945 2,184 1,701
-------- ------- -------- ------- -------- ------- -------
Net income (loss) from
continuing operations...... $(11,438) $ 3,162 $(76,027) $ (84,569) $(24,848) $ (425) $ 194
======== ======= ======== ======= ======== ======= =======
Net loss applicable to common
stock...................... $(16,696) $(2,096) $(82,390) $ (85,619) $(30,185) $ (425) $ (676)
======== ======= ======== ======= ======== ======= =======
OTHER FINANCIAL DATA:
Capital expenditures......... $ 8,463 $14,921 $ 25,799 $ 32,628 $ 25,061 $ 4,154 $ 14,815
OPERATING DATA (AT PERIOD
END):
Seismic crews in operation... 15 14 14 22 14 13 20
Seismic recording channels
owned...................... 12,520 12,320 17,430(8) 25,970(8) 17,430(8) 17,870(8) 26,762(8)
</TABLE>
7
<PAGE> 9
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
-------------------------
GRANT THE COMPANY
ACTUAL PRO FORMA(2)
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash....................................................................... $ 5,939 $ 5,625
Working capital............................................................ (24,039) (9,284)
Total assets............................................................... 82,849 148,766
Long-term debt, including current portion.................................. 10,149 67,280
Stockholders' equity(5).................................................... 19,571 49,668
</TABLE>
- ---------------
(1) Operating expenses for the year ended December 31, 1996 include costs of
operations in excess of planned costs in Peru ($23.0 million) and Nigeria
($2.5 million). The Company is no longer operating in Peru and Nigeria. Also
included in operating expenses are costs incurred in the United States
relating to the unsuccessful deployment of a proprietary data recording
system ($12.1 million) and a writedown of certain deferred costs, prepaid
expenses and other assets ($5.6 million). Selling, general and
administrative expenses for the year ended December 31, 1996 include a
reserve for doubtful accounts of $5.5 million, severance costs of $423,000,
the write-off of deferred costs of a proprietary data acquisition system of
$823,000 and legal fees of $367,000.
(2) Solid State's fiscal year end is August 31. For pro forma purposes, the
statement of operations data for Solid State has been adjusted to reflect
the periods December 1, 1995 through November 30, 1996 and December 1, 1996
through August 31, 1997 to combine with GGI's year ended December 31, 1996
and nine months ended September 30, 1997. For pro forma purposes, the
statement of operations data for Solid State has been translated from
Canadian dollars into U.S. dollars using the average exchange rates
prevailing during the respective periods, and the balance sheet data has
been translated using the exchange rate at September 30, 1997.
(3) Operating expenses for the nine months ended September 30, 1996 include
costs of operations in excess of planned costs in Peru ($10.7 million) and
Nigeria ($285,000). Also included in operating expenses are costs incurred
in the United States relating to the unsuccessful deployment of a
proprietary data recording system ($4.2 million). Selling, general and
administrative expenses for the nine months ended September 30, 1996 include
a reserve for doubtful accounts of $1.3 million.
(4) The summary selected financial data, except for operating data, for the
nine-month period ended September 30, 1996 has been derived from the
unaudited consolidated financial statements of GGI, which include all
adjustments, consisting of normal recurring adjustments, that the Company
considers necessary for a fair presentation of its financial position and
results of operation for this period.
(5) At September 30, 1997, on a pro forma basis, stockholders' equity assumes
that the net realizable value of certain multi-client data acquired by Solid
State is equal to the book value of such data. Based on the licensing
revenues actually realized and on future licensing prospects identified for
such data through December 31, 1997, the Company believes that there has
been a permanent impairment in the net realizable value of such data. As a
result, at December 31, 1997, the Company anticipates a significant
reduction in the carrying value of its multi-client data. Such reduction
will correspondingly reduce stockholders' equity.
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RISK FACTORS
Eligible Subscribers should consider carefully the following factors, as
well as the other information provided elsewhere in this Subscription Offering
Prospectus before deciding whether to subscribe for shares of Common Stock. See
"Disclosure Regarding Forward-Looking Statements."
RECENT INSOLVENCY AND REORGANIZATION OF GGI; RECENT OPERATING LOSSES OF SOLID
STATE
GGI sought protection under chapter 11 of the Bankruptcy Code in December
1996. In the bankruptcy, previous investors in, and unsecured lenders to, GGI
incurred substantial losses. From 1992 to 1994 and in 1996, GGI had significant
operating losses, including a net loss of approximately $76 million in 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of GGI and the notes
thereto, included elsewhere in this Subscription Offering Prospectus.
In connection with GGI's reorganization, Grant was formed in September 1997
to acquire certain assets and assume certain liabilities of GGI. Former senior
management of GGI has been replaced since the commencement of its reorganization
in December 1996, and the Company's current senior management has concentrated
on formulating and refining the Company's business strategy. Since the
consummation of the Plan, the Company has no meaningful financial performance
history.
Solid State reported revenues of Cdn $47.7 million and Cdn $68.7 million
for its fiscal years ended August 31, 1996 and 1997, respectively, and a net
loss of Cdn $12.1 million and Cdn $5.5 million for fiscal years 1996 and 1997,
respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Impact of Solid State Acquisition." Management of
Solid State has disclosed in a note to its fiscal 1997 financial statements that
material uncertainties exist that may affect Solid State's ability to continue
as a going concern. The auditors of Solid State, Price Waterhouse, chartered
accountants, have noted this significant doubt on the Company's ability to
continue as a going concern in comments appended to their auditors' report dated
October 31, 1997. There can be no assurance that the financial performance of
Solid State will improve in future periods. If Solid State's financial
performance does not so improve, the Company's results of operations and
financial condition could be adversely affected.
SUBSTANTIAL LEVERAGE
As a result of the indebtedness incurred under the Credit Facility (as
defined herein),the Subordinated Note and in connection with the Acquisition, as
well as the assumption of the existing debt of Grant and Solid State, the
Company is highly leveraged. As of September 30, 1997, on a pro forma basis
after giving effect to the consummation of the Plan, the issuance of the
Subordinated Note and the Acquisition, the Company's consolidated long-term
indebtedness, including the current portion of long-term debt, was approximately
$67.3 million, approximately 39.9% of which was at variable rates of interest,
and has increased to approximately $72.8 million as of December 1997. See
"Capitalization," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Payments of interest on and principal of such pro forma consolidated long-term
indebtedness will materially decrease funds available to the Company to finance
capital expenditures and operations. Subject to compliance with various
financial and operating covenants and restrictions contained in the Company's
existing debt instruments, the Company and its subsidiaries may incur additional
indebtedness from time to time.
The degree to which the Company is leveraged could have important
consequences to holders of Common Stock, including, without limitation: (i) a
substantial portion of the Company's cash flow from operations must be dedicated
to the payment of interest and principal on its indebtedness, (ii) the Company's
leverage position will substantially increase its vulnerability to economic
downturns and may limit its ability to withstand competitive pressures, (iii)
the Company's ability to obtain additional financing for working capital,
capital expenditures, acquisitions and general corporate and other purposes may
be impaired and (iv) a portion of the Company's borrowings is at variable rates
of interest which subject the Company to fluctuations in interest rates.
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RESTRICTIONS IMPOSED BY THE TERMS OF THE COMPANY'S INDEBTEDNESS
The terms and conditions of the Company's outstanding debt instruments,
including the Credit Facility, impose, and the terms and conditions of future
debt instruments of the Company may impose, restrictions on the Company that
affect, among other things, its ability to incur debt, pay dividends or make
distributions, make acquisitions, create liens, sell assets and make certain
investments.
In 1996 and 1997, Solid State failed to comply with certain financial
covenants under certain agreements relating to its outstanding indebtedness. In
addition, certain debt instruments of the Company contain cross-default
provisions under which a failure to comply with any covenant in one instrument
could become a default under such other debt instruments. Solid State has
obtained waivers of certain covenants and events of default under certain of its
outstanding debt instruments. Solid State has not, however, obtained waivers
under all such debt instruments under which it may be in default. The Company
believes that it will be able to obtain such waivers and to comply with such
covenants in 1998 and the foreseeable future. There can be no assurance,
however, that these debt holders will not accelerate such indebtedness and
demand immediate payment of the outstanding amount of such indebtedness. Such
acceleration and demand by debt holders would have a significant adverse effect
upon the Company's financial condition.
The ability of the Company to comply with the terms of its debt instruments
can be affected by events beyond its control, including events and changes in
the competitive environment, which could impair the Company's operating
performance. There can be no assurance that the Company will be able to comply
with the provisions of its debt instruments, including the Credit Facility.
Breach of any of these covenants or the failure to fulfill the obligations
thereunder and the lapse of any applicable grace periods could result in an
event of default pursuant to which holders of such indebtedness could declare
all amounts outstanding under such debt instruments to be due and payable
immediately. Any such declaration under a debt instrument is likely to result in
an event of default under the other debt instruments of the Company, if any,
then outstanding. There can be no assurance that the assets or cash flows of the
Company would be sufficient to repay in full borrowings under its outstanding
debt instruments, whether upon maturity or in the event of acceleration upon an
event of default, or that the Company would be able to refinance or restructure
the payments of such indebtedness. The Company's ability to meet its debt
obligations will depend upon its ability to execute its business strategy, which
includes successfully integrating the business of Solid State into its existing
operations and other factors, many of which are not within the Company's
control.
DEPENDENCE UPON ENERGY INDUSTRY SPENDING
Demand for the Company's services depends upon the level of expenditures by
oil and gas companies for exploration, production and development activities.
These activities depend in part on current and expected oil and gas prices, the
cost of exploring for, producing and delivering oil and gas, the sale and
expiration dates of leases and concessions for oil and gas exploration in the
United States, Canada and other countries, the discovery rate of new oil and gas
reservoirs, domestic and international political, regulatory and economic
conditions and the ability of oil and gas companies to obtain capital. In
addition, a decrease in oil and gas expenditures could result from such factors
as unfavorable tax and other legislation or uncertainty concerning national
energy policies.
Since reaching a high in 1981, the number of companies providing seismic
data acquisition services has declined dramatically. Beginning in 1982, a sharp
decline in oil and gas prices led to a worldwide reduction in oil and gas
exploration activities. This decline resulted in a significant reduction in the
overall demand for seismic data acquisition services. Notwithstanding recent
increases in oil and gas exploration activity, no assurance can be given that
current levels of exploration activity will be maintained or that demand for the
Company's services will reflect the level of such activity. Decreases in
exploration activity would have a significant adverse effect upon the demand for
the Company's services and the Company's results of operations.
CAPITAL INTENSIVE BUSINESS; RISK OF TECHNOLOGICAL OBSOLESCENCE
Seismic data acquisition is a capital intensive business. The development
of seismic data acquisition equipment has been characterized by rapid
technological advancements in recent years, and the Company expects
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this trend to continue. There can be no assurance that manufacturers of seismic
data acquisition equipment will not develop new systems that have competitive
advantages over systems now in use that either render the Company's current
equipment obsolete or require the Company to make significant capital
expenditures to maintain its competitive position. The Company committed
approximately $11 million of capital expenditures during the fourth quarter of
1997 and has budgeted approximately $21 million of capital expenditures in 1998
to upgrade and expand its seismic data acquisition equipment. The Company
intends to continually maintain and periodically upgrade its seismic data
acquisition equipment as often as necessary to maintain its competitive
position. Such upgrades may require large expenditures of capital in addition to
the Company's other capital expenditures. For 1998, the Company has also
budgeted approximately $16 million of expenditures, before customer commitments,
for multi-client data acquisition activities. There can be no assurance that the
Company will have the necessary capital or that financing will be available on
favorable terms for any such future expenditures. The inability of the Company
to access the capital necessary to maintain and upgrade its seismic data
acquisition equipment and perform such multi-client data acquisition activities
may have a material adverse effect upon the Company's competitive position and
the demand for its services.
OPERATING RISKS; INSURANCE; HIGH FIXED COSTS
The Company's seismic data acquisition activities involve operating under
extreme weather and other hazardous conditions. Accordingly, these operations
are subject to risks of loss to property and injury to personnel from fires,
adverse weather and accidental explosions. Although the Company carries
insurance against these risks in amounts that it considers adequate, the Company
may not be able to obtain insurance against certain risks or for certain
equipment located from time to time in certain areas of the world.
Because of the high fixed costs involved in the major components of the
Company's business, downtime due to reduced demand, weather interruptions,
equipment failures, hazardous conditions or other causes can result in
significant operating losses. In recent years, GGI's contracts for seismic data
acquisition projects were predominately on a turnkey or on a combination
turnkey/term basis. Under the turnkey method, payments for data acquisition
projects are based upon the amount of data collected. Consequently, the Company
bears substantially all of the risk of business interruption caused by inclement
weather and other hazards. Under the term method, the customer pays a periodic
fee during the term of the project, thereby shifting certain risks of business
interruption to the customer. The Company also contracts for its services on a
cost-plus basis, which provides that the costs of a project, plus a percentage
fee, are borne by the customer. The Company plans to attempt to increase the
percentage of its term and cost-plus basis contracts in order to reduce the
financial risks associated with these operations; however, there can be no
assurance that such contracts will be widely acceptable to the Company's
customers or that competitors will not offer their services on a turnkey basis.
COMPETITION FOR SEISMIC BUSINESS
The land and transition zone seismic data acquisition business is highly
competitive. Competitive factors include price, crew availability, prior
performance, technology, safety, quality, dependability and the contractor's
expertise in the particular area where the survey is to be conducted. Certain of
the Company's major competitors operate more seismic data acquisition crews than
the Company, provide integrated seismic data acquisition, processing and
interpretation services, have substantially greater financial resources than the
Company, are subsidiaries or divisions of major industrial enterprises having
far greater resources than the Company or have more extensive relationships with
major domestic and international oil and gas companies. Such resources and
relationships may enable these competitors to maintain technological and certain
other advantages that may provide them with an advantage over the Company in
bidding for contracts.
RELIANCE ON SIGNIFICANT CUSTOMERS AND PROJECTS
As is the case for many service companies in the oil and gas industry, a
relatively small number of customers or a limited number of significant projects
may account for a large percentage of the Company's net sales in any given year.
Moreover, such customers and projects may, and often do, vary from year to year.
During 1996 and the first nine months of 1997, GGI's five largest customers
accounted for approximately 42.3% and 53.0%, respectively, of GGI's net sales.
In the first nine months of 1997, the five largest customers of the Company, on
a
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pro forma basis, accounted for approximately 36.1% of the Company's net sales.
Although GGI and Solid State have had long-term relationships with numerous
customers, the continuation of these relationships is primarily dependent on the
customers' needs for the Company's services and the customers' ongoing
satisfaction with the price, quality, dependability and availability of the
Company's services. The loss or inability of the Company to obtain such
significant projects in the future could have a material impact on the operating
results of the Company.
RISKS INHERENT IN INTERNATIONAL OPERATIONS
Approximately 60.1% and 55.5% of GGI's revenues in 1996 and in the first
nine months of 1997, respectively, were derived from operations outside the
United States and Canada. On a pro forma basis, the Company's revenues derived
from operations outside the United States and Canada for the year ended December
31, 1996 and the nine months ended September 30, 1997, were approximately 49.8%
and 52.7%, respectively. As a result, the Company is subject to certain risks
inherent in doing business internationally. In addition to unpredictable
operating risks, such risks include the possibility of unfavorable changes in
tax or other laws, partial or total expropriation, the disruption of operations
from labor and political disturbances, insurrection or war, the effect of
partial local ownership requirements in certain countries, currency exchange
rate fluctuations and restrictions on currency repatriation.
To reduce currency risks, the Company generally denominates its contracts
in U.S. dollars, Canadian dollars or other currencies that it believes to be
stable. The Company's operations in certain areas outside the United States and
Canada may, however, require the Company to denominate contracts in currencies
other than U.S. dollars or Canadian dollars. While the Company employs certain
policies intended to reduce the risk associated with exchange rate fluctuations,
there can be no assurance that such policies will be effective or that
fluctuations in the value of non-U.S. or Canadian currencies will not materially
affect the Company's revenues in the future. The Company presently does not use
derivatives or forward foreign currency exchange rate hedging contracts, but may
elect to do so in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Foreign Exchange Gains and
Losses."
The Company also obtains insurance against war, expropriation, confiscation
and nationalization when such insurance is available and when management
considers it advisable to do so. Such coverage is not always available, and when
available, is subject to unilateral cancellation by the insuring companies on
short notice. In addition, the Company's international operations may be in part
dependent upon foreign governmental funding of projects. Significant changes in
the level of foreign governmental funding of these projects could have an
unfavorable impact on the operating results of the Company.
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success will depend to a significant extent
upon the continued services of certain key executive officers and operating
personnel. The Company has entered into employment agreements with certain of
its key executive officers. See "Management -- Employment Agreements." The
Company also depends on the services of professionals such as engineers,
geologists and geophysicists. The loss of the services of certain key executive
officers and operating personnel or the loss or shortage of a significant number
of professionals could have a material adverse effect on the Company. The
Company does not maintain key employee insurance on any of its personnel.
NO PUBLIC MARKET
The Common Stock will constitute a new issue of securities with no
established trading market. In connection with the Subscription Offering, the
Company has not made an application to list the Common Stock on any securities
exchange or to admit the Common Stock for trading in the Nasdaq National Market
or the Nasdaq Smallcap Market, and there can be no assurance that the Company
will apply for such listing or admission in the future. Neither the Subscription
Agent nor any other person is obligated, or has committed, to make a market in
the Common Stock. Prior to the Subscription Offering, there has been no public
market for the Common Stock, and there can be no assurance as to the development
or continuation of any active trading market
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for the Common Stock, or the ability of Eligible Subscribers to sell their
Common Stock. The Subscription Purchase Price in the Subscription Offering was
determined in connection with the confirmation of the Plan by the Bankruptcy
Court and may not be indicative of the price at which the Common Stock will
trade after completion of the Subscription Offering.
INVESTMENT IN MULTI-CLIENT DATA LIBRARY
The Company has a significant investment in multi-client data that is
marketed broadly on a non-exclusive basis to oil and gas companies. Solid State
has in the past experienced significant losses in connection with the
acquisition of multi-client data, as a result of substantially underestimating
the cost of acquiring such multi-client data. In addition, the Company presently
anticipates that it will reduce the carrying value of such data acquired by
Solid State. The Company intends to expand its multi-client data acquisition and
marketing efforts in the future. Although the Company will attempt to obtain
commitments for a majority of the costs of these surveys, future data licensing
to multiple customers may not enable the Company to fully recoup its costs.
Furthermore, even if the Company obtains commitments, the Company may not be
able to fully recoup its acquisition costs if it substantially underestimates
the cost of, or market demand for, such projects. Factors affecting the
Company's ability to recoup its costs include adverse environmental or
regulatory requirements, the inability or delay in obtaining permits, and other
technological, industry or general economic developments, as well as the
ultimate oil and gas prospectivity of the area surveyed, any of which could
render all or portions of the Company's library of multi-client data obsolete or
otherwise impair its value. In addition, revenues generated by licensing of
multi-client data are typically less predictable from period to period than are
revenues from surveys performed on an exclusive contract basis for customers.
For 1998, the Company has budgeted approximately $16 million of expenditures,
before customer commitments, for multi-client data acquisition projects.
ENVIRONMENTAL AND OTHER REGULATIONS
The Company's operations are subject to a variety of foreign, federal,
state and local laws and regulations, including laws and regulations relating to
the protection of human health and the environment. Violation of these laws and
regulations may result in civil and even criminal penalties. The Company
currently is required to invest financial and managerial resources to comply
with such laws, regulations and related permit requirements in its operations
and anticipates that it will continue to do so in the future. The Company's
seismic data acquisition contracts typically require customers to obtain all
necessary permits. Conversely, the acquisition of multi-client data may require
the Company to obtain required permits. Failure to obtain required permits in a
timely manner may result in crew downtime and operating losses. Although neither
GGI's nor Grant's cost of complying with governmental laws and regulations has
been significant to date, there can be no assurance that environmental laws and
regulations will not change in the future or that the Company will not incur
significant costs in the future performance of its operations. The modification
of existing laws or regulations or the adoption of new laws or regulations
curtailing oil and gas exploration or imposing more stringent restrictions on
seismic data acquisition operations could adversely affect the Company.
ACQUISITION OF SOLID STATE AND FUTURE ACQUISITIONS
The Acquisition is the first acquisition made by Grant. Although the
Company's management believes Solid State's business and customer base should
complement Grant's operations, there can be no assurance that the Company will
successfully integrate the business of Solid State into its existing operations
and effectively manage the increased size of the Company or that such activities
will not require a disproportionate amount of management's attention. The
Company's failure to successfully integrate Solid State's business into its
existing operations, or the occurrence of unexpected costs or liabilities in
connection with Solid State's operations, could have a material adverse effect
on the Company's results of operations and financial condition. See "-- Recent
Insolvency and Reorganization of GGI; Recent Operating Losses of Solid State."
The Company is actively seeking other strategic acquisitions that will
provide additional and complementary products, equipment and services. However,
there can be no assurance that attractive acquisitions will be available to the
Company at reasonable prices or that the Company will successfully integrate the
operations and assets of any acquired business with its own or that the
Company's management will be able to manage
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effectively the increased size of the Company or operate a new line of business.
Any inability on the part of the Company to integrate and manage acquired
businesses could have a material adverse effect on the Company's results of
operations and financial condition. The Company may be required to raise
substantial additional funds to finance future acquisitions. There can be no
assurance that the Company will be able to obtain any such financing or that, if
available, such financing will be on terms acceptable to the Company. See "--
Substantial Leverage." Depending upon the circumstances of a particular
acquisition, the Company may fund an acquisition through the issuance of Common
Stock or other equity securities, or, to the extent permitted by the Credit
Facility and any future debt instruments, with additional borrowed funds.
Acquisitions may result in potentially dilutive issuances of equity securities,
increased depreciation and amortization expense, increased interest expense,
increased financial leverage or decreased operating income, any of which could
have a material adverse effect on the Company's operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
POTENTIAL LIABILITY UNDER THE PLAN
Although GGI's bankruptcy proceedings resulted in the consummation of the
Plan on September 30, 1997, the Bankruptcy Court has retained jurisdiction over
disputes arising under the Plan. On December 11, 1997, certain Eligible
Subscribers commenced a lawsuit in the Bankruptcy Court against GGI, Grant,
Elliott, Westgate and SSGI (as defined herein) alleging various claims related
to the Plan and the Acquisition. Elliott has agreed to indemnify the Company
against any liability, other than legal expenses, that the Company may incur by
reason of any adverse final judgment in the lawsuit. Nevertheless, if not
resolved in the Company's favor, this lawsuit, and the potential for other
lawsuits related to the Plan, could have an adverse effect on the Company's
business, reputation, operating results and financial condition. See
"Business -- Legal Proceedings."
CONCENTRATION OF OWNERSHIP
The Selling Stockholders currently hold all of the issued and outstanding
shares of Common Stock. After the consummation of the Subscription Offering, the
Selling Stockholders will hold approximately 76% of the issued and outstanding
shares of Common Stock, assuming all Eligible Subscribers exercise their
subscription rights in full. In addition, the holders of Common Stock are not
entitled to cumulative voting rights. Westgate also holds all of the issued and
outstanding shares of Preferred Stock (as defined herein) of the Company. The
terms of the Preferred Stock permit Westgate to designate two directors to the
Board of Directors of the Company and to vote on certain extraordinary matters
presented for a stockholder vote. As a result of such voting power, the Selling
Stockholders have the ability to elect all of the directors of the Company who
will control the management and affairs of the Company, as well as the ability
to control the outcome of other matters that may be submitted to a stockholder
vote from time to time. The voting power held by the Selling Stockholders may
also have the effect of discouraging certain types of transactions involving an
actual or potential change of control of the Company. See "The Company,"
"Selling Stockholders" and "Certain Relationships and Related Transactions."
NONCOMPARABILITY OF HISTORICAL FINANCIAL INFORMATION
As a result of the consummation of the Plan and the Acquisition and in each
case, the transactions contemplated thereby, the financial condition and results
of operations of the Company will not be comparable to the financial condition
or results of operations reflected in the historical financial statements of GGI
and Solid State, included elsewhere in this Subscription Offering Prospectus.
See "Unaudited Pro Forma Financial Information," "Selected Consolidated
Historical Financial Data" and the consolidated financial statements of GGI,
Grant and Solid State and notes thereto, included elsewhere in this Subscription
Offering Prospectus.
HOLDING COMPANY STRUCTURE
The Company is structured as a holding company that owns all of the capital
stock of its operating subsidiaries. As a holding company, the Company is
dependent on dividends or other intercompany transfers of funds from its
subsidiaries to meet the Company's debt service and other obligations.
Consequently, the Company's cash flow and ability to pay its expenses and meet
its obligations, including the ability to service its debt obligations, are
dependent upon the earnings of the subsidiaries and the distribution of those
earnings to the
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Company, or upon loans, advances or other payments made by the subsidiaries to
the Company. There can be no assurance that the earnings of the Company's
subsidiaries will be adequate for the Company to meet such obligations.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the marketplace, whether by
purchasers in the Subscription Offering or other stockholders of the Company,
purchasers in any future public offering or other stockholders of the Company,
or the perception that such sales could occur, may adversely affect the market
price of the Common Stock. See "Shares Eligible for Future Sale."
Following the Subscription Offering, the Selling Stockholders will
beneficially own approximately 76% of the issued and outstanding Common Stock,
assuming that all Eligible Subscribers exercise their subscription rights in
full. A decision by the Selling Stockholders to sell shares could adversely
affect the market price of the Common Stock. The Company and the Selling
Stockholders have entered into a Registration Rights Agreement (as defined
herein), which requires the Company to effect a registration statement, covering
some or all of the Selling Stockholders' shares, subject to certain terms and
conditions. See "Certain Relationships and Related Transactions -- Registration
Rights Agreement."
Upon completion of the Subscription Offering, the shares of Common Stock
purchased by Eligible Subscribers will be freely tradeable without restriction
or further registration under the Securities Act.
NO DIVIDENDS
The Company currently does not intend to pay any cash dividends on the
Common Stock. The Company currently intends to retain any earnings for support
of its working capital, repayment of indebtedness, capital expenditures and
general corporate purposes. The Credit Facility contains restrictions on the
Company's ability to pay dividends or make other distributions. The Credit
Facility provides that the Company may not declare any dividends or make any
other payments or distributions except in certain limited circumstances. See
"Dividend Policy" and "-- Restrictions Imposed by the Terms of the Company's
Indebtedness."
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Subscription Offering Prospectus includes statements that contain
"forward-looking" information (as defined in the Private Securities Litigation
Reform Act of 1995). Words such as "anticipate," "expect," "estimate," "project"
and similar expressions are intended to identify such forward-looking
statements. Forward-looking statements may be made by management in written
material such as press releases, portions of "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business" and "Risk
Factors" contained in this Subscription Offering Prospectus.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to be correct. Such forward-looking statements are
subject to certain risks, uncertainties and assumptions, including without
limitation those identified below and under "Risk Factors." Should one or more
of these risks or uncertainties materialize, or should any of the underlying
assumptions prove incorrect, actual results of current and future operations may
vary materially from those anticipated, estimated or projected. Prospective
purchasers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their dates.
Among the factors that will have a direct bearing on the Company's results
of operations and the oil and gas services industry in which it operates are the
effects of rapidly changing technology; the presence of competitors with greater
financial resources; risks associated with the Acquisition, including failure to
successfully manage the Company's growth and integrate the business operations
of Solid State; operating risks inherent in the oil and gas services industry;
regulatory uncertainties; potential liability under the Plan; worldwide
political stability and economic conditions and other risks associated with
international operations, including foreign currency exchange risk; and the
Company's successful execution of its strategy and internal operating plans. See
"Risk Factors."
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THE COMPANY
BACKGROUND
Grant was incorporated in Delaware in September 1997, and is the successor
to several seismic data acquisition companies. Solid State was incorporated in
Alberta, Canada in 1985. The Company's predecessor companies have been active in
the seismic data acquisition services business in the United States and Latin
America since the 1940s, the Far East since the 1960s and Canada since the
1970s. Additionally, the Company has significant operating experience in the
Middle East and West Africa.
THE REORGANIZATION
In 1996, GGI experienced a deteriorating financial condition and liquidity
crisis precipitated by several factors, including an overly rapid and
under-financed expansion in United States and Latin America, significant costs
related to the unsuccessful development of a proprietary data recording system
and poor operational results in the United States and certain international
markets. On December 6, 1996 (the "Petition Date"), GGI filed a voluntary
petition for relief with the Bankruptcy Court under chapter 11 of the Bankruptcy
Code.
In connection with its reorganization, GGI replaced its senior management
team, disposed of unprofitable operations, continued to operate as a
debtor-in-possession and developed the Plan, which was confirmed by the
Bankruptcy Court on September 15, 1997 and was consummated on the Effective
Date. The Plan provided that Grant would (i) purchase substantially all of the
assets of GGI for $47.5 million in cash (the "Cash Purchase Price"), (ii) assume
certain debts and long-term lease commitments of GGI not exceeding $15.1 million
and (iii) assume certain other liabilities of GGI.
In connection with the consummation of the Plan, the Selling Stockholders
satisfied certain claims against GGI in the amount of approximately $12.7
million, which was credited against the Cash Purchase Price. In addition,
Westgate purchased certain claims against GGI that were assumed by Grant, in the
principal amount of approximately $6.9 million. The Selling Stockholders also
purchased certain claims against GGI, in the principal amount of approximately
$5.6 million, which was credited against the Cash Purchase Price.
In exchange for the satisfaction or cancellation of certain claims against
GGI, Grant issued 19,571.162 shares of cumulative pay-in-kind preferred stock,
$0.001 par value per share (the "Preferred Stock"), to the Selling Stockholders.
The Preferred Stock provides for dividends payable annually in additional shares
of Preferred Stock at a rate of 10.5% per annum, the right to designate two
members of the Board of Directors of the Company and the right to vote on
certain extraordinary matters presented for a stockholder vote. See "Description
of Capital Stock -- Preferred Stock." On December 18, 1997 Grant exchanged
9,571.162 shares of Preferred Stock held by Elliott, together with accrued
dividends thereon, for a subordinated note (the "Subordinated Note") in the
aggregate principal amount of approximately $9.8 million. The Subordinated Note
bears interest at the rate of 10.5% per annum and matures on March 31, 1999. See
"Certain Relationships and Related Transactions -- Selling Stockholders." On
December 30, 1997, the Selling Stockholders purchased 9,499,998 shares of Common
Stock for an amount equal to the remainder of the Cash Purchase Price, which
included the cancellation of certain claims against GGI. In addition, upon
consummation of the Subscription Offering, Elliott is entitled to receive
237,500 shares of Common Stock pursuant to the Plan. See "Certain Relationships
and Related Transactions -- Selling Stockholders."
THE ACQUISITION
As of November 20, 1997, Elliott held 5,963,565 shares, or 40.9%, and
Westgate held 3,341,544 shares, or 22.9% of the outstanding shares of common
stock of Solid State ("Solid State Stock"). In connection with the Acquisition,
the Selling Stockholders transferred their shares of Solid State Stock to Grant
in exchange for 4,652,555 shares of Common Stock. SSGI Acquisition Corporation
("SSGI"), a corporation organized under the laws of Alberta, Canada and a wholly
owned subsidiary of Grant, commenced a cash tender offer for all of the
outstanding shares of Solid State Stock not held by SSGI or its affiliates (the
"Tender Offer"). Grant subsequently transferred the shares of Solid State Stock
to SSGI.
17
<PAGE> 19
To consummate the Tender Offer and the Acquisition, on December 19, 1997,
Elliott advanced approximately $15.8 million to Grant (the "Acquisition
Financing") under a term note pursuant to the Credit Facility. Upon the
expiration of the Tender Offer on December 19, 1997, SSGI held approximately 99%
of the outstanding shares of Solid State Stock. On December 23, 1997, because
SSGI acquired over 90% of the outstanding shares of Solid State Stock not
already held by SSGI or its affiliates pursuant to the Tender Offer, SSGI
qualified to exercise its statutory right under Canadian law to acquire the
remaining shares of Solid State Stock on the same terms and at the same price as
the Tender Offer. On December 23, 1997, Solid State became an indirect wholly
owned subsidiary of the Company.
The Company's principal executive offices are located in Houston, Texas.
The Company's address is 16850 Park Row, Houston, Texas 77084, and its telephone
number is (281) 398-9503.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the shares of
Common Stock sold by the Selling Stockholders in the Subscription Offering.
DIVIDEND POLICY
The Company currently intends to retain all future earnings for use in the
operations of its business and does not anticipate paying any cash dividends in
the foreseeable future. The declaration and payment in the future of any cash
dividend will be at the discretion of the Company's Board of Directors and will
depend upon, among other things, the earnings, capital requirements and
financial position of the Company, existing and/or future loan covenants and
general economic conditions. The Credit Facility provides that the Company may
not declare any dividends or make any other payments or distributions except in
certain limited circumstances. See "Risk Factors -- No Dividends."
18
<PAGE> 20
CAPITALIZATION
The following table sets forth at September 30, 1997, the cash and cash
equivalents, debt and equity capitalization of (i) Grant on an actual
consolidated basis and (ii) the Company on a pro forma basis after giving effect
to the consummation of the Plan and related transactions, the issuance of the
Subordinated Note and the Acquisition as if they were completed at September 30,
1997. This information should be read in conjunction with "Unaudited Pro Forma
Financial Information," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
of GGI, Grant and Solid State, including the notes thereto, included elsewhere
in this Subscription Offering Prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
-----------------------
GRANT THE COMPANY
ACTUAL PRO FORMA
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................................ $ 5,939 $ 5,625
======= =======
Current portion of long-term debt and notes payable.................. 3,940 23,797
Long-term debt, excluding current indebtedness:
10.5% subordinated note............................................ -- 9,571
Other.............................................................. 6,209 33,912
------- -------
Total long-term debt............................................ 6,209 43,483
------- -------
Stockholders' equity:
Cumulative pay-in-kind preferred stock, $.001 par value per share
(actual: 20,000 shares authorized, 19,571 shares outstanding;
pro forma: 20,000 shares authorized, 10,000 shares
outstanding).................................................... 19,571 10,000
Common stock, $.001 par value per share (actual: 100 shares
authorized, one share outstanding; pro forma: 25,000,000 shares
authorized, 14,152,555 shares outstanding)...................... -- 15
Paid-in capital.................................................... -- 40,065
Accumulated deficit(1)............................................. -- (412)
------- -------
Total stockholders' equity(1)................................... 19,571 49,668
------- -------
Total capitalization............................................ $29,720 $ 116,948
======= =======
</TABLE>
(1) At September 30, 1997, on a pro forma basis, stockholders' equity assumes
that the net realizable value of certain multi-client data acquired by Solid
State is equal to the book value of such data. Based on the licensing
revenues actually realized and on future licensing prospects identified for
such data through December 31, 1997, the Company believes that there has
been a permanent impairment in the net realizable value of such data. As a
result, at December 31, 1997, the Company anticipates a significant
reduction in the carrying value of its multi-client data. Such reduction
will correspondingly reduce stockholders' equity.
19
<PAGE> 21
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information (the
"Unaudited Pro Forma Financial Information") is based on the consolidated
financial statements of GGI, Grant and Solid State and has been prepared to
illustrate the effects of the consummation of the Plan and certain related
transactions, the issuance of the Subordinated Note and the Acquisition.
The unaudited pro forma consolidated balance sheet at September 30, 1997
gives effect to the consummation of the Plan and certain related transactions,
the issuance of the Subordinated Note and the Acquisition as if they were
completed at September 30, 1997. The unaudited pro forma condensed consolidated
statements of operations for the year ended December 31, 1996 and for the nine
months ended September 30, 1997 give effect to the consummation of the Plan and
certain related transactions, the issuance of the Subordinated Note and the
Acquisition as if they were completed at January 1, 1996.
Solid State's fiscal year end is August 31. For pro forma purposes, the
statement of operations data for Solid State has been adjusted to reflect the
periods December 1, 1995 through November 30, 1996 and December 1, 1996 through
August 31, 1997 to combine with GGI's year ended December 31, 1996 and nine
months ended September 30, 1997. For pro forma purposes, the statement of
operations data for Solid State has been translated from Canadian dollars into
U.S. dollars using the average exchange rates prevailing during the respective
periods, and the balance sheet data has been translated using the exchange rate
at September 30, 1997.
The Unaudited Pro Forma Financial Information does not purport to represent
what the financial position or results of operations of the Company would
actually have been if the transactions and events assumed therein in fact
occurred on the dates indicated or to project the financial position or results
of operations of the Company for any future date or period. The Unaudited Pro
Forma Financial Information is based on certain assumptions and adjustments
described in the notes hereto and should be read in conjunction therewith. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of GGI, Grant and Solid
State and the notes thereto, included elsewhere in this Subscription Offering
Prospectus.
20
<PAGE> 22
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
PRO FORMA
AT SEPTEMBER 30, 1997
-----------------------------
PLAN,
GRANT SOLID STATE SUBORDINATED NOTE
AT SEPTEMBER 30, AT AUGUST 31, AND ACQUISITION THE
1997 1997 ADJUSTMENTS COMPANY
---------------- ------------- ----------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents.................. $ 5,618 $ 547 $ 392(a) $ 5,304
(485)(b)
15,800(f)
(15,738)(g)
(830)(h)
Restricted cash............................ 321 -- -- 321
Accounts receivable........................ 16,771 12,128 -- 28,899
Inventories................................ 530 49 -- 579
Prepaid expenses........................... 1,924 722 -- 2,646
Work-in-progress costs..................... 1,339 716 -- 2,055
------- ------- ------- --------
Total current assets..................... 26,503 14,162 (861) 39,804
Property, plant and equipment.............. 32,528 25,460 -- 57,988
Multi-client data.......................... -- 11,345 -- 11,345
Goodwill................................... 21,012 -- 13,398(g) 35,999
1,589(e)
Other assets............................... 2,806 824 -- 3,630
------- ------- ------- --------
Total assets............................. $ 82,849 $51,791 $ 14,126 $148,766
======= ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Notes payable, current portion of long-term
debt and capital lease obligations....... $ 3,940 $31,907 $ (12,050)(i) $ 23,797
Accounts payable........................... 5,820 10,689 -- 16,509
Accrued expenses........................... 4,131 2,783 -- 6,914
Due to GGI in the form of cash............. 34,783 -- (33,953)(h) --
(830)(h)
Income taxes payable....................... 1,868 -- -- 1,868
------- ------- ------- --------
Total current liabilities................ 50,542 45,379 (46,833) 49,088
Long-term debt and capital lease obligations,
excluding current portion.................. 6,209 -- (147)(a) 33,912
15,800(f)
12,050(i)
Other liabilities and deferred credits....... 6,527 -- -- 6,527
Subordinated Note............................ -- -- 9,571(i) 9,571
------- ------- ------- --------
Total liabilities........................ $ 63,278 $45,379 $ (9,559) $ 99,098
Minority interest............................ -- -- 2,340(c) --
(2,340)(g)
Stockholders' equity:
Preferred Stock............................ 19,571 -- (9,571)(i) 10,000
Common Stock............................... -- 18,127 392(a) 15
147(a)
(6,754)(c)
10(h)
5(d)
(11,912)(d)
Additional paid-in capital................. -- -- 33,943(h) 40,065
4,533(d)
1,589(e)
Accumulated deficit........................ -- (11,715) 4,414(c) (412)(n)
(485)(b)
7,374(b)
------- ------- ------- --------
Total stockholders' equity............... 19,571 6,412 23,685 49,668(n)
------- ------- ------- --------
Total liabilities and stockholders'
equity................................. $ 82,849 $51,791 $ 14,126 $148,766
======= ======= ======= ========
</TABLE>
See notes to unaudited pro forma financial statements.
21
<PAGE> 23
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
------------------------------------------------------------------------
PRO FORMA
DECEMBER 31, 1996
HISTORICAL ---------------------------------
----------------------------------- PLAN,
GGI SOLID STATE SUBORDINATED NOTE
DECEMBER 31, NOVEMBER 30, AND ACQUISITION THE
1996 1996 ADJUSTMENTS COMPANY
---------------- --------------- ----------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................... $ 105,523 $ 32,632 $ -- $ 138,155
Expenses:
Operating expenses................... 136,326 33,237 -- 169,563
Selling, general and administrative
expenses........................... 17,865 2,288 485(b) 20,638
Depreciation and amortization........ 11,500 4,572 1,450(j) 17,522
Asset impairment..................... 5,802 -- -- 5,802
------- ------- ------- -------
Total costs and expenses........... 171,493 40,097 1,935 213,525
------- ------- ------- -------
Operating income (loss)............ (65,970) (7,465) (1,935) (75,370)
Other expenses:
Interest expense, net................ (7,522) (3,015) 2,515(k) (8,022)
Reorganization costs................. (412) -- 412(l) --
Other................................ (502) 350 -- (152)
------- ------- ------- -------
Total other expenses............... (8,436) (2,665) 2,927 (8,174)
------- ------- ------- -------
Income (loss) before income
taxes............................ (74,406) (10,130) 992 (83,544)
Income tax expense..................... 1,621 (596) --(m) 1,025
------- ------- ------- -------
Net income (loss)...................... $ (76,027) $ (9,534) $ 992 $ (84,569)
======= ======= ======= =======
Net income (loss) applicable to common
stock................................ $ (82,390) $ (9,534) $ (58) $ (85,619)
======= ======= ======= =======
Income (loss) per common share:
Net income (loss) from continuing
operations......................... $ (5.88)
Dividend requirement on Preferred
Stock.............................. (0.07)
-------
Net loss per common share.............. $ (5.95)
=======
Weighted average common shares
outstanding
Primary.............................. 14,699,824 5,379,790 14,390,055
Fully diluted........................ 14,699,824 6,939,460 14,390,055
OTHER FINANCIAL DATA:
Capital expenditures................... $ 25,799 $ 6,829 $ 32,628
OPERATING DATA (AT PERIOD END):
Seismic crews in operation............. 14 8 22
Seismic recording channels owned....... 17,430 8,540 25,970
</TABLE>
See notes to unaudited pro forma financial statements.
22
<PAGE> 24
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------------------------------------------------
PRO FORMA
SEPTEMBER 30, 1997
HISTORICAL ---------------------------------
-------------------------------- PLAN,
GGI SOLID STATE SUBORDINATED NOTE
SEPTEMBER 30, AUGUST 31, AND ACQUISITION THE
1997 1997 ADJUSTMENTS COMPANY
---------------- ------------ ----------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................. $ 92,705 $ 43,292 $ -- $ 135,997
Expenses:
Operating expenses..................... 71,006 36,432 -- 107,438
Selling, general and administrative
expenses............................. 6,473 2,399 -- 8,872
Depreciation and amortization.......... 8,432 5,266 1,087(j) 14,785
------------ ------------ ------- ------------
Total costs and expenses............. 85,911 44,097 1,087 131,095
------------ ------------ ------- ------------
Operating income (loss).............. 6,794 (805) (1,087) 4,902
Other expense:
Interest expense, net.................. (3,758) (2,484) 1,158(k) (5,084)
Reorganization costs................... (3,543) -- 3,543(l) --
Other.................................. 2,266 (189) -- 2,077
------------ ------------ ------- ------------
Total other expenses................. (5,035) (2,673) 4,701 (3,007)
------------ ------------ ------- ------------
Income (loss) before income taxes.... 1,759 (3,478) 3,614 1,895
Income tax expense....................... 2,184 (483) --(m) 1,701
------------ ------------ ------- ------------
Net income (loss)........................ (425) (2,995) 3,614 194
------------ ------------ ------- ------------
Net income (loss) applicable to common
stock.................................. $ (425) $ (2,995) $ 2,744 $ (676)
============ ============ ======= ============
Income (loss) per common share:
Net income (loss) from continuing
operations........................... $ 0.01
Dividend requirement on Preferred
Stock................................ (0.06)
------------
Net loss per common share................ $ (0.05)
============
Weighted average common shares
outstanding
Primary................................ 21,826,940 12,193,784 14,390,055
Fully diluted.......................... 21,826,940 13,433,430 14,390,055
OTHER FINANCIAL DATA:
Capital expenditures..................... $ 4,154 $ 10,661 $ 14,815
OPERATING DATA (AT PERIOD END):
Seismic crews in operation............... 13 7 20
Seismic recording channels owned......... 17,870 8,892 26,762
</TABLE>
See notes to unaudited pro forma financial statements.
23
<PAGE> 25
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Pro forma adjustments have been made to record certain transactions related
to the consummation of the Plan and certain related transactions, the issuance
of the Subordinated Note in exchange for 9,571.162 shares of Preferred Stock,
the Acquisition, which includes the transfer of shares of Solid State Stock to
Grant by the Selling Stockholders, which has been accounted for as an exchange
of ownership interest between entities under common control (as-if-pooling) and
the acquisition of the unaffiliated minority interest of Solid State, which has
been accounted for as a purchase. The excess of the purchase price over the
historical book value of the net assets acquired has been allocated on a
preliminary basis.
(a) Adjustment to record the exercise of 320,000 stock options to purchase
Solid State Stock ($392,000) by Solid State employees and the exercise
of 125,000 warrants for Solid State Stock ($147,320) by the Selling
Stockholders prior to the Acquisition.
(b) Adjustment to record the payment of certain employment contract
termination payments in the amount of $485,915.
(c) Adjustment to record the minority interest of Solid State before the
Acquisition, which includes the equity of Solid State at September 30,
1997 added to (a) above reduced by (b) above and multiplied by the
minority ownership factor (.361813).
(d) Adjustment to record the contribution by the Selling Stockholders of
their ownership (9,305,109 shares) in Solid State in exchange for
4,652,555 shares of Common Stock, which includes the equity of Solid
State at September 30, 1997 added to (a) above reduced by (b) above
and multiplied by the Selling Stockholders' ownership factor
(.638187).
(e) Adjustment to record the Selling Stockholders' basis in Solid State in
excess of the carrying value.
(f) Adjustment to record the Acquisition Financing from the Selling
Stockholders for the purchase of the minority interest in Solid State
in the form of a $15.800 million term note under the Credit Facility.
(g) Adjustment to record the purchase of the minority interest in Solid
State, including advisory, legal and accounting fees of approximately
$1.800 million. Goodwill is calculated as the difference between the
purchase price, including the acquisition costs, and the carrying
value of the minority interests calculated in (c) above.
(h) Adjustment to record the payment by the Selling Stockholders to Grant
of $33.953 million in exchange for 9,499,998 shares of Common Stock
and the subsequent payment by Grant to GGI of $34.783 million, the
balance of which was funded from existing cash ($830,000).
(i) Adjustment to record the exchange by the Selling Stockholders of
9,571.162 shares of Preferred Stock with a liquidation value of $9.571
million for the Subordinated Note, which matures on March 31, 1999 and
to record the reclassification of certain debt instruments from the
Selling Stockholders totaling $12.050 million, as Elliott has extended
the maturities of such debt instruments to March 31, 1999.
(j) Adjustment to record amortization of goodwill created in the
reorganization of Grant and the acquisition of the minority interest
in Solid State. The amortization period for the Grant and Solid State
goodwill is 30 years ($700,000 per annum) and 20 years ($750,000 per
annum), respectively.
(k) Adjustment to record interest expense for debt held by GGI, which was
not assumed by Grant under the Plan ($4.707 million for the twelve
month period and $2.976 million for the nine month period), and record
interest expense for the Subordinated Note and the term note referred
to in (f) above.
(l) Adjustment to remove reorganization costs.
(m) Income tax expense has not been recorded as a result of the benefits
available from an operating loss carryforward of Grant.
(n) At September 30, 1997, on a pro forma basis, stockholders' equity
assumes that the net realizable value of certain multi-client data
acquired by Solid State is equal to the book value of such data. Based
on the licensing revenues actually realized and on future licensing
prospects identified for such data through December 31, 1997, the
Company believes that there has been a permanent impairment in the net
realizable value of such data. As a result, at December 31, 1997, the
Company anticipates a significant reduction in the carrying value of
its multi-client data. Such reduction will correspondingly reduce
stockholders' equity.
24
<PAGE> 26
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The statement of operations data for GGI is presented below as of the end
of each of the years in the five-year period ended December 31, 1996 and the
nine-months ended September 30, 1997 is derived from the consolidated financial
statements of GGI. The balance sheet data of Grant at September 30, 1997 is
derived from the consolidated financial statements of Grant. This data should be
read in conjunction with such consolidated financial statements of GGI and Grant
and the notes thereto, included elsewhere in this Offering Circular.
<TABLE>
<CAPTION>
GGI
------------------------------------------------------------------------------------------
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------------- ------------------------
1992 1993 1994 1995 1996(1) 1996(2)(3) 1997
---------- ---------- ---------- ---------- ----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.................. $ 90,556 $ 69,255 $ 73,691 $ 91,996 $ 105,523 $ 80,925 $ 92,705
Expenses:
Operating expenses...... 66,042 53,678 53,132 69,046 136,326 83,243 71,006
Selling, general and
administrative
expense............... 12,337 13,375 7,810 8,527 17,865 8,948 6,473
Depreciation and
amortization.......... 14,617 13,078 12,079 9,424 11,500 8,237 8,432
Asset impairment........ 19,363 3,339 9,911 -- 5,802 -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses........ 112,359 83,470 82,932 86,997 171,493 100,428 85,911
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income
(loss).............. (21,803) (14,215) (9,241) 4,999 (65,970) (19,503) 6,794
Other income (deductions):
Interest expense, net... (2,244) (3,020) (3,384) (3,522) (7,522) (4,426) (3,758)
Reorganization costs.... -- -- -- -- (412) -- (3,543)
Other................... (4,331) 425 1,380 2,076 (502) 26 2,266
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total other income
(deductions)........ (6,575) (2,595) (2,004) (1,446) (8,436) (4,400) (5,035)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes........ (28,378) (16,810) (11,245) 3,553 (74,406) (23,903) 1,759
Income tax expense........ 1,508 143 193 391 1,621 945 2,184
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) from
continuing operations... $ (29,886) $ (16,953) $ (11,438) $ 3,162 $ (76,027) $ (24,848) $ (425)
========== ========== ========== ========== ========== ========== ==========
Net loss applicable to
common stock............ $ (44,581) $ (29,669) $ (16,696) $ (2,096) $ (82,390) $ (30,185) $ (425)
========== ========== ========== ========== ========== ========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Primary................. 11,929,074 12,145,100 12,470,704 12,535,352 14,699,824 13,455,767 21,826,940
Fully diluted........... 11,929,074 12,145,100 12,484,093 12,571,984 14,699,824 13,455,767 21,826,940
OTHER FINANCIAL DATA:
Capital expenditures...... $ 24,315 $ 5,781 $ 8,463 $ 14,921 $ 25,799 $ 25,061 $ 4,154
Cash provided by operating
activities.............. 12,647 2,133 3,170 2,759 (9,346) (15,029) 4,526
Cash provided by (used in)
investing activities.... (13,923) (1,128) (9,698) (9,272) (10,181) (9,873) (6,731)
Cash provided by (used in)
financing activities.... 574 (3,486) 5,260 6,929 25,667 23,906 1,289
OPERATING DATA (AT PERIOD
END):
Seismic crews in
operation............... 14 15 15 14 14 14 13
Seismic recording channels
owned................... 10,000 12,120 12,520 12,320 17,430(1) 17,430(1) 17,870(1)
</TABLE>
25
<PAGE> 27
<TABLE>
<CAPTION>
GGI
--------------------------------------------------------------
AT DECEMBER 31,
GRANT
-------
AT SEPTEMBER 30,
--------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996(2) 1997
-------- -------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.................................. $ 5,969 $ 2,992 $ 3,670 $ 1,147 $ 6,772 $ 437 $ 5,939
Working capital....................... (243) 4,585 3,022 8,033 22,421 (32,452) (24,039)
Total assets.......................... 118,548 70,745 61,609 86,932 70,123 105,982 82,849
Long-term debt, including current
portion............................. 33,320 15,859 19,412 27,219 589 56,199 10,149
Stockholders' equity (deficit)........ 60,689 37,774 26,399 29,715 (34,213) 15,692 19,571
</TABLE>
- ---------------
(1) Operating expenses for the year ended December 31, 1996 include costs of
operations in excess of planned costs in Peru ($23.0 million) and Nigeria
($2.5 million). The Company is no longer operating in Peru and Nigeria. Also
included in operating expenses are costs incurred in the United States
relating to the unsuccessful deployment of a proprietary data recording
system ($12.1 million) and a write-down of certain deferred costs, prepaid
expenses and other assets ($5.6 million). Selling, general and
administrative expenses for the year ended December 31, 1996 include a
reserve for doubtful accounts of $5.5 million, severance costs of $423,000,
the write-off of deferred costs of a proprietary data recording system of
$823,000 and legal fees of $367,000.
(2) The selected consolidated historical financial data, except for operating
data, for the nine-month period ended September 30, 1996 have been derived
from the unaudited consolidated financial statements of GGI, which include
all adjustments, consisting of normal recurring adjustments, that the
Company considers necessary for a fair presentation of its financial
position and results of operations for this period.
(3) Operating expenses for the nine months ended September 30, 1996 include
costs of operations in excess of planned costs in Peru ($10.7 million) and
Nigeria ($285,000). The Company is no longer operating in Peru and Nigeria.
Also included in operating expenses are costs incurred in the United States
relating to the unsuccessful deployment of a proprietary data recording
system ($4.2 million). Selling, general and administrative expenses for the
nine months ended September 30, 1996 include a reserve for doubtful accounts
of $1.3 million.
26
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and the notes thereto included elsewhere in
this Subscription Offering Prospectus.
GENERAL
The Company's business activities involve land and transition zone seismic
data acquisition in selected markets worldwide, including the United States,
Canada, Latin America and the Far East. The Company generally acquires seismic
data on an exclusive contract basis for oil and gas companies on (i) a turnkey
basis, which provides a fixed fee for each project, (ii) a term basis, which
provides for a periodic fee during the term of the project or (iii) a cost-plus
basis, which provides that the costs of a project, plus a percentage fee, are
borne by the customer. In addition, the Company acquires and owns certain
multi-client seismic data that is marketed broadly on a non-exclusive basis to
oil and gas companies.
Beginning in 1994, GGI concentrated on expanding its contract land and
transition zone seismic data acquisition services internationally. This
expansion coincided with an increase in demand for seismic data acquisition
services, particularly within the United States and Latin America. During the
two years ending December 31, 1996, GGI's revenues from United States operations
increased 51% from $27.8 million in 1994 to $42.1 million in 1996. Over this
same period, GGI expanded its international operations, particularly in Latin
America, realizing an increase in Latin American revenues from $15.6 million in
1994 to $57.1 million in 1996. This rapid expansion and the resulting need for
working capital put a tremendous strain on GGI's capital resources. In addition,
GGI began development of a proprietary data recording system in 1994 intended to
replace an older recording system used in transition zone areas. GGI's
management believed that the system would have relatively low development and
manufacturing costs when compared to third party systems. Problems with software
design and hardware availability, however, resulted in numerous delays and
substantial cost overruns. Moreover, the completed system did not meet
performance expectations. Consequently, the Company's projects were delayed due
to the development problems associated with the proprietary data recording
system and had to be conducted utilizing less appropriate equipment, resulting
in significant losses. GGI also incurred significant losses in Peru during 1996
as a result of its inability to accurately estimate production capabilities and
operating costs. During 1996, Peruvian operations had revenues of approximately
$27.5 million and operating losses of approximately $19.8 million, including
losses related to the shutdown of its operations in, and the withdrawal of
equipment and personnel from, the country. During late 1995 and all of 1996, GGI
experienced liquidity problems, which became severe by the second half of 1996.
In December 1996, GGI filed for protection under the United States
Bankruptcy Code and began its reorganization under the supervision of the
Bankruptcy Court. The filing was precipitated by the factors described above,
including a rapid and under-financed expansion in the United States and Latin
American markets, which contributed to poor operational results in these
markets. These factors impaired GGI's ability to service its indebtedness,
finance its existing capital expenditure requirements and meet its working
capital needs. In addition, GGI was unable to raise additional equity, causing a
disproportionate reliance on debt financing and equipment leasing. In connection
with its reorganization, GGI replaced its senior management, disposed of
unprofitable operations, operated as debtor in possession and developed the
Plan, which was confirmed by the Bankruptcy Court on September 15, 1997 and
consummated on the Effective Date with Grant's purchase of substantially all of
the assets and assumption of certain liabilities of GGI.
In December 1997, Grant, through SSGI, a wholly owned Canadian subsidiary,
acquired all of the outstanding shares of Solid State Stock. In connection with
the Acquisition, the Selling Stockholders exchanged their shares of Solid State
Stock for shares of Common Stock. On December 23, 1997, Solid State became an
indirect wholly owned subsidiary of the Company.
The Company believes that the combined operations of Grant and Solid State
will expand its market presence and enhance the Company's ability to compete
more effectively for projects in its selected markets. The Company also believes
that the Acquisition will increase management and operating depth, mitigate the
effects of seasonality and create operating efficiencies by consolidating
operations, increasing overall crew utilization and
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<PAGE> 29
reducing capital expenditures. As of December 31, 1997, the Company was
operating or mobilizing 21 seismic data acquisition crews, consisting of 17 land
and four transition zone crews, utilizing approximately 26,000 seismic recording
channels. According to industry sources, as of December 31, 1997, the Company is
the third largest land seismic data acquisition company operating in the western
hemisphere, based on the number of seismic data acquisition crews in operation.
RESULTS OF OPERATIONS OF GGI
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Revenues. GGI's consolidated revenues increased $11.8 million, or 15%, from
$80.9 million in the nine months ended September 30, 1996 to $92.7 million in
the comparable period for 1997. This increase was the result of increased
seismic data acquisition crew activity in the United States and the Far East.
During the nine months ended September 30, 1997, GGI's seismic data acquisition
capacity, measured by seismic recording channels owned, increased by 3%, from
17,430 to 17,870 seismic recording channels.
Revenues from United States seismic data acquisition operations increased
$6.4 million, or 18%, from $34.9 million in the nine months ended September 30,
1996, to $41.3 million in the comparable period for 1997. This increase was
primarily attributable to two transition zone crews operating along the Gulf
Coast. From time to time during each period, GGI operated as many as seven
seismic crews in the United States.
GGI's crew activity in Latin America declined from 1996 to 1997, although
revenues increased $658,000, or 2%, to $42.5 million in the nine months ended
September 30, 1997 compared with the same period in 1996. From time to time
during 1996, GGI operated as many as nine seismic crews in the region, including
four in Peru, two in Colombia and one in each of Bolivia, Brazil and Ecuador. In
late 1996 and the first quarter of 1997, GGI completed operations in both
Bolivia and Peru. Equipment and personnel from these locations were redeployed
in Colombia, Ecuador, Guatemala and the United States. During the first nine
months of 1997, GGI's Latin American operations consisted of as many as five
land seismic data acquisition crews operating in Colombia, Ecuador, Brazil and
Guatemala.
Revenues from the Far East increased $5.6 million, or 174%, from $3.2
million in the nine months ended September 30, 1996, to $8.9 million in the
comparable period in 1997. GGI mobilized and operated one land seismic data
acquisition crew in Bangladesh during the nine months ended September 30, 1996.
In the nine months ended September 30, 1997, GGI operated this land crew and
also mobilized a transition zone crew during the first and second quarters,
which began operations in Bangladesh in July 1997.
Expenses. GGI's consolidated operating expenses decreased $12.2 million, or
15%, from $83.2 million for the nine months ended September 30, 1996 to $71.0
million for the same period in 1997. Operating expenses as a percentage of
revenues decreased from 103% in the nine months ended September 30, 1996 to 77%
in the comparable period for 1997. During the nine months ended September 30,
1996, GGI experienced significant cost overruns, which increased operating
expenses on several crews operating in the United States. Most notable were
higher than anticipated costs incurred by a transition zone crew as a result of
adverse weather conditions and costs associated with the unsuccessful deployment
of a proprietary data recording system. The proprietary data recording system
was abandoned in November 1996. Also, during the nine months ended September 30,
1996, GGI's Peruvian operations experienced crew costs significantly higher than
originally projected primarily due to a combination of modified job parameters
that were not accurately reflected in the turnkey contract price and a lack of
effective crew oversight.
Selling, general and administrative expenses decreased $2.4 million, or
28%, from $8.9 million for the nine months ended September 30, 1996 to $6.5
million for the same period in 1997. Selling, general and administrative
expenses decreased as a percentage of revenue from 11% in 1996 to 7% in 1997.
This decrease was the result of an increase in consolidated revenue, a cost
reduction at the corporate offices beginning in the fourth quarter of 1996 and a
reduction in foreign overhead due to the sale of GGI's operations in Nigeria.
Depreciation and amortization increased $195,000, or 2%, from $8.2 million
for the nine months ended September 30, 1996 to $8.4 million for the same period
in 1997. This slight increase was the result of
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<PAGE> 30
depreciation on equipment that was converted from leased to owned equipment
during the nine months ended September 30, 1997.
Other Income (Deductions). Interest expense, net, decreased $668,000, or
15%, from $4.4 million for the nine months ended September 30, 1996 to $3.8
million for the same period in 1997. This was the result of a decrease in the
use of foreign credit facilities in Latin America, which was partially offset by
increased interest expense in the United States.
Reorganization costs of $3.5 million related to charges incurred in
connection with GGI's reorganization, which was completed in September 1997.
There were no comparable charges for the nine months ended September 30, 1996.
Other income of $2.3 million was the result of the settlement of a
longstanding dispute between one of GGI's Brazilian subsidiaries and a former
customer relating to services rendered on contracts dating back to 1983. In
settlement of all claims, GGI received payment, net of related costs and
expenses, of approximately $2.4 million in July 1997.
Tax Provision. The income tax provision in both periods consisted of income
taxes in foreign countries. The increase from the nine months ended September
30, 1996 compared with the same period in 1997 is a result of higher taxable
income in Colombia and Ecuador. No provision for United States federal income
tax was made in either period as GGI had net losses available for carryforward.
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
Revenues. GGI's consolidated revenues increased $13.5 million, or 15%, from
$92.0 million in 1995 to $105.5 million in 1996. This increase resulted from
significant growth in GGI's international operations in Latin America and
Bangladesh, which growth was offset partially by a reduction in revenues from
the United States and Nigeria. During 1996, GGI's seismic data acquisition
capacity, measured by seismic recording channels owned, increased by
approximately 41%, from 12,320 to 17,430 seismic recording channels.
Revenues from United States data acquisition operations decreased $5.8
million, or 12%, to $42.1 million in 1996 when compared with 1995. This
reduction was principally the result of several factors experienced during the
fourth quarter of 1996, including a severe shortage of operating funds, which
caused major disruptions on many domestic crews and resulted in lower revenues.
Additionally, GGI's proprietary data recording system, which operated for four
months in 1996, experienced lower than anticipated production performance, which
led to crew disruptions and delays causing further loss of revenues. GGI's
inability to adequately fund the crew operating the proprietary data recording
system resulted in the suspension of the system's use in November 1996.
Furthermore, a transition zone crew, operating along the coast of Louisiana, was
hampered by severe weather and the frequent failure of leased equipment, which,
combined with the Company's liquidity problems, resulted in the postponement of
the survey.
Revenues from international operations increased $19.3 million, or 44%,
from $44.1 million in 1995, to $63.4 million in 1996. This increase was
primarily the result of significant increases in seismic operations in Latin
America and, to a lesser extent, in the Far East, which increases were partially
offset by a reduction in revenues from Nigeria.
Latin American revenue during 1996 increased $31.6 million, or 124%, from
$25.5 million in 1995, to $57.1 million in 1996. During 1996, GGI operated one
crew in each of Bolivia, Brazil and Ecuador, two crews in Colombia and four
crews in Peru. In 1995, crew activity consisted of one crew during the fourth
quarter in Bolivia, one crew in Brazil, one to two crews in Colombia and three
crews in Peru. The most significant revenue increases in 1996 occurred in
Colombia and Peru, where revenues increased $8.2 million, or 181%, to $12.7
million, and $13.8 million, or 100%, to $27.5 million, respectively. Due to
significant operating losses incurred in Peru during 1996, GGI discontinued
operations in Peru and moved the seismic equipment from its Peruvian crews to
other GGI crews.
Revenues from the Far East increased 49%, or $1.8 million, from $3.6
million in 1995, to $5.4 million in 1996. In 1996, crew activity consisted
primarily of one transition zone crew in operation for the entire year in
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<PAGE> 31
Bangladesh, as compared to 1995, when GGI operated one crew in Indonesia and
mobilized the Bangladesh crew in the fourth quarter.
Revenues from Nigeria decreased 94%, or $13.3 million, from $14.2 million
in 1995, to $904,000 in 1996. GGI operated three crews during most of 1995 in
Nigeria, but completed two of these three contracts in the fourth quarter of
1995 and the remaining contract in the first quarter of 1996. Although GGI
participated in bidding for new contracts, all three crews remained idle during
1996. Due to the risks involved in operating in Nigeria, the anticipated high
cost of mobilizing a new crew and the limited resources available to GGI at the
time, GGI sold its Nigerian operation as of December 1996. GGI had no revenues
from the Middle East during 1996. Middle East revenue in 1995, totaling
$786,000, was the result of various rental contracts for equipment and personnel
that expired in July 1995.
Expenses. GGI's consolidated operating expenses increased $67.3 million, or
97%, from $69.0 million in 1995 to $136.3 million in 1996. Operating expenses as
a percentage of revenues increased to 129% in 1996 from 75% in 1995. This
increase was due to higher than anticipated operating costs principally in the
United States, Peru and Nigeria, accelerated amortization of prepaid and
deferred costs associated with certain ongoing operations, and the write-down of
certain other GGI assets as a result of a comprehensive review of GGI's
operations.
In the United States, adverse weather conditions and the repeated breakdown
of a leased data recording system combined to increase operating expenses by
approximately $7.7 million on one transition zone crew. The slow development and
late deployment of GGI's proprietary data recording system also affected
operations in the United States in 1996. The proprietary data recording system
was originally planned to be completed and operational by early 1996, but
completion was delayed until the summer of 1996. As a result, several contracts
that were priced and bid with the expectation that the proprietary data
recording system would be employed were performed with other, less appropriate
equipment. This resulted in operating losses on such contracts of approximately
$3.0 million. When the proprietary data recording system was finally deployed in
July 1996, the system's production performance was well below anticipated
levels, causing additional operating expenses of approximately $1.4 million. The
late deployment and poor performance of the proprietary data recording system
caused a general equipment shortage during most of 1996, resulting in a
shuffling of equipment between GGI's crews, which caused inefficiencies and
higher than anticipated operating expenses.
In Peru, actual operating expenses exceeded planned costs by approximately
$23.0 million, primarily due to a combination of modified job parameters that
were not accurately reflected in the turnkey contract price and a general lack
of effective crew oversight. In Nigeria, GGI continued to incur certain
operating expenses despite a lack of crew activity during most of the year.
These operating expenses exceeded expectations by $2.7 million and were
primarily related to standby costs incurred while pursuing new contracts.
Selling, general and administrative expenses increased $9.3 million, or
110%, from $8.5 million in 1995 to $17.9 million in 1996. Selling, general and
administrative expenses increased as a percentage of revenue to 17% in 1996 from
9% in 1995. This increase was primarily attributable to allowances and charges
incurred at the corporate headquarters that resulted in an increase in corporate
overhead of approximately $6.8 million, including an increase in the reserve for
doubtful trade accounts of approximately $5.5 million for 1996 compared to no
increase in the reserve for 1995. Other significant one time or unusual items
incurred in 1996 included severance costs of $423,000, a write-off of the
proprietary data recording system startup costs of $824,000 and legal fees and
settlements of $367,000.
Depreciation and amortization expenses increased $2.1 million, or 22%, from
$9.4 million in 1995, to $11.5 million in 1996. This increase was principally
due to the increased level of depreciable assets. Additions to fixed assets
during 1995 and 1996 were approximately $14.9 million and $26.0 million,
respectively.
At December 31, 1996, GGI recorded a special charge for asset impairment of
$5.8 million. Management considered this special charge to be necessary
following an assessment of events and changes in circumstances that clearly
indicated that the carrying value of certain assets was not recoverable. This
charge related solely to the write-down of the carrying value of the proprietary
data recording system discussed previously.
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<PAGE> 32
Other Income (Deductions). Interest expense, net, increased $4.0 million,
or 114%, from $3.5 million in 1995, to $7.5 million in 1996. The increase in
interest expense, net, was the result of $1.1 million of interest paid on
financing of additional equipment purchases, $921,000 related to increased
domestic working capital borrowings, $589,000 attributable to new financing
evidenced by subordinated convertible debentures and $950,000 of interest
attributable to an increased usage of foreign lines of credit.
Other income (deductions) for 1996 consisted primarily of foreign exchange
losses of $251,000 and a $198,000 loss on the sale of the Venezuelan and
Nigerian subsidiaries. Other income (deductions) for 1995 included a $1.2
million gain on an insurance settlement and a $212,000 gain on the sale of
miscellaneous fixed assets.
Tax Provision. The income tax provisions in both periods consisted of
income taxes in foreign countries. No provision for United States federal income
taxes was made in either period as GGI had net operating losses available to
offset domestic taxable income.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. GGI's consolidated revenues increased $18.3 million, or 25%, from
$73.7 million in 1994, to $92.0 million in 1995. The revenue growth during 1995
was primarily due to an increase in GGI's seismic services in the United States,
which was offset slightly by a decrease in revenues from GGI's international
operations. During 1995, GGI's seismic data acquisition capacity, measured by
seismic recording channels owned, decreased by approximately 2%, from 12,520 to
12,320 seismic recording channels.
Revenues from United States data acquisition operations increased $20.1
million, or 72%, from $27.8 million in 1994, to $47.8 million in 1995. Revenues
from international operations decreased $1.8 million, or 4%, from $45.9 million
in 1994, to $44.1 million in 1995, primarily due to the completion of Middle
East operations in August 1994 and reduced activity in the Far East and Nigeria
during 1995. These decreases were partially offset by a significant increase in
Latin American operations during 1995.
Revenues from Latin America increased $9.9 million, or 63%, from $15.6
million in 1994, to $25.5 million in 1995. This increase was primarily the
result of mobilizing three crews into Peru during March, April and May of 1995
to accommodate market demand. These crews had operated in Bolivia and Colombia
during 1994.
Revenues from the Far East declined by $2.4 million, or 40%, from $6.0
million in 1994, to $3.6 million in 1995, due primarily to lower crew
utilization in the region. GGI operated two crews in the region throughout the
majority of 1994, with one crew operating under a sizable contract. During 1995,
GGI again operated two crews; however, the contracted jobs were of a shorter
duration and lower value. In addition, operations in Bangladesh were temporarily
suspended due to political unrest, but were resumed shortly thereafter.
Revenues from Nigerian operations decreased $1.3 million, or 8%, from $15.5
million in 1994, to $14.2 million in 1995. By October 31, 1995, two of GGI's
crews had completed all of their contractual backlog and were demobilized. GGI
continued to operate a third crew in Nigeria for all of 1995. Middle East
operations in 1994 consisted of one transition zone crew in Abu Dhabi that was
demobilized in August 1994. No revenue from seismic services was generated in
the Middle East during 1995, although revenue was received from ongoing
equipment rental contracts with local seismic contractors. The Abu Dhabi office
was closed in August 1995.
Expenses. GGI's consolidated operating expenses increased $15.9 million, or
30%, from $53.1 million in 1994, to $69.0 million in 1995. Operating expenses as
a percentage of revenue increased to 75% in 1995 from 72% in 1994. The increase
in operating expenses resulted primarily from increased seismic data acquisition
activity in the United States and Latin America. The increase in expenses as a
percentage of revenues was primarily a result of higher direct operating
expenses in Nigeria during 1995. Operating efficiencies achieved during 1994
were not repeated during 1995 due to a lack of available funding and equipment
shortages and difficult terrain encountered on certain surveys.
Selling, general and administrative expenses increased $717,000, or 9%,
from $7.8 million in 1994, to $8.5 million in 1995, but decreased as a
percentage of revenue to 9% in 1995, from 11% in 1994, principally due to a
significant increase in revenue without a comparable increase in overhead.
One-time charges relating to the
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<PAGE> 33
termination of a proposal to reclassify GGI's preferred stock and increased
overhead costs in Peru and the United States contributed to the increase in
these expenses during 1995.
Depreciation and amortization expenses decreased $2.7 million, or 22%, from
$12.1 million in 1994, to $9.4 million in 1995. This decrease was principally
attributable to a reduced level of depreciable assets resulting from a special
charge for asset impairment recorded in December 1994.
Other Income (Deductions). Interest expense, net, increased by $138,000, or
4%, from $3.4 million in 1994, to $3.5 million in 1995. Demobilization costs for
two crews in Nigeria, coupled with a lack of working capital, contributed to the
increased usage of foreign lines of credit in Nigeria during the third and
fourth quarter of 1995, which contributed to the increase in interest expense in
1995.
Other income (deductions) for 1995 consisted primarily of a $1.2 million
gain on an insurance recovery and a $212,000 gain on the sale of miscellaneous
fixed assets. Other income (deductions) for 1994 resulted from the recovery of
approximately $664,000 in bad debt and a non-recurring royalty income item of
$500,000.
Tax Provision. The income tax provision in both periods consisted of income
taxes in foreign countries. No provision for United States federal income taxes
was made in either period as GGI had net operating losses available to offset
domestic taxable income.
RESULTS OF OPERATIONS OF SOLID STATE
Year Ended August 31, 1997 Compared to the Year Ended August 31, 1996
Net Contract Revenues. Solid State's consolidated net contract revenues
for seismic data acquisition services increased Cdn $18.6 million, or 68%, from
Cdn $27.3 million for fiscal 1996 to Cdn $45.9 million in fiscal 1997.
Solid State's Canadian seismic data acquisition activity increased Cdn $3.9
million, or 24%, from Cdn $16.0 million for fiscal 1996 to Cdn $19.9 million in
fiscal 1997. This increase was primarily the result of a higher industry demand
for services and favorable weather conditions coupled with overall higher
productivity by Solid State's seismic data acquisition crews.
Solid State's United States net contract revenues for seismic data
acquisition services increased Cdn $3.0 million, or 54%, from Cdn $5.6 million
in fiscal 1996 to Cdn $8.6 million in fiscal 1997. The increase in net contract
revenues was the result of the availability of equipment redeployed from
multi-client data library acquisition activity and improved productivity by
Solid State's seismic data acquisition crew.
Net contract revenue for seismic data acquisition services from geographic
areas located outside North America increased Cdn $11.8 million, or 227% from
Cdn $5.2 million in fiscal 1996 to Cdn $17.0 million in fiscal 1997. One crew
operated outside North America in fiscal 1996, while three crews operated
outside North America (in South America and the Middle East) during fiscal 1997.
Multi-client data library revenues decreased Cdn $10.9 million, or 73%,
from Cdn $14.9 million in fiscal 1996 to Cdn $4.0 million in fiscal 1997.
Revenues associated with a multi-client data acquisition project in southern
Louisiana, which revenues were recorded in fiscal 1996, accounted for
approximately Cdn $8.9 million of the decrease. The Canadian multi-client data
library sales were Cdn $6.0 million in fiscal 1996 compared to Cdn $191,000 in
fiscal 1997.
Cost of Sales. Solid State's costs of sales increased Cdn $12.0 million,
or 57%, from Cdn $21.3 million in fiscal 1996 to Cdn $33.3 million in fiscal
1997. The primary reason for the increase was the higher level of activity
experienced by Solid State's seismic data acquisition crews in most geographic
segments coupled with cost overruns associated with a Venezuelan crew and
resulting from adverse weather and work conditions and productivity shortfalls
related to inexperienced local management. This Venezuelan contract was
completed and the crew demobilized and returned to Solid State's core operations
in Canada. At August 31, 1997, in accordance with Canadian generally accepted
accounting principles, all anticipated losses for the Venezuelan contract were
provided for.
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General and Administrative Expenses. Solid State's general and
administrative expenses increased Cdn $968,000, or 32%, from Cdn $3.0 million in
fiscal 1996 to Cdn $4.0 million in fiscal 1997. This increase is primarily
attributed to the administrative expense of the Venezuelan activities discussed
above and severance expense for certain senior managers in the course of Solid
State's corporate restructuring process.
Restructuring Costs and Other. Solid State's restructuring costs and other
decreased Cdn $642,000, or 74%, from Cdn $873,000 in fiscal 1996 to Cdn $231,000
in fiscal 1997. The charges in 1996 represented legal fees, financial advisory
fees, and certain bank charges related to various financial restructuring
initiatives. In 1997, an additional restructuring expense of Cdn $231,000 was
incurred, which represented fees paid to financial advisors charged with
locating additional capital resources for Solid State.
Depreciation and Amortization. Solid State's depreciation and amortization
increased Cdn $3.1 million, or 53%, from Cdn $5.9 million in fiscal 1996 to Cdn
$9.0 million in fiscal 1997. This is a direct result of more equipment deployed
in seismic data acquisition operations.
Interest. Solid State's short-term interest increased Cdn $1.0 million, or
109%, from Cdn $953,000 in fiscal 1996 to Cdn $2.0 million in fiscal 1997. This
increase was primarily because of additional borrowings at high interest rates.
Long-term interest increased Cdn $343,000, or 20% from Cdn $1.7 million in
fiscal 1996 to Cdn $2.1 million in fiscal 1997, reflecting higher loan balances
at slightly lower weighted interest rates.
Year Ended August 31, 1996 Compared to the Year Ended August 31, 1995
Net Contract Revenues. Solid State's consolidated net contract revenues
from seismic data acquisition services decreased Cdn $1.6 million, or 5% from
Cdn $28.9 million in fiscal 1995 to Cdn $27.3 million in fiscal 1996. Canadian
and United States net contract revenues increased, but were more than offset by
the overall decline in net contract revenues from locations outside North
America.
Net contract revenues from seismic data acquisition services in Canada
increased Cdn $400,000, or 2%, from Cdn $19.4 million in fiscal 1995 to Cdn
$19.8 million in fiscal 1996.
Net contract revenues for seismic data acquisition services in the United
States increased Cdn $5.5 million, or 19,768%, from Cdn $28,000 in fiscal 1995
to Cdn $5.6 million in fiscal 1996. This increase was the result of Solid State
entering the U.S. market for approximately the first half of fiscal 1996. This
crew was re-deployed to Canada in mid-year fiscal 1996.
Net contract revenue for seismic data acquisition services from geographic
segments located outside North America decreased Cdn $7.2 million, or 56%, from
Cdn $12.9 million in fiscal 1995 to Cdn $5.7 million in fiscal 1996. Three crews
operated outside North America (two in South America and one in the Middle East)
during fiscal 1995, while only one crew operated outside North America in fiscal
1996.
Multi-client data library revenues increased Cdn $14.1 million, or 1,826%,
from Cdn $773,000 in fiscal 1995 to Cdn $14.9 million in fiscal 1996. Revenues
associated with a multi-client data acquisition project in southern Louisiana,
which revenues were recorded in fiscal 1996, accounted for approximately Cdn
$8.9 million of the increase. The Canadian multi-client data library sales
increased from Cdn $773,000 in fiscal 1995 to Cdn $6.0 million in fiscal 1996.
Cost of Sales. Solid State's costs of sales increased Cdn $866,000, or 4%,
from Cdn $20.4 million in fiscal 1995 to Cdn $21.2 million in fiscal 1996.
Higher costs for leased recording equipment in Canada of approximately Cdn $1.1
million was the primary reason for the increase.
General and Administrative Expenses. Solid State's general and
administrative expenses increased Cdn $724,000, or 32%, from Cdn $2.3 million in
fiscal 1995 to Cdn $3.0 million in fiscal 1996. The primary reason for the
increase was that Solid State opened a new office in the United States and the
expenses reflect a full year's cost component.
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Restructuring Costs and Other. Solid State's restructuring costs and other
increased Cdn $873,000, as Solid State incurred charges in 1996 for legal fees,
financial advisory fees, and certain bank charges related to various financial
restructuring initiatives. There were no corresponding costs in fiscal 1995.
Depreciation and Amortization. Solid State's depreciation and amortization
expense decreased Cdn $112,000, or 2%, from Cdn $6.0 million in fiscal 1995 to
Cdn $5.9 million in fiscal 1996.
Interest. Solid State's short-term interest increased Cdn $844,000, or
774%, from Cdn $109,000 in fiscal 1995 to Cdn $1.0 million in fiscal 1996. Solid
State utilized its credit facility with a local banking institution for the
majority of 1996. Long-term debt interest increased Cdn $648,000, or 61%, from
Cdn $1.1 million in fiscal 1995 to Cdn $1.7 million in fiscal 1996. This is a
result of a net increase in long-term debt and higher interest rates.
CANADIAN AND UNITED STATES ACCOUNTING POLICY DIFFERENCES
The discussion under "-- Results of Operations of Solid State" has been
prepared in conjunction with the consolidated financial statements, included
elsewhere in this Subscription Offering Prospectus, that have been prepared in
accordance with Canadian generally accepted accounting principles ("GAAP"). In
certain aspects GAAP as applied in the United States differs from Canadian GAAP.
Balance Sheet. Under Canadian GAAP, foreign exchange gains and losses
resulting from long-term monetary items of the reporting company are deferred
and amortised over the lives of those monetary items. Under U.S. GAAP these
gains and losses would be expenses in the period. At August 31, 1996 and 1997,
the deferred exchange loss on the balance sheet under U.S. GAAP would be zero.
Under U.S. GAAP the multi-client data, current portion, would be reclassed
to multi-client data, less current portion. The amounts that would be reclassed
at August 31, 1996 and 1997, are Cdn $6.0 million and Cdn $2.5 million
respectively.
Under U.S. GAAP debt covenants, violations must be waived for a full year
to classify the debt as long-term. None of the debt instruments had these
waivers. At August 31, 1997 Cdn $18.7 million currently classified as long-term
would be reclassed as current.
Consolidated Statements of Operations. For U.S. reporting, net amounts
billed to customers for reimbursable costs would have reduced revenues from
those reported in the financial statements and resulted in changed costs of
sales with no change in gross margins. The amount of revenue associated with the
reimbursable costs was Cdn $7.3 million, Cdn $12.7 million and Cdn $13.2 million
for the fiscal years ended August 31, 1995, 1996 and 1997, respectively.
Under U.S. GAAP, foreign exchange gains and losses resulting from long-term
monetary items of the reporting company are expensed in the period. Under
Canadian GAAP these gains and losses are deferred and amortised over the lives
of those monetary items. For the year ended August 31, 1995, Solid State had
gains totaling Cdn $100,000. For the fiscal years ended August 31, 1996 and
1997, Solid State had losses totaling Cdn $100,000 and Cdn $200,000,
respectively.
Additionally in the fiscal year ended August 31, 1997 for U.S. GAAP
reporting, proceeds from the conversion feature of the convertible debenture
that was issued in 1996 would have been considered part of shareholders' equity
instead of being reported as part of the debt amount. This significant amount
was determined by the difference between the conversion price for the shares and
the trading price of the shares at the date of the grant. When the debt was
retired in fiscal 1997, this difference was an additional loss on the
extinguishment of debt in the fiscal year ended August 31, 1997 in the amount of
Cdn $500,000.
SEASONALITY
GGI's land and transition zone seismic data acquisition activities were
traditionally seasonal in nature, with decreased revenues experienced during the
first quarter of each year due to the effects of weather conditions in the
United States and delays by customers in committing their annual geophysical
expenditure budgets to specific
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projects. The Company believes that the Acquisition will help mitigate this
traditional seasonality due to Solid State's Canadian operations, which
generally experience a peak during the first quarter of the year, primarily due
to favorable ground conditions in Canada.
IMPACT OF SOLID STATE ACQUISITION
The Company believes that the Acquisition will increase management and
operating depth, mitigate the effects of seasonality and create operating
efficiencies by consolidating operations, increasing overall crew utilization
and reducing capital expenditures. Solid State, however, has incurred operating
losses in two of its most recent three fiscal years and has experienced
significant net losses in each of its most recent three fiscal years after
accounting for costs and charges for interest, income taxes and asset
writedowns. Aggregate net losses during this three-year period totaled Cdn $21.6
million on aggregate contract revenues of Cdn $171.6 million. See the
consolidated financial statements of Solid State and notes thereto, included
elsewhere in this Subscription Offering Prospectus.
The losses experienced by Solid State were primarily the result of
specific, identifiable events. The most significant loss incurred by Solid State
during this three-year period related to a 1996 multi-client data project in
southern Louisiana. On this project, Solid State incurred a loss of
approximately Cdn $10.0 million. This loss primarily resulted from materially
underestimated costs associated with working in swamp, marsh and river
environments where Solid State had very limited operating experience. The
collection of such multi-client data was completed in 1997, and such data was
written down to its then estimated net realizable value in connection with Solid
State's audit for fiscal 1996. At September 30, 1997, on a pro forma basis, the
carrying value of such multi-client data was approximately $11.3 million. Based
on licensing revenues actually realized and on future licensing prospects
identified for such data through December 31, 1997, management of the Company
believes that there has been a permanent impairment in the net realizable value
of such data. As a result, management of the Company anticipates a significant
reduction in the carrying value of its multi-client data as of December 31,
1997.
In fiscal 1997, Solid State incurred losses of approximately Cdn $5.5
million primarily related to a turnkey project for an oil company in Venezuela.
A combination of limited operating experience in the jungle environment,
combined with a lack of sufficient organizational infrastructure, resulted in
poor productivity and substantially increased costs. This project was completed
in November 1997 and the equipment and permanent personnel relocated to Solid
State's core Canadian operations. The losses associated with the Venezuelan
project were recognized in Solid State's fiscal 1997 results.
In 1996 and 1997, Solid State failed to comply with certain financial
covenants under certain agreements relating to its outstanding indebtedness. In
addition, certain other debt instruments of the Company contain cross-default
provisions under which a failure to comply with any covenant in one instrument
could become a default under such other debt instruments. Solid State has
obtained waivers of certain covenants and events of default under certain of its
outstanding debt instruments. Solid State has not, however, obtained waivers
under all such debt instruments under which it may be in default. The Company
believes that it will be able to obtain such waivers and to comply with such
covenants in 1998 and the foreseeable future. There can be no assurance,
however, that these debt holders will not accelerate such indebtedness and
demand immediate payment of the outstanding amount of such indebtedness. Such
acceleration and demand by debt holders would have a significant adverse effect
upon the Company's financial condition.
Management of the Company believes that the operating difficulties outside
of Canada that have impacted Solid State's financial results in the past three
years have been satisfactorily addressed and are less likely to reoccur in
future periods. However, because of conditions that may impair Solid State's
ability to continue as a going concern, Price Waterhouse, chartered accountants
for Solid State, has supplemented its opinion on Solid State's fiscal 1997
financial statements. There can be no assurance that the operations of Solid
State that are being purchased in the Acquisition will not incur significant
operating losses in future periods.
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<PAGE> 37
LIQUIDITY AND CAPITAL RESOURCES
The Company's internal sources of liquidity are its cash balances ($5.9
million at December 31, 1997) and cash flow from operations ($19.7 million of
operating income plus depreciation for the nine months ended September 30, 1997,
on a pro forma basis). External sources include the unutilized portion of the
Credit Facility with Elliott ($4.2 million at December 31, 1997), equipment
financing and trade credit. The Credit Facility provides for a $5 million
revolving credit facility, which currently provides for borrowings at an
interest rate per annum of the prime rate plus 2%, secured by liens on
substantially all of the assets of the Company and certain of its subsidiaries.
The Company anticipates that it will replace the Credit Facility with a new
credit facility with an unaffiliated lender, which will provide the Company with
greater borrowing capacity. The Credit Facility limits the Company from taking,
without the consent of the lender, certain actions, including creating
indebtedness in excess of specified amounts and declaring and paying dividends.
In addition to its borrowing under the Credit Facility, the Company periodically
enters into equipment financing agreements with sellers of seismic data
acquisition equipment to pay all or a portion of the purchase price of such
equipment and regularly utilizes normal trade credit in connection with certain
of its purchases of goods and services to support its ongoing field crew
activities.
The Company's principal uses of liquidity will be to provide working
capital, finance capital expenditures, make principal and interest payments
required by the terms of its indebtedness and fund expenses associated with the
implementation of its business strategy. Because of the traditionally longer
period required to collect receivables and the high costs associated with
equipping and operating crews outside of the United States and Canada, the
Company requires significant levels of working capital to fund its international
operations. These operations accounted for 53% of the Company's total revenues
for the nine months ended September 30, 1997, on a pro forma basis.
The Company's capital expenditures, on a pro forma basis, for the year
ended December 31, 1996 were $32.6 million and for the nine months ended
September 30, 1997 were $14.8 million. Capital expenditures are used primarily
by the Company to purchase seismic data acquisition equipment. The Company
committed approximately $11 million of capital expenditures during the fourth
quarter of 1997 and has budgeted approximately $21 million of capital
expenditures in 1998 to upgrade and expand its seismic data acquisition
equipment. For 1998, the Company has also budgeted approximately $16 million of
capital expenditures, before customer commitments, for multi-client data
acquisition activities. The 1997 capital spending commitments made to date by
Grant have been financed primarily through the issuance of short-term promissory
notes to the sellers of equipment. The Company intends to finance its fiscal
1998 capital spending program from a combination of its operating cash flow,
seller-provided financing and other external sources. There can be no assurance
that financing will be available or will be available on terms acceptable to the
Company.
At December 31, 1997, on a pro forma basis, the Company had total
indebtedness (exclusive of trade credit and accrued liabilities) of
approximately $67.3 million, which has increased to approximately $72.8 million
as of December 1997. In aggregate, the Selling Stockholders are the holders of
approximately $42.9 million of such indebtedness. As of December 15, 1997, the
accrued interest on such indebtedness was approximately $1.1 million. The
Company's pro forma total indebtedness is comprised of $16.6 million of advances
under the Credit Facility (including $800,000 of revolving advances and $15.8
million under a term loan used to complete the Acquisition), $16.7 million of
loans, primarily for working capital, advanced to Solid State by Elliott prior
to the date of the Acquisition including working capital loans of $4.5 million
made to Solid State by the Selling Stockholders, the $9.6 million Subordinated
Note issued to Elliott, $3.8 million of advances under a bank revolving credit
facility advanced to Solid State prior to the completion of the Acquisition (the
"Solid State Revolver"), $7.2 million of remaining balances under term loans
made by a bank to Solid State prior to the completion of the Acquisition (the
"Solid State Term Loans") and $18.9 million of combined loans and capitalized
leases incurred for the purpose of financing capital expenditures (the
"Equipment Loans").
In 1996 and 1997, Solid State failed to comply with certain financial
covenants under certain agreements relating to its outstanding indebtedness. In
addition, certain other debt agreements of the Company contain cross-default
provisions under which a failure to comply with any covenant in one agreement
could become a default under such other debt agreements. Solid State has
obtained waivers of certain covenants and events of default
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<PAGE> 38
under certain of its outstanding debt instruments. Solid State has not, however,
obtained waivers under all such debt instruments under which it may be in
default. The Company believes that it will be able to obtain such waivers and to
comply with such covenants in 1998 and the foreseeable future. There can be no
assurance, however, that these debt holders will not accelerate such
indebtedness and demand immediate payment of the outstanding amount of such
indebtedness. Such acceleration and demand by debt holders would have a
significant adverse effect upon the Company's financial condition.
A significant amount of the Company's outstanding indebtedness presently
matures on March 31, 1999. The Company is currently exploring various
alternatives to refinance all or a significant portion of its indebtedness,
including the amounts due on March 31, 1999. However, there can be no assurance
that such indebtedness can be refinanced or can be refinanced on terms
acceptable to the Company. Absent new financing or a renewal and extension of a
significant portion of the maturing indebtedness, it is highly unlikely that the
Company's sources of liquidity would be sufficient to pay all maturing
indebtedness and continue adequately to fund the Company's working capital and
capital expenditure requirements and expenses associated with the implementation
of its business strategy. In such event, the Company's business would be
adversely affected.
FOREIGN EXCHANGE GAINS AND LOSSES
The Company conducts a substantial portion of its business in currencies
other than the U.S. dollar or Canadian dollar, particularly various Latin
American currencies, and its operations are subject to fluctuations in foreign
currency exchange rates. Accordingly, certain of the Company's international
contracts could be significantly affected by fluctuations in exchange rates,
particularly in Brazil and Columbia. The Company's international contracts
require payment in U.S. dollars, Canadian dollars, various local currencies or a
combination thereof. Payments in local currencies typically are indexed to
inflationary tables and generally are used for local expenses. The Company
attempts to structure the majority of its international contracts to be billed
and paid at a certain U.S. dollar conversion rate. Additionally, the Company's
foreign subsidiaries periodically enter into local currency debt to pay expenses
incurred locally. The Company presently does not use any derivatives or forward
foreign currency exchange rate hedging arrangements, but may elect to do so in
the future.
GGI's operating results were negatively impacted by foreign exchange losses
of approximately $98,000 during the nine months ended September 30, 1997, and
$251,000 during 1996. Foreign exchange gains positively impacted operating
results in 1995 and 1994 by approximately $102,000 and $121,000, respectively.
EFFECT OF INFLATION
Current economic conditions indicate that the costs of exploration and
production for oil and gas are increasing. The oil and gas industry historically
has experienced periods of rapid cost increases within short periods of time as
demand for drilling rigs, drilling pipe and other materials and supplies
increases. The oil and gas industry is currently experiencing such increases in
demand, which have historically led to rapid increases in costs. Increases in
exploration and production costs could lead to a decrease in such activities by
oil and gas companies, which would have an adverse effect on the demand for the
Company's services.
YEAR 2000 COMPLIANCE
The Company does not expect that the cost of converting its computer
systems to year 2000 compliance will be material to its financial condition. The
Company believes that it will be able to achieve year 2000 compliance by the end
of 1999, and it does not currently anticipate any disruption in its operations
as the result of any failure by the Company to be in compliance. The Company
does not currently have any information concerning the year 2000 compliance
status of its customers.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 128, Earnings per Share
("SFAS 128"). SFAS 128 specifies the compilation, presentation and disclosure
requirements for earnings per share for entities with publicly held common stock
or
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<PAGE> 39
potential common stock. Grant adopted SFAS 128 in the quarter ended December 31,
1997. Management does not believe that the implementation of SFAS 128 will have
a material effect on its financial statements.
In December 1997, the Company was required to adopt Statement of Financial
Accounting Standards No. 129, Disclosure of Information about Capital Structure
("SFAS 129"). SFAS 129 requires that all entities disclose in summary form
within the financial statements the pertinent rights and privileges of the
various securities outstanding. An entity is to disclose within the financial
statements the number of shares issued upon conversion, exercise, or
satisfaction of required conditions during at least the most recent annual
fiscal period and any subsequent interim period presented. Other special
provisions apply to preferred and redeemable stock. The Company adopted SFAS 129
in the quarter ended December 31, 1997.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income ("SFAS 130"), which establishes
standards for reporting and display of comprehensive income and its components.
The components of comprehensive income refer to revenues, expenses, gains and
losses that are excluded from net income under current accounting standards,
including foreign currency translation items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. SFAS 130 requires that all items that are recognized under
accounting standards as components of comprehensive income be reported in a
financial statement displayed in equal prominence with other financial
statements; the total or other comprehensive income for a period is required to
be transferred to a component of equity that is separately displayed in a
statement of financial position at the end of an accounting period. SFAS 130 is
effective for both interim and annual periods beginning after December 15, 1997.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("SFAS 131"). SFAS 131 establishes standards for the way public enterprises are
to report information about operating segments in annual financial statements
and requires the reporting of selected information about operating segments in
interim financial reports issued to stockholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS 131 is effective for periods beginning after December 15, 1997.
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<PAGE> 40
BUSINESS
OVERVIEW
The Company is a leading provider of seismic data acquisition services in
land and transition zone environments in selected markets, including the United
States, Canada, Latin America and the Far East. In September 1997, Grant
purchased substantially all of the assets and certain of the liabilities of GGI,
and in December 1997, completed the acquisition of Solid State, a leading
provider of land seismic data acquisition services in Canada. Through its
predecessors, including GGI and Solid State, the Company has participated in the
seismic data acquisition services business in the United States and Latin
America since the 1940s, the Far East since the 1960s and Canada since the
1970s. The Company has conducted operations in each of these markets, as well as
in the Middle East and Africa, in the past three years. The Company's seismic
data acquisition services typically are provided on an exclusive contract basis
to domestic and international oil and gas companies and seismic data marketing
companies. The Company also owns interests in certain multi-client seismic data
covering selected areas in the United States and Canada that is marketed broadly
on a non-exclusive basis to oil and gas companies.
According to industry sources, as of December 31, 1997, the Company is the
third largest land seismic data acquisition company in the western hemisphere,
based on the number of seismic data acquisition crews in operation. As of
December 31, 1997, the Company was operating or mobilizing 21 seismic data
acquisition crews, consisting of 17 land and four transition zone crews,
utilizing approximately 26,000 seismic recording channels, which use
sophisticated equipment to perform specialized 3D and 2D seismic surveys. All of
the Company's seismic data acquisition crews are capable of performing surveys
in land environments, and four are equipped to perform surveys in transition
zone environments. Transition zone environments include swamps, marshes and
shallow water areas that require specialized equipment and must be surveyed with
minimal disruption to the natural environment. Three transition zone crews
employ remote digital seismic data recording systems, which are used primarily
to perform surveys in certain logistically challenging areas, such as highly
populated regions where cable-based recording systems are impractical. The
Company has over 20 years of experience operating in transition zone
environments.
The Company believes that the combined operations of Grant and Solid State
will expand its market presence and enhance the Company's ability to compete
more effectively for projects in its selected markets. The Company also believes
that the Acquisition will increase management and operating depth, mitigate the
effects of seasonality and create operating efficiencies by consolidating
operations, increasing overall crew utilization and reducing capital
expenditures. As of the date of the Acquisition, Solid State was operating a
total of nine land crews consisting of six crews in Canada, two crews in the
United States and one in Bolivia.
As of December 31, 1997, the Company was operating or mobilizing a total of
six crews in the United States, consisting of four land and two transition zone
crews, six land crews in Latin America, six land crews in Canada and three crews
in the Far East, consisting of one land and two transition zone crews. For the
nine months ended September 30, 1997, on a pro forma basis, the Company's total
revenues were $136.0 million, with approximately 39.6% from Latin America, 36.2%
from the United States, 11.1% from Canada, 6.6% from Africa and 6.5% from the
Far East. As of December 31, 1997, the Company estimates that its total backlog
was approximately $144.4 million, with approximately 92% of such amount expected
to be completed in 1998.
BUSINESS STRATEGY
The Company's objectives are to strengthen its position as an established
provider of land and transition zone seismic data acquisition and related
services, increase revenue and revenue predictability, and improve cash flow and
profitability. To achieve these objectives, the Company is pursuing the
following business strategies:
Expand and Upgrade Seismic Services in Selected Growth Markets. The Company
plans to expand and upgrade its seismic data acquisition services in growing
markets where it has significant operating experience, including the United
States, particularly in the Gulf Coast, mid-continent and West Texas regions,
Canada, Latin America and the Far East. The Company believes that its experience
in these markets provides it with certain advantages over its competitors,
including lower mobilization costs, well established customer relationships and
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<PAGE> 41
familiarity with country specific socio-political dynamics. In 1998, one of the
Company's primary expansion focuses will be on the Far East, where the Company
perceives sustainable long-term growth opportunities.
Improve Operating Efficiency and Reduce Operating Risk. The Company
continually refines its operating procedures and acquires seismic data
acquisition equipment aimed at increasing the efficiency of its seismic data
acquisition crews. The Company also intends to increase efficiency by expanding
crew level accountability, implementing additional procedures designed to
control costs, improving revenue predictability, increasing contractual weather
downtime protection and improving bidding practices. Management believes that
the Acquisition is consistent with this strategy in that it will mitigate the
effects of seasonality and create operating efficiencies by consolidating
operations, increasing crew utilization and reducing capital expenditures. In
addition, the Company has adopted policies to focus its operations primarily in
regions where it has significant operating experience and will undertake certain
higher-risk contracts only on a term or cost-plus basis. These policies are
intended to reduce the financial risks associated with operations in certain
geographic areas. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Seasonality."
Acquire Seismic Data Acquisition and Processing Businesses. The Company
regularly evaluates potential acquisitions of seismic data acquisition and
processing businesses to expand and strengthen its activities in its selected
markets. The United States and Canadian markets are served by a large number of
seismic data acquisition companies, and the Company believes that it can improve
its competitive position through acquisitions. The Company believes that its
utilization of the crews and equipment from such acquisitions would increase the
Company's capacity and further enable the Company to deploy crews and equipment
to international locations, which have historically yielded higher profit
margins. In addition, the Company believes that the acquisition of a seismic
data processing business would complement its existing services and thereby
improve its competitive position with existing and potential customers.
Management believes that entry into the seismic data processing business would
be accomplished best through the acquisition of an established seismic data
processing company.
Expand Selected Multi-Client Data Acquisition Activities. The Company plans
to increase its investment in non-exclusive multi-client data for licensing to
multiple oil and gas companies. Increased demand by oil and gas companies for
larger and higher cost 3D surveys has resulted in significant growth in the use
of multi-client data in active oil and gas producing regions. This increased
demand has expanded the market for such data and lowered the overall risk to
seismic data acquisition companies that acquire, process and own such data.
Recently, the Company entered into an agreement with a third party that
specializes in creating and marketing multi-client surveys. The Company intends
to conduct thorough marketing and cost analyses to determine the market demand
and funding requirements and obtain significant customer commitments before
initiating such products, thereby reducing the overall investment risk
associated with such projects. For 1998, the Company has budgeted approximately
$16 million of expenditures, before customer commitments, for multi-client data
acquisition projects. See "Risk Factors -- Investment in Multi-Client Data
Library."
Invest in Leading Technology. The Company believes that growth in demand
for geophysical services will continue to be associated with new technologies.
The Company intends to periodically upgrade its seismic data acquisition
equipment to maintain technological capabilities comparable or superior to those
of its competitors. In addition, the Company intends to expand its use of
innovative seismic data acquisition techniques, including three-component 3D and
time-lapse 3D, or 4D, seismic data acquisition services, which are experiencing
growing market demand. For 1998, the Company has budgeted approximately $21
million of capital expenditures to upgrade and expand its seismic data
acquisition equipment.
THE INDUSTRY
Oil and gas companies regularly use seismic data acquisition services to
image and identify underground geological structures likely to trap
hydrocarbons, both to aid in the exploration for and development of new
hydrocarbon reservoirs and to enhance production from existing reservoirs.
Seismic data has been used in the exploration for oil and gas since the late
1920s, and the application of seismic technology frequently has led to
significant discoveries of new oil and gas reservoirs. Seismology encompasses
the generation and recording of
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<PAGE> 42
reflected or refracted seismic energy that, when computer processed, produces 3D
images or 2D cross sections of the earth's subsurface structures. The computer
processed seismic data is used by geoscientists to identify geological
characteristics favorable for the accumulation of oil and gas and to evaluate
the potential for commercial production of oil and gas. More recently, seismic
data has been used to monitor and optimize the production of existing oil and
gas reservoirs. During the last fifty years, seismology has become the leading
method used by oil and gas companies to identify and image underground
geological structures favorable for hydrocarbon accumulation. Recent advances in
seismic data acquisition techniques, coupled with improvements in computer
technology, have resulted in an increased demand for seismic data acquisition
services in both the exploration for and development of new reservoirs and the
further development of existing reservoirs.
Seismic data acquisition services companies acquire seismic data in land
and transition zone environments by deploying thousands of seismic sensors,
called geophones, over a portion of the area to be covered by the survey. An
energy source, such as a small explosive charge or mechanical vibrating unit, is
used to generate seismic energy that moves through the earth's subsurface and is
reflected by various underlying rock layers to the surface, where it is detected
by the geophones. For 2D seismic data acquisition, the typical configuration of
geophones and energy sources is a single line with an energy source and small
groups or strings of geophones placed at even intervals every few hundred feet
along the line. A geophone string typically consists of six to twelve geophones
connected by a cable. For 3D seismic data acquisition the typical configuration
is generally a grid of perpendicular lines spaced a few hundred to a few
thousand feet apart, with geophone strings spaced at intervals every few hundred
feet along one set of parallel lines and energy sources spaced at intervals
every few hundred feet along the perpendicular lines. Recording configurations
must be carefully designed to provide optimal imaging of the targeted subsurface
structures, while taking into account surface obstructions such as oil and gas
wells and pipelines, or restricted areas where permits to enter cannot be
obtained.
As many as six geophone strings are connected to a field recording box,
which collects the seismic data from those geophones. The electrical output of
each geophone string becomes the electrical input for one recording channel, or
"trace," of seismic data. Once the geophones and field recording boxes are
deployed over a portion of the survey area, an energy source is activated, the
reflected seismic energy is detected by the geophones, and the signals from the
geophones are collected and digitized by the field recording boxes. These boxes
in turn transmit the seismic data by cable, radio telemetry or through hand-held
data collection units to a central recording system. The geophones and field
recording boxes from one end of the single recording line in the case of 2D
seismic data, or an area of multiple recording lines in the case of 3D seismic
data, are then removed and relocated elsewhere in the survey area. The seismic
energy source is again activated and the entire process is repeated, moving a
few hundred feet at a time, until the entire survey area is covered.
Historically, the acquisition of 2D seismic data was the principal seismic
data acquisition technique. However, with the advancement and miniaturization of
seismic data recording equipment and the improvement of computer technology in
the past ten years, high-density surveys, or 3D seismic data, which provide a
much more comprehensive subsurface image, have become the industry standard.
Recent technical advances in seismic data acquisition and computer processing
have also resulted in the acquisition of higher-resolution surveys using
three-component geophones, known as 3C-3D, which permit the recording of shear
wave information, in addition to conventional vertical profile seismic data. In
addition, the industry is increasingly utilizing time-lapse 3D, or 4D, seismic
data acquisition techniques, where surveys are periodically reacquired to
monitor and optimize production of existing reservoirs.
Technical advances in the seismic services industry have increased the
probability of oil and gas exploration success and improved the delineation of
subsurface geological structures, which have in turn lowered overall exploration
and development costs and increased worldwide demand for seismic services. In
addition, the industry is experiencing growing demand for non-exclusive
multi-client seismic data due to the high cost and risk of drilling exploration
wells and the relatively high cost of acquiring and processing 3D seismic data.
Multi-client data allows numerous oil and gas companies to purchase the same
seismic data, thereby expanding the overall market for such data while lowering
the price charged each customer.
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<PAGE> 43
LAND AND TRANSITION ZONE SEISMIC DATA ACQUISITION
A seismic data acquisition crew typically consists of a surveying crew that
lays out the lines to be recorded and marks the sites for energy source or
geophone placement and equipment location, an explosives or mechanical vibrating
or compressed air unit crew, and a recording crew that lays out the geophones
and field recording boxes, directs shooting operations and records the seismic
energy reflected from subsurface structures. A land seismic data acquisition
crew utilizing an explosives unit is supported by several drill crews, generally
furnished by third parties under short-term contracts. Drill crews operate in
advance of the seismic data acquisition crew and bore shallow holes for small
explosive charges that, when detonated, produce the necessary seismic impulse.
In locations where conditions dictate or where the use of explosives is
precluded due to regulatory, topographical or ecological factors, a mechanical
vibrating unit or compressed air unit is substituted for explosives as the
seismic energy source. The Company also employs specialized crew mobilization
equipment to improve productivity in certain applications, including helicopters
for rugged terrain or in agricultural areas, small water craft for transition
zone applications, and man-portable equipment in jungle and other environments
where vehicular access is limited. Depending on the size of the seismic survey,
the location and other logistical factors, a typical land seismic data
acquisition crew operated by the Company may involve from as few as 30 to as
many as 1,500 employees.
One of the challenges inherent in land seismic data acquisition is
operating in challenging logistical environments without disrupting the
sensitive ecosystems in which surveys are frequently located. The Company
currently operates three seismic crews that employ remote digital seismic
equipment, which can be deployed without the use of conventional seismic cables,
thereby allowing access to such environments. Remote digital seismic equipment,
which uses radio signals to transmit data, is typically used in transition zone
and other logistically challenging environments such as highly populated regions
with numerous topographic obstructions and areas where conventional cable-based
recording systems are impractical. The Company has over 20 years of experience
operating in transition zone environments in the Gulf Coast region of the United
States, the Far East and Africa.
Once recorded by the seismic data acquisition crew, seismic data is
computer processed to enhance the recorded signal by reducing noise and
distortion and improving resolution to produce a representation of the survey
site's subsurface structures. The Company presently does not perform seismic
data processing services, although it plans to initiate such services in the
future. See " -- Business Strategy -- Acquire Complementary Seismic Data
Acquisition and Processing Businesses."
The Company markets its seismic data acquisition services from its Houston
and Calgary corporate offices and its regional and international administrative
centers by personnel whose duties include technical, supervisory or executive
responsibilities. The Company works closely with its clients to plan seismic
data acquisition projects in accordance with their specifications. Contracts are
executed with oil and gas companies on either a turnkey, term or cost-plus
basis. Turnkey contracts provide for payments from customers based upon the
amount of data collected. Term contracts provide that the customer is
responsible for a periodic fee during the term of the project. Cost-plus basis
contracts provide that the costs of a project plus a percentage fee are borne by
the customer, which significantly reduces the Company's risk of a cost overrun.
In addition, the Company's contracts typically specify the amount of weather and
other downtime risk that will be borne by the Company.
Contracts are usually awarded on a competitive bid basis. Contracts for
seismic data acquisition services outside the United States are typically
denominated in U.S. dollars, Canadian dollars or other currencies that the
Company believes to be stable. The Company's operations in certain areas outside
the United States and Canada may, however, require the Company to denominate
contracts in the local currency or partially in U.S. dollars and partially in
the currency of the country of operation. In such contracts, the local currency
is usually used to pay local crew-related expenses. See "Risk Factors -- Risks
Inherent in International Operations" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Foreign Exchange Gains and
Losses."
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MARKETS
The Company is presently active in the United States, Canada, Latin America
and the Far East and has conducted activities in the Middle East and West Africa
within the last three years. The following table sets forth the Company's
revenues by geographic area, on a pro forma basis, for the periods shown:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- -------------
1994 1995 1996 1997
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
United States.................. $ 27,791 $ 51,079 $ 53,406 $ 49,172
Canada......................... 21,790 16,796 15,824 15,123
Latin America.................. 25,544 32,623 60,688 53,894
Far East....................... 6,032 3,621 5,412 8,871
Africa and Middle East......... 25,509 19,346 2,746 8,937
-------- -------- -------- ---------
$106,666 $123,465 $138,076 $ 135,997
======== ======== ======== =========
</TABLE>
- ---------------
Solid State's fiscal year end is August 31. For pro forma purposes, revenues
for Solid State have been adjusted to reflect the periods December 1 through
November 30 for each of the years ended 1994 through 1996 and to reflect the
period December 1, 1995 through August 31, 1997 to combine with GGI's year
ended 1994, 1995 and 1996 and nine months ended September 30, 1997. See Note
5 of notes to the consolidated financial statements of Grant and GGI and
Note 11 of notes to the consolidated financial statements of Solid State for
additional geographic information.
BACKLOG
The Company's backlog for seismic data acquisition services represents the
revenues anticipated to be received by the Company in connection with
commitments for contracted services received from its customers. As of December
31, 1997, the Company estimates that its total backlog was approximately $144.4
million, with approximately 92% of such amount expected to be completed in 1998,
as compared to a total backlog of approximately $100 million as of December 31,
1996. Most of the Company's contracts are terminable by the customer upon
relatively short notice and, in some cases, without penalty. The Company's
backlog as of any particular date is not indicative of the likely operating
results for any succeeding period, and there can be no assurance that the amount
of backlog will ultimately be realized as revenue.
CAPITAL EXPENDITURES AND TECHNOLOGY
The Company's ability to compete and maintain a significant market position
in the land seismic data acquisition business is partially driven by its ability
to provide technology comparable to that of its primary competitors.
Accordingly, the Company continually maintains and periodically upgrades its
seismic data acquisition equipment to maintain its competitive position. The
Company committed approximately $11 million of capital expenditures during the
fourth quarter of 1997 and has budgeted approximately $21 million for this
purpose in 1998. Capital expenditures in 1998 will be used principally to
upgrade and expand its seismic data acquisition equipment. In addition, the
Company has budgeted approximately $16 million of expenditures, before customer
commitments, for multi-client data acquisition projects in 1998.
In connection with its capital expenditure program, the Company focuses its
efforts on developing operating procedures and acquiring equipment that will
enhance the efficiency of its seismic data acquisition crews and reduce the time
required to complete projects. The Company's strategic plan does not contemplate
the development of proprietary seismic data acquisition equipment, but instead
relies on the use of third-party equipment suppliers to provide such equipment,
although certain equipment will be customized to the Company's specifications to
enhance operating efficiency. Certain of the equipment, processes and techniques
used by the Company are subject to the patent rights of others, and the Company
holds non-exclusive licenses with respect to a number of such patents. While the
Company regards as beneficial its access to third-party technology through
licensing, the Company believes that substantially all presently licensed
technology could be replaced without significant disruption to the business.
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LICENSING OF MULTI-CLIENT DATA
The Company presently owns a small library of multi-client seismic data
that is licensed to oil and gas companies on a non-exclusive basis and has an
interest in certain multi-client data that is owned by third-parties. This data
was previously acquired by GGI and Solid State in three principal areas:
southern Louisiana, New Mexico and western Canada. At September 30, 1997 on a
pro forma basis, the carrying value of multi-client data acquired by Solid State
was approximately $11.3 million. Based on licensing revenues actually realized
and on future licensing prospects identified for such data through December 31,
1997, management of the Company believes that there has been a permanent
impairment in the net realizable value of such data. As a result, management of
the Company anticipates a significant reduction in the carrying value of its
multi-client data as of December 31, 1997.
In October 1997, Grant entered into an agreement with Millennium Seismic,
Inc. ("Millennium") to develop, market and regularly conduct non-exclusive
seismic surveys. Millennium's management has significant experience in the
planning, development and sale of multi-client surveys in the United States.
Under the agreement with Millennium, all surveys developed and acquired will be
owned by the Company, and Millennium will receive payments based on the revenues
obtained through licensing the acquired data. The Company plans to expand its
acquisition of multi-client seismic data by conducting additional surveys that
are partially or wholly funded by multiple customers. For 1998, the Company has
budgeted approximately $16 million of expenditures, before customer commitments,
for multi-client data acquisition projects.
Factors considered by the Company when determining whether to undertake a
multi-client survey include the availability of customer commitments to offset a
percentage of the survey cost, the number of potential customers for the
completed data, the location to be surveyed, the probability and timing of
future lease, concession, exploration and development activity in the area, and
the availability, quality and price of competing data. Although the Company
anticipates obtaining commitments for a substantial majority of the cost of any
future multi-client data survey and conducts thorough market and cost analyses
to determine the market demand and necessary funding prior to undertaking a
project, the Company still may not be able to fully recoup its costs if it
substantially underestimates the cost or market demand for such multi-client
project. See "Risk Factors -- Investment in Multi-Client Data Library."
CUSTOMERS AND PROJECTS
The Company's customers consist of domestic and international oil and gas
companies and seismic data marketing companies. As is the case for many service
companies in the oil and gas industry, a relatively small number of customers or
a limited number of significant projects may account for a large percentage of
the Company's net sales in any given year. Moreover, such customers and projects
may, and often do, vary from year to year. During 1996 and the first nine months
of 1997, GGI's five largest customers accounted for approximately 42.3% and
53.0%, respectively, of GGI's net sales. GGI, during 1996, had revenues from a
U.S. based international oil company of approximately $14.8 million (14%). In
the first nine months of 1997, GGI had revenues from a foreign national oil
company of approximately $14.0 million (15%) and also from a U.S. based
exploration company of approximately $9.9 million (10%). In the first nine
months of 1997, on a pro forma basis, the five largest customers of the Company
accounted for approximately 36.1% of the Company's net sales. In the first nine
months of 1997, on a pro forma basis, the Company had revenues from one foreign
national oil company of approximately $14.0 million (10%). Although GGI and
Solid State have had long-term relationships with numerous customers, the
continuation of these relationships is primarily dependent on the customers'
needs for the Company's services and the customers' ongoing satisfaction with
the price, quality, dependability and availability of the Company's services.
See "Risk Factors -- Reliance on Significant Customers and Projects."
COMPETITION
The acquisition of seismic data for the oil and gas industry is highly
competitive worldwide. However, as a result of changing technology and increased
capital requirements, the seismic industry has consolidated substantially since
the late 1980s, thereby reducing the number of competitors. The Company's
principal competitors in North America are Western Atlas, Inc. ("Western
Atlas"), Veritas DGC, Inc., Geco-Prakla, a subsidiary of Schlumberger Limited,
and several regional competitors. In Latin America and the Far East, the
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<PAGE> 46
Company competes with Western Atlas, Compagnie General de Geophysique, Inc.
("CGG"), Geco-Prakla, and several other local competitors. Competition is based
primarily on price, crew availability, prior performance, technology, safety,
quality, dependability and the contractor's expertise in the particular area
where the survey is to be conducted. See "Risk Factors -- Competition for
Seismic Business."
EMPLOYEES
As of December 31, 1997 the Company employed approximately 750 full-time
personnel worldwide and approximately 2,600 auxiliary field personnel on
temporary contracts. None of the Company's employees is subject to collective
bargaining agreements. The Company considers its relations with its employees to
be good.
PROPERTIES
The Company owns a 30,000 square foot building and storage yard in Houston,
Texas which serves as its corporate headquarters, warehouse and staging
facility. The Company also owns its office, staging and repair facility located
on a two acre tract in New Iberia, Louisiana. In Calgary, Alberta, Canada, the
Company owns an 18,000 square foot building and storage yard that serves as the
Company's Canadian headquarters. In addition, the Company leases office,
warehouse and storage space in areas throughout the world as may be required
from time to time to support the Company's operations.
ENVIRONMENTAL MATTERS/GOVERNMENTAL REGULATION
The Company's domestic operations are subject to a variety of federal,
state and local laws and regulations relating to the protection of human health
and the environment, the violation of which may result in civil or criminal
penalties. The Company invests financial and managerial resources to comply with
such laws and regulations and management believes that it is in compliance in
all material respects with applicable environmental laws and regulations.
Although such environmental expenditures by the Company historically have not
been significant, there can be no assurance that these laws and regulations will
not change in the future or that the Company will not incur significant costs in
the future performance of its operations. The Company is not involved in any
legal proceedings concerning environmental matters and is not aware of any
claims or potential liability concerning environmental matters that could have a
material adverse impact on the Company's business or consolidated financial
condition.
The Company's operations outside of the United States are subject to
similar environmental regulation in a number of foreign locations, including
Canada, Latin America, and the Far East. Management believes that the Company is
in material compliance with the existing environmental requirements of these
foreign governmental bodies. The Company has not incurred any significant
environmental cost in connection with the performance of its foreign operations;
however, any regulatory changes that impose additional environmental
restrictions or requirements on the Company or its customers could adversely
affect the Company through increased operating costs and decreased demand for
the Company's services.
LEGAL PROCEEDINGS
On December 11, 1997, certain Eligible Subscribers, acting through an "ad
hoc" committee (the "Plaintiffs") commenced a lawsuit in the Bankruptcy Court
against Grant, GGI, Elliott, Westgate and SSGI. The lawsuit alleges that (i) GGI
and Elliott breached their obligations under the Plan by seeking to complete the
Acquisition prior to commencing the Subscription Offering, (ii) the Acquisition
and certain related transactions are unfair to Eligible Subscribers because they
dilute the value of the Common Stock to be issued to them under the Subscription
Offering and impair the Company's equity value and (iii) the Acquisition and
certain related transactions could and should have been, but were not,
adequately disclosed in the disclosure statement filed with the Bankruptcy Court
regarding the Plan. The Plaintiffs have requested (i) compensatory and punitive
damages in an unstated amount and (ii) revocation of the Plan.
In addition, the Plaintiffs sought to enjoin completion of the Acquisition
and certain related transactions pending a trial on the merits. This request for
injunctive relief was denied by the Bankruptcy Court on December 16, 1997, and
was denied on appeal by the United States District Court for the District of
Delaware on December
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<PAGE> 47
19, 1997. Currently, discovery for the lawsuit is ongoing; however, no trial
date has been set. The Company believes that all claims by the Plaintiffs are
without merit and plans to vigorously defend the lawsuit. In addition, Elliott
has agreed to indemnify the Company against any liability, other than legal
expenses, that the Company may incur by reason of any adverse final judgment in
the lawsuit. Nevertheless, if not resolved in the Company's favor, this lawsuit,
and the potential for other lawsuits related to the Plan, could have an adverse
effect on the Company's business, reputation, operating results and financial
condition.
The Company is also involved in or threatened with other various legal
proceedings from time to time arising in the ordinary course of business.
Management of the Company does not believe that any liabilities resulting from
any such current proceedings will have a material adverse effect on its
consolidated operations or financial position.
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<PAGE> 48
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The name, age and current principal position of each director, executive
officer and significant employee of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------- ----- ------------------------------------------
<S> <C> <C>
Jonathan D. Pollock 34 Chairman of the Board
Larry E. Lenig, Jr. 49 President, Chief Executive Officer and
Director
Mitchell L. Peters 42 Senior Vice President
Michael P. Keirnan 46 Vice President and Chief Financial
Officer, Treasurer and Secretary
Barry K. Burt 48 Vice President-International Operations
D. Hugh Fraser 50 Vice President-United States Operations
W. Richard Anderson 44 Director
James R. Brock 38 Director
J. Kelly Elliott 67 Director
Donald G. Russell 66 Director
Donald W. Wilson 50 Director
</TABLE>
Executive officers are elected by and serve at the discretion of the Board
of Directors until their successors are duly elected and qualified. There are no
family relationships between or among any directors or executive officers of the
Company. See "Certain Relationships and Related Transactions -- Selling
Stockholders" for a description of certain other relationships between or among
directors and executive officers of the Company.
JONATHAN D. POLLOCK has served as Chairman of the Board of the Company
since September 30, 1997. Mr. Pollock has served as a Portfolio Manager with
Stonington Management Corporation, the management company of Elliott and
Westgate since 1989. Mr. Pollock is also a director of Tatham Offshore, Inc., an
oil and gas exploration services company, a director of F-W Oil Interests, Inc.,
an oil and gas exploration and production company, a director and Chairman of
Horizon Offshore, Inc., an oil and gas pipeline construction company, and a
director and Chairman of Horizon Barge and Towing, Inc.
LARRY E. LENIG, JR. has served as President, Chief Executive Officer and a
director of the Company since September 30, 1997, and President and Chief
Operating Officer of GGI from January 1997 until September 30, 1997. From 1993
through 1996, Mr. Lenig was engaged in private consulting to a variety of energy
and energy services companies and financial institutions. Mr. Lenig served as
President and Chief Operating Officer and a director of Digicon Inc., a seismic
services company, from 1989 until 1993.
MITCHELL L. PETERS has served as Senior Vice President of the Company since
December 1997 and has served as President and Chief Executive Officer of Solid
State since 1985. Mr. Peters is also a director of Nortech Geomatics Inc., an
engineering services company.
MICHAEL P. KEIRNAN has served as Vice President and Chief Financial Officer
of the Company since September 30, 1997, and was Vice President and Chief
Financial Officer of GGI from February 1997 until September 30, 1997. From March
1996 until February 1997, Mr. Keirnan served as Manager of Treasury Operations
of Gundle/SLT Environmental, Inc., a plastic lining manufacturing company. Mr.
Keirnan also served as Controller and Treasurer of GGI from 1993 through March
1996 and held other senior financial management positions with GGI since 1988.
BARRY K. BURT has served as Vice President -- International Operations of
the Company since September 30, 1997, and was Vice President -- International
Operations of GGI from December 1996 until September 30, 1997. From 1986 through
December 1996, Mr. Burt held a variety of management positions with GGI in
international operations.
D. HUGH FRASER has served as Vice President -- United States Operations of
the Company since September 30, 1997, and was Vice President -- United States
Operations of GGI from January 1992 until September 30, 1997. From 1986 through
January 1992, Mr. Fraser was an area manager of United States operations with
GGI.
W. RICHARD ANDERSON has served as a director of the Company since January
1998. Mr. Anderson previously served as a director of Solid State from December
1996 through December 1997. He has served as a managing partner of Hein +
Associates LLP, a certified public accounting firm, since January 1995 and as a
partner since 1989.
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<PAGE> 49
JAMES R. BROCK has served as a Director of the Company since January 1998.
Mr. Brock has served as Executive Vice President and Chief Financial Officer of
F-W Oil Interests, Inc., an oil and gas exploration and production company,
since January 1995. From November 1990 through December 1995, Mr. Brock served
as Treasurer, Corporate Controller and Chief Accounting Officer of Offshore
Pipelines, Inc., a marine engineering and construction company.
J. KELLY ELLIOTT has served as director of the Company since September 30,
1997. Until that time, Mr. Elliott was Chairman of the Board of GGI beginning on
November 20, 1996. He previously served as Chairman of the Board of GGI from
June 1993 through November 1995. Mr. Elliott has served as Chairman, President,
and Chief Executive Officer of Sigma Electronics, Inc., an electronics and
manufacturing company since 1991. Mr. Elliott is also a director of Tescorp,
Inc., a cable-manufacturing company. Mr. Elliott has no affiliation with Elliott
or Westgate.
DONALD G. RUSSELL has served as a director of the Company since September
30, 1997 and a director of GGI from February 1997 until September 30, 1997 and
from July 1993 through November 1995. Mr. Russell has served as Chairman of the
Board and Chief Executive Officer of Sonat Exploration Company, an oil and gas
exploration company, since 1988, and a director of Sonat, Inc., a diversified
energy company, since 1994.
DONALD W. WILSON has served as a Director of the Company since January
1998. Mr. Wilson has served as President and Chief Executive Officer of F-W Oil
Interests, Inc., an oil and gas exploration and production company, since
January 1996. From January 1995 through December 1995, Mr. Wilson served as
Executive Vice President - Worldwide Operations of J. Ray McDermott, S.A., a
marine engineering and construction company. From December 1992 through December
1994, Mr. Wilson served as President of O.P.I. International, Inc., a subsidiary
of Offshore Pipelines, Inc.
COMPENSATION OF DIRECTORS
Each nonemployee director of the Company will be paid a monthly retainer of
$1,000 and $500 for each board or committee meeting attended by such director.
Under the Incentive Plan (as defined below), each nonemployee director of the
Company will receive 3,000 restricted shares of Common Stock on the date that
such director is first elected (after the adoption of the Incentive Plan) and
again upon the date of each subsequent reelection to the board of directors.
Nonemployee directors are also eligible to receive other awards under the
Incentive Plan. See "-- 1997 Equity and Performance Incentive Plan."
COMPENSATION OF EXECUTIVE OFFICERS
The Company was organized in September 1997 and did not conduct any
operations or have any employees before the Effective Date. As a result, the
Company does not have any executive officers with respect to whom disclosure of
executive compensation is required under the Securities Act or the rules and
regulations promulgated thereunder.
EMPLOYMENT AGREEMENTS
Grant and Solid State have entered into employment agreements (the
"Employment Agreements") with Larry E. Lenig, Jr. and Mitchell L. Peters (the
"Executive Officers"), respectively. The Employment Agreements have an initial
term through December 31, 2000 and provide for annual base salaries of $180,000
for Mr. Lenig and Cdn $230,000 for Mr. Peters. Mr. Lenig's Employment Agreement
also provides for an annual bonus based on the Company's performance. The
Employment Agreements provide generally that, if the Executive Officer is
terminated for any reason other than for "cause" (as defined in the Employment
Agreements), the Company must: (i) in Mr. Lenig's case, make base salary
payments for the remainder of his Employment Agreement's term, and (ii) in Mr.
Peters' case, make a payment equal to two-times his base salary in effect as of
the date of termination. Each of Mr. Lenig and Mr. Peters has agreed pursuant to
the Employment Agreements not to compete with the Company by engaging in any
"competing business" (as defined in the Employment Agreements) for a period of,
in Mr. Peters' case, 24 months following termination of employment or, in Mr.
Lenig's case, 24 months following the term of his agreement.
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<PAGE> 50
1997 EQUITY AND PERFORMANCE INCENTIVE PLAN
The 1997 Equity and Performance Incentive Plan (the "Incentive Plan) was
adopted by the Board of Directors and approved by Grant's stockholders in
December 1997. A total of one million shares of Common Stock has been reserved
for issuance under the Incentive Plan. The Incentive Plan provides for the grant
to officers (including officers who are also directors), employees, consultants
and nonemployee directors of the Company and its subsidiaries, of "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code of
1986 (the "Code"), nonstatutory stock options, stock appreciation rights and
restricted shares and deferred shares of Common Stock (collectively, the
"Awards"). The Incentive Plan is not a qualified deferred compensation plan
under Section 401(a) of the Code and is not subject to the provisions of the
Employee Retirement Income Security Act of 1974.
The Incentive Plan is required to be administered by the Board of Directors
or by a committee of the Board of Directors consisting of at least two
nonemployee directors. The Board of Directors or its designated committee will
select the employees and nonemployee directors to whom Awards may be granted and
the type of Award to be granted and determine, as applicable, the number of
shares to be subject to each Award, the exercise price and the vesting. In
making such determinations, the Board of Directors or its designated committee
will take into account the employee's present and potential contributions to the
success of the Company and other relevant factors. As of the date of the
Subscription Offering Prospectus, no Awards have been granted under the
Incentive Plan.
401(k) PLAN
The Company has assumed GGI's defined contribution retirement plan, which
complies with Section 401(k) of the Code (the "401(k) Plan"). The 401(k) Plan
was adopted by GGI in January of 1989 and assigned to the Company as of the
Effective Date. Substantially all U.S. based employees of the Company and its
subsidiaries with at least six months of continuous service are eligible to
participate and may contribute from 1% to 15% of their annual compensation.
Under the 401(k) Plan, the Company may provide matching contributions of a
discretionary percentage, as determined by the Board of Directors, of an
employee's contributions.
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<PAGE> 51
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SELLING STOCKHOLDERS
In connection with the consummation of the Plan, the Selling Stockholders
satisfied certain claims of Foothill Capital Corporation against GGI (the
"Foothill Claim") in the principal amount of approximately $12.7 million. In
addition, Westgate purchased certain claims of Oyo Geospace Corporation against
GGI (the "Oyo Claim") that were assumed by Grant, in the principal amount of
approximately $6.9 million, and the Selling Stockholders purchased certain
claims of Madeleine L.L.C. against GGI (the "Madeleine Claim"), in the principal
amount of approximately $5.6 million. The Selling Stockholders' satisfaction of
the Foothill Claim was credited against the cash obligation under the Cash
Purchase Price. In exchange for the satisfaction of the Foothill Claim and the
cancellation of the Oyo Claim, Grant issued 19,571.162 shares of Preferred Stock
to the Selling Stockholders. The Preferred Stock provides for dividends payable
in additional shares of Preferred Stock at a rate of 10.5% per annum, the right
to designate two members of the Board of Directors and the right to vote on
certain extraordinary matters presented for a stockholder vote. On December 19,
1997, Grant exchanged 9,571.162 shares of Preferred Stock held by Elliott for
the Subordinated Note. Elliott loaned $10.2 million to the Company on November
26, 1997, under a demand promissory note (the "Promissory Note"), with interest
at a rate per annum equal to the prime rate plus 2%. On December 30, 1997, the
Selling Stockholders and the Company paid the remainder of the Cash Purchase
Price, approximately $34.8 million, which included the satisfaction of the
Madeleine Claim and the cancellation of the Promissory Note, and the Company
issued 9.5 million shares of Common Stock to the Selling Stockholders in
accordance with the Plan. In addition, upon consummation of the Subscription
Offering, Elliott is entitled to receive 237,500 shares of Common Stock pursuant
to the Plan.
Elliott is a Delaware limited partnership and Westgate is a Cayman Islands
limited partnership, each of which invests and trades in a wide range of United
States and non-United States equity and debt securities and other financial and
investment interests, instruments and property. The general partners of Elliott
are Paul E. Singer and Braxton Associates, L.P., which was formed by Mr. Singer
in 1975. Elliott commenced operations in 1977, and its limited partners include
pension plans, corporations, family groups, individuals and a substantial
investment by Mr. Singer and his family. The general partner of Westgate is
Hambledon, Inc., a corporation controlled by Braxton Associates, L.P. Elliott
and Westgate are each managed by Stonington Management Corporation, a
corporation controlled by Mr. Singer. Jonathan D. Pollock, Chairman of the Board
and a director of the Company, is also a Portfolio Manager with Stonington
Management Corporation and a director of F-W Oil Interests, Inc. In addition,
Donald W. Wilson and James R. Brock, directors of the Company, are officers of
F-W Oil Interests, Inc., an affiliate of the Selling Stockholders. Elliott has
also agreed to indemnify the Company against any liability, other than legal
expenses, that the Company may incur by reason of any adverse final judgment in
the lawsuit brought by the Plaintiffs in the Bankruptcy Court. See
"Business -- Legal Proceedings."
LOAN AND SECURITY AGREEMENT
On October 1, 1997, Grant and Elliott entered into the Credit Facility
under which the Company may borrow up to an aggregate principal amount of $5
million in revolving loans. The Company is required to pay interest on the
outstanding principal balance of revolving loans at a rate per annum equal to
the prime rate plus 2%. The term of the Credit Facility runs through March 31,
1999 at which time all obligations of the Company under the Credit Facility are
due and payable. Elliott has also advanced the Acquisition Financing under a
$15.8 million term note and $800,000 of revolving loans pursuant to the Credit
Facility. The revolving loans and any term notes under the Credit Facility are
secured by liens on substantially all of the assets of the Company and its
subsidiaries and a pledge by the Company of certain notes and all the
outstanding shares of capital stock of its subsidiaries. Each subsidiary of the
Company has executed a guaranty in favor of Elliott, each of which guarantees
payment of all the Company's obligations owed to Elliott under the Credit
Facility. Each subsidiary has pledged its assets in favor of Elliott to secure
its obligations under its respective guaranty.
REGISTRATION RIGHTS AGREEMENT
On September 19, 1997, the Selling Stockholders and the Company entered
into a Registration Rights Agreement, as amended (the "Registration Rights
Agreement"). Pursuant to the Registration Rights Agreement,
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<PAGE> 52
stockholders holding at least 25% of the Registrable Securities (as defined
below) have the right to require, or "demand," registration of such Registrable
Securities. Such demand rights are subject to the condition that the Company
would not be required to effect more than five demand registrations and no more
than three demands within any twelve-month period. Such holders also have the
right to participate, or "piggyback," in equity offerings, if the Company
proposes to register any of its equity securities under the Securities Act for
its own account or for the account of other stockholders, subject to reduction
of the size of such offering on the advice of the underwriters. "Registrable
Securities" is defined in the Registration Rights Agreement as all shares of
Common Stock issued to the Selling Stockholders in connection with the Plan or
the Acquisition and any equity securities of the Company issued or distributed
in respect thereof by way of any rights offering, stock dividend, stock split or
other distribution, recapitalization or reclassification and any equity
securities acquired upon exercise or conversion of any such securities. The
Company is required to pay all expenses in connection with such demand and
piggyback registrations and is required to indemnify the selling stockholders
against certain liabilities, including liabilities under the Securities Act. The
rights provided in the Registration Rights Agreement are transferable to
transferees of Registrable Securities. The Company is registering the Common
Stock offered by the Selling Stockholders in connection with the Subscription
Offering pursuant to the Registration Rights Agreement.
SOLID STATE AND THE ACQUISITION
Prior to the Tender Offer, the Selling Stockholders held an aggregate of
9,305,109 shares (representing approximately 63.8% of the fully diluted shares)
of Solid State Stock. In connection with the Acquisition, the Principal
Stockholders transferred their shares of Solid State Stock to Grant in exchange
for 4,652,555 shares of Common Stock. Grant subsequently contributed the shares
of Solid State Stock to SSGI prior to the completion of the Tender Offer. In
connection with the Tender Offer, the Selling Stockholders advanced the
Acquisition Financing to enable SSGI to consummate the Tender Offer. As a result
of the Acquisition, Grant, through SSGI, assumed $36.4 million of debt of Solid
State (the "Solid State Debt") of which $16.7 million is held by the Selling
Stockholders, which includes approximately $4.2 million loaned to Solid State
and the U.S. Subsidiary (as defined herein) by the Selling Stockholders and
approximately $12.5 million loaned to the U.S. Subsidiary by Elliott under
various promissory notes.
In April 1996, the Selling Stockholders acquired 266,100 shares of Solid
State Stock at an approximate price of $1.80 per share. On April 23, 1996, Solid
State Geophysical Corp., a U.S. subsidiary of Solid State (the "U.S.
Subsidiary") issued to the Selling Stockholders a $2 million 8% Convertible
Debenture due April 30, 2001, convertible into 1,141,667 shares of Solid State
Stock. In addition, the Selling Stockholders loaned the U.S. Subsidiary $3
million due December 31, 1996 pursuant to a secured loan agreement, with
interest at 18% per annum. Such loans, and all other loans (described below) by
the Selling Stockholders to the U.S. Subsidiary, were guaranteed by Solid State.
As part of these transactions, the Selling Stockholders received warrants to
acquire 110,000 shares of Solid State Stock at an exercise price of Cdn $2.76
per share.
On October 16, 1996, the Selling Stockholders subscribed for 3,044,444
shares of Solid State Stock at a price of Cdn $1.35 per share for aggregate
proceeds of $3 million. In addition, pursuant to a secured loan agreement, the
Selling Stockholders advanced $9 million to the U.S. Subsidiary. The loan was
due October 31, 1999, and required Solid State to use its best efforts to
complete a rights offering to raise at least $4 million to pay down the loan by
January 31, 1997. Upon such repayment, the interest rate was to be reduced from
18% to 15%. The proceeds were used for working capital and to retire the April
23, 1996 loans. As part of the transaction, the Selling Stockholders received
125,000 warrants to acquire shares of Solid State Stock at an exercise price of
Cdn $1.65 per share and the warrants issued as part of the April 23, 1996
transaction were canceled.
On December 12, 1996, each of Richard Anderson, a nominee of Elliott
serving on the board of directors of Solid State, and Michael Latina, an
employee of Elliott and a director of Solid State, were awarded options to
acquire 20,000 shares of Solid State Stock at an exercise price of Cdn $1.00 per
share. In January 1997, Elliott granted to Mitchell Peters, as an incentive, an
option to acquire 546,285 shares of Solid State Stock owned by Elliott at an
exercise price of Cdn $0.92 per share after payment to Elliott of Cdn $50,000
for the option, such option to be exercisable commencing February 1998. In
addition, in connection with the Tender Offer, Elliott agreed to repurchase such
option from Mr. Peters upon taking up any shares under the Tender Offer for an
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<PAGE> 53
aggregate consideration of approximately Cdn $1.4 million, representing the
difference in the Tender Offer price and exercise price multiplied by 546,285,
less Cdn $50,000. In connection with the Acquisition, Grant assumed Elliott's
obligation to repurchase such option.
In January 1997, Elliott and Westgate subscribed for 4,459,565 and
1,410,000 shares, respectively, at Cdn $0.92 per share. Aggregate proceeds of $4
million were used to retire indebtedness to Westgate and to reimburse expenses
of the Selling Stockholders.
On October 31, 1997, the Selling Stockholders exercised their warrants to
acquire 125,000 shares of Solid State Stock. The proceeds from the issuance of
the warrants were applied by Solid State to reduce the consolidated indebtedness
owed by Solid State to Elliott.
As of December 31, 1997, Solid State and the U.S. Subsidiary had
outstanding to the Selling Stockholders approximately $4.2 million in principal
amount under a loan agreement, which matures on October 31, 1999 and the U.S.
Subsidiary had outstanding to Elliott approximately $12.5 million in aggregate
principal amount under various promissory notes, all of which bear interest at
15% per annum. The maturities of such promissory notes have been extended to
March 31, 1999.
OTHER
The Company engages, in the ordinary course of business, in various
transactions with its subsidiaries on a regular basis. These transactions
include the transfer of personnel and equipment, advances, repayments,
guarantees, and other similar transactions.
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock and Preferred Stock as of the date of this
Subscription Offering Prospectus by (i) each person who is known by the Company
to own beneficially more than 5% of the outstanding shares of the Common Stock
or Preferred Stock, (ii) each director and executive officer and (iii) all
executive officers and directors as a group. Unless otherwise indicated, each
person has sole voting power and investment power with respect to the shares
attributed to them.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
------------------------------------------------------------------------
COMMON STOCK
------------------------------------------------
PRIOR TO THE AFTER THE SUBSCRIPTION
SUBSCRIPTION OFFERING (3)
OFFERING ------------------------ PREFERRED STOCK
-------------------- NUMBER OF --------------------
NUMBER OF SHARES NUMBER OF
NAME OF BENEFICIAL OWNER SHARES PERCENT (4) PERCENT (4) SHARES PERCENT
- ---------------------------------- --------- ------- --------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Elliott Associates, L.P.(1)....... 7,076,278 50% 5,465,321 38% -- --%
Westgate International, L.P.(2)... 7,076,277 50 5,465,320 38 10,000 100
Jonathan D. Pollock............... -- -- -- -- -- --
Larry E. Lenig, Jr................ -- -- -- -- -- --
Mitchell L. Peters................ -- -- -- -- -- --
Michael P. Keirnan................ -- -- -- -- -- --
W. Richard Anderson............... -- -- -- -- -- --
James R. Brock.................... -- -- -- -- -- --
J. Kelly Elliott.................. -- -- -- -- -- --
Donald G. Russell................. -- -- -- -- -- --
Donald W. Wilson.................. -- -- -- -- -- --
All executive officers and
directors as a group (9
persons)........................ -- -- -- -- -- --
</TABLE>
- ---------------
(1) Paul E. Singer and Braxton Associates L.P., which is controlled by Mr.
Singer, are the general partners of Elliott. The business address of Elliott
is 712 Fifth Avenue, 36th Floor, New York, New York 10019.
(2) Hambledon, Inc., which is controlled by Mr. Singer, is the sole general
partner of Westgate. Martley International, Inc. ("Martley"), which is
controlled by Mr. Singer, is the investment manager for Westgate.
52
<PAGE> 54
Martley expressly disclaims equitable ownership of and pecuniary interest in
any shares of Common Stock. The business address of Westgate is Westgate
International, L.P. c/o Midland Bank Trust Corporation (Cayman) Limited,
P.O. Box 1109, Mary Street, Grand Cayman, Cayman Islands, British West
Indies.
(3) Assumes that all Eligible Subscribers exercise their rights in full to
purchase shares of Common Stock in the Subscription Offering.
(4) Including 237,500 shares of Common Stock, in aggregate, that the Selling
Stockholders are entitled to receive upon consummation of the Subscription
Offering pursuant to the Plan.
SUBSCRIPTION PROCEDURES
The following discussion of the Subscription Offering does not purport to
be complete and is subject to, and is qualified in its entirety by reference to,
the provisions of the Plan and the accompanying Subscription Exercise Notice,
which are incorporated herein by reference and is filed as an exhibit to the
Registration Statement of which this Subscription Offering Prospectus is a part.
See "Additional Information."
SUBSCRIPTION RIGHTS; ELIGIBLE SUBSCRIBERS
This Subscription Offering Prospectus and a Subscription Exercise Notice,
which contain information concerning the Subscription Offering, is being mailed
to each Eligible Subscriber.
The Plan provides that (i) Eligible Class 5 Claim Holders; (ii) Eligible
Class 7 Interest Holders; and (iii) Eligible Class 8 Interest Holders, each as
defined in the Plan (collectively, the "Eligible Subscribers") have the right to
participate in the Subscription Offering. Each Eligible Subscriber's right to
purchase Common Stock is nontransferable, will not be evidenced by certificates,
and will expire on the Expiration Date. The Plan provides that subscription
rights shall represent the right to purchase, in the aggregate 4,750,000 shares
of Common Stock, for an aggregate purchase price of $23,750,000. The Eligible
Subscribers are divided into the following three groups: (i) Eligible Class 5
Interest Holders that have the right to purchase, in the aggregate, 475,000
shares of Common Stock, for an aggregate purchase price of $2,375,000, (ii)
Eligible Class 7 Claim Holders that have the right to purchase, in the
aggregate, 4,255,000 shares of Common Stock, for an aggregate purchase price of
$21,275,000 and (iii) Eligible Class 8 Interest Holders that have the right to
purchase, in the aggregate, 20,000 shares of Common Stock, for an aggregate
purchase price of $100,000. NO PERSON IS REQUIRED TO PURCHASE ANY SHARES OF
COMMON STOCK IN THE SUBSCRIPTION OFFERING.
Pursuant to the Plan, the Company is required to conduct a subscription
offering of 4,750,000 shares of Common Stock to certain holders of claims and
other interests under the Plan for an aggregate purchase price of $23,750,000.
The Plan also authorized the offering of shares of common stock of a successor
company on economically equivalent terms. The Plan provides, however, that
Elliott or its affiliates may pay the entire purchase price to GGI, representing
the total anticipated proceeds of such offering, and then conduct a subscription
offering and retain the proceeds therefrom, which Elliott has elected to do.
Because Elliott and certain of its affiliates, as interest holders under the
Plan, were entitled to purchase 1,290,586 shares of Common Stock in an offering
by the Company, the Selling Stockholders are offering the balance of such shares
of Common Stock to the Eligible Subscribers pursuant to the Subscription
Offering. The Company is registering such shares of Common Stock pursuant to the
Registration Rights Agreement.
EXERCISE OF RIGHTS TO PURCHASE COMMON STOCK
Each Eligible Subscriber who wishes to exercise rights to purchase shares
of Common Stock must properly complete, duly execute and deliver the
accompanying Subscription Exercise Notice indicating the number of shares of
Common Stock subscribed for, together with a certified check or bank draft upon
a United States bank or wire transfer in an amount equal to the product of the
Subscription Purchase Price and the number of shares sought to be subscribed.
The Subscription Exercise Notice delivered to each Eligible Subscriber sets
forth the maximum number of shares of Common Stock that such Eligible Subscriber
is entitled to purchase in the Subscription Offering. The Subscription Exercise
Notice, together with full payment for shares subscribed for, may be delivered
to the Subscription Agent or be mailed in the enclosed return envelope. Unless
withdrawn,
53
<PAGE> 55
Subscription Exercise Notices, once delivered, may not be amended or modified,
unless permitted by the Selling Stockholders in their sole discretion, to
correct immaterial irregularities.
WHETHER HAND DELIVERED OR MAILED, SUBSCRIPTION EXERCISE NOTICES AND PAYMENT
MUST BE RECEIVED BY 5:00 P.M. EASTERN STANDARD TIME ON , 1998.
Failure of such receipt by the expiration time for any reason, will be deemed a
waiver and release by the Eligible Subscriber of any rights the Eligible
Subscriber may have to purchase shares in the Subscription Offering. An executed
Subscription Exercise Notice, once delivered cannot be amended, modified or
rescinded by an Eligible Subscriber. Subscription Exercise Notices may be
withdrawn prior to the Expiration Date. To withdraw a Subscription Exercise
Notice, a written notice of withdrawal must be received by the Subscription
Agent prior to the Expiration Date. Any notice of withdrawal must (i) specify
the name of the Eligible Subscriber, (ii) indicate the number of shares of
Common Stock subscribed for and (iii) be signed by the Eligible Subscriber in
the same manner as the original signature on the Subscription Exercise Notice.
All determinations as to proper completion, due execution timeliness,
eligibility and other matters affecting the validity or effectiveness of any
attempted exercise of subscription rights shall be made by the Selling
Stockholders, whose determination shall be final and binding. The Selling
Stockholders in their sole discretion may waive any defect or irregularity, or
permit a defect or irregularity to be corrected within such time as they may
determine or reject the purported exercise of any rights to purchase shares of
Common Stock subject to any such defect or irregularity. Deliveries required to
be received by the Subscription Agent in connection with a purported exercise of
rights to purchase shares of Common Stock will not be deemed to have been so
received or accepted until actual receipt thereof by the Subscription Agent
shall have occurred and any defects or irregularities shall have been waived or
cured within such time as the Selling Stockholders may determine in their sole
discretion. Neither the Selling Stockholders nor the Subscription Agent will
have any obligation to give notice to any Eligible Subscriber of any defect or
irregularity in connection with any purported exercise thereof or incur any
liability as a result of any failure to give such notice.
Questions or requests regarding subscription procedures or related matters
may be directed to the Subscription Agent, ( ) - .
has been appointed as Subscription Agent for the
Subscription Offering. Delivery of Subscription Exercise Notices and any other
required documents, questions or requests, whether hand delivered or mailed,
should be directed to the Subscription Agent as follows:
Telephone:
Delivery to other than the above address will not constitute a valid
delivery.
PURCHASE PRICE
The Subscription Purchase Price will be $5.00 per share.
THE SUBSCRIPTION PURCHASE PRICE IS NOT INTENDED, AND MUST NOT BE CONSTRUED,
AS AN APPRAISAL OR RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF
PURCHASING SHARES OF COMMON STOCK. THE SUBSCRIPTION PURCHASE PRICE WAS
DETERMINED IN CONNECTION WITH THE CONFIRMATION OF THE PLAN BY THE BANKRUPTCY
COURT AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE CURRENT LIQUIDATION
VALUE OF THE COMPANY OR THE PRICE AT WHICH THE COMMON STOCK WILL TRADE AFTER
COMPLETION OF THE SUBSCRIPTION OFFERING, AND THE SUBSCRIPTION PURCHASE PRICE IS
NOT INTENDED, AND MUST NOT BE CONSTRUED, TO EXPRESS AN OPINION AS TO THE VALUE
OF COMMON STOCK OFFERED HEREBY.
SETTLEMENT FOR SHARES; DELIVERY OF CERTIFICATES
As promptly as practicable following the Expiration Date, the Subscription
Agent will mail, or cause to be mailed, to each Eligible Subscriber that has
sought to exercise rights to purchase shares of Common Stock, a written
statement specifying the number of shares of Common Stock validly and
effectively subscribed for, together with a stock certificate representing the
shares of Common Stock so purchased.
54
<PAGE> 56
Although it is anticipated that the Closing Date and delivery of the stock
certificates will occur as soon as practicable after the expiration of the
Subscription Offering, there can be no assurance that delays will not occur.
Subscribers may not be able to sell the shares purchased until certificates are
delivered.
SELLING STOCKHOLDERS
All of the 3,459,414 shares of Common Stock being offered hereby are being
offered by the Selling Stockholders. Prior to the Subscription Offering, all of
the shares of Common Stock of the Company have been owned by the Selling
Stockholders, with Elliott and Westgate holding 7,076,278 and 7,076,277 shares,
respectively. See "Certain Relationships and Related Transactions -- Selling
Stockholders." Assuming all Eligible Subscribers exercise their subscription
rights in full, following the Subscription Offering, Elliott and Westgate,
respectively, will hold 5,465,321 and 5,465,320 shares of Common Stock
(including 237,500 shares of Common Stock that the Selling Stockholders are
entitled to receive upon consummation of the Subscription Offering pursuant to
the Plan), which will constitute approximately 76% in aggregate of the
outstanding shares of Common Stock. Pursuant to the Registration Rights
Agreement, the Company is responsible for the expenses of the Subscription
Offering.
DESCRIPTION OF CAPITAL STOCK
The Company has and will have upon completion of the Subscription Offering
authorized capital stock consisting of 25 million shares of Common Stock, par
value $0.001 per share, and 20,000 shares of Preferred Stock, par value $0.001
per share.
COMMON STOCK
All outstanding shares of Common Stock are fully paid and nonassessable.
All holders of Common Stock have full voting rights and are entitled to one vote
for each share held of record on all matters submitted to a vote of the
stockholders. Votes may not be cumulated in the election of directors.
Stockholders have no preemptive or subscription rights other than the
subscription rights offered to Eligible Subscribers pursuant to the Plan and
this Subscription Offering. The Common Stock is neither redeemable nor
convertible, and there are no sinking fund provisions. Holders of Common Stock
are entitled to dividends when, as and if declared by the Board of Directors
from funds legally available therefor and are entitled, upon liquidation, to
share ratably in all assets remaining after payment of liabilities. See
"Dividend Policy." The rights of holders of Common Stock will be subject to any
preferential rights of any Preferred Stock that is issued and outstanding or
that may be issued in the future.
PREFERRED STOCK
Holders of Preferred Stock have dividend and liquidation preferences to
holders of Common Stock and all other outstanding capital stock of the Company
and have the right to approve the issuance of any parity or senior securities.
Dividends on Preferred Stock accrue at an annual rate of 10.5% and are
cumulative and payable annually in additional shares of Preferred Stock. The
Preferred Stock is redeemable by the Company at the Company's option at any time
at a price per share equal to 100% of the liquidation value of $1,000 per share,
plus accrued and unpaid dividends. The Company must also redeem the Preferred
Stock upon a Change in Control (as defined in the Certificate of Incorporation)
of the Company, in whole or in part, at the option of the holders of Preferred
Stock, at a redemption price per share equal to 105% of the liquidation value
plus accrued and unpaid dividends to the date of redemption. The Preferred
Stock, voting separately as a class, is entitled to elect two directors to the
Board of Directors of the Company. In addition, upon default by the Company in
its obligations under the terms of the Preferred Stock, the Board of Directors
of the Company shall be increased by two and the holders of the Preferred Stock
shall have the right to elect directors to fill such new directorships. Holders
of Preferred Stock are also entitled to vote as a class on certain extraordinary
matters, such as amendments to the Certificate of Incorporation or the issuance
of parity or senior securities, reclassification of junior securities to parity
or senior securities, the authorization of consolidations, mergers or the sale
or disposition of substantially all of the Company's assets or the authorization
of the sale or other disposition of properties or assets exceeding
55
<PAGE> 57
25% of the economic value of the Company. The holders of Preferred Stock do not
have any other voting rights, except as otherwise required by law.
LIMITATIONS ON LIABILITY OF DIRECTORS AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS
The Certificate of Incorporation limits the liability of directors to the
extent allowed by the Delaware General Corporation Law. Specifically, directors
will not be held liable to the Company or its stockholders for an act or
omission in such capacity as a director, except for liability as a result of (i)
a breach of the duty of loyalty to the Company or its stockholders, (ii) actions
or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) payment of an improper dividend or improper
repurchase of the Company's stock under Section 174 of the Delaware General
Corporation Law, or (iv) actions or omissions pursuant to which the director
will receive an improper personal benefit.
The principal effect of the limitation of liability provision is that a
stockholder is unable to prosecute an action for monetary damages against a
director of the Company unless the stockholder can demonstrate one of the
specified bases for liability. This provision, however, does not eliminate or
limit director liability arising in connection with causes of action brought
under the federal securities laws.
The Certificate of Incorporation does not eliminate the directors' duty of
care. The inclusion of this provision in the Certificate of Incorporation may,
however, discourage or deter stockholders or management from bringing a lawsuit
against directors for a breach of their fiduciary duties, even though such an
action, if successful, might otherwise have benefited the Company and its
stockholders. This provision should not affect the availability of equitable
remedies such as injunction or rescission based upon a director's breach of the
duty of care. The affirmative vote of the holders of two-thirds or more of the
outstanding voting stock of the Company will be required to amend this
provision.
The Certificate of Incorporation and By-laws provide that the Company is
generally required to indemnify its directors and officers for all judgments,
fines, settlements, legal fees and other expenses incurred in connection with
pending or threatened legal proceedings because of the director's or officer's
position with the Company or another entity that the director serves at the
Company's request, subject to certain conditions, and to advance funds to its
directors and officers to enable them to defend against such proceedings. To
receive indemnification, the director or officer must have been successful in
the legal proceeding or acted in good faith and in what was reasonably believed
to be a lawful manner and in the Company's best interest. The affirmative vote
of the holders of two-thirds or more of the outstanding voting stock of the
Company will be required to amend this provision.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Subscription Offering, the Selling Stockholders will
own approximately 76% of the outstanding Common Stock, assuming all Eligible
Subscribers exercise their subscription rights in full.
Upon completion of the Subscription Offering, the Company will have
14,390,055 shares of Common Stock outstanding. Of these shares, the 3,459,414
shares of Common Stock sold in the Subscription Offering will be freely
tradeable in the public market without restriction by persons other than
affiliates of the Company. The remaining 10,930,641 shares of Common Stock
outstanding will be "restricted securities" within the meaning of Rule 144 under
the Securities Act ("Rule 144"). Consequently, such shares may not be resold
unless they are registered under the Securities Act or resold pursuant to an
applicable exemption from registration under the Securities Act, such as Rule
144.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least one year is, entitled to sell, within any three-month period, a
number of shares of Common Stock which does not exceed the greater of 1% of the
number of then-outstanding shares of the Common Stock or the average weekly
trading volume of the Common Stock during the four calendar weeks preceding the
date on which notice of the sale is filed with the Securities and Exchange
Commission (the "Commission"). Sales under Rule 144 also may be subject to
certain manner of sale provisions, notice requirements and the availability of
current public information about the Company. Any person (or persons whose
shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the
56
<PAGE> 58
three months preceding a sale, and who has beneficially owned shares within the
definition of "restricted securities" under Rule 144 for at least two years, is
entitled to sell such shares under Rule 144(k) without regard to the volume
limitation, manner of sale provisions, public information requirements or notice
requirements.
Prior to the Subscription Offering, there has been no public market for the
Common Stock and no prediction can be made as to the effect, if any, that sales
of shares of Common Stock or the availability of such shares for sale will have
on the market price of the Common Stock prevailing from time to time.
Nevertheless, sales of substantial amounts of Common Stock in the open market
could adversely affect prevailing market prices. The Company has not made an
application to list the Common Stock on any securities exchange or to admit the
Common Stock for trading in the National Association of Securities Dealers
Automated Quotation System.
EXPERTS
The consolidated financial statements of GGI as of December 31, 1995 and
1996 and for each of the three years in the period ended December 31, 1996 and
the nine month period ended September 1997 and the consolidated balance sheet of
Grant at September 30, 1997 have been included in this Subscription Offering
Prospectus in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP covering the December 31, 1996
financial statements of GGI contains an explanatory paragraph that states that
GGI's recurring losses from operations and net capital deficiency raise
substantial doubt about the entity's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of that uncertainty.
The consolidated financial statements of Solid State for each of the three
years ended August 31, 1997 and for each of the years in the period ended August
31, 1997 included in this Subscription Offering Prospectus have been audited by
Price Waterhouse, independent accountants, as stated in their report appearing
herein.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement (which
term shall encompass any amendment thereto) on Form S-1 under the Securities Act
of 1933, as amended (the "Securities Act"), with respect to the Common Stock
offered hereby. This Subscription Offering Prospectus, which constitutes a part
of the Registration Statement, does not contain all of the information set forth
in the Registration Statement, certain items of which are omitted from the
Subscription Offering Prospectus as permitted by the rules and regulations
promulgated by the Commission. For further information with respect to the
Company and the Common Stock offered in the Subscription Offering, reference is
hereby made to the Registration Statement and the exhibits thereto. Statements
made in this Subscription Offering Prospectus as to the provisions of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such statement as to a contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference.
The Registration Statement and the exhibits thereto, as well as any such
reports and other information to be filed by the Company with the Commission,
may be inspected and copied at the public reference facilities of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at 7 World Trade Center, Suite 1300, New York, New
York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material can be obtained from the public reference
section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. In addition, the Commission maintains a Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission, including the Company.
The Company intends to furnish its shareholders with annual reports
containing audited consolidated financial statements and quarterly reports
containing unaudited condensed consolidated financial information for the first
three quarters of its fiscal year.
57
<PAGE> 59
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
GRANT GEOPHYSICAL, INC. PAGE
----
<S> <C>
Independent Auditors Report:
GGI Liquidating Corporation......................................................... F-2
Grant Geophysical, Inc.............................................................. F-3
Consolidated Balance Sheets:
GGI Liquidating Corporation as of December 31, 1995 and 1996........................ F-4
Grant Geophysical, Inc. as of September 30, 1997.................................... F-4
Consolidated Statement of Operations:
GGI Liquidating Corporation for the years ended December 31, 1994, 1995 and 1996 and
for the nine month period ended September 30, 1996 (unaudited) and 1997.......... F-5
Consolidated Statement of Stockholders' Equity:
GGI Liquidating Corporation for the years ended December 31, 1993, 1994, 1995 and
1996............................................................................. F-6
Grant Geophysical, Inc. as of September 30, 1997.................................... F-6
Consolidated Statement of Cash Flows:
GGI Liquidating Corporation for the years ended December 31, 1994, 1995 and 1996 and
for the nine month period ended September 30, 1996 (unaudited) and 1997.......... F-7
Notes to Consolidated Financial Statements............................................ F-9
</TABLE>
<TABLE>
<CAPTION>
SOLID STATE GEOPHYSICAL INC. PAGE
----
<S> <C>
Auditors' Report -- Chartered Accountants............................................. F-34
Comments by Auditors for U.S. Readers on Canada -- U.S. Reporting
Difference -- Chartered Accountants................................................. F-34
Consolidated Balance Sheet............................................................ F-35
Consolidated Statement of Operations and (Deficit) Retained Earnings.................. F-36
Consolidated Statement of Changes in Financial Position............................... F-37
Notes to Consolidated Financial Statements............................................ F-38
</TABLE>
F-1
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
The Board of Directors
GGI Liquidating Corporation
We have audited the accompanying consolidated balance sheets of GGI
Liquidating Corporation (a debtor-in-possession as of December 31, 1996)
(formerly Grant Geophysical, Inc.) and subsidiaries as of December 31, 1995 and
1996, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for each of the years in the three-year period
ended December 31, 1996 and the nine month period ended September 30, 1997. In
connection with our audit of the consolidated financial statements, we have also
audited the financial statement schedule as listed in the accompanying index.
These consolidated financial statements and the financial statement schedule are
the responsibility of GGI Liquidating Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule 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 our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial positions of GGI
Liquidating Corporation and subsidiaries as of December 31, 1995 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996, and the nine month period ended
September 30, 1997, in conformity with generally accepted accounting principles.
Also in our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements and financial statement
schedule have been prepared assuming that GGI Liquidating Corporation will
continue as a going concern which contemplates among other things, the
realization of assets and liquidation of liabilities in the ordinary course of
business. As discussed in Note 1 to the consolidated financial statements, GGI
Liquidating Corporation (the Petitioning Company) filed a voluntary petition for
reorganization under chapter 11 of the United States Bankruptcy Code on December
6, 1996. The chapter 11 case of the Petitioning Company is administered by the
United States Bankruptcy Court for the District of Delaware (the "Court"). The
Petitioning Company is operating the business as debtor-in-possession which
requires certain of its actions to be approved by the Court. In September 1997
the Court approved the "Second Amended Plan of Reorganization" (the "Plan")
filed by GGI Liquidating Corporation. The Plan was consummated on September 30,
1997, with the purchase by Grant Geophysical, Inc. of substantially all of the
assets and the assumption of certain liabilities of GGI Liquidating Corporation.
GGI Liquidating Corporation is currently in liquidation and will distribute all
of its assets pursuant to the Plan. Upon the completion of its asset
distribution, GGI Liquidating Corporation will dissolve and cease to exist. The
consolidated financial statements and financial statement schedule do not
include any adjustments relating to the recoverability and classification of
reported asset amounts or the amounts and classification of liabilities that
might result from the Plan and the distribution of assets pursuant thereto.
KPMG PEAT MARWICK LLP
Houston, Texas
December 22, 1997
F-2
<PAGE> 61
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Grant Geophysical, Inc.
We have audited the accompanying consolidated balance sheet of Grant
Geophysical, Inc. and subsidiaries as of September 30, 1997. This consolidated
financial statement is the responsibility of Grant Geophysical, Inc.'s
management. Our responsibility is to express an opinion on this consolidated
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the financial position of Grant Geophysical,
Inc. and subsidiaries as of September 30, 1997, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
December 22, 1997
F-3
<PAGE> 62
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
GGI
--------------------
DECEMBER 31, GRANT
---------------------- SEPTEMBER 30,
1995 1996 1997
-------- --------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 1,047 $ 6,772 $ 5,618
Restricted cash...................................................................... 100 -- 321
Accounts receivable:
Trade (net of allowance for doubtful accounts of $2,344, and $5,711 at December 31,
1995 and 1996, respectively, and $0 at September 30, 1997)........................ 37,069 19,471 15,017
Other.............................................................................. 1,826 996 1,754
Inventories.......................................................................... 1,417 503 530
Prepaids............................................................................. 3,347 1,411 1,924
Work in process...................................................................... 6,772 1,071 1,339
------- ------- -------
Total current assets........................................................... 51,578 30,224 26,503
Property, plant and equipment:
Land................................................................................. 231 231 231
Buildings and improvements........................................................... 1,692 1,397 1,116
Plant facilities and store fixtures.................................................. 2,723 1,703 259
Machinery and equipment.............................................................. 88,573 90,892 30,922
------- ------- -------
Total property, plant and equipment............................................ 93,219 94,223 32,528
Less accumulated depreciation........................................................ 61,565 56,555 --
------- ------- -------
Net property, plant and equipment.............................................. 31,654 37,668 32,528
Deferred costs......................................................................... 334 -- --
Restricted cash........................................................................ 315 321 --
Goodwill............................................................................... -- -- 21,012
Other assets........................................................................... 3,051 1,910 2,806
------- ------- -------
Total assets................................................................... $ 86,932 $ 70,123 $82,849
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable, current portion of long-term debt and capital lease obligations....... $ 18,430 $ 589 $ 3,940
Accounts payable..................................................................... 19,241 3,975 5,820
Accrued expenses..................................................................... 5,643 3,051 4,131
Due to GGI........................................................................... 34,783
Foreign income taxes payable......................................................... 231 188 1,868
------- ------- -------
Total current liabilities...................................................... 43,545 7,803 50,542
Pre-petition liabilities subject to chapter 11 case.................................... -- 90,244 --
Long-term debt and capital lease obligations, excluding current portion................ 8,789 -- 6,209
Unearned revenue....................................................................... 4,074 6,031 3,191
Other liabilities and deferred credits................................................. 809 258 3,336
Commitments and contingencies.......................................................... -- -- --
Stockholders' equity (deficit):
$2.4375 Convertible exchangeable preferred stock, $.01 par value. Authorized
2,300,000 shares; issued and outstanding 2,157,000 and 2,300,000 shares at December
31, 1995 and 1996, respectively, none issued and outstanding at September 30, 1997.
(liquidating preference $25 per share, aggregating $57,500,000).................... 22 23 --
Series A Convertible preferred stock, $.01 par value. Authorized 75,000 shares; none
issued and outstanding............................................................. -- -- --
Junior preferred stock, $100 par value. Authorized 15,000 shares; issued and
outstanding 14,904 shares at December 31, 1995 and 1996, none at September 30,
1997............................................................................... 1,490 1,490 --
Serial preferred stock, $100 par value. Authorized 250,000 shares; none issued and
outstanding........................................................................ -- -- --
Common stock, $.001 par value. Authorized 100 shares; issued and outstanding 1 share
at September 30, 1997 none authorized, issued and outstanding at December 31, 1995
and 1996........................................................................... -- -- --
Common stock, $.002 par value. Authorized 40,000,000 shares; issued and outstanding
12,234,151 and 20,641,765 shares at December 31, 1995 and 1996, respectively, none
issued and outstanding at September 30, 1997....................................... 24 41 --
Cumulative pay-in-kind preferred stock, $.001 par value. Authorized 20,000 shares;
issued and outstanding 19,571 shares at September 30, 1997 none authorized, issued
and outstanding at December 31, 1995 and 1996; liquidating preference of $1,000 per
share.............................................................................. -- -- 19,571
Additional paid-in capital........................................................... 112,122 124,203 --
Accumulated deficit.................................................................. (83,943) (159,970) --
------- ------- -------
Total stockholders' equity (deficit)........................................... 29,715 (34,213) 19,571
------- ------- -------
Total liabilities and stockholders' equity..................................... $ 86,932 $ 70,123 $82,849
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 63
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
GGI
-------------------------------------------------------------------
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................ $ 73,691 $ 91,996 $ 105,523 $ 80,925 $ 92,705
Expenses:
Direct operating expenses..... 53,132 69,046 136,326 83,243 71,006
Other operating expenses...... 7,810 8,527 17,865 8,948 6,473
Depreciation and
amortization............... 12,079 9,424 11,500 8,237 8,432
Special charge for asset
impairment................. 9,911 -- 5,802 -- --
----------- ----------- ----------- ----------- -----------
Total costs and
expenses............ 82,932 86,997 171,493 100,428 85,911
----------- ----------- ----------- ----------- -----------
Operating
income/(loss)....... (9,241) 4,999 (65,970) (19,503) 6,794
Other income (deductions):
Interest expense.............. (3,561) (3,635) (7,558) (4,460) (4,037)
Reorganization costs.......... -- -- (412) -- (3,543)
Interest income............... 177 113 36 34 279
Other......................... 1,380 2,076 (502) 26 2,266
----------- ----------- ----------- ----------- -----------
Total other
deductions.......... (2,004) (1,446) (8,436) (4,400) (5,035)
----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes........ (11,245) 3,553 (74,406) (23,903) 1,759
Income tax expense.............. 193 391 1,621 945 2,184
----------- ----------- ----------- ----------- -----------
Net income (loss)..... $ (11,438) $ 3,162 $ (76,027) $ (24,848) $ (425)
========== ========== ========== ========== ==========
Net loss applicable to
common stock........ $ (16,696) $ (2,096) $ (82,390) $ (30,185) $ (425)
========== ========== ========== ========== ==========
INCOME (LOSS) PER COMMON
SHARE -- ASSUMING NO AND FULL
DILUTION:
Net income (loss)............... $ (0.92) $ 0.25 $ (5.17) $ (1.85) $ (0.02)
Dividend requirement on $2.4375
preferred stock............... (0.42) (0.42) (0.43) (0.39) --
----------- ----------- ----------- ----------- -----------
Net loss per common share....... $ (1.34) $ (0.17) $ (5.60) $ (2.24) $ (0.02)
========== ========== ========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Primary....................... 12,470,704 12,535,352 14,699,824 13,455,767 21,826,940
Fully diluted................. 12,484,093 12,571,984 14,699,824 13,455,767 21,826,940
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 64
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GGI
--------------------------------------------------------------------------------------------
$2.4375
CONVERTIBLE SERIES A
EXCHANGEABLE CONVERTIBLE JUNIOR CUMULATIVE ADDITIONAL
PREFERRED PREFERRED PREFERRED PAY-IN-KIND COMMON PAID-IN ACCUMULATED
STOCK STOCK STOCK PREFERRED STOCK STOCK CAPITAL DEFICIT
------------ ----------- --------- --------------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December
31, 1993........... $ 22 $ -- $ 1,490 $ -- $ 24 $111,905 $ (75,667)
Net loss........... -- -- -- -- -- (11,438)
Restricted common
stock issued
under the
Incentive Stock
Option Plan...... -- -- -- -- -- 62 --
Proceeds from sale
of 11,500 shares
under the
Incentive Stock
Option Plan...... -- -- -- -- -- 1 --
--- ---- ------ ------ --- -------- --------
Balances at December
31, 1994........... 22 -- 1,490 -- 24 111,968 (87,105)
Net income......... -- -- -- -- -- -- 3,162
Restricted common
stock issued
under the
Incentive Stock
Option Plan...... -- -- -- -- -- 86 --
Proceeds from sale
of 15,000 shares
under the
Incentive Stock
Option Plan...... -- -- -- -- -- 11 --
Restricted common
stock issued
under the
Employee
Retirement
Savings Plan..... -- -- -- -- -- 57 --
--- ---- ------ ------ --- -------- --------
Balances at December
31, 1995........... 22 -- 1,490 -- 24 112,122 (83,943)
Net loss........... -- -- -- -- -- -- (76,027)
Common stock issued
in connection
with obtaining
equipment and
short- and
long-term
financing........ -- -- -- -- -- 389 --
Issuance of 143,000
shares of $2.4375
Convertible
exchangeable
preferred stock,
net of non-cash
issuance costs of
$171,000......... 1 -- -- -- -- 1,372 --
Issuance of 70,000
shares of Series
A convertible
preferred
stock............ -- 1 -- -- -- 6,999 --
Conversion of
convertible
debentures....... -- -- -- -- 7 2,767 --
Conversion of
Series A
convertible
preferred
stock............ -- (1) -- -- 9 (8) --
Proceeds from the
exercise of
200,000
warrants......... -- -- -- -- 1 150 --
Restricted common
stock issued
under the
Incentive Stock
Option Plan...... -- -- -- -- -- 129 --
Proceeds from sale
of 125,000 shares
under the Incentive
Stock Option
Plan............... -- -- -- -- -- 145 --
Restricted common
stock issued
under the
Employee
Retirement
Savings Plan..... -- -- -- -- -- 138 --
--- ---- ------ ------ --- -------- --------
Balances at December
31, 1996........... $ 23 $ -- $ 1,490 $ -- $ 41 $124,203 $(159,970)
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY (DEFICIT)
-----------------
<S> <<C>
Balances at December
31, 1993........... $ 37,774
Net loss........... (11,438)
Restricted common
stock issued
under the
Incentive Stock
Option Plan...... 62
Proceeds from sale
of 11,500 shares
under the
Incentive Stock
Option Plan...... 1
--------
Balances at December
31, 1994........... 26,399
Net income......... 3,162
Restricted common
stock issued
under the
Incentive Stock
Option Plan...... 86
Proceeds from sale
of 15,000 shares
under the
Incentive Stock
Option Plan...... 11
Restricted common
stock issued
under the
Employee
Retirement
Savings Plan..... 57
--------
Balances at December
31, 1995........... 29,715
Net loss........... (76,027)
Common stock issued
in connection
with obtaining
equipment and
short- and
long-term
financing........ 389
Issuance of 143,000
shares of $2.4375
Convertible
exchangeable
preferred stock,
net of non-cash
issuance costs of
$171,000......... 1,373
Issuance of 70,000
shares of Series
A convertible
preferred
stock............ 7,000
Conversion of
convertible
debentures....... 2,774
Conversion of
Series A
convertible
preferred
stock............ --
Proceeds from the
exercise of
200,000
warrants......... 151
Restricted common
stock issued
under the
Incentive Stock
Option Plan...... 129
Proceeds from sale
of 125,000 shares
under the Incentive
Stock Option
Plan............... 145
Restricted common
stock issued
under the
Employee
Retirement
Savings Plan..... 138
--------
Balances at December
31, 1996........... $ (34,213)
</TABLE>
<TABLE>
<CAPTION>
GRANT
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning
balances........... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Common stock, one
share issued....... -- -- -- -- -- -- -- --
Cumulative preferred
stock Issued....... $ -- $ -- $ -- $19,571 $ -- $ -- $ -- $ 19,571
--- ---- ------ ------ --- -------- -------- --------
Balances at
September 30, 1997 $ -- $ -- $ -- $19,571 $ -- $ -- $ -- $ 19,571
=== ==== ====== ====== === ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 65
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GGI
-------------------------------------------------------
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ ----------------------
1994 1995 1996 1996 1997
-------- -------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income -- (loss)....................... $(11,438) $ 3,162 $(76,027) $ (24,848) $ (425)
Adjustments to reconcile net income/(loss)
to net cash provided by (used in)
operating activities:
Special charge for asset impairment..... 9,911 -- 5,802 -- --
Provision for doubtful accounts......... 14 -- 5,511 -- --
Depreciation and amortization expense... 12,079 9,424 11,500 8,237 8,432
Deferred costs amortization............. 5,824 12,550 29,528 18,595 --
Loss on sale of subsidiaries............ -- -- 198 -- --
(Gain) -- loss on the sale of fixed
assets................................ (10) (212) (25) (13) 39
Gain on insurance claim................. -- (1,247) -- -- --
Exchange loss (gain).................... (121) (102) 251 (4) 98
Other non-cash items.................... 61 191 328 330 225
Changes in assets and liabilities, excluding
effects of divestitures:
(Increase) decrease in:
Accounts receivable........................ (4,046) (14,828) 13,346 4,320 2,375
Inventories................................ -- 27 914 179 (27)
Prepaids................................... (1,747) (1,701) 1,228 (732) (538)
Work-in-process............................ (5,242) (18,439) (24,969) (24,969) (268)
Other assets............................... (589) (521) 1,846 (192) (1,031)
Increase (decrease) in:
Accounts payable........................... 1,659 10,637 9,328 1,024 3,143
Accrued expenses........................... (619) 1,046 5,059 1,398 830
Foreign income taxes payable............... (2) 122 390 135 1,767
Other liabilities and deferred credits..... (2,564) 2,650 7,973 1,511 (2,320)
Change in pre-petition liabilities subject to
Chapter 11 case:
Accounts payable........................ -- -- -- -- (2,226)
Accrued expenses........................ -- -- (125) -- (1,732)
Foreign income tax payable.............. -- -- -- -- (194)
Other liabilities and deferred
credits............................... -- -- (1,402) -- (3,622)
-------- -------- -------- -------- --------
Total cash provided by (used in)
operating activities............. 3,170 2,759 (9,346) (15,029) 4,526
-------- -------- -------- -------- --------
Cash flows from (used in) investing
activities:
Capital expenditures, net.................. (9,697) (13,757) (10,339) (9,546) (6,751)
Proceeds from the sale of assets........... 13 255 25 13 20
Proceeds from the sale of
subsidiaries/businesses................. 880 -- 39 -- --
Insurance proceeds from arson damage, net
of losses incurred...................... -- 1,351 -- -- --
</TABLE>
(Continued on next page)
F-7
<PAGE> 66
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GGI
-------------------------------------------------------
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ ----------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Restricted cash............................ (894) 2,879 94 (340) --
-------- -------- -------- -------- --------
Net cash used in investing activities... (9,698) (9,272) (10,181) (9,873) (6,731)
-------- -------- -------- -------- --------
Cash flows from (used in) financing
activities:
Proceeds from the exercise of stock options
and warrants............................ 2 11 296 295 --
Proceeds from issuance of $2.4375 preferred
stock, net of issuance costs............ -- -- 1,544 1,573 --
Proceeds from issuance of Series A
preferred stock......................... -- -- 7,000 7,000 --
Borrowings made during the period.......... 77,754 89,950 122,354 95,439 4,207
Repayment on borrowings during the
period.................................. (72,496) (83,032) (105,757) (80,401) (1,838)
Pre-petition liabilities subject to Chapter
11 case:
Borrowings under credit facility........ -- -- 3,612 -- 49,385
Repayment on borrowings................. -- -- (3,382) -- (50,465)
-------- -------- -------- -------- --------
Net cash provided by financing
activities............................ 5,260 6,929 25,667 23,906 1,289
Effect of exchange rate changes on cash...... (720) (173) (415) (51) (238)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................. (1,988) 243 5,725 (1,047) (1,153)
Cash and cash equivalents at beginning of
period..................................... 2,792 804 1,047 1,047 6,772
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period... $ 804 $ 1,047 $ 6,772 $ -- $ 5,618
======== ======== ======== ======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES. SEE NOTE
17.
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 67
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995, 1996, SEPTEMBER 30, 1997
(1) BASIS OF PRESENTATION
Effective September 30, 1997, Grant Geophysical, Inc. ("Grant"), which was
formerly known as Grant Acquisition Corporation, acquired substantially all of
the assets and assumed certain liabilities of GGI Liquidating Corporation
("GGI"), which was formerly known as Grant Geophysical, Inc. As of September 30,
1997, Elliott Associates L.P. ("Elliott") and Westgate International, L.P.
("Westgate") own all of the issued and outstanding common and preferred stock of
Grant. The general partners of Elliott are Paul E. Singer and Braxton
Associates, L.P. The general partner of Westgate is Hambledon, Inc., a
corporation controlled by Braxton Associates, L.P. Elliott and Westgate are each
managed by Stonington Management Corporation, a corporation controlled by Mr.
Singer. For financial statement purposes, the purchase of GGI's assets by Grant
was accounted for as a purchase acquisition. The effects of the acquisition have
been reflected in Grant's assets and liabilities at that date. As a result,
Grant's consolidated balance sheet as of September 30, 1997 is presented on
Grant's new basis of accounting, while the consolidated balance sheets as of
December 31, 1995 and 1996 and the consolidated statements of operations and
cash flows for the three-years ended December 31, 1996 and the nine-months ended
September 30, 1996 (unaudited) and 1997 are presented on GGI's historical cost
basis of accounting. Because of the recent acquisition and related adjustment of
assets and liabilities to fair value as of September 30, 1997, the carrying
value of Grant's financial assets and liabilities approximates fair value.
On December 6, 1996, (the "Petition Date") GGI filed for protection under
the United States Bankruptcy Code and began its reorganization under the
supervision of the Bankruptcy Court. The reorganization was precipitated by
several factors, including overly rapid and underfinanced expansion in the
United States and Latin American markets, costs related to the development of a
proprietary data recording system and poor operational results in the United
States and certain international markets. These factors impaired GGI's ability
to service its indebtedness, finance its existing capital expenditure
requirements and meet its working capital needs. In addition, GGI was unable to
raise additional equity, causing a disproportionate reliance on debt financing
and equipment leasing. In connection with the reorganization, GGI replaced its
senior management, disposed of unprofitable operations and developed a plan of
Reorganization (the "Plan"), which was consummated on September 30, 1997 (the
"Effective Date") with the purchase by Grant of substantially all of the assets
and the assumption certain liabilities of GGI. GGI is currently in liquidation
and will distribute all of its assets pursuant to the Plan. Upon the completion
of its asset distribution, GGI will dissolve and cease to exist.
Grant was incorporated in Delaware in September 1997. Grant has several
wholly owned subsidiaries incorporated in the United States and certain foreign
jurisdictions and has established branch operations in various foreign
jurisdictions. Grant provides the petroleum industry with land and transition
zone seismic data acquisition services. Grant operates seismic crews in areas of
oil and gas exploration in the United States, Latin America and the Far East.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Going Concern Considerations -- GGI
The accompanying financial statements of GGI have been prepared on a going
concern basis, which contemplates the realization of assets and the liquidation
of liabilities in the ordinary course of business. As described earlier, GGI is
in the process of distributing its assets pursuant to the Plan and will be
dissolved. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of reported asset amounts or
the amounts and classification of liabilities that may result from the Plan and
the distribution of assets pursuant thereto.
F-9
<PAGE> 68
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Principles of Consolidation
Each of the consolidated financial statements include the accounts of GGI
or Grant and all of their respective majority-owned subsidiaries. All
significant intercompany accounts and transactions are eliminated in
consolidation.
Revenues
Revenues from data acquisition are recognized based on contractual rates
set forth in the related contract. If the contract only provides a rate for the
completed service, revenue and any unearned revenue recorded is recognized based
on the percentage of the work effort completed compared with the total work
effort involved in the contract.
Cash and Cash Equivalents
For purposes of the consolidated statement of cash flows, all highly liquid
debt instruments purchased with an original maturity of three months or less are
considered to be cash equivalents. Investments in Federal agency securities were
$701,000, at December 31, 1995. There were no such investments at December 31,
1996 or September 30, 1997.
Restricted Cash
At December 31, 1995 and 1996, and September 30, 1997, restricted cash
included three certificates of deposit totaling $415,000, $321,000 and $321,000,
respectively, which are pledged as collateral for letters of credit.
Inventories
Inventories, which consist primarily of miscellaneous supplies, are stated
at lower of cost or market. Cost is determined using the specific identification
method.
Work in Process
Expenses related to the work in progress of seismic crews are deferred and
recognized over the performance of the contract.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Plant and equipment under
capital leases are stated at the present value of future minimum lease payments
at the inception of the lease.
Depreciation is provided principally by the straight-line method over the
estimated useful lives of the various classes of assets as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and improvements............................................ 5-10
Data processing equipment............................................. 3-5
Office equipment...................................................... 5-10
Seismic exploration and transportation equipment...................... 3-10
</TABLE>
F-10
<PAGE> 69
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Plant and equipment held under capital leases are amortized by the
straight-line method over the shorter of the lease term or estimated useful life
of the asset. Expenditures for maintenance and repairs are charged to
operations. Betterments and major renewals are capitalized.
Capitalized Software Costs
Capitalized software costs consist of certain expenses incurred to
internally develop software. Capitalization of cost begins upon the
establishment of the software's technological feasibility. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized software development costs requires considerable judgment by
management with respect to certain external factors, including, but not limited
to anticipated future gross revenue, estimated economic life and changes in
software and hardware technologies.
At December 31, 1995, GGI had capitalized approximately $717,000 of
software development costs which were included in property, plant and equipment.
At December 31, 1996, in conjunction with GGI's evaluation of the recoverability
of its asset carrying values, $760,000 carrying value of capitalized software
was written off. See Note 4.
Multi-Client Data Library
The costs incurred in acquiring and processing multi-client seismic data
owned by Grant are capitalized. During the twelve month period beginning with
the initiation of acquisition of each multi-client survey, costs are amortized
based on revenues from such survey as a percentage of total estimated revenues
to be realized from such survey. Thereafter, amortization of remaining
capitalized costs is provided at the greater of the percentage of realized
revenues to total estimated revenues or straight line over four years.
On a quarterly basis, management estimates the residual value of each
survey, and additional amortization is provided if the remaining revenues
reasonably expected to be obtained from any survey are less than the carrying
value of such survey.
At September 30, 1997 Grant did not have any unamortized costs related to
multi-client seismic data.
Asset Impairment
In the fourth quarter of 1995, GGI adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." This standard requires that
long-lived assets and certain identifiable intangibles held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. During the
fourth quarter of 1994, GGI reviewed the quantity and age of its data
acquisition equipment to ensure the carrying amount of these assets were
recoverable. While still usable, rapid technological changes which had occurred
during the preceding three years and a resultant demand for new advanced
technology equipment by GGI's customers made it unlikely that the carrying value
of certain equipment prior to the write down was recoverable from expected
future cash flows. Accordingly, GGI recorded a $9,911,000 special charge for
asset impairment during 1994. Adoption of SFAS No. 121 did not materially affect
GGI's consolidated results of operations or financial position at December 31,
1995. At December 31, 1996, as a result of this review, a $5,802,000 charge for
asset impairment was recorded during the fourth quarter of 1996. See Note 4.
Long-lived assets and certain identifiable intangibles are written down to
their current fair value whenever events or changes in circumstances indicate
that the carrying amount of these assets are not recoverable. These events or
changes in circumstances may include but are not limited to a significant change
in the extent in which an assets is used, a significant decrease in the market
value of the asset, or a projection or forecast that
F-11
<PAGE> 70
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
demonstrates continuing losses associated with an asset. If an impairment is
determined, the asset is written down to its current fair value and a loss is
recognized.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited. Goodwill will be amortized over thirty years. Grant
assesses the recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation. The
amount of goodwill impairment, if any, is measured based on projected discounted
future operating cash flows using a discount rate reflecting the Grant's average
cost of funds. The assessment of the recoverability of goodwill will be impacted
if estimated future operating cash flows are not achieved.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reorganization Costs
Reorganization costs consist of professional fees and similar types of
expenditures directly related to GGI's chapter 11 proceeding, and are expensed
as incurred. During 1996 and the nine months ended September 30, 1997, GGI had
incurred approximately $412,000 and $3,543,000 of reorganization costs.
Foreign Exchange Gains and Losses
In an effort to mitigate foreign exchange rate fluctuations, the majority
of international contracts are billed and paid at a certain U.S. Dollar rate.
Foreign currency transaction gains and losses are included in Other
income/deductions. Grant does not presently use derivatives or forward foreign
exchange hedging contracts.
Income Taxes
The Financial Accounting Standards Board issued SFAS No. 109, "Accounting
for Income Taxes." Under the asset and liability method of SFAS No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Post Employment Benefits
GGI adopted SFAS No. 112 effective January 1, 1994. SFAS No. 112 requires
companies to account for benefits to former or inactive employees after
employment but before retirement on the accrual basis of accounting.
Post-employment benefits include every form of benefit provided to former or
inactive employees, their beneficiaries and covered dependents. Benefits
include, but are not limited to, salary continuation, supplemental unemployment
benefits, severance benefits, disability-related benefits (including workers'
compensation), job training and counseling, and continuation of benefits such as
health care benefits and life insurance
F-12
<PAGE> 71
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
coverage. Adoption of SFAS No. 112 did not materially affect GGI's consolidated
results of operations or financial position.
Income (Loss) Per Common Share
GGI's income (loss) per common share is computed based upon the weighted
average number of common shares outstanding during each period. For purposes of
this calculation, outstanding stock options and warrants are considered common
stock equivalents. Fully diluted income (loss) per common share is determined
based upon the weighted average number of common shares, calculated using the
ending market price of common shares for the period if that market price is
higher than the average market price used in computing primary earnings per
share. The income (loss) is adjusted for undeclared, unpaid cumulative preferred
stock dividends in calculating net income (loss) attributable to the common
shareholder.
Stock Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" which establishes a fair value
method for accounting for stock-based compensation plans either through
recognition or disclosure. Grant has elected to continue to follow the intrinsic
value method of accounting prescribed by Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees", where compensation costs are not
recognized in Grant's stock option plans.
However, had GGI adopted SFAS No. 123 for options granted after January 1,
1995, GGI's net loss and net loss per common share for the years ended December
31, 1995 and 1996 would have been increased as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
GGI
-------------------------------------------------
1995 1996
---------------------- ----------------------
AS AS
REPORTED PRO FORMA REPORTED PRO FORMA
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net loss.......................... $ (2,096) $ (2,215) $(82,390) $ (82,612)
Net loss per common share......... $ (0.17) $ (0.18) $ (5.60) $ (5.62)
</TABLE>
For purposes of determining compensation costs using the provisions of SFAS
123, the fair value of option grants were determined using the Black-Scholes
option-valuation model. The key input variables used in valuing the options
were: risk-free interest rate of 8.5%; dividend yield of zero; stock price
volatility of 70%; expected option lives of four years.
Pursuant to the Plan, GGI's capital stock was canceled on the Effective
Date. As a result, GGI's Amended 1989 Long-Term Incentive Plan was also
canceled. Therefore, the effect of SFAS No. 123 for the nine months ended
September 30, 1997 has not been presented.
Reclassifications
Certain amounts previously reported have been reclassified in order to
ensure comparability between the periods reported.
Recent Accounting Pronoucements
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, "Earnings per Share." SFAS No. 128 specifies the compilation,
presentation and disclosure requirements for earnings per share for entities
with publicly held common stock or potential common stock. Grant will adopt SFAS
No. 128 for the
F-13
<PAGE> 72
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
quarter ended December 31, 1997. Management does not believe that the
implementation of SFAS No. 128 will have a material effect on its financial
statements.
In December 1997, Grant will be required to adopt Statement of Financial
Accounting Standards No. 129, Disclosure of Information about Capital Structure
("SFAS 129"). SFAS 129 requires that all entities disclose in summary form
within the financial statement the pertinent rights and privileges of the
various securities outstanding. An entity is to disclose within the financial
statement the number of shares issued upon conversion, exercise, or satisfaction
of required conditions during at least the most recent annual fiscal period and
any subsequent interim period presented. Other special provisions apply to
preferred and redeemable stock. Grant will adopt SFAS 129 in the fourth quarter
of 1997.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income ("SFAS 130"), which establishes
standards for reporting and display of comprehensive income and its components.
The components of comprehensive income refer to revenues, expenses, gains and
losses that are excluded from net income under current accounting standards,
including foreign currency translation items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. SFAS 130 requires that all items that are recognized under
accounting standards as components of comprehensive income be reported in a
financial statement displayed in equal prominence with other financial
statements; the total or other comprehensive income for a period is required to
be transferred to a component of equity that is separately displayed in a
statement of financial position at the end of an accounting period. SFAS 130 is
effective for both interim and annual periods beginning after December 15, 1997.
In June 1997, the FASB issued "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS 131"). SFAS No. 131 regarding disclosures about
segments of an enterprise and related information. SFAS No. 131 establishes
standards for reporting information about operating segments in annual financial
statements and requires the reporting of selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for periods
beginning after December 15, 1997. The Grant will adopt SFAS No. 131 for the
fiscal year ending December 31, 1998.
(3) PRE-PETITION LIABILITIES SUBJECT TO GGI'S CHAPTER 11 CASE
As a result of GGI's chapter 11 reorganization proceedings, all
pre-petition liabilities of GGI outstanding at December 31, 1996 were classified
as pre-petition liabilities subject to chapter 11 case. The terms and amounts
F-14
<PAGE> 73
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
due are subject to the conditions of the Plan confirmed on September 15, 1997.
GGI's secured and unsecured debt at December 31, 1996 was as follows (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------
PRE-PETITION
ACCRUED
AMOUNT INTEREST TOTAL
------- ------------ -------
<S> <C> <C> <C>
SECURED DEBT:
Revolving line of credit, 12.7%-14.7%(A)........... $11,774 $ -- $11,774
Equipment notes payable, 7.3%-12.0%(A)............. 16,594 557 17,151
Other notes payable, 10.7%-15.0%(A)................ 5,560 302 5,862
Capital lease obligations, 9.0%-27.0%(A)........... 8,971 198 9,169
Other Claims....................................... 1,662 -- 1,662
------- ------ -------
$44,561 $1,057 $45,618
======= ====== =======
UNSECURED DEBT:
Convertible Debentures, 8%(A)...................... $ 350 $ -- $ 350
Other notes payable, 6%-22%(A)..................... 11,266 158 11,424
Capital lease obligations, 12%-37%(A).............. 687 37 724
Trade Accounts Payable............................. 23,718 -- 23,718
Accrued Expenses................................... 2,956 -- 2,956
Other liabilities and deferred credits............. 5,454 -- 5,454
------- ------ -------
44,431 195 44,626
------- ------ -------
Total...................................... $88,992 $1,252 $90,244
======= ====== =======
</TABLE>
- ---------------
(A) Represents contractual stated interest rates.
On February 4, 1997, the Court approved a Financing Order that authorized
GGI to enter into an agreement to obtain secured post-petition financing with
its primary working capital lender (the "Lender") under which agreement the
Lender continued to advance funds to GGI for its operations. The Financing Order
was amended by order of the Court on April 9, 1997. Pursuant to the Amended
Financing Order, the Lender agreed to make revolving advances not to exceed
$12,500,000. The advances are not to exceed a borrowing base equal to a
percentage of certain trade accounts receivable and an overadvance amount. The
maximum permitted overadvance was $7,000,000 through September 30, 1997 when the
Amended Financing Order expired. A $125,000 fee was paid to the Lender. Interest
accrued at prime plus 3.75% on the advance funds and prime plus 7.25% on the
overadvance funds. Pursuant to the Plan, all loans made under the Financing
Order were paid in full on September 30,1997.
On August 22, 1996, GGI amended a two-year term loan agreement with a
secured lender to increase the principal amount to $5,000,000. Interest on such
debt at the rate of 13.5% has been accruing since the petition date. Pursuant to
the Plan, this loan is required to be paid on December 31, 1997.
Agreements with certain lenders and lessors have been reached and pursuant
to the Plan, GGI is making payments of adequate protection in varying amounts.
Pursuant to the Plan, each of these loans and leases is included in the
liabilities assumed by Grant (see Note 9) or are required to be paid in full on
December 31, 1997.
On March 27, 1996, GGI issued $3,000,000 of its 8% Convertible Debentures
("Debentures") due December 31, 1999. The Debentures were convertible, at the
option of the purchaser, into shares of GGI's Common Stock at a conversion price
of 80% of the five day average low trading price prior to the conversion
F-15
<PAGE> 74
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
election of the Common Stock, provided that such 80% figure was increased to
100% if the Debentures were converted within 45 days of the Closing Date. As of
December 31, 1996, approximately $2,650,000 of the Debentures had been converted
into 3,400,261 shares of GGI's Common Stock. The remaining amount is an
unsecured debt of GGI which will receive the recovery, if any, afforded to
allowed unsecured creditors pursuant to the Plan.
GGI borrowed an aggregate of $3,149,000 from Westgate and Elliott for
working capital purposes. This amount remained outstanding at December 31, 1996.
The remaining amount is an unsecured debt of GGI which will receive the
recovery, if any, afforded to allowed unsecured creditors pursuant to the Plan.
Prior to the Petition Date, interest was accrued on all debt instruments
based on contractual rates. Interest has continued to accrue on all secured
equipment notes payable and capital leases based on renegotiated rates of 7% to
11.09% since December 7, 1996. All unsecured and undersecured debt have not been
entitled to accrue interest since the Petition Date. Interest expense, based on
contractual rates of debt instruments, would have been approximately $7,667,000
for the year ended December 31, 1996. Interest expense for the nine months ended
September 30, 1997, has been accrued at the negotiated contractual rates.
(4) SPECIAL CHARGE FOR ASSET IMPAIRMENT
During the fourth quarter of 1994, GGI reviewed the quantity and age of its
data acquisition equipment to ensure the carrying amount of these assets were
recoverable. While still usable, rapid technological changes which had occurred
during the preceding three years and a resultant demand for new advanced
technology equipment by GGI's customers made it unlikely that the carrying value
of certain equipment prior to the write down was recoverable from expected
future cash flows. Accordingly, GGI recorded a $9,911,000 special charge for
asset impairment during 1994. The majority of the 1994 impairment, approximately
75%, related to assets located in Nigeria. The remainder was associated with
equipment in the Middle East, Far East and United States, which was deemed to be
overvalued due to the decline in demand for that equipment's technology.
In 1994 GGI began development of a proprietary data recording system, which
was intended to replace an older recording system used in transition zone areas.
Problems with software design and hardware availability resulted in numerous
delays and substantial cost overruns. In addition, the completed system did not
meet performance expectations. Consequently, at December 31, 1996, GGI reduced
the carrying value of the proprietary data recording system which was not
expected to generate future cash flows adequate to support current carrying
values. Accordingly, a $5,802,000 charge for asset impairment was recorded
during the fourth quarter of 1996.
GGI adopted SFAS 121 in the fourth quarter of 1995 and continually performs
an evaluation of the asset groups in their respective future cash flows to
determine if any impairment exists.
F-16
<PAGE> 75
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) SUMMARY OF OPERATIONS
A summary of operations by geographical area follows (dollars in
thousands):
<TABLE>
<CAPTION>
GGI
--------------------------------------------------
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------- SEPTEMBER 30,
1994 1995 1996 1997
------- ------- -------- -------------
<S> <C> <C> <C> <C>
Total revenues:
U.S.................................. $27,791 $47,849 $ 42,074 $41,267
Middle East.......................... 8,725 786 -- --
Africa............................... 15,500 14,208 904 --
Colombia............................. 5,557 4,535 12,722 19,797
Peru................................. -- 13,719 27,490 2,696
Other Latin America.................. 10,086 7,278 16,921 20,074
Far East............................. 6,032 3,621 5,412 8,871
------- ------- -------- -------
$73,691 $91,996 $105,523 $92,705
======= ======= ======== =======
Operating income/(loss):
United States........................ $(1,112) $ 4,575 $(35,920) $(1,924)
Middle East.......................... (1,182) 285 (144) --
Africa............................... (6,164) 1,130 (4,281) --
Europe............................... (617) (821) (922) --
Colombia............................. (346) (271) (94) 4,750
Peru................................. 106 1,205 (19,804) 4
Other Latin America.................. 439 (714) (4,744) 1,619
Far East............................. (365) (390) (61) 2,345
------- ------- -------- -------
$(9,241) $ 4,999 $(65,970) $ 6,794
======= ======= ======== =======
Foreign currency exchange
gains/(losses):
Africa............................... $ (80) $ 265 $ 15 $ --
Europe............................... (26) (8) (16) --
Middle East.......................... (21) (13) -- --
Colombia............................. (63) 99 (26) (182)
Peru................................. (6) 2 (2) --
Other Latin America.................. 324 (184) (197) (6)
Far East............................. (7) (59) (25) 90
------- ------- -------- -------
$ 121 $ 102 $ (251) $ (98)
======= ======= ======== =======
</TABLE>
F-17
<PAGE> 76
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
GGI
-------------------
DECEMBER 31, GRANT
------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Identifiable assets:
U.S................................................ $42,738 $36,956 $35,570
Europe and the Middle East......................... 567 41 --
Africa............................................. 15,536 -- --
Peru............................................... 11,722 10,354 --
Colombia........................................... 4,507 9,233 8,099
Brazil............................................. 2,036 7,271 7,191
Other Latin America................................ 5,277 1,803 4,245
Far East........................................... 2,107 2,701 5,154
Other.............................................. 136 136 --
------- ------- -------
Total identifiable assets....................... 84,626 68,495 60,259
Corporate assets................................... 2,306 1,628 1,578
------- ------- -------
$86,932 $70,123 $61,837
======= ======= =======
</TABLE>
In fiscal 1994 and 1995, revenues from a nationalized oil company totaled
approximately $8,902,000 (12%) and $10,048,000 (11%), respectively. Revenues
from a U.S. based international oil company were approximately $12,683,000 (14%)
and $20,233,000 (19%) for the years ended December 31, 1995 and 1996,
respectively. For the nine months ended September 30, 1997, revenues from three
oil companies, one domestic and two international, were approximately
$14,008,000 (15%), $9,925,000 (11%), $8,896,000 (10%).
(6) DIVESTITURES
During the fourth quarter of 1996, GGI sold the stock of its Venezuela
subsidiary and also entered into an agreement to sell the stock of its Nigeria
subsidiary. The sale of the Nigeria subsidiary was finalized in April 1997.
Proceeds from these sales totaled approximately $380,000. Other than a $198,000
loss recognized on these sales in 1996, these transactions did not have a
significant impact on GGI's operating results.
F-18
<PAGE> 77
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows:
<TABLE>
<CAPTION>
ACCUMULATED
GGI COST DEPRECIATION
------------------------------------------------------ ------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
December 31, 1995
Land................................................ $ 231 $ --
Buildings and improvements.......................... 1,692 345
Plant facilities and store fixtures................. 2,723 1,766
Machinery and equipment............................. 88,573 59,454
------- -------
$93,219 $61,565
======= =======
December 31, 1996
Land................................................ $ 231 $ --
Buildings and improvements.......................... 1,397 202
Plant facilities and store fixtures................. 1,703 1,041
Machinery and equipment............................. 90,892 55,312
------- -------
$94,223 $56,555
======= =======
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
GRANT COST DEPRECIATION
------------------------------------------------------ ------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
September 30, 1997
Land................................................ $ 231 $ --
Buildings and improvements.......................... 1,116 --
Plant facilities and store fixtures................. 259 --
Machinery and equipment............................. 30,922 --
--
-------
$32,528 $ --
======= ==
</TABLE>
(8) INCOME TAXES
The composition of the income tax expense follows (dollars in thousands):
<TABLE>
<CAPTION>
GGI
----------------------------------------
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------ SEPTEMBER 30,
1994 1995 1996 1997
---- ---- ------ -------------
<S> <C> <C> <C> <C>
Current:
State....................................... $ -- $ -- $ -- $ --
Federal..................................... -- -- --
Foreign..................................... 193 391 1,621 2,184
Deferred:
State....................................... -- -- -- --
Federal..................................... -- -- --
Foreign..................................... -- -- -- --
---- ---- ------ ------
Income tax expense....................... $193 $391 $1,621 $ 2,184
==== ==== ====== ======
</TABLE>
F-19
<PAGE> 78
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996, GGI had net operating losses ("NOLs") of
approximately $173,000,000 available for carryforward for U.S. Federal income
tax purposes. The NOLs, if unused, will expire between 1997 and 2011. Since GGI
will in accordance with the Plan, be liquidated, approximately $151,000,000 of
these NOLs will not be used and will expire at such time as GGI ceases to exist.
The portion of GGI's NOLs, which existed prior to July 1991 and expire
between 1997 and 2006 are subject to annual utilization limitations imposed by
section 382 of the Internal Revenue Code. Based on the ownership changes to
date, the NOLs would be limited by a minimum of $23,000,000.
Grant acquired approximately $23,000,000 of GGI NOLs on the Effective Date.
The NOLs, if unused, will expire between 1997 and 2011. Grant's NOLs will
decrease the income tax expense of Grant only if Grant generates income which
would be subject to U.S. Federal income tax.
In addition, future utilization of Grant's U.S. NOLs acquired on the
Effective Date will be restricted due to the change of ownership resulting from
the Plan. Based on current valuations, Grant's U.S. NOLs acquired on the
Effective Date would be limited to approximately $704,000 annually.
The total income tax expense is different from the amount computed by
applying the U.S. Federal income tax rate to income before income taxes. The
reasons for these differences were as follows (dollars in thousands):
<TABLE>
<CAPTION>
GGI
-----------------------------------------------
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------- SEPTEMBER 30,
1994 1995 1996 1997
------- ------ -------- -------------
<S> <C> <C> <C> <C>
U.S. Federal income tax expense (benefit)
at statutory rate........................ $(3,823) $1,208 $(25,298) $ 616
Increases (reductions) in taxes from:
Foreign income tax rate more (less) than
U.S. rate on foreign income.............. 1,987 110 4,712 741
Losses of the U.S. return group from which
no benefit is expected................... 2,029 -- 22,207 827
Utilization of prior year losses for which
no benefit was recognized................ -- (927) -- --
------- ------ -------- ------
Income tax expense recorded................ $ 193 $ 391 $ 1,621 $ 2,184
======= ====== ======== ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below (dollars in thousands):
<TABLE>
<CAPTION>
GGI
---------------------
DECEMBER 31, GRANT
--------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Deferred tax asset:
Plant and equipment, principally due to
differences in depreciation................. $ 1,890 $ 3,841 $ 5,042
Allowance for doubtful accounts and other
accruals.................................... -- 3,042 --
Net operating loss carryforwards............... 36,519 58,795 8,026
Less valuation allowance....................... (38,409) (65,678) (13,068)
-------- -------- --------
Net deferred tax asset......................... $ -- $ -- $ --
======== ======== ========
</TABLE>
F-20
<PAGE> 79
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The valuation allowance for deferred tax assets as of January 1, 1995 was
$39,039,000. The net change in the total valuation allowance for the years ended
December 31, 1995, 1996 and the nine months ended September 30, 1997 was a
decrease of $630,000, an increase of $27,269,000, and a decrease of $54,120,000,
respectively.
(9) NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
A summary of notes payable, long-term debt, and capital lease obligations
was as follows (dollars in thousands):
<TABLE>
<CAPTION>
GGI
---------------
DECEMBER 31, GRANT
--------------- SEPTEMBER 30,
1995 1996 1997
------- ---- -------------
<S> <C> <C> <C>
Revolving lines of credit:
15.0%, due February 20, 1996......................... $ 1,750 $ -- $ --
11.0%, due February 17, 1997......................... 8,045 -- --
Equipment notes payable -- 6.93%-12%, due 1996-1999.... 5,178 -- 1,576
Other notes payable -- 10.0% to 34.0%,
due 1996-2005........................................ 6,579 589 1,559
Capital lease obligations -- 10.0% to 28.0%,
due 1996-2000........................................ 5,667 -- 7,014
------- ---- -------
Total long term debt................................... 27,219 589 10,149
Less current portion................................... 18,430 589 3,940
------- ---- -------
Notes payable, long-term debt and capital lease
obligations, excluding current portion............ $ 8,789 $ -- $ 6,209
======= ==== =======
</TABLE>
At the Petition Date all of GGI's notes payable, long-term debt and capital
lease obligations were reclassified to Pre-Petition Liabilities Subject to
Chapter 11 Case (see Note 3). At December 31, 1996, other notes payable
consisted of a revolving line of credit maintained by a foreign subsidiary.
At September 30, 1997 total long-term debt consisted of $7,745,620 of
obligations assumed by Grant pursuant to the Plan that had previously been
classified as Pre-Petition Liabilities subject to Chapter 11 Case and $2,403,094
of obligations incurred by GGI subsequent to the Petition Date and also assumed
by Grant.
On October 1, 1997, Grant and Elliott entered into a credit facility
providing for a revolving loan facility under which Grant may borrow up to an
aggregate principal amount of $5 million. Grant is required to pay interest on
the outstanding principal balance of revolving loans at a rate per annum equal
to the prime rate plus 2%. On December 18, 1997, the credit facility was amended
to provide for a term loan of $15.8 million in addition to the revolving loans.
The proceeds of the term loan were used by Grant to purchase all of the stock of
Solid State Geophysical, Inc. not already owned by Grant (see Note 18). The term
of the credit facility runs through March 31, 1999 at which time all obligations
of Grant under the credit facility are due and payable. The loans under the
credit facility are secured by all of Grant's assets and a pledge by Grant of
certain notes and all the outstanding shares of capital stock of its
subsidiaries. Each subsidiary of Grant has executed a guaranty in favor of
Elliott, each of which guarantees payment of all Grant's obligations owed to
Elliott under the credit facility. Each subsidiary has pledged its assets in
favor of Elliott to secure its obligations under its respective guaranty. The
credit facility contains restrictions which, among other things, prohibit
Grant's right to pay dividends and limits its right to borrow money, purchase
fixed assets or engage in certain types of transactions without the consent of
the lender.
F-21
<PAGE> 80
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On November 26, 1997 Grant borrowed $10,200,000 from Elliott pursuant to a
demand loan. The loan bears interest at an annual interest rate equal to the
prime rate plus 2% per annum payable on the date any principal amount is paid.
The proceeds were used to reduce the remaining cash obligation under the
purchase price. The note will be converted into Grant Common Stock on December
31, 1997.
On December 19, 1997 Elliot and Westgate exchanged 9,571.162 shares of
preferred stock with a liquidation value of $9,571,162 plus accrued dividends,
for a subordinated note which bears interest at an annual rate of 10.5%.
(10) LEASES
The future minimum rental payments for Grant's various noncancelable
operating leases at September 30, 1997 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
MINIMUM RENTALS OF
GRANT'S MINIMUM RENTALS
SUBSIDIARIES OF GRANT
------------------ ----------------------
OPERATING OPERATING
LEASES LEASES
------------------ ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
1997.................................... $ 3 $ 272
1998.................................... -- 893
1999.................................... -- 612
2000.................................... -- 445
2001.................................... -- 205
---- ------
-- 2,427
Less amount representing interest....... -- --
---- ------
Present value of future minimum lease
payments........................... $ 3 $2,427
==== ======
</TABLE>
The total rental expenses for each of the periods was as follows (dollars
in thousands):
<TABLE>
<CAPTION>
GGI
- ----------------------------------------------
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
- ---------------------------- SEPTEMBER 30,
1994 1995 1996 1997
- ------ ------ ------ -------------
<S> <C> <C> <C>
$2,758 $1,880 $2,089 $ 830
</TABLE>
(11) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments.
Cash and short-term financial instruments
The carrying amount approximates fair value due to the short maturity of
these instruments.
Long-term notes receivable
The fair value has been estimated using the expected future cash flows
discounted at market interest rates which approximate its carrying value.
F-22
<PAGE> 81
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt
The fair value of GGI's and Grant's long-term debt has been estimated based
on quoted market prices for the same or similar issues, or on the current rates
offered to GGI and Grant for debt of the same remaining maturities.
As a result of the Plan of reorganization certain long-term debt claims
against GGI at December 31, 1996 will be settled at less than 100 percent of
their value. However, distributions under the Plan have not been completed, and
until such time as such distributions are completed, the fair value of these
claims will continue to be uncertain.
(12) EMPLOYEE BENEFIT PLANS
Incentive Stock Option Plan
On November 1, 1996, GGI's Amended 1989 Long-Term Incentive Plan was
amended to increase the shares of common stock reserved to cover the granting of
options to purchase shares of Common Stock ("Options"), issuing of shares of
Common Stock which are subject to vesting requirements or other restrictions
("Restricted Stock") and issuing of Stock Appreciation Rights ("SAR") to
employees to 2,803,930 shares.
GGI options were awarded at an option price determined by the Board of
Directors, which was not less than 100% of fair market value or 110% of fair
market value for employees already owning more than 10% of the voting power of
all classes of stock. The options were exercisable either by the purchase of
shares at the option price or as stock appreciation rights by which the employee
received cash or stock equivalent in value of the difference between the option
price and the market value of the stock at the exercise date. These options were
to expire ten years from the date of grant and were exercisable as defined by
the stock option plan. No stock appreciation rights were granted. Transactions
for Options under the plan are summarized as follows:
<TABLE>
<CAPTION>
SHARES OPTION PRICE
-------- ------------
<S> <C> <C>
Outstanding, December 31, 1993:
14,500 $0.10
212,000 0.938-1.125
108,750 7.00
-------
335,250
Granted.......................................... 70,000 1.313-2.500
Exercised........................................ (11,500) 0.10
------- ----------
Outstanding, December 31, 1994:
3,000 $0.10
262,000 0.938-1.313
20,000 2.50
108,750 7.00
-------
393,750
Granted.......................................... 150,000 2.31
Exercised........................................ (15,000) 0.10-0.938
------- ----------
</TABLE>
F-23
<PAGE> 82
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SHARES OPTION PRICE
------- ----------
<S> <C> <C>
Outstanding, December 31, 1995:
250,000 $0.938-131
170,000 2.310-2.50
108,750 7.00
-------
528,750
Granted.......................................... 784,000 2.219-2.688
Exercised........................................ (125,000) 1.125-1.313
Canceled......................................... (125,000) 0.938-1.313
Canceled......................................... (700,000) 2.219-2.688
Canceled......................................... (45,000) 7.00
Outstanding, December 31, 1996..................... 254,000 $2.219-2.688
Outstanding, December 31, 1996..................... 63,750 7.00
==========
Exercisable, December 31, 1996..................... 56,000 $2.310
Exercisable, December 31, 1996..................... 63,750 $7.00
==========
</TABLE>
Additionally, a plan amendment was approved, effective January 1, 1996, by
the stockholders which permitted current and former non-employee directors of
GGI to participate in the plan solely for the purpose of receiving Restricted
Stock of GGI in lieu of part or all of the directors' fees. The shares of
Restricted Stock were automatically issued on the first day of each calendar
quarter following a calendar quarter of service. The fair market value of the
Restricted Stock was deemed to be the closing price of the common stock on the
last trading day of the preceding calendar quarter. In 1996, 1995 and 1994,
40,055, 41,711, and 28,108 shares, respectively, of Restricted Stock were
issued. The charges to income totaled $127,000, $103,000, and $62,000 in 1996,
1995 and 1994, respectively.
At December 31, 1996, 1,974,306 shares were available for future grants.
All options to acquire GGI's common stock and all stock appreciation rights
were canceled in connection with the Plan.
1997 Equity and Performance Incentive Plan
The 1997 Equity and Performance Incentive Plan (the "Incentive Plan") was
adopted by the Board of Directors and approved by Grant's stockholders in
December 1997. A total of one million shares of Grant Common Stock has been
reserved for issuance under the Incentive Plan. The Incentive Plan provides for
the grant to officers (including officers who are also directors), employees,
consultants and nonemployee directors of Grant and its subsidiaries, of
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986 (the "Code"), nonstatutory stock options, stock
appreciation rights and restricted shares and deferred shares of Grant Common
Stock (collectively, the "Awards"). The Incentive Plan is not a qualified
deferred compensation plan under Section 401(a) of the Code and is not subject
to the provisions of the Employee Retirement Income Security Act of 1974.
The Incentive Plan is required to be administered by the Board of Directors
or by a committee of the Board of Directors consisting of at least two
nonemployee directors. The Board of Directors or its designated committee will
select the employees and nonemployee directors to whom Awards may be granted and
the type of Award to be granted and determine, as applicable, the number of
shares to be subject to each Award, the exercise price and the vesting. In
making such determinations, the Board of Directors or its designated committee
will take into
F-24
<PAGE> 83
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
account the employee's present and potential contributions to the success of
Grant and other relevant factors. As of the date of the Subscription Offering
Prospectus, no Awards have been granted under the Plan.
Employee Retirement Savings Plan
GGI established a defined contribution plan covering substantially all U.S.
employees whereby participants may elect to contribute between 1% and 15% of
their annual salary. Participants may not make contributions in excess of $9,500
per year (as adjusted annually by the cost of living adjustment factor). On the
Effective Date, GGI assumed and assigned the plan to Grant. Under the plan, the
employer may contribute, on a discretionary basis, one-half of the participant's
contribution percentage up to 6% (limited to 3% of any employee's annual
salary). Beginning in August 1995, a portion of GGI's employer contribution was
made in the form of GGI common stock. The plan was amended in June of 1997 to
eliminate the employer's option to contribute common stock so that discretionary
contributions may be made only in the form of cash. Contributions made by GGI
for the years ended December 31, 1994, 1995, and 1996 totaled $93,000, $154,000,
which included 24,466 shares of GGI Common Stock with a market value of $56,838,
and 58,395 shares of GGI Common Stock with a market value of $138,000,
respectively. For the nine months ended September 30, 1997, no discretionary
contributions were made by GGI to the plan. At December 31, 1995 and 1996, the
plan held 24,466 and 82,861 shares, respectively, of GGI Common Stock. Due to
the cancellation of GGI's Common Stock on the Effective Date, the plan
administrator reduced the carrying value of the shares held by the plan to zero
and the trustee returned the certificates to GGI.
Other Postretirement Benefits
GGI sponsored a defined contribution postretirement plan which, pursuant to
the Plan, was assumed by GGI and assigned to Grant on the Effective Date. The
Plan provides medical coverage for eligible retirees and their dependents (as
defined in the plan). GGI and Grant adopted SFAS No. 106 -- "Employers'
Accounting for Postretirement Benefits Other Than Pensions" requiring companies
to account for these. The following sets forth the plan's funded status
reconciled with the amount shown in the consolidated statement of operations on
an accrual basis rather than a pay-as-you-go (cash) basis as follows:
<TABLE>
<CAPTION>
GGI
-------------------------
DECEMBER 31, GRANT
------------------------- SEPTEMBER 30,
1994 1995 1996 1997
----- ----- ----- -------------
<S> <C> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees and dependents..................... $ (18) $ (16) $ (17) $ (17)
Fully eligible active plan participants..... (11) (27) (42) (48)
Other active plan participants.............. (138) (211) (308) (366)
----- ----- ----- -----
(167) (254) (367) (431)
Unrecognized net loss (gain)................ (65) (19) 17 17
Unrecognized transition obligation.......... 133 126 118 113
----- ----- ----- -----
Accrued postretirement benefit cost...... $ (99) $(147) $(232) $(301)
===== ===== ===== =====
</TABLE>
F-25
<PAGE> 84
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
GGI
-------------------------------------------
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------- SEPTEMBER 30,
1994 1995 1996 1997
----- ----- ----- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Service cost -- benefits attributed to service
during the period........................... $ 32 $ 41 66 $ 52
Interest cost on accumulated postretirement
benefit obligation.......................... 12 13 21 20
Amortization of transition obligation over 20
years....................................... 7 7 7 5
Amortization of gain.......................... (1) (2) -- --
Other amortizations........................... 11 -- -- --
----- ----- ----- -----
Net periodic postretirement benefit cost.... $ 61 $ 59 $ 94 $ 77
===== ===== ===== =====
</TABLE>
For measurement purposes, a 12% annual rate of increase in the per capita
cost of medical benefits was assumed for the years ended 1994 and 1995, with a
7.25% and 7.25% assumed annual rate for the year ended 1996 and the nine months
ended September 30, 1997, respectively; the rate was assumed to decrease
gradually to 5% for 2001 and remain at that level thereafter. The medical cost
trend rate assumption has a significant effect on the amounts reported. To
illustrate, increasing the assumed medical cost trend rates by 1% point in each
year would increase the accumulated postretirement benefit obligations as of
December 31, 1994, 1995, 1996 and September 30, 1997 by approximately $22,000,
$43,000, $56,000 and $60,600, respectively, and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost for the
years ended December 31, 1994, 1995, 1996 and the nine months ended September
30, 1997 by $7,000, $10,000, $15,000, and $12,900 respectively.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% for December 31, 1995, 1996 and
September 30, 1997. A rate of 8.5% was used for 1994.
(13) STOCKHOLDERS' EQUITY (DEFICIT)
GGI
General
On the Effective Date, the capital stock of GGI was deemed to be cancelled,
extinguished and retired. Except for the holders of GGI's $2.4375 Convertible
Exchangeable Preferred Stock (the "2.4375 Preferred") and the Junior Preferred
Stock, no holders of any GGI equity security will receive any cash or other
distribution under the plan, and the holders of such securities have no further
claims against GGI or rights relating to such securities other than the rights,
if any, provided by the Plan.
$2.4375 Convertible Exchangeable Preferred Stock
GGI had authorized 2,300,000 shares of $2.4375 Preferred ($0.01 par value,
$25.00 liquidation preference, of which 2,157,000 was outstanding through March
20, 1996. The remaining 143,000 shares were issued on March 20, 1996. The
purchaser of the remaining shares was entitled to all unpaid, undeclared
dividends in arrears through March 31, 1996, totaling $1,220,000. The $2.4375
Preferred bore annual cumulative dividends of $2.4375 per share accruing from
July 26, 1991, payable quarterly on each March 31, June 30, September 30 and
December 31, commencing September 30, 1991. It was convertible at any time at
the option of the holder, unless previously redeemed, into Common Stock ($.002
par value) of GGI at the initial conversion rate of 2.739726
F-26
<PAGE> 85
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares of Common Stock for each share of $2.4375 Preferred. It was exchangeable,
at the option of GGI, in whole but not in part, on any dividend payment date
commencing September 30, 1993, for GGI's 9 3/4% Convertible Subordinated
Debentures (the "Subordinated Debentures") due 2016, at the rate of $25.00
principal amount of subordinated debentures for each share of $2.4375 preferred
stocks provided that all accumulated and unpaid dividends through the date of
exchange have been paid. Pursuant to the Plan, the $2.4375 Preferred was
canceled and the holders thereof are entitled to purchase shares of Grant Common
Stock as described above.
Series A Convertible Preferred Stock
GGI had authorized 75,000 shares of Series A Convertible Preferred Stock,
$0.01 par value. A total of 70,000 shares were issued in May 1996, all of which
have been converted into 4,428,404 shares of GGI Common Stock by December 31,
1996. Pursuant to the Plan all Series A Convertible Preferred Stock was
cancelled.
Junior Preferred Stock
GGI had authorized 15,000 shares and had issued and outstanding 14,904
shares of nonvoting, redeemable Junior Preferred Stock with a $100 par value.
The shares were redeemable at any time by GGI upon 30-day written notice to
holders of such shares. No dividends were declared or paid on the Junior
Preferred Stock. Pursuant to the Plan, the Junior Preferred Stock was canceled
and the holders thereof are entitled to purchase shares of Grant Common Stock as
described above.
Serial Preferred Stock
GGI had authorized 250,000 shares of Serial Preferred Stock, $100 par
value, none of which were issued and outstanding. Pursuant to the Plan, all
Serial Preferred Stock was canceled.
Dividends in Arrears
The quarterly dividend payments for the periods of 1993 through December 6,
1996 and one quarterly dividend payment for 1992 on the $2.4375 preferred stock
were deferred by GGI's Board of Directors.
As of December 31, 1995 and 1996, preferred dividends in arrears on the
$2.4375 Preferred amounted to approximately $17,088,000 and $23,451,000,
respectively.
Pursuant to the Plan all unpaid dividends were canceled.
Common Stock (dollars in thousands)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------
SHARES AMOUNT
---------- ------
<S> <C> <C>
Balance, December 31, 1993..................................... 12,113,366 $ 24
Restricted common stock issued (Note 12)..................... 28,108 --
Stock options exercised...................................... 11,500 --
---------- ---
Balance, December 31, 1994..................................... 12,152,974 24
Restricted common stock issued (Note 12)..................... 41,711 --
Restricted common stock issued under the Employee Retirement
Savings Plan (Note 12).................................... 24,466 --
Stock options exercised...................................... 15,000 --
---------- ---
</TABLE>
F-27
<PAGE> 86
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------
SHARES AMOUNT
----------- ------
<S> <C> <C>
Balance, December 31, 1995..................................... 12,234,151 24
Warrants exercised........................................... 200,000 1
Conversion of debentures..................................... 3,400,261 7
Conversion of Series A Preferred Stock....................... 4,428,404 9
Payment in connection with equipment and short- and long-term
financing (Note 15)....................................... 155,499 --
Restricted common stock issued (Note 12)..................... 40,055 --
Restricted common stock issued under the Employee Retirement
Savings Plan (Note 12).................................... 58,395 --
Stock options exercised...................................... 125,000 --
---------- ---
Balance, December 31, 1996..................................... 20,641,765 $ 41
========== ===
</TABLE>
Pursuant to the Plan, all GGI common stock was canceled.
GRANT
Cumulative Preferred Stock
Grant has authorized 20,000 shares of cumulative pay-in-kind preferred
stock (the "Grant Preferred Stock"), par value $0.001 per share, with a
liquidation preference of $1,000 per share of which 10,000 are outstanding.
Dividends shall accrue and be cumulative from September 30, 1997, the date on
which such shares were issued. Dividends shall accrue at an annual rate of 10.5%
of the liquidation value and be payable annually on September 30 of each year.
Dividend interest shall accrue on dividends not paid on the dividend payment
date at a rate of 12.5% annually. Dividend payments or dividend interest shall
be paid by issuing shares of cumulative preferred stock with an aggregate
liquidation preference equal to the amount of such dividends or dividend
interest. Upon the occurrence of a change in control the Grant Preferred Stock
is redeemable at the option of the holder at a redemption price equal to 105% of
the liquidation value plus accrued and unpaid dividends and interest. Grant may
redeem at any time for cash the Grant Preferred Stock for 100% of the
liquidation value plus accrued and unpaid dividends and interest.
Common Stock
At September 30, 1997, Grant has authorized 100 shares of common stock, par
value $.001 per share, of which one share is issued and outstanding. The changes
in common stock are as follows (dollars in thousands).
<TABLE>
<CAPTION>
COMMON STOCK
-----------------
GRANT SHARES AMOUNT
---------------------------------------------------------- ------ ------
<S> <C> <C>
Balance September 30, 1997................................ 1 $ --
</TABLE>
(14) CONTINGENCIES
GGI and Grant are involved in various claims and legal actions arising in
the ordinary course of business. Other than the Plan and actions commenced
pursuant thereto or in connection therewith, management of GGI and management of
Grant are of the opinion that none of the claims and actions are likely to have
a material impact on GGI's or Grant's financial condition.
F-28
<PAGE> 87
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Although GGI's bankruptcy proceedings resulted in the consummation of the
Plan on September 30, 1997, the Bankruptcy Court has retained jurisdiction over
disputes arising under the Plan. On December 11, 1997, certain Eligible
Subscribers commenced a lawsuit in the Bankruptcy Court against GGI, Grant,
Elliott, Westgate and SSGI (as defined herein) alleging various claims related
to the Plan and the Acquisition. If not resolved in the Company's favor, this
lawsuit, and the potential for other lawsuits related to the Plan, could have a
material and adverse effect on the Company's business, reputation, operating
results and financial condition. See "Business -- Legal Proceedings."
The Court generally has jurisdiction over all of GGI's property, as defined
in section 541 of the Bankruptcy Code, held on the Petition Date or acquired
thereafter. GGI may not engage in transactions except pursuant to the Plan
without prior approval of the Court.
GGI and Grant are subject to review by various taxing authorities for the
purpose of verifying compliance with numerous local tax laws and regulations. As
a result of one of these reviews, GGI was notified that, during 1995, it had
neglected to collect a certain tax from several clients and remit those
collections to the local government. The total amount of the potential
assessment, including penalties and interest, is approximately $6,000,000. GGI
believes the tax authority's claim is without merit. Moreover, such assessment
was not filed as a claim in GGI's chapter 11 case. As a result, GGI has made no
provision for payment on the assessment. GGI intends to vigorously protest any
attempted enforcement of the assessment; however, there can be no assurances
regarding the outcome of any such protest.
(15) RELATED PARTY TRANSACTIONS
During 1996, GGI entered into an exclusive agreement with Macdonald & King,
Incorporated, a financial services firm, for the purpose of assisting GGI in
securing additional sources of financing including equipment financing and short
and long-term financing. Mr. William C. Macdonald, a former director of GGI, is
the Chairman of the Board and sole shareholder of Macdonald & King,
Incorporated. Pursuant to the terms of the agreement, GGI issued 155,499 shares
of GGI Common Stock with a market value of approximately $388,748 to Macdonald &
King, Incorporated in connection with financing obtained by GGI prior to Mr.
Macdonald's resignation from GGI's Board of Directors effective August 8, 1996.
On March 20, 1996, GGI issued 143,000 shares of GGI's $2.4375 Preferred to
Westgate, an affiliate of Elliott, a holder of more than 5% of the $2.4375
Preferred, for an aggregate purchase price of $1,573,000. Westgate subsequently
sold its shares of $2.4375 Preferred to Liverpool Limited Partners, who also is
an affiliate of Elliott.
In November 1996, GGI borrowed an aggregate of $3,149,000 from Westgate and
Elliott for working capital purposes. The borrowings are in the form of
unsecured promissory notes and remain outstanding at December 31, 1996, and are
classified in pre-petition liabilities subject to the chapter 11 case.
See the discussion of debt financing with Elliott in Notes 3 and 9.
See discussion of the Subscription Offering, the acquisition of Solid State
and the Tender Offer for the Minority Interest in Solid State in Note 19.
F-29
<PAGE> 88
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) OTHER INCOME (DEDUCTIONS)
Other Income (Deductions) consisted of the following (amounts in
thousands):
<TABLE>
<CAPTION>
GGI
------------------------------------------------------
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ----------------------
1994 1995 1996 1996 1997
------ ------ ----- ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Gain (loss) on the sale of fixed assets...... $ 10 $ 212 $ 25 $-- $ (67)
Net gain (loss) on foreign exchange.......... 121 102 (251) 26 (98)
Loss on sale of subsidiaries................. (198) -- --
Foreign credit insurance..................... (137) (73) (8) -- --
Recovery of bad debts........................ 664 -- -- -- --
Gain on insurance settlement................. -- 1,247 -- -- 11
Nonrecurring royalty income.................. 500 -- -- -- --
Legal settlements............................ -- -- -- -- 2,359(a)
Miscellaneous................................ 222 588 (70) -- 61
------ ------ ----- --- ------
Total................................... $1,380 $2,076 $(502) $26 $2,266
====== ====== ===== === ======
</TABLE>
- ---------------
(a) On July 15, 1997, GGI's Brazilian subsidiary finalized an agreement with a
former customer that resolved a long standing dispute relating to services
rendered on contracts dating back to 1983. In settlement of all claims, GGI
received payment, net of related costs and expenses, of approximately
$2,359,000.
(17) SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Non Cash investing and financing activities consisted of the following
(amounts in thousands):
<TABLE>
<CAPTION>
GGI
---------------------------------------------------------
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- -----------------------
1994 1995 1996 1996 1997
------ ------ ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH PAID FOR INTEREST AND TAXES WAS AS
FOLLOWS:
Taxes, net of refunds.................... $1,044 $ 968 $ 3,496 $ 2,717 2,037
Interest, net of amounts capitalized..... 3,704 3,524 6,106 4,849 3,742
NONCASH INVESTING AND FINANCING ACTIVITIES:
Property, plant and equipment debt
additions............................. 5,899 8,106 19,718 18,901 1,483
Property, plant and equipment debt
payments.............................. 7,133 6,942 4,258 3,386 3,102
Debenture conversion..................... -- -- 2,774 -- --
Fair value of divestitures, net of cash
held.................................. -- -- 493 -- --
Receivables acquired in connection with
divestitures.......................... -- -- 255 -- --
</TABLE>
F-30
<PAGE> 89
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(18) THE PLAN
On September 30, 1997, in connection with the Plan, Grant agreed to
purchase substantially all of the assets of GGI for $47.5 million in cash,
assume certain debts and long-term lease commitments of GGI and assume certain
other liabilities of GGI.
Concurrent with the consummation of the Plan on September 30, 1997, Elliott
satisfied certain claims against GGI in the amount of approximately $12.7
million which was credited against the cash obligation under the purchase price
with GGI. In addition Westgate purchased certain debts assumed by Grant in the
purchase, in the principal amount of approximately $6.8 million. In exchange for
the funding of this repayment, Grant issued to Elliott and Westgate 19,571
shares of Grant Preferred Stock, liquidation amount $1,000 per share. The
remainder of the cash obligation under the purchase price at September 30, 1997,
is recorded as a non-interest bearing payable to GGI in the amount of
$34,783,000, which, pursuant to the Plan, is required to be paid by December 31,
1997. The funding for the settlement of the payable to GGI will be provided by
Elliott and Westgate for which Grant will issue 9,499,998 common shares.
The acquisition has been accounted for as a purchase effective as of
September 30, 1997. The effect of which is reflected in the financial statement
balances of Grant at that date.
(19) SUBSEQUENT EVENTS (UNAUDITED)
In November 1997, Grant, through SSGI Acquisition Corp., a wholly owned
Canadian subsidiary ("SSGI"), initiated a tender offer for all of the
outstanding common shares, not held by SSGI or its affiliates, of Solid State
Geophysical, Inc. ("Solid State"), a Canadian-based land seismic data
acquisition company. Solid State operates a total of nine land crews, consisting
of two crews in the United States, six in Canada and one in Bolivia. On November
20, 1997, Elliott held 5,963,565 shares, or 40.9%, and Westgate held 3,341,544
shares, or 22.9%, of the outstanding common shares of Solid State ("Solid State
Stock"). In connection with SSGI's tender offer for Solid State, Elliott and
Westgate transferred their shares of Solid State Stock to SSGI in exchange for
4,652,554 shares of Grant Common Stock and agreed to loan Grant $15.8 million to
enable SSGI to pay for shares tendered in the tender offer and costs incurred in
connection with such tender offer. Upon the expiration of the Tender Offer on
December 19, 1997, SSGI held approximately 99% of the outstanding shares of
Solid State Stock. On December 23, 1997, because SSGI acquired over 90% of the
outstanding shares of Solid State Stock not already held by SSGI or its
affiliates pursuant to the Tender Offer, SSGI qualified to exercise its
statutory right under Canadian law to acquire the remaining shares of Solid
State Stock on the same terms and at the same price as the Tender Offer. On
December 23, 1997 after exercising these statutory rights, Solid State became an
indirect wholly owned subsidiary of the Company.
The transfer of the shares of Solid State Stock to SSGI by Elliott and
Westgate will be accounted for as an exchange of ownership interests between
entities under common control and as such the assets and liabilities transferred
will be accounted for at historical cost in a manner similar to a
pooling-of-interests. The acquisition of the unaffiliated minority interest
under the tender offer will be accounted for under the purchase method of
accounting at the date of acceptance. The general partners of Elliott are Paul
E. Singer and Braxton Associates, L.P. The general partner of Westgate is
Hambledon, Inc., a corporation controlled by Braxton Associates, L.P. Elliott
and Westgate are each managed by Stonington Management Corporation, a
corporation controlled by Mr. Singer.
The Plan provides that (i) Eligible Class 5 Claim Holders; (ii) Eligible
Class 7 Interest Holders; and (iii) Eligible Class 8 Interest Holders, each as
defined in the Plan (collectively, the "Eligible Subscribers") have the right to
participate in the Subscription Offering. Each Eligible Subscriber's right to
purchase Grant Common Stock is nontransferable, will not be evidenced by
certificates, and will expire on the Expiration Date. The Plan provides that
subscription rights shall represent the right to purchase, in the aggregate
4,750,000 shares of Grant
F-31
<PAGE> 90
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Common Stock, for an aggregate purchase price of $23,750,000. The Eligible
Subscribers are divided into the following three groups: (i) Eligible Class 5
Interest Holders that have the right to purchase, in the aggregate, 475,000
shares of Grant Common Stock, for an aggregate purchase price of $2,375,000,
(ii) Eligible Class 7 Claim Holders that have the right to purchase, in the
aggregate, 4,255,000 shares of Grant Common Stock, for an aggregate purchase
price of $21,275,000 and (iii) Eligible Class 8 Interest Holders that have the
right to purchase, in the aggregate, 20,000 shares of Grant Common Stock, for an
aggregate purchase price of $100,000.
Pursuant to the Plan, the Company is required to conduct a subscription
offering of 4,750,000 shares of Grant Common Stock to certain holders of claims
and other interests under the Plan for an aggregate purchase price of
$23,750,000. The Plan also authorized the offering of shares of common stock of
a successor company on economically equivalent terms. The Plan provides,
however, that Elliott or its affiliates may pay the entire purchase price to
GGI, representing the total anticipated proceeds of such offering, and then
conduct a subscription offering and retain the proceeds therefrom, which Elliott
has elected to do. Because Elliott and certain of its affiliates, as interest
holders under the Plan, were entitled to purchase 1,290,586 shares of Grant
Common Stock in an offering by the Company, the Selling Stockholders are
offering the balance of such shares of Grant Common Stock to the Eligible
Subscribers pursuant to the Subscription Offering. The Company is registering
such shares of Grant Common Stock pursuant to the Registration Rights Agreement.
On December 19, 1997, in connection with the Acquisition, the Selling
Stockholders transferred their shares of Solid State Stock to Grant in exchange
for 4,652,555 shares of Common Stock.
On December 11, 1997, certain Eligible Subscribers, acting through an "ad
hoc" committee (the "Plaintiffs") commenced a lawsuit in the Bankruptcy Court
against Grant GGI, Elliott, Westgate and SSGI. The lawsuit alleges that (i) GGI
and Elliott breached their obligations under the Plan by seeking to complete the
Acquisition prior to commencing the Subscription Offering, (ii) the Acquisition
and the certain related transactions are unfair to Eligible Subscribers because
they dilute the value of the Common Stock to be issued under the Subscription
Offering and impair the Company's equity value and (iii) the Acquisition and
certain related transactions could and should have been, but were not,
adequately disclosed in the disclosure statement filed with the Bankruptcy Court
regarding the Plan. The Plaintiffs have requested (i) compensatory and punitive
damages in an unstated amount and (ii) revocation of the Plan.
In addition, the Plaintiffs sought to enjoin completion of the Acquisition
and certain related transactions pending a trial on the merits. This request for
injunctive relief was denied by the Bankruptcy Court on December 16, 1997, and
was denied on appeal by the United States District Court for the District of
Delaware on December 19, 1997. Currently, a pre-trial conference on the lawsuit
is scheduled for January 21, 1998; however, no trial date has been set. The
Company believes that all claims by the Plaintiffs are without merit and plans
to vigorously defend the lawsuit. If not resolved in the Company's favor, this
lawsuit, and the potential for other lawsuits related to the Plan, could have a
material adverse effect on the Company's business, reputation, operating results
and financial condition.
F-32
<PAGE> 91
GGI LIQUIDATING CORPORATION
SUPPLEMENTARY FINANCIAL INFORMATION
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Quarterly financial information of GGI is summarized as follows:
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER(2) QUARTER(3) YEAR ENDED
------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1995
Revenues.................................... $18,406 $20,712 $ 24,763 $ 28,115 $ 91,996
Operating income............................ 296 2,037 1,484 1,182 4,999
Net income.................................. 40 1,083 1,713 326 3,162
Net income/(loss) applicable to common
stock..................................... (1,275) (231) 398 (988) (2,096)
INCOME/(LOSS) PER COMMON SHARE -- ASSUMING
NO AND FULL DILUTION:
Net income/(loss) per common share.......... $ (0.10) $ (0.01) $ 0.03 $ (0.08) $ (0.17)
======= ======= ======= ======== ========
1996
Revenues.................................... $27,808 $26,951 $ 26,166 $ 24,598 $105,523
Operating income/(loss)..................... 1,060 955 (21,518) (46,467) (65,970)
Net loss.................................... (572) (621) (23,655) (51,179) (76,027)
Net loss applicable to common stock......... (3,106)(1) (2,023) (25,056) (52,205) (82,390)
LOSS PER COMMON SHARE -- ASSUMING NO AND
FULL DILUTION:
Net loss per common share................... $ (0.25) $ (0.15) $ (1.72) $ (2.70) $ (5.60)
======= ======= ======= ======== ========
</TABLE>
- ---------------
(1) Includes $1,220 cumulative adjustment for the prior unpaid, undeclared
dividends associated with the issuance of 143,000 shares of GGI's $2.4375
Preferred.
(2) Includes $8,374 recognition of anticipated contract losses in 1996.
(3) Includes $5,802 special charge for asset impairment (see Note 4 of Notes to
the Consolidated Financial Statements), $5,511 reserve for accounts
receivable determined to be uncollectible, $2,700 demobilization charge for
closed operations, $1,206 related to future estimated contract losses and
$412 of reorganization costs.
F-33
<PAGE> 92
October 31, 1997, except for Note 17 which is
as at November 27, 1997
AUDITORS' REPORT
To the Directors of
Solid State Geophysical Inc.
We have audited the consolidated balance sheets of Solid State Geophysical
Inc. as at August 31, 1996 and 1997 and the consolidated statements of
operations and (deficit) retained earnings and changes in financial position for
the years ended August 31, 1995, 1996 and 1997. These financial statements are
the responsibility of the Solid State Geophysical Inc.'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 an audit to obtain
reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of Solid State Geophysical Inc. as
at August 31, 1996 and 1997 and the results of its operations and the changes in
its financial position for the years ended August 31, 1995, 1996 and 1997 in
accordance with Canadian generally accepted accounting principles.
PRICE WATERHOUSE
Chartered Accountants
Calgary, Alberta
October 31, 1997, except for Note 17 which is
as at November 27, 1997
COMMENTS BY AUDITORS FOR U.S. READERS
ON CANADA-U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition
of an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
Solid State Geophysical Inc.'s ability to continue as a going concern, such as
those described in Note 1 to the financial statements. Our report to the
directors dated October 31, 1997, except for note 17, which is as at November
17, 1997, is expressed in accordance with Canadian reporting standards which do
not permit a reference to such events and conditions in the auditors' report
when these are adequately disclosed in the financial statements.
PRICE WATERHOUSE
Chartered Accountants
Calgary, Alberta
F-34
<PAGE> 93
SOLID STATE GEOPHYSICAL INC.
CONSOLIDATED BALANCE SHEET
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
AUGUST 31,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash........................................................... $ 308,000 $ 740,000
Accounts receivable............................................ 8,016,000 16,203,000
Income taxes recoverable....................................... 463,000 428,000
Work-in-progress............................................... 430,000 989,000
Multi-client data, current portion (Notes 1 and 4)............. 5,978,000 2,454,000
Prepaid expenses, deposits and other........................... 1,169,000 1,200,000
Discontinued operations (Note 3)............................... 133,000 --
------------ ------------
16,497,000 22,014,000
Multi-client data, less current portion (Notes 1 and 4).......... 5,723,000 13,213,000
Other non-current assets (Note 3)................................ 1,527,000 1,137,000
Property and equipment (Note 5).................................. 31,638,000 35,161,000
Deferred exchange loss........................................... 26,000 234,000
Goodwill (Note 3)................................................ 189,000 --
------------ ------------
$55,600,000 $71,759,000
============ ============
LIABILITIES
Current liabilities
Bank indebtedness (Note 6)..................................... $ 5,788,000 $ 5,235,000
Accounts payable and accrued liabilities....................... 17,290,000 18,605,000
Advances on contracts.......................................... 2,101,000 --
Promissory notes (Note 7)...................................... 2,600,000 11,109,000
Long-term debt -- current portion.............................. 8,054,000 9,028,000
Discontinued operations (Note 3)............................... 180,000 --
------------ ------------
36,013,000 43,977,000
Long-term debt (Note 7).......................................... 14,526,000 18,693,000
Deferred income taxes............................................ 988,000 --
------------ ------------
51,527,000 62,670,000
------------ ------------
SHAREHOLDERS' EQUITY
Capital stock (Note 8)........................................... 14,758,000 24,469,000
Deficit.......................................................... (10,685,000) (15,380,000)
------------ ------------
4,073,000 9,089,000
------------ ------------
$55,600,000 $71,759,000
============ ============
</TABLE>
Contingencies (Notes 1 and 16)
F-35
<PAGE> 94
SOLID STATE GEOPHYSICAL INC.
CONSOLIDATED STATEMENT OF OPERATIONS
AND (DEFICIT) RETAINED EARNINGS
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
---------------------------------------------
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
CONTRACT REVENUE.................................. $48,357,000 $ 45,503,000 $ 77,999,000
Third party costs................................. 19,507,000 18,213,000 32,089,000
------------ ------------ -----------
NET CONTRACT REVENUE.............................. 28,850,000 27,290,000 45,910,000
Costs of sales.................................... 20,384,000 21,250,000 33,262,000
------------ ------------ -----------
GROSS PROFIT CONTRACT............................. 8,466,000 6,040,000 12,648,000
------------ ------------ -----------
DATA LIBRARY REVENUE.............................. 773,000 14,891,000 3,919,000
Amortization of data library...................... 476,000 20,694,000 4,784,000
------------ ------------ -----------
GROSS (LOSS) PROFIT DATA LIBRARY.................. 297,000 (5,803,000) (865,000)
------------ ------------ -----------
COMBINED GROSS PROFIT............................. 8,763,000 237,000 11,783,000
------------ ------------ -----------
General and administrative expenses............... 2,256,000 2,980,000 3,948,000
Restructuring costs and other..................... -- 873,000 231,000
------------ ------------ -----------
2,256,000 3,853,000 4,179,000
------------ ------------ -----------
EARNINGS (LOSS) BEFORE DEPRECIATION, INTEREST AND
DISCONTINUED OPERATIONS......................... 6,507,000 (3,616,000) 7,604,000
Depreciation and amortization..................... 5,968,000 5,856,000 8,974,000
------------ ------------ -----------
EARNINGS (LOSS) BEFORE INTEREST AND DISCONTINUED
OPERATIONS, WRITE-DOWN AND TAXES................ 539,000 (9,472,000) (1,370,000)
Interest
Short-term obligations....................... 109,000 953,000 1,993,000
Long-term debt............................... 1,066,000 1,714,000 2,057,000
------------ ------------ -----------
1,175,000 2,667,000 4,050,000
------------ ------------ -----------
(636,000) (12,139,000) (5,420,000)
INCOME TAX PROVISION (RECOVERY)
Current......................................... (250,000) (414,000) 69,000
Deferred........................................ 250,000 -- (915,000)
------------ ------------ -----------
-- (414,000) (846,000)
------------ ------------ -----------
LOSS BEFORE DISCONTINUED OPERATIONS AND WRITE-DOWN
OF DISCONTINUED OPERATIONS ASSETS............... (636,000) (11,725,000) (4,574,000)
Write-down of discontinued operations assets to
recoverable amount (Note 3)..................... 3,349,000 -- --
------------ ------------ -----------
(3,985,000) (11,725,000) (4,574,000)
Discontinued operations (Note 3).................. (938,000) (242,000) (121,000)
------------ ------------ -----------
NET LOSS.......................................... (4,923,000) (11,967,000) (4,695,000)
Retained earnings (deficit) at beginning of
year............................................ 6,205,000 1,282,000 (10,685,000)
------------ ------------ -----------
Retained earnings (deficit) at end of year........ $ 1,282,000 $(10,685,000) $(15,380,000)
============ ============ ===========
Loss per share before discontinued operations
(Note 8)........................................ $ (0.80) $ (2.34) $ (0.42)
============ ============ ===========
Loss per share after discontinued operations (Note
8).............................................. $ (0.98) $ (2.39) $ (0.44)
============ ============ ===========
</TABLE>
F-36
<PAGE> 95
SOLID STATE GEOPHYSICAL INC.
CONSOLIDATED STATEMENT OF CHANGES IN
FINANCIAL POSITION
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
----------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN) CONTINUING OPERATING
ACTIVITIES
Loss before discontinued operations and
write-down of assets..................... $ (636,000) $(11,725,000) $ (4,574,000)
Charges (credits) to income not affecting
cash
Amortization of data library............. 476,000 20,694,000 4,784,000
Depreciation and amortization............ 5,968,000 5,856,000 8,974,000
Gain on disposal of fixed assets......... (54,000) (134,000) (325,000)
Deferred income taxes.................... 250,000 -- (915,000)
------------ ------------ ------------
6,004,000 14,691,000 7,944,000
Changes in working capital balances related
to operations............................ 10,924,000 1,168,000 (9,528,000)
------------ ------------ ------------
16,928,000 15,859,000 (1,584,000)
FINANCING ACTIVITIES
Promissory notes -- net.................... -- 2,600,000 8,509,000
Proceeds of long-term debt................. 12,839,000 11,007,000 19,777,000
Repayment of long-term debt................ (7,940,000) (5,193,000) (14,636,000)
Capital stock
Issued for options....................... -- 20,000 311,000
Issued for repayment of debt............. -- -- 3,989,000
Issued for cash.......................... -- -- 5,338,000
Deferred exchange gain (loss).............. 121,000 (100,000) (208,000)
------------ ------------ ------------
5,020,000 8,334,000 23,080,000
------------ ------------ ------------
INVESTING ACTIVITIES
Sale of operations of a subsidiary (Note
3)....................................... -- 2,275,000 177,000
Preferred shares acquired on sale of
operations of a subsidiary (Note 3)...... -- (1,441,000) --
Proceeds from disposal of fixed assets..... 91,000 698,000 3,476,000
Acquisition of fixed assets................ (10,888,000) (11,025,000) (15,770,000)
Data library............................... (7,680,000) (21,643,000) (8,439,000)
Other...................................... (200,000) 4,000 213,000
------------ ------------ ------------
(18,677,000) (31,132,000) (20,343,000)
------------ ------------ ------------
DISCONTINUED OPERATIONS (NOTE 3)
Operating activities....................... 126,000 (12,000) (121,000)
Financing activities....................... (188,000) 19,000 --
Investing activities....................... (898,000) (148,000) (47,000)
------------ ------------ ------------
(960,000) (141,000) (168,000)
------------ ------------ ------------
Change in cash.................................. 2,311,000 (7,080,000) 985,000
Cash (bank indebtedness less cash), beginning of
year.......................................... (711,000) 1,600,000 (5,480,000)
------------ ------------ ------------
Cash (bank indebtedness less cash), end of
year.......................................... $ 1,600,000 $ (5,480,000) $ (4,495,000)
============ ============ ============
</TABLE>
F-37
<PAGE> 96
SOLID STATE GEOPHYSICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997
(1) CORPORATE FINANCING, OPERATIONS AND BASIS OF FINANCIAL PRESENTATION
These financial statements have been prepared on the basis that Solid State
Geophysical Inc. ("Solid State") will be able to complete major projects in
progress and generate sufficient timely cash flow to pay its liabilities in the
normal course of business. At August 31, 1997, Solid State had negative working
capital of $21,963,000 which amount includes $9,028,000, representing the
current portion of long-term debt due over the next twelve month period.
See Note 7 for details on debt covenant violations, postponement of certain
principal payments and extension of promissory note repayment dates.
Solid State's liquidity problems arose primarily from cost overruns
relating to a multi-client library acquisition, losses relating to the Nortech
operations which were sold and losses from performing certain large non-Canadian
data acquisition contracts for clients. Continued purchase of property, plant
and equipment was also a major factor in debt incurred.
Solid State had a loss for the year before discontinued operations of
$4,574,000; cash flow from continuing operations before changes in working
capital of $7,944,000 (before expenditures on the data library of $8,439,000)
and shareholders' equity, at year end, of $9,089,000.
The recovery of the data library and certain other assets is dependent upon
future occurrences. The amounts recorded for such assets are subject to
significant management estimates (see Notes 3 and 4).
Funding for Solid State's commitments must be provided by future data
library sales, normal operations, additional financing or the issue of share
capital. (See Note 17 for funds advanced after August 31, 1997.)
On August 30, 1997, Solid State's wholly-owned subsidiary, Nortech Surveys
(Canada) Inc. was wound up into Solid State.
(2) ACCOUNTING POLICIES
The consolidated financial statements of Solid State have been prepared in
accordance with Canadian generally accepted accounting principles. The
significant accounting policies used in these consolidated financial statements
are:
Basis of consolidation
The consolidated financial statements include the accounts of Solid State;
Solid State Geophysical Corp. (a United States company); and Solid State
International Ingenieria, C.A. (a Venezuelan company).
Revenue recognition and work-in-progress
Solid State recognizes revenue on fixed price contracts on the basis of
percentage complete. Revenue on hourly rate contracts is recognized in the
period earned. Start-up costs, inventory and other costs related to contracts
not sufficiently underway to warrant revenue recognition are carried as
work-in-progress and charged to expense as revenue is recognized.
Work-in-progress is valued at the lower of cost and net realizable value.
Anticipated losses on contracts are recorded when reasonably determinable.
Multi-client data library
Solid State collects certain seismic data for its own account which it
resells to clients on a non-transferrable, non-exclusive basis. During the
period beginning with the initiation of each multi-client survey to the
completion of the survey, total estimated costs are amortized based on revenues
from such survey as a percentage of total estimated revenues to be realized from
such survey. After the survey is completed, amortization of remaining
F-38
<PAGE> 97
SOLID STATE GEOPHYSICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
capitalized costs is provided at the greater of the percentage of realized
revenues to total estimated revenues or over a period not to exceed four years.
Solid State periodically reviews the carrying value of multi-client data to
assess whether there has been a permanent impairment of value and records losses
in periods when the total estimated costs exceed total estimated sales or in
periods when it is determined that sales would not be sufficient to cover the
carrying value of the asset.
Depreciation
Property and equipment are depreciated on the straight-line basis to
reflect the estimated useful life of the related assets (Note 5).
Income taxes
Solid State prepares its financial statements on the deferred income tax
allocation basis. A provision is made for all income taxes currently payable as
well as for those deferred to future years as a result of timing differences
between income for income tax purposes and for accounting purposes arising
primarily from the difference between amounts claimed for fixed assets for
income tax purposes and depreciation recorded for accounting purposes.
Foreign currency translation
Transaction amounts denominated in foreign currencies are translated to
Canadian dollar equivalents at exchange rates prevailing at the transaction
dates. Carrying values of monetary assets and liabilities reflect the exchange
rates at the balance sheet date. Translation gains and losses, except those
related to long-term debt, are included in earnings. Gains and losses related to
long-term debt are deferred and amortized over the remaining term of the debt.
The operations of foreign subsidiaries are considered to be integrated and
accordingly, the monetary assets and liabilities are translated at the rate of
exchange at the balance sheet date. Revenue and expenses of the foreign
subsidiaries are translated at the exchange rate prevailing at the date of the
transaction.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Solid State's policy is to amortize data library costs based upon the
anticipated revenues Solid State expects to realize over a period not to exceed
four years from the date of project completion or the end of any exclusive use
period. It is reasonably possible that those estimates of anticipated revenues,
the remaining estimated economic life of the data library, or both will be
reduced significantly in the near term due to competitive pressures. As a
result, the carrying amount of the data library costs may be reduced materially
in the near term.
(3) OTHER NON-CURRENT ASSETS
In July 1996, the operations of Nortech Surveys (Canada) Inc. were sold for
$2,275,000 and the operations were presented as discontinued operations. There
was no gain or loss recorded on the sale.
Part of the proceeds on sale was $1,263,000 of preferred shares of Nortech
Geomatics Inc. These shares have the right to receive quarterly cumulative
dividends at a rate equal to 80% of the prime interest rate, are non-voting,
have mandatory redemption of $200,000 per year and under certain conditions may
be converted into a one year promissory note. Under certain conditions these
shares may be converted into common shares after
F-39
<PAGE> 98
SOLID STATE GEOPHYSICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2003. $206,000 of preferred shares were redeemed in 1997. In fiscal 1997,
$629,000 of the preferred shares were converted into Common shares, which Solid
State intends to sell.
The ability of Solid State to liquidate its investment in Common shares on
a timely basis is dependent on the ability of Nortech Geomatics Inc. to become a
public company.
The following summarizes the results of Nortech's operations over the last
three fiscal periods and are reflected in the Consolidated Statement of
Operations and Deficit as a one line item -- Discontinued Operations:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues........................... $5,674,000 $3,595,000 $ --
Expenses
Operating and interest costs......... 5,989,000 3,607,000 121,000
Amortization......................... 623,000 230,000 --
---------- ---------- ----------
6,612,000 3,837,000 121,000
---------- ---------- ----------
Net loss............................... $ (938,000) $ (242,000) $ (121,000)
========== ========== ==========
</TABLE>
In addition to the loss shown above, $3,349,000 of the proprietary
engineering and system development costs and certain survey equipment included
in property and equipment related to the Nortech operations were written down to
their net recoverable amounts in 1995. In April 1994, Solid State acquired all
the outstanding shares of Seismoven C.A., a Venezuelan company, for
consideration of $270,000 (U.S. $200,000). The acquisition was accounted for
using the purchase method with the majority of the purchase consideration being
allocated to goodwill. Subsequent to acquisition, the Corporation's name was
changed to Solid State Internacional Ingenieria, C.A. The goodwill related to
this investment was expensed in 1997.
(4) MULTI-CLIENT DATA
Atchafalaya Bay
Work commenced on the Atchafalaya Bay project in late fiscal 1995 and the
project was 77% complete at August 31, 1996. In 1996, as part of a series of
transactions to enable completion of the project, Solid State sold its ownership
in this data bank, and retained an interest in the future revenues from the
project in return for completing the project.
Prior to the sale of its ownership interest, Solid State had a revenue
sharing agreement with another third party. Under this other revenue sharing
basis the first U.S. $10,500,000 went to Solid State, between $10,500,000 and
$13,000,000 revenue was split as follows: 73.7% to Solid State and 26.3% to the
other party. Revenue above $13,000,000 was shared 50/50. The other party's share
of this revenue sharing agreement was purchased by Solid State in conjunction
with its sale of the data library and the negotiation of its retained interest
in future revenues.
As at August 31, 1996, all anticipated losses related to the Atchafalaya
Bay project were recognized. The resultant net book value of $7,841,000
represented management's estimate of net future proceeds from data sales.
During the year ended August 31, 1997, Solid State spent an additional
$8,715,000 on this project achieving completion. Processing of the data is
anticipated to be completed in November 1997. Amortization of $3,815,000
resulted in a net book value at August 31, 1997 of $12,741,000 which represents
management's estimate of net future proceeds from data sales attributable to
Solid State. This estimate is supported by a current market valuation of the
project done by a data library valuer using the most likely undiscounted cash
flow model.
Solid State's share of revenues for the year ended August 31, 1997 was
$3,728,000. Total costs for the project are estimated to be $32,836,000,
including $3,188,000 of depreciation.
F-40
<PAGE> 99
SOLID STATE GEOPHYSICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net revenue sharing arrangement, which is in U.S. dollars which was
converted to Canadian dollars at an average rate of $0.727 as at August 31, 1997
(closing rate $0.721), with the Atchafalaya Bay Data library owner is as
follows:
<TABLE>
<CAPTION>
CANADIAN RECORDED IN REVENUE TO
DOLLAR AUGUST 31,
SALES -------------------------
REVENUE SHARING BASIS REVENUE OWNER SOLID STATE 1996 1997
- -------------------------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
First................... $11,414,000 $ -- $11,414,000 $8,882,000 $2,532,000
Next.................... 4,601,000 3,405,000 1,196,000 -- 1,196,000
----------- ----------- ----------- ---------- ----------
Sales to date............. 16,015,000 3,405,000 12,610,000 8,882,000 3,728,000
----------- ----------- ----------- ---------- ----------
Next.................... 7,405,000 5,480,000 1,925,000 -- --
Next.................... 8,280,000 -- 8,280,000 -- --
Next.................... 11,501,000 8,051,000 3,450,000 -- --
----------- ----------- ----------- ---------- ----------
Future sales.............. 27,186,000 13,531,000 13,655,000 -- --
----------- ----------- ----------- ---------- ----------
$43,201,000 $16,936,000 $26,265,000 $8,882,000 $3,728,000
=========== =========== =========== ========== ==========
</TABLE>
The revenue sharing basis in U.S. dollars is $8,394,000, $3,334,000,
$5,366,000, $6,000,000 and $8,334,000, respectfully, for the amounts shown in
the Canadian dollar Sales Revenue column.
Realization of these sales is dependent upon the availability of land in
the data area, petroleum discoveries or anticipated discoveries in that area and
general petroleum industry economics.
Canadian
No significant additions were made to the Canadian data library in the year
ended August 31, 1997. Amortization of $969,000 was recorded. As at August 31,
1997, the net book value was $2,926,000.
Recovery of these costs is dependent upon future sales which are influenced
by the availability of land in the data area, petroleum discoveries or
anticipated discoveries in that area and general petroleum industry economics.
Other
Certain financing agreements require all proceeds from the data library
sales to be applied against the specified debt (see Note 7).
F-41
<PAGE> 100
SOLID STATE GEOPHYSICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
UNITED
CANADA STATES TOTAL
---------- ----------- -----------
<S> <C> <C> <C>
COST
Balance as at September 1, 1995.................... $3,886,000 $ 4,874,000 $ 8,760,000
Additions.......................................... 5,214,000 19,246,000 24,460,000
---------- ----------- -----------
Balance as at September 1, 1996.................... $9,100,000 $24,120,000 $33,220,000
========== =========== ===========
Balance, as at September 1, 1996................... $9,100,000 $24,120,000 $33,220,000
Additions.......................................... 35,000 8,715,000 8,750,000
---------- ----------- -----------
Balance as at August 31, 1997...................... $9,135,000 $32,835,000 $41,970,000
========== =========== ===========
ACCUMULATED AMORTIZATION
Balance as at September 1, 1995.................... $ 964,000 $ -- $ 964,000
Amortization for the year.......................... 4,276,000 16,279,000 20,555,000
---------- ----------- -----------
Balance as at September 1, 1996.................... $5,240,000 $16,279,000 $21,519,000
========== =========== ===========
ACCUMULATED AMORTIZATION
Balance as at September 1, 1996.................... $5,240,000 $16,279,000 $21,519,000
Amortization for the year.......................... 969,000 3,815,000 4,784,000
---------- ----------- -----------
Balance as at August 31, 1997...................... $6,209,000 $20,094,000 $26,303,000
========== =========== ===========
NET BOOK VALUE AS AT AUGUST 31, 1996
Current portion.................................... $1,454,000 $ 4,524,000 $ 5,978,000
Non-current portion................................ 2,406,000 3,317,000 5,723,000
---------- ----------- -----------
$3,860,000 $ 7,841,000 $11,701,000
========== =========== ===========
NET BOOK VALUE AS AT AUGUST 31, 1997
Current portion.................................... $ 917,000 $ 1,537,000 $ 2,454,000
Non-current portion................................ 2,009,000 11,204,000 13,213,000
---------- ----------- -----------
$2,926,000 $12,741,000 $15,667,000
========== =========== ===========
</TABLE>
F-42
<PAGE> 101
SOLID STATE GEOPHYSICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
CANADA UNITED STATES TOTAL
---------- ------------- -----------
<S> <C> <C> <C>
FOR THE YEAR ENDED AUGUST 31, 1995
Revenues........................................... $ 773,000 $ -- $ 773,000
Amortization....................................... 476,000 -- 476,000
---------- ------------ -----------
Gross profit....................................... $ 297,000 $ -- $ 297,000
========== ============ ===========
FOR THE YEAR ENDED AUGUST 31, 1996
Revenues........................................... $6,009,000 $ 8,882,000 $14,891,000
Amortization....................................... 4,276,000 16,418,000 20,694,000
---------- ------------ -----------
Gross profit (loss)................................ $1,733,000 $ (7,536,000) $(5,803,000)
========== ============ ===========
FOR THE YEAR ENDED AUGUST 31, 1997
Revenues........................................... $ 191,000 $ 3,728,000 $ 3,919,000
Amortization....................................... 969,000 3,815,000 4,784,000
---------- ------------ -----------
Gross loss......................................... $ (778,000) $ (87,000) $ (865,000)
========== ============ ===========
</TABLE>
(5) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
AUGUST 31, 1996
-----------------------------------------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
----------- --------------- -----------
<S> <C> <C> <C>
Land............................................. $ 275,000 $ -- $ 275,000
Building......................................... 659,000 69,000 590,000
Recording equipment.............................. 42,329,000 16,507,000 25,822,000
Survey equipment................................. 2,235,000 1,429,000 806,000
Drilling equipment............................... 2,783,000 1,206,000 1,577,000
Vehicles (including boats)....................... 2,318,000 1,673,000 645,000
Office equipment................................. 653,000 408,000 245,000
Radio equipment.................................. 434,000 301,000 133,000
----------- ----------- -----------
51,686,000 21,593,000 30,093,000
Equipment under capital lease.................... 2,339,000 794,000 1,545,000
----------- ----------- -----------
$54,025,000 $22,387,000 $31,638,000
=========== =========== ===========
</TABLE>
F-43
<PAGE> 102
SOLID STATE GEOPHYSICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AUGUST 31, 1997
------------------------------------------------------------
DEPRECIATION
TERMS IN ACCUMULATED NET BOOK
YEARS COST DEPRECIATION VALUE
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Land................................... -- $ 275,000 $ -- $ 275,000
Building............................... 20 681,000 108,000 573,000
Recording equipment.................... 2 - 7 51,809,000 22,430,000 29,379,000
Survey equipment....................... 3 - 5 2,251,000 1,737,000 514,000
Drilling equipment..................... 2 - 3 3,309,000 2,146,000 1,163,000
Vehicles (including boats)............. 3 - 5 2,606,000 2,080,000 526,000
Office equipment....................... 5 880,000 532,000 348,000
Radio equipment........................ 2 - 4 593,000 387,000 206,000
----- ----------- ----------- -----------
62,404,000 29,420,000 32,984,000
Equipment under capital lease.......... 3 - 5 3,239,000 1,062,000 2,177,000
----- ----------- ----------- -----------
$65,643,000 $30,482,000 $35,161,000
===== =========== =========== ===========
</TABLE>
Property and equipment are pledged as security pursuant to long-term debt
(see Note 7).
(6) OPERATING LOANS
Solid State and its subsidiaries have operating lines of credit of
$5,100,000 which were fully utilized at August 31, 1997. The credit facilities
are secured by assignments of receivables and bear interest at prime plus 0.75%
(6.5% at August 31, 1996; 5.5% -- 1997). (See Note 7 regarding covenant
violations).
(7) PROMISSORY NOTES AND LONG-TERM DEBT
<TABLE>
<CAPTION>
AUGUST 31,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
PROMISSORY NOTES
Promissory note bearing interest at 18% with interest due
quarterly commencing July 1, 1996 and principal due and payable
December 31, 1996. Secured by future Multi-client data sales
($1,900,000 U.S.). ............................................. $ 2,600,000 $ --
Promissory note bearing interest at 15% with interest commencing
February 10, 1997 and $1,000,000 U.S. of $2,000,000 U.S.
principal due May 10, 1997 and balance due August 10, 1997, all
extended to November 30, 1997. Secured by future Multi-client
data sales ($2,000,000 U.S.). .................................. -- 2,777,000
Promissory note bearing interest at 15% with interest commencing
February 19, 1997 and $1,000,000 U.S. of $2,000,000 U.S.
principal due May 19, 1997 and balance due August 19, 1997, all
extended to November 30, 1997. Secured by future Multi-client
data sales ($2,000,000 U.S.). .................................. -- 2,777,000
Promissory note bearing interest at 15% with interest commencing
July 2, 1997 and balance due August 15, 1997, extended to
November 30, 1997. Secured by future Multi-client data sales
($3,000,000 U.S.). ............................................. -- 4,166,000
Promissory note bearing interest at 15% with interest commencing
July 22, 1997 and balance due August 15, 1997, extended to
November 30, 1997. Secured by future Multi-client data sales
($1,000,000 U.S.). ............................................. -- 1,389,000
----------- -----------
$ 2,600,000 $11,109,000
=========== ===========
</TABLE>
F-44
<PAGE> 103
SOLID STATE GEOPHYSICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AUGUST 31,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
LONG-TERM DEBT
Demand non-revolving loan bearing interest at prime plus 1.75%
(6.5%) repayable in consecutive monthly installments of $12,500
until January 1, 2002. ........................................ $ 917,000 $ 663,000
Demand non-revolving loan bearing interest at lender's U.S. dollar
cost of funds plus 1.75% repayable in consecutive monthly
installments of $13,750 U.S. until January 1, 2002
(1996 -- $1,054,500 U.S.; $728,800 U.S.). ..................... 1,443,000 1,012,000
Demand non-revolving loan bearing interest at lender's U.S. dollar
cost of funds plus 1.75% repayable in consecutive monthly
installments of $13,125 U.S. until January 1, 2002
(1996 -- $974,900 U.S.; $695,600 U.S.). ........................ 1,334,000 966,000
Demand non-revolving loan bearing interest at prime plus 1.75%
(6.5%) repayable in consecutive monthly installments of $63,333
until January 1, 2002. ......................................... 4,475,000 3,357,000
Demand non-revolving loan bearing interest at lender's U.S. dollar
cost of funds plus 1.75% repayable in consecutive monthly
installments of $53,083 U.S. until January 1, 2002
(1996 -- $3,510,000 U.S.; $2,813,400 U.S.). .................... 4,803,000 3,906,000
Conditional sales agreement repayable in sixty equal monthly
installments of $89,437 U.S., with interest commencing October
16, 1996. Secured by related equipment. Effective interest rate
of 10.471% ($3,703,000 U.S.) -- renegotiated 1996 CSA, adding
additional equipment (including consolidation of the following
CSA). .......................................................... 5,782,000 5,141,000
Obligations under capital lease, secured by related equipment,
repayable in equal monthly installments of $19,012 U.S.,
including interest (consolidated into CSA $5,141,000). ......... 655,000 --
Convertible debenture bearing interest at 8% with interest due
quarterly commencing July 1, 1996 and failing the exercise of
conversion rights, principle due April 30, 2001. The debenture
was convertible into 1,141,667 common shares of the Corporation
(convertible at $2.40 per share, closing price at date of grant
was $2.76). Repaid with proceeds of financing in October
1996. .......................................................... 2,737,000 --
Obligations under capital lease, secured by related equipment,
repayable in monthly installments of $52,000 (1996 -- $36,000),
including interest at approximately 7.5%........................ 414,000 1,061,000
Conditional sales agreement repayable in 12 monthly installments
of $18,219 U.S. with interest commencing November 26, 1997.
Secured by related equipment. Effective interest rate of 10.746%
($71,347 U.S.). ................................................ -- 99,000
Conditional sales agreement repayable with a principle payment of
$150,000 U.S. June 30, 1997; two monthly installments of
$250,000, including interest commencing June 30, 1996;
twenty-eight monthly installments of $127,050 U.S., including
interest until December 31, 1999. Secured by related equipment.
Effective interest rate of 10.746% ($3,592,566 U.S.). .......... -- 4,988,000
Conditional sales agreement repayable in twenty four equal monthly
installments of $23,309 U.S., including interest, with interest
commencing September 30, 1997. Secured by related equipment.
Effective interest rate of 10.746% ($503,855 U.S.). ............ -- 700,000
</TABLE>
F-45
<PAGE> 104
SOLID STATE GEOPHYSICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AUGUST 31,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
Promissory note bearing interest at 18% commencing October 17,
1996 (15% interest ($4,197,000 U.S.) effective February 24,
1997). Interest due quarterly commencing January 1, 1997, due
October 1999 with minimal annual payments of $1,380,000
($1,000,000 U.S.). Secured by future multi- client data sales.
$4,000,000 U.S. ($5,400,000 Cdn.) converted to equity February
24, 1997. ...................................................... $ -- $ 5,828,000
Other............................................................. 20,000 --
----------- -----------
22,580,000 27,721,000
Less: Current portion............................................. 8,054,000 9,028,000
----------- -----------
$14,526,000 $18,693,000
=========== ===========
</TABLE>
In 1997, Solid State postponed certain principal repayments.
At August 31, 1997, the Company was in violation of certain debt covenants
with its main banker. These violations were waived to October 31, 1997. The bank
retains the right to demand all loans after this date if there are covenant
violations. Certain promissory note and conditional sales agreement repayment
dates were not adhered to.
The demand non-revolving loans are secured by fixed and floating charge
debentures over all of the assets of Solid State, subsidiaries and specific
charges on property and equipment.
In certain debt agreements, there are cross-default provisions under which
a default in one agreement could become a default under such other agreements.
Principal repayments are as follows:
<TABLE>
<S> <C>
1998.................................................... $ 9,028,000
1999.................................................... 9,403,000
2000.................................................... 4,455,000
2001.................................................... 3,641,000
2002.................................................... 1,194,000
----------
$27,721,000
==========
</TABLE>
F-46
<PAGE> 105
SOLID STATE GEOPHYSICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) CAPITAL STOCK
Authorized share capital is comprised of unlimited common shares and
preferred shares.
<TABLE>
<CAPTION>
SHARES BOOK VALUE
---------- -----------
<S> <C> <C>
Total common shares outstanding September 1, 1993.................. 2,800,000 $ 800,000
Common shares issued in accordance with initial public offering.... 2,000,000 12,238,000
Common shares issued upon acquisition of Nortech Surveys (Canada)
Inc. (Note 3).................................................... 200,000 1,700,000
---------- ----------
Total common shares outstanding August 31, 1994 and 1995........... 5,000,000 14,738,000
Common shares issued in accordance with a rights offering in March
1996............................................................. 6,520 20,000
---------- ----------
Common shares outstanding August 31, 1996.......................... 5,006,520 14,758,000
Common shares issued to specified shareholders for debt, net of
issue costs less related deferred tax............................ 3,044,444 4,044,000
Common shares issued to specified shareholders for cash, net of
issue costs less related deferred tax............................ 5,869,565 5,356,000
Common shares issued under options................................. 215,000 311,000
---------- ----------
Common shares outstanding August 31, 1997.......................... 14,135,529 $24,469,000
========== ==========
</TABLE>
Earnings per share for the year ended August 31, 1997 have been calculated
using the weighted average shares outstanding of 10,787,000 (1995 -- 5,000,000;
1996 -- 5,003,000).
Fully diluted earnings per share for 1997, 1996 and 1995 would have been
anti-dilutive.
(9) STOCK OPTIONS AND SHARES RESERVED
At August 31, 1997, Solid State had options to purchase 952,000 Common
shares outstanding, of which 325,000 expired subsequent to the year end. Prices
ranged from $1.00 to $6.50. During 1996, 505,000 options were granted. In 1997,
670,000 options were granted to purchase Common shares at between $0.95 and
$1.80. All options expire on or before December 31, 2000. Grant prices were
equal to or greater than fair market value at the dates of grant and to date
215,000 stock options have been exercised. They were warrants outstanding to
purchase 125,000 Common Shares at $1.65 per share.
(10) INCOME TAXES
Reconciliation of expected income tax provision to recorded income tax
provision:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Expected income tax (recovery) at
(1995 -- 44.34%; 1996 -- 44.53%;
44.62%)............................ $(2,144,000) $(3,357,000) $(2,418,000)
Future benefit of tax losses in
subsidiaries not recognized........ 1,219,000 2,943,000 1,572,000
Assets written off with no tax
basis.............................. 925,000 -- --
---------- ---------- ----------
Income taxes (recovery) per financial
statements......................... $ -- $ (414,000) $ (846,000)
========== ========== ==========
</TABLE>
Solid State can defer future income taxes by claiming allowable income tax
deductions in excess of those provided in the accounting records.
F-47
<PAGE> 106
SOLID STATE GEOPHYSICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Solid State does not anticipate repatriating income from foreign operations
and accordingly, has not provided for any possible future repatriation taxation.
At August 31, 1997, there was not a material amount in income which could be
repatriated.
Solid State has unclaimed research and development expenditures and
noncapital losses carried forward for income tax purposes of $1,489,000 and
$3,900,000 respectively, which resulted from operations in a Canadian
subsidiary. There are non-North American foreign subsidiaries with approximately
$4,400,000 of non-capital tax losses for accounting carried forward. The U.S.
subsidiary has non-capital accounting losses carried forward of approximately
$8,600,000 as at August 31, 1997, which may be claimable in future years. The
potential benefits of these items have not been reflected in the consolidated
financial statements. Realization of these losses is dependent upon taxable
income being earned in each jurisdiction that has the tax losses. Solid State
has non-capital losses of $2,762,000 resulting from its Canadian operations of
which $703,000 has a potential unrecorded benefit. The amount of tax losses
available is subject to normal audit by the various tax authorities which may
result in changes to the losses.
F-48
<PAGE> 107
SOLID STATE GEOPHYSICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) SEGMENTED INFORMATION
Solid State operates in two business segments with both domestic and
foreign contracts.
Industry segments
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
--------------------------------------------
1995 1996 1997
----------- ------------ -----------
<S> <C> <C> <C>
NET REVENUES FROM CUSTOMERS OUTSIDE THE ENTERPRISE
Seismic acquisition.............................. $28,850,000 $ 27,290,000 $45,910,000
Data library..................................... 773,000 14,891,000 3,919,000
----------- ----------- -----------
TOTAL.............................................. $29,623,000 $ 42,181,000 $49,829,000
=========== =========== ===========
OPERATING LOSS BEFORE RESTRUCTURING AND OTHER
COSTS, INTEREST AND WRITE-DOWN
Seismic acquisition.............................. $ 242,000 $ (2,796,000) $ (274,000)
Data library..................................... 297,000 (5,803,000) (865,000)
----------- ----------- -----------
TOTAL.............................................. $ 539,000 $ (8,599,000) $(1,139,000)
=========== =========== ===========
IDENTIFIABLE ASSETS
Seismic acquisition.............................. $40,032,000 $ 42,325,000 $55,035,000
Data library..................................... 7,797,000 11,701,000 15,667,000
Corporate........................................ -- 1,441,000 1,057,000
Discontinued operations.......................... 3,925,000 133,000 --
----------- ----------- -----------
TOTAL.............................................. $51,754,000 $ 55,600,000 $71,759,000
=========== =========== ===========
CAPITAL EXPENDITURES
Seismic acquisition.............................. $10,888,000 $ 11,025,000 $15,770,000
Data library..................................... 7,680,000 21,643,000 8,439,000
Discontinued operations.......................... 898,000 148,000 47,000
----------- ----------- -----------
TOTAL.............................................. $19,466,000 $ 32,816,000 $24,256,000
=========== =========== ===========
DEPRECIATION AND AMORTIZATION
Seismic acquisition.............................. $ 5,968,000 $ 5,856,000 $ 8,974,000
Data library..................................... 476,000 20,694,000 4,784,000
----------- ----------- -----------
TOTAL.............................................. $ 6,444,000 $ 26,550,000 $13,758,000
=========== =========== ===========
DISCONTINUED OPERATIONS
Operating loss................................... $ (938,000) $ (242,000) $ (121,000)
=========== =========== ===========
TOTAL INDUSTRY SEGMENTS
Net revenue from customers outside the
enterprise.................................... $29,623,000 $ 42,181,000 $49,829,000
=========== =========== ===========
SEGMENTED OPERATING INCOME (LOSS) BEFORE THE
FOLLOWING........................................ $ 539,000 $ (8,599,000) $(1,139,000)
Interest expense................................. (1,175,000) (2,667,000) (4,050,000)
Restructuring costs.............................. -- (873,000) (231,000)
Write-down of fixed assets....................... (3,349,000) -- --
Income tax recovery.............................. -- 414,000 846,000
Discontinued operations loss..................... (938,000) (242,000) (121,000)
----------- ----------- -----------
Net loss........................................... $(4,923,000) $(11,967,000) $(4,695,000)
=========== =========== ===========
</TABLE>
F-49
<PAGE> 108
SOLID STATE GEOPHYSICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Geographic segments
<TABLE>
<CAPTION>
AUGUST 31, 1995
-------------------------------------------------------------------
MIDDLE EAST
SOUTH UNITED AND
CANADA AMERICAN STATES OTHER TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net contract revenue*........... $16,461,000 $ 28,000 $ 9,016,000 $ 4,118,000 $29,623,000
Earnings (loss) before
interest**.................... 1,748,000 (154,000) (1,867,000) 812,000 539,000
Identifiable assets............. 25,100,000 16,606,000 4,475,000 1,648,000 47,829,000
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31, 1996
-------------------------------------------------------------------
MIDDLE EAST
SOUTH UNITED AND
CANADA AMERICAN STATES OTHER TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net contract revenue*........... $22,053,000 $ 5,687,000 $14,445,000 $ (4,000) $42,181,000
Earnings (loss) before
interest...................... 283,000 587,000 (8,928,000) (541,000) (8,599,000)
Identifiable assets............. 25,521,000 1,490,000 27,951,000 505,000 55,467,000
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31, 1997
-------------------------------------------------------------------
MIDDLE EAST
SOUTH UNITED AND
CANADA AMERICAN STATES OTHER TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net contract revenue*........... $20,046,000 $10,818,000 $12,312,000 $ 6,653,000 $49,829,000
Earnings (loss) before
interest...................... 2,260,000 (3,749,000) (704,000) 1,054,000 (1,139,000)
Identifiable assets............. 27,016,000 13,238,000 25,434,000 6,071,000 71,759,000
</TABLE>
- ---------------
* Includes Data Library sales.
** Before write-down of fixed assets ($3,349,000 -- 1995, nil -- 1996 and 1997),
financial restructuring costs and discontinued operations.
As at August 31, (1995 -- 42%; 1996 -- 43%) 1997, approximately 59% of
identifiable foreign assets are represented by accounts receivable, multi-client
data and work-in-progress. The balance, represented by property and equipment,
is readily transferrable from country to country as contracts are negotiated.
(12) ECONOMIC DEPENDENCE
Solid State operates in several countries. These operations are dependent
upon the level of oil and gas exploration and development. Solid State operates
for several customers, the only customers that accounted for more than 10% of
the net contract revenue during the year ended August 31, 1996 were two
customers accounting for $4,204,000 of South American net contract revenues and
$5,815,000 of Canadian net contract revenues and during the year ended August
31, 1997 one customer accounted for $6,218,000 of South American net contract
revenues.
(13) FINANCIAL INSTRUMENTS
a) Fair value of financial assets and liabilities
Solid State's financial instruments are substantially all cash, accounts
receivable, income taxes receivable, accounts payable, promissory notes and
long-term debt. The book value for all financial instruments, including
$16,937,000 of promissory notes and long-term debt, approximates their fair
value. The $16,937,000 of long-term debt and promissory notes which are at 15%
were negotiated during the year and there was additional borrowings secured by
promissory notes subsequent to the year end with interest at 15%.
F-50
<PAGE> 109
SOLID STATE GEOPHYSICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
b) Interest rate risk
At August 31, 1997, Solid State had $15,139,000 of debt with variable
interest rates based upon bank prime rates. For each one percentage change in
interest rates, interest expense would change by $151,000.
c) Credit risk
A substantial portion of Solid State's receivables are with customers in
the oil and gas business and are subject to normal industry credit risks.
Accounts receivable in Venezuela with a national oil company are factored, with
Solid State paying an annual fee of 29% and having a contingent liability for
any receivables not ultimately collected. The amount received on factoring has
been recorded as a loan and included in current liabilities.
d) Foreign currency risk
$33,749,000 of Solid State's promissory notes and long-term debt is
repayable in U.S. dollars. This amount is hedged only by operations conducted in
U.S. dollars. For each $0.01 change in the Canadian dollar relative to the U.S.
dollar, the debt will change by approximately $470,000.
(14) RELATED PARTY TRANSACTIONS
During 1997, two creditors became the major shareholders ("investors") of
Solid State. At August 31, 1996, these creditors were owed money under two lines
of credit; one for $2,600,000 with interest at 18% and one for $2,737,000 with
interest at 8% and convertible into 1,146,667 Common shares of Solid State.
Subsequent to August 31, 1996, a further $2,877,000 ($2,100,000 U.S.) was
advanced to Solid State with interest at 18% to bring the total of these loans
to $5,480,000.
On October 16, 1996, Solid State completed a $16,440,000 ($12,000,000 U.S.)
equity/debt financing. The financing was as follows:
<TABLE>
<CAPTION>
DESCRIPTION Cdn. U.S.
---------------------------------------------------------- ----------- -----------
<S> <C> <C>
3,044,444 Common shares (before net expenses of
$66,000)................................................ $ 4,110,000 $ 3,000,000
Secured loans with interest at 18% until a private
placement was completed and 15% thereafter;
Secured by data libraries; repayments from proceeds of
the data libraries revenues..........................
Minimum annual repayments of $1,370,000 ($1,000,000
U.S.) for the first two years and any balance in
October 1999......................................... 6,850,000 5,000,000
Proceeds from a private placement were to be used to
retire this loan..................................... 5,480,000 4,000,000
----------- -----------
$16,440,000 $12,000,000
=========== ===========
</TABLE>
F-51
<PAGE> 110
SOLID STATE GEOPHYSICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The proceeds of the October 16, 1996, financing were used as follows:
<TABLE>
<CAPTION>
DESCRIPTION CDN. U.S.
---------------------------------------------------------- ----------- -----------
<S> <C> <C>
To repay convertible debt owing to the specified
investors............................................... $ 2,740,000 $ 2,000,000
To repay term debt owing to the specified investors....... 5,480,000 4,000,000
To repay related interest and legal costs to the specified
investors............................................... 330,000 240,000
To pay trade debt and interest in arrears on two
conditional sales agreements with a major equipment
supplier................................................ 1,645,000 1,200,000
To retire a conditional sales agreement with a major
supplier................................................ 655,000 479,000
To repay trade debt with Canadian and U.S. suppliers...... 4,385,000 3,200,000
For general working capital requirements.................. 1,205,000 881,000
----------- -----------
$16,440,000 $12,000,000
=========== ===========
</TABLE>
In February 1997, the investors purchased an additional 5,869,565 shares
for $5,356,000 net of expenses at which time they became the majority
shareholders of the Corporation.
In July 1997, an investor lent $5,600,000 ($4,000,000 U.S.) to Solid State
with interest at 15%.
At August 31, 1997, $16,937,000 ($12,198,000 U.S.) was owed to an investor
with interest at 15%.
Interest incurred during the year on the related party loans was $1,972,000
(1996 -- $339,000).
At August 31, 1997, the investors had 2 out of 4 directors on Solid State's
Board of Directors and were providing assistance for working capital (see Note
17).
(15) COMMITMENTS
In addition to the data library costs at August 31, 1997, Note 4, Solid
State had cash cost commitments to complete these programs estimated in the
amount of $227,000.
(16) CONTINGENCIES
Legal items relating to permitting and other business matters which were
incurred in the normal course of business were outstanding at August 31, 1997.
In most cases, any liability would be passed onto third parties.
(17) SUBSEQUENT EVENTS
Subsequent to the year end the following occurred:
(a) A shareholder advanced an additional $6,245,000 ($4,500,000 U.S.)
with interest at 15%.
(b) The major investors advised Solid State that they were considering
a take-over bid to acquire the minority Common shares at a price of $3.00
per share in cash. On November 27, 1997, the price was amended to $3.50 in
an offer to the minority shareholders.
(c) The covenant defaults indicated in Note 7 were waived to November
26, 1997.
(d) The due dates for the promissory notes indicated in Note 7 were
extended from November 30, 1997 to January 15, 1998.
(e) 125,000 warrants were exercised to purchase Common shares for
proceeds of $147,320 and 320,000 options were exercised to purchase shares
for proceeds of $392,000.
F-52
<PAGE> 111
SOLID STATE GEOPHYSICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(18) PRIOR YEAR AMOUNTS
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
(19) CANADIAN AND UNITED STATES ACCOUNTING POLICY DIFFERENCES
These financial statements have been prepared in accordance with Canadian
generally accepted accounting principles (GAAP). In certain aspects GAAP as
applied in the United States differs from Canadian GAAP.
Canadian balance sheet
Under Canadian GAAP, foreign exchange gains and losses resulting from
long-term monetary items of the reporting company are deferred and amortized
over the lives of those monetary items. Under U.S. GAAP these gains and losses
would be expensed in the period.
<TABLE>
<CAPTION>
AUGUST 31
-----------------------------
1996 1997
------------ ------------
<S> <C> <C>
Deferred exchange loss (per financial statements)............. $ 26,000 $ 234,000
------------ ------------
Deferred exchange loss (per U.S. GAAP)........................ $ -- $ --
============ ============
</TABLE>
Under U.S. GAAP the multi-client data, current portion would be grouped
with multi-client data, less current portion.
<TABLE>
<CAPTION>
AUGUST 31
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
Current assets (per financial statements)....................... $16,497,000 $22,014,000
Less: multi-client data, current portion........................ (5,978,000) (2,454,000)
----------- -----------
Current assets (per U.S. GAAP).................................. $10,519,000 $19,560,000
=========== ===========
Multi-client data, less current portion (per financial
statements)................................................... $ 5,723,000 $13,213,000
Add: multi-client data, current portion......................... 5,978,000 2,454,000
----------- -----------
Multi-client data (per U.S. GAAP)............................... $11,701,000 $ 15,667,00
=========== ===========
</TABLE>
The current portion of long-term debt under U.S. GAAP in 1997 would be
reduced by $1,074,000, which would reduce the current portion of the promissory
note to its minimal annual payment of $1,380,000 in 1998 rather than being the
total amount of the multi-client data, current portion. The 1997 working capital
would have been reduced by $1,380,000.
F-53
<PAGE> 112
SOLID STATE GEOPHYSICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under U.S. GAAP debt covenants, violations must be waived for a full year
to classify the debt as long-term. Bank debt did not have covenants waived for
one year. This debt and the remaining long-term debt has been reclassified as
current.
<TABLE>
<CAPTION>
AUGUST 31,
1997
-----------
<S> <C>
Current liabilities (per financial statements)................................ $43,977,000
Add: Long-term portion of debt................................................ 18,693,000
-----------
Current liabilities (per U.S. GAAP)........................................... $62,670,000
===========
</TABLE>
Conditional sales agreements are supplier financing contracts.
Statement of changes in shareholders' equity
For U.S. reporting, the information contained in the consolidated statement
of operations and (deficit) retained earnings and Note 8, Capital stock, would
be combined to develop a complete statement of changes in shareholders' equity.
For U.S. reporting, the proceeds from the convertible debenture issued in
1996 would have been split between debt and shareholders' equity with the
majority of the amount going to shareholders' equity being determined by the
difference between the conversion price for the shares and the trading price of
the shares at the date of grant.
<TABLE>
<CAPTION>
AUGUST 31,
-----------------------------
1996 1997
------------ ------------
<S> <C> <C>
Additional paid-in capital (per U.S. GAAP).................... $ 637,000 $ 637,000
============ ============
Deficit (per financial statements)............................ $(10,685,000) $(15,380,000)
Additional foreign exchange expense........................... (26,000) (234,000)
Additional financing cost..................................... (53,000) (73,000)
Additional loss on extinguishment of debt..................... -- (564,000)
------------ ------------
Deficit (per U.S. GAAP)....................................... $(10,764,000) $(16,251,000)
============ ============
</TABLE>
Consolidated statements of operations
For U.S. reporting, net amounts billed to customers for reimbursable costs
would have reduced revenues from those reported in the financial statements and
resulted in changed costs of sales with no change in gross margins.
F-54
<PAGE> 113
SOLID STATE GEOPHYSICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
---------------------------------------------
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Contract revenue (per financial statements)..... $48,357,000 $ 45,503,000 $ 77,999,000
Data library revenue (per financial
statements)................................... 773,000 14,891,000 3,919,000
------------ ------------ ------------
49,130,00 60,394,000 81,918,000
Reimbursable and third party revenue
adjustments................................... (7,265,000) (12,663,000) (13,218,000)
------------ ------------ ------------
Contract revenues (per U.S. GAAP)............... $41,865,000 $ 47,731,000 $ 68,700,000
============ ============ ============
Costs of sales (per financial statements)....... $20,384,000 $ 21,250,000 $ 33,262,000
Amortization data bank (per financial
statements)................................... 476,000 20,694,000 4,784,000
------------ ------------ ------------
20,860,000 41,944,000 38,046,000
Reimbursable and third party cost adjustments... 12,242,000 5,550,000 18,871,000
------------ ------------ ------------
Cost of sales (per U.S. GAAP)................... $33,102,000 $ 47,494,000 $ 56,917,000
============ ============ ============
</TABLE>
There is no significant difference in accounting for deferred taxes between
Canadian and U.S. GAAP. Under Canadian GAAP, the deferral method is used for
accounting for income taxes whereas under U.S. GAAP the asset and liability
approach is used. No deferred tax asset has been recorded for the tax losses
carried forward because valuation allowances were provided against all losses.
In Canada, earnings (loss) per share is calculated based on the weighted
average number of shares outstanding during the period. For U.S. GAAP, earnings
(loss) per share would be calculated using common stock equivalents outstanding
during the period. The weighted average number of shares outstanding gives
approximately the same loss per share as using common stock equivalent because
any potential conversions for common share equivalents would have the effect of
decreasing loss per share and therefore, would not be converted for purposes of
the calculation.
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
--------------------------------------------
1995 1996 1997
----------- ------------ -----------
<S> <C> <C> <C>
Net loss as reported............................. $(4,923,000) $(11,967,000) $(4,695,000)
Additional foreign exchange income (loss)........ 121,000 (100,000) (208,000)
Additional financing cost........................ -- (53,000) (20,000)
Additional loss on extinguishment of debt........ -- -- (564,000)
----------- ------------ -----------
Net loss in accordance with U.S. GAAP............ $(4,802,000) $(12,120,000) $(5,487,000)
=========== ============ ===========
Net loss per share............................... $ (0.96) $ (2.42) $ (0.51)
----------- ------------ -----------
Weighted average number of shares outstanding.... 5,000,000 5,003,000 10,787,000
=========== ============ ===========
</TABLE>
Consolidated statement of changes in financial position
The statement of changes in financial position is substantially the same as
the statement of cash flows prepared under U.S. GAAP, except for the following
differences:
For the U.S. GAAP, additional disclosure for cash interest and taxes paid
would be made:
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
----------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Interest paid.................................. $1,108,000 $2,379,000 $3,593,000
---------- ---------- ----------
Taxes paid (recovered)......................... $1,046,000 $ (201,000) $ 107,000
========== ========== ==========
</TABLE>
F-55
<PAGE> 114
SOLID STATE GEOPHYSICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For U.S. GAAP, cash provided by (used in) operating activities would
include operating activities from discontinued operations.
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-----------------------------------------
1995 1996 1997
---------- ----------- ----------
<S> <C> <C> <C>
Cash provided by continuing operating
activities before changes in working capital
balances related to operations (as
reported)................................... $6,004,000 $14,691,000 $7,944,000
Discontinued operations....................... 126,000 (12,000) (121,000)
---------- ----------- ----------
Cash provided by operating activities before
changes in working capital balances related
to operations in accordance with U.S.
GAAP........................................ $6,130,000 $14,679,000 $7,823,000
========== =========== ==========
</TABLE>
Under U.S. GAAP, the following would not have been disclosed in the cash
flow statement but would have been disclosed in a separate supplementary
schedule of non-cash financing and investing activities.
In 1997, there was one non-cash financing activity which was Common shares
valued at $3,989,000 issued to repay debt included in the statement of changes
in financial position.
In 1996 there was a non-cash investing activity which was the receipt of
$1,441,000 preferred shares on the sale of assets of a subsidiary.
In 1995, 1996 and 1997, there was the purchase of property and equipment
for the execution of capital leases and notes of $1,679,000, $6,662,000, and
$7,178,000 respectively, which would have affected financing and investing
activities.
For U.S. GAAP, bank indebtedness of 1995 -- $1,105,000; 1996 -- $5,788,000;
and 1997 -- $5,235,000; would have been shown as a financing activity. Cash
would be shown as 1995 -- $2,705,000; 1996 -- $308,000; and 1997 -- $740,000.
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-------------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Financing activities as reporting........... $ 5,020,000 $ 8,334,000 $23,080,000
Change in bank indebtedness................. (304,000) 4,683,000 (553,000)
Change in proceeds of long-term debt........ (1,679,000) (6,662,000) (7,178,000)
---------- ----------- -----------
Financing activities in accordance with U.S.
GAAP...................................... $ 3,037,000 $ 6,355,000 $15,349,000
========== =========== ===========
Investing activities as reported............ $18,677,000 $31,132,000 $20,343,000
Fixed assets purchased using supplier
debt...................................... (1,679,000) (6,662,000) (7,178,000)
---------- ----------- -----------
Investing activities in accordance with U.S.
GAAP...................................... $16,998,000 $24,470,000 $13,165,000
---------- ----------- -----------
Change in cash as reported.................. $ 2,311,000 $(7,080,000) $ 985,000
Change in bank indebtedness................. (304,000) 4,683,000 (553,000)
---------- ----------- -----------
Change in cash in accordance with U.S.
GAAP...................................... $ 2,007,000 $(2,397,000) $ 432,000
========== =========== ===========
</TABLE>
F-56
<PAGE> 115
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS SUBSCRIPTION OFFERING
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING
STOCKHOLDERS. THIS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS SUBSCRIPTION
OFFERING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................. 3
Risk Factors............................ 9
Disclosure Regarding Forward-Looking
Statements............................ 16
The Company............................. 17
Use of Proceeds......................... 18
Dividend Policy......................... 18
Capitalization.......................... 19
Unaudited Pro Forma Financial
Information........................... 20
Unaudited Pro Forma Combined Balance
Sheet................................. 21
Unaudited Pro Forma Combined Statement
of Operations......................... 22
Selected Consolidated Historical
Financial Data........................ 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 27
Business................................ 39
Management.............................. 47
Certain Relationships and Related
Transactions.......................... 50
Security Ownership of Management and
Principal Stockholders................ 52
Subscription Procedures................. 53
Selling Stockholders.................... 55
Description of Capital Stock............ 55
Shares Eligible for Future Sale......... 56
Experts................................. 57
Additional Information.................. 57
Index to Financial Statements and
Financial Statement Schedule.......... F-1
</TABLE>
3,459,414 SHARES
[GRANT GEOPHYSICAL, INC. LOGO]
COMMON STOCK
SUBSCRIPTION OFFERING PROSPECTUS
, 1998
<PAGE> 116
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a list of the estimated expenses to be incurred by the
Company in connection with the issuance and distribution of the Common Stock
being registered hereby.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee....................... $5,102.64
National Association of Securities Dealers, Inc. filing fee............... $ *
Transfer Agent's and Registrar's fees..................................... $ *
Printing and engraving costs.............................................. $ *
Accounting fees and expenses.............................................. $ *
Legal fees and expenses (not including Blue Sky).......................... $ *
Blue Sky fees and expenses................................................ $ *
Miscellaneous expenses.................................................... $ *
--------
Total................................................................ $ *
</TABLE>
- ---------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") makes
provision for the indemnification of officers and directors of corporations in
terms sufficiently broad to indemnify the officers and directors of the
Registrant under certain circumstances from liabilities (including reimbursement
of expenses incurred) arising under the Securities Act of 1933, as amended (the
"Securities Act").
As permitted by the DGCL, the Registrant's Certificate of Incorporation
(the "Charter") provides that, to the fullest extent permitted by the DGCL, no
director shall be liable to the Registrant or to its stockholders for monetary
damages for breach of his fiduciary duty as a director. Delaware law does not
permit the elimination of liability (i) for any breach of the director's duty of
loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) in respect of certain unlawful dividend payments or stock redemptions
or repurchases or (iv) for any transaction from which the director derives an
improper personal benefit. The effect of this provision in the Charter is to
eliminate the rights of the Registrant and its stockholders (through
stockholders' derivative suits on behalf of the Registrant) to recover monetary
damages against a director for breach of fiduciary duty as a director thereof
(including breaches resulting from negligent or grossly negligent behavior)
except in the situations described in clauses (i)-(iv), inclusive, above. These
provisions will not alter the liability of directors under federal securities
laws.
The Registrant's Bylaws (the "Bylaws") provide that the Registrant may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the Registrant) by reason of the fact that he is or was a director,
officer, employee or agent of the Registrant or is or was serving at the request
of the Registrant as a director, officer, employee or agent of another
corporation or enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding if such person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Registrant, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe such person's
conduct was unlawful.
The Bylaws also provide that the Registrant may indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the Registrant to procure a
judgment in its favor by reason of the fact that such person acted in any of the
capacities set forth above, against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection with the defense
or settlement of such action or suit if such person acted under similar
standards, except that no
II-1
<PAGE> 117
indemnification may be made in respect of any claim, issue or matter as to which
such person shall have been adjudged to be liable to the Registrant unless and
only to the extent that the Court of Chancery of the State of Delaware or the
court in which such action or suit was brought shall determine upon application
that despite the adjudication of liability but in view of all the circumstances
of the case, such person if fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
The Bylaws also provide that to the extent a director or officer of the
Registrant has been successful in the defense of any action, suit or proceeding
referred to in the previous paragraphs or in the defense of any claim, issue, or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith; that
indemnification provided for in the Bylaws shall not be deemed exclusive of any
other rights to which the indemnified party may be entitled; and that the
Registrant may purchase and maintain insurance on behalf of a director or
officer of the Registrant against any liability asserted against him or incurred
by him in any such capacity or arising out of his status as such whether or not
the Registrant would have the power to indemnify him against such liabilities
under such Bylaws.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On September 30, 1997, the Company issued 9,785,581 shares of Preferred
Stock to each of Elliott and Westgate in exchange for an aggregate of
$19,571,162 in cash and/or satisfaction of indebtedness of the Company.
In connection with the consummation of the Plan, on September 30, 1997, the
Company issued one share of Common Stock to Elliott in exchange for $1.00. On
December 19, 1997, the Company effected a two-to-one stock split in the form of
a stock dividend of shares to Elliott.
On December 18, 1997, Grant exchanged 9,571.162 shares of Preferred Stock
held by Elliott, together with accrued dividends thereon, for the Subordinated
Note.
On December 19, 1997, in connection with the Acquisition, the Selling
Stockholders transferred their shares of Solid State Stock to Grant in exchange
for 4,652,555 shares of Common Stock.
The foregoing transactions were effected pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits. The following Exhibits are filed herewith and made a part
hereof:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ ----------------------------------------------------------------------------------
<C> <S>
2.1 GGI's Second Amended Plan of Reorganization under chapter 11 of the Bankruptcy
Code.
2.2 Offer to Purchase for Cash all of the Common Shares of Solid State not already
held by or on behalf of SSGI or its Affiliates at a price of Cdn $3.50 per Common
Share by SSGI.
3.1(i) Restated Certificate of Incorporation of the Company.
3.1(ii) Amended and Restated By-Laws of the Company.
4.1* Specimen Certificate for the Common Stock, par value $.001, of the Company.
4.2 Registration Rights Agreement between Grant and Elliott, dated September 19, 1997.
4.3 Amendment No. 1 to Registration Rights Agreement between Grant and Elliott, dated
October 1, 1997.
4.4 Amendment No. 2 to Registration Rights Agreement between Grant and Elliott, dated
December 17, 1997.
5.1* Opinion of Jones, Day, Reavis & Pogue as to the validity of the securities being
offered.
10.1 Loan and Security Agreement between Grant and Elliott, dated October 1, 1997.
</TABLE>
II-2
<PAGE> 118
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ ----------------------------------------------------------------------------------
<C> <S>
10.2 First Amendment to Loan and Security Agreement between Grant and Elliott, dated
December 19, 1997.
10.3 Demand Promissory Note from Grant to Elliott, dated November 26, 1997.
10.4 Subordinated Promissory Note from Grant to Elliott, dated December 18, 1997.
10.5** Stock Purchase Agreement among the Company, Elliott and Westgate, dated December
19, 1997.
10.6 Restated and Amended Employment Agreement between Grant and Larry E. Lenig, Jr.,
dated October 1, 1997.
10.7 Executive Employment Agreement between Solid State and Mitchell L. Peters, dated
November 24, 1997.
10.8* Grant Geophysical, Inc. Equity and Performance Incentive Plan.
10.9 Loan Agreement among Elliott, Westgate, Solid State and the U.S. Subsidiary, dated
October 16, 1996.
10.10 Form of Promissory Note from the U.S. Subsidiary to Elliott.
10.11 Letter Agreement among Elliott, Westgate, Solid State and the U.S. Subsidiary,
dated June 17, 1997.
10.12 Letter Agreement among Elliott, Westgate, Solid State and the U.S. Subsidiary,
dated September 4, 1997.
10.13 Letter Agreement among Elliott, Westgate, Solid State and the U.S. Subsidiary,
dated October 17, 1997.
10.14 Letter Agreement among Elliott, Westgate, Solid State and the U.S. Subsidiary,
dated November 30, 1997.
10.15 Letter Agreement between Elliott and Mitchell L. Peters, dated November 24, 1997.
21.1* Subsidiaries of the Company.
23.1* Consent of Jones, Day, Reavis & Pogue (included in Exhibit 5.1).
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of KPMG Peat Marwick LLP.
23.4 Consent of Price Waterhouse, Chartered Accountants.
24.1** Powers of Attorney.
</TABLE>
- ---------------
* To be filed by amendment.
** Filed herewith
(b) Financial Statement Schedules.
All schedules have been omitted because they are not applicable, not
required or the required information is included in the financial statements and
notes thereto.
ITEM 17. UNDERTAKINGS
(a) Acceleration of Effectiveness. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the Company pursuant to the
foregoing provisions or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Company of expenses incurred or paid by a director,
officer or controlling person of the Company in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by
II-3
<PAGE> 119
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(b) Rule 430A Prospectuses. The undersigned Registrant hereby undertakes
that:
(1) For the purpose of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide public offering thereof.
II-4
<PAGE> 120
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 1 to the Registration Statement to be signed on
its behalf by the undersigned, thereunder duly authorized, in the City of
Houston, State of Texas, on February 4, 1998.
GRANT GEOPHYSICAL, INC.
By: /s/ LARRY E. LENIG, JR.
------------------------------------
Larry E. Lenig, Jr.
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------- ------------------------------------------------- ------------------
<C> <S> <C>
/s/ LARRY E. LENIG, JR. President, Chief Executive Officer and Director February 4, 1998
- -------------------------------- (Principal Executive Officer)
Larry E. Lenig, Jr.
* Chief Financial Officer, Treasurer and Secretary February 4, 1998
- -------------------------------- (Principal Financial Officer)
Michael P. Keirnan
* Controller February 4, 1998
- -------------------------------- (Principal Accounting Officer)
Charles Ackerman
Chairman of the Board
- --------------------------------
Jonathan D. Pollock
* Director February 4, 1998
- --------------------------------
W. Richard Anderson
* Director February 4, 1998
- --------------------------------
James R. Brock
* Director February 4, 1998
- --------------------------------
J. Kelly Elliott
* Director February 4, 1998
- --------------------------------
Donald G. Russell
Director
- --------------------------------
Donald W. Wilson
</TABLE>
* The undersigned by signing his name hereto, does sign and execute this
Amendment No. 1 to the Registration Statement pursuant to the Powers of
Attorney executed by the above-named officers and directors of the Company and
which have been filed with the Securities and Exchange Commission on behalf of
such officers and directors.
By: /s/ LARRY E. LENIG, JR.
---------------------------------------------------------
Larry E. Lenig, Jr.
as Attorney-in-Fact
II-5
<PAGE> 121
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ ----------------------------------------------------------------------------------
<C> <S>
2.1 GGI's Second Amended Plan of Reorganization under chapter 11 of the Bankruptcy
Code.
2.2 Offer to Purchase for Cash all of the Common Shares of Solid State not already
held by or on behalf of SSGI or its Affiliates at a price of Cdn $3.50 per Common
Share by SSGI.
3.1(i) Restated Certificate of Incorporation of the Company.
3.1(ii) Amended and Restated By-Laws of the Company.
4.1* Specimen Certificate for the Common Stock, par value $.001, of the Company.
4.2 Registration Rights Agreement between Grant and Elliott, dated September 19, 1997.
4.3 Amendment No. 1 to Registration Rights Agreement between Grant and Elliott, dated
October 1, 1997.
4.4 Amendment No. 2 to Registration Rights Agreement between Grant and Elliott, dated
December 17, 1997.
5.1* Opinion of Jones, Day, Reavis & Pogue as to the validity of the securities being
offered.
10.1 Loan and Security Agreement between Grant and Elliott, dated October 1, 1997.
10.2 First Amendment to Loan and Security Agreement between Grant and Elliott, dated
December 19, 1997.
10.3 Demand Promissory Note from Grant to Elliott, dated November 26, 1997.
10.4 Subordinated Promissory Note from Grant to Elliott, dated December 18, 1997.
10.5** Stock Purchase Agreement among the Company, Elliott and Westgate, dated December
19, 1997.
10.6 Restated and Amended Employment Agreement between Grant and Larry E. Lenig, Jr.,
dated October 1, 1997.
10.7 Executive Employment Agreement between Solid State and Mitchell L. Peters, dated
November 24, 1997.
10.8* Grant Geophysical, Inc. Equity and Performance Incentive Plan.
10.9 Loan Agreement among Elliott, Westgate, Solid State and the U.S. Subsidiary, dated
October 16, 1996.
10.10 Form of Promissory Note from the U.S. Subsidiary to Elliott.
10.11 Letter Agreement among Elliott, Westgate, Solid State and the U.S. Subsidiary,
dated June 17, 1997.
10.12 Letter Agreement among Elliott, Westgate, Solid State and the U.S. Subsidiary,
dated September 4, 1997.
10.13 Letter Agreement among Elliott, Westgate, Solid State and the U.S. Subsidiary,
dated October 17, 1997.
10.14 Letter Agreement among Elliott, Westgate, Solid State and the U.S. Subsidiary,
dated November 30, 1997.
10.15 Letter Agreement between Elliott and Mitchell L. Peters, dated November 24, 1997.
21.1* Subsidiaries of the Company.
23.1* Consent of Jones, Day, Reavis & Pogue (included in Exhibit 5.1).
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of KPMG Peat Marwick LLP.
23.4 Consent of Price Waterhouse, Chartered Accountants.
24.1** Powers of Attorney.
</TABLE>
- ---------------
* To be filed by amendment.
** Filed herewith
<PAGE> 1
Exhibit 10.5
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT, dated as of December 18, 1997
(this "Agreement"), is made by and among Grant Geophysical, Inc., a Delaware
corporation ("Grant"), Elliott Associates, L.P., a Delaware limited partnership
("Elliott") and Westgate International, L.P., a Delaware limited partnership
("Westgate").
RECITALS:
---------
A. Elliott owns 5,963,565 shares (the "Elliott Shares") and
Westgate owns 3,341,544 shares (the "Westgate Shares," and together with the
Elliott Shares) of common stock ("Solid State Common Stock") of Solid State
Geophysical Inc., an Alberta, Canada corporation ("Solid State").
B. Grant desires to purchase, and Elliott and Westgate desire
to sell, the Elliott Shares and Westgate Shares, respectively, pursuant to the
terms and conditions of this Agreement.
C. SSGI Acquisition Corporation ("SSGI"), an Alberta, Canada
corporation and a wholly owned subsidiary of Grant, has commenced a cash tender
offer (the "Tender Offer") for all of the outstanding shares of Solid State
Common Stock not held by SSGI or its affiliates. Upon the completion of the
Tender Offer and related transactions, Grant will own 100% of the outstanding
Solid State Common Stock.
NOW, THEREFORE, in consideration of the mutual promises and
subject to the terms and conditions herein set forth, the parties hereby agree
as follows:
SECTION 1. PURCHASE AND SALE OF STOCK
--------------------------
1.1 PURCHASE AND SALE. Subject to Section 1.2, below Grant
hereby purchases from Elliott and Westgate, and Elliott and Westgate hereby sell
to Grant, the Elliott Shares and the Westgate Shares, respectively, in exchange
for 2,981,783 shares (the "Elliott Consideration") and 1,670,772 shares (the
"Westgate Consideration"), respectively, of common stock of Grant, par value US
$.001 per share ("Grant Common Stock"). Grant further agrees, in consideration
for the Elliott Shares, to assume Elliott's obligation, under that certain
letter agreement dated November 24, 1997, to purchase an option (the "Option"),
held by Mitchell L. Peters, to purchase 546,285 shares of Solid State Common
Stock held by Elliott, at an exercise price of Cdn. $.92 per share after payment
of Cdn. $50,000, for Cdn. $1,359,415.30, representing the difference between the
Tender Offer Price (as defined below) and the exercise price of the Option of
Cdn. $.92 per share multiplied by 546,285 shares, less Cdn. $50,000.
1.2 SHARE CONSIDERATION ADJUSTMENT.
(a) If the final per share price paid by SSGI pursuant to the
Tender Offer (the "Tender Offer Price") is greater than Cdn $3.50 per
share, then each of the Elliott
<PAGE> 2
Consideration and the Westgate Consideration shall be adjusted as set
forth in paragraph (b) below.
(b) Subject to paragraph (a) above, Grant shall issue
additional shares of Grant Common Stock to Elliott and Westgate,
respectively, equal to the difference between (i) the product of (A)
the Conversion Price divided by US $5.00 and (B) the applicable Shares
and (ii) the applicable Share Consideration. After the completion of
the Tender Offer, Grant shall issue such additional shares (including
any payment for fractional shares as set forth below).
(c) For purposes of this Section 1.2, (i) the "applicable
Share Consideration" shall mean, with respect to Elliott, the Elliott
Consideration and, with respect to Westgate, the Westgate
Consideration; (ii) the "applicable Shares" shall mean, with respect to
Elliott, the Elliott Shares and, with respect to Westgate, the Westgate
Shares; and (iii) the Conversion Price shall be equal to the Tender
Offer Price divided by 1.4.
(d) In the event of any adjustment pursuant to this Section
1.2, no fractional shares or scrip representing fractional shares of
Grant Common Stock shall be issued. Instead of any fractional interest
in a share of Grant Common Stock that would otherwise be deliverable
upon the adjustment as set forth above, Grant shall pay to Elliott and
Westgate an amount in cash equal to their respective fractional
interests multiplied by US $5.00.
SECTION 2. MISCELLANEOUS
-------------
2.1 GOVERNING LAW. This Agreement shall be governed by,
construed and interpreted in accordance with the internal, substantive laws of
the State of Delaware.
2.2 COUNTERPARTS. This Agreement may be executed concurrently
in two or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
2.3 AMENDMENTS. This Agreement may be amended or modified in
whole or in part only by a writing that makes reference to this Agreement
executed by each of the parties to this Agreement.
2.4 ENTIRE AGREEMENT. This Agreement and the other agreements
and instruments expressly provided for herein, together set forth the entire
understanding of the parties hereto and supersede in their entirety all prior
contracts, agreements, arrangements, communications, discussions,
representations, and warranties, whether oral or written, among the parties.
2.5 BINDING EFFECT; ASSIGNMENT. This Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and assigns. No assignment of this Agreement or of any rights or
obligations hereunder may be made by Grant (by operation or law or otherwise)
without the prior written consent of Elliott and Westgate, and any attempted
assignment without such required consents shall be void.
2
<PAGE> 3
IN WITNESS WHEREOF, the undersigned have duly executed and
delivered this Agreement as of the date first above written.
GRANT GEOPHYSICAL, INC.
By: /s/ Larry E. Lenig, Jr.
----------------------------------
Name: Larry E. Lenig, Jr.
Title: President
ELLIOTT ASSOCIATES, L.P.
By: /s/ Paul Singer
----------------------------------
Name: Paul Singer
Title: General Partner
WESTGATE INTERNATIONAL, L.P.
By: Martley International, Inc.,
attorney-in-fact
By: /s/ Paul Siner
---------------------------
Name: Paul Singer
Title: President
3
<PAGE> 1
Exhibit 24.1
In addition to the powers of attorney filed with the Registration Statement on
December 24, 1997, the following powers of attorney are filed herewith:
DIRECTOR OF
GRANT GEOPHYSICAL, INC.
REGISTRATION STATEMENT ON FORM S-1
POWER OF ATTORNEY
The undersigned director of Grant Geophysical, Inc., a
Delaware corporation (the "Corporation"), hereby constitutes and appoints
Jonathan D. Pollock and Larry E. Lenig, Jr. and each of them, with full power of
substitution and resubstitution, as attorneys-in-fact or attorney-in-fact of the
undersigned, for him and in his name, place and stead, to sign and file with the
Securities and Exchange Commission under the Securities Act of 1933 (the
"Securities Act") one or more Registration Statement(s) on Form S-1 relating to
the registration of the offering for sale of the Common Stock, $.001 par value
per share of the Corporation, with any and all amendments, supplements and
exhibits thereto, including pre-effective and post-effective amendments or
supplements or any additional registration statement filed pursuant to Rule 462
promulgated under the Securities Act, with full power and authority to do and
perform any and all acts and things whatsoever that any of said attorneys or
their substitutes may deem necessary or desirable, in his or their sole
discretion, with any such act or thing being hereby ratified and approved in all
respects without any further act or deed whatsoever.
EXECUTED as of February 4, 1998.
/s/ W. Richard Anderson
- -----------------------------
W. Richard Anderson
Director
<PAGE> 2
DIRECTOR OF
GRANT GEOPHYSICAL, INC.
REGISTRATION STATEMENT ON FORM S-1
POWER OF ATTORNEY
The undersigned director of Grant Geophysical, Inc., a
Delaware corporation (the "Corporation"), hereby constitutes and appoints
Jonathan D. Pollock and Larry E. Lenig, Jr. and each of them, with full power of
substitution and resubstitution, as attorneys-in-fact or attorney-in-fact of the
undersigned, for him and in his name, place and stead, to sign and file with the
Securities and Exchange Commission under the Securities Act of 1933 (the
"Securities Act") one or more Registration Statement(s) on Form S-1 relating to
the registration of the offering for sale of the Common Stock, $.001 par value
per share of the Corporation, with any and all amendments, supplements and
exhibits thereto, including pre-effective and post-effective amendments or
supplements or any additional registration statement filed pursuant to Rule 462
promulgated under the Securities Act, with full power and authority to do and
perform any and all acts and things whatsoever that any of said attorneys or
their substitutes may deem necessary or desirable, in his or their sole
discretion, with any such act or thing being hereby ratified and approved in all
respects without any further act or deed whatsoever.
EXECUTED as of February 4, 1998.
/s/ James R. Brock
- -----------------------------
James R. Brock
Director
