<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
(MARK ONE)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended September 30, 1998
Commission file number: 000-18816
GRANT GEOPHYSICAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0548468
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16850 PARK ROW
HOUSTON, TEXAS 77084
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 398-9503
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of November 13, 1998, 14,426,055 shares of common stock, par value
$.001 per share, were issued and outstanding. As of such date, there was no
public purchase market for shares of Grant Geophysical common stock.
1
<PAGE> 2
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets of Grant Geophysical, Inc. ("Grant" or the "Company") as of
September 30, 1998 (Unaudited) and December 31, 1997................................................... 3
Consolidated Statements of Operations:
Grant Geophysical, Inc. for the Three and Nine Months Ended September 30, 1998 (Unaudited) ............ 5
GGI Liquidating Corporation ("GGI") for the Three Months Ended September 30, 1997
(Unaudited) and the Nine Months Ended September 30, 1997........................................... 5
Consolidated Statements of Cash Flows:
Grant Geophysical, Inc. for the Nine Months Ended September 30, 1998 (Unaudited)....................... 6
GGI Liquidating Corporation for the Nine Months Ended September 30, 1997............................... 6
Notes to Consolidated Financial Statements (Unaudited)................................................... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................................ 13
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................................................ 21
Item 6. Exhibits and Reports on Form 8-K................................................................... 21
SIGNATURES...................................................................................................... 22
</TABLE>
2
<PAGE> 3
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
-------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,093 $ 5,974
Restricted cash 321 95
Accounts receivable:
Trade (net of allowance for doubtful accounts of $158
and $677 at December 31, 1997 and September 30, 1998,
respectively) 29,495 42,245
Other 2,487 1,890
Inventories 530 532
Prepaids 4,190 5,855
Work in process 2,779 4,753
-------------- --------------
Total current assets 46,895 61,344
Property, plant and equipment 73,002 92,610
Accumulated depreciation (8,498) (22,873)
-------------- --------------
Net property, plant and equipment 64,504 69,737
Multi-client data, net 5,736 8,454
Goodwill, net 36,304 36,978
Deferred issue costs, net -- 4,366
Other assets 2,265 2,964
-------------- --------------
Total assets $ 155,704 $ 183,843
============== ==============
</TABLE>
(Continued on next page)
3
<PAGE> 4
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
-------------- --------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt $ 1,158 $ 2,865
Accounts payable 16,422 21,132
Accrued expenses 10,318 10,245
Foreign income taxes payable 2,807 4,155
-------------- --------------
Total current liabilities 30,705 38,397
Long-term debt and capital lease obligations 65,409 107,575
Unearned revenue 5,443 3,157
Other liabilities and deferred credits 2,369 3,182
Subordinated note 9,786 --
Stockholders' equity:
Cumulative pay-in-kind preferred stock, $.001 par
value. Authorized 20,000, issued and outstanding
10,000 shares at December 31, 1997. Authorized,
issued and outstanding zero at September 30, 1998 10,000 --
Common stock, $.001 par value. Authorized
25,000,000 shares; issued and outstanding
14,152,555 shares at December 31, 1997 and
14,426,055 at September 30, 1998 14 14
Additional paid-in capital 41,278 41,083
Accumulated deficit (8,833) (7,462)
Accumulated other comprehensive loss (467) (2,103)
-------------- --------------
Total stockholders' equity 41,992 31,532
-------------- --------------
Total liabilities and stockholders' equity $ 155,704 $ 183,843
============== ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 5
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
GGI GRANT GGI GRANT
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
------------- | ------------- ------------- | -------------
(UNAUDITED) | (UNAUDITED) | (UNAUDITED)
| |
<S> <C> | <C> <C> | <C>
Revenues $ 25,536 | $ 50,995 $ 92,705 | $ 147,357
| |
Expenses: | |
Direct operating expenses 19,186 | 37,913 71,006 | 107,445
Other operating expenses 2,315 | 3,725 6,473 | 11,409
Depreciation and amortization 2,843 | 5,872 8,432 | 16,087
------------- | ------------- ------------- | -------------
Total costs and expense 24,344 | 47,510 85,911 | 134,941
------------- | ------------- ------------- | -------------
| |
Operating income 1,192 | 3,485 6,794 | 12,416
| |
Other income (deductions): | |
Interest expense (1,334) | (2,735) (4,037) | (7,528)
Interest income 79 | 219 279 | 708
Reorganization costs (1,763) | -- (3,543) | --
Other 2,051 | (102) 2,266 | (283)
------------- | ------------- ------------- | -------------
Total other deductions (967) | (2,618) (5,035) | (7,103)
------------- | ------------- ------------- | -------------
| |
Income before taxes 225 | 867 1,759 | 5,313
| |
Income tax expense 513 | 710 2,184 | 3,218
------------- | ------------- ------------- | -------------
| |
Net income (loss) (288) | 157 (425) | 2,095
| |
Preferred dividends -- | -- -- | 440
------------- | ------------- ------------- | -------------
| |
Net income (loss) applicable | |
to common stock (288) | 157 (425) | 1,655
============= | ============= ============= | =============
| |
INCOME PER COMMON SHARE - BASIC | |
AND DILUTED: | |
| |
Net income | $ .01 | $ 0.15
Dividend requirement on pay-in-kind | |
preferred stock | -- | (0.03)
| ------------ | -------------
| |
Net income per common share | $ .01 | $ 0.12
| ============ | =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE> 6
GRANT GEOPHYSICAL, INC AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GGI GRANT
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
------------------ | ------------------
| (UNAUDITED)
<S> <C> | <C>
CASH FLOWS FROM OPERATING ACTIVITIES: |
NET INCOME (LOSS) BEFORE DIVIDEND REQUIREMENT $ (425) | $ 2,095
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED |
IN) OPERATING ACTIVITIES: |
Depreciation and amortization expense 8,432 | 16,087
Loss (gain) on sale of fixed assets 39 | (120)
Provision for doubtful accounts -- | 450
Exchange loss 98 | 679
Other non-cash items 225 | 48
CHANGES IN ASSETS AND LIABILITIES: |
(INCREASE) DECREASE IN: |
Accounts receivable 2,375 | (12,239)
Inventories (27) | (2)
Multi-client data -- | (2,848)
Prepaids (538) | (479)
Work in process (268) | (1,974)
Other assets (1,031) | (1,168)
INCREASE (DECREASE) IN: |
Accounts payable 3,143 | 4,667
Accrued expenses 830 | (109)
Foreign income tax payable 1,767 | 1,348
Other liabilities and deferred credits (2,320) | (1,235)
CHANGE IN PRE-PETITION LIABILITIES SUBJECT TO CHAPTER 11 CASE: |
Accounts payable (2,226) | --
Accrued expenses (1,732) | --
Foreign income tax payable (194) | --
Other liabilities and deferred credits (3,622) | --
------------- | -------------
|
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,526 | 5,200
|
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: |
Capital expenditures, net (6,751) | (18,031)
Proceeds from sale of assets 20 | 649
Acquisition of Interactive Seismic Imaging -- | (2,988)
Restricted cash -- | 226
------------- | -------------
|
NET CASH USED IN INVESTING ACTIVITIES (6,731) | (20,144)
</TABLE>
(Continued on next page)
6
<PAGE> 7
GRANT GEOPHYSICAL, INC AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GGI GRANT
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
------------------ | ------------------
| (UNAUDITED)
<S> <C> |<C>
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: |
Debt issue costs -- | (4,597)
Common stock issue costs -- | (195)
Redemption of preferred stock -- | (10,000)
Dividends paid -- | (723)
Borrowings made during the period 4,207 | 105,020
Repayment on borrowings during the period (1,838) | (75,249)
Pre-petition liabilities subject to chapter 11 case: |
Borrowings under credit facility 49,385 | --
Repayment on borrowings (50,465) | --
------------- | -------------
|
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,289 | 14,256
------------- | -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (238) | (431)
------------- | -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,154) | (1,119)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,772 | 7,093
------------- | -------------
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,618 | $ 5,974
============= | =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
7
<PAGE> 8
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
Effective September 30, 1997, in connection with a plan of reorganization
(the "Plan") for GGI Liquidating Corporation, ("GGI"), Grant Geophysical, Inc.
("Grant" or the "Company") acquired substantially all of the assets and assumed
certain liabilities of GGI. Elliott Associates L.P. ("Elliott") and Westgate
International, L.P. ("Westgate") (collectively known as "the Principal
Stockholders") own 85.4% of the issued and outstanding common stock, $.001 par
value ("Grant Common 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 purchase price was allocated between the fair value of the GGI assets
purchased and liabilities assumed, and Grant recorded goodwill of approximately
$21.3 million. The effects of the acquisition have been reflected in Grant's
assets and liabilities at that date.
At September 30, 1997, Elliott held 5,888,565 shares or 40.7% and Westgate
held 3,291,544 shares, or 23.3% of the outstanding common shares of Solid State
Geophysical Inc. ("Solid State Stock"). As of September 30, 1997, Elliott and
Westgate combined owned a controlling interest in both Solid State Geophysical
Inc. ("Solid State") and Grant. As a result, as of that date, Elliott and
Westgate were deemed to have transferred their ownership in Solid State to Grant
in exchange for 4,590,055 shares of Grant Common Stock. This transaction was
accounted for as an exchange of ownership interests between entities under
common control and the assets and liabilities transferred were accounted for at
historical cost in a manner similar to a pooling-of-interests. In November 1997,
Grant initiated a tender offer (the "Tender Offer') for all of the outstanding
shares of Solid State Stock not held by Grant. In connection with the Tender
Offer, Elliott and Westgate transferred their ownership in Solid State to Grant
in exchange for an aggregate 4,652,555 shares of Grant Common Stock and agreed
to loan Grant $15.8 million 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, Grant held approximately 99% of the
outstanding shares of Solid State Stock. On December 23, 1997, because Grant
acquired over 90% of the outstanding shares of Solid State Stock that it did not
already own, Grant 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 these statutory
rights were exercised, Solid State became an indirect wholly owned subsidiary of
Grant. The acquisition of the unaffiliated minority interest under the Tender
Offer was accounted for under the purchase method of accounting at the date of
acceptance. Grant recorded goodwill of approximately $15.3 million in connection
with the acquisition of the unaffiliated minority interest.
On July 29, 1998, Grant, through a wholly owned subsidiary, purchased,
effective July 1, 1998, the outstanding partnership interest in Interactive
Seismic Imaging ("ISI"), a seismic data processing company, for $3.6 million in
cash. Grant had been a 10% owner of ISI since its formation in 1994 and will
integrate the ISI operation into its domestic operational entity.
As a result, Grant's consolidated balance sheet as of December 31, 1997 and
September 30, 1998 and statement of operations and cash flows for the three and
nine months ended September 30, 1998 are presented using Grant's new basis of
accounting, while the consolidated statements of operations and cash flows of
GGI for the three and nine months ended September 30, 1997 are presented using
GGI's historical cost basis of accounting.
Grant is a holding company with no independent operations other than its
investments in its subsidiaries. Grant Geophysical Corp., Grant Geophysical do
Brasil Ltda., Grant Geophysical (Int'l), Inc., P.T. Grant Geophysical Indonesia,
Recursos Energeticos Ltda., Advanced Seismic Technology, Inc., Solid State
Geophysical Inc., Solid State Internacional Ingenieria C.A., Solid State
Geophysical Corp., and SSGI Acquisition Corp. (the "Subsidiary Guarantors")
represent all of the indirect and direct wholly owned subsidiaries of Grant.
Grant conducts all of its operations through its subsidiaries. The Notes (see
Note 3) are fully, unconditionally, jointly and severally guaranteed by the
Subsidiary Guarantors, and therefore, separate financial statements of the
Subsidiary Guarantors will not be presented. Management has determined that the
information presented by such separate financial statements of the Subsidiary
Guarantors is not material to investors.
8
<PAGE> 9
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The balance sheet of Grant as of September 30, 1998 and the related
statements of operations and cash flows for the three and nine months ended
September 30, 1998 and GGI's statements of operations for the three months ended
September 30, 1997 are unaudited. GGI's statement of operations and cash flows
for the nine months ended September 30, 1997 are audited. In the opinion of
management, the accompanying unaudited condensed financial statements of Grant
and its consolidated subsidiaries contain all adjustments necessary to present
fairly the financial position as of September 30, 1998 and the results of
operations for the three and nine months ended September 30, 1998. The
consolidated financial statements of both Grant and GGI should be read in
conjunction with the audited financial statements and footnotes for the year
ended December 31, 1997, included in the Company's Form 10-K, as filed with the
Securities and Exchange Commission (the "Commission").
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.
Income (Loss) Per Common Share
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
specifies new measurement, presentation and disclosure requirements for earnings
per share and is required to be applied retroactively upon initial adoption.
Grant has adopted SFAS No. 128 effective December 31, 1997. Earnings per share
data have not been presented for GGI as this information is not meaningful.
Basic income (loss) per common share is computed based upon the weighted
average number of common shares outstanding during each period without any
dilutive effects considered. Diluted income (loss) per common share reflects
dilution for all potentially dilutive securities including warrants, stock
options and convertible securities. The income (loss) is adjusted for by
cumulative preferred stock dividends in calculating net income (loss)
attributable to the common shareholder.
(3) NOTES PAYABLE
On February 18, 1998, Grant completed the sale of $100 million aggregate
principal amount of its 9 3/4% Senior Notes, due 2008 (the "Notes"). The Notes
bear interest from February 18, 1998, at the rate per annum set forth above
payable semi-annually on February 15 and August 15 of each year, commencing
August 15, 1998 in the amount of $4.8 million. The net proceeds from the sale of
the Notes were approximately $95.2 million after deducting the discount on the
sale and certain other fees and expenses. Grant used the proceeds to repay
approximately $74.5 million (approximately $73.0 million in principal and $1.5
million in interest) of the outstanding balance of debt and interest existing at
December 31, 1997.
In connection with the sale of the Notes, the Company entered into a
Registration Rights Agreement pursuant to which the Company agreed to file with
the Commission an Exchange Offer Registration Statement (the "Registration
Statement"). The Registration Statement was filed on March 24, 1998, amended on
May 8, 1998 and became effective on May 13, 1998.
In connection with the redemption of the cumulative pay-in-kind preferred
stock, par value $.001 per share ("Preferred Stock") (see Note 8), held by
Westgate, on June 5, 1998, Elliott agreed to amend the Credit Facility to
increase the maximum borrowing capacity from $5 million to $15 million and to
extend the term of the facility from March 31, 1999 to March 31, 2000. The
current amount outstanding in the facility is $5.5 million.
9
<PAGE> 10
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(4) EMPLOYEE BENEFIT PLANS
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. The Incentive Plan was amended in September 1998 to increase the
number of shares reserved for issuance under the Incentive Plan from 1,450,000
shares of Grant Common Stock to 1,900,000 shares of Grant Common Stock. 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 non-employee 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 November 13, 1998,
Awards covering 1,611,600 shares have been made by the Board of Directors. The
Awards consist of 1,575,600 nonstatutory stock options that will vest annually
in equal one-third increments beginning on December 31, 1998. All options have
an average exercise price of $5.76 per share (range of $4.75 to $6.84 per
share), subject to adjustment in certain circumstances. In addition, 6,000
restricted shares (36,000 total restricted shares) were granted to each
non-employee director. One-half (or 3,000) of such shares became unrestricted on
August 18, 1998 and the remaining 3,000 will become unrestricted on February 18,
1999, subject to the satisfaction of certain conditions set forth under the
Incentive Plan.
(5) CONTINGENCIES
Grant is involved in various claims and legal actions arising in the
ordinary course of business. Management of Grant is of the opinion that none of
the claims and actions are likely to have a material impact on its financial
condition.
On December 11, 1997, certain persons, acting through an "ad hoc" committee
(the "Plaintiffs") commenced a lawsuit in the Bankruptcy Court against Grant,
GGI, Elliott, Westgate and a subsidiary of Grant. The lawsuit alleged that (i)
GGI and Elliott breached their obligations under the Plan by seeking to complete
the acquisition of Solid State prior to commencing a subscription offering to
purchase Grant Common Stock, (ii) the acquisition of Solid State and the certain
related transactions were unfair to the Plaintiffs because they diluted the
value of the Common Stock to be issued under such subscription offering and
impair Grant's equity value and (iii) the acquisition of Solid State and certain
related transactions could and should have been, but were not, adequately
disclosed in the disclosure statement filed with the United States Bankruptcy
Court for the District of Delaware (the "Bankruptcy Court") regarding the Plan.
The Plaintiffs had 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
of Solid State 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. During the discovery process
for the lawsuit, the parties began to discuss a settlement. These discussions
led to a settlement of the lawsuit on June 19, 1998 (the "Settlement"). Under
the terms of the Settlement, in exchange for a full and complete release of all
of the Plaintiffs' claims against Elliott, Westgate, the Company and their
respective officers, directors, partners, employees, agents, subsidiaries,
affiliates, successors and assigns relating to or arising out of the bankruptcy
proceedings of GGI and a dismissal of the lawsuit, Elliott paid the Plaintiffs
$150,000 for reimbursement of legal expenses, and permitted the Plaintiffs to
purchase Grant Common
10
<PAGE> 11
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Stock in the subscription offering at a discounted subscription purchase price
of $4.75 per share. In addition, Elliott has agreed to indemnify Grant against
any liability that they may incur in connection with the lawsuit. Nevertheless,
other eligible subscribers in the subscription offering who did not execute a
release in connection with the subscription offering could commence other
lawsuits related to the Plan, which may not be subject to indemnification by
Elliott, and which could have an adverse effect on Grant's business, reputation,
operating results and financial condition.
Grant is also involved in or threatened with various claims and legal
actions 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.
(6) SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Non-cash investing and financing activities consisted of the following
(amounts in thousands):
<TABLE>
<CAPTION>
GGI GRANT
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998
------------- | -------------
| (UNAUDITED)
<S> <C> | <C>
CASH PAID FOR INTEREST AND TAXES WAS AS FOLLOWS: |
Taxes, net of refunds $ 2,037 | $ 3,181
Interest, net of amounts capitalized 3,742 | 6,490
|
NON-CASH INVESTING AND FINANCING ACTIVITIES: |
Property, plant and equipment debt additions $ 1,483 | $ 3,200
Debenture conversion 80 | --
Prepaid insurance debt additions -- | 1,186
</TABLE>
11
<PAGE> 12
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(7) ADOPTION OF ACCOUNTING STANDARDS
Effective January 1, 1998, Grant adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting and display of comprehensive income and its
components in a full set of financial statements. Comprehensive income includes
all changes in a company's equity, including, among other things, foreign
currency translation adjustments, notes receivable from employee stock ownership
plans, deferred gains (losses) on hedging activities, and unrealized gains
(losses) on marketable securities classified as available-for-sale. Grant's and
GGI's total comprehensive earnings which consist of foreign currency translation
adjustments are as follows for the periods presented.
<TABLE>
<CAPTION>
GGI GRANT
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
------------------ | ------------------
(UNAUDITED) | (UNAUDITED)
<S> <C> | <C>
Net income (loss) $ (425) | $ 2,095
Other comprehensive income - (loss) -- | (1,636)
-------------- | --------------
|
Total comprehensive earnings (loss) $ (425) | $ 459
============== | ==============
</TABLE>
(8) STOCKHOLDERS' EQUITY
On June 5, 1998 the Company redeemed 10,000 shares of its Preferred
Stock, held by Westgate, representing all of the outstanding shares of Preferred
Stock, in the aggregate amount of $10.7 million, representing the liquidation
amount of such shares of Preferred Stock, together with all accumulated, accrued
and unpaid dividends. Upon redemption, the Preferred Shares were canceled,
retired and eliminated from the shares that the Company is authorized to issue.
(9) SUBSCRIPTION OFFERING
Pursuant to the Plan, the Company was required to conduct a subscription
offering (the "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 provided 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") could participate in the Subscription Offering. Because Elliott
and certain of its affiliates, as interest holders under the Plan, were entitled
to purchase 1,356,231 shares of Grant Common Stock in an offering by the
Company, the Principal Stockholders offered the balance of such shares of Grant
Common Stock to the Eligible Subscribers pursuant to the Subscription Offering.
The Company registered the shares of Grant Common Stock with the Commission
pursuant to the Subscription Offering. The registration statement became
effective on July 7, 1998, and rights to subscribe for shares of Common Stock
pursuant to the Subscription Offering expired if not exercised on August 24,
1998. As a result of the Subscription Offering a total of 2,080,722 of shares
were subscribed. The total purchase price for these shares received by the
Principal Shareholders was approximately $9,918,000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Grant was formed in September 1997, and on September 30, 1997, acquired
substantially all of the assets and assumed certain liabilities of GGI
Liquidating Corporation ("GGI"). On December 23, 1997, Grant, through a wholly
owned Canadian subsidiary, acquired all of the outstanding shares of Solid State
Geophysical Inc. ("Solid State").
The Company's business activities involve the performance of land and
transition zone seismic data acquisition and data processing services 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. As
of November 13, 1998, the Company was operating or mobilizing 16 seismic data
acquisition crews, consisting of 13 land and three transition zone crews,
utilizing approximately 35,000 seismic recording channels.
On July 29, 1998, Grant, through a wholly owned subsidiary, purchased,
effective July 1, 1998, the outstanding partnership interest in Interactive
Seismic Imaging ("ISI"), a seismic data processing company, for $3.6 million in
cash. Grant had been a 10% owner of ISI since its formation in 1994 and will
integrate the ISI operation into its domestic operational entity. ISI currently
provides seismic data processing services through offices located in Midland and
Dallas, Texas. Grant is expanding ISI's capabilities through the establishment
of a third processing center located at Grant's Houston offices. Grant believes
that the purchase of ISI will complement its existing services and thereby
improve its competitive position with existing and potential customers.
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 a number of factors, including
an overly rapid expansion in the United States and Latin American markets, which
contributed to poor operational results in these markets, the attempted
development of a proprietary data recording system, which did not meet operating
expectations and a lack of available capital, which led to a severe working
capital shortage. 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 September 30, 1997 (the "Effective Date"), with Grant's purchase
of substantially all of the assets and assumption of certain liabilities of GGI.
As part of the Plan, GGI will be dissolved and will cease to exist once the
remainder of its assets are distributed to its creditors.
The historical results of operations of the Company for the three and nine
months ended September 30, 1998 are not directly comparable to the results of
operations of GGI for the three and nine months ended September 30, 1997 due to
the effects of the acquisition of Solid State and ISI.
RESULTS OF OPERATIONS
THE COMPANY'S THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH GGI'S THREE
MONTHS ENDED SEPTEMBER 30, 1997
Revenues. Consolidated revenue increased $25.5 million, or 100%, from $25.5
million for GGI for the three months ended September 30, 1997 to $51.0 million
in revenue for the Company for the three months ended September 30, 1998. This
increase was the result of growth in revenues from all operating regions. These
include Latin America, the Far East, United States and Canada. The inclusion of
Solid State's results of operations also contributed significantly to the
revenue increase. In the aggregate, Solid State's operations added $12.6 million
to revenue for the third quarter of 1998.
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Revenues from the southern United States data acquisition operations
increased $2.5 million, or 16%, from $15.5 million for GGI for the quarter ended
September 30, 1997 to $18.0 million for the Company for the quarter ended
September 30, 1998. This increase was primarily attributable to the addition of
one Solid State crew as well as to increased crew productivity as a result of a
higher channel count per crew and a more efficient use of both equipment and
personnel throughout the region. The Company and GGI operated six seismic data
acquisition crews continuously in the southern United States during the three
months ended September 30, 1997 and 1998.
Revenues from Canada and the northern United States data acquisition
operations were $7.6 million for the Company's quarter ended September 30, 1998
compared to zero for GGI for the same period in 1997. The Canadian seismic
business is seasonal with the greatest activity occurring during the months of
October through March. Typically during the spring and summer months, when
seismic activity decreases in Canada, the Company (through Solid State) markets
its services to oil and gas companies in both Canada and the northern United
States. The Company operated as many as four land seismic crews in the region
during the third quarter of 1998. Two crews operated in Canada and two in the
northern United States. GGI had no operations in Canada or the northern United
States during the same period in 1997.
The Company's multi-client data acquisition activities in the United States
and Canada contributed significantly to the quarter ended September 30, 1998.
The Company has completed or is conducting eleven data library projects totaling
approximately 1,440 square miles in Texas, California and Canada. At September
30, 1998, 341 square miles had been completed and an additional 404 square miles
are scheduled for completion by the end of the year. The remaining 695 miles are
to be completed in 1999. Average underwriting on programs completed or in
progress is approximately 88%. The Company expects to continue to expand its
strategy of building a strong multi-client data library and has identified and
is currently evaluating projects totaling an additional 1,000 square miles for
possible acquisition in 1999. GGI had no multi-client data activity. Revenues
associated with the underwriters' portion of multi-client data programs is
recognized as part of the data acquisition revenues discussed above in the South
U.S., North U.S. and Canada.
Revenues from the Far East increased $6.8 million, or 203%, from $3.4
million for GGI for the third quarter of 1997 to $10.2 million for the Company
for the third quarter of 1998. During the third quarter of 1997, GGI's Far East
operations consisted of one land crew and one transition zone crew operating in
Bangladesh. During the third quarter of 1998, the Company operated as many as
four crews in the region; two crews in Bangladesh and two crews in Indonesia.
Revenues from Latin America increased $8.1 million, or 122%, from $6.6
million for GGI for the quarter ended September 30, 1997 to $14.8 million for
the Company for the quarter ended September 30, 1998. During the third quarter
of 1997, GGI's Latin American operations consisted of three land seismic data
acquisition crews operating in Brazil, Ecuador and, beginning in late September
1997, one crew in Guatemala. During the third quarter of 1998, the Company
operated as many as five seismic crews in the region, in Bolivia, Colombia,
Ecuador and Guatemala. The Brazilian crew completed operations in early April
1998 and the Company acquired the Bolivian operations in the Solid State
acquisition in December 1997. As of November 13, 1998 the Company is operating
three crews in Latin America: one each in Bolivia, Ecuador and Guatemala. Both
the Bolivia and Guatemala projects are expected to be completed during December
1998.
Revenues from data processing operations were $470,000 for the Company's
quarter ended September 30, 1998 compared to zero for GGI for the same period in
1997. The Company's previously discussed purchase of ISI was effective on July
1, 1998. The third quarter revenues were from operations in the Company's
Midland and Dallas centers. The new Houston center is expected to be operational
in December 1998. GGI had no data processing capabilities.
Expenses. Operating expenses of the Company as a percentage of revenues
decreased to 74% for the three months ended September 30, 1998 from 75% for GGI
for the three months ended September 30, 1997. This percentage decrease can be
attributed to a continued improvement in operating efficiency most notably in
the southern United States. Operating expenses during the third quarter of 1998
increased $18.7 million to $37.9 million for the Company compared to $19.2
million for GGI's same period ended September 30, 1997. This increase is a
result of the revenue increases experienced in all the operating areas and
revenue increases directly from the acquisition of Solid State.
Other operating expenses increased $1.4 million, or 61%, to $3.7 million
for the Company for the quarter ended September 30, 1998 from $2.3 million for
GGI for the quarter ended September 30, 1997. The primary reason for
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the increase is the inclusion of Solid State expenses. In addition, the Company
has incurred costs for the development of new markets and increased reserves for
incentive and performance bonuses and provisions for doubtful accounts. Other
operating expenses decreased as a percentage of revenue to 7% in third quarter
of 1998 from 9% in same period in 1997. This decrease is the result of
significant revenue increases in the third quarter 1998 compared to 1997.
Depreciation and amortization increased $3.0 million, or 107% to $5.9
million for the Company for the quarter ended September 30, 1998 from $2.8
million for GGI for the quarter ended September 30, 1997. This increase is
attributable to $2.0 million in depreciation on the acquired Solid State assets
and amortization of goodwill of $372,000, neither of which was incurred by GGI
during the third quarter of 1997. Also contributing to the increase was
depreciation on new assets purchased by the Company during the twelve-month
period ended September 30, 1998.
Other Income (Deductions). Interest expense increased $1.4 million, or
108%, to $2.7 million for the Company for the quarter ended September 30, 1998
from $1.3 million for GGI for the quarter ended September 30, 1997. This
increase was the result of the increase in debt resulting from the sale on
February 18, 1998 of $100 million of 9 3/4% senior notes due 2008. Proceeds from
the sale were used to retire substantially all of the Company's outstanding
indebtedness, to fund capital expenditures and provide working capital.
Reorganization costs of $1.7 million for the quarter ended September 30,
1997 related to charges incurred in connection with GGI's reorganization, which
began in December 1996 and was completed in September 1997. The Company incurred
no reorganization charges in the three months ended September 30, 1998 and none
are expected to be incurred in the future.
For the three months ended September 30, 1998 the other deductions of
$102,000 relate primarily to foreign exchange losses incurred in Canada. In July
of 1997 GGI experienced a gain of approximately $2.4 million associated with the
receipt of a previously written off account receivable.
Tax Provision. The income tax provision in both periods consisted of income
taxes in foreign countries. This includes provisions for taxes in Colombia,
Ecuador, Guatemala, Bangladesh and Indonesia. No provision for United States
federal income tax was made by GGI, and the Company, with respect to the United
States and Canada, for either period as each had net loss carryforwards
available.
THE COMPANY'S NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH GGI'S NINE
MONTHS ENDED SEPTEMBER 30, 1997
Revenues. Consolidated revenues increased $54.7 million, or 59%, from $92.7
million for GGI for the nine months ended September 30, 1997 to $147.4 million
in revenues for the Company for the nine months ended September 30, 1998. This
increase was the result of growth in revenues in the southern United States, the
Far East and the inclusion of Solid State's results of operation. In the
aggregate, Solid State's operations added $34.5 million to revenue for first
nine months of 1998.
Revenues from the southern United States data acquisition operations
increased $13.6 million, or 33%, from $41.3 million for GGI for the nine months
ended September 30, 1997 to $54.9 million for the Company for the nine months
ended September 30, 1998. This increase was attributable to the addition of one
Solid State crew for the entire nine months of 1998, the addition of a new and
more efficient recording system, a higher channel count per crew which resulted
in increased productivity and increased revenue from a cost-plus transition zone
crew operating in Louisiana. The Company and GGI operated six seismic data
acquisition crews continuously in the southern United States during the nine
months ended September 30, 1997 and 1998.
Revenues from Canada and the northern United States data acquisition
operations were $19.0 million for the Company's nine months ended September 30,
1998 compared to zero for GGI for the same period in 1997. The Canadian seismic
business is seasonal with most of the crew activity occurring during the months
of October through March. Typically during the spring and summer months, when
seismic activity decreases in Canada, the Company (through Solid State) markets
its services to oil and gas companies in both Canada and in the northern United
States. The Company operated as many as six land seismic crews in Canada and the
northern United States during the first nine months of 1998. GGI had no
operations in Canada or the northern United States during the same period in
1997.
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The Company began its multi-client data acquisition activities in the
United States and Canada during the nine months ended September 30, 1998. The
most significant activity occurred in the three months ended September 30, 1998.
The Company has completed or is conducting eleven data library projects totaling
approximately 1,440 square miles in Texas, California and Canada. At September
30, 1998, 341 square miles had been completed and an additional 404 square miles
are scheduled for completion by the end of the year. The remaining 695 miles are
to be completed in 1999. Average underwriting on programs completed and in
progress is approximately 88%. The Company expects to continue to expand its
strategy of building a strong multi-client data library and has identified and
is currently evaluating projects totaling an additional 1,000 square miles for
possible acquisition in 1999. GGI had no multi-client data activity. Revenues
associated with the underwriters' portion of multi-client data programs is
recognized as part of the data acquisition revenues discussed above in the South
U.S., North U.S. and Canada.
Revenues from the Far East increased $17.7 million, or 199%, from $8.9
million for GGI for the nine months ended September 30, 1997 to $26.5 million
for the Company for the nine months ended September 30, 1998. During the first
nine months of 1997 GGI's Far East operations consisted of two crews in
Bangladesh. One land crew operated for the entire period and one transition zone
crew mobilized and began operations in March 1997. This is compared to as many
as five crews that have operated during the first nine months of 1998.
Revenues from Latin America increased $3.9 million, or 9%, from $42.6
million for GGI for the nine months ended September 30, 1997 to $46.5 million
for the Company for the nine months ended September 30, 1998. During the first
nine months of 1997, GGI's Latin American operations consisted of as many as
eight land seismic data acquisition crews operating in Colombia, Ecuador, Brazil
and Peru. GGI completed operations in Peru and withdrew in January 1997. During
the first nine months of 1998, the Company operated as many as seven seismic
crews in the region in Bolivia, Brazil, Colombia, Ecuador and Guatemala. The
increase in revenue between the two periods was due primarily to the acquisition
of the Bolivian operations as a result of the purchase of Solid State. At
November 13, 1998 the Company is operating three crews in Latin America; one
each in Ecuador, Guatemala and Bolivia.
Revenues from data processing operations were $470,000 for the Company's
nine months ended September 30, 1998 compared to zero for GGI for the same
period in 1997. The Company's previously discussed purchase of ISI was effective
on July 1, 1998. The third quarter 1998 revenues were from operations in the
Company's Midland and Dallas centers. The new Houston center is expected to be
operational in December 1998. GGI had no data processing capabilities.
Expenses. Operating expenses of the Company as a percentage of revenues
decreased to 73% for the nine months ended September 30, 1998 from 77% for GGI
for the nine months ended September 30, 1997. This percentage decrease can be
attributed to an improvement in operating efficiency primarily in the southern
United States. Operating expenses during the nine months ended of 1998 increased
$36.4 million to $107.4 million for the Company compared to $71.0 million for
GGI's same period ended September 30, 1997. This increase is a result of the
revenue increases experienced in the United States and the Far East and revenue
increases directly from the acquisition of Solid State.
Other operating expenses increased $4.9 million, or 76%, to $11.4 million
for the Company for the nine months ended September 30, 1998 from $6.5 million
for GGI for the nine months ended September 30, 1997. Other operating expenses
also increased as a percentage of revenue to 8% in the first nine months of 1998
from 7% in same period in 1997. The primary reason for the increase is the
inclusion of Solid State's expenses. In addition, the Company has incurred costs
for the development of new markets, increased reserves for incentive,
performance bonuses and increased provision for doubtful accounts.
Depreciation and amortization increased $7.6 million, or 90% to $16.1
million for the Company for the nine months ended September 30, 1998 from $8.4
million for GGI for the nine months ended September 30, 1997. This increase is
primarily attributable to $5.4 million in depreciation on the acquired Solid
State assets and amortization of goodwill of $1.1 million, neither of which was
incurred by GGI during the nine months ended September 30, 1997. Also
contributing to the increase was depreciation on new assets purchased during the
twelve-month period ended September 30, 1998.
Other Income (Deductions). Interest expense increased $3.5 million, or 88%,
to $7.5 million for the Company for the nine months ended September 30, 1998
from $4.0 million for GGI for the nine months ended September 30, 1997. This
increase was the result of interest on debt both incurred and assumed by the
Company as a result of the
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Solid State acquisition and from the sale on February 18, 1998 of $100 million
of 9 3/4% senior notes due 2008. Proceeds from the sale were used to retire
substantially all of the Company's outstanding indebtedness, to fund capital
expenditures and provide working capital.
Reorganization costs of $3.5 million for the nine months ended September
30, 1997 related to charges incurred in connection with GGI's reorganization,
which began in December 1996 and was completed in September 1997. The Company
incurred no reorganization charges in the nine months ended September 30, 1998
and none are expected to be incurred in the future.
Other deduction of $283,000 for the nine months ended September 30, 1998
relate to losses from foreign currency transactions occurring primarily in
Canada. In July of 1997 GGI experienced a gain of approximately $2.4 million
associated with the receipt of a previously written off account receivable.
Tax Provision. The income tax provision for the Company and GGI consisted
of income taxes in foreign countries. This includes provisions for taxes in
Colombia, Ecuador, Guatemala, Bangladesh and Indonesia. No provision for United
States federal income tax was made by GGI, and the Company, with respect to the
United States and Canada, for either period as each had net loss carryforwards
available.
LIQUIDITY AND CAPITAL RESOURCES
The Company's internal sources of liquidity are its cash balances
(approximately $5.5 million at November 6, 1998) and cash flow from operations.
External sources include the unutilized portion ($9.5 million at November 13,
1998) of a credit facility entered into with Elliott on October 1, 1997, as
amended (the "Credit Facility"), equipment financing and trade credit. The
Credit Facility contains a $15 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 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.
On February 18, 1998, the Company issued $100 million aggregate principal
amount of 9 3/4% Senior Notes due 2008 (the "Notes"). The Notes bear interest at
9 3/4% per annum and were sold at a discount to yield 9 7/8% per annum. The net
proceeds from the sale of the Notes were used to retire substantially all of
Grant's then outstanding indebtedness, purchase certain leased equipment and
provide for working capital. In connection with the sale of the Notes, the
Company entered into a Registration Rights Agreement pursuant to which the
Company agreed to file with the Commission an Exchange Offer Registration
Statement (the "Registration Statement"). The Registration Statement was filed
on March 24, 1998, amended on May 8, 1998 and became effective on May 13, 1998.
The Indenture imposes certain limitations on the ability of the Company and
its Restricted Subsidiaries (as defined in the Indenture) to, among other
things, incur additional indebtedness (including capital leases), incur liens,
pay dividends or make certain other restricted payments, consummate certain
asset sales, enter into certain transactions with affiliates, issue preferred
stock, merge or consolidate with any other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of the assets of
the Company or any of its Restricted Subsidiaries. In addition, 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.
On June 5, 1998 the Company redeemed 10,000 shares of the cumulative
pay-in-kind preferred stock, par value $.001 per share ("Preferred Stock"), held
by Westgate, representing all of the outstanding shares of Preferred Stock, in
the aggregate amount of $10.7 million, representing the liquidation amount of
such shares of Preferred Stock, together with all accumulated, accrued and
unpaid dividends. Upon redemption the Preferred Shares were canceled, retired
and eliminated from the shares that the Company is authorized to issue. In
conjunction with the redemption Elliott agreed to amend the Credit Facility to
increase the maximum borrowing capacity from $5 million to $15 million and to
extend the term of the facility from March 31, 1999 to March 31, 2000.
At November 13, 1998, the Company's total indebtedness was approximately
$111.2 million (including approximately $100,000 under letters of credit).
Included in the total indebtedness is a new equipment financing agreement dated
July 2, 1998 with an equipment manufacturer for $3.2 million, $3.0 million of
which is still outstanding, and a new premium financing agreement dated
August 2, 1998 for $1.2 million, $800,000 of which is still outstanding, to
finance the purchase of the Company's annual insurance policies. The Company's
total indebtedness is comprised of $99.2 million aggregate principal amount
of the Notes and $11.1
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million of combined loans and capitalized leases incurred for the purpose of
financing capital expenditures and $800,000 to finance the purchase of annual
insurance policies and $100,000 under letters of credit.
The Company's principal uses of liquidity will be to provide working
capital, finance capital expenditures, finance the unfunded portion of
multi-client data acquisition projects, 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 49% and 50% of total revenues for the
three and nine months ended September 30, 1998.
Capital expenditures are made by the Company primarily to purchase seismic
data acquisition equipment. The Company made approximately $12.4 million of
capital expenditures during the fourth quarter of 1997 and budgeted
approximately $24 million of capital expenditures in 1998 to upgrade and expand
its seismic data acquisition capability and equipment. Capital expenditures for
the nine months ended September 30, 1998 were $21.2 million.
The Company will require substantial cash flow to continue operations on a
satisfactory basis, complete its capital expenditure program, fully implement
its business strategy and meet its principal and interest obligations with
respect to the Notes and its other indebtedness. The Company anticipates that
available cash, cash flow generated from operations and borrowings under the
Credit Facility will provide sufficient liquidity to fund these requirements for
the foreseeable future. However, the Company's ability to meet its debt service
and other obligations depends on its future performance, which in turn is
subject to general economic conditions and other factors beyond the Company's
control. If the Company is unable to generate sufficient cash flow from
operations or otherwise to comply with the terms of the Indenture, the Credit
Facility or its other debt instruments, it may be required to refinance all or a
portion of its existing debt or obtain additional financing. There can be no
assurance that such refinancing or additional financing will be available on
terms acceptable to the Company.
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 Colombia. 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 but has
elected to use forward foreign currency exchange rate hedging arrangements in
certain foreign locations.
The Company's operating results were negatively impacted by foreign
exchange losses of approximately $156,000 and $679,000 during the three and nine
months ended September 30, 1998, 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.
RECENT ACCOUNTING PRONOUNCEMENTS
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.
The Company will adopt SFAS 131 in the fourth quarter of 1998.
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In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" which will supersede the
disclosure requirements of SFAS No. 87, "Employers' Accounting for Pensions",
SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits", and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." This
statement addresses disclosures only and will require the Company to provide a
reconciliation of the beginning and ending balances of the benefit obligation
and the fair value of plan assets in addition to disclosures already presented.
The Company will be required to implement this statement in 1999.
YEAR 2000 COMPLIANCE
The Company is completing a formal plan to address Year 2000 ("Y2K")issues
as they relate to the Company's business and its operations. In accordance with
that plan, the Company has evaluated all internal hardware and software used in
its operations. The Company will be identifying all external relationships and
mailing each entity an internally prepared questionnaire addressing their state
of readiness regarding Year 2000 issues. The Company is preparing a replacement
schedule for hardware and software that is not Year 2000 compliant that has been
identified to date. In addition, the Company is preparing a contingency plan to
address any unidentified internal or external hardware and software that is not
Year 2000 compliant. The Company estimates that it will complete its plan,
including remedial actions, by the end of 1999.
Incremental out-of-pocket costs incurred to date to address Y2K have
been approximately $800,000. The Company estimates an additional $1.2 million
will be expended during the remainder of 1998 and 1999 relating to this issue.
These costs have been and are expected to be funded by cash flows from
operations.
The Company believes that it will formulate a compliance plan that will
mitigate the risk that the Y2K issue will have a material adverse affect on the
Company. The ultimate impact of this issue on the Company is uncertain.
Suppliers' failure to deliver critical components, third-parties' failure to
supply power and/or telecommunication systems to the Company at its offices or
its crew working in the field, or the Company's failure to complete, in a timely
manner, the updating of computer-controlled equipment could result in delayed
delivery of products to customers, which could have a material adverse effect on
earnings and cash flow. In addition, customers' non-compliance could result in
the loss of customers or a customer's inability to purchase or pay for products,
which could have a material adverse effect on the earnings and cash flow.
The Company has not yet finished its assessment, renovation and testing
of all areas of Y2K compliance. Therefore, there can be no assurance that the
Y2K issue will not have a material adverse effect on the Company's operations,
results of operations or cash flows.
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
From time to time, information provided by the Company, statements by its
employees or information included in written material, such as press releases
and filings (including this Form 10-Q Quarterly Report) with the Commission
(including portions of the "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and certain other sections
contained in such filings) may contain "forward-looking" statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
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. 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. Investors 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 of Solid State
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, the Year 2000 issue 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.
20
<PAGE> 21
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On August 18, 1998, pursuant to a stockholders' meeting the
current board members were re-elected to the Board of Directors of
Grant.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits
Exhibit No.
27.01 - Financial data schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the nine months ended
September 30, 1998.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 16th day of November 1998.
GRANT GEOPHYSICAL, INC.
(REGISTRANT)
By /s/ Larry E. Lenig, Jr.
--------------------------------
Larry E. Lenig, Jr.
Chief Operating Officer,
President
(Principal Executive Officer)
By /s/ Ben L. Roberts
--------------------------------
Ben L. Roberts
Chief Financial Officer
(Principal Financial Officer)
22
<PAGE> 23
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27.01 Financial data schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,069
<SECURITIES> 0
<RECEIVABLES> 42,922
<ALLOWANCES> 677
<INVENTORY> 532
<CURRENT-ASSETS> 61,344
<PP&E> 92,610
<DEPRECIATION> 22,873
<TOTAL-ASSETS> 183,843
<CURRENT-LIABILITIES> 38,397
<BONDS> 107,575
0
0
<COMMON> 14
<OTHER-SE> 31,518
<TOTAL-LIABILITY-AND-EQUITY> 183,843
<SALES> 0
<TOTAL-REVENUES> 147,357
<CGS> 0
<TOTAL-COSTS> 134,941
<OTHER-EXPENSES> 283
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,528
<INCOME-PRETAX> 5,313
<INCOME-TAX> 3,218
<INCOME-CONTINUING> 2,095
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,095
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
