<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 June 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 No X
----- -----
As of August 6, 1998, 14,170,555 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.
<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
June 30, 1998 (Unaudited) and December 31, 1997..................................................... 3
Consolidated Statements of Operations:
Grant Geophysical, Inc. for the Three and Six Months Ended June 30, 1998 (Unaudited) ............... 5
GGI Liquidating Corporation ("GGI") for the Three and Six Months Ended June 30, 1997 (Unaudited).... 5
Consolidated Statements of Cash Flows:
Grant Geophysical, Inc. for the Six Months Ended June 30, 1998 (Unaudited).......................... 6
GGI Liquidating Corporation for the Six Months Ended June 30, 1997 (Unaudited)...................... 6
Notes to Consolidated Financial Statements (Unaudited)................................................ 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................................................... 14
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
PART III. SIGNATURES .................................................................................. 22
</TABLE>
2
<PAGE> 3
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,093 $ 13,700
Restricted cash 321 321
Accounts receivable:
Trade(net of allowance for doubtful accounts of $158
and $494 at December 31, 1997 and June 30, 1998,
respectively) 29,495 42,291
Other 2,487 1,732
Inventories 530 528
Prepaids 4,190 4,864
Work in process 2,779 5,534
--------- ---------
Total current assets 46,895 68,970
Property, plant and equipment 73,002 83,850
Accumulated depreciation (8,498) (17,596)
--------- ---------
Net property, plant and equipment 64,504 66,254
Multi-client data, net 5,736 4,867
Goodwill, net 36,304 35,311
Deferred issue costs, net -- 4,455
Other assets 2,265 2,089
--------- ---------
Total assets $ 155,704 $ 181,946
========= =========
</TABLE>
(Continued on next page)
3
<PAGE> 4
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ ----------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt $ 1,158 $ 934
Accounts payable 16,422 22,864
Accrued expenses 10,318 12,798
Foreign income taxes payable 2,807 4,069
--------- ---------
Total current liabilities 30,705 40,665
Long-term debt and capital lease obligations 65,409 101,211
Unearned revenue 5,443 4,792
Other liabilities and deferred credits 2,369 2,558
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 June 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
14,170,555 at June 30, 1998 14 14
Additional paid-in capital 41,278 41,262
Accumulated deficit (8,833) (7,618)
Accumulated other comprehensive income (467) (938)
--------- ---------
Total stockholders' equity 41,992 32,720
--------- ---------
Total liabilities and stockholders' equity $ 155,704 $ 181,946
========= =========
</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 SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues $ 36,873 | $ 48,467 $ 67,169 | $ 96,362
| |
Expenses: | |
Direct operating expenses 28,264 | 34,792 51,820 | 69,532
Other operating expenses 2,098 | 3,882 4,158 | 7,684
Depreciation and amortization 2,978 | 4,926 5,589 | 10,215
---------- | ---------- ---------- | ---------
Total costs and expenses 33,340 | 43,600 61,567 | 87,431
---------- | ---------- ---------- | ---------
| |
Operating income 3,533 | 4,867 5,602 | 8,931
| |
Other income (deductions): | |
Interest expense (1,312) | (2,625) (2,703) | (4,793)
Interest income 196 | 286 200 | 489
Reorganization costs (787) | -- (1,780) | --
Other (80) | (19) 215 | (181)
---------- | ---------- ---------- | ---------
Total other deductions (1,983) | (2,358) (4,068) | (4,485)
---------- | ---------- ---------- | ---------
| |
Income before taxes 1,550 | 2,509 1,534 | 4,446
| |
Income tax expense 1,411 | 1,304 1,671 | 2,508
---------- | ---------- ---------- | ---------
| |
Net income (loss) 139 | 1,205 (137) | 1,938
| |
Preferred dividends -- | 176 -- | 440
---------- | ---------- ---------- | ---------
| |
Net income (loss) applicable | |
to common stock $ 139 | $ 1,029 $ (137) | $ 1,498
========== | ========== ========== | =========
| |
INCOME PER COMMON SHARE - BASIC | |
AND DILUTED: | |
| |
Net income | $ .09 | $ 0.14
Dividend requirement on pay-in-kind | |
preferred stock | (.01) | (0.03)
| ---------- | ---------
| |
Net income per common share | $ .08 | $ 0.11
| ========== | =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE> 6
GRANT GEOPHYSICAL, INC AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GGI GRANT
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1998
---------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) BEFORE DIVIDEND REQUIREMENT $ (137) | $ 1,938
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET |
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: |
Depreciation and amortization expense 5,589 | 10,215
Gain on sale of fixed assets 44 | (90)
Provision for doubtful accounts -- | 300
Exchange (gain) loss (113) | 473
Other non-cash items 199 | 27
CHANGES IN ASSETS AND LIABILITIES: |
(INCREASE) DECREASE IN: |
Accounts receivable 529 | (12,341)
Inventories (27) | 2
Multi-client Data -- | 829
Prepaids 983 | (674)
Work in process (811) | (2,755)
Other assets (434) | 147
INCREASE (DECREASE) IN: |
Accounts payable 1,402 | 6,442
Accrued expenses 997 | 2,480
Foreign income tax payable 1,690 | 1,262
Other liabilities and deferred credits (308) | (295)
CHANGE IN PRE-PETITION LIABILITIES SUBJECT TO CHAPTER 11 CASE: |
Accounts payable (1,086) | --
Accrued expenses (1,443) | --
Foreign income tax payable (194) | --
Other liabilities and deferred credits (2,637) | --
-------- | --------
|
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,243 | 7,960
|
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: |
Capital expenditures, net (4,922) | (12,161)
Proceeds from sale of assets 15 | 515
-------- | --------
|
NET CASH USED IN INVESTING ACTIVITIES (4,907) | (11,646)
</TABLE>
(Continued on next page)
6
<PAGE> 7
GRANT GEOPHYSICAL, INC AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GGI GRANT
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1998
---------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: |
Debt issue costs -- | (4,585)
Common Stock Issue Costs -- | (16)
Redemption of Preferred Stock -- | (10,000)
Dividends Paid -- | (723)
Borrowings made during the period 2,957 | 100,279
Repayment on borrowings during the period (263) | (74,397)
Pre-petition liabilities subject to chapter 11 case: |
Borrowings under credit facility 30,897 | --
Repayment on borrowings (35,189) | --
--------- | ---------
|
|
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,598) | 10,558
--------- | ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (21) | (265)
--------- | ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,283) | 6,607
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,772 | 7,093
--------- | ---------
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,489 | $ 13,700
========= | =========
</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 all of the issued and outstanding common stock, $.001 par
value ("Grant Common Stock"), of Grant other than shares of restricted stock
granted under the 1997 Equity and Performance Incentive Plan. 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 $21.0 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 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.
As a result, Grant's consolidated balance sheet as of December 31, 1997
and June 30, 1998 and statement of operations and cash flows for the three and
six months ended June 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 six months ended June 30, 1997 are presented using GGI's
historical cost basis of accounting. Because of the recent acquisition and
related adjustment of assets and liabilities to fair value as of December 31,
1997, the carrying value of Grant's financial assets and liabilities
approximates fair value.
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., PT. Grant Geophysical Indonesia,
Recursos Engergeticos 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
other than one subsidiary, which is inconsequential to Grant on a consolidated
basis. 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 June 30, 1998 and the related statements
of operations and cash flows for the three and six months ended June 30, 1998
and GGI's statements of operations and cash flows for the three and six months
ended June 30, 1997 are unaudited. 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 June 30, 1998 and the results of operations for
the three and six months ended June 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 and
convertible securities. The income (loss) is adjusted for by cumulative
preferred stock dividends in calculating net income (loss) attributable to the
common shareholder.
Recent Accounting Pronouncements
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. The Company adopted SFAS 130 in the first quarter of 1998.
(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. The net proceeds from the sale of the Notes were
approximately $95.2 million after deducting the discount on the sale
9
<PAGE> 10
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
(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 June 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 August 6, 1998, Awards covering 1,473,200 shares have been made
by the Board of Directors. The Awards consist of 1,455,200 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, 3,000 restricted shares (18,000 total restricted
shares) were granted to each non-employee director and will vest on August 18,
1998 provided that such director continues to serve on the Board of Directors
until such date.
(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
10
<PAGE> 11
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 shall pay to the
Plaintiffs $150,000 for reimbursement of legal expenses, and permit the
Plaintiffs to purchase Grant Common Stock in the subscription offering at a
discounted subscription purchase price of $4.75 per share. In addition, Elliott
has agreed to indemnify Grant and its subsidiary against any liability that
they may incur in connection with the lawsuit. Nevertheless, other eligible
subscribers in the subscription offering who do 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 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 Grant is of the opinion that
none of the claims and actions are likely to have a material impact on Grant's
financial condition.
(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
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1998
---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH PAID FOR INTEREST AND TAXES WAS AS FOLLOWS: |
Taxes, net of refunds $ 1,801 | $ 976
Interest, net of amounts capitalized 2,374 | 1,507
|
NON-CASH INVESTING AND FINANCING ACTIVITIES: |
Property, plant and equipment debt additions $ 2,207 | $ --
Debenture conversion 80 | --
</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
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1998
---------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net income (loss) $ (137) | $ 1,938
Other comprehensive income - (loss) -- | (471)
------- | --------
|
Total comprehensive earnings (loss) $ (137) | $ 1,467
======= | ========
</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 is 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 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 set forth below. 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
are offering the balance of such shares of Grant Common Stock to the Eligible
Subscribers pursuant to the Subscription Offering. The Company has 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 will expire if not exercised on or prior to 5:00 p.m.,
Central, on Monday, August 24, 1998.
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(10) SUBSEQUENT EVENTS
In a transaction completed on July 29, 1998, and effective June 30, 1998,
Grant, through a wholly owned subsidiary, purchased 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. ISI currently provides seismic data processing services
through offices located in Midland and Dallas, Texas. Grant expects to expand
ISI's capabilities through the establishment of a third processing center to be
located at Grant's Houston offices.
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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 August 6, 1998, the Company was operating or mobilizing 18 seismic data
acquisition crews, consisting of 14 land and four transition zone crews,
utilizing approximately 37,000 seismic recording channels. According to
industry sources, as of August 6, 1998, 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.
On July 29, 1998, Grant, through a wholly owned subsidiary, purchased,
effective June 30, 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. ISI
currently provides seismic data processing services through offices located in
Midland and Dallas, Texas. Grant expects to expand ISI's capabilities through
the establishment of a third processing center to be 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 six
months ended June 30, 1998 are not directly comparable to the results of
operations of GGI for the three and six months ended June 30, 1997 due to the
effects of the acquisition of Solid State.
RESULTS OF OPERATIONS
THE COMPANY'S THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH GGI'S THREE MONTHS
ENDED JUNE 30, 1997
Revenues. Consolidated revenue increased $11.6 million, or 31%, from $36.9
million for GGI for the three months ended June 30, 1997 to $48.5 million in
revenue for the Company for the three months ended June 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. This increase was
partially offset by a decrease in revenues from Latin America. In the
aggregate, Solid State's operations added $7.8 million to revenue for the
second quarter of 1998.
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Revenues from the southern United States data acquisition operations
increased $7.3 million, or 49%, from $15.0 million for GGI for the quarter
ended June 30, 1997 to $22.3 million for the Company for the quarter ended June
30, 1998. This increase was attributable to increased crew productivity as a
result of a higher channel count per crew, a more efficient use of both
equipment and personnel throughout the region and the addition of one Solid
State crew for the entire second quarter of 1998. The Company and GGI operated
six seismic data acquisition crews continuously in the southern United States
during the three months ended June 30, 1997 and 1998.
Revenues from the Far East increased $7.9 million, or 263%, from $3.0
million for GGI for the second quarter of 1997 to $10.9 million for the Company
for the second quarter of 1998. During the second quarter of 1997, GGI's Far
East operations consisted of one land crew and one transition zone crew
operating in Bangladesh. During the second quarter of 1998, the Company
operated as many as five crews in the region; three crews in Bangladesh and two
crews in Indonesia.
Revenues from Latin America decreased $6.8 million, or 36%, from $18.8
million for GGI for the quarter ended June 30, 1997 to $12.0 million for the
Company for the quarter ended June 30, 1998. During the second quarter of 1997,
GGI's Latin American operations consisted of as many as five land seismic data
acquisition crews operating in Colombia, Ecuador and Brazil. During the second
quarter of 1998, the Company operated as many as five seismic crews in the
region, in Colombia, Bolivia, Guatemala and Ecuador. The decrease in revenue
between the two periods was due in part to exceptionally high production that
was achieved by the crews operating in Colombia and Ecuador during in the
second quarter of 1997. During the second quarter of 1998 only one crew
operated for the entire quarter in Colombia while the other Colombian and
Ecuadorian crews were either completing or in transition between projects. In
addition the Brazilian crew, which had been in operation since March 1995,
completed operations in early April 1998. The Brazilian equipment is currently
being mobilized into Guatemala for a project commencing in the third quarter of
1998. The Company began operations in Guatemala in September 1997 and acquired
the Bolivian operations in the Solid State acquisition in December 1997.
Revenues from Canada and the northern United States data acquisition
operations were $3.3 million for the Company's quarter ended June 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. The Company completed the seasonal operations of four
crews on April 1, 1998. Traditionally 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 second 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.
Expenses. Operating expenses of the Company as a percentage of revenues
decreased to 72% for the three months ended June 30, 1998 from 77% for GGI for
the three months ended June 30, 1997. This percentage decrease can be
attributed to overall improved operating efficiency. Operating expenses during
the second quarter of 1998 increased $6.5 million to $34.8 million for the
Company compared to $28.3 million for GGI's same period ended June 30, 1997.
This increase is a result of the revenue increases experienced in the United
States, the Far East and Canada which were partially offset by a revenue
decrease in Latin America.
Other operating expenses increased $1.8 million, or 86%, to $3.9 million
for the Company for the quarter ended June 30, 1998 from $2.1 million for GGI
for the quarter ended June 30, 1997. Other operating expenses also increased as
a percentage of revenue to 8% in second quarter of 1998 from 5% in same period
in 1997. The primary reason for 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, performance bonuses and
provisions for doubtful accounts.
Depreciation and amortization increased $1.9 million, or 63% to $4.9
million for the Company for the quarter ended June 30, 1998 from $3.0 million
for GGI for the quarter ended June 30, 1997. This increase is primarily
attributable to $1.2 million in depreciation on the acquired Solid State assets
and amortization of goodwill of $366,000, neither of which was incurred by GGI
during the second quarter of 1997. Also contributing to the increase was
depreciation on new assets purchased by the Company during the quarters ending
December 31, 1997, March 31, 1998 and June 30, 1998.
Other Income (Deductions). Interest expense, net, increased $1.2 million,
or 109%, to $2.3 million for the Company for the quarter ended June 30, 1998
from $1.1 million for GGI for the quarter ended June 30, 1997. This
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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 $787,000 for the quarter ended June 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 June 30, 1998 and
none are expected to be incurred in the future.
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 SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH GGI'S SIX MONTHS
ENDED JUNE 30, 1997
Revenues. Consolidated revenue increased $29.2 million, or 43%, from $67.2
million for GGI for the six months ended June 30, 1997 to $96.4 million in
revenue for the Company for the six months ended June 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. This increase was
partially offset by a reduction in revenues from Latin America. In the
aggregate, Solid State's operations added $21.9 million to revenue for the
first and second quarters of 1998.
Revenues from the southern United States data acquisition operations
increased $11.1 million, or 43%, from $25.7 million for GGI for the six months
ended June 30, 1997 to $36.8 million for the Company for the six months ended
June 30, 1998. This increase was attributable to the addition of one Solid
State crew for the entire first six months of 1998, the addition of a new and
more efficient recording system, a higher channel count per crew resulting 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 six
months ended June 30, 1997 and 1998.
Revenues from the Far East increased $10.8 million, or 197%, from $5.5
million for GGI for the six months ended June 30, 1997 to $16.4 million for the
Company for the six months ended June 30, 1998. During the first six 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 a total of five crews that
have operated during the first six months of 1998. In addition to the two
Bangladesh crews discussed above that operated for the entire period, during
the first quarter of 1998 the Company mobilized and is now operating two crews
in Indonesia. The fifth crew was a small shallow water transition zone crew
that operated for a three-month period in Bangladesh.
Revenues from Latin America decreased $4.2 million, or 12%, from $35.9
million for GGI for the six months ended June 30, 1997 to $31.7 million for the
Company for the six months ended June 30, 1998. During the first six months of
1997, GGI's Latin American operations consisted of as many as six 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 six
months of 1998, the Company operated as many as seven seismic crews in the
region, in Colombia, Bolivia, Brazil, Guatemala and Ecuador. The decrease in
revenue between the two periods was due in part to exceptionally high
production that was achieved by the crews operating in Colombia and Ecuador
during the second quarter of 1997. During the six months ended June 30, 1998
the Company continued to operate crews in Colombia and Ecuador during most of
the period but achieved lower revenue due primarily to transitioning between
contracts. In addition the Brazilian crew, which had been in operation since
March 1995, completed operations in early April 1998. The Brazilian equipment
is currently being mobilized into Guatemala for a project commencing in the
third quarter of 1998. The Company began operations in Guatemala in September
1997 and acquired the Bolivian operations in the Solid State acquisition in
December 1997. At June 30, 1998 the Company operated four crews in Latin
America; one each in Colombia, Ecuador, Guatemala and Bolivia.
Revenues from Canada and the northern United States data acquisition
operations were $11.3 million for the Company's six months ended June 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. Traditionally during the spring and summer months,
when seismic activity decreases in Canada, the Company
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(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 during the first three months of 1998. On or about
April 1, 1998 four of these crews completed operations in Canada. During the
second 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.
Expenses. Operating expenses of the Company as a percentage of revenues
decreased to 72% for the six months ended June 30, 1998 from 77% for GGI for
the six months ended June 30, 1997. This percentage decrease can be attributed
to overall improved operating efficiency. Operating expenses during the six
months ended of 1998 increased $17.7 million to $69.5 million for the Company
compared to $51.8 million for GGI's same period ended June 30, 1997. This
increase is a result of the revenue increases experienced in the United States,
the Far East and Canada partially offset by a revenue decrease in Latin America
which have previously been discussed.
Other operating expenses increased $3.5 million, or 83%, to $7.7 million
for the Company for the six months ended June 30, 1998 from $4.2 million for
GGI for the six months ended June 30, 1997. Other operating expenses also
increased as a percentage of revenue to 8% in second quarter of 1998 from 6% 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 $4.6 million, or 82% to $10.2
million for the Company for the six months ended June 30, 1998 from $5.6
million for GGI for the six months ended June 30, 1997. This increase is
primarily attributable to $2.5 in depreciation on the acquired Solid State
assets and amortization of goodwill of $732,000, neither of which was incurred
by GGI during the six months ended June 30, 1997. Also contributing to the
increase was depreciation on new assets purchased by the Company during the
quarters ending December 31, 1997, March 31, 1998 and June 30, 1998.
Other Income (Deductions). Interest expense, net, increased $1.8 million,
or 72%, to $4.3 million for the Company for the six months ended June 30, 1998
from $2.5 million for GGI for the six months ended June 30, 1997. This increase
was the result of interest on debt both incurred and assumed by the company as
a result of the 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 $1.8 million for the six months ended June 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 six months ended June 30, 1998 and
none are expected to be incurred in the future.
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 $6.5 million at August 6, 1998) and cash flow from operations.
External sources include the unutilized portion ($15.0 million at August 6,
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
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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 August 6, 1998, the Company's total indebtedness was approximately
$106.8 million (including approximately $300,000 under letters of credit).
Included in the total indebtedness is an equipment financing agreement dated
July 2, 1998 with an equipment manufacturer for $3.2 million and a premium
financing agreement dated August 2, 1998 for $1.2 million to finance the
purchase of the Company's annual insurance policies. The Company's total
indebtedness is comprised of $99.3 million aggregate principal amount of the
Notes and $6.0 million of combined loans and capitalized leases incurred for
the purpose of financing capital expenditures and $1.2 million to finance the
purchase of annual insurance policies and $300,000 under letters of credit.
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 54% and 62% of total
revenues for the three and six months ended June 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 $21 million of capital expenditures in 1998 to upgrade and expand
its seismic data acquisition capability and equipment. Capital expenditures for
the six months ended June 30, 1998 were $12.2 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.
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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
or forward foreign currency exchange rate hedging arrangements, but may elect
to do so in the future.
The Company's operating results were negatively impacted by foreign
exchange losses of approximately $247,000 and $473,000 during the three and six
months ended June 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.
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 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 and is not aware of
any material contingencies or costs that will be incurred in order to be Year
2000 compliant.
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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
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.
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PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On January 8, 1998, Elliott and Westgate, being all the
holders of Common Stock and pursuant to a written consent without a
meeting, elected W. Richard Anderson to the Board of Directors of
Grant.
On January 15, 1998, Elliott and Westgate, being all the
holders of Common Stock and pursuant to a written consent without a
meeting, elected Donald W. Wilson and James R. Brock to the Board of
Directors of Grant.
On February 18, 1998, Elliott and Westgate, being all the
holders of Common Stock and pursuant to a written consent without a
meeting, approved Amendment No. 1 to the Incentive Plan, which
increased shares of Common Stock available under the Incentive Plan to
1,450,000.
On April 28, 1998, Elliott and Westgate, being all of the
holders of the Common and Preferred Stocks, and pursuant to a written
consent without a meeting, approved a Consulting Agreement of that
date between the Company and its Chairman, Donald W. Wilson.
On June 5, 1998, Elliott and Westgate, being all of the
holders of the Common Stock, and pursuant to a written consent without
a meeting, approved an amendment to Article FOURTH of the Company's
Restated Articles of Incorporation removing the wording authorizing
the issuance of the Preferred Stock.
On June 22, 1998, Elliott and Westgate, being all of the
holders of the Common Stock, and pursuant to a written consent without
a meeting, approved an increase of the number of shares of Common
Stock available under the Incentive Plan to 1,900,000.
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 six months ended
June 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 13 day of August, 1998.
GRANT GEOPHYSICAL, INC.
(REGISTRANT)
By /s/ Larry E. Lenig, Jr.
--------------------------------
Larry E. Lenig, Jr.
Chief Operating Officer,
President
(Principal Executive Officer)
By /s/ Michael P. Keirnan
--------------------------------
Michael P. Keirnan
Chief Financial Officer
(Principal Financial Officer)
22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
27 Financial data schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 14,021
<SECURITIES> 0
<RECEIVABLES> 42,785
<ALLOWANCES> 494
<INVENTORY> 528
<CURRENT-ASSETS> 68,970
<PP&E> 83,850
<DEPRECIATION> 17,596
<TOTAL-ASSETS> 181,946
<CURRENT-LIABILITIES> 40,665
<BONDS> 101,211
0
0
<COMMON> 14
<OTHER-SE> 32,706
<TOTAL-LIABILITY-AND-EQUITY> 181,946
<SALES> 0
<TOTAL-REVENUES> 96,362
<CGS> 0
<TOTAL-COSTS> 87,431
<OTHER-EXPENSES> 181
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,304
<INCOME-PRETAX> 4,446
<INCOME-TAX> 2,508
<INCOME-CONTINUING> 1,938
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,938
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
