<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
----------------------------------------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 1-19971
---------------------------------------
UNIVERSAL SEISMIC ASSOCIATES, INC.
(Exact name of Registrant in its Charter)
DELAWARE 76-0256086
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
16420 PARK TEN PLACE, SUITE 300
HOUSTON, TEXAS 77084-5051
(Address of Principal Executive Office) (Zip Code)
(281) 578-8081
(Issuer's Telephone Number)
-----------------------------------------
Check whether the issuer (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]
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. 5,234,109 shares of Common
Stock, $.0001 par value, were outstanding as of June 30, 1998.
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UNIVERSAL SEISMIC ASSOCIATES, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 1997 and June 30, 1997.......................... 3
Consolidated Statements of Operations for the three and six months ended
December 31, 1997 and 1996................................................................ 4
Consolidated Statements of Stockholders' Equity for the six
months ended December 31, 1997 and the year ended June 30, 1997........................... 5
Consolidated Statements of Cash Flows for the six months ended
December 31, 1997 and 1996................................................................ 6
Notes to Consolidated Financial Statements.................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................. 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ 15
Item 2. Changes in Securities........................................................................ 15
Item 3. Defaults Upon Senior Securities.............................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 15
Item 5. Other Information............................................................................ 15
Item 6. Exhibits and Reports on Form 8-K............................................................. 15
</TABLE>
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PART I
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
UNIVERSAL SEISMIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1997
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 471,307 $ 1,859,677
Accounts receivable, net 5,374,283 5,579,876
Costs and estimated earnings in excess of billings on
uncompleted contracts 115,184 702,066
Prepaid expenses and other current assets 539,358 498,982
------------ ------------
Total current assets 6,500,132 8,640,601
Property and equipment, net:
Seismic property and equipment 15,883,857 15,896,535
Oil and gas properties, full cost method 8,173,927 6,881,115
------------ ------------
Total property and equipment, net 24,057,784 22,777,650
Other assets:
Goodwill, net 576,272 601,694
Other 153,183 228,088
------------ ------------
729,455 829,782
Total assets $ 31,287,371 $ 32,248,033
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 22,193,301 $ 1,423,859
Billings in excess of costs and estimated earnings on
uncompleted contracts 374,415 499,916
Accounts payable 4,320,142 5,912,647
Accrued and other current liabilities 2,075,179 2,431,164
------------ ------------
Total current liabilities 28,963,037 10,267,586
Long-term obligations, net of current maturities 1,775,236 16,729,140
------------ ------------
Total liabilities 30,738,273 26,996,726
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.0001 par value; 20,000,000 shares authorized;
5,239,109 shares issued and 5,234,109 shares outstanding
at December 31, 1997 and June 30, 1997 523 523
Additional paid in capital 17,105,444 17,105,444
Accumulated deficit (16,536,869) (11,834,660)
Less: Treasury stock, at cost; 5,000 shares (20,000) (20,000)
------------ ------------
Total stockholders' equity 549,098 5,251,307
------------ ------------
Total liabilities and stockholders' equity $ 31,287,371 $ 32,248,033
============ ============
</TABLE>
See accompanying notes to financial statements.
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UNIVERSAL SEISMIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues:
Data acquisition $ 3,772,133 $ 10,158,535 $ 12,500,153 $ 18,695,533
Data processing 206,864 376,297 509,200 790,878
Oil and gas production 279,329 -- 431,623 --
------------ ------------ ------------ ------------
Total operating revenues 4,258,326 10,534,832 13,440,976 19,486,411
------------ ------------ ------------ ------------
Operating expenses:
Cost of data acquisition 4,588,486 7,435,615 13,716,038 15,521,322
Cost of data processing 177,286 231,616 377,445 423,975
Oil and gas operating 64,541 -- 106,354 --
Selling, general and administrative 688,364 506,279 1,327,820 1,059,325
Cost of aborted merger, proxy contest and
stockholder litigation -- 301,230 -- 301,230
Depreciation, depletion and amortization 868,754 774,721 1,685,048 1,535,726
------------ ------------ ------------ ------------
Total operating expenses 6,387,431 9,249,461 17,212,705 18,841,578
------------ ------------ ------------ ------------
Total operating income (loss) (2,129,105) 1,285,371 (3,771,729) 644,833
Interest expense, net of capitalized interest (537,661) (313,833) (943,999) (662,043)
Other income, net 4,494 2,593 13,519 4,897
------------ ------------ ------------ ------------
Net income (loss) $ (2,662,272) $ 974,131 $ (4,702,209) $ (12,313)
============ ============ ============ ============
Basic and diluted earnings (loss) per share $ (.51) $ .19 $ (.90) $ --
============ ============ ============ ============
Weighted average common shares outstanding 5,234,109 5,229,109 5,234,109 4,797,002
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
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UNIVERSAL SEISMIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND
THE YEAR ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK ADDITIONAL TOTAL
----------------------- ------------------------- PAID IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------------ -------- ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1996 4,278,147 $ 428 5,000 $ (20,000) $ 13,553,317 $ (6,310,497) $ 7,223,248
Net loss (5,524,163) (5,524,163)
Exercise of stock
options 15,000 1 51,249 51,250
Exercise of convertible
and exchangeable notes 940,962 94 3,500,878 3,500,972
------------ -------- ------------ ---------- ------------ ------------ ------------
Balance June 30, 1997 5,234,109 523 5,000 (20,000) 17,105,444 (11,834,660) 5,251,307
Net loss for six months
ended December 31, 1997 (4,702,209) (4,702,209)
------------ -------- ------------ ---------- ------------ ------------ ------------
Balance December 31, 1997 5,234,109 $ 523 5,000 $ (20,000) $ 17,105,444 $(16,536,869) $ 549,098
============ ======== ============ ========== ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
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UNIVERSAL SEISMIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (4,702,209) $ (12,313)
Adjustments to reconcile net (loss) to net cash (used in)
provided by operating activities:
Depreciation, depletion and amortization 1,685,048 1,535,726
Loss on disposal of assets 507,864 --
Changes in operating assets and liabilities:
Accounts receivable, net 205,593 520,806
Costs and estimated earnings in excess of billings
on uncompleted contracts 586,882 1,349,434
Prepaid expenses and other current assets 435,743 354,569
Accounts payable (1,592,505) 2,315,014
Billings in excess of costs and estimated earnings
on uncompleted contracts (125,501) (1,796,871)
Accrued and other current liabilities 1,898,398 (269,143)
Other assets 15,632 9,779
------------ ------------
Net cash (used in) provided by operating activities (1,085,055) 4,007,001
------------ ------------
Cash flows from investing activities:
Capital expenditures (2,850,608) (4,467,139)
Proceeds from sale of assets 1,168,088 680,625
Proceeds from receivable from stockholder -- 28,440
------------ ------------
Net cash (used in) investing activities (1,682,520) (3,758,074)
------------ ------------
Cash flows from financing activities:
Proceeds from debt and obligations 11,379,287 16,796,639
Payments on debt and obligations (10,000,082) (16,710,967)
Proceeds from issuance of common stock, net -- 38,750
------------ ------------
Net cash provided by financing activities 1,379,205 124,422
------------ ------------
Net (decrease) increase in cash and cash equivalents (1,388,370) 373,349
Cash and cash equivalents at beginning of period 1,859,677 982,431
------------ ------------
Cash and cash equivalents at end of period $ 471,307 $ 1,355,780
------------ ------------
Supplemental disclosures:
Cash paid for interest 558,392 730,658
Equipment acquired in exchange for note payable 1,918,193 --
Prepaid expenses financed by notes payable 263,757 214,505
Conversion of long-term obligations to common stock -- 3,500,972
Stockholder litigation settlement financed by note payable 1,880,000 --
</TABLE>
See accompanying notes to financial statements.
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UNIVERSAL SEISMIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The consolidated financial statements of Universal Seismic Associates,
Inc. and Subsidiaries (the "Company") included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. These
financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's amended Annual Report on Form 10-KSB/A filed with the
Securities and Exchange Commission for the year ended June 30, 1997.
In the opinion of the Company, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the
financial position as of December 31, 1997, the results of operations
for the three and six-month periods ended December 31, 1997 and 1996,
statement of stockholders' equity for the six months ended
December 31, 1997 and statements of cash flows for the six-month
periods ended December 31, 1997 and 1996, have been included.
The interim results are not necessarily indicative of results of
operations for the full fiscal year ending June 30, 1998.
2. LIQUIDITY AND OPERATING LOSSES
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As more
fully explained below, the Company has incurred continuing losses from
operations of $4,239,383 and $429,877 for the years ended June 30, 1997
and 1996, respectively, and these losses have continued during the
six months ended December 31, 1997 with operating losses of
$2,129,105 and $3,771,729 for the three and six month periods ended
December 31, 1997, respectively. In addition, the Company had an
accumulated deficit and a net working capital deficiency of
$16,536,869 and $22,462,905, respectively, as of December 31, 1997.
All debt due the Company's major debtholder, RIMCO (defined below),
has been classified as current maturities as of December 31, 1997.
As of December 31, 1997, the Company had a cash balance of $471,307. If
losses from operations continue (as is anticipated), the Company
believes this cash, along with anticipated cash flow from its seismic
and exploration and production operations and funds available under its
credit facilities, will not be adequate for its overall working capital
requirements. The Company believes that it could generate substantial
cash flow from its oil and gas properties if it had sufficient funding
for its drilling program. Future cash flows are subject to a number of
uncertainties, particularly the condition of the oil and gas industry
and related seismic activity in the Company's markets. Liquidity of the
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Company should be considered in light of the significant fluctuations
in demand that may be experienced by seismic data acquisition
contractors and exploration and production owners as rapid changes in
oil and gas producers' expectations and budgets occur. These
fluctuations can rapidly impact the Company's liquidity as supply and
demand factors directly affect utilization and contract revenues, which
are primary determinants of cash flow from the Company's operations.
As of December 31, 1997, the Company was in default on certain
covenants of its financing agreements with RIMCO Partners, L.P., RIMCO
Partners II, L.P., RIMCO Partners III, L.P. and RIMCO Partners IV, L.P.
(collectively, "RIMCO"). RIMCO has waived such defaults and principal
and interest payment covenants through July 1, 1998. The Company is
negotiating an extension of this waiver and a debt-to-equity exchange
with RIMCO whereby the indebtedness to RIMCO, including accrued
interest, would be converted into equity and subordinated debt. In the
original agreement with RIMCO, which was executed on February 9, 1998
and expired on June 1, 1998, $15,000,000 was to be converted into
common stock of the Company and the balance into convertible
subordinated notes. The shares to be issued in the conversion were to
be tied to the average price of the Company's common stock for the
30-day period prior to receiving stockholder approval. As of June 30,
1998, the Company was indebted to RIMCO under the various financing
agreements for $22,168,899 principal and $1,896,450 accrued interest.
Until such time as the Company and RIMCO are able to consummate the
debt-to-equity exchange, all RIMCO debt has been classified as current
maturities.
The above factors raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include
any adjustments relating to the recoverability and classification of
assets carrying amounts or the amount and classification of liabilities
that might result should the Company be unable to continue as a going
concern.
3. RESTATEMENT AND RECLASSIFICATIONS
In its June 30, 1997 Form 10-KSB/A, the Company restated and
reclassified its financial statements for the fiscal years ended June
30, 1997 and 1996. In addition, unaudited quarterly financial data for
fiscal 1997 and 1996 have also been restated and reclassified. Except
as otherwise stated herein, all information presented in this Report on
Form 10-Q includes all such restatements and reclassifications as they
apply to the fiscal 1997 period.
In February 1998, the Company's independent accountants (Coopers &
Lybrand L.L.P.), who had issued opinions on the financial statements
for the years ended June 30, 1997 and 1996, resigned and stated that
their opinions with respect to the financial statements for those years
should no longer be relied upon. In March 1998, the Company engaged
Arthur Andersen LLP as its independent public accountants to perform
the necessary audits to issue new auditors' reports on the financial
statements for fiscal 1997 and 1996.
As a result of a comprehensive review begun by the Company in December
1997, and the audits performed by new independent public accountants,
it was determined that certain adjustments and reclassifications were
necessary to fairly state the financial statements for
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the years ended June 30, 1997 and 1996 and all respective quarterly
data. These adjustments principally relate to the timing for
recognition of contract revenue and associated costs under percentage
of completion accounting and to certain costs which were expensed as
cost of data acquisition but should have been recorded as capitalized
oil and gas properties. In addition, it was determined that the gain on
the sale of oil and gas properties previously reported of $559,461 in
fiscal 1997, should not have been recognized in income but instead
recorded as a reduction of oil and gas properties in accordance with
full cost accounting. The following is a summary of the adjustments and
the related impact on the statement of operations for the three and
six-month periods ended December 31, 1996:
<TABLE>
<CAPTION>
RESTATEMENTS FOR PERIODS
ENDED DECEMBER 31, 1996
------------------------------
THREE SIX
MONTHS MONTHS
------------ ------------
<S> <C> <C>
Data acquisition revenues $ (40,322) $ 1,503,653
Cost of data acquisition 298,170 (939,756)
Gain on sale of oil and gas property -- (559,461)
Interest expense 18,042 36,084
------------ ------------
Net adjustments 275,890 40,520
Net income (loss) previously reported 698,241 (52,833)
------------ ------------
Restated net income (loss) for periods $ 974,131 $ (12,313)
============ ============
</TABLE>
The net financial impact of these adjustments increases net income for
the three months ended December 31, 1996 by $275,980 to $974,131 and
decreases the net loss for the six months ended December 31, 1996 by
$40,520 to $12,313.
4. DEBT AND FINANCING ARRANGEMENTS
A summary of the Company's debt and obligations at the respective dates
is presented below:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1997
------------ ------------
<S> <C> <C>
Notes and obligations due RIMCO $ 20,807,900 $ 16,108,995
Operating lease for equipment not
expected to be utilized in the future 815,529 929,191
Other notes payable 2,345,108 1,114,813
------------ ------------
23,968,537 18,152,999
Less current maturities (22,193,301) (1,423,859)
------------ ------------
Total long-term debt $ 1,775,236 $ 16,729,140
============ ============
</TABLE>
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On November 3, 1997, the Company entered into two additional financing
agreements with RIMCO for $2,144,000 and $1,730,383, respectively,
under revolving credit facilities and issued 12% Senior Secured General
Obligation Notes with interest payable monthly and principal due
December 1, 1999. As of December 31, 1997, the Company had borrowed
$1,494,000 under the first facility which was used for working capital
and $1,090,383 under the second facility used to expand the Company's
oil and gas exploration activities and the notes are secured by the
Company's oil and gas properties.
RIMCO has waived defaults under the covenants in its various financing
agreements until July 1, 1998. (See Note 2 to the Consolidated
Financial Statements for further discussion.)
5. EARNINGS (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS 128"). SFAS 128 requires presentation of "basic" and "diluted"
earnings per share. SFAS 128 is effective for financial statements
issued for periods ending after December 15, 1997 and requires
restatement of all prior period earnings per share amounts. The Company
has adopted SFAS 128 and has applied the provisions of the statement to
current and prior periods. While the Company has outstanding stock
options and warrants, these are not included in the computation of
diluted earnings (loss) per share because to do so would be
anti-dilutive. Earnings (loss) per share under SFAS 128 is the same as
has been reported under the previously required accounting standards.
6. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position. The resolution
in any reporting period of one or more of these matters in a manner
adverse to the Company could have a material impact on the Company's
results of operations and cash flows for that period.
7. SHAREHOLDER LITIGATION
The Company was involved in an aborted merger earlier in fiscal 1997
that led to a proxy fight with a group of shareholders that styled
themselves "The Universal Seismic Stockholders' Protective Committee"
(the "Stockholders' Committee"). The proxy fight was resolved at the
reconvened Annual Meeting of Shareholders on February 11, 1997, at
which time management's slate of directors was reelected and all of the
Stockholders' Committee's proposals were defeated.
Thereafter, Michael T. Kanarellis, one of the members of the
Stockholders' Committee, submitted letters to various members of the
Audit Committee of the Company, alleging that "the Company's financial
statements for the fiscal year ended June 30, 1996 and the fiscal
quarters ended September 30, 1996 and December 31, 1996 were false and
materially misstated" and alleging certain specific items of
misstatement. The
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Stockholders' committee also filed a suit against the Company and its
directors styled "The Universal Seismic Associates, Inc. Stockholders'
Protective Committee, Michael T. Kanarellis, and Robert J. Kecseg Vs.
Michael J. Pawelek, Ronald L. England, Calvin G. Cobb, Gary Milavec,
Steven Oakes, Rick Trapp, RIMCO Associates, L.P., Resource Investors
Management Company, L.P. and Universal Seismic Associates, Inc.", in
the United States District Court (the "Court") in Delaware. All parties
entered into a Stipulation of Settlement which was tendered to the
Court on August 7, 1997, whereby RIMCO agreed to purchase all of the
shares of the Company's common stock owned by the Stockholders'
Committee for an aggregate purchase price of $650,000, or $3.17 per
share. Also in connection with the settlement, RIMCO entered into a
$2,000,000 loan agreement with the Company, with the proceeds being
used to fund the immediate costs of settlement and to pay other
expenses associated with the lawsuit. The settlement was approved by
the Court on October 1, 1997, at which time the Court entered judgment
dismissing all claims with prejudice. The Company believes that it will
recover a substantial portion of its costs of settlement and expenses
associated with the lawsuit from its directors' and officers' liability
insurance carrier. As of January 30, 1998, the Company had received a
settlement of $1,245,000 and is pursuing additional recovery.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1996
OPERATING REVENUES AND EXPENSES
Operating Revenues. Overall operating revenues for the six-month period
were down $6.0 million, or 31%, from the comparable period in fiscal 1997. This
decrease was primarily due to interruptions in South Texas due to restrictions
during hunting season, preparation and delays in South Louisiana and fewer crews
under contract. Data processing revenues were down from $790,878 to $509,200, or
36%, as a result of fewer jobs being processed. Oil and gas operations began
initial production in May and June, 1997. Oil and gas sales of $431,623 for the
six-month period ended December 31, 1997, averaged approximately $72,000 per
month with increased sales expected as additional production comes on stream. It
should be noted that substantially all of the Company's oil and gas revenue
comes from natural gas sales. The Company does expect oil and gas revenues to
increase in fiscal 1998 over fiscal 1997, although such increase is likely to be
limited because the Company currently lacks sufficient financial resources to
fully develop its oil and gas properties.
Operating Expenses. Overall costs were down slightly in the period from
$18.8 million to $17.2 million, or 9%, reflecting a decrease in the data
acquisition group of 8% from $15.5 million to $13.7 million. However, this group
continued to experience negative margins due to weather and seasonal
restrictions.
Selling, General and Administrative Expenses. These expenses increased
to $1.3 million from $1.1 million, or 25% due to increased consulting expenses
and additional accounting expenses.
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Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization (DD&A) was up approximately $149,000 or 9.7% over the same period
in fiscal 1997, reflecting , in part, the first DD&A expense from the oil and
gas operations of $119,852 for the six months ended December 31, 1997.
Interest Expense. Interest expense was up 43% or $281,956 over the same
period in fiscal 1997. This was primarily due to increased debt outstanding for
financing the oil and gas operations and working capital needs.
Income Taxes. At the current time the Company has significant net
operating loss carryforwards of approximately $14,145,000 available to offset
future federal taxable income which will expire if not used in fiscal years 2007
through 2012. Therefore, no income tax provision has been reflected in the
accompanying financial statements.
Net Loss. The Company reported a net loss of $4.7 million for the 1998
fiscal six-month period which was compared to an insignificant loss for the same
period in fiscal 1997. The major reasons for the loss are significantly lower
gross margins for the data acquisition activities combined with higher indirect
overhead and interest expense. Sales in the data acquisition unit were also down
significantly as backlog was not replaced as rapidly as contracts were
completed. The Company is attempting to improve its marketing efforts in the
data acquisition unit, improving crew management and efficiency of its crews to
improve overall margins. Even with these improvements, it is expected that the
Company will continue to incur operating losses in the near term.
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1996
OPERATING REVENUES AND EXPENSES
Operating Revenues. Operating revenues for the three months ended
December 31, 1997 were down 62% to $4.3 million, reflecting a steep decline in
data acquisition revenues due to the Company being unable to generate new
contracts in this area of operations. Data processing revenues were also down in
the period from $376,297 to $201,864, a 46% decline, due to fewer data
processing jobs. Oil and gas revenues of $279,329 are being reported for the
first time in the quarter ended December 31, 1997 at an average monthly rate of
approximately $93,000. Substantially all revenues of the oil and gas operations
come from natural gas sales.
Operating Expenses. Overall operating expenses decreased by 31%,
substantially due to a 38% decline in cost of data acquisition offset by higher
selling, general and administrative and depreciation, depletion and amortization
expense. Idle crews due to insufficient work continue to prevent the data
acquisition group from generating positive margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were up for the quarter over the prior period by 26%,
from $506,279 to $688,364, reflecting, in part, increased legal and accounting
expenses.
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Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization (DD&A) was up 12% from $774,721 in the prior quarter to $868,754.
This is due, in part, to DD&A for the oil and gas operations of $70,178 for the
three months ended December 31, 1997.
Interest Expense. Interest expense increased by approximately 71% from
$313,833 to $537,661. This increase is due to additional borrowings for
financing oil and gas operations and for working capital needs.
Income Taxes. At the current time the Company has significant net
operating loss carryforwards of approximately $14,145,000 available to offset
future federal taxable income which will expire if not used in fiscal years 2007
through 2012. Therefore, no income tax provision has been reflected in the
accompanying financial statements.
Net Loss. The Company reported a net loss of $2,662,272 for the current
three-month period ended December 31, 1997, compared with a profit of $974,131
in the same period in fiscal 1997. The current period loss is primarily due to
losses in the data acquisition group where revenues were down 62% due to slowing
of available contract projects. Higher selling, general and administrative
expense due, in part, to increased consulting expenses and higher salary
expenses as a result of management changes and DD&A expense also contributed to
the overall loss for the period.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended December 31, 1997, cash and cash equivalents
decreased by $1,388,370 to $471,307. Cash used by investing activities of
$1,682,520 includes investments in oil and gas properties of $2,733,808, $27,800
for data processing equipment and upgrades, with the balance of $89,000 used for
miscellaneous data acquisition equipment, less $1,168,088 received from the sale
of interest in two of the Company's oil and gas properties.
In August 1997, the Company borrowed an additional $2,000,000 from
RIMCO. The proceeds were utilized to fund the shareholder litigation settlement
and legal and accounting fees incurred as a result of such litigation. The
Company expects to recover a substantial portion of its costs of the settlement
and expenses associated with the lawsuit from its directors' and officers'
liability insurance carrier. As of January 30, 1998, the Company had received a
settlement of $1,245,000 and is pursuing additional recovery.
The Company's accounts payable balance decreased by $1,592,505 during
the six-month period ended December 31, 1997. Accounts receivable (net)
decreased slightly by $205,593 during the period. The Company had approximately
$1,523,000 of receivables over 90 days old as of December 31, 1997 for which
adequate reserves have been made.
On November 3, 1997, the Company entered into two additional financing
agreements with RIMCO for $2,144,000 and $1,730,383, respectively, under
revolving credit facilities and issued 12% Senior Secured General Obligation
Notes with interest payable monthly and principal due December 1, 1999. As of
December 31, 1997, the Company had borrowed $1,494,000 under the first facility
which was used for working capital and $1,090,383 under the second facility used
13 of 16
<PAGE> 14
to expand the Company's oil and gas exploration activities and the notes are
secured by the Company's oil and gas properties.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As more fully
explained below, the Company has incurred continuing losses from operations of
$4,239,383 and $429,877 for the years ended June 30, 1997 and 1996,
respectively, and these losses have continued during the six-month period ended
December 31, 1997, with operating losses of $2,129,105 and $3,771,729 for
the three and six-month periods ended December 31, 1997, respectively. In
addition, the Company had an accumulated deficit and a net working capital
deficiency of $16,536,869 and $22,462,905, respectively, as of December 31,
1997. All debt due the Company's major debtholder, RIMCO, has been classified
as current maturities as of December 31, 1997.
As of December 31, 1997, the Company had a cash balance of $471,307. If
losses from operations continue (as is anticipated), the Company believes this
cash, along with anticipated cash flow from its seismic and exploration and
production operations and funds available under its credit facilities, will not
be adequate for its overall working capital requirements. The Company believes
that it could generate substantial cash flow from its oil and gas properties if
it had sufficient funding for its drilling program. Future cash flows are
subject to a number of uncertainties, particularly the condition of the oil and
gas industry and related seismic activity in the Company's markets. Liquidity of
the Company should be considered in light of the significant fluctuations in
demand that may be experienced by changes in gas producers' expectations and
budgets occur. These fluctuations can rapidly impact the Company's liquidity as
supply and demand factors directly affect utilization and contract revenues,
which are primary determinants of cash flow from the Company's operations.
Reference is made to Note 2 to the Consolidated Financial Statements
for further discussion of defaults under the RIMCO financing agreements.
SUBSEQUENT EVENTS
Reference is made to Note 2 and Note 3 to the Consolidated Financial
Statements for a discussion relating to subsequent events regarding liquidity
and continuing operating losses and the restatement and reclassification of the
financial statements.
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<PAGE> 15
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
As of December 31, 1997, the Company was in default on certain
covenants of its RIMCO financing agreements and RIMCO has waived such defaults
and principal and interest payment covenants through July 1, 1998. The Company
is negotiating an extension of this waiver and a debt-to-equity exchange with
RIMCO whereby the indebtedness to RIMCO, including accrued interest, would be
converted into equity and subordinated debt. In a proposed agreement with RIMCO,
which was executed on February 9, 1998 and expired on June 1, 1998, $15,000,000
was to be converted into common stock of the Company and the balance into
convertible subordinated notes. The shares to be issued in the conversion were
to be tied to the average price of the Company's common stock for the 30-day
period prior to receiving stockholder approval. As of June 30, 1998, the Company
was indebted to RIMCO under the various financing agreements for $22,168,899
principal and $1,896,450 accrued interest.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On November 11, 1997, the Company announced that Joe T. Rye was
appointed President and Chief Executive Officer on an interim basis succeeding
Michael J. Pawelek, who will serve as Executive Vice President of the Company
and President of the Company's oil and gas subsidiary, UNEXCO, Inc. Also
appointed by the Board was Stephen H. Wood as Vice President - Seismic
Operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
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<PAGE> 16
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVERSAL SEISMIC ASSOCIATES, INC.
/s/ JOE T. RYE
DATE: JULY 23, 1998 PRESIDENT/CHIEF EXECUTIVE OFFICER
16 of 16
<PAGE> 17
Index to Exhibit
Item
----
Ex-27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 471,307
<SECURITIES> 0
<RECEIVABLES> 5,489,467
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,500,132
<PP&E> 24,057,784
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,287,371
<CURRENT-LIABILITIES> 28,963,037
<BONDS> 1,775,236
0
0
<COMMON> 523
<OTHER-SE> 548,575
<TOTAL-LIABILITY-AND-EQUITY> 31,287,371
<SALES> 13,440,976
<TOTAL-REVENUES> 13,440,976
<CGS> 0
<TOTAL-COSTS> 15,884,885
<OTHER-EXPENSES> 1,314,820
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 943,999
<INCOME-PRETAX> (4,702,209)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,702,209)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,702,209)
<EPS-PRIMARY> (.90)
<EPS-DILUTED> 0
</TABLE>
