-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qmje9tFXtod1vhr5UfeUHi96nr/9i2ROWiiVRETh4FCU53Ei/ACVBrWjgig2+wAO jAvP66+zLgTx9iBwo/avDg== 0000890566-00-000544.txt : 20000417 0000890566-00-000544.hdr.sgml : 20000417 ACCESSION NUMBER: 0000890566-00-000544 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GEOKINETICS INC CENTRAL INDEX KEY: 0000314606 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 941690082 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-09268 FILM NUMBER: 601259 BUSINESS ADDRESS: STREET 1: 8401 WESTHEIMER STREET 2: SUITE 150 CITY: HOUSTON STATE: TX ZIP: 77063 BUSINESS PHONE: 7138507600 MAIL ADDRESS: STREET 1: 8401 WESTHEIMER STREET 2: SUITE 150 CITY: HOUSTON STATE: TX ZIP: 77063 10KSB40 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-9268 GEOKINETICS INC. (Exact name of small business issuer as specified in its charter) Delaware 94-1690082 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8401 Westheimer, Suite 150 Houston, Texas 77063 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (713) 850-7600 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] Registrant's revenues for its most recent fiscal year were $14,194,126. As of December 31, 1999, 19,367,156 shares of the Registrant's Common Stock were outstanding, and the aggregate market value of the Common Stock held by non-affiliates was approximately $3,115,157 the last reported sales price of such stock on that date. DOCUMENTS INCORPORATED BY REFERENCE Documents incorporated by reference: None. GEOKINETICS INC. FORM 10-KSB YEAR ENDED DECEMBER 31, 1999 TABLE OF CONTENTS PAGE PART I Item 1. Description of Business.......................................1 Item 2. Description of Property.......................................9 Item 3. Legal Proceedings............................................10 Item 4. Submission of Matters to a Vote of Security Holders..........10 PART II Item 5. Market for Common Equity and Related Stockholder Matters.....10 Item 6. Management's Discussion and Analysis or Plan of Operation....11 Item 7. Financial Statements.........................................14 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....................................14 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act............15 Item 10. Executive Compensation.......................................17 Item 11. Security Ownership of Certain Beneficial Owners and Management...................................................19 Item 12. Certain Relationships and Related Transactions...............22 Item 13. Exhibits and Reports on Form 8-K.............................25 i PART I ITEM 1. DESCRIPTION OF BUSINESS. DEVELOPMENT OF CURRENT BUSINESS OPERATIONS The predecessor corporation of Geokinetics Inc. ("Geokinetics" or the "Company") was organized in 1969 under the laws of California. The Company was incorporated in Delaware in April 1980, and the California corporation was merged into the Company. During 1994, the Company acquired certain oil and gas properties from two independent oil and gas companies located in Houston, Texas. The Company completed these acquisitions by means of a merger of HOC Operating Co., Inc. and Hale Exploration Company, each Texas corporations, into two newly-formed subsidiaries of the Company. Since April 1997, the Company has repositioned itself from an oil & gas exploration and production company into a technologically advanced provider of seismic acquisition and high-end seismic data processing services to the oil and gas industry. Through equipment purchases, acquisitions of certain competitors and the completion of a series of private equity transactions, the Company now has the capacity to operate three seismic crews in the Rocky Mountain and Gulf Coast regions of the United States ("US"). As previously disclosed, the Company divested its interests in its oil and gas properties during 1999. o On April 25, 1997, the Company obtained $500,000 in short-term financing in the form of 12% senior notes from William R. Ziegler and Steven A. Webster (both of whom were appointed to the Company's Board of Directors effective August 1, 1997). As additional consideration for providing this financing, the Company issued warrants entitling each of Messrs. Ziegler and Webster to purchase 500,000 shares (subject to anti-dilution provisions contained therein) of the Company's Common Stock, par value $.01 per share (the "Common Stock") at a price of $0.75 per share. On July 18, 1997, pursuant to the Securities Purchase and Exchange Agreement, described below, these notes were exchanged for (i) 458,333 newly-issued shares of the Company's Common Stock, (ii) 15,625 newly-issued shares of the Company's Series A Preferred Stock and (iii) Shadow Warrants to purchase an additional 592,009 shares of the Company's Common Stock at a price of $0.20 per share. o On July 18, 1997, the Company entered into a Securities Purchase and Exchange Agreement (the "Purchase Agreement") with Blackhawk Investors, L.L.C., William R. Ziegler and Steven A. Webster (referred to collectively as the "Blackhawk Group"). Pursuant to the Purchase Agreement, the Blackhawk Group acquired from the Company (i) 5,500,000 newly-issued shares of the Company's Common Stock, (ii) 187,500 newly-issued shares of the Company's Series A Preferred Stock (which were converted into an aggregate of 2,500,000 shares of Common Stock on November 24, 1997), and (iii) Shadow Warrants to purchase up to an additional 7,104,103 shares of Common Stock at a price of $0.20 per share, in exchange for (x) an aggregate of $5,500,000 in cash paid to the Company and (y) the exchange of certain indebtedness in the principal amount of $500,000 owed by the Company to Messrs. Ziegler and Webster. 1 o On July 24, 1997, Blackhawk Investors, L.L.C. acquired 100,000 shares of the Company's newly-issued Series B Preferred Stock for $1 million in cash. The Series B Preferred Stock was automatically converted into an aggregate of 1,333,333 shares of Common Stock on January 1, 1998. o On July 18, 1997, the Company acquired Signature Geophysical Services, Inc., a Michigan corporation ("Signature"). Signature, based in Houston, Texas, is engaged in the business of providing 3D seismic surveys of oil and gas properties, focusing primarily on the Gulf Coast of the United States, with particular emphasis on coastal swamp operations. o On January 26, 1998, the Company acquired Reliable Exploration Incorporated, a Montana corporation ("Reliable"). Reliable, based in Billings, Montana, is engaged in the business of providing 2D and 3D seismic surveys to the oil & gas industry, focusing on the Rocky Mountain region of the United States. o On April 30, 1998, the Company completed the acquisition of Geophysical Development Corporation, a Texas corporation ("GDC"). GDC, based in Houston, Texas is a high-end provider of seismic data processing, software and consultation services to the oil and gas industry. o On April 30, 1998, the Company completed a private offering of $40,000,000 of certain securities designated as its 12% Senior Subordinated Notes (the "1998 Notes") to DLJ Investment Partners, L.P. and certain additional investors (the "1998 Purchasers") pursuant to the terms of a Securities Purchase Agreement by and among the Company and the 1998 Purchasers. Additionally, the Company (i) caused certain of its wholly-owned subsidiaries to execute guarantees of the 1998 Notes pursuant to an Indenture executed by each of them, (ii) granted warrants (the "Warrants") to the Purchasers entitling them to purchase up to an aggregate of 7,618,594 shares of Common Stock at a price of $2.00 per share, subject to certain adjustments, and (iii) granted certain registration rights in favor of the Purchasers with respect to the 1998 Notes, the Warrants and the shares of Common Stock which may be acquired upon exercise of the Warrants. The completion of this offering enabled the Company to purchase an additional 3,000 channel I/O RSR System Two and complete the acquisition of GDC. o On July 28, 1999, the Company sold HOC Operating Co., Inc., a wholly owned subsidiary of the Company ("HOC"), to Halex Oil Corporation ("Halex"). Immediately prior to the sale of HOC to Halex, Geokinetics Production Company, Inc., a wholly owned subsidiary of the Company, conveyed to HOC various interests in certain oil and gas properties. These transactions completed the Company's divestment of its oil and gas operations. o On October 1, 1999, the Company completed a restructuring of its 1998 Notes and received an additional $4,000,000 from the holders of the 1998 Notes and $1,000,000 from other investors. On November 30, 1999, the Company received an additional $895,000 from other investors. The restructuring involved the company exchanging the 1998 Notes in the aggregate principal amount of $45,358,000 (the "2005 Notes") 2 and the Company issued $5,895,000 of its 13.5% Senior Secured Notes due 2002 (the "2002 Notes") for the additional funding received on October 1 and November 30, 1999. The company granted security interests covering substantially all of its assets as security for the 2005 Notes and 2002 Notes and caused certain of its wholly-owned subsidiaries to execute guaranties of the 2005 Notes and the 2002 Notes. Concurrently, the Company also completed a restructuring of its debt obligations to its principal equipment supplier for the Company's seismic acquisition operations. o On February 23, 2000, the Company sold Reliable Exploration, Incorporated, a wholly-owned subsidiary of the Company ("Reliable"), to RNS, LLC, a Montana limited liability company. RNS, LLC is wholly-owned by Allen Rein, Kim Nordberg and Scott Schmitt, the persons from whom the Company had previously acquired Reliable in January of 1998. In addition, as a condition to the closing of the sale of Reliable, the Company obtained a release of its guaranty of Reliable's indebtedness to a former shareholder of Reliable. As a result of these transactions, the Company has evolved into a technologically focused provider of 3D seismic services to the oil and gas industry. By completing the transactions described above, the Company has been able to expand its seismic acquisition capabilities and significantly increase its overall capabilities by being able to provide high-end seismic data processing services. The industry downturn which began in mid-1998 worsened during 1999. Demand for the Company's seismic acquisition and seismic data processing services weakened significantly in 1999. Although the downturn continues to negatively affect the Company's operating and financing results, the Company will continue to evaluate opportunities which would allow the Company to expand its capabilities and become a significant provider of land-based seismic acquisition services as well as continuing to increase the high-end services provided by its seismic data processing and interpretation business. The Company's corporate headquarters is located in Houston, Texas. The Company's address is 8401 Westheimer, Suite 150, Houston, Texas 77063 and its telephone number is (713) 850-7600. FORWARD-LOOKING INFORMATION This report contains forward-looking statements, including statements regarding future financial performance and results and other statements that are not historical facts. Such statements are included in Item 1 ("Business"), Item 2 ("Property"), and Item 6 ("Management's Discussion and Analysis of Financial Condition and Results of Operations"). When used in this report, words such as "anticipate," "believe," "expect," "estimate," "intend," "may," and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, there can be no assurance that actual results or developments anticipated by the Company will be realized or, even if realized, that they will have the expected effects on its business or operations. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors beyond the Company's control. Such factors include, but are not limited to, dependence upon oil and gas industry spending, worldwide prices, demand for oil and gas, technological changes and 3 developments in the seismic acquisition business, operating risks, regulatory changes, and changes in economic conditions both domestic and international. INDUSTRY OVERVIEW Seismic surveys enable oil and gas companies to determine whether subsurface conditions are favorable for finding new oil and gas accumulations and assist oil and gas companies in determining the size and structure of previously identified oil and gas fields. Seismic surveys consist of the acquisition and processing of two dimensional ("2D") and three dimensional ("3D") seismic data, which is used to produce computer generated graphic cross-sections, maps and 3D images of the subsurface. These resulting images are then analyzed and interpreted by geophysicists and are used by oil and gas companies in the acquisition of new leases, the selection of drilling locations on exploratory prospects and in managing and developing producing reservoirs. With the advent of modern 3D technology, the seismic industry has changed profoundly. In the past the role of seismic, in particular 2D surveys, was restricted to that of simply illustrating gross structural features. In contrast, 3D surveys provide detailed views of subsurface geologic structures and much higher resolution of the structures than is available from a 2D survey. Moreover, 3D surveys have proven to be more reliable indicators of the oil and gas potential in the surveyed area than 2D surveys. As a result, drilling based on 3D seismic surveys has improved the economics of discovering oil and gas by reducing risks and finding costs for the oil and gas industry. Consequently, the demand for 3D seismic surveys has significantly increased in the past several years. In technical literature, it is 3D seismic technology that is cited time and again as the technology most impacting exploration and production economics over the last five years. Additionally, as the image quality of 3D seismic has improved, the role of 3D seismic has expanded beyond the identification of exploration drilling prospects and into the realm of field development and production management. Seismic data is acquired by land, transition zone and offshore crews. Seismic data is generated by the propagation of sound waves near the earth's surface by controlled sources, such as dynamite or vibration equipment. The seismic waves radiate into the earth and are reflected back to the surface with the information collected by strategically positioned data collection devices known in the industry as "geophones". This data is then input into a specialized data processing system that enhances the recorded signal by reducing noise and distortion and improving resolution and arranges the input data to produce an image of the subsurface. Practically speaking, 3D seismic surveys collect far more information than previously used seismic methods, generating significantly greater detail about the underlying reservoirs. With advances in equipment and computer power resulting in lower costs, 3D technology is now being applied to virtually all exploration ventures as well as field development and prospect delineation. Since 1988 the offshore seismic data acquisition market has changed from a market that was roughly 50-60% proprietary 3D seismic surveys to one that is predominately multi-client or "spec surveys". The major difference between a proprietary survey and a multi-client survey is the data acquired from a proprietary survey is exclusively owned by the customer whereas the data acquired from a multi-client survey is owned by the contractor and can be resold. The reduced cost which customers generally enjoy from participating in a multi-client survey more than offset the loss of exclusive data ownership. This fact and the general industry perception that seismic acquisition is a commodity business have been the primary reasons for the rapid expansion of multi-client data in the offshore. Most exploration companies use processing, interpretation or other in-house technology as a means of 4 differentiation rather than acquired data. This same circumstance is now occurring on land. In the next few years, as small onshore oil and gas companies become more comfortable with a multi-client business model, it will become the preferred method of acquiring 3D seismic data causing a reduction in proprietary surveys. In the past several years, the seismic service industry has undergone a significant change. 1998 began with an abundance of work, attractive gross margins (20-30%) and a solid oil and gas price premise. However, with the deterioration of the price of oil which began in mid-1998 and continued into early 1999, the industry has experienced a significant downturn. Margins have been reduced significantly, the number of 3D proprietary seismic surveys to be acquired has been greatly reduced, seismic crews have been stacked and a number of seismic service companies are experiencing financial difficulties. Couple this with a continuing trend towards larger crews with a greater number of channels and more technologically capable equipment and it is clear that properly capitalized companies with access to lower costing capital will have a significant advantage in a high capital cost business. These conditions also apply to the seismic data processing segment of the industry. Margins have deteriorated, although not to the levels seen in acquisition, and the number of processing opportunities also has decreased. Seismic data processing companies with proprietary processing techniques, large computing infrastructure and industry recognized staffs will have a significant advantage going forward. While the price of oil has steadily increased during the second half of 1999 and continues to increase in early 2000, demand for the services provided by the Company has not as yet been positively affected. SEISMIC ACQUISITION SERVICES The Company is engaged in land-based and transition zone seismic acquisition services on a contract basis for its clients. The Company's equipment is capable of collecting both 2D and 3D seismic acquisition data, has a combined recording capacity of approximately 9,000 channels and can be configured to operate up to 3 crews. A majority of the Company's land and transition zone acquisition services involve 3D surveys. The Company is currently operating one crew in the Gulf Coast region. On a typical land seismic survey, the seismic crew is supported by a surveying crew which lays out the lines to be recorded and identifies the sites for shot-hole placement, a drilling crew which creates the holes for the explosive charges which produce the necessary acoustical impulse or a mechanical vibrating unit in areas where explosives are not utilized. The seismic crew lays out the geophones and recording instruments, directs shooting operations and records the acoustical signal reflected from subsurface strata. The survey crew and drill crew are typically provided by third parties and supervised by Company personnel. A fully staffed 3D seismic crew typically consists of twenty-five to fifty persons, including a party manager, an observer, a head linesman and crew laborers. The number of individuals on each crew is dependent upon the size and nature of the seismic survey requested by the customer. The Company uses helicopters to assist its crews in seismic data acquisition in circumstances where such use will reduce overall costs and improve productivity. These savings are achieved by deploying the crew and its equipment more rapidly and significantly reducing surface damages. SEISMIC DATA PROCESSING The Company currently operates one seismic data processing center in Houston, Texas capable of processing 2D and 3D seismic data acquired from its own crews as well as data acquired by other 5 geophysical crews. A majority of the Company's data processing services is performed on 3D seismic data. Seismic data is processed to produce an image of the earth's subsurface using proprietary computer software and techniques developed by the Company. The Company also reprocesses older seismic data using new techniques designed to enhance the quality of the data. The Company's data processing center operates high capacity, advanced technology data processing systems based primarily on Sun(R) computer systems using high-speed networks. These systems utilize the Company's proprietary data processing software. The Company processes both land and marine seismic data. The geophysical industry is highly technical, and the technological requirements for the acquisition and processing of seismic data have increased continuously over time. Thus, the Company must continually take steps to ensure that its technological capabilities are comparable or superior to those of its competitors, whether through continuing research and development, strategic alliances with equipment manufacturers or by acquiring technology under license from others. The Company has introduced several technological innovations that have become industry-standard products in the seismic data processing business. The Company significantly expanded its capability to provide pre-stack time and pre-stack depth migration by recently entering into an alliance with a Texas-based hardware infrastructure and software company. The alliance provides the Company with additional computer capacity to deliver more than 400 OCS blocks of pre-stacked depth migration per year. The Company's seismic data processing operations are conducted by Geophysical Development Corporation ("GDC"), its wholly-owned subsidiary. GDC, which was founded in 1981 to provide geophysical processing, interpretation, software and consultation services to the oil and gas industry, was acquired by the Company in April 1998. CAPITAL EXPENDITURES The seismic service industry is capital intensive, and the Company will need to raise additional capital to continue to expand its seismic service capabilities. The cost of sophisticated seismic acquisition equipment has increased significantly over the last several years. The cost of equipping a crew with a state-of-the-art system such as an I/O System Two, can range from $4 to $10 million. The Company's ability to expand its business operations is dependent upon the availability of internally generated cash flow and financing alternatives. Such financing may consist of bank or commercial debt, equity or debt securities or any combination thereof. There can be no assurance that the Company will be successful in obtaining additional financing if and when required. Any substantial alteration or increase in the Company's capitalization through the issuance of debt or equity securities or otherwise may significantly increase the leverage and decrease the financial flexibility of the Company. Due to the uncertainties surrounding the changing market for seismic services, increases in technological requirements, and other matters associated with the Company's operations, the Company is unable to estimate the amount of any financing that it may need to acquire, upgrade and maintain seismic equipment and continue its diversification as a full-scale geotechnology enterprise. If the Company is unable to obtain such financing if and when needed, it will be forced to curtail its business objectives, and to finance its business activities with only such internally generated funds as may then be available. 6 OPERATING CONDITIONS The Company's seismic acquisition activities are often conducted under extreme weather, in difficult terrain and under other hazardous conditions. As a result, these activities are subject to risks of injury to Company personnel and loss of seismic acquisition equipment. The Company maintains insurance against the destruction of its seismic acquisition equipment and injury to person and property that may result from its operations and considers the amount of such insurance to be adequate. However, the Company is not fully insured for all risks, either because such insurance is not available or because the Company elects not to obtain insurance coverage because of cost. Fixed costs, including costs associated with operating leases, labor costs, depreciation and interest expense account for a substantial percentage of the Company's costs and expenses. Accordingly, downtime or low productivity resulting from weather interruptions, reduced demand, equipment failures or other causes can result in significant operating losses. The Company believes it will have the opportunity to generate its highest revenues during the third quarter (July 1 through September 30) primarily because this period typically provides for more recording hours due to longer days and less curtailment of operations due to poor weather. Although certain seasons generally provide better working conditions, adverse conditions may impact revenues at any time throughout the year. MARKETING The Company's seismic acquisition and seismic data processing services are marketed from its Houston office. While the Company relies upon the traditional utilization of Company personnel in making sales calls, it anticipates receiving a significant amount of work through word-of-mouth referrals and sales, repeat customer sales and the Company's industry reputation and presence of its personnel. Contracts are obtained either through competitive bidding, in response to invitations to bid, or by direct negotiation with a prospective client. A significant portion of the Company's contracts result from competitive bidding. Contracts are awarded primarily on the basis of price, crew experience and availability, technological expertise and reputation for dependability and safety. Seismic acquisition contracts, whether bid or negotiated, provide for payment on either a turnkey or a time basis or on a combination of both methods. A turnkey contract provides for a fixed fee to be paid per square mile of data acquired. Such a contract causes the Company to bear substantially all the risks of business interruption caused by weather delays and other hazards. Time contracts provide for payments based on agreed rates per units of time, which may be expressed in periods ranging from days to months. This type of contract causes the client to bear substantially all of the business interruption risks. When a combination of both turnkey and time methods is used, the risk of business interruption is shared by the Company and the client. In either case, progress payments are usually required unless it is expected the job can be accomplished in a short period. The Company's contracts for seismic acquisition have been predominantly on a turnkey or combination of turnkey/time basis. The Company's contracts currently provide that the seismic data acquired by the Company is the exclusive property of the Company's client. Substantially all of the Company's data processing contracts are on a turnkey basis. 7 CUSTOMERS The Company's customers include a number of major oil industry companies and their affiliates, including Mobil, Seitel, Marathon, Texaco and Phillips as well as many smaller, independent oil and gas companies. The table below sets forth customers that accounted for more than 10% of the Company's revenues during the fiscal year ended December 31, 1999: FOR THE YEAR ENDED DECEMBER 31, 1999 ------------------------------------------------- REVENUES PERCENTAGE OF TOTAL REVENUES Phillips Petroleum Company $2,073,262 14.6% Mobil $1,642,600 11.6% No other customer accounted for more than 10% of the Company's revenues in 1999. BACKLOG At March 31, 2000, the Company's backlog of commitments for services was $7.5 million. It is anticipated that significantly all of the March 31, 2000 backlog will be completed in the next 12 months. This backlog consists of written orders or commitments believed to be firm. Contracts for services are occasionally varied or modified by mutual consent and in certain instances are cancelable by the customer on short notice without penalty. As a result of these factors, the Company's backlog as of any particular date may not be indicative of the Company's actual operating results for any succeeding fiscal period. COMPETITION The acquisition and processing of seismic data for the oil and gas industry is highly competitive. Although reliable comparative figures are not available, the Company believes its principal competitors have more extensive and diversified operations and also have financial, operating and other resources substantially in excess of those available to the Company. Competitive factors include the type and capability of equipment used to conduct seismic surveys and that equipment's availability. In addition to price, the performance and dependability of a crew significantly affect a potential customer's decision to award a contract to a company or one of its competitors. The Company's major competitors include Western Geophysical (a division of Baker Hughes), Veritas DGC, Geco-Prakla (a division of Schlumberger Ltd.), Eagle Geophysical, Inc., Dawson Geophysical Company and PGS, Inc. REGULATION The Company's operations are subject to numerous federal, state and local laws and regulations. These laws and regulations govern various aspects of operations, including the discharge of explosive materials into the environment, requiring removal and clean-up of materials that may harm the environment or otherwise relating to the protection of the environment and access to private and 8 governmental land to conduct seismic surveys. The Company believes it has conducted its operations in substantial compliance with applicable environmental laws and regulations governing its activities. TECHNOLOGY The Company relies on certain proprietary information, trade secrets, and confidentiality and licensing agreements (collectively, "Intellectual Property") to conduct its current operations. The Company's future success will depend, in part, on its ability to maintain and preserve its Intellectual Property, without infringing the rights of any third parties. There can be no assurance that the Company will be successful in protecting its Intellectual Property or that its competitors will not develop technologies that are substantially equivalent or superior to the Company's technologies. The Company continues to incur expenses associated with research and development and expects that research and development expenditures will increase as the Company's expansion into other areas of seismic operations develops. EMPLOYEES At March 31, 2000, the Company had approximately 100 full-time employees. None of the Company's employees are parties to a collective bargaining agreement. The Company considers the relations with its employees to be good. ITEM 2. DESCRIPTION OF PROPERTY. In October of 1999, the Company consolidated all of its office operations to what formerly had been its geophysical data processing center, located at 8401 Westheimer, Houston, Texas 77063. Prior to this consolidation, the Company's headquarters and seismic acquisition operations had been located at 5555 San Felipe, Houston, Texas 77056. The Company leases 26,956 square feet of office space at its current headquarters under a lease expiring April 30, 2001. The Company's annual rent under this lease is $243,156. In addition, the Company owns approximately one acre of property in Brookshire, Texas, which is serving as the Company's maintenance facility for its seismic acquisition operations. The Brookshire, Texas property consists of a facility of approximately 5,400 square feet where maintenance activities are conducted and a smaller storage facility of approximately 1,200 square feet. The Brookshire facility is subject to a Deed of Trust, Security Agreement and Fixtures Financing Statement dated March 1, 1996 from Quantum Geophysical, Inc. (now Quantum Geophysical Services, Inc.), Mortgagor, to Benefit Life Insurance Company, Mortgagee. The Company also leases an office and maintenance facility of approximately 5,000 square feet in Billings, Montana. The Company's annual rent under this lease is $41,400. The lease has an eleven-year term that will expire in December of 2009, but may be terminated by the Company in February 2001 under certain circumstances. The Company currently has no plans to renovate, improve or develop any of its forgoing properties, and believes each of the properties is adequately covered by insurance. The Company also believes that its present facilities are sufficient for the foreseeable future and that it will be able to negotiate favorable lease renewals of the leased facilities or find suitable replacement facilities without substantial difficulty. The Company does not invest in real estate, interests in real estate or real estate mortgages and does not acquire assets primarily for capital gain or primarily for income. 9 ITEM 3. LEGAL PROCEEDINGS. On September 9, 1998 the Company filed suit in Smith County, Texas against SMK Energy Corporation ("SMK") to collect approximately $2.8 million due for seismic data acquisition services performed by one of the Company's subsidiaries. On January 13, 1999, the Company obtained a judgment against SMK for approximately $3 million, including interest and attorneys' fees. SMK is currently the subject of involuntary bankruptcy proceedings that were brought against SMK in March 1999. On February 17, 2000, the Company entered into a final compromise and settlement of any and all claims it had against SMK and any other involved parties. The Company had previously entered into and agreed to the terms of a Settlement Term Sheet approved by the United States Bankruptcy Court for the Southern District of Texas and made effective on December 6, 1999. As part of the settlement agreement, the Company received an ownership interest in 200 miles of previously recorded seismic data located in the Atchafalaya Basin of Louisiana. Except for the proceedings discussed above, neither the Company nor any of its subsidiaries is a party to any pending legal proceedings. Moreover, the Company is not aware of any such legal proceedings that are contemplated by governmental authorities with respect to the Company, any of its subsidiaries, or any of their respective properties. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1999. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock, $.01 par value per share (the "Common Stock") is traded on the Nasdaq OTC Bulletin Board under the trading symbol "GEOK." As of December 31, 1999, the Company had 378 stockholders of record. The following table sets forth the high and low closing prices for the Common Stock during the Company's most recent fiscal quarter and its last two fiscal years as reported by the National Association of Security Dealers on the Nasdaq OTC Bulletin Board. HIGH LOW ------ ------ Twelve Months Ended December 31, 1999 Quarter Ended March 31, 1999 5/8 1/5 Quarter Ended June 30, 1999 25/32 17/32 Quarter Ended September 30, 1999 1 1/8 9/32 Quarter Ended December 31, 1999 1 7/32 7/32 10 HIGH LOW ------ ------ Twelve Months Ended December 31, 1998 Quarter Ended March 31, 1998 4 1/16 2 1/2 Quarter Ended June 30, 1998 4 3/8 3 3/8 Quarter Ended September 30, 1998 3 3/8 1 13/16 Quarter ended December 31, 1998 1 13/16 11/32 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. GENERAL On July 28, 1999, the Company sold all of the outstanding capital stock of HOC Operating Co., Inc. ("HOC"), a wholly-owned subsidiary of the Company, to Halex Oil Corporation ("Halex"), a Texas corporation owned by a former officer of the Company, pursuant to the terms of a Stock Purchase Agreement ("HOC Agreement"). Under the HOC Agreement, Halex acquired all of the capital stock of HOC in exchange for the assumption by Halex of certain debt obligations and accounts payable of HOC and Geokinetics Production Company, Inc. ("Geokinetics Production"), a wholly-owned subsidiary of the Company. Immediately prior to the sale of HOC's Stock to Halex, Geokinetics Production conveyed to HOC various interests in certain oil and gas properties, as well as certain liabilities. This transaction completed the discontinuance of the Company's oil and gas operations and has been accounted for as a discontinued operation. On February 23, 2000, the Company sold all of the outstanding capital stock of Reliable Exploration, Incorporated ("Reliable"), a wholly-owned subsidiary of the Company, to RNS, LLC, a Montana limited liability company ("RNS"). RNS is wholly-owned by Allen Rein, Kim Nordberg and Scott Schmitt (the "Former Shareholders"), current officers of Reliable and the persons from whom the Company had previously acquired Reliable in January 1998. The transaction ("Reliable Sale") was completed pursuant to the terms of a Stock Purchase Agreement, by and among the Company, RNS, and the Former Shareholders. The consideration received by the Company in the Reliable Sale consisted of (i) a $250,000 promissory note of RNS, payable in 36 monthly installments and bearing interest at a fixed rate of 8% per annum and (ii) 375,000 shares of the Company's Common Stock, $0.01 par value per share. In addition, as a condition to the closing of the Reliable Sale, the Company obtained a release of its guaranty of Reliable's indebtedness, in the amount of $501,356, to a former shareholder of Reliable. At December 31, 1999, the Company's financial position reflects (i) the seismic acquisition services being conducted by Quantum Geophysical, Inc. ("Quantum") and (ii) the seismic data processing, software and consultation services being provided by Geophysical Development Corporation ("GDC"). The oil service industry downturn, which began in 1998, worsened during 1999. This downturn resulted from the deterioration of the price of oil which occurred in mid 1998 and continued into early 1999. Demand for the Company's seismic acquisition and seismic data processing services weakened significantly in 1999. This unprecedented downturn severely constrained the Company's working capital position. While there has been a continuing increase in the price of oil, in relation to where it was in early 1999, the demand for services provided by the Company has not yet been positively affected. The Company anticipates that the demand for its seismic acquisition and seismic data processing services will remain weak during the first half of 2000. 11 RESULTS OF OPERATIONS Revenues for the 12 months ended December 31, 1999 were $14,194,126, as compared to $32,627,174 for the same period of 1998, as adjusted for the discontinuance of the Company's oil and gas operations, a decrease of 57%. This decrease is a direct result of the weakened demand for the Company's seismic acquisition and seismic data processing services which occurred in 1999. During 1998, the Company operated as many as five seismic acquisition crews. During 1999, the Company did not operate more than two crews at any one time and had periods where no crews were operational. The Company also saw weakness in its seismic data processing operations. Seismic data processing revenue totaled $9,257,500 in 1998. This revenue was generated over an eight month period as revenue was recognized from the date of acquisition of GDC, April 30, 1998, to December 31, 1998. Revenue in 1999 totaled $8,786,231 but was generated over a twelve month period. Operating expenses for the 12 months ended December 31, 1999 were $13,922,368, as compared to $25,096,892 for the same period of 1998, as adjusted for the discontinuance of the Company's oil and gas operations, a decrease of 45%. This decrease is directly attributable to the weakened demand for the Company's seismic data acquisition and seismic data processing services. General and Administrative expenses for 1999 totaled $2,817,885, a decrease of $300,294 from 1998, as adjusted for the discontinuance of the Company's oil and gas operations. The decrease in General and Administrative expenses is attributable to manpower reductions and other measures instituted to reduce costs during this period of weakened demand. Depletion, depreciation and amortization expense for 1999 totaled $9,907,917, as compared to $7,128,594 for the same period of 1998 and as adjusted for the discontinuance of the Company's oil and gas operations, an increase of 39%. This increase is primarily the result of the previous expansion of the Company's inventory of seismic acquisition equipment and the amortization of goodwill associated with the acquisition of GDC. During 1999, a decision was made to dispose of Reliable. An impairment reserve of $2,143,635 was recorded during 1999 to provide for the loss on the ultimate disposal of Reliable. Reliable was subsequently sold on February 23, 2000. Interest expense (net of interest income) for the 12 months ended December 31, 1999 totaled $7,331,600, as compared to $4,732,038 for the same period of 1998, as adjusted for the discontinuance of the Company's oil and gas operations, an increase of 55%. The increase in interest expense is a result of (i) the Company's closing of a $40,000,000 12% Senior Subordinated Debt financing on April 30, 1998, (ii) the restructuring of that financing on October 1, 1999 in exchange for 13.5% Senior Secured Notes in the amount of $45,358,000, inclusive of accrued unpaid interest of $5,358,000, and (iii) the Company's closing of a $5,895,000 in 13.5% Senior Secured debt financing on October 1 and November 30, 1999. The proceeds from these financings were utilized to acquire GDC, purchase additional seismic acquisition equipment and provide the Company with additional working capital to meet its current obligations. On July 28, 1999, the Company sold all of the outstanding capital stock of HOC to Halex. As a result of this transaction, the Company recognized a loss on the disposal in the amount of $563,375. In addition, the loss for 1999 from the Company's oil and gas operations, prior to the sale, totaled $71,494. This transaction completed the discontinuance of the Company's oil and gas exploration and production operations and has been accounted for as a discontinued operation. 12 The Company had a net loss of $30,419,897, or ($1.57) per share, for the 12 months ended December 31, 1999, as compared to a net loss of $9,968,602, or ($0.53) per share, for the same period of 1998. This increase in net loss is the result of (i) a significant decrease in the Company's revenues, attributable to a significant industry downturn, (ii) increases in depletion, depreciation and amortization expense and interest expense, as outlined above, (iii) the recognition of an $8.3 million loss associated with the extinguishment and restructuring of the Company's Senior Subordinated debt and (iv) a $563,000 loss on the disposition of the Company's oil and gas operations. LIQUIDITY AND CAPITAL RESOURCES During 1999, the seismic service industry experienced an unprecedented downturn which severely constrained the Company's working capital position. During this period, management developed a financial and operational plan to carry the Company's operations through the year 2000. One component of this plan included a restructuring of the Company's long term debt. The plan also included disposing of the Company's oil and gas operations as well as one of its seismic acquisition subsidiaries. As a result of the conditions and plan implementation outlined above, the Company incurred a loss of approximately $30.4 million during 1999, and a loss of approximately $10 million incurred in 1998, leaving the Company with an equity deficit of approximately $14.1 million at December 31, 1999. On October 1, 1999 the Company entered into a Securities Purchase Agreement ("Purchase Agreement") with DLJ Partners, L.P. ("DLJ") and certain additional investors (collectively, the "Purchasers"), pursuant to which the Company completed a restructuring of its $40,000,000 12% Senior Subordinated Notes due April 2005 ("Prior Notes") and received an additional $4,000,000 from the Purchasers, the holders of the Prior Notes, and $1,000,000 from other sources. On November 30, 1999, the Company received an additional $895,000 from other investors. The restructuring involved the Company exchanging the Prior Notes for its 13.5% Senior Secured Notes due 2005 in the aggregate principal amount of $45,358,000 (the "2005 Notes") and the Company issuing $5,895,000 of its 13.5% Senior Secured Notes due 2002 (the "2002 Notes") for the additional funding received on October 1, 1999 and November 30, 1999. This transaction provided the Company with the option, during 2000, to make interest payments due on the 13.5% Senior Secured Notes either in cash or by issuing additional notes. Concurrently with the transactions contemplated by the Purchase Agreement, the Company completed a restructuring of its debt obligations to the principal equipment supplier for the Company's seismic acquisition operations. At December 31, 1999, the Company had cash balances of $2,677,996. The Company believes this cash, anticipated cash flow from its seismic acquisition and seismic data processing operations, continued adherence to the financial and operational plan noted above and the deferral of certain accrued expenses will provide sufficient liquidity to continue operations through 2000. As noted above, the Company has the option to avoid making cash interest payments on its 13.5% Senior Secured Notes during 2000. As presently structured, the Company will be required to make a cash interest payment of approximately $3.9 million on March 15, 2001. Under current conditions, continued operations by the Company through this payment will be dependent upon a continued forbearance by the holders of the Company's 13.5% Senior Secured Notes. The Company's ability to expand its business operations is dependent upon the availability of internally generated cash flow and external financing activities. Such financing may consist of bank or commercial debt, equity or debt securities or any combination thereof. There can be no assurance that the Company will be successful in obtaining additional financing when required. Any substantial alteration or increase in the Company's capitalization through the issuance of debt or equity securities or otherwise may 13 significantly decrease the financial flexibility of the Company. Due to uncertainties regarding the changing market for seismic services, technological changes, and other matters associated with the Company's operations, the Company is unable to estimate the amount of any financing that it may need to acquire, upgrade and maintain seismic equipment and continue its diversification as a full-scale geotechnology enterprise. If the Company is unable to obtain such financing when needed, it will be forced to curtail its business objectives, and to finance its business activities with only such internally generated funds as may then be available. YEAR 2000 As of March 30, 2000, the Company had not experienced any materially important business disruptions or system failures as a result of year 2000 issues nor was it aware of any year 2000 issues that impacted its suppliers or other third parties to an extent significant to the Company. However, year 2000 compliance has many elements and potential consequences, some of which may not be foreseeable or may be realized in future periods. Consequently, there can be no assurance that unforeseen circumstances may not arise, or that the Company will not in the future identify equipment or systems which are not year 2000 compliant. OTHER INFORMATION During 1998, a customer of a subsidiary of the Company defaulted on payment of $2.8 million due the Company for seismic data acquisition services performed by its subsidiary. The Company obtained a judgment against the customer in the amount of the outstanding obligation plus interest and attorney's fees. As a result of the customer's subsequent bankruptcy proceedings, the Company determined that the obligation was not collectible and charged the amount against earnings during the fourth quarter of 1998. On February 17, 2000, the Company entered into a compromise and settlement of all claims it had against the customer and any other involved party. As part of the settlement agreement, the Company received an ownership interest in approximately 200 miles of previously recorded seismic data located in the Atchafalaya Basin of Louisiana. No value has been assigned to the data and income will be recognized upon any subsequent sale. ITEM 7. FINANCIAL STATEMENTS. The Company's Annual Consolidated Financial Statements, Notes to Consolidated Financial Statements and the report of Fitts, Roberts & Co., Inc., independent certified public accountants, with respect thereto, referred to in the Table of Contents to Consolidated Financial Statements, appear elsewhere in this report beginning on Page F-1. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 14 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. DIRECTORS AND OFFICERS Set forth below are the names, ages and positions of the directors and executive officers of the Company. Each of the directors named below were elected at the Company's 1998 Annual Meeting of the Stockholders for a term of one year or until their successors were elected. Each of the directors named below will be nominated at the 2000 Annual Meeting of Stockholders to serve on the Company's Board of Directors for additional one year terms or until their successors are elected.
OFFICE HELD NAME AGE POSITION WITH THE COMPANY SINCE ---- --- ------------------------- ----------- William R. Ziegler 57 Chairman (non executive) (since 1997 February 2, 1999) and Director Lynn A. Turner 50 President and Chief Operating Officer 1997 Michael A. Dunn 45 Vice President and 1997 Chief Technology Officer Thomas J. Concannon 46 Vice President and 1997 Chief Financial Officer Michael A. Schott 55 Vice President of Financial 1998 Reporting and Compliance Christopher M. Harte 51 Director 1997 Steven A. Webster 47 Director 1997
There are no family relationships between any of the directors or executive officers of the Company. WILLIAM R. ZIEGLER, age 57, was appointed as the Company's Chairman (non-executive) on February 2, 1999 succeeding Mr. Jay D. Haber. Mr. Ziegler is a partner of the law firm of Satterlee Stephens Burke & Burke, LLP, located in New York, New York. Since June 1994, Mr. Ziegler served as Chairman of the New York law firm of Parson & Brown, L.L.P. which merged with Satterlee Stephens Burke & Burke, LLP effective September 1, 1999. Mr. Ziegler was formerly a partner of Whitman Breed Abbott & Morgan, located in New York, New York (1993 - May 1994), and a predecessor law firm, Whitman & Ransom (since 1976), where he was Co-Chairman of its Corporate Department. Mr. Ziegler is a director of R&B Falcon Corporation, a director and Vice Chairman of Grey Wolf, Inc., a director of Ponder Industries, Inc., a director of Flotek Industries Inc. (an oil services equipment supplier), a general partner of Somerset Capital Partners, and a general partner of Blackhawk Capital Partners, the managing member of Blackhawk Investors, L.L.C. Mr. Ziegler has served as a member of the Company's Board of Directors since August 1, 1997. LYNN A. TURNER, age 50, has served as the President and Chief Operating Officer of the Company since July 28, 1997. Prior to joining the Company, Mr. Turner was employed for six years by Fairfield 15 Industries, Inc., a provider of seismic acquisition services, most recently as Senior Vice President and Manager of Data Acquisition. Mr. Turner has more than 20 years of experience in the seismic data acquisition business. MICHAEL A. DUNN, age 45, has served as a Vice President and the Chief Technology Officer of the Company since August 18, 1997. On August 1, 1999, Mr. Dunn was appointed President of Geophysical Development Corporation, a wholly-owned subsidiary of the Company. Prior to joining the Company, Mr. Dunn was employed for 18 years by Shell Oil Company, most recently as Technology Manager at its Exploration and Production Research Center. Mr. Dunn has over 20 years background in all aspects of geoscience, including seismic acquisition, seismic processing, exploration and research. THOMAS J. CONCANNON, age 46, has served as a Vice President and the Chief Financial Officer of the Company since July 15, 1997. Prior to joining the Company, he worked for four years as a private consultant for various energy companies. Prior to that time, he served as President of NJR Energy, an exploration company and as a director of its parent company, NJ Resources, Inc. Mr. Concannon has over 15 years of energy industry experience. MICHAEL A. SCHOTT, age 55, has served as Vice President of Financial Reporting and Compliance and Secretary since August 5, 1998. Prior to joining the Company, Mr. Schott served eight years as a Vice President and shareholder of a public accounting firm in San Antonio, Texas. Prior to that time Mr. Schott served as Controller, then Senior Vice President and Treasurer of Venus Oil Company. Mr. Schott is a Certified Public Accountant with more than 30 years of experience, including 10 years in the oil and gas exploration industry and 20 years in the practice of public accounting. Mr. Schott is a member of the Texas Society of Public Accountants and the American Institute of CPAs. CHRISTOPHER M. HARTE, age 51, is a private investor. From 1992 to 1994, Mr. Harte was the President of Portland Newspapers, Inc. Mr. Harte is a director of several corporations, including Harte-Hanks Communications, Inc. (a direct marketing and shopper publishing company), Wildfire Fire Equipment Inc. (a forest fire pump manufacturer) and Hi-Port Inc. (a petroleum product contract packaging company), and is an investor member of Blackhawk Investors, L.L.C. Mr. Harte has served as a member of the Company's Board of Directors since August 1, 1997. STEVEN A. WEBSTER, age 47, is the Vice Chairman of R&B Falcon Corporation, an international oil and gas drilling contractor which is listed on the New York Stock Exchange. From January 1998 to June 1999, Mr. Webster served as the President and Chief Executive Officer of R&B Falcon Corporation, and from November 1991 to December 31, 1997, was the Chairman, Chief Executive Officer and Treasurer of Falcon Drilling Company, Inc., a marine oil and gas drilling contractor that, prior to becoming a wholly- owned subsidiary of R&B Falcon Corporation on January 1, 1998, was listed on the New York Stock Exchange. Mr. Webster is a Managing director of Global Energy Partners, a wholly-owned affiliate of the Merchant Banking division of Donaldson Lufkin & Jenrette. Mr. Webster serves as a director of R&B Falcon Corporation, Grey Wolf, Inc. (formerly DI Industries, Inc.) (an international land drilling company), Crown Resources Corporation (a precious metals mining company), Carrizo Oil & Gas, Inc. (an independent oil and gas company), and as a trust manager of Camden Property Trust (a real estate investment trust). Mr. Webster is Chairman of the Board of Directors of Carrizo Oil & Gas, Inc. Mr. Webster is also a general partner of Equipment Asset Recovery Fund (an investment fund), a general partner of Somerset Capital Partners, and a general partner of Blackhawk Capital Partners, the managing member of Blackhawk Investors, L.L.C. Mr. Webster has served as a member of the Company's Board of Directors since August 1, 1997. 16 COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company under Rule 16(a)-3(e) during the fiscal year ended December 31, 1999 and Form 5 and amendments thereto furnished to the Company with respect to such period, the Company is not aware of any director, officer, or beneficial owner of more 10% of any class of equity securities of the Company registered pursuant to Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act") that has failed to file on a timely basis, as disclosed in the above forms, reports required by Section 16(a) of the Exchange Act during the Company's most recent fiscal year or prior years. ITEM 10. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION TABLE The following table reflects all forms of compensation paid to the Company's chief executive officer and its other executive officers for each of the Company's last three completed fiscal years. No other director or executive officer received compensation which exceeded $100,000 during any of such periods.
ANNUAL COMPENSATION LONG TERM COMPENSATION ---------------------------------------- --------------------------------------------------------- AWARDS PAYOUTS --------------------------- ----------------------------- OTHER RESTRICTED SECURITIES NAME AND ANNUAL STOCK UNDERLYING ALL OTHER PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS OPTIONS/SARS LTIP PAYOUTS COMPENSATION ($) ($) ($) ($) (#) ($) ($) (A) (B) (C) (D) (E) (F) (G) (H) (I) - --------------------------------- ---------- -------------- -------------- --------------------------- -------------- -------------- Lynn A. Turner, 1999 $135,000 -- - - - -- - President and Chief 1998 $135,000 -- - - - - - Operating Officer (since 1997 -- $156,780(1) $1,200 - 500,000(2) - -- July 28, 1997) Michael A. Dunn, Vice 1999 $150,000 - - - - - - President and Chief 1998 $150,000 - - - - - - Technology Officer 1997 - $90,000(3) - - 550,000(4) - -- (since August 18, 1997) Thomas J. 1999 $120,000 - - - - - - Concannon(4) Vice 1998 $120,000 - - - 300,000(5) - - President and 1997 - - - - - - -- Chief Financial Officer Michael A. Schott 1999 $105,000 - - - - - - Vice President of 1998 - - - - 200,000(6) - - Financial Reporting and 1997 - - - - - - -- Compliance and Secretary Jay D. Haber, 1999 $165,000 - - - - - - Chairman and Chief 1998 $165,000 - - - - - - Executive Officer (from 1997 $156,250 - - - 600,000(7) - -- August 1, 1997 until February 2, 1999) Michael Hale, 1999 $ 60,000 - - - - - - Vice President and 1998 $120,000 - - - - Secretary 1997 $111,249 - - - 300,000(8) ================================= ========== ============== ============== =========================== ============== ==============
(1) Refers to a $156,780 bonus paid to Mr. Turner on February 13, 1998, in accordance with the employment agreement between Mr. Turner and the Company (See "Certain Relationships and Related Transactions--Employment Agreements" below). 17 (2) Refers to non-qualified stock options to purchase 500,000 shares of Common Stock granted to Mr. Turner under the Company's 1995 Stock Option Plan, in accordance with the employment agreement between Mr. Turner and the Company (See "Certain Relationships and Related Transactions--Employment Agreements" below). (3) Refers to a $90,000 bonus paid to Mr. Dunn in August 1997, in accordance with the employment agreement between Mr. Dunn and the Company (See "Certain Relationships and Related Transactions --Employment Agreements" below). (4) Refers to non-qualified stock options to purchase 550,000 shares of Common Stock granted to Mr. Dunn under the Company's 1995 Stock Option Plan, in accordance with the employment agreement between Mr. Dunn and the Company (See "Certain Relationships and Related Transactions--Employment Agreements" below). (5) Refers to incentive stock options entitling Mr. Concannon to purchase 300,000 shares of Common Stock under the Company's 1995 Stock Option Plan in accordance with the employment agreement between Mr. Concannon and the Company. (See "Certain Relationships and Related Transactions--Employment Agreements" below). (6) Refers to incentive stock options to purchase 200,000 shares of Common Stock granted to Mr. Schott under the Company's 1997 Stock Awards Plan, in accordance with the employment agreement between Mr. Schott and the Company (See "Certain Relationships and Related Transactions--Employment Agreements" below). (7) Refers to incentive stock options to purchase 600,000 shares of Common Stock issued to Mr. Haber under the Company's 1995 Stock Option Plan. However, as a result of Mr. Haber's resignation from the Company effective February 2, 1999, stock options to purchase an aggregate of 240,000 of such shares of Common Stock were vested and are currently exercisable. (See "Certain Relationships and Related Transactions--Other Related Transactions" below). (8) Refers to incentive stock options to purchase 300,000 shares of Common Stock granted to Mr. Hale under the Company's 1995 Stock Option Plan, in accordance with the new employment agreement between Mr. Hale and the Company. As a result of Mr. Hale's resignation from the Company effective July 1, 1999, stock options to purchase an aggregate of 200,000 shares were vested and remain exercisable. (See "Certain Relationships and Related Transactions--Other Related Transactions" below). OPTION/SAR GRANTS IN LAST FISCAL YEAR The Company did not grant any stock options or stock appreciation rights ("SARs") to any of its executive officers during the fiscal year ended December 31, 1999. AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES None of the Company's executive officers exercised any options during the fiscal year ended December 31, 1999. The Company did not issue any SARs during the fiscal year ended December 31, 1999. As of December 31, 1999, none of the stock options held by the executive officers named above had a value that exceeded the exercise price of any such options. The following table sets forth the number of shares underlying the unexercised options of each of the Company's executive officers as of December 31, 1999: 18 NAME EXERCISABLE UNEXERCISABLE ---- ----------- ------------- Lynn A. Turner 200,000 300,000 Michael A. Dunn 250,000 300,000 Thomas J. Concannon 250,000 50,000 Michael A. Schott 80,000 120,000 LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR None of the Company's executive officers were granted awards under any long-term incentive plan during the fiscal year ended December 31, 1999. COMPENSATION OF DIRECTORS Directors of the Company who are not employees are entitled to receive $2,500 per year for their services as directors and $250 per meeting attended. Directors, who are not employees or officers of the Company, are reimbursed for their actual expenses incurred in attending meetings of the Board of Directors. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth, as of December 31, 1999, the number of shares of the Company's Common Stock beneficially owned by (i) each person known by the Company (based on filings under Section 13(d) or 13(g) of the Exchange Act) to be the holder of more than five percent of its voting securities, (ii) each director or nominee for election as a director, and (iii) all of the Company's directors and officers as a group. Unless otherwise indicated, each holder has sole voting and investment power with respect to the shares of Common Stock owned by such holder. NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT AND NATURE OF PERCENT OF OF GROUP TITLE OF CLASS BENEFICIAL OWNERSHIP CLASS (1) -------- -------------- -------------------- --------- Jay D. Haber Common 1,191,734 shares (2) 6.08% 2310C Nantucket Houston, TX 77057 Steven A. Webster Common 19,791,025 shares (3) 65.62% R&B Falcon Corporation 901 Threadneedle, Suite 200 Houston, TX 77079 William R. Ziegler Common 19,841,048 shares (4) 65.68% Satterlee Stevens Burke & Burke, LLP 230 Park Avenue New York, NY 10169 19 NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT AND NATURE OF PERCENT OF OF GROUP TITLE OF CLASS BENEFICIAL OWNERSHIP CLASS (1) -------- -------------- -------------------- --------- Christopher M. Harte Common 479,902 shares (5) 2.42% 217 Commercial Street, Suite 200 Portland, ME 04101 Blackhawk Investors, Common 14,402,178 shares (6) 57.37% L.L.C. 1013 Centre Road Wilmington, DE 19805- 1297 Blackhawk Capital Common 14,402,178 shares (7) 57.37% Partners 3711 San Felipe, #5G Houston, TX 77027 All Directors and Common 23,728,983 shares (8) 70.28% Executive Officers as a Group DLJ Funds Common 22,362,204(9) 53.59% Chase Equity Associates, Common 10,648,669(10) 35.48% L.P. Spindrift Partners, L.P. Common 5,324,334(11) 21.56% MHR Capital Partners, Common 3,194,601(12) 14.16% L.P. - ------------------ (1) These percentages are calculated on the basis of 19,367,156 shares of Common Stock, that were issued and outstanding on December 31, 1999, plus, with respect to each person, group or entity listed, such number of shares of Common Stock as such person or entity has the right to acquire within 60 days pursuant to options, warrants, conversion privileges or other rights held by such person or entity. Certain shares are deemed beneficially owned by more than one person or entity listed in the table. (2) Includes 240,000 shares of Common Stock purchasable pursuant to options granted to Mr. Haber under the Company's 1995 Stock Option Plan. (3) Includes (i) 2,074,115 shares of Common Stock issuable pursuant to warrants held by Mr. Webster, (ii) 333,326 shares owned of record by Mr. Webster, (iii) (A) 8,666,667 shares of Common Stock owned of record by Blackhawk Investors, L.L.C. ("Blackhawk") and (B) 5,735,511 shares of Common Stock presently exercisable pursuant to the Shadow Warrant issued to Blackhawk, since Mr. Webster is one of two partners of Blackhawk Capital Partners ("BCP"), the managing member of Blackhawk and excludes 610,740 shares of Common Stock not presently exercisable pursuant to the Shadow Warrant issued 20 to Blackhawk, (iv) 220,592 shares of Common Stock presently exercisable pursuant to the Shadow Warrant issued to Mr. Webster, and excludes 23,489 shares not presently exercisable pursuant to the Shadow Warrant issued to Mr. Webster, and (v) 2,760,814 shares of Common Stock issuable pursuant to warrants held by Somerset Capital Partners ("SCP"), since Mr. Webster is one of three general partners of SCP. (4) Includes (i) 2,074,115 shares of Common Stock issuable pursuant to warrants held by Mr. Ziegler, (ii) 333,340 shares owned of record by Mr. Ziegler, (iii) (A) 8,666,667 shares of Common Stock owned of record by Blackhawk (B) 5,735,511 shares of Common Stock presently exercisable pursuant to the Shadow Warrant issued to Blackhawk, since Mr. Ziegler is one of two partners of BCP, the managing member of Blackhawk, and excludes 610,740 shares of Common Stock not presently exercisable under the Shadow Warrant issued to Blackhawk , (iv) 50,000 shares of Common Stock issuable pursuant to stock options held by Mr. Ziegler, (v) 220,601 shares of Common Stock presently exercisable pursuant to the Shadow Warrant issued to Mr. Ziegler, and excludes 23,490 shares not presently exercisable under the Shadow Warrant issued to Mr. Ziegler, and (vi) 2,760,814 shares of Common Stock issuable pursuant to warrants held by SCP, since Mr. Ziegler is one of three general partners of SCP. (5) Includes (i) 85,500 shares of Common Stock issuable pursuant to warrants held by Mr. Harte, which warrants were issued in accordance with the terms of that certain promissory note dated March 24, 1998 of the Company payable to Mr. Harte, and (ii) 394,402 shares of Common Stock issuable pursuant to warrants held by Spicewood Family Partners of which Mr. Harte is the general partner. (6) Includes (i) 8,666,667 shares owned of record by Blackhawk and (ii) 5,735,511 shares of Common Stock presently exercisable pursuant to the Shadow Warrant issued to Blackhawk; excludes 979,607 shares of Common Stock not presently exercisable under the Shadow Warrant issued to Blackhawk. (7) Includes (i) 8,666,667 shares owned of record by Blackhawk and (ii) 5,735,511 shares of Common Stock presently exercisable pursuant to the Shadow Warrant issued to Blackhawk, which are deemed beneficially owned by BCP as the managing member of Blackhawk; excludes 979,607 shares of Common Stock not presently exercisable under the Shadow Warrant issued to Blackhawk. (8) Includes an aggregate of (i) 9,333,333 issued and outstanding shares beneficially owned by the directors and executive officers as a group, (ii) 14,395,650 shares of Common Stock that such persons have the right to acquire within 60 days pursuant to options, warrants, conversion privileges or other rights held by such persons (inclusive of 6,111,364 shares of Common Stock presently exercisable pursuant to the Shadow Warrants issued to Blackhawk and Messrs. Webster and Ziegler); excludes 1,054,961 shares of Common Stock not presently exercisable under the Shadow Warrants issued to Blackhawk and Messrs. Webster and Ziegler. (9) Refers to shares of Common Stock issuable pursuant to warrants beneficially owned by each of DLJ Investment Partners, L.P., DLJ Investment Funding, Inc., DLJ LBO Plans Management Corporation, and DLJ Capital Investors, Inc. Pursuant to a 21 Schedule 13D filed October 18, 1999, each of the following has expressly disclaimed beneficial ownership with respect to these shares: Donaldson Lufkin & Jenrette, Inc., AXA Financial, Inc., AXA, Finaxa, AXA Assurances I.A.R.D. Mutuelle, AXA Assurances Vie Mutuelle, AXA Courtage Assurance Mutuelle, AXA Conseil Vie Assurance Mutuelle, and Claude Bebear, Patrice Garnier and Henri deClermonte- Tonnerre ("AXA Voting Trustees"), trustees of a voting trust established pursuant to a Voting Trust Agreement by and among AXA and the AXA Voting Trustees, dated as of May 12, 1999, as amended January 22, 1997. (10) Refers to shares of Common Stock issuable pursuant to warrants held by Chase Equity Associates, L.P. (11) Refers to shares issuable pursuant to warrants held by Spindrift Partners, L.P. (12) Refers to shares issuable pursuant to warrants held by MHR Capital Partners. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. EMPLOYMENT AGREEMENTS The Company is a party to an employment agreement with Lynn A. Turner, dated July 15, 1997, pursuant to which Mr. Turner serves as the President and Chief Operating Officer of the Company, with overall responsibility for geophysical operations. The compensation payable to Mr. Turner under the employment agreement consists of: (i) a "sign-on" bonus of $156,780 paid on February 13, 1998, (ii) an annual base salary of $135,000 per year, (iii) an annual incentive cash bonus equal to 100% of base salary if the Company's geophysical operations meet certain goals set forth in a plan to be established by the Board of Directors after consultation with Mr. Turner, plus an additional bonus in excess of annual base salary if the financial results of the Company's geophysical operations exceed such goals, and (iv) an option to acquire 500,000 shares of Common Stock, at an exercise price of $0.75 per share, which option vests in equal one-fifth increments of 100,000 shares each on each of July 15, 1998, 1999, 2000, 2001 and 2002, provided that he continues to be employed by the Company on such dates, and he exercises such option prior to or on July 15, 2004. Mr. Turner's employment agreement has a term of five years and is terminable by the Company upon its good faith determination that there has been a willful violation of the terms of the agreement and in certain other events. The Company is a party to an employment agreement with Michael A. Dunn, dated July 15, 1997, pursuant to which Mr. Dunn serves as a Vice President and the Chief Technical Officer of the Company. The compensation payable to Mr. Dunn under the employment agreement consists of: (i) a "sign on" bonus of $90,000, paid upon commencement of employment, (ii) an annual base salary of $150,000 per year, (iii) an annual incentive cash bonus commensurate with his position at the Company in accordance with a plan to be established by the Board of Directors after consultation with Mr. Dunn, and (iv) stock options to acquire (A) 50,000 shares of Common Stock, at an exercise price of $0.75 per share, which option became exercisable on August 18, 1997 and has an expiration date of July 15, 2002, and (B) an additional 500,000 shares of Common Stock, at an exercise price of $0.75 per share, which option vests in equal one-fifth increments of 100,000 shares each on each of July 15, 1998, 1999, 2000, 2001 and 2002, provided that he continues to be employed by the Company on such dates, and he exercises such option prior to or on July 15, 2004. Mr. Dunn's employment agreement has a term of five 22 years and is terminable by the Company upon its good faith determination that there has been a willful violation of the terms of the agreement and in certain other events. The Company is a party to an employment agreement with Thomas J. Concannon dated July 15, 1997, pursuant to which Mr. Concannon serves as a Vice President and the Chief Financial Officer of the Company. The compensation payable to Mr. Concannon under the employment agreement consists of: (i) an annual base salary of $120,000 per year, (ii) participation in any and all current and future employee/officer incentive plans, employee/officer stock plans, employee/officer stock option plans and any and all other employee/officer benefit/compensation plans of the Company, (iii) stock options to acquire (A) an aggregate of 150,000 shares of Common Stock, at an exercise price of $0.75 per share, which option became exercisable on July 15, 1997 and has an expiration date of July 15, 2002, and (B) an additional 150,000 shares of Common Stock, at an exercise price of $0.75 per share, which option vests in equal one-third increments of 50,000 shares each on each of July 15, 1998, 1999 and 2000, provided that he continues to be employed by the Company on such dates, and he exercises such option prior to or on July 15, 2002. Mr. Concannon's employment agreement has a term of three years and is terminable by the Company upon its good faith determination that there has been a willful violation of the terms of the agreement and in certain other events. The Company is a party to an employment agreement with Michael A. Schott dated August 5, 1998, pursuant to which Mr. Schott serves as a Vice President of Financial Reporting and Compliance. The compensation payable to Mr. Schott under the employment agreement consists of: (i) an annual base salary of $105,000 per year, (ii) participation in any and all current and future employee/officer incentive plans, employee/officer stock plans, employee/officer stock option plans and any and all other employee/officer benefit/compensation plans of the Company, (iii) a stock option to acquire an aggregate of 200,000 shares of Common Stock at an exercise price of $2.625 per share, which option vests in equal one-fifth increments of 40,000 shares on each of August 5, 1998 and August 5, 1999, 2000, 2001 and 2002, provided that he continues to be employed by the Company on such dates, and he exercises such option prior to or on August 5, 2004. Mr. Schott's employment agreement has a term of four years and is terminable by the Company upon its good faith determination that there has been a willful violation of the terms of the agreement and in certain other events. OTHER RELATED TRANSACTIONS The father of a former Vice-President of the Company is a participant in the Company's lease acquisition program with a note balance of $35,500 at December 31, 1999. In connection with certain financing transactions that were completed in April and July of 1997, the Company entered into a three-year consulting agreement (beginning April 25, 1997) with William R. Ziegler, pursuant to which Mr. Ziegler agreed to provide the Company certain strategic planning and other consulting services. Under Mr. Ziegler's consulting agreement, Mr. Ziegler is entitled to receive a quarterly consulting fee equal to one-half of 1% of the total investment made by him and certain other persons or before July 31, 1997 in debt and equity securities of the Company that are outstanding as of the end of each quarter during the term of the consulting agreement. As of December 31, 1999 and 1998, respectively, the Company owed Mr. Ziegler $343,207 and $203,207 in consulting fees pursuant to the agreement. In addition, pursuant to the consulting agreement, the Company granted Mr. Ziegler options to purchase 50,000 shares of Common Stock of the Company at a price of $0.75 per share. 23 On March 27, 1998, the Company obtained a $1,500,000 private short-term financing from a group of investors, including William R. Ziegler, Steven A. Webster and Christopher M. Harte and several related family members who collectively provided $1,000,000 of this financing. The Company issued promissory notes, with interest at prime plus 2% to these individuals. Additionally, Christopher M. Harte and the related family members were granted warrants to purchase 150,000 shares of Common Stock of the Company at a purchase price of $2.00 per share. The Company paid these notes in full with interest on May 1, 1998 including interest payments of $11,083 to the related parties and family members. On April 30, 1998, the Company completed a private offering of $40,000,000 of certain securities designated as its 12% Senior Subordinated Notes (the "1998 Notes") to DLJ Investment Partners, L.P. and certain additional investors ("1998 Purchasers") pursuant to the terms of a Securities Purchase Agreement by and among the Company and the Purchasers. Additionally, the Company (i) caused certain of its wholly-owned subsidiaries to execute guarantees of the 1998 Notes pursuant to an Indenture executed by each of them, (ii) granted warrants (the "Warrants") to the 1998 Purchasers entitling them to purchase up to an aggregate of 7,618,594 shares of Common Stock at a price of $2.00 per share, subject to certain adjustments, and (iii) granted certain registration rights in favor of the Purchasers with respect to the 1998 Notes, the Warrants and the shares of Common Stock which may be acquired upon exercise of the Warrants. The completion of this offering enabled the Company to purchase an additional 3,000 channel I/O System Two RSR System and complete the acquisition of GDC. On July 28, 1999, the Company sold all of the outstanding capital stock of HOC Operating Co., Inc., a Texas corporation and wholly-owned subsidiary of the Company ("HOC"), to Halex Oil Corporation ("Halex"), a Texas corporation controlled by Michael Hale, the Company's Vice President and Secretary until June 30, 1999, pursuant to the terms of a Stock Purchase Agreement (the "HOC Agreement") among the Company, HOC and Halex. Pursuant to the HOC Agreement, Halex acquired 1,000 shares of the common stock of HOC (the "HOC shares"), representing 100% of the outstanding capital stock of HOC from the Company in exchange for the assumption by Halex of (i) $75,000 of the Company's obligations under that certain Lease Bank Facility Promissory Note in the principal amount of $110,000 payable by Geokinetics Production Company, Inc., a Texas corporation and wholly-owned subsidiary of the Company ("Geokinetics Production"), to the Dan C. Hale and Donna Jane Hale Trust dated January 17, 1995 (the "Trust"); and (ii) approximately $58,500 of HOC's and Geokinetics Production's accounts payable (as defined in the HOC Agreement). The value of the proved producing oil and gas reserves owned by HOC on the date of the transaction was approximately $136,000. Immediately prior to the sale of HOC's stock to Halex, Geokinetics Production conveyed to HOC various interests in certain oil and gas properties. Further, the Company issued to the Trust a Common Stock Purchase Warrant entitling the Trust to purchase from the Company all or any part of 35,000 shares of fully paid and non-assessable Common Stock at a purchase price of $0.656 per share. The expiration date of this warrant is June 30, 2004. The Company also entered into a Promissory Note with the Trust for $35,000, with an effective interest rate based on the Citibank, N.A. prime rate plus four percent, due on or before December 31, 2000. On October 1, 1999, the Company restructured its obligations to the holders of the 1998 Notes and entered into a Securities Purchase Agreement (the "1999 Purchase Agreement") with the holders of the 1998 Notes and certain additional investors, including Steven A. Webster and William R. Ziegler, two of the Company's directors (collectively, the "1999 Purchasers"), pursuant to which the Company completed a restructuring of the 1998 Notes, and received $4,000,000 in additional senior secured debt financing from the holders of the 1998 Notes and $1,000,000 from three other investors, including Messrs. Webster and Ziegler (the "Secured Loan"). Pursuant to the 1999 Purchase Agreement, the Company (i) exchanged the 24 1998 Notes for its 13.5% Senior Secured Notes due 2005 in the aggregate principal amount of $45,358,000 issued to the 1999 Purchasers (the "2005 Notes"), (ii) issued the 1999 Purchasers its 13.5% Senior Secured Notes due 2002 in the aggregate principal amount of up to $6,000,000 (the "2002 Notes"), (iii) granted security interests covering substantially all of the Company's assets as security for the 2005 Notes and the 2002 Notes, (iv) caused certain of the Corporation's wholly-owned subsidiaries to execute guarantees of the 2005 Notes and the 2002 Notes, (v) issued warrants to the 1999 Purchasers of the 2002 Notes (the "2002 Warrants") to purchase 23,250,000 shares of the Common Stock at a price of $0.56 per share, and (vi) issued warrants to the 1999 Purchasers of the 2005 Notes (the "2005 Warrants") to purchase 26,818,594 shares of Common Stock at a price of $0.56 per share (the 2005 Warrants, together with the 2002 Warrants, being the "New Warrants"). The Company issued 7,618,594 of the 2005 Warrants in exchange for 7,618,594 warrants issued to the holders of the 1998 Notes. The New Warrants were issued in accordance with an Amended and Restated Warrant Agreement executed among the Company and the 1999 Purchasers. As a result of the issuance of the New Warrants, the 1999 Purchasers, collectively, have the right to acquire 66.5% of the Company's outstanding Common Stock on a fully diluted basis. On November 30, 1999, the Company completed an additional $895,000 in financing by issuing the remaining $895,000 of the 2002 Notes in accordance with the 1999 Purchase Agreement to certain private investors, including Spicewood Family Partnership of which Christopher M. Harte, one of the Company's directors, is the general partner. In exchange for providing $100,000 in financing to the Company, the Company issued Spicewood Family Partnership (i) 2002 Notes in the aggregate principal amount of $100,000, and (ii) 2002 Warrants to purchase 394,402 shares of the Common Stock, all in accordance with the 1999 Purchase Agreement. William R. Ziegler is a partner of the New York-based law firm of Satterlee Stephens Burke & Burke, LLP, the successor in interest of Parson & Brown, L.L.P. of which Mr. Ziegler was also a partner. During the fiscal years ended December 31, 1998 and December 31, 1999, those firms billed the Company $204,282.72 and $123,217.80 respectively, for services rendered. On March 5, 1999, the Company and Jay D. Haber entered into a Severance Agreement and Release terminating the Company's employment agreement with Mr. Haber and confirming certain agreements and effecting mutual releases relating to Mr. Haber's resignation as a director, officer and employee of the Company. This agreement provided, among other things, that the Company pay Mr. Haber a severance payment of $165,000 in twelve (12) equal monthly installments (which amounts were paid in full in February 2000). In addition, effective February 2, 1999, stock options entitling Mr. Haber to purchase an aggregate of 240,000 shares of Common Stock at a price of $1.00 per share were deemed vested and exercisable until June 2002. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (A) EXHIBITS AND REPORTS ON FORM 8-K. 3.1 Certificate of Incorporation of the Company (incorporated by reference from Exhibit 3(a) to Amendment No. 1 to the Company's Registration Statement on Form S-3, filed with the Securities and Exchange Commission on March 25, 1980 (file no. 000-09268)). 3.2 Certificate of Amendment of Certificate of Incorporation of the Company (incorporated by reference from Exhibit 3.2 to Form 10-KSB filed with the Securities and Exchange Commission on April 24, 1996 (file no. 000-09268)). 25 3.3 Certificate of Amendment of Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on July 14, 1997 (incorporated by reference from Exhibit 3.3 to Form 10-KSB filed with the Securities and Exchange Commission on March 31, 1998 (file no.000-09268)) 3.4 Certificate of Amendment of Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on November 24, 1997 (incorporated by reference from Exhibit 3.4 to Form 10-KSB filed with the Securities and Exchange Commission on March 31, 1998 (file no.000-09268)). 3.5 Amended and Restated Bylaws of the Company (incorporated by reference from Exhibit 3.5 to Form 10-KSB filed with the Securities and Exchange Commission on March 31, 1998 (file no.000-09268)). 4.1 Statement of Designations of the Company's Series A Preferred Stock (incorporated by reference from Exhibit 4 to Form 8-K filed with the Securities and Exchange Commission on August 5, 1997 (file no.000-09268)). 4.2 Indenture dated as of April 30, 1998, executed by the Company, HOC Production Co., Inc., Geokinetics Production Co., Inc., Quantum Geophysical, Inc., Geoscience Software Solutions, Inc., Signature Geophysical Services, Inc., Reliable Exploration, Incorporated, and Geophysical Development Corporation (incorporated by reference from Exhibit (4.4) to Form 8-K filed with the Securities and Exchange Commission on May 15, 1998 (file no.000-09268)). 4.3 Indenture dated as of October 1, 1999, executed by the Company, Geokinetics Production Co., Inc., Quantum Geophysical, Inc., Geoscience Software Solutions, Inc., Signature Geophysical Services, Inc., Reliable Exploration, Incorporated, and Geophysical Development Corporation (incorporated by reference from Exhibit 4.3 to Form 8-K filed with the Securities and Exchange Commission on October 18, 1999 (file no. 000-09268)). 8.1 Tax Opinion of David E. Hammer, P.C. concerning the deductibility of the Company's net operating loss carryforwards following the Company's acquisition of certain oil and gas properties effective August 1, 1994 (incorporated by reference from Exhibit 8.1 to Form 10-KSB filed with the Securities and Exchange Commission on May 19, 1995 (file no.000-09268)). 10.1 Securities Purchase Agreement dated as of April 25, 1997 among the Company and each of William R. Ziegler and Steven A. Webster. (incorporated by reference from Exhibit II to the Schedule 13D filed with the Securities and Exchange Commission by William R. Ziegler on May 5, 1997 (file no. 005-32355)). 10.2 Form of 12% Senior Secured Promissory Note dated as of April 25, 1997 in the principal amount of $250,000 executed by the Company to each of William R. Ziegler and Steven A. Webster (incorporated by reference from Exhibit III to the Schedule 13D filed with the Securities and Exchange Commission by William R. Ziegler on May 5, 1997 (file no. 005- 32355)). 10.3 Registration Rights Agreement dated as of April 25, 1997 executed by the Company and each of the William R. Ziegler and Steven A. Webster (incorporated by reference from 26 Exhibit V to the Schedule 13D filed with the Securities and Exchange Commission by William R. Ziegler on May 5, 1997 (file no. 005-32355)). 10.4 Form of Warrant to Purchase Common Stock dated as of April 25, 1997 issued by the Company to each of William R. Ziegler and Steven A. Webster (incorporated by reference from Exhibit IV to the Schedule 13D filed with the Securities and Exchange Commission by William R. Ziegler on May 5, 1997 (file no. 005-32355)). 10.5 Consulting Agreement dated as of April 25, 1997 executed by the Company and William R. Ziegler (incorporated by reference from Exhibit VI to the Schedule 13D filed with the Securities & Exchange Commission by William R. Ziegler on May 5, 1997 (file no. 005- 32355)). 10.6 Securities Purchase and Exchange Agreement dated as of July 18, 1997 among the Company, Blackhawk Investors, L.L.C., William R. Ziegler, and Steven A. Webster (incorporated by reference from Exhibit (2.1) to Form 8-K filed on August 5, 1997 (file no.000-09268)). 10.7 Investment Monitoring Agreement dated July 18, 1997, between the Company and Blackhawk Capital Partners, L.P. (incorporated by reference from Exhibit 10.2 to Form 8-K filed August 5, 1997 (file no.000-09268)). 10.8 Letter Agreement re Additional Investment dated July 24, 1997, between the Company and Blackhawk Investors, L.L.C. (incorporated by reference from Exhibit (2.3) to Form 8-K filed on August 5, 1997 (file no.000-09268)). 10.9 Stock Purchase Agreement dated as of June 25, 1997 among the Company, Signature Geophysical Services, Inc., Gallant Energy, Inc. and James Gallant (incorporated by reference from Exhibit (2.2) to Form 8-K filed on August 5, 1997 (file no.000-09268)). 10.10 Stock Purchase Agreement dated December 3, 1997, by and among the Company, Reliable Exploration, Incorporated, Allen Rein, Scott Schmitt, and Kim Nordberg. (incorporated by reference from Exhibit (2) to Form 8-K filed with the Securities and Exchange Commission on February 10, 1998 (file no.000-09268)). 10.11 Stock Purchase Agreement dated as of March 24, 1998, among the Company, Geophysical Development Corporation and the holders of all of the capital stock of Geophysical Development Corporation (incorporated by reference from Exhibit 2.1 to Form 8-K filed with the Securities and Exchange Commission on May 15, 1998 (file no.000-09268)). 10.12 Employment Agreement dated as of July 15, 1997 between the Company and Lynn A. Turner (incorporated by reference from Exhibit 10.5 to Form 10-KSB filed with the Securities and Exchange Commission on March 31, 1998 (file no.000-09268)). 10.13 Employment Agreement dated as of July 15, 1997 between the Company and Michael A. Dunn (incorporated by reference from Exhibit 10.6 to Form 10-KSB filed with the Securities and Exchange Commission on March 31, 1998 (file no.000-09268)). 27 10.14 Employment Agreement dated as of July 15, 1998 between the Company and Thomas J. Concannon (incorporated by reference from Exhibit 10.7 to Form 10-KSB filed with the Securities and Exchange Commission on March 31, 1998 (file no.000-09268)). 10.15 Securities Purchase Agreement dated as of April 30, 1998, among the Company, DLJ Investment Partners, L.P. and certain additional investors (incorporated by reference from Exhibit (4.1) to Form 8-K filed with the Securities and Exchange Commission on May 15, 1998 (file no.000-09268)) 10.16 Warrant Agreement dated as of April 30, 1998, among the Company, DLJ Investment Partners, L.P. and certain additional investors (incorporated by reference from Exhibit (4.2) to Form 8-K filed with the Securities and Exchange Commission on May 15, 1998 (file no.000-09268)). 10.17 Note Registration Rights Agreement dated as of April 30, 1998, among the Company, DLJ Investment Partners, L.P. and certain additional investors (incorporated by reference from Exhibit (4.3) to Form 8-K filed with the Securities and Exchange Commission on May 15, 1998 (file no.000-09268)). 10.18 Tag Along-Drag Along Agreement dated as of April 30, 1998 among the Company, DLJ Investment Partners, L.P. and certain additional investors (incorporated by reference from Exhibit (4.5) to Form 8-K filed with the Securities and Exchange Commission on May 15, 1998 (file no.000-09268)). 10.19 Stock Purchase Agreement, dated July 28, 1999, among Halex Oil Corporation, HOC Operating Co., Inc. and the Company (without exhibits) (incorporated by reference from Exhibit (2.1) to Form 8-K filed with the Securities and Exchange Commission on August 12, 1999 (file no. 000-09268)). 10.20 Securities Purchase Agreement dated as of October 1, 1999, among the Company, DLJ Investment Partners, L.P. and certain additional investors (incorporated by reference from Exhibit 4.1 to Form 8-K filed with the Securities and Exchange Commission on October 18, 1999 (file no. 000-09268)). 10.21 Amended and Restated Warrant Agreement dated as of October 1, 1999, among the Company, DLJ Investment Partners, L.P. and certain additional investors (incorporated by reference from Exhibit 4.2 to Form 8-K filed with the Securities and Exchange Commission on October 18, 1999 (file no. 000-09268)). 10.22 Amended and Restated Tag Along-Drag Along Agreement dated as of September 30, 1999, among the Company, DLJ Investment Partners, L.P. and certain additional investors (incorporated by reference from Exhibit 4.4 to Form 8-K filed with the Securities and Exchange Commission on October 18, 1999 (file no. 000-09268)). 10.23 Restructure Agreement dated October 1, 1999, among the Company, Geophysical Services, Inc., Quantum Geophysical Services, Inc., Input/Output, Inc. and Global Charter Corporation (incorporated by reference from Exhibit 99 to Form 8-K filed with the Securities and Exchange Commission on October 18, 1999 (file no. 000-09268)). 28 16 Letter dated March 1, 1999 by Tsakopulos Brown Schott & Anchors to the Securities and Exchange Commission (incorporated by reference from Exhibit (16) to Form 8-K filed with the Securities and Exchange Commission on March 4, 1999 (file no. 000-09268)). 22 Following is a list of the Company's Subsidiaries: OTHER NAME UNDER WHICH SUBSIDIARY JURISDICTION OF NAME OF SUBSIDIARY CONDUCTS BUSINESS INCORPORATION - ------------------ ----------------- --------------- Geokinetics Production Co., Inc. None Texas (formerly HLX Acquisition Corp.) Quantum Geophysical Services, Inc. (formerly Quantum Geophysical, Inc.) None Texas Quantum Geophysical, Inc. None Texas Geophysical Development Corporation None Texas Geoscience Software Solutions, Inc. None Texas Following is a list of the subsidiaries of Quantum Geophysical, Inc.: OTHER NAME UNDER WHICH SUBSIDIARY JURISDICTION OF NAME OF SUBSIDIARY CONDUCTS BUSINESS INCORPORATION - ------------------ ----------------- --------------- Signature Geophysical, Inc. None Michigan (b) Reports on Form 8-K filed during the last quarter of the period covered by this Form 10-KSB. (1) On October 18, 1999, the Company filed a Current Report on Form 8-K under (i) Item 1 concerning a change in control of the Company pursuant to a restructuring of its $40,000,000 in 12% Senior Subordinated Notes due April 2005 and the completion of up to %6,000,000 in additional secured debt financing, and (ii) Item 5 concerning a refinancing of the Company's debt obligations to a supplier and the election of Steven A. Webster as a non-executive Chairman of the Executive Committee of the Company's Board of Directors. (2) On November 17, 1999, the Company filed a Current Report on Form 8-K under Item 5 thereof concerning the resignation of Antony T. F. Lundy as a member of the Board of Directors of the Company. 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GEOKINETICS INC. Date: April 14, 2000 By:/s/Lynn A. Turner Lynn A. Turner, President and Chief Operating Officer By:/s/Thomas J. Concannon Thomas J. Concannon Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: SIGNATURE TITLE DATE - --------- ----- ---- /s/Lynn A. Turner President and Chief Operating April 14, 2000 Lynn A. Turner Officer /s/Thomas J. Concannon Vice President and April 14, 2000 Thomas J. Concannon Chief Financial Officer /s/William R. Ziegler Director and Chairman April 14, 2000 William R. Ziegler /s/Steven A. Webster Director April 14, 2000 Steven A. Webster 30 GEOKINETICS INC. AND SUBSIDIARIES ANNUAL CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 TABLE OF CONTENTS CONSOLIDATED FINANCIAL STATEMENTS INDEPENDENT AUDITOR'S REPORT..........................................F-2 CONSOLIDATED BALANCE SHEETS...........................................F-3 CONSOLIDATED STATEMENTS OF OPERATIONS.................................F-5 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY.......................F-6 CONSOLIDATED STATEMENTS OF CASH FLOWS.................................F-7 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS........................F-8 Page F-1 [FITTS, ROBERTS & CO., P.C. LETTERHEAD] INDEPENDENT AUDITOR'S REPORT To the Board of Directors Geokinetics Inc. and Subsidiaries Houston, Texas We have audited the accompanying consolidated balance sheets of Geokinetics Inc. and Subsidiaries as of December 31, 1999 and 1998, and the related statements of operations, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Geokinetics Inc. and Subsidiaries as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. As described in Note 7 to the financial statements, a cash interest payment of approximately $3.9 million is required on March 15, 2001. /s/ FITTS, ROBERTS & CO., P.C. Houston, Texas April 7, 2000 Page F-2 CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, DECEMBER 31, 1999 1998 ----------- ----------- CURRENT ASSETS Cash ............................................ $ 2,677,996 $ 2,705,581 Accounts receivable - trade, net ................ 2,010,381 6,831,765 Accounts receivable - officers and employees .... 19,930 39,493 Work in progress ................................ 1,225,799 514,167 Prepaid expenses ................................ 411,489 490,098 Accrued income tax refund ....................... 16,000 -- ----------- ----------- Total Current Assets ........................ 6,361,595 10,581,104 ----------- ----------- PROPERTY AND EQUIPMENT, net ......................... 11,877,927 27,375,512 ----------- ----------- OTHER ASSETS Deferred charges ................................ 44,534 419,077 Restricted investments .......................... 106,700 106,700 Deposits and other assets ....................... 78,097 98,493 Goodwill and other intangibles, net of $4,923,964 amortization in 1999, and $2,091,170 in 1998 and net of impairment reserve of $2,143,635 in 1999 .......................... 25,781,443 30,957,183 ----------- ----------- Total Other Assets .......................... 26,010,774 31,581,453 ----------- ----------- TOTAL ASSETS ............................. $44,250,296 $69,538,069 =========== ===========
The accompanying notes are an integral part of these Consolidated Financial Statements Page F-3 CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ CURRENT LIABILITIES Current maturities of long-term debt ............ $ 713,280 $ 4,648,110 Accounts payable - trade ........................ 1,182,144 4,822,802 Accrued income tax payable ...................... 146,327 935,000 Accrued liabilities ............................. 3,599,099 3,176,673 Customer deposits ............................... 15,000 35,000 Notes payable ................................... 398,109 2,151,405 Due to officers and stockholders ................ 410,268 251,137 Advances for lease bank ......................... 185,500 260,500 Site restoration costs payable .................. 6,418 6,418 Deferred revenue ................................ 74,188 -- ------------ ------------ Total Current Liabilities ................... 6,730,333 16,287,045 ------------ ------------ LONG-TERM LIABILITIES Long-term debt, net of current maturities, net of OID ............................................. 51,267,997 40,624,341 ------------ ------------ OTHER LIABILITIES Deferred income tax ............................. -- 222,045 Deferred gain ................................... 359,974 -- ------------ ------------ Total Other Liabilities .................... 359,974 222,045 ------------ ------------ TOTAL LIABILITIES ........................ 58,358,304 57,133,431 ------------ ------------ STOCKHOLDERS' EQUITY Preferred stock, Series B, $10.00 par value, 100,000 shares authorized, none outstanding ..... -- -- Common stock, $.01 par value, 100,000,000 shares authorized, 19,367,156 shares outstanding at December 31, 1999 and 19,332,480 shares outstanding at December 31, 1998 ........... 193,672 193,325 Additional paid-in capital ...................... 33,019,248 29,112,344 Retained deficit ................................ (47,320,928) (16,901,031) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY ............... (14,108,008) 12,404,638 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................... $ 44,250,296 $ 69,538,069 ============ ============
The accompanying notes are an integral part of these Consolidated Financial Statements Page F-4 CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED ----------------------------- DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ REVENUES Seismic revenue ........................................ $ 5,407,895 $ 23,369,624 Data processing revenues ............................... 8,786,231 9,257,550 ------------ ------------ Total Revenues ..................................... 14,194,126 32,627,174 ------------ ------------ EXPENSES Seismic operating expenses ............................. 7,513,734 21,396,903 Data processing expenses ............................... 6,408,634 3,699,989 General and administrative ............................. 2,817,885 3,118,179 Depletion, depreciation and amortization ............... 9,907,917 7,128,594 Provision for disposition of subsidiary ................ 2,143,635 -- ------------ ------------ Total Expenses ..................................... 28,791,805 35,343,665 ------------ ------------ Loss from Continuing Operations before Income Tax (14,597,679) (2,716,491) OTHER INCOME (EXPENSE) Interest income ........................................ 128,698 205,834 Interest expense ....................................... (7,460,298) (4,937,872) ------------ ------------ Total Other Income (Expense) ....................... (7,331,600) (4,732,038) ------------ ------------ Loss Before Income Tax, Discontinued Operations and Extraordinary Item ............... (21,929,279) (7,448,529) INCOME TAX BENEFIT (EXPENSE) Current income tax benefit ............................. 197,596 -- Deferred income tax benefit (expense) .................. 222,045 (2,236,078) ------------ ------------ Total income tax benefit (expense) ................. 419,641 (2,236,078) ------------ ------------ Loss before Discontinued Operations and Extraordinary Item .............................. (21,509,638) (9,684,607) LOSS FROM DISCONTINUED OPERATIONS Loss from oil and gas operations ....................... (71,494) (283,995) Loss on disposition of oil and gas operations .......... (563,375) -- ------------ ------------ Total loss from discontinued operations ............ (634,869) (283,995) ------------ ------------ Loss before Extraordinary Item .................. (22,144,507) (9,968,602) ------------ ------------ EXTRAORDINARY ITEM Loss on extinguishment of debt ......................... (8,275,390) -- ------------ ------------ NET LOSS ................................................... $(30,419,897) $ (9,968,602) ============ ============ NET EARNINGS (LOSS) PER COMMON SHARE-BASIC Loss from Continuing Operations ........................ $ (1.11) $ (.51) Loss from Discontinued Operations ...................... (.03) (.02) Extraordinary loss on extinguishment of debt ........... (.43) -- ------------ ------------ Net Loss ....................................... $ (1.57) $ (.53) ============ ============ Weighted average common shares outstanding ........ 19,348,155 18,975,746 ============ ============
The accompanying notes are an integral part of these Consolidated Financial Statements Page F-5 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
STOCKHOLDERS' EQUITY --------------- --------------- ----------------------------------- PREFERRED SHARES COMMON SHARES ISSUED ISSUED PREFERRED STOCK COMMON STOCK --------------- --------------- --------------- --------------- Balance at January 1, 1998 ..................... 100,000 16,598,483 $ 1,000,000 $ 165,985 Net Loss ....................................... Conversion of Series B Preferred .............. (100,000) 1,333,333 (1,000,000) 13,333 Acquisition of Reliable Exploration Incorporated 375,000 3,750 Stock Issued to Vendor in Lieu of Cash ......... 20,000 200 Acquisition of Geophysical Development Corp. ... 1,000,000 10,000 Warrants Issued Associated with Subordinated Debt ............................ Exercise of Warrants ........................... 5,664 57 --------------- --------------- --------------- --------------- Balance at December 31, 1998 ................... -- 19,332,480 -- 193,325 Net Loss ....................................... Warrants Issued Associated with Senior Secured Debt Notes due 2002 ............................ Notes due 2005 ............................ Exercise of Warrants ........................... 34,676 347 --------------- --------------- --------------- --------------- Balance at December 31, 1999 ................... -- 19,367,156 $ -- $ 193,672 =============== =============== =============== =============== STOCKHOLDERS' EQUITY ------------------------------------------------------ ADDITIONAL PAID RETAINED IN CAPITAL DEFICIT TOTAL --------------- --------------- --------------- Balance at January 1, 1998 ..................... $ 14,017,394 $ (6,932,429) $ 8,250,950 Net Loss ....................................... (9,968,602) (9,968,602) Conversion of Series B Preferred .............. 986,667 -- Acquisition of Reliable Exploration Incorporated 980,625 984,375 Stock Issued to Vendor in Lieu of Cash ......... 54,800 55,000 Acquisition of Geophysical Development Corp. ... 4,052,500 4,062,500 Warrants Issued Associated with Subordinated Debt ............................ 9,020,415 9,020,415 Exercise of Warrants ........................... (57) -- --------------- --------------- --------------- Balance at December 31, 1998 ................... 29,112,344 (16,901,031) 12,404,638 Net Loss ....................................... (30,419,897) (30,419,897) Warrants Issued Associated with Senior Secured Debt Notes due 2002 ............................ 1,860,000 1,860,000 Notes due 2005 ............................ 2,038,213 2,038,213 Exercise of Warrants ........................... 8,691 9,038 --------------- --------------- --------------- Balance at December 31, 1999 ................... $ 33,019,248 $ (47,320,928) $ (14,108,008) =============== =============== ===============
The accompanying notes are an integral part of these Consolidated Financial Statements Page F-6 CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED ----------------------------- DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ OPERATING ACTIVITIES Net Loss...................................................... $(30,419,897) $ (9,968,602) Adjustments to reconcile net loss to net cash provided by (used in) operating activities Depreciation and Amortization ................................ 9,916,418 7,144,854 (Gain) Loss on disposal of assets Operating assets ........................................ 7,348 (600) Oil and gas operations .................................. 563,375 -- Reserve for disposition of subsidiary ........................ 2,143,635 -- Extinguishment of debt, net .................................. 7,818,756 -- Current & deferred tax (benefit) expense ..................... (419,641) 2,236,078 Changes in operating assets and liabilities Accounts receivable ..................................... 4,840,857 1,636,771 Work in progress ........................................ (711,632) 177,563 Prepaid expenses and other assets ....................... 62,609 (36,325) Accounts payable ........................................ (3,640,658) 1,814,997 Accrued liabilities and deferred revenue ................ (152,928) 1,840,392 ------------ ------------ Net cash provided (used) in operating activities .................. (9,991,758) 4,845,128 INVESTING ACTIVITIES Purchase of Reliable Exploration Incorporated ................ -- (1,300,000) Purchase of Geophysical Development Corporation ....................................................... -- (26,000,000) Proceeds from insurance ...................................... 21,504 -- Purchases of capital assets .................................. (945,083) (12,477,237) Proceeds from sale of capital assets ......................... 9,999,337 -- Payments for deposits ........................................ -- (4,700) ------------ ------------ Net cash provided (used) in investing activities .................. 9,075,758 (39,781,937) FINANCING ACTIVITIES Proceeds from long-term debt ................................. 51,253,000 40,000,000 Proceeds from short-term debt ................................ 1,043,582 3,352,870 Proceeds from software financing ............................. 795,997 -- Principal paid on long-term debt ............................. (49,399,690) (4,760,475) Principal paid on short-term debt ............................ (2,813,512) (3,213,491) Proceeds from issuance of common stock ....................... 9,038 -- ------------ ------------ Net cash provided from financing activities ....................... 888,415 35,378,904 Net increase (decrease) in cash ................................... (27,585) 442,095 Cash acquired in acquisitions ..................................... -- 50,805 Cash at beginning of period ....................................... 2,705,581 2,212,681 ------------ ------------ Cash at end of period ............................................. $ 2,677,996 $ 2,705,581 ============ ============
SUPPLEMENTAL DISCLOSURE RELATED TO CASH FLOWS: Income taxes of $935,000 were paid in 1999. Interest expense of $5,851,653 and $3,894,627 was paid in 1999 and 1998. Change in accounts receivable is net of a bad debt of $2.8 million in 1998. The accompanying notes are an integral part of these Consolidated Financial Statements Page F-7 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF THE ORGANIZATION Geokinetics Inc., a Delaware corporation, founded in 1980, (the "Company") is based in Houston, Texas. The Company has repositioned itself from an oil and gas exploration and production company into a technologically advanced provider of three-dimensional ("3-D") seismic acquisition services to the U.S. land-based oil and gas industry and data processing services to clients involved in both on-shore and off-shore operations. Through equipment purchases and acquisition of other companies, the Company currently has the capability of operating three seismic crews in the Rocky Mountain region and on the Gulf Coast. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Geokinetics Inc. and its wholly-owned subsidiaries, HOC Operating Co., Inc. (HOC), Geokinetics Production Co., Inc. (GPCI), Quantum Geophysical, Inc. (Quantum), Quantum Geophysical Services, Inc. (QGS), Reliable Exploration Incorporated (Reliable), Geophysical Development Corporation (GDC) and Signature Geophysical Services, Inc. (Signature). All inter-company items and transactions have been eliminated in the consolidation. BASIS OF ACCOUNTING The consolidated financial statements of the Company have been prepared on the accrual basis of accounting and, accordingly, reflect all significant receivables, payables and other liabilities. USE OF ESTIMATES IN PREPARING CONSOLIDATED FINANCIAL STATEMENTS Management uses estimates and assumptions in preparing consolidated financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect amounts reported in these financial statements and accompanying notes. The more significant areas requiring the use of management estimates relate to the percentage of work completed in determining work in process, evaluating the outcome of uncertainties involving claims against or on behalf of the Company, useful lives for depreciation and amortization and cash flow projections used in the determination of asset impairment. Actual results could differ materially from these estimates. Consolidated Financial Statements Page F-8 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FAIR VALUES OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash, accounts receivable, accounts payable and notes payable. The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable and accounts payable approximate fair values due to the short maturity of those instruments. The fair value of debt was determined based upon the present value of expected cash flows considering expected maturities and using interest rates currently available to the Company for long-term borrowings with similar terms. The carrying amount of debt reported in the consolidated balance sheets approximates fair value. WORK IN PROGRESS In order to properly match revenue and expenses, the Company records amounts due from customers but not invoiced at the end of each accounting period based upon the contractual agreement in effect with each customer for services. These calculations are based upon daily progress reports provided by field supervisors. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the respective assets. Repairs and maintenance, which are not considered betterments and do not extend the useful life of property, are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the asset and accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in income. IMPAIRMENT OF LONG-LIVED ASSETS In accordance with FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Company records impairment losses on long-lived assets and related intangibles and goodwill related to those assets that are used in operations, when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. The Company has significant investments in seismic acquisition equipment and in the goodwill of subsidiaries acquired, as described in Note 10. The downturn in the seismic service industry caused the Company to review the carrying value of these assets in accordance with FASB 121. The Company's estimate of undiscounted cash flows currently indicates that such carrying amounts are expected to be recovered. However, actual results could vary materially from these estimates should the current downturn in the industry continue. Consolidated Financial Statements Page F-9 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) GOODWILL Goodwill represents the aggregate excess cost of companies acquired over the fair value of their net assets at dates of acquisition. Goodwill is amortized using the straight-line method over a period of 40 years for subsidiaries providing seismic acquisition services and 10 years for subsidiaries providing seismic data processing services. In accordance with APB 17, Intangible Assets, the Company continues to evaluate the amortization period to determine whether events or circumstances warrant revised amortization periods. Additionally, the Company considers whether the carrying value of such assets should be reduced based on the future benefits of its intangible assets. Goodwill amortization expense totaled $2,927,293 and $2,005,196 during 1999 and 1998. DEBT ISSUANCE COSTS The value of detachable warrants issued in relation to debt obligations is reflected as discount which is netted against the face amount of the obligation and is amortized to expense over the term of the obligation. Discount amortization expense totaled $603,700 and $482,624 in 1999 and 1998, respectively. PRE-OPERATING COSTS It is the Company's policy to expense non-recoverable pre-operating costs as they are incurred. RESTRICTED INVESTMENTS AND SITE RESTORATION COSTS Restricted investments represent investments carried at cost, which approximates market. Such investments represent amounts of certificates of deposit or other deposit accounts required by various state and federal agencies in connection with the performance of field operations by the Company and its subsidiaries. The amount of restricted investments was $106,700 at December 31, 1999 and 1998. CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. There were no cash equivalents at December 31, 1999 and 1998. INCOME TAX The Company follows Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included Consolidated Financial Statements Page F-10 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) in the consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are computed using the liability method based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred income tax is provided in the accompanying consolidated financial statements as a result of differences related to timing differences in reporting of depreciation and depletion for income tax purposes and consolidated financial statement purposes. A valuation allowance account is maintained to estimate the amount of net operating loss carryforwards and tax credit carryforwards which the Company may not be able to use as a result of the expiration of maximum carryover periods allowed under Internal Revenue tax codes. LOSS PER COMMON SHARE Basic loss per common share is computed based on the weighted average number of common shares outstanding during the respective years. Stock options and stock warrants have not been included in the calculation of diluted earnings per share as their effect would be antidilutive. ACCOUNTING STANDARDS ADOPTED In June 1997, Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131), was issued. SFAS 131 requires that companies report financial and descriptive information about their reportable operating segments. Segment information to be reported is to be based upon the way management organizes the segments for making operating decisions and assessing performance. The Company adopted SFAS 131 in the fourth quarter of 1998 and has made the appropriate disclosures. Effective for fiscal years beginning after December 15, 1995, Statement of Financial Accounting Standards No. 123 establishes accounting and reporting standards for stock-based compensation plans. SFAS No. 123 encourages entities to use a "fair value based method" in accounting for employee stock-based compensation plans but allows the "intrinsic value based method" prescribed by APB Opinion No. 25. SFAS No. 123 amends Opinion No. 25 to require pro forma disclosures of net income and earnings per share as if the "fair valued based method" was used. The Company has elected to remain on its current method of accounting as described in Note 12, and has adopted the disclosure requirements of SFAS No. 123. Consolidated Financial Statements Page F-11 NOTE 2. FINANCIAL RESULTS, LIQUIDITY AND BASIS OF PRESENTATION These financial statements are prepared assuming that the Company will continue as a going concern. They do not include any adjustments relating to the recoverability and classification of recorded assets or the amounts and classification of liabilities that would be necessary in the event the Company cannot continue in existence. During 1999, the seismic service industry experienced an unprecedented downturn which severely constrained the Company's working capital position. During this period, management developed a financial and operational plan to carry the Company's operations through the year 2000. One component of this plan included a restructuring of the Company's long term debt as further outlined in Note 11. The restructuring provided the Company with additional funding, in the amount of $5,895,000, and the option, during 2000, to make interest payments due on its 13.5% Senior Secured Notes either in cash or by issuing additional notes. The plan also included disposing of the Company's oil and gas operations as well as one of its seismic acquisition subsidiaries, as further discussed in Notes 18 and 19. As a result of the above outlined conditions and plan implementation, the Company incurred a loss of approximately $30.4 million during 1999 in addition to a loss of approximately $10 million incurred in 1998, leaving the Company with a deficit equity position of approximately $14.1 million at December 31, 1999. Management believes that this plan, along with the deferral of certain accrued expenses, will provide sufficient liquidity to continue operations through 2000. As noted above, the Company has the option to avoid making cash interest payments on its 13.5% Senior Secured Notes during 2000. As presently structured, the Company will be required to make a cash interest payment of approximately $3.9 million on March 15, 2001. Under current conditions, continued operations by the Company through this payment will be dependent upon a continued forbearance by the holders of the Company's 13.5% Senior Secured Notes. Consolidated Financial Statements Page F-12 NOTE 3. PROPERTY AND EQUIPMENT A summary of property and equipment follows: December 31, December 31, 1999 1998 ----------- ----------- Field operating equipment ...................... $17,213,247 $32,401,674 Proved oil and gas properties .................. -- 919,285 Vehicles ....................................... 735,994 867,506 Buildings and improvements ..................... 287,429 279,893 Software ....................................... 977,913 167,830 Data processing equipment ...................... 3,219,272 3,106,399 Furniture and equipment ........................ 228,050 236,932 ----------- ----------- 22,661,905 37,979,519 Less accumulated depletion, depreciation and ... 10,807,428 10,627,457 ----------- ----------- Amortization ........................ 11,854,477 27,352,062 Land ........................................... 23,450 23,450 ----------- ----------- Net Property and Equipment ......... $11,877,927 $27,375,512 =========== =========== NOTE 4. ACCRUED LIABILITIES A summary of accrued liabilities follows: December 31, December 31, 1999 1998 ----------- ----------- Sales tax payable .............................. $ 189,377 $ 681,505 Royalties payable .............................. -- 282,796 Accrued payroll ................................ 647,406 816,488 Accrued interest payable ....................... 1,769,687 1,178,440 Payroll taxes payable .......................... -- 9,056 Accrued operating expense ...................... 992,629 208,388 ----------- ----------- $ 3,599,099 $ 3,176,673 =========== =========== Consolidated Financial Statements Page F-13 NOTE 5. NOTES PAYABLE A summary of notes payable follows:
DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ Note representing an amount due under the terms of an agreement for payment of funds in settlement of a claim, dated May 7, 1997, with no interest $ 158,524 $ 158,524 Notes representing financing of insurance premiums for operating subsidiaries over periods of nine to eleven months at interest rates varying from 7.9% to 8.2% 237,037 315,908 Notes representing refinancing arrangements with certain suppliers of an operating subsidiary for accounts payable invoices outstanding beyond normal industry payment terms 30,191 Note dated December 18, 1990 due December 1, 1992 payable to unrelated corporation with interest accruing at 10% per annum; secured by certain oil and gas leases 25,000 Note to an equipment vendor dated November 11, 1998 secured by seismic equipment, with interest at 9.5%, payable interest only monthly through May 11, 1999, principal and interest through October 11, 1999 and all remaining principal and interest due November 11, 1999. Obligation was satisfied on October 1, 1999 1,621,782 Notes to financial institutions for the purchase of Company vehicles used by marketing and sales personnel secured by vehicles, principal and interest payable monthly. 2,548 ------------ ------------ $ 398,109 $ 2,151,405 ============ ============
Consolidated Financial Statements Page F-14 NOTE 6. LEASE BANK The Company had previously utilized a revolving credit facility to provide funds to acquire, package and sell oil and gas properties. Notes issued under this facility are payable upon demand one year from the date of the individual notes. If there is no demand, the notes automatically renew on a quarterly basis. The Notes matured on December 31, 1999. The outstanding balance on the advances for Lease Bank was $185,500 at December 31, 1999 and $260,500 at December 31, 1998. The Company intends to continue to meet its quarterly interest obligation of prime plus 4%. NOTE 7. LONG-TERM DEBT
DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ Note to a financial institution dated March 1, 1996 payable in 120 monthly installments of principal and interest adjusted quarterly based on interest at prime plus 1.5% through March 1, 2006 when all unpaid principal and accrued interest is due (monthly payments at December 31, 1999 were $64,104 including principal and interest at 9.75%), secured by first security interest in a subsidiary's accounts receivable, inventory, property and equipment, oil and gas leases, intangibles, guaranty of the Company and a $4,000,000 guaranty of the Farmers Home Administration of the United States Department of Agriculture $ 3,616,758 $ 4,073,573 Note to an equipment vendor dated September 30, 1997 payable in 36 monthly installments of $106,237 including principal and interest at 10%, due September 30, 2007, secured by equipment, unpaid principal and interest balances subject to certain mandatory prepayment amounts if the Company receives proceeds from the sale of common stock other than under employee benefit plans or currently outstanding warrants. Obligation was satisfied on October 1, 1999. (See Note 11) $ 2,127,425
Consolidated Financial Statements Page F-15 NOTE 7. LONG-TERM DEBT (CONTINUED)
DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ Note originally dated June 9, 1998, extended on September 2, 1999, payable to a financial institution in 7 monthly installments of principal in the amount of $53,544 plus accrued interest at prime beginning October 2, 1999 with a final payment of the unpaid principal balance plus accrued interest due on May 2, 2000. The Note is secured by equipment, inventory, accounts receivable, fixtures and a guaranty of the Company $ 268,451 $ 910,979 Note dated January 8, 1998 payable to an individual in 36 monthly installments of $18,957 including principal and interest at 10% beginning February 8, 1998, secured by certain equipment, accounts receivable and a guaranty of the Company. The subsidiary company with this obligation was sold on February 23, 2000 and the Company's guaranty was released. (See Note 19) $ 501,356 $ 501,356 Notes to financial institutions for the purchase of Company vehicles used by marketing and sales personnel, secured by vehicles, principal and interest payable monthly $ 22,479 Note to an equipment vendor dated August 31, 1997 payable in 4 installments of $360,000 including principal and interest at 12%, beginning August 31, 1997, and 45 monthly installments of $220,599 including principal and interest at 12%, beginning December 31, 1997, due August 31, 2001, secured by equipment, and a guaranty of the Company, unpaid principal and interest balances subject to certain mandatory prepayment amounts if the Company receives proceeds from the sale of common stock other than under employee benefit plans or currently outstanding warrants. Obligation was satisfied on October 1, 1999. (See Note 11) $ 6,174,430
Consolidated Financial Statements Page F-16 NOTE 7. LONG-TERM DEBT (CONTINUED)
DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ 12% Senior Subordinated Notes dated April 30, 1998 in the aggregate principal amount of $40,000,000, to certain investors due and payable on April 15, 2005, and interest of 12% per annum is payable on each April 15 and October 15, commencing October 15, 1998. The notes are guaranteed by all subsidiaries of the Company (except Quantum Geophysical Services, Inc) and the notes and guarantees are subordinated in right of payment to certain senior debt of the Company and the subsidiaries which have guaranteed the 12% Senior Subordinated Notes. Pursuant to the terms of a warrant agreement, the Company issued to the investors warrants to purchase up to an aggregate of 7,618,594 shares of the Company's Common Stock. The warrants have an exercise price of $2.00 per share and are exercisable at any time on or prior to April 30, 2005. For financial statement purposes, the notes are presented net of unamortized original issue discount of $8,537,791. Obligation was satisfied on October 1, 1999. (See Note 11) $ 31,462,209 13.5% Senior Secured Notes dated October 1, 1999 in the aggregate principal amount of $45,358,000, to certain investors due and payable on September 15, 2005, and interest of 13.5% per annum is payable on each March 15 and September 15, commencing March 15, 2000. The Company granted security interests covering substantially all of the Company's assets as security for the Notes and caused certain of its wholly-owned subsidiaries to execute guarantees of the Notes. The Company issued to the investors warrants to purchase 26,818,594 shares of the Company's Common Stock at a price of $0.56 per share. The Company issued 7,618,594 of these warrants in exchange for 7,618,594 warrants previously issued to the investors. For financial statement purposes, the notes are presented net of unamortized discount of $1,953,289 $ 43,404,711
Consolidated Financial Statements Page F-17 NOTE 7. LONG-TERM DEBT (CONTINUED)
DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ 13.5% Senior Secured Notes dated October 1 and November 30, 1999 in the aggregate principal amount of $5,895,000, to certain investors due and payable on September 15, 2002 and interest of 13.5% per annum is payable on each March 15, and September 15, commencing March 15, 2000. The Company granted security interests covering substantially all of the Company's assets as security for the Notes and caused certain of its wholly-owned subsidiaries to execute guarantees of the Notes. The Company issued to the investors warrants to purchase 23,250,000 shares of the Company's Common Stock at a price of $0.56 per share. For financial statement purposes, the Notes are presented net of unamortized original issue discount of $1,704,999 $ 4,190,001 ------------ ------------ $ 51,981,277 $ 45,272,451 Less Current Maturities 713,280 4,648,110 ------------ ------------ $ 51,267,997 $ 40,624,341 ============ ============ A summary of long-term debt principal maturities follows: FOR THE YEARS ENDING DECEMBER 31, AMOUNT --------------------------------- ------------ 2000 $713,280 2001 486,914 2002 4,726,569 2003 591,286 2004 651,520 Thereafter 44,811,708 ------------ $ 51,981,277 ============
Consolidated Financial Statements Page F-18 NOTE 7. LONG-TERM DEBT (CONTINUED) The 13.5% Senior Secured Notes due 2002 and 2005, as outlined above, have interest payments due and payable on each March 15 and September 15, commencing March 15, 2000. Interest payments of $3,151,142 and $3,672,280 are due on March 15, 2000 and September 15, 2000 respectively. The Company has the option of making these interest payments in cash or by the issuance of additional notes (payment in kind). The interest payment of $3,920,158 due March 15, 2001 currently calls for a cash payment. NOTE 8. INCOME TAX The income tax benefit (expense) charged to continuing operations for the years ended December 31, 1999 and 1998 was as follows: 1999 1998 ----------- ----------- Current: U.S. Federal ............................. $ 197,596 $ 1,940,000 State and Local .......................... -- -- Foreign .................................. -- -- ----------- ----------- Total Current ......................... 197,596 1,940,000 ----------- ----------- Deferred: U.S. Federal ............................. 222,045 429,376 State and Local .......................... -- -- Foreign .................................. -- -- ----------- ----------- Total Deferred ........................ 222,045 429,376 ----------- ----------- Other: Adjustment to valuation allowance ........ -- (4,605,454) ----------- ----------- Total ................................. $ 419,641 $(2,236,078) =========== =========== Consolidated Financial Statements Page F-19 NOTE 8. INCOME TAX (CONTINUED) The income tax provision differs from the amount of income tax determined by applying the U.S. Federal Income Tax Rate to pre-tax income from continuing operations for the years ended December 31, 1999 and 1998 due to the following: 1999 1998 ------------ ------------ Computed "expected" tax benefit .............. $ 10,485,445 $ 3,292,765 Non deductible expenses: Goodwill .............................. (995,280) (692,405) High yield interest, current .......... (2,063,000) Adjust prior year high yield interest . (340,000) Amortization and write off of OID ..... (2,902,850) (164,092) Non deductible capital loss ............. (920,380) Adjustment of prior year subsidiary tax liabilities ....................... 419,641 Establish deferred tax for depreciation . (1,438,967) Other adjustments ....................... (238,381) (66,892) Change in valuation allowance ........... (1,586,587) (4,605,454) ------------ ------------ Income tax benefit (expense) ............ $ 419,641 $ (2,236,078) ============ ============ Deferred tax assets at December 31, 1999 and 1998 are comprised primarily of net operating loss carryforwards. Deferred tax liabilities consist primarily of the difference between book and tax basis depreciation. A valuation allowance has been provided for net deferred tax assets that the Company has not yet determined to be more likely than not to be realizable at this time. The Company will continue to review this valuation allowance and make adjustments when deemed appropriate. Following is a summary of deferred tax assets and liabilities. 1999 1998 ----------- ----------- Deferred tax assets: Loss carryforwards ................. $ 8,514,485 $ 5,375,400 Tax credits ........................ 132,238 245,769 ----------- ----------- 8,646,723 5,621,169 Deferred tax liabilities Depreciation ...................... (1,438,967) (222,045) ----------- ----------- Net deferred tax assets ........... $ 7,207,756 $ 5,399,124 =========== =========== Valuation allowance .................... $ 7,207,756 $ 5,621,169 =========== =========== At December 31, 1999, the Company had net operating loss carryforwards of $25,042,604 and tax credit carryforwards of $132,238 that expire in 2000 through 2014. Consolidated Financial Statements Page F-20 NOTE 8. INCOME TAX (CONTINUED) The Company evaluated the deferred tax benefit of $2,236,078 which had been reflected on its balance sheet in accordance with the provisions of FASB 109. Because of the conditions in the Company's sector of the oil industry, and because the Company did not have taxable income for the year ending December 31, 1998, the Company's management believed that, based upon the weight of currently available evidence, the Company should increase the valuation allowance to the full amount of the computed tax benefit. This resulted in a 1998 income tax expense of $2,236,078. The computed tax benefit at December 31, 1999 was $7,207,756 and at December 31, 1998 was $5,621,169. The amounts and expiration dates of the carryforwards are as follows: NET OPERATING TAX CREDIT EXPIRATION DATE LOSS AMOUNT AMOUNT --------------- ----------- ----------- 2000 $ 257,107 $ 118,936 2001 206,140 74 2002 1,502,500 2003 142,273 2004 94,586 2005 1,134 2006 141,998 2007 46,928 13,228 2008 304,632 2009 249,844 2010 879,151 2011 2,613,419 2012 2,191,002 2013 7,179,391 2014 9,232,499 ----------- ----------- Totals $25,042,604 $ 132,238 =========== =========== NOTE 9. RELATED PARTY TRANSACTIONS The father of a former Vice-President of the Company is a participant in the Company's Lease Bank with a note balance of $35,500 at December 31, 1999. On April 25, 1997, the Company obtained a $500,000 short-term financing from two individuals who were subsequently elected directors at the annual shareholders meeting on November 20, 1997. The Company issued 12% senior notes to the individuals, which were exchanged on July 18, 1997, in connection with the Securities Purchase and Exchange Agreement described in Note 11, for 458,333 shares of the Company's common stock, 15,625 shares of Series A preferred stock and 592,009 shadow warrants. As part of this financing transaction, the Company Consolidated Financial Statements Page F-21 NOTE 9. RELATED PARTY TRANSACTIONS (CONTINUED) entered into a consulting agreement with a director on July 18, 1997, pursuant to which, in consideration of certain strategic planning and other consulting services to be provided to the Company and its subsidiaries by that individual, he will be paid a quarterly consulting fee equal to one half of 1% of the total investment made by him and certain other persons in debt and equity securities of the Company that is outstanding as of the end of each quarter during the three-year term of such agreement. As of December 31, 1999 and 1998, respectively, the Company owed the director $343,207 and $203,207 in consulting fees under the terms of the agreement, which are included as amounts due to officers and shareholders in the Company's balance sheet. The Company and the director entered into an option agreement providing for the grant of options to purchase 50,000 shares of common stock of the Company to the director at $0.75 per share. In connection with the private placement offering described in Note 11 to the consolidated financial statements, the Company entered into an investment monitoring agreement with an investment group, under which the Company will pay the investment group an annual fee of $25,000. Two directors of the Company are the two partners of the sole managing member of the investment group. The Company owed the investment group $62,500 and $37,500 as of December 31, 1999 and 1998, respectively, under the terms of the agreement, which are included as amounts due to officers and shareholders on the Company's balance sheet. On March 27, 1998, the Company obtained a $1,500,000 short-term financing from a group of individuals. Three of the Company's directors and several related family members provided $1,000,000 of this financing. The Company issued promissory notes, with interest at prime plus 2%, to these individuals. Additionally, one director and the related family members were granted warrants to purchase 150,000 shares of common stock of the Company at a purchase price of $2.00 per share. The Company paid these notes in full with interest due on May 1, 1998. The above noted related parties received interest payments of $11,083. A director of the Company is a partner of a law firm which provides legal services to the Company related to financing and private placement offering activities. In connection with these activities the Company incurred legal costs from the director's law firm during the years ended December 31, 1999 and 1998, respectively of $123,218 and $204,283. NOTE 10. ACQUISITION OF WHOLLY-OWNED SUBSIDIARIES On January 26, 1998, the Company acquired, effective January 1, 1998, all of the outstanding capital stock of Reliable Exploration Incorporated, a Montana corporation (Reliable), pursuant to the terms of a Stock Purchase Agreement dated as of December 3, 1997, by and among the Company, Reliable and the holders of all of the outstanding capital stock of Reliable. Reliable, based in Billings, Montana, is Consolidated Financial Statements Page F-22 NOTE 10. ACQUISITION OF WHOLLY-OWNED SUBSIDIARIES (CONTINUED) engaged in the business of providing 2-D and 3-D seismic surveys to the oil and gas industry, specifically focusing on the Rocky Mountain region of the United States. The consideration paid by the Company for the Reliable acquisition included $1,300,000 in cash and 375,000 newly-issued shares of the Company's common stock. On the closing date, Reliable restructured $1,487,500 of indebtedness to a former stockholder of Reliable by paying $900,000 in cash and refinancing the balance of $587,500 in a promissory note, which bears interest at the rate of 10% per annum beginning on January 8, 1998. The promissory note matures on January 8, 2001. The Company guaranteed payment of Reliable's indebtedness due under the promissory note and advanced Reliable $900,000 on the closing date in order to permit the refinancing. The Company also entered into two-year employment agreements with the three former stockholders of Reliable. The acquisition by the Company of Reliable Exploration Incorporated is accounted for as a purchase, with results of Reliable's operations included in the Company's financial statements from January 1, 1998 forward. The cost of the Company's investment in Reliable is $2,284,375 and the goodwill of $3,053,075 acquired in the purchase is being amortized on a straight line basis over a forty-year period. Amortization expense from the date of acquisition through December 31, 1999 was $137,716. On April 30, 1998, the Company acquired all of the outstanding capital stock of Geophysical Development Corporation, a Texas corporation (GDC) pursuant to the terms of a Stock Purchase Agreement (GDC Agreement) among the Company, GDC and the holders of all of the outstanding capital stock of GDC. GDC is a Houston, Texas-based provider of seismic data processing, software and consultation services. Pursuant to the GDC Agreement, the Company acquired 6,750 shares of GDC's common stock (GDC shares), representing 100% of the outstanding capital stock of GDC from the shareholders of GDC in exchange for (i) cash in the amount of $26,000,000 and (ii) 1,000,000 newly-issued shares of the Company's common stock. In addition, the Company granted options entitling certain employees of GDC to purchase up to an aggregate of 1,000,000 shares of common stock at an exercise price of $3.00 per share. Effective April 30, 1998, the Company also entered into employment agreements with certain of the former GDC shareholders, pursuant to which such former GDC shareholders were granted options to purchase up to an aggregate of 400,000 shares of common stock at an exercise price equal to the closing price per share of the common stock on April 30, 1998. The acquisition by the Company of GDC is accounted for as a purchase, with results of GDC's operations included in the Company's financial statements from May 1, 1998 forward. The cost of the Company's investment in GDC is $30,062,500 and the goodwill of $27,961,807 acquired in the purchase is being amortized on a straight line basis over a ten-year period. Amortization expense from the date of acquisition through December 31, 1999 was $4,660,301. Consolidated Financial Statements Page F-23 NOTE 10. ACQUISITION OF WHOLLY-OWNED SUBSIDIARIES (CONTINUED) The Company's consolidated results of operations have incorporated activity from the effective date of the acquisitions of the above subsidiaries. The unaudited pro forma information below presents combined results of operations as if the acquisition of GDC had occurred at the beginning of 1998. The unaudited pro forma information is not necessarily indicative of the results of operations of the combined company had the acquisition occurred at the beginning of the year presented, nor is it necessarily indicative of future results. Pro forma information is not provided for 1999 because twelve months of financial results for all subsidiaries are included in the Consolidated Financial Statements for 1999. 1998 ------------ Revenues ................................ $ 39,051,810 Net Income (Loss) ....................... (9,571,427) Earnings (Loss) per share ............... (0.50) NOTE 11. PRIVATE PLACEMENT OFFERINGS & RESTRUCTURING OF DEBT In order to finance the acquisition of GDC, the Company completed a private offering in the amount of $40,000,000 of certain securities designated as its 12.0% Senior Subordinated Notes (Notes) to DLJ Investment Partners, L.P. (DLJ) and certain additional investors (DLJ and certain other investors being referred to herein collectively as the Purchasers) pursuant to the terms of Securities Purchase Agreement dated as of April 30, 1998, by and among the Company and the Purchasers. In addition, the Company (i) caused certain of its wholly-owned subsidiaries to execute guarantees of the Notes pursuant to an Indenture executed by each of them, (ii) granted warrants (Warrants) to the Purchasers entitling them to purchase up to an aggregate of 7,618,594 shares of Common Stock at a price of $2.00 per share, subject to certain adjustments, and (iii) granted certain rights in favor of the Purchasers with respect to the Notes, the Warrants and the shares of Common Stock which may be acquired upon exercise of the Warrants. On October 1, 1999 the Company entered into a Securities Purchase Agreement (Purchase Agreement) with DLJ Partners, L. P. (DLJ) and certain additional investors (collectively, the Purchasers), pursuant to which the Company completed a restructuring of its $40,000,000 12% Senior Subordinated Notes due April 2005 (Prior Notes) and received an additional $4,000,000 from the Purchasers, the holders of the Prior Notes, and $1,000,000 from other sources. On November 30, 1999, the Company received an additional $895,000 from other investors. The restructuring involved the Company exchanging the Prior Notes for its 13.5% Senior Secured Notes due 2005 in the aggregate principal amount of $45,358,000 (the 2005 Notes) and the Company issued $5,895,000 of its 13.5% Senior Secured Notes due 2002 (the 2002 Notes) for the additional funding received on October 1, 1999 and November Consolidated Financial Statements Page F-24 NOTE 11. PRIVATE PLACEMENT OFFERINGS & RESTRUCTURING OF DEBT (CONTINUED) 30, 1999. The Company granted security interest covering substantially all of its assets as security for the 2005 Notes and 2002 Notes and caused certain of its wholly-owned subsidiaries to execute guaranties of the 2005 Notes and 2002 Notes. As additional consideration, the Company issued warrants to the Purchasers to acquire 50,068,594 shares of the Company's common stock at an exercise price of $.56 per share. The Company issued 7,618,594 of these warrants in exchange for 7,618,594 warrants previously issued to the Purchasers. The warrants expire on September 15, 2006. The Company also recognized additional interest expense of $758,000 upon completion of the restructuring as a result of the interest rate increasing from 12% to 13.5% on accrued unpaid interest. As a result of the issuance of the warrants, the Purchasers, collectively, have the right to acquire 51.6% of the Company's outstanding common stock on a fully diluted basis. As a consequence of the extinguishment of the Prior Notes, the original issue discount and other loan costs associated with the Prior Notes have been expensed and resulted in an extraordinary loss of $8,275,390. Concurrently with the transactions contemplated by the Purchase Agreement, the Company completed a restructuring of its debt obligations to the principal equipment supplier for the Company's seismic acquisition operations through a sale leaseback transaction. NOTE 12. OUTSTANDING OPTIONS AND WARRANTS Under two plans, the Company may grant stock options and other awards to key executive, management and other personnel at exercise prices equal to or exceeding the market value at the date of grant. In general, options become exercisable over a three to five year period from the date of grant and expire five to seven years after the date of grant. Shares available for future option grants at December 31, 1999, totaled 3,564,001. Consolidated Financial Statements Page F-25 NOTE 12. OUTSTANDING OPTIONS AND WARRANTS (CONTINUED) The following table summarizes information about stock option transactions: 1999 1998 ------------------------- ------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE SHARES PRICE SHARES PRICE ---------- ---------- ---------- ---------- Outstanding at Beginning of year ...... 5,307,000 $ 1.69 2,882,500 $ .96 Awards: Granted ............. 100,000 .50 2,707,500 2.61 Exercised ........... -- -- Forfeited ........... (1,291,001) 1.89 (283,000) 3.18 ---------- ---------- Outstanding at December 31 ............ 4,115,999 $ 1.59 5,307,000 $ 1.69 ---------- ---------- Exercisable at December 31 ............ 2,538,999 $ 1.36 1,126,653 $ .95 ---------- ---------- The following table summarizes information about stock options outstanding at December 31, 1999: WEIGHTED WEIGHTED RANGE OF NUMBER OF AVERAGE NUMBER OF AVERAGE EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE PRICES OUTSTANDING PRICE EXERCISABLE PRICE ----------- ----------- -------- ----------- -------- $0-$1 2,490,000 $0.78 1,740,000 $0.81 $1-$2 152,500 1.63 152,500 1.63 $2-$3 487,498 2.41 309,165 2.35 $3-$4 779,335 3.01 290,668 3.01 $4-$5 206,666 4.07 46,666 4.09 ----------- ----------- 4,115,999 2,538,999 =========== =========== Consolidated Financial Statements Page F-26 NOTE 12. OUTSTANDING OPTIONS AND WARRANTS (CONTINUED) As permitted under generally accepted accounting principles, stock-based awards granted to employees are accounted for following APB 25. Accordingly, the Company has not recognized compensation expense for its stock-based awards to employees. Outlined below are pro forma results had compensation costs for the Company's stock-based compensation plans been determined based on the fair value approach of SFAS 123. The weighted average fair value of options granted during 1999 is $0.38. The weighted average fair value of options granted during 1998 is $1.19. The fair value of each option granted is estimated on the date of grant, using the Black-Scholes option-pricing model. The model assumed expected volatility of 50% and risk-free interest rate of 5.1% in 1999 and volatility of 50% and risk-free interest rate of 5.4% in 1998. As the Company has not declared dividends since it became a public entity, no dividend yield was used. The expected life of the options granted ranges from five to seven years. The following table reflects pro forma net income and earnings per share had the Company elected to adopt the fair value approach of SFAS 123: 1999 1998 ------------ ----------- Net Loss: As reported $(30,419,897) $(9,968,602) Pro Forma (30,787,776) (10,332,681) Basic Earnings per share: As reported $(1.57) $(.53) Pro Forma (1.59) (.54) These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period and additional options may be granted in future years. Consolidated Financial Statements Page F-27 NOTE 12. OUTSTANDING OPTIONS AND WARRANTS (CONTINUED) A summary of outstanding warrants issued in connection with notes payable and private placement offerings is as follows: WARRANTS EXERCISE SHARES PRICE ----------- ----------- Outstanding at December 31, 1998 ................ 11,943,496 $0.26-2.86 Warrants issued ................................. 42,490,000 0.56-3.30 Warrants exercised, surrendered or called ....... (415,820) 0.26-2.26 Outstanding at December 31, 1999 ................ 54,017,676 0.26-3.30 SHADOW WARRANTS Outstanding at December 31, 1999 ................ 6,834,423 $ 0.20 Exercisable at December 31, 1999 ................ 6,176,704 $ 0.20 NOTE 13. COMMITMENTS OPERATING LEASES In October of 1999, the Company consolidated all of its office operations to what formerly had been its geophysical data processing center, located at 8401 Westheimer, Houston, Texas. Prior to this consolidation, the Company's corporate headquarters and seismic acquisition operations had been located at 5555 San Felipe, Houston, Texas. The Company leased office space under two leases which were to expire on June 30, 2003. The Company was able to exercise an option to cancel one of these leases on November 30, 1999 and has successfully sub-leased a significant portion of the remaining lease. The Company's yearly rent on the remaining lease totals $54,320 net of sub-lease income of approximately $60,000. The Company currently leases office space for its headquarters and subsidiary operations under a lease which expires April 2001. The current annual base rent for this lease is $243,156. The Company's data processing subsidiary, Geophysical Development Corporation (GDC), entered into a lease agreement for computer hardware and software for a thirty-three month period beginning January 1, 1999. Lease payments of $650,580 are due in 2000 and $152,736 in 2001. GDC has entered into several additional leases for computer hardware and software. The leases vary in length from 12 to 36 months. Annual lease payments total $120,848. Consolidated Financial Statements Page F-28 NOTE 13. COMMITMENTS (CONTINUED) The Company's seismic acquisition subsidiary leased vehicles for use in field operations under various forty-eight month leases which expire beginning in the year 2001. Rental expense under these leases amounted to $226,571 for the year ended December 31, 1999. The Company entered into a lease agreement for seismic acquisition equipment for a thirty-six month term beginning October 1, 1999. Lease payments of $2,100,000 are due in 2000 and $3,360,000 in 2001. Rental expense under the leases recorded in the consolidated financial statements amounted to $2,142,759 and $727,690 for the years ended December 31, 1999 and 1998. Aggregate future minimum rentals under the various lease agreements including the base rent and the average operating cost are as follows: FOR THE YEARS ENDING DECEMBER 31, AMOUNT --------------------------------- ----------- 2000 $ 3,391,823 2001 3,977,878 2002 2,727,361 2003 27,160 2004 - $10,124,222 NOTE 14. MAJOR CUSTOMERS Revenues from major customers, which exceeded ten percent of total revenues, are as follows: FOR THE YEARS ENDED --------------------------------- DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------- Customer A - $ 7,971,545 ============ ============= Customer B - $ 5,336,732 ============ ============= Customer C $ 1,642,000 - ============ ============= Customer D $ 2,073,262 - ============ ============= Consolidated Financial Statements Page F-29 NOTE 15. CONCENTRATION OF CREDIT RISK Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of unsecured trade receivables. In the normal course of business, the Company provides credit terms to its customers. Accordingly, the Company performs ongoing credit evaluations of its customers and maintains allowances for possible losses which, when realized, have been within the range of management's expectations. The Company generally provides services to a relatively small group of key customers that account for a significant percentage of the accounts receivable of the Company at any given time. The Company's key customers vary over time. The Company extends credit to various companies in the oil and gas industry, including its key customers, for the acquisition of seismic data, which results in a concentration of risk. This concentration of credit risk may be affected by changes in the economic or other conditions of the Company's key customers and may accordingly impact the Company's overall credit risk. The Company wrote off a receivable from a customer of approximately $2.8 million during 1998 as a result of that company's involuntary bankruptcy proceedings. Historical credit losses incurred on receivables by the Company, except for the above, have been immaterial. The Company has cash in bank and short-term investments which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and short-term investments. NOTE 16. FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amounts and fair values of the Company's financial instruments are determined as described in Note 1, Summary of Significant Accounting Policies, Fair Values of Financial Instruments and are summarized as follows: December 31, 1999 December 31, 1998 -------------------------- -------------------------- Carrying Carrying Amount Fair Value Amount Fair Value ----------- ----------- ----------- ----------- Cash ............... $ 2,677,996 $ 2,677,996 $ 2,705,581 $ 2,705,581 Accounts receivable 2,010,381 2,010,381 6,831,765 6,831,765 Accounts payable ... 1,182,144 1,182,144 4,822,802 4,822,802 Indebtedness ....... 52,975,154 52,975,154 47,935,493 47,935,493 Consolidated Financial Statements Page F-30 NOTE 17. SUBSEQUENT EVENTS During 1998, a customer of a subsidiary of the Company defaulted on payment of $2.8 million due the Company for seismic data acquisition services performed by its subsidiary. The Company obtained a judgment against the customer in the amount of the outstanding obligation plus interest and attorney's fees. As a result of the customers' subsequent bankruptcy proceedings, the Company determined that the obligation was not collectible and charged the amount against earnings during the fourth quarter of 1998. On February 17, 2000, the Company entered into a final compromise and settlement of any and all claims it had against the customer and any involved party. As part of the settlement agreement, the Company received an ownership interest in approximately 200 miles of previously recorded seismic data located in the Atchafalaya Basin of Louisiana. No value has been assigned to the data and income will be recognized upon any subsequent sale. NOTE 18. DISCONTINUED OPERATIONS On July 28, 1999, the Company sold all of the outstanding capital stock of HOC Operating Co., Inc. (HOC), a wholly-owned subsidiary of the Company, to Halex Oil Corporation (Halex), a Texas Corporation owned by a former officer of the Company, pursuant to the terms of a Stock Purchase Agreement (HOC Agreement). Pursuant to the HOC Agreement , Halex acquired all of the capital stock of HOC in exchange for the assumption by Halex of certain debt obligations and accounts payable of HOC and Geokinetics Production Company, Inc., a wholly-owned subsidiary of the Company (Geokinetics Production). Immediately prior to the sale of HOC's stock to Halex, Geokinetics Production conveyed to HOC various interests in certain oil and gas properties as well as certain liabilities. This transaction completes the discontinuance of the Company's oil and gas operations. The Company recognized a charge to earnings (before and after tax) during 1999 in the amount of $563,375 as a result of the transaction. This sale represented all of the Company's oil and gas exploration and production activities and has been accounted for as a discontinued operation. Accordingly, operating results are segregated and reported as discontinued operations in the accompanying consolidated statements of operations and cash flows. Information related to the discontinued oil and gas operations of HOC and Geokinetics Production are as follows: 1999 1998 --------- --------- Revenue from oil and gas operations .............. $ 219,096 $ 417,097 Operating and other expenses ..................... (333,875) (702,707) Other income ..................................... 43,284 1,615 --------- --------- Loss before and after income taxes .... $ (71,495) $(283,995) ========= ========= Consolidated Financial Statements Page F-31 NOTE 18. DISCONTINUED OPERATIONS (CONTINUED) The assets and the liabilities of the discontinued operations included in the accompanying consolidated balance sheet at December 31, 1998 are as follows: ASSETS Cash ................................................. $ 86,810 Accounts receivable .................................. 319,134 Prepaid expenses ..................................... 9,013 ----------- Total Current Assets ............................ 414,957 Restricted cash ...................................... 21,700 Property and equipment (net) ......................... 698,775 ----------- Total Assets .................................... 1,135,432 LIABILITIES Accounts payable ..................................... 237,797 Accrued expenses ..................................... 316,682 Notes payable (i) .................................... 285,500 Advances from affiliates (net) ....................... 2,183,517 ----------- Total Liabilities .............................. 3,023,496 ----------- Liabilities in excess of assets ................ $(1,888,064) =========== (i) Notes payable of $100,000 were assumed by the Purchaser. NOTE 19. IMPAIRMENT RESERVE - DISPOSAL OF SUBSIDIARY During 1999, a decision was made that it was in the best interests of the Company to dispose of its wholly-owned subsidiary, Reliable Exploration, Incorporated (Reliable). On February 23, 2000, the Company sold all of the outstanding capital stock of Reliable to RNS, LLC, a Montana limited liability company (RNS). RNS is wholly-owned by Allen Rein, Kim Nordberg and Scott Schmitt (the Former Shareholders), the persons from whom the Company had previously acquired such Reliable stock in January, 1998. The transaction (the Reliable Sale) was completed pursuant to the terms of a Stock Purchase Agreement, by and among the Company, RNS and the Former Shareholders. The consideration received by the Company in the Reliable Sale consisted of (i) a $250,000 promissory note, payable in 36 monthly installments and bearing interest at a fixed rate of 8% per annum and (ii) 375,000 shares of the Company's Common Stock, $0.01 par value per share. In addition, as a condition to the closing of the Reliable Sale, the Company obtained a release of its guaranty of Reliable's indebtedness, in the amount of $501,356, to a former shareholder of Reliable. Consolidated Financial Statements Page F-32 NOTE 19. IMPAIRMENT RESERVE - DISPOSAL OF SUBSIDIARY (CONTINUED) An impairment reserve of $2,143,635 was recorded during 1999 to provide for the loss on the disposal of Reliable. The impairment reserve is reflected as a reduction of goodwill. Following is a summary of the results of operations and assets and liabilities of Reliable included in the accompanying consolidated balance sheet and statements of operations as of December 31, 1999 and 1998 and for the years then ended. 1999 1998 ----------- ----------- Revenue from seismic operations ................ $ 1,662,119 $ 4,900,755 Operating and other expenses ................... (2,281,980) (5,130,331) Other income (expense) ......................... 2,986 13,612 ----------- ----------- (Loss) before income taxes ......... (616,875) (215,964) Deferred income tax benefit ........ 488,542 -- ----------- ----------- Net (Loss) .................... $ (128,333) $ (215,964) =========== =========== ASSETS Cash ...................................... $ (10,859) $ 57,279 Accounts receivable-trade ................. 449,818 270,517 Accounts receivable-officers and employees 8,145 8,230 Work-in-process ........................... -- 152,629 Prepaid expenses .......................... 37,142 43,069 ----------- ----------- Total current assets ................. 484,246 531,724 Restricted cash ........................... 35,000 35,000 Property and equipment (net) .............. 147,831 225,565 Deposits and other assets ................. 42,780 52,423 Deferred tax assets ....................... -- (68,901) ----------- ----------- Total Assets ......................... 709,857 775,811 ----------- ----------- LIABILITIES Accounts payable .......................... 203,965 197,053 Current portion of long-term debt ......... -- 310,732 Accrued expenses and other liabilities .... 329,903 506,626 Notes payable ............................. -- 42,021 Long-term debt ............................ 501,356 190,623 Deferred income tax ....................... -- 222,045 Advances from affiliates (net) ............ -- 291,375 ----------- ----------- Total Liabilities .................... 1,035,224 1,760,475 ----------- ----------- LIABILITIES IN EXCESS OF ASSETS . $ (325,367) $ (984,664) =========== =========== Consolidated Financial Statements Page F-33 NOTE 20. SEGMENT DISCLOSURES AND RELATED INFORMATION DESCRIPTION OF REPORTABLE SEGMENTS The Company has two reportable segments, seismic acquisition and data processing, but also presents information for its oil and gas exploration and production segment. The oil and gas exploration and production segment was sold in July of 1999 and has been reflected as a discontinued operation as more fully described in Note 18. The seismic acquisition segment acquires data for clients by conducting seismic shooting operations in the Rocky Mountain and Gulf Coast regions of North America. The data processing segment operates a processing center in Houston, Texas which processes seismic data for oil and gas exploration companies. The oil and gas exploration and production segment operates oil and gas properties in Texas. MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies. The Company evaluates performance based on earnings or loss from operations before interest, taxes, depreciation and amortization. There are no inter-segment sales or transfers. Investment in acquired subsidiaries, amortization of related goodwill, and interest expenses related to financing of acquired business units are accounted for at the Parent Company. FACTORS MANAGEMENT USED TO IDENTIFY REPORTABLE SEGMENTS The Company's reportable segments are strategic business units that offer different services to clients. Each segment is managed separately, has a different client base, and requires unique and sophisticated technology. Consolidated Financial Statements Page F-34 NOTE 20. SEGMENT DISCLOSURES AND RELATED INFORMATION (CONTINUED) The following table sets forth the Company's significant information from reportable segments (See Note 18 for disposal of the oil and gas production segment):
FOR THE YEAR ENDED DECEMBER 31, 1999 ---------------------------------------------------------- SEISMIC DATA OIL & GAS ACQUISITION PROCESSING PRODUCTION TOTALS ----------- ----------- ----------- ----------- Revenues from external customers .......... $ 5,407,895 $ 8,786,231 $ 219,096 $14,413,222 Segment earnings before interest, taxes, depreciation and amortization ....... (2,821,076) 1,567,598 (68,740) (1,322,218) Interest and Other Revenue ............ 21,618 1,990 43,284 66,892 Interest Expense ..... 1,229,869 162,277 37,537 1,429,683 Depreciation and Amortization ....... 5,495,494 637,454 8,501 6,141,449 Income Tax Benefit ... 197,596 -- -- 197,596 Segment Profit (Loss) (9,327,225) 769,857 (71,494) (8,628,862) Segment Assets ....... 22,389,476 15,964,508 -- 38,353,984 Expenditures for Segment Assets ..... 18,151 922,348 -- 940,499
Consolidated Financial Statements Page F-35 NOTE 20. SEGMENT DISCLOSURES AND RELATED INFORMATION (CONTINUED) The following table sets forth the Company's significant information from reportable segments (See Note 18 for disposal of the oil and gas production segment):
FOR THE YEAR ENDED DECEMBER 31, 1998 -------------------------------------------------------------- SEISMIC DATA OIL & GAS ACQUISITION PROCESSING PRODUCTION TOTALS ------------ ------------ ------------ ------------ Revenues from external customers ........... $ 23,369,624 $ 9,257,550 $ 417,097 $ 33,044,271 Segment earnings before interest, taxes, depreciation and amortization .... 851,950 5,015,614 (222,698) 5,644,866 Interest Revenue ...... 38,856 750 1,615 41,221 Interest Expense ...... 1,634,945 85,276 46,652 1,766,873 Depreciation and Amortization ........ 4,059,161 578,753 16,260 4,654,174 Segment Profit (Loss) .............. (4,803,300) 4,352,335 (283,995) (734,960) Segment Assets ........ 36,911,140 8,823,741 2,483,048 48,217,929 Expenditures for Segment Assets .............. 12,376,470 100,767 -- 12,477,237
Annual Revenues from major customers, which exceed ten percent of a segment's total revenues are as follows: SEISMIC DATA OIL & GAS ACQUISITION PROCESSING PRODUCTION ---------- ---------- ---------- December 31, 1999: Customer A ...................... $ 820,506 $1,252,756 -- Customer B ...................... -- 1,642,600 -- Customer C ...................... 769,500 -- -- December 31, 1998: Customer A ...................... $7,971,545 -- -- Customer B ...................... 5,336,732 -- -- Customer C ...................... -- $2,375.200 -- Consolidated Financial Statements Page F-36 NOTE 20. SEGMENT DISCLOSURES AND RELATED INFORMATION (CONTINUED) The Company's geographic revenue and asset locations is as follows: All of the Company's revenue and asset locations of long-lived assets were geographically within the United States during 1999 and 1998. RECONCILIATIONS OF REPORTABLE SEGMENT REVENUES, PROFIT OR LOSS AND ASSETS
1999 1998 ------------ ------------ REVENUES Total revenues for reportable segments .................. $ 14,413,222 $ 33,044,271 Revenue included with discontinued oil and gas segment .. (219,096) (417,097) ------------ ------------ Total consolidated revenues ........................ $ 14,194,126 $ 32,627,174 ============ ============ EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION, DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM Total for reportable segments ........................... $ (1,322,218) $ 5,644,866 Loss from oil and gas operations ........................ 68,740 222,698 Provision for disposition of subsidiary ................. (2,143,635) Unallocated corporate expense ........................... (1,292,649) (1,455,461) ------------ ------------ Total consolidated earnings before interest, taxes, $ (4,689,762) $ 4,412,103 depreciation and amortization ============ ============ PROFIT OR LOSS Total profit or loss for reportable segments ............ $ (8,628,862) $ (734,960) Unallocated amounts: Corporate expenses net of interest earnings ........... (1,187,557) (1,289,233) Interest expense on acquisitions indebtedness ......... (6,068,153) (3,217,651) Depreciation and amortization of goodwill ............. (3,774,969) (2,490,680) Loss on disposition of oil and gas segment .............. (563,375) Loss on extinguishment of debt .......................... (8,275,391) Provision for disposition of subsidiary ................. (2,143,635) Deferred tax benefit (cost) .......................... 222,045 (2,236,078) ------------ ------------ Total consolidated loss .................... $(30,419,897) $ (9,968,602) ============ ============ INTEREST REVENUE Total revenue expense for reportable segments ........... $ 66,892 $ 41,221 Revenue included with discontinued oil and gas segment .. (43,284) (1,615) Unallocated amounts: Corporate consolidated cash management ......... 105,090 166,228 ------------ ------------ Total consolidated interest revenue ............ $ 128,698 $ 205,834 ============ ============
Consolidated Financial Statements Page F-37 NOTE 20. SEGMENT DISCLOSURES AND RELATED INFORMATION (CONTINUED)
1999 1998 ------------ ------------ INTEREST EXPENSE Total interest expense for reportable segments ............ $ 1,429,683 $ 1,766,873 Interest included with discontinued oil and gas segment ... (37,537) (46,652) Unallocated amounts: Corporate interest expense ........................... 501 17,651 Interest expense on acquisitions indebtedness ....... 6,067,651 3,200,000 ------------ ------------ Total consolidated interest expense ............ $ 7,460,298 $ 4,937,872 ============ ============ DEPRECIATION AND AMORTIZATION Total depreciation and amortization for reportable segments $ 6,141,449 $ 4,654,174 Depreciation included with discontinued oil and gas segment (8,501) (16,260) Unallocated amounts: Depreciation and amortization ........................ 847,502 485,302 Amortization of goodwill ............................. 2,927,467 2,005,378 ------------ ------------ Total consolidated depreciation and amortization $ 9,907,917 $ 7,128,594 ============ ============ ASSETS Total assets for reportable segments ..................... $ 38,353,984 $ 48,217,929 Unallocated corporate assets ............................. 2,736,228 2,765,468 Elimination of net receivable from corporate ............. (22,621,359) (12,402,511) Impairment reserve for disposal of subsidiary ............ (2,143,635) Goodwill not allocated to segments ....................... 27,925,078 30,957,183 ------------ ------------ Total consolidated assets ........................ $ 44,250,296 $ 69,538,069 ============ ============
NOTE 21. YEAR 2000 The Company utilizes software and technologies throughout its operations and administration that may be vulnerable to the date change in the year 2000. Identification, assessment, and in some cases, replacement of equipment that may be affected by the year 2000 is underway. Software controlled by the Company, including proprietary seismic processing, has been tested successfully. Replacements and upgrades have not been accelerated by the year 2000 issue and do not represent costs in addition to normal operating expenditures. The Company has communicated with its significant suppliers to determine if those parties have appropriate plans to remedy year 2000 issues when their systems interface with the Company's systems or may otherwise impact operations of the Company. However, there can be no guarantee that the systems of other companies, on which the Company's systems rely, will be timely converted or that a failure to convert by another company or a Consolidated Financial Statements Page F-38 NOTE 21. YEAR 2000 (CONTINUED) conversion that is incompatible with the Company's systems would not have a material adverse effect on the Company. Assessment continues by technical staff on an ongoing basis. Although the Company is not aware of any material operational issues, there can be no assurance that there will not be a delay in, or increased costs associated with, the implementation of the necessary systems and changes to address the year 2000. A potential source of risk includes, but is not limited to, the inability of principal suppliers to be year 2000 compliant, which could result in an interruption of the Company's services. The Company currently does not have a formal contingency plan. If unforeseen problems are encountered that relate to the year 2000, possible solutions will be evaluated and the most efficient will be enacted. As of March 30, 2000, the Company has not experienced any materially important business disruptions or system failures as a result of year 2000 issues nor is it aware of any year 2000 issues that have impacted its suppliers or other significant third parties to an extent significant to the Company. However, year 2000 compliance has many elements and potential consequences, some of which may not be foreseeable or may be realized in future periods. Consequently, there can be no assurance that unforeseen circumstances may not arise, or that the Company will not in the future identify equipment or systems which are not year 2000 compliant. Consolidated Financial Statements Page F-39 EX-27 2
5 12-MOS DEC-31-1999 DEC-31-1999 2,677,996 0 2,010,381 0 0 6,361,595 11,877,927 0 44,250,296 6,730,333 0 0 0 193,672 0 44,250,296 14,194,126 14,194,126 0 28,791,805 0 0 7,331,600 (21,929,279) (419,641) 0 0 0 0 (30,419,897) (1.57) 0
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