-----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, ETlg8hWFvgsv8HS7UrJo3MGXjJMw51NBZm2a+e79ysw/K4U9Y23k1JpOzygqkw0j 3pzfP3KmiNwSTXDL/Wm/SA== 0000890566-98-000666.txt : 19980416 0000890566-98-000666.hdr.sgml : 19980416 ACCESSION NUMBER: 0000890566-98-000666 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980415 SROS: NASD 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: 10KSB/A SEC ACT: SEC FILE NUMBER: 000-09268 FILM NUMBER: 98594462 BUSINESS ADDRESS: STREET 1: MARATHON OIL TOWER STREET 2: 5555 SAN FELIPE SUITE 780 CITY: HOUSTON STATE: TX ZIP: 77056 BUSINESS PHONE: 7138507600 MAIL ADDRESS: STREET 1: MARATHON OIL TOWER STREET 2: 5555 SAN FELIPE, ST 780 CITY: HOUSTON STATE: TX ZIP: 77056 10KSB/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB/A (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, 1997 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.) 5555 San Felipe, Suite 780 Houston, Texas 77056 (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| Issuer's revenues for its most recent fiscal year were $9,647,931. As of December 31, 1997, 16,598,483 shares of the Registrant's Common Stock were outstanding, and the aggregate market value of the Common Stock held by non-affiliates was approximately $27,151,240 based on the last reported sales price of such stock on that date. DOCUMENTS INCORPORATED BY REFERENCE Documents incorporated by reference: Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 1998, are incorporated by reference into Part III of this Form 10-KSB/A. GEOKINETICS INC. FORM 10-KSB/A YEAR ENDED DECEMBER 31, 1997 TABLE OF CONTENTS PAGE PART I Item 1. Description of Business...................................... 1 Item 2. Description of Properties.....................................7 PART II Item 6. Management's Discussion and Analysis or Plan of Operation....11 Item 7. Financial Statements.........................................14 i PART I ITEM 1. DESCRIPTION OF BUSINESS. HISTORICAL DEVELOPMENT OF BUSINESS The predecessor of Geokinetics Inc. (the "Company") was incorporated 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. Historically, the Company was primarily engaged in research and development of processes to extract shale oil from oil shale deposits, and in related activities. During 1994, the Company completely phased out its synthetic fuels and oil shale business. The Company acquired certain oil and gas properties from two independent oil and gas companies located in Houston, Texas, effective August 1, 1994. The Company completed these acquisitions by means of the merger of HOC Operating Co., Inc. and Hale Exploration Company, each Texas corporations, into two newly-formed subsidiaries of the Company. The Company now conducts oil and gas development, production, and exploration through two of its wholly-owned subsidiaries: HOC Operating Co., Inc. and Geokinetics Production Co., Inc. On November 18, 1994, the Company began the process of entering into the three dimensional ("3-D") seismic data acquisition business by forming a wholly-owned subsidiary to conduct three dimensional seismic data acquisition operations. On March 5, 1996, the Company completed initial equipment financing arrangements for the subsidiary. During the fiscal year ended on December 31, 1997, the Company repositioned itself from an oil and gas exploration and production company into a technologically advanced provider of seismic acquisition services to the domestic land-based oil and gas industry. As a result of equipment purchases and acquisitions of certain competitors, the Company now operates four seismic crews in the Rocky Mountain and Gulf Coast regions of the United States. The Company's corporate headquarters is located in Houston, Texas. The Company's address is 5555 San Felipe, Houston, Texas 77056 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 ("Properties"), and Item 7 ("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 1 changes and developments in the seismic acquisition business, operating risks, regulatory changes, and changes in economic conditions both domestic and international. RECENT TRANSITIONS On April 25, 1997, the Company obtained a $500,000 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). These notes were exchanged on July 18, 1997, in connection with the Securities Purchase and Exchange Agreement described below, for 458,333 shares of the Company's Common Stock, $.01 par value ("Common Stock"), 15,625 shares of Series A Preferred Stock, $10.00 par value ("Series A Preferred Stock"), which were converted subsequently into an aggregate of 208,333 shares of Common Stock, and 592,009 Shadow Warrants (exercisable only if certain of the Company's then outstanding warrants are exercised). On July 18, 1997, the Company entered into a Securities Purchase and Exchange Agreement (the "Purchase Agreement") with Blackhawk Investors, L.L.C., Mr. Ziegler and Mr. 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 indebtedness in the principal amount of $500,000 owed by the Company to Messrs. Ziegler and Webster. On July 24, 1997, Blackhawk Investors, L.L.C. ("Blackhawk") invested an additional $1,000,000 in cash to purchase 100,000 shares of the Company's Series B Preferred Stock, $10.00 par value per share ("Series B Preferred Stock"). The Series B Preferred Stock was automatically converted into an aggregate of 1,333,333 shares of Common Stock on January 1, 1998. On July 18, 1997, the Company acquired the stock of 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 on the Gulf Coast of the United States, with particular emphasis on coastal swamp operations. On September 5, 1997, the Company organized a wholly-owned subsidiary, Quantum Geophysical, Inc. ("Quantum"), to own all of the Company's subsidiaries engaged in seismic data acquisition operations. On January 26, 1998, the Company acquired the stock of 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 and gas industry, specifically focusing on the Rocky Mountain region of the United States. BUSINESS STRATEGY The Company's recent transactions repositioned the Company as a technologically advanced provider of 2D and 3D seismic acquisition services to the oil and gas industry in selected onshore domestic markets. The Company is currently operating two state-of-the-art Input/Output, Inc. ("I/O") System Two's, through its Quantum and Signature subsidiaries, and is operating two additional seismic acquisition crews (a 2D system and a 3D system) through its Reliable subsidiary. 2 It is the Company's intention to field a fifth seismic crew during the second quarter of 1998. This will be accomplished by purchasing additional seismic acquisition equipment. Upon completion of this planned expansion, the Company believes it will be positioned to participate in the continuing consolidation of the seismic acquisition and seismic data industries with the goal of becoming a significant provider of land based seismic services in the United States. The Company intends to continue to expand by seeking additional acquisitions of other seismic service and technology companies, as well as benefiting from an anticipated improvement in the domestic, land-based seismic market. The Company will also seek to establish strategic alliances with major oil companies and large independents. 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 3D seismic data, which is used to produce computer-generated, graphic cross-sections, maps and 3D images of the subsurface. The 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. 3D surveys provide detailed views of subsurface geologic structure and much higher resolution of the structure than is available from a 2D survey. 3D surveys have proven to be more reliable indicators of the oil and gas potential in the surveyed area. 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. 3D seismic technology is regularly cited in technical literature as the technology most impacting exploration and production economics during 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 (geophones). This data is then input into a specialized data processing system that (i) enhances the recorded signal by reducing noise and distortion and improving resolution, and (ii) arranges the input data to produce an image of the subsurface area. 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. The seismic industry is in the midst of a continuing consolidation of seismic data acquisition providers. There is also a technology-driven trend towards larger crews with a greater number of channels and more technologically capable equipment. These conditions are creating a competitive advantage for companies with state-of-the-art equipment and greater access to financial resources. The Company believes that well capitalized companies with access to lower costing capital will have a significant advantage in a high capital cost business and that ongoing consolidation should ultimately improve the operating and financial environments in the domestic land-based seismic market. 3 SEISMIC ACQUISITION SERVICES The company is engaged in land-based and transition zone seismic acquisition services on a contract basis for its clients. As of March 31, 1998 the Company was operating four seismic crews with a total seismic recording capacity of approximately 7,000 channels. All of the Company's crews were operating in the United States, with two performing seismic acquisition services in the Gulf Coast region and two performing such services in the Rocky Mountain 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, and a drilling crew which creates the holes for the explosive charges which produce the necessary acoustical impulse. 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 25 to 50 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 client. The Company uses helicopters to assist its crews in seismic data acquisition in circumstances where such use is expected to reduce overall costs and improve productivity. These savings are achieved by deploying the crew and its equipment more rapidly and significantly reducing surface damages. CAPITAL EXPENDITURES The seismic data acquisition industry is capital intensive, and the Company will be required to raise additional capital to continue the implementation of its business strategy. The cost of sophisticated seismic acquisition equipment has increased significantly over the last several years. The costs of equipping a crew with a state-of-the-art system such as an I/O System Two, can range from approximately $4 to $10 million. The Company's ability to expand its business operations is dependent upon the availability of internally generated cash flow and external financing alternatives. Such financing may consist of bank or commercial debt, forward sales of production, 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 significantly decrease the financial flexibility of the Company. Due to the uncertainties arising from the changing market for seismic acquisition 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. OPERATING CONDITIONS The Company's seismic acquisition activities are often conducted in extreme weather, on difficult terrain and under other hazardous conditions. As such, 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 persons 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 unavailable or because the Company elects not to obtain insurance coverage because of cost. 4 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) of each year 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 during the year generally provide better working conditions, adverse conditions may impact revenues at any time during the year. MARKETING The Company's seismic acquisition services are marketed from its corporate offices. 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 sales, repeat customer sales and the 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. Contracts, whether bid or negotiated, provide for payment on either a turnkey or 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 of the risk 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 risk of business interruption. 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 combination turnkey/time basis. The Company's contracts provide that the seismic data acquired is the exclusive property of the Company's client. Although the Company has considered opportunities to acquire a partial ownership interest in seismic data obtained during the course of a survey for one or more of its clients, all seismic data acquired to date has been for the exclusive account of the Company's clients. There may be certain opportunities in the future, however, when the Company believes it is in its best interest to acquire an interest in seismic data in a joint venture with one or more of its clients. CUSTOMERS The Company's customers include a number of major oil industry companies and their affiliates, including Schlumberger and Marathon Oil Company, as well as many smaller, independent oil and gas companies. The table below lists customers that accounted for more than 10% of the Company's seismic acquisition revenues during the fiscal year ended December 31, 1997: 5 FOR THE YEAR ENDED DECEMBER 31, 1997 -------------------------------------------- REVENUES PERCENTAGE OF TOTAL REVENUES ------------ ---------------------------- Schlumberger/Geco-Prakla $ 6,891,867 77.9% Weems Geophysical, Inc. $ 950,608 10.7% No other customer accounted for more than 10% of the Company's seismic acquisition revenues in 1997. BACKLOG At March 31, 1998, the Company's backlog of commitments for services was approximately $17.5 million. It is anticipated that significantly all of the March 31, 1998 backlog will be completed during 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 revenues for any succeeding fiscal period. COMPETITION The acquisition of seismic data for the oil and gas exploration industry is highly competitive. Although reliable comparative figures are not available, the Company believes that 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, Veritas DGC Inc., Geco-Prakla (a division of Schlumberger) and Eagle Geophysical Inc. REGULATION Seismic acquisition 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 governmental land to conduct seismic surveys. The Company's seismic data acquisition contracts typically require customers to obtain all necessary permits. Failure to obtain required permits in a timely manner may result in crew down time and operating losses. The Company believes that it has conducted its operations in substantial compliance with applicable environmental laws and regulations governing its activities. There can be no assurance that environmental or other laws and regulations will not change in the future or that the Company will not be required to incur significant costs related to its compliance with such laws and regulations. 6 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 has not spent any significant amount on research and development during its last two fiscal years, but expects that research and development expenditures will increase as the Company's expansion into other areas of seismic operations continues. EMPLOYEES At March 31, 1998, the Company had approximately 138 full-time employees. None of the Company's employees are parties to a collective bargaining agreement. The Company considers relations with its employees to be good. ITEM 2. DESCRIPTION OF PROPERTIES. FACILITIES The Company is leasing approximately 8,898 square feet of office space under two separate leases at its corporate headquarters located at 5555 San Felipe, Houston, Texas 77056. One lease provides for a base rent of $24,104 per year, plus operating expenses, and the other lease provides for an annual rent of $62,784. In 1997, the Company's rent expenses under the leases (including base rent) were $75,964. These two leases expire on June 30, 1998 and September 30, 2002, respectively. The Company believes that its present space in Houston is sufficient for the foreseeable future and that it will be able to negotiate a favorable renewal of the leases or find a suitable replacement facility without substantial difficulty. In addition, the Company owns approximately one acre of property in Brookshire, Texas, which is serving as the Company's maintenance facility. The property consists of a facility of approximately 5,400 square feet where maintenance activities occur and a smaller storage facility of approximately 1,200 square feet. 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 $36,000. 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. CERTAIN DEFINITIONS As used in this Form 10-KSB, "Mcf" means thousand cubic feet, "MMcf" means million cubic feet, "Bcf" means billion cubic feet, "Bbl" means barrel, "MBbls" means thousand barrels, "MMBbls" means million barrels, "BOE" means equivalent barrels of oil and "MBOE" means thousand equivalent barrels of oil. Unless otherwise indicated in this Form 10-KSB, gas volumes are stated at the legal pressure base of the state or area in which the reserves are located and at 60" Fahrenheit. Barrels of oil equivalent are determined using the ratio of six Mcf of gas to one Bbl of crude oil, condensate or natural gas liquids. The term "gross" refers to the total acres or wells in which the Company has a working interest. The term "net" refers to gross acres or wells multiplied by the percentage working interest owned by the Company. Unless the context requires otherwise, all references to the "Company" include Geokinetics Inc. and its consolidated subsidiaries. 7 ACQUISITION AND EXPLOITATION OF OIL AND GAS PROPERTIES The Company owns working interests in 23 producing oil and gas wells located in Texas. The Company is also the operator of each of these 23 wells. All of the Company's wells were originally drilled and have been continuously operated by current management and their predecessor companies. OIL AND GAS SALES PRICES AND PRODUCTION COSTS The following table sets forth for the Company, its subsidiaries and their predecessors, the pro forma average sales prices per Bbl of oil (including condensate) and per Mcf of gas produced, and the production costs (including taxes on production and property and transportation charges) per BOE produced for each of the last three fiscal years: Company, Subsidiaries and their Predecessors Year Ended December 31 ------------------------ 1995 1996 1997 ------ ------ ------ Weighted average sales price per Bbl of oil produced ............................................ $16.72 $20.67 $18.98 Weighted average sales price per Mcf of gas produced ............................................ $ 1.71 $ 2.55 $ 2.86 Weighted average production cost per BOE ............ $ 6.65 $ 5.22 $ 5.42 RESERVES The following table sets forth, as of December 31, 1997, certain information about the pro forma estimated developed and undeveloped proved reserves of the Company's subsidiaries and their predecessors: Company Subsidiaries Pro Forma December 31, 1997 -------------------- Proved developed: Oil (Bbls)..................................... 264,690 Gas (Mcf)...................................... 946,879 8 Company Subsidiaries Pro Forma December 31, 1997 -------------------- Proved undeveloped: Oil (Bbls)..................................... 208,298 Gas (Mcf)...................................... 2,438,084 Total proved: Oil (Bbls)..................................... 472,988 Gas (Mcf)...................................... 3,384,963 Estimated future net cash flows, before income taxes........................... $9,007,200 Present value of estimated future net cash flows, before income taxes, discounted at 10%............................................... $4,149,000 There are numerous uncertainties inherent in estimating quantities of proved reserves, including many factors beyond the control of the Company. The reserve data set forth in the above table represent only estimates. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geologic interpretation and judgment. As a result, estimates by different engineers often vary, sometimes significantly. In addition, physical factors, such as the results of drilling, testing and production subsequent to the date of an estimate, as well as economic factors, such as the results of drilling, testing and production subsequent to the date of an estimate, as well as economic factors, such as an increase or decrease in product prices that renders production of such reserves more or less economic, may justify revision of such estimates. Accordingly, reserve estimates are different from the quantities of oil and gas that are ultimately recovered. PRODUCTIVE WELLS AND ACREAGE During the fiscal year ended December 31, 1997, neither the Company nor its subsidiaries and their predecessors completed any productive or non-productive wells, The following table sets forth the approximate number of gross productive wells and net productive wells owned by the Company as of December 31, 1997. 9 Gross Net ----- ----- Texas Panhandle... 15 1.16 Texas Upper Gulf Coast............. 5 2.58 Texas Lower Gulf Coast............. 3 1.75 ----- ----- Total 23 5.49 The following table shows, by geologic region, the approximate leasehold acreage and royalty and mineral acreage of the Company as of December 31, 1997:
Leasehold Acreage Royalty and Mineral Acreage ---------------------------------------- ---------------------------------------- Non-Producing/ Non-Producing/ Undeveloped Undeveloped Producing Acreage(1) Producing Acreage(1) ----------------- -------------------- ----------------- -------------------- Region Gross Net Gross Net Gross Net Gross Net - ------------- ------- ------- ------- ------- ------- ------- ------- ------- Texas Panhandle 5,152 317 -- -- -- -- -- -- Texas Upper ... -- -- -- -- -- -- 150(2) 12 Gulf Coast .... 2,520 1,365 -- -- -- -- 765(3) 765 TexasLower Gulf Coast .... 440 215 1571 393 -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- Total ..... 8,112 1,897 1,925 (5) 1,925 (5) -- -- 915 777 ======= ======= ======= ======= ======= ======= ======= =======
- -------------- (1) Undeveloped Acreage is considered to be those lease acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas regardless of whether or not such acreage contains proved reserves. (2) Mineral Fee. 10 (3) The Company owns an approximate 1.5% overriding royalty interest and a 6.125% after payout working interest under 765 net acres. (4) Reflects Undeveloped Acreage. DRILLING ACTIVITY During 1997, the Company participated in the drilling of one exploratory well in South Texas, which well was subsequently completed as a commercial producer in February 1998. Through its seismic-based business, the Company has earned a 5% interest through casing point in an exploratory well to be drilled in Louisiana during the first quarter of 1998. The Company anticipates that it may incur certain drilling obligations during 1998 with respect to the continued development of its existing oil and gas leasehold position. PRESENT DRILLING ACTIVITY The Louisiana exploratory well, noted above, was drilled during the first quarter of 1998. This drilling activity resulted in a dry hole. No determination has been made whether any additional drilling will result from this activity. PART II ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. GENERAL At December 31, 1997, the Company's financial position primarily reflected (i) the Company's ongoing oil and gas operations, and (ii) commencement of the Company's seismic acquisition operations. This was accomplished with the acquisition of Signature in July 1997, and the activation of the Company's Quantum crew in October, 1997. The financial requirements of the Company's oil and gas operations and seismic acquisition operations during fiscal 1997 required the Company to utilize a substantial portion of its current assets, incur additional indebtedness and raise additional capital in order to acquire additional operating assets and initiate its seismic acquisition operations. The Company expects that it will be required to raise additional capital in 1998 to fully implement its business strategy regarding the continued expansion of the seismic acquisition operation. As of December 31, 1997, the Company reported a $2,292,430 asset relating to deferred tax benefits. This asset consists of the anticipated utilization of the Company's accumulated net operating loss for federal income tax purposes, as a reduction of future taxable income. The value of the deferred tax benefits reflects the amount that the Company believes to be realizable at this time. The Company is confident of the utilization of this asset due to the anticipated revenues to be generated from the commencement of operations by Quantum. As the Company's operations expand and additional revenues are generated, the Company will review its valuation of the deferred tax benefits and make adjustments when necessary. SEISMIC OPERATIONS During the fiscal year ended December 31, 1997, the Company began providing seismic acquisition services to the oil and gas industry. On July 18, 1997, the Company acquired all of the outstanding capital stock of Signature from Gallant Energy, Inc., a Texas corporation ("GEI"), pursuant to the terms of a Stock Purchase Agreement (the "Signature 11 Agreement") among the Company, Signature, GEI and the sole shareholder of GEI. Signature, based in Houston, Texas, is engaged in the business of providing 2D and 3D seismic surveys of oil and gas properties, focusing on the Permian Basin and the Gulf Coast, with special emphasis on coastal swamp operations. Pursuant to the Signature Agreement, the Company acquired 500 shares of the outstanding common stock of Signature in exchange for 400,000 newly-issued shares of the Company's common stock. The Company, through Signature, also entered into an employment agreement with the sole shareholder of GEI granting options to purchase up to 400,000 shares of the Company's Common Stock at an exercise price of $.75 per share, depending upon the financial performance of Signature during the period from July 18, 1997 to September 30, 1999. The acquisition by the Company of Signature was accounted for as a purchase, with results of Signature operations included in the Company's financial statements from July 18, 1997 forward. The cost of the Company's investment in Signature is $1,024,800 and the goodwill of $1,834,159 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, 1997 was $21,016. Operations of the Signature crew have been ongoing since July 19, 1997. The Company's Quantum crew, the equipment for which was purchased in 1996, began operations October 1, 1997. Its initial operations were conducted in Orange County, Texas and consisted of performing a 3D seismic survey of approximately 40 square miles. Operations of the Quantum crew have been ongoing since October 1, 1997. OIL AND GAS OPERATIONS Although no longer a core business, the Company continues to conduct its oil and gas operations by acquiring, exploring, exploiting and developing its existing producing and non-producing oil and gas properties, with the goal of increasing cash flow, oil and gas reserves and value for the long-term benefit of the Company's stockholders. LIQUIDITY AND CAPITAL SOURCES SEISMIC ACQUISITION OPERATIONS The seismic acquisition industry is capital intensive and the Company will need to raise additional capital to implement its business strategy. The cost of sophisticated seismic acquisition equipment has increased significantly over the last several years. The costs of equipping a crew with a state-of-the-art system, such as an I/O System Two, can range from approximately $4 to $10 million. The Company's ability to expand its business operations is dependent upon the availability of internally generated cash flow and external financing alternatives. Such financing may consist of bank or commercial debt, forward sales of production, 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 significantly decrease the financial flexibility of the Company. Due to the uncertainties respecting 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. 12 INCREASED CURRENT ASSETS AND INCREASED CASH At December 31, 1997, the Company's current assets were $6,809,823 compared with $1,224,254 at December 31, 1996. This increase partially reflects the Company's initiation of its seismic acquisition operations and an increased cash position. As a reflection of the Company's shift in business activity, the carrying value of the Company's inventory of oil and gas leases held for resale was $0 at December 31, 1997, compared to $597,822 at December 31, 1996. Cash on hand at December 31, 1997 totaled $2,212,681, compared with $413,935 as of December 31, 1996. The Company's increased cash position partially reflects the proceeds the Company received from the closing of a private placement of $7,000,000 in July, 1997, the exercise of certain warrants to purchase shares of Common Stock in December 1997, and the commencement of the Company's seismic acquisition activities. INCREASED PROPERTY AND EQUIPMENT At December 31, 1997, the Company's property and equipment accounts were $17,314,325 compared with $3,881,648 at December 31, 1996. This increase reflects the Company's continuing purchases of seismic acquisition equipment and the acquisition of Signature. INCREASED OTHER ASSETS At December 31, 1997, the Company's other assets were $4,378,848, compared with $1,898,374 at December 31, 1996. This increase partially reflects the increase in the Company's deferred tax asset from $1,620,000 at December 31, 1996 to $2,292,430 at December 31, 1997, and the recording of $1,949,626 of goodwill associated with the acquisition of Signature. RESULTS OF OPERATIONS Operating revenue during the fiscal year ended December 31, 1997 was $9,647,931, compared with $812,850 during the fiscal year ended December 31, 1996. This increase is a result of the Company's seismic acquisition operation which generated revenue of $8,848,842 in fiscal 1997, compared to no revenue in fiscal 1996. Operating expenses totaled $9,994,820 during the year ended December 31, 1997, compared with $2,810,025 during the year ended December 31, 1996. This increase partially reflects $5,563,525 of seismic operating expenses in 1997, as compared to none in 1996, lease abandonments of $364,481 in 1997, compared to $1,450 in 1996 and general and administrative expenses of $2,441,581 in 1997 compared to $1,297,474 during 1996. During the year ended December 31, 1997, the Company experienced a net loss of $1,772,817, compared to a net loss of $1,115,820 during the year ended December 31, 1996. INCREASED CURRENT LIABILITIES AND LONG-TERM DEBT At December 31, 1997, the Company's current liabilities were $8,122,626, compared with $3,045,760 at December 31, 1996. This increase reflects the Company's need to continue to borrow additional funds in order to finance the capital needs of its seismic acquisition operation and its continuing oil and gas operations. In December 1995, the Company conducted a private placement of (i) 332,968 shares of the Company's Common Stock at a purchase price of $1.50 per share and (ii) warrants at a purchase price of $.01 per warrant to purchase up to 332,968 additional shares of the Company's Common Stock (the "Private Placement"). During January 1996, net proceeds received from the Private Offering were $125,832. 13 PRIVATE PLACEMENT AND STOCKHOLDERS EQUITY In December 1995, the Company completed a private offering of 332,968 shares of its Common Stock for the purpose of raising funds for operations. Net proceeds received from the private offering during 1996, after deduction of associated expenses, were $125,832. The 332,968 shares were sold at $1.50 per share and 332,968 accompanying warrants sold at $.01 per warrant. On July 18, 1997, the Company entered into the Purchase Agreement with the Blackhawk Group. Pursuant to the Purchase Agreement, the Company received $5,500,000 in cash and the exchange of certain indebtedness in the principal amount of $500,000 owed by the Company for the issuance of the following securities to the Blackhawk Group: (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 convertible preferred stock (which was 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 (subject to adjustment) of Common Stock at a price of $.20 per share. As a result of the Purchase Agreement, certain changes to the membership of the Company's Board of Directors and officers were made effective July 18, 1997. On July 24, 1997, Blackhawk invested an additional $1,000,000 in cash for 100,000 shares of the Company's newly-issued Series B Preferred Stock. The Series B Preferred Stock was automatically converted into an aggregate of 1,333,333 shares of Common Stock on January 1, 1998. The number of issued and outstanding shares of the Company's Common Stock at December 31, 1997 increased to 16,598,483 from 4,953,288 at December 31, 1996. The increase in the number of outstanding shares reflects the completion of the July 1997 private placement, the acquisition of Signature, and the exercise of certain warrants to purchase shares of Common Stock. TAX NET OPERATING LOSS CARRYFORWARDS At December 31, 1997, the Company had approximately $9,244,955 of tax net operating loss ("NOL") carryforwards and $246,000 in tax credit carryforwards that expire from 1999 through 2012. Section 382 of the Internal Revenue Code of 1986, as amended, limits the availability of the losses and credits remaining unused on the date of a change of ownership of more than 50% of the Company's Common Stock. The limitation, if applied, would limit the utilization of such carryforwards in each taxable year to an amount equal to the product of the federal long-term tax-exempt bond rate prescribed by the Internal Revenue Service times the fair market value of all of the Company's Common Stock at the time of the ownership change. The Company believes that the issuances of Common Stock in conjunction with the July 1997 Private Placement and the Signature acquisition triggered the limitation under Section 382. ITEM 7. FINANCIAL STATEMENTS. See page F-0 for Index to Financial Statements. The Financial Statements were previously filed on March 31, 1998, and are only being filed to correct a typographical error of the number of outstanding shares as of December 31, 1997. 14 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, 1998 By: \s\ JAY D. HABER Jay D. Haber, Chief Executive Officer (Principal Executive 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\ JAY D. HABER Director and Chief April 14, 1998 Jay D. Haber Executive Officer \s\ THOMAS J. CONCANNON Vice President and April 14, 1998 Thomas J. Concannon Chief Financial Officer \s\ STEVEN A. WEBSTER Director April 14, 1998 Steven A. Webster \s\ WILLIAM R. ZIEGLER Director April 14, 1998 William R. Ziegler \s\ CHRISTOPHER M. HARTE Director April 14, 1998 Christopher M. Harte 15 GEOKINETICS INC. AND SUBSIDIARIES ANNUAL CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 TABLE OF CONTENTS GEOKINETICS INC. AND SUBSIDIARIES DECEMBER 31, 1997 AND 1996 INDEPENDENT AUDITORS' REPORT...............................................F-1 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS........................................F-2 CONSOLIDATED STATEMENTS OF OPERATIONS..............................F-4 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)..........F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS..............................F-6 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.....................F-7 INDEPENDENT AUDITORS' REPORT March 7, 1998 To the Board of Directors and Stockholders Geokinetics Inc. and subsidiaries We have audited the accompanying consolidated balance sheets of Geokinetics Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Geokinetics Inc. and subsidiaries as of December 31, 1997 and 1996 and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Tsakopulos Brown Schott & Anchors F - 1 CONSOLIDATED BALANCE SHEETS GEOKINETICS INC. AND SUBSIDIARIES ASSETS December 31, December 31, 1997 1996 ------------ ------------ CURRENT ASSETS Cash ............................................... $ 2,212,681 $ 413,935 Accounts receivable - trade ........................ 3,654,829 199,150 Accounts receivable - officers and employees ....... 182,480 -- Work in progress ................................... 380,925 -- Oil and gas leases held for resale ................. -- 597,822 Prepaid expenses ................................... 367,687 13,347 Accrued interest ................................... 11,221 -- ----------- ---------- Total Current Assets ........................... 6,809,823 1,224,254 PROPERTY AND EQUIPMENT, net .......................... 17,314,325 3,881,648 OTHER ASSETS Deferred loan cost ................................. 60,316 76,317 Deferred tax asset ................................. 2,292,430 1,620,000 Restricted investments ............................. 71,700 21,700 Deposits ........................................... 4,776 180,357 Goodwill and other intangibles, net of $87,614 amortization ................................... 1,949,626 -- ----------- ---------- Total Other Assets ............................. 4,378,848 1,898,374 ----------- ---------- TOTAL ASSETS .............................. $28,502,996 $7,004,276 =========== ========== The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements F-2 CONSOLIDATED BALANCE SHEETS GEOKINETICS INC. AND SUBSIDIARIES LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
December 31, December 31, 1997 1996 ------------ ----------- CURRENT LIABILITIES Current maturities of long-term debt ................ $ 3,463,660 $ 331,825 Accounts payable - trade ............................ 2,282,037 721,535 Accrued liabilities ................................. 1,049,119 434,526 Customer deposits ................................... -- 10,000 Notes payable ....................................... 896,686 1,028,733 Due to officers and shareholders .................... 164,206 152,223 Advances for lease bank ............................. 260,500 360,500 Site restoration costs payable ...................... 6,418 6,418 ------------ ----------- Total Current Liabilities ....................... 8,122,626 3,045,760 LONG-TERM LIABILITIES Long-term debt, net of current maturities ........... 12,129,420 4,860,123 ------------ ----------- TOTAL LIABILITIES .......................... 20,252,046 7,905,883 STOCKHOLDERS' EQUITY (DEFICIT) Preferred stock, Series B, $10 par value, 100,000 shares authorized, issued and outstanding at December 31, 1997, automatically convertible into 1,333,333 shares common stock on January 1, 1998 ................. 1,000,000 -- Common stock, $.01 par value, 100,000,000 shares authorized, 16,598,483 shares outstanding at December 31, 1997, and $.20 par value, 15,000,000 shares authorized, 4,953,288 outstanding at December 31, 1996 ............................... 165,985 990,657 Additional paid-in capital .......................... 14,017,394 3,924,345 Retained deficit .................................... (6,932,429) (5,816,609) ------------ ----------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) ....................... 8,250,950 (901,607) ------------ ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ......... $ 28,502,996 $7,004,276 ============ ===========
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements F - 3 CONSOLIDATED STATEMENTS OF OPERATIONS GEOKINETICS INC. AND SUBSIDIARIES
For the Years Ended December 31, -------------------------- 1997 1996 ----------- ------------ REVENUES Seismic revenue ........................................ $ 8,848,842 $ -- Oil and gas sales ...................................... 431,533 560,481 Operator overhead fees ................................. 242,556 248,358 Sale of oil and gas leases ............................. 125,000 4,011 ----------- ----------- Total Revenues ..................................... 9,647,931 812,850 EXPENSES Seismic operating expenses ............................. 5,563,525 -- General and administrative ............................. 2,441,581 1,297,474 Depletion, depreciation and amortization ............... 1,207,812 91,608 Lease abandonments ..................................... 364,481 1,450 Lease operating expenses ............................... 248,686 288,992 Cost of oil and gas leases sold ........................ 168,735 61,924 Non-recovery of advances ............................... -- 494,460 Pre-operating expenses ................................. -- 327,580 Impairment of equipment and vehicles ................... -- 224,451 Delay rentals .......................................... -- 22,086 ----------- ----------- Total Expenses ..................................... 9,994,820 2,810,025 ----------- ----------- Loss from Operations .......................... (346,889) (1,997,175) OTHER INCOME (EXPENSE) Interest income ........................................ 66,309 10,545 Interest expense ....................................... (1,210,240) (606,187) ----------- ----------- Total Other Income (Expense) ....................... (1,143,931) (595,642) ----------- ----------- Net Loss Before Income Tax Expense ............ (1,490,820) (2,592,817) =========== =========== INCOME TAX BENEFIT Deferred income tax benefit ............................ 375,000 820,000 ----------- ----------- NET LOSS ................................................. $(1,115,820) $(1,772,817) =========== =========== Loss per common share .................................... $ (.14) $ (0.36) =========== =========== Weighted average common shares and equivalents outstanding $ 8,091,336 $ 4,949,635 =========== ===========
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements F - 4 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) GEOKINETICS INC. AND SUBSIDIARIES
Stockholders' Equity (Deficit) ------------------------------------------------------------------ Preferred Common Preferred Common Additional Accumulated Shares Issued Shares Issued Stock Stock Paid In Capital Deficit Total --------------- ------------- ------------ ----------- ---------------- ------------- ---------- Balance at January 1, 1996 ........... -- 4,869,955 $ -- $ 973,991 $ 3,815,179 $(4,043,792) $ 745,378 Net Loss ............................. -- -- -- -- -- (1,772,817) (1,772,817) Private placement offering ........... -- 83,333 -- 16,666 109,166 -- 125,832 -------- ---------- ----------- ----------- ------------ ----------- ----------- Balance at December 31, 1996 ......... -- 4,953,288 -- 990,657 3,924,345 (5,816,609) (901,607) Net Loss ............................. -- -- -- -- -- (1,115,820) (1,115,820) Private placement offerings: July 18, 1997 ................... 187,500 5,500,000 1,875,000 1,100,000 3,025,000 -- 6,000,000 July 24, 1997 ................... 100,000 -- 1,000,000 -- -- -- 1,000,000 Costs of placements .................. -- -- -- -- (80,728) -- (80,728) Employee stock options ............... -- 7,500 -- 1,500 7,953 -- 9,453 Acquisition of Signature Geophysical, Inc. ............... -- 400,000 -- 80,000 944,800 -- 1,024,800 Exercise of warrants ................. -- 1,732,139 -- 132,834 2,182,756 -- 2,315,590 Exercise of non-cash warrants ........ -- 1,505,556 -- 15,056 (15,056) -- -- Purchase of warrants ................. -- -- -- -- (738) -- (738) Reduction of common par value ........................... -- -- -- (2,179,062) 2,179,062 -- -- Conversion of Series A Preferred Stock ................. (187,500) 2,500,000 (1,875,000) 25,000 1,850,000 -- -- -------- ---------- ----------- ----------- ------------ ----------- ----------- Balance at December 31, 1997 ......... 100,000 16,598,483 $ 1,000,000 $ 165,985 $ 14,017,394 $(6,932,429) $ 8,250,950 ======== ========== =========== =========== ============ =========== ===========
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements F - 5 CONSOLIDATED STATEMENTS OF CASH FLOWS GEOKINETICS INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, ------------------------- 1997 1996 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES INFLOWS CASH RECEIVED FROM CUSTOMERS ....................................... $ 6,567,888 $ 879,059 CASH RECEIVED FROM SALE OF LEASES .................................. 125,000 4,011 INTEREST AND DIVIDENDS RECEIVED .................................... 55,088 10,798 ----------- ----------- 6,747,976 893,868 OUTFLOWS CASH PAID TO SUPPLIERS AND EMPLOYEES ............................... 8,607,458 2,349,037 CASH PAID FOR OIL AND GAS LEASES ................................... 16,115 101,080 INTEREST PAID ...................................................... 1,224,910 472,588 CASH PAID FOR SITE RESTORATION COSTS ............................... -- 29,767 ----------- ----------- 9,848,483 2,952,472 ----------- ----------- NET CASH USED BY OPERATING ACTIVITIES ....................... (3,100,507) (2,058,604) CASH FLOWS FROM INVESTING ACTIVITIES INFLOWS REDEMPTION OF CERTIFICATE OF DEPOSIT ............................... -- 79,639 OUTFLOWS CASH PAYMENTS FOR THE PURCHASE OF PROPERTY ......................... 904,725 3,255,773 PURCHASE OF CERTIFICATE OF DEPOSIT ................................. 50,000 -- ----------- ----------- 954,725 3,255,773 ----------- ----------- NET CASH USED BY INVESTING ACTIVITIES ....................... (954,725) (3,176,134) CASH FLOWS FROM FINANCING ACTIVITIES INFLOWS PROCEEDS FROM LONG-TERM DEBT ....................................... -- 5,000,000 PROCEEDS FROM SHORT-TERM DEBT ...................................... 500,000 798,732 PROCEEDS FROM PRIVATE PLACEMENT OFFERING, NET OF STOCK ISSUE COSTS OF $80,728 ............................................ 5,419,272 125,833 PROCEEDS FROM EXERCISE OF WARRANTS ................................. 1,899,661 PROCEEDS FROM EXERCISE OF OPTIONS .................................. 9,453 ADVANCES FROM OFFICERS ............................................. -- 15,501 PROCEEDS FROM ISSUANCE OF SERIES B PREFERRED STOCK ................. 1,000,000 -- ----------- ----------- 8,828,386 5,940,066 OUTFLOWS PAYMENTS ON LONG-TERM DEBT ......................................... 2,036,589 228,298 PAYMENTS ON SHORT-TERM DEBT ........................................ 778,104 -- PAYMENTS TO OFFICERS ............................................... 159,715 -- PAYMENT OF LOAN FEE ................................................ -- 80,000 ----------- ----------- 2,974,408 308,298 ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES ................... 5,853,978 5,631,768 ----------- ----------- NET INCREASE IN CASH .............................................................. 1,798,746 397,030 CASH, BEGINNING OF YEAR ........................................................... 413,935 16,905 ----------- ----------- CASH, END OF YEAR ................................................................. $ 2,212,681 $ 413,935 =========== ===========
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements F - 6 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS GEOKINETICS INC. AND SUBSIDARIES DECEMBER 31, 1997 AND 1996 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF THE ORGANIZATION Geokinetics Inc., a Delaware corporation, (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. Through equipment purchases and acquisition of other companies, the Company currently operates four 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) 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 the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported revenues and expenses. Actual results could vary from the estimates that were used. 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. F - 7 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. The Company uses the successful efforts method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells that find proved reserves and to drill and equip development wells are capitalized. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs and costs of carrying and retaining unproved properties are expensed. Unproved oil and gas properties that are individually significant are periodically assessed for impairment of value and a loss is recognized at the time of impairment by providing an impairment allowance. Capitalized costs of producing oil and gas properties, after considering estimated dismantlement and abandonment costs and estimated salvage values, are depreciated and depleted by the unit-of-production method. On the sale or retirement of a complete unit of a proved property, the cost and related accumulated depreciation, depletion and amortization are eliminated from the property accounts and the resultant gain or loss is recognized. On the retirement or sale of a partial unit of proved property, the cost is charged to accumulated depreciation, depletion and amortization with a resulting gain or loss recognized in income. On the sale of an interest in an unproved property for cash or cash equivalent, gain or loss on the sale is recognized, taking into consideration the amount of any recorded impairment if the property had been assessed individually. F - 8 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEFERRED LOAN COST The deferred loan cost is the unamortized balance of bank fees that were incurred to obtain long-term financing with a guaranty from the Farmers Home Administration. These costs are amortized over the life of the term loan using the effective interest rate method. The amortized amount for the years ended December 31, 1997 and 1996 was $16,000 and $3,684, respectively. RESTRICTED INVESTMENTS AND SITE RESTORATION COSTS Restricted investments represent investments carried at cost which approximates market. Such investments are to be used in the future to fund site restoration as required by the state of Utah. Site restoration costs are based upon an estimate of the cost of restoration prepared by the Utah State agency responsible for site restoration. Expenditures made for site restoration are subtracted from the estimate. 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, 1997 and 1996, respectively. INCOME TAX The Company follows Statement of Financial Accounting Standards No. 109 entitled "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 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 bases 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 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. F - 9 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) IMPAIRMENT OF LONG-LIVED ASSETS The Company follows Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Statement established accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets. There was no material effect on the consolidated financial statements from the adoption because the Company's prior impairment recognition practice was consistent with the major provisions of the Statement. Under provisions of the Statement, impairment losses are recognized when expected future cash flows are less than the assets' carrying value. Accordingly, when indicators of impairment are present, the Company evaluates the carrying value of property and equipment and intangibles in relation to the operating performance and future undiscounted cash flows of the underlying business. The Company adjusts the net book value of the underlying assets if the sum of expected future cash flows is less than book value. PRE-OPERATING COSTS It is the Company's policy to expense non-recoverable pre-operating costs as they are incurred. LOSS PER COMMON SHARE Loss per common share is computed based on the weighted average number of common shares outstanding during the respective years. Stock warrants and common stock subscribed have not been included in the calculation as their effect would be antidilutive. F - 10 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2. PROPERTY AND EQUIPMENT A summary of property and equipment follows: December 31, December 31, 1997 1996 ----------- ---------- Field operating equipment ......................... $18,383,515 $2,669,169 Proved oil and gas properties ..................... 919,285 1,032,509 Vehicles .......................................... 377,043 253,025 Buildings ......................................... 128,106 128,106 Furniture and equipment ........................... 80,186 26,854 ----------- ---------- 19,888,135 4,109,663 Less accumulated depletion, depreciation and amortization .............................. 2,597,260 251,465 ----------- ---------- 17,290,875 3,858,198 Land .............................................. 23,450 23,450 ----------- ---------- Net Property and Equipment ......... $17,314,325 $3,881,648 =========== ========== NOTE 3. ACCRUED LIABILITIES A summary of accrued liabilities follows: December 31, December 31, 1997 1996 ----------- ---------- Sales tax payable ........................... $ 398,656 $ -- Royalties payable ........................... 270,205 245,685 Accrued payroll ............................. 158,736 -- Accrued interest payable .................... 142,868 157,538 Payroll taxes payable ....................... 78,654 21,718 Other ....................................... -- 9,585 ----------- ---------- $ 1,049,119 $ 434,526 =========== ========== F - 11 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 4. NOTES PAYABLE A summary of notes payable follows:
December 31, December 31, 1997 1996 ------------ ------------ 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, payable directly out of funds to be received by an operating subsidiary in the performance of seismic data acquisition services under an existing contract with a customer $ 472,000 $ -- Notes representing financing of insurance premiums for operating subsidiaries over periods of nine to eleven months at interest rates varying from 6.67% to 6.9% final payment due November 14, 1998 313,370 -- Notes representing refinancing arrangements with certain suppliers of an operating subsidiary for accounts payable invoices outstanding beyond normal industry payment terms 86,316 -- Note in default 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 25,000 Note to an unrelated corporation dated January 8, 1996 with principal and interest at 10% (18% default rate) originally due February 5, 1996; after default, note was extended to July 31, 1996 and then to October 1, 1997; secured by certain oil and gas leases -- 306,708
F - 12 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 4. NOTES PAYABLE (CONTINUED)
December 31, December 31, 1997 1996 -------------------- --------------------- Notes representing refinancing of defaulted 697,025 lease bank notes; dated March 31, 1997 with interest at 4% plus prime due monthly and principal and unpaid accrued interest due on June 30, 1997; secured by certain oil and gas leases $ -- $ -------------------- --------------------- $ 896,686 $ 1,028,733 ==================== =====================
NOTE 5. LEASE BANK The Company has a revolving credit facility to provide funds to acquire, package and sell oil and gas properties. Total borrowings under this facility (Lease Bank) are guaranteed by the Company and may not exceed $1,200,000. Funds are provided from individual investors. Notes issued under this agreement 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. In no event will the notes extend beyond December 31, 1999. Interest is payable quarterly based on the prime rate as of the first day of each quarter plus 4.0%. In addition to interest, the depositors will receive either (a) a proportionate share of a .25% after prospect payout overriding royalty interest in prospects acquired through the Lease Bank and sold by the Company or (b) a common stock purchase warrant for each full year of deposit numerically equal to the amount of deposit with a purchase price per share equal to twenty-five percent over the average of the daily closing high bid and low asked quotation for the sixty (60) day period immediately preceding the yearly anniversary date for which such warrant is issued. The outstanding balances on the Advances for Lease Bank were $260,500 and $360,500 at December 31, 1997 and 1996, respectively. F - 13 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 6. LONG-TERM DEBT
December 31, December 31, 1997 1996 -------------------- --------------------- 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, 1997 were $66,043 including principal and interest at 10.0%), secured by first security interest in accounts receivable, inventory, property and equipment, oil and gas leases, intangibles, life insurance policies on key officers, guaranty of the Company and a $4,000,000 guaranty of the Farmers Home Administration of the United States Department of Agriculture $ 4,440,077 $ 4,771,702 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 3,054,050 --
F - 14 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 6. LONG-TERM DEBT (CONTINUED)
December 31, December 31, 1997 1996 -------------------- --------------------- 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 corporate guaranty of the parent 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 $ 8,098,953 -- Notes dated March 15, 1995 payable to individuals for purchase of oil and gas interests with 8% interest payable quarterly, principal and unpaid accrued interest due September 30, 1999; collateralized by guarantee agreement with the Company -- 420,246 -------------------- -------------- 15,593,080 5,191,948 Less Current Maturities 3,463,660 331,825 -------------------- -------------- $ 12,129,420 $ 4,860,123 ==================== ============== A summary of long-term debt principal maturities follows: FOR THE YEARS ENDING DECEMBER 31, Amount ------------ 1998 $ 3,463,660 1999 3,560,111 2000 3,655,967 2001 2,180,227 2002 543,841 Thereafter 2,189,274 ------------ $ 15,593,080 ============
F - 15 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 7. IMPAIRMENT OF EQUIPMENT AND VEHICLES As a result of improper unauthorized actions exercised by former Company personnel, an accumulation of costs in excess of the amount originally expected to acquire field equipment and vehicles was experienced during 1996. Management has physically examined the acquisitions and determined their fair market value based on current market prices and on recent arms-length transactions involving similar assets. The write-down to fair market value resulted in a charge to income of $224,451 for the year ended December 31, 1996. NOTE 8. INCOME TAX Income tax benefit is deferred tax arising from temporary differences between income for financial reporting and income for tax purposes. For the Years Ended --------------------------- December 31, December 31, 1997 1996 ----------- ----------- Income tax benefit at statutory rate ........... $ 3,308,145 $ 2,591,850 Valuation allowance ............................ (1,015,715) (971,850) ----------- ----------- Deferred Tax Asset ..................... $ 2,292,430 $ 1,620,000 =========== =========== Deferred tax asset, beginning of year .......... $ 1,620,000 $ 800,000 Deferred tax asset, subsidiary acquired ........ 297,430 -- Deferred tax asset, end of year ................ 2,292,430 1,620,000 ----------- ----------- Deferred Tax Benefit ................... $ (375,000) $ (820,000) =========== =========== Deferred tax assets at December 31, 1997 and 1996 are comprised primarily of net operating loss carryfoward and differences in reporting pre-operating expenses and amortization. A valuation allowance has been provided for 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. At December 31, 1997, the Company had net operating loss carryforwards of $9,244,955 and tax credit carryforwards of $245,769 that expire in 1999 through 2012. F - 16 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 9. RELATED PARTY TRANSACTIONS The Chairman of the Company has made advances totaling $88,500 to the Company at December 31, 1997. The advances are payable upon demand. Interest is payable quarterly based on the prime rate as of the first day of each quarter plus 4%. Included in accrued interest at December 31, 1997 is $2,503 interest payable on the officer advances. The father of a Vice-President of the Company is a participant in the Lease Bank with a note balance of $110,500 at December 31, 1997. Included in long-term debt at December 31, 1996 are notes payable totaling $47,357 to a member of the board directors who resigned on July 18, 1997. The notes were paid in full during October 1997. Interest of $2,844 and $3,799 was paid to this director in 1997 and 1996, respectively, on the notes payable. In addition to the notes, this former director exercised 107,231 stock warrants to purchase common stock of the Company at an exercise price of $1.50 per warrant, for a total purchase price of $160,846. Another former member of the board of directors who resigned on July 18, 1997 held a total of 852,959 warrants to purchase common stock of the Company at prices ranging from $.415 to $1.25 per share. On December 31, 1997, this individual entered into an agreement with the Company to exchange these warrants for 635,000 warrants to acquire common stock of the Company at no cost, exercised the 635,000 warrants and was issued 635,000 shares of common stock. On April 25, 1997, the Company obtained a $500,000 private 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 12, 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 entered into a consulting agreement with one of the individuals, 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, 1997, the Company owed the director $63,207 in consulting fees under the terms of the agreement, which is included as an amount due to officers and shareholders in the Company's balance sheet. In addition, pursuant to the purchase agreement and in satisfaction of the Company's obligation under the consulting agreement, 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. F - 17 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 9. RELATED PARTY TRANSACTIONS (CONTINUED) Inconnection with the private placement offering described in Note 12 to the consolidated financial statements, the Company entered into an investment monitoring agreement, under which the Company will pay the investment group an annual fee of $25,000. A director of the Company is one of two partners of the sole managing member of the investment group. The Company owed the investment group $12,500 as of December 31, 1997 under the terms of the agreement, which is included as an amount due to officers and shareholders on the Company's balance sheet. NOTE 10.ACQUISITION OF WHOLLY-OWNED SUBSIDIARIES A wholly-owned subsidiary corporation was formed under the name of Quantum Geophysical, Inc. (Quantum) in November 1994. Quantum was formed to provide 3-D geophysical data acquisition services and business operations commenced in October 1997. Since the inception of Quantum through September 30, 1997, the Company has expensed $673,959 for non-recoverable pre-operating costs. It is the Company's policy to expense non-recoverable pre-operating costs as incurred. In addition, interest expense of $463,417 and $403,492 for the nine months ended September 30, 1997 and for the year ended December 31, 1996, respectively, has been incurred. A new wholly-owned subsidiary, Quantum Geophysical, Inc. was formed in September 1997 to conduct the field operations for 3-D seismic data acquisition commencing October 1, 1997. The name of the original Quantum was simultaneously changed to Quantum Geophysical Services, Inc. On July 18, 1997, the Company acquired all of the outstanding capital stock of Signature Geophysical Services, Inc. (SGS), a Michigan corporation, from Gallant Energy, Inc. (GEI), a Texas corporation, pursuant to the terms of a Stock Purchase Agreement (the SGS Agreement) among the Company, SGS, GEI and the sole shareholder of GEI. SGS, based in Houston, Texas, is engaged in the business of providing 2-D and 3-D seismic surveys of oil and gas properties, focusing on the Permian Basin and the U.S. Gulf Coast, with special emphasis on coastal swamp operations. Pursuant to the SGS Agreement, the Company acquired 500 shares of the outstanding common stock of SGS in exchange for 400,000 newly-issued shares of the Company's common stock. The Company also entered into an Employment Agreement with the sole shareholder of GEI granting options to purchase up to 400,000 shares of the Company's common stock at an exercise price of $.75 per share depending on the financial performance of SGS during the period from July 18, 1997 to September 30, 1999. F - 18 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 10. ACQUISITION OF WHOLLY-OWNED SUBSIDIARIES (CONTINUED) The acquisition by the Company of Signature Geophysical Services, Inc. is accounted for as a purchase, with results of SGS operations included in the Company's financial statements from July 18, 1997 forward. The cost of the Company's investment in SGS is $1,024,800 and the goodwill of $1,834,159 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, 1997 was $21,016. NOTE 11. STOCK OPTION PLANS The 1995 Stock Option Plan (the "Plan") was approved by stockholders of the Company on August 9, 1995 with an effective date of August 1, 1994. On August 1, 1997, the Board approved amendments to the plan (Option Amendment), which were approved by the stockholders of the Company on November 20, 1997 in order to increase the total number of shares of common stock available for grant under the 1995 Plan from 500,000 to 2,687,500, to increase the period in which a non-qualified stock option under the 1995 Plan can be exercisable from five years to ten years after the date of grant and to extend the date on which the 1995 Plan will automatically terminate from July 31, 2004 to July 31, 2007. The purpose of the Option Amendment is to allow the Company to meet contractual commitments to certain directors, key management employees and persons affiliated with the Company. The purpose of the 1995 Plan is to secure for the Company and its stockholders the benefits that flow from providing certain directors, key management employees and persons affiliated with the Company (the "Participants") with additional incentive to further the business of the Company by increasing their proprietary interest in the success of the Company. The 1995 Plan provides for the granting of options to purchase shares of the Company's common stock. Under the 1995 Plan, the Participants may be granted Nonqualified Stock Options, Nonqualified Stock Options with Stock Appreciation Rights, Incentive Stock Options and Incentive Stock Options with Stock Appreciation Rights. Stock options may be granted for the purchase of common stock at a price determined by the Stock Option Committee. Incentive stock options may be granted for the purchase of common stock at a price not less than the fair market value of the stock on the date of grant. At December 31, 1997, 2,687,500 stock options have been awarded under the Plan, 2,672,500 are outstanding, 7,500 have been exercised and 7,500 have been forfeited and are again available for grant under the Plan. F - 19 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 11. STOCK OPTION PLANS (CONTINUED) On August 1, 1997, the Board authorized the adoption of the Company's 1997 Stock Awards Plan (the "1997 Plan"), which was approved by the stockholders of the Company on November 20, 1997, because the shares available under the 1995 Plan would become depleted once the Company met its contractual commitments to certain directors, key management employees and persons affiliated with the Company, and certain directors of the Company are not eligible to receive awards under the 1995 Plan. Unlike the 1995 Plan, however, the 1997 Plan permits directors who are not employees or consultants of the Company or of a subsidiary to be eligible to participate and takes advantage of recent amendments to Rule 16b-3. A total of 5,000,000 shares of common stock are reserved for issuance under the 1997 Plan, which will be used primarily to grant stock options in the future to certain employees, members of the Board or any persons affiliated with the Company. The purpose of the 1997 Plan is to provide a means by which the Company and its subsidiaries may attract, retain and motivate employees, members of the Board or other persons affiliated with the Company (the "1997 Plan Participants") and to provide a means whereby such 1997 Plan Participants can acquire and maintain stock ownership, thereby strengthening their concern for the welfare of the Company. Accordingly, the 1997 Plan provides for granting Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Phantom Stock Awards or any combination of the foregoing, as is best suited to the particular circumstances. The 1997 Plan is to be administered by the Board or, in the discretion of the Board, a committee appointed by the Board (the "1997 Plan Committee"), which will have sole authority, to determine which 1997 Plan Participant shall receive an Award, the time or times when such Award shall be made, the number of shares of common stock which may be issued under each Incentive Stock Option, Nonqualified Stock Option, Stock Appreciation Right or Restricted Stock Award and the value of each Phantom Stock Award. Incentive Stock Options may only be granted to employees of the Company and its affiliates at a price which shall be determined by the Board or the 1997 Plan Committee, but such purchase price shall not be less than, in the case of Incentive Stock Options, the fair market value of common stock subject to the stock options on the date the stock option is granted. At December 31, 1997, 210,000 stock options have been awarded and are outstanding under the plan. F - 20 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 12. PRIVATE PLACEMENT OFFERINGS In December 1995, the Company completed a private offering of 332,968 shares of its common stock for the purpose of raising funds for operations. Net proceeds received from the private offering during 1996, after deduction of associated expenses, were $125,832. The 332,968 shares were sold at $1.50 per share and with 332,968 accompanying warrants sold at $.01 per warrant. On July 18, 1997, the Company entered into a Securities Purchase and Exchange Agreement (the Purchase Agreement) with an investment limited liability company (Investment Group). Pursuant to the Purchase Agreement, the Company received $5,500,000 in cash and the exchange of certain indebtedness in the principal amount of $500,000 owed by the Company for the issuance of the following securities to the Investment Group: (i) 5,500,000 newly-issued shares of the Company's common stock, par value $.20 per share, (ii)187,500 newly-issued shares of the Company's Series A convertible preferred stock, (which was converted into an aggregate of 2,500,000 shares of common stock on November 20, 1997) and (iii) shadow warrants to purchase up to an additional 7,104,103 shares (subject to adjustment) of common stock at a price of $.20 per share. As a result of the Purchase Agreement, certain changes to the membership of the Company's board of directors and officers were made effective July 18, 1997. Pursuant to a Letter Agreement, the Investment Group invested an additional $1,000,000 in cash for 100,000 shares of the Company's newly-issued Series B preferred stock on July 24, 1997. The Series B preferred stock is automatically convertible into an aggregate of 1,333,333 shares of common stock on January 1, 1998. As set forth in Note 9, the Investment Group will oversee its investments in the Company pursuant to an Investment Monitoring Agreement agreed to by both parties. The Company will pay the Investment Group $25,000 annually under the Investment Monitoring Agreement. F - 21 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 13. OUTSTANDING OPTIONS AND WARRANTS A summary of outstanding options and warrants issued in connection with notes payable, private placement offerings, the 1995 Stock Option Plan and the 1997 Stock Awards Plan are as follows: EMPLOYEE STOCK OPTIONS Shares Exercise Price ---------- ------------- 1995 Stock Option Plan: Outstanding at December 31, 1996 ....... 212,500 $0.875-$2.26 Employee stock options forfeited ....... (7,500) $ 1.03125 Employee stock options exercised ....... (7,500) $0.875-$1.875 Employee stock options granted ......... 2,475,000 $0.75-$1.00 ------------- Outstanding at December 31, 1997 ....... 2,672,500 $0.75-$1.875 ============= 1997 Stock Awards Plan: Employee stock options granted ......... 210,000 $0.75-$2.25 ------------- Outstanding at December 31, 1997 ....... 210,000 $0.75-$2.25 ============= WARRANTS Outstanding at December 31, 1996 ............... 1,486,626 $1.50-$2.26 Warrants issued ................................ 5,660,589 $0.26-$2.26 Warrants exercised, surrendered or called ...... (3,521,470) $0.00-$1.50 ------------- Outstanding at December 31, 1997 ............... 3,625,745 $0.26-$2.26 ============= SHADOW WARRANTS Outstanding at December 31, 1997 ............... 7,497,832 $ 0.20 ============= Exercisable at December 31, 1997 ............... 6,100,692 ============= F - 22 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 14. COMMITMENTS OPERATING LEASES The Company leases office space for its corporate headquarters under a lease which expires July 30, 1998. The lease provides for a base rental of $24,104 per year. In addition, the Company pays for its share of the basic operating costs of the building. The Company's share of these costs has averaged $41,357 for the past three years. Additional space has been leased under a lease which expires November 30, 2002 at a base rental of $37,080 per year, plus its share of basic operating costs, currently $24,120 per year. Rental expense under these leases recorded in the consolidated financial statements amounted to $65,578 and $60,338 for the years ended December 31, 1997 and 1996. Aggregate future minimum rentals under the lease agreements including the base rent and the average operating cost follows: FOR THE YEARS ENDING DECEMBER 31, AMOUNT ------------- 1998 $ 99,386 1999 61,200 2000 61,200 2001 61,200 2002 56,100 ------------- $ 339,086 ============= EMPLOYMENT AGREEMENTS Beginning June 19, 1997, the Company entered into new employment agreements with officers of the Company. The compensation payable under these agreements consists of: (1) annual base salaries, (2) an incentive cash bonus in accordance with the Company's bonus plan to be established for its senior executives, (3) the Company's agreement to grant options to purchase shares of common stock under stock option plans adopted by the Company for the benefit of its directors, officers and employees and (4) eligibility to participate in the Company's employee benefits plans which may be adopted. The employment agreements have terms of three to five years and are terminable by the Company upon its good faith determination that there has been a willful violation of the terms of the agreements. Under the 1995 Stock Option Plan, there were 2,410,000 and 130,000 stock options granted to officers which were outstanding and exercisable at December 31, 1997 and 1996, respectively. F - 23 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 14. COMMITMENTS (CONTINUED) Under the 1997 Stock Awards Plan, a total of 5,000,000 shares of the Company's common stock has been reserved for issuance to certain directors and key management employees. There were 50,000 stock options outstanding for officers or directors of the Company at December 31, 1997 under the 1997 Stock Awards Plan. NOTE 15. MAJOR CUSTOMERS Revenues from major customers which exceeded ten percent of total revenues are as follows: For the Years Ended --------------------------------------------- December 31, December 31, 1997 1996 -------------------- --------------------- Customer A $ 6,891,867 $ -- ==================== ===================== Customer B $ 950,608 $ -- ==================== ===================== Customer C $ -- $ 137,885 ==================== ===================== NOTE 16. 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's customer base consists primarily of oil and gas companies. Although the Company is directly affected by the well-being of the oil and gas industry, management does not believe significant credit risk exists at December 31, 1997. 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. F - 24 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 17. SUBSEQUENT EVENTS 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 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 has 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. F - 25 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 18. CASH FLOWS A reconciliation of net loss to net cash used by operating activities as follows: For the Years Ended ------------------------- December 31, December 31, 1997 1996 ----------- ----------- Net Loss ......................................... $(1,115,820) $(1,772,817) Adjustments to reconcile net loss to net cash used by operating activities: Depletion, depreciation and amortization ......... 1,207,812 91,608 Loss on disposal of property ..................... 511,735 -- Deferred income tax benefit ...................... (375,000) (820,000) (Increase) decrease in current assets, net of effects of acquisition of Signature Accounts receivable - trade .............. (2,955,672) 60,220 Work in progress ......................... 347,414 -- Oil and gas leases held for resale ....... -- (15,620) Prepaid expenses ......................... (233,252) (572) Interest ................................. (11,221) -- Increase (decrease) in current liabilities, net of effects of acquisition of Signature Accounts payable - trade ................. (522,132) 179,024 Accrued liabilities ...................... 55,629 235,636 Site restoration costs payable ........... -- (29,767) Customer deposits ........................ (10,000) 10,000 ----------- ----------- Net Cash Used by Operating Activities .... $(3,100,507) $(2,062,288) =========== =========== F - 26 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 19. 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, 1997 December 31, 1996 -------------------------- ------------------------ Carrying Carrying Amount Fair Value Amount Fair Value ----------- ----------- ---------- ---------- Cash ................. $ 2,212,681 $ 2,212,681 $ 413,935 $ 413,935 Accounts receivable .. 3,654,829 3,654,829 199,150 199,150 Accounts payable ..... 2,282,037 2,282,037 721,535 721,535 Indebtedness ......... 16,914,472 16,914,472 6,733,404 6,733,404 NOTE 20. SUPPLEMENTAL OIL AND GAS INFORMATION Information with respect to the Company's oil and gas producing activities is presented in the following tables. Estimates of reserve quantities, as well as future production and discounted cash flows, were determined by R. T. Garcia & Co., Inc., Petroleum Engineering- Management Consulting, as of December 31, 1997. OIL AND GAS RELATED COSTS The following table sets forth information concerning costs related to the Company's oil and gas property acquisition, exploration and development activities in the United States during the years ended December 31, 1997 and 1996: For the Years Ended ------------------------------- December 31, December 31, 1997 1996 ----------- ---------- Property acquisition costs ....... $ 91,162 $ -- Exploration costs, net ........... -- -- Development costs, net ........... -- -- F - 27 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 20. SUPPLEMENTAL OIL AND GAS INFORMATION (CONTINUED) RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES The following table sets forth the Company's results of operations from oil and gas producing activities: For the Years Ended ------------------------ December 31, December 31, 1997 1996 --------- --------- Revenues ........................................ $ 431,533 $ 560,481 Production costs and taxes ...................... (248,686) (288,992) Depletion, depreciation and amortization ........ (14,763) (91,608) --------- --------- Results of operations from oil and gas producing activities .................... $ 168,084 $ 179,881 ========= ========= In the presentation above, no deduction has been made for direct costs such as corporate overhead or interest expense. No income taxes are reflected due to the fact that the Company is not currently in a taxpaying position. The depletion, depreciation and amortization rate per barrel of oil equivalent of production was $.57 and $2.33 for the years ended December 31, 1997 and 1996, respectively. F - 28 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 20. SUPPLEMENTAL OIL AND GAS INFORMATION (CONTINUED) OIL AND GAS RESERVES (UNAUDITED) The following table sets forth the Company's net proved oil and gas reserves at December 31, 1997 and 1996 and the changes in net proved oil and gas reserves for the years then ended. Proved reserves represent the estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. The reserve information indicated below requires substantial judgement on the part of the reserve engineers, resulting in estimates which are not subject to precise determination. Accordingly, it is expected that the estimates of reserves will change as future production and development information becomes available and that revisions in these estimates could be significant. Oil (BBLS) Gas (MCF) -------- ---------- Proved reserves: Balance at December 31, 1996 ................. 533,000 3,438,000 Change in previous estimates .......... (43,000) 21,000 Production ............................ (17,000) (74,000) -------- ---------- Balance at December 31, 1997 ................. 473,000 3,385,000 ======== ========== Oil (BBLS) Gas (MCF) -------- ---------- Proved developed reserves at December 31: 1996 ............................... 323,000 1,061,000 ======== ========== 1997 ............................... 265,000 947,000 ======== ========== All of the Company's reserves are located in Texas. F - 29 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 20. SUPPLEMENTAL OIL AND GAS INFORMATION (CONTINUED) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED) The standardized measure of discounted future net cash flows from the Company's proved oil and gas reserves is presented in the following table: December 31, December 31, 1997 1996 ------------ ------------ Future cash inflows ............................ $ 14,717,000 $ 23,069,000 Future production costs and taxes .............. (3,898,000) (5,315,000) Future development costs ....................... (1,812,000) (1,750,000) Future income tax expense ...................... -- -- ------------ ------------ Net Future Cash Flows .................. 9,007,000 16,004,000 Discounted at 10% for timing of cash flows ..... (4,813,000) (8,913,000) ------------ ------------ Discounted future net cash flows from proved reserves at December 31 ................ $ 4,194,000 $ 7,091,000 ============ ============ The following table sets forth the changes in the standardized measure of discounted future net cash flows from proved reserves: For the Years Ended --------------------------- December 31, December 31, 1997 1996 ----------- ----------- Balance at beginning of year ................... $ 7,091,000 $ 3,286,000 Sales, net of production costs and taxes ....... (183,000) (171,000) Net changes in prices, production costs and previous estimates ..................... (2,714,000) 3,976,000 Purchase of reserves in place .................. -- -- ----------- ----------- Balance at end of year ......................... $ 4,194,000 $ 7,091,000 =========== =========== F - 30 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 20. SUPPLEMENTAL OIL AND GAS INFORMATION (CONTINUED) Estimated future net cash flows represent an estimate of future net revenues from the production of proved reserves using current sales prices, along with estimates of the production costs, ad valorem and production taxes and future development (and abandonment) costs necessary to produce such reserves. The average prices used at December 31, 1997 and 1996 were $15.68 and $24.25, respectively, per barrel of oil and $2.07 and $2.98, respectively, per mcf of gas. No deduction has been made for depletion, depreciation or any indirect costs such as general corporate overhead or interest expense. Operating costs and ad valorem and production taxes are estimated based on current costs with respect to producing oil and gas properties. Future development costs are based on the best estimate of such costs assuming current economic and operating conditions. Income tax expense is computed based on applying the appropriate statutory tax rate to the excess of future cash inflows less future production and development costs over the current tax basis of the properties involved, less applicable net operating loss and tax credit carryforwards, for both regular and alternative minimum tax (AMT). On such bases, no regular tax or AMT results. The future net revenues information assumes no escalation of costs or prices, except for gas sales made under terms of contracts which include fixed and determinable escalation. Future costs and prices could significantly vary from current amounts and, accordingly, revisions in the future could be material. F - 31 EX-27 2
5 YEAR DEC-31-1997 DEC-31-1997 2,212,681 71,700 4,218,234 0 0 6,809,823 19,911,585 2,597,260 28,502,996 8,122,626 0 0 1,000,000 165,985 0 28,502,996 0 9,647,931 0 9,994,820 0 0 1,210,240 (1,490,820) 375,000 0 0 0 0 (1,115,820) (.14) 0
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