-----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, SlerR9rRpkazpeUutmM0gwgTejNogSgEutU+JtJIxqNQQfHvhK3ouepbaaykGsVV vTmLy+UsMGt8ySCAenZE2Q== 0000912057-01-508903.txt : 20010417 0000912057-01-508903.hdr.sgml : 20010417 ACCESSION NUMBER: 0000912057-01-508903 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010416 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GEOKINETICS INC CENTRAL INDEX KEY: 0000314606 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 941690082 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-09268 FILM NUMBER: 1603243 BUSINESS ADDRESS: STREET 1: 8401 WESTHEIMER STREET 2: SUITE 150 CITY: HOUSTON STATE: TX ZIP: 77063 BUSINESS PHONE: 7138507600 MAIL ADDRESS: STREET 1: 8401 WESTHEIMER STREET 2: SUITE 150 CITY: HOUSTON STATE: TX ZIP: 77063 10KSB40 1 a2045163z10ksb40.txt FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) |X|: ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-9268 GEOKINETICS INC. (Exact name of small business issuer as specified in its charter) Delaware 94-1690082 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8401 Westheimer, Suite 150 Houston, Texas 77063 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (713) 850-7600 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. |X| Registrant's revenues for its most recent fiscal year were $15,672,957. As of December 31, 2000, 18,992,156 shares of the Registrant's Common Stock were outstanding, and the aggregate market value of the Common Stock held by non-affiliates was approximately $1,400,000 the last reported sales price of such stock on that date. DOCUMENTS INCORPORATED BY REFERENCE Documents incorporated by reference: None. GEOKINETICS INC. FORM 10-KSB YEAR ENDED DECEMBER 31, 2000 TABLE OF CONTENTS
PAGE ---- PART I Item 1. Description of Business.............................................................1 Item 2. Description of Property.............................................................10 Item 3. Legal Proceedings...................................................................10 Item 4. Submission of Matters to a Vote of Security Holders.................................10 PART II Item 5. Market for Common Equity and Related Stockholder Matters............................10 Item 6. Management's Discussion and Analysis or Plan of Operation...........................11 Item 7. Financial Statements................................................................15 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........................................................................15 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act...................................15 Item 10. Executive Compensation..............................................................17 Item 11. Security Ownership of Certain Beneficial Owners and Management......................19 Item 12. Certain Relationships and Related Transactions......................................22 Item 13. Exhibits and Reports on Form 8-K....................................................26
i PART I ITEM 1. DESCRIPTION OF BUSINESS. DEVELOPMENT OF CURRENT BUSINESS OPERATIONS The predecessor corporation of Geokinetics Inc. ("Geokinetics" or the "Company") was organized in 1969 under the laws of California. The Company was incorporated in Delaware in April 1980, and the California corporation was merged into the Company. During 1994, the Company acquired certain oil and gas properties from two independent oil and gas companies located in Houston, Texas. The Company completed these acquisitions by means of a merger of HOC Operating Co., Inc. and Hale Exploration Company, each Texas corporations, into two newly-formed subsidiaries of the Company. The Company divested its interests in its oil and gas properties during 1999. Since April 1997, the Company has repositioned itself from an oil & gas exploration and production company into a technologically advanced provider of seismic acquisition and high-end seismic data processing services to the oil and gas industry. Through equipment purchases, acquisitions of certain competitors and the completion of a series of private equity transactions, the Company now has the capacity to operate three seismic crews in the Rocky Mountain and Gulf Coast regions of the United States ("US"). o On April 25, 1997, the Company obtained $500,000 in short-term financing in the form of 12% senior notes from William R. Ziegler and Steven A. Webster (both of whom were appointed to the Company's Board of Directors effective August 1, 1997). As additional consideration for providing this financing, the Company issued warrants entitling each of Messrs. Ziegler and Webster to purchase 500,000 shares (subject to anti-dilution provisions contained therein) of the Company's Common Stock, par value $.01 per share (the "Common Stock") at a price of $0.75 per share. On July 18, 1997, pursuant to the Securities Purchase and Exchange Agreement, described below, these notes were exchanged for (i) 458,333 newly-issued shares of the Company's Common Stock, (ii) 15,625 newly-issued shares of the Company's Series A Preferred Stock and (iii) Shadow Warrants to purchase an additional 592,009 shares of the Company's Common Stock at a price of $0.20 per share. o On July 18, 1997, the Company entered into a Securities Purchase and Exchange Agreement (the "Purchase Agreement") with Blackhawk Investors, L.L.C., William R. Ziegler and Steven A. Webster (referred to collectively as the "Blackhawk Group"). Pursuant to the Purchase Agreement, the Blackhawk Group acquired from the Company (i) 5,500,000 newly-issued shares of the Company's Common Stock, (ii) 187,500 newly-issued shares of the Company's Series A Preferred Stock (which were converted into an aggregate of 2,500,000 shares of Common Stock on November 24, 1997), and (iii) Shadow Warrants to purchase up to an additional 7,104,103 shares of Common Stock at a price of $0.20 per share, in exchange for (x) an aggregate of $5,500,000 in cash paid to the Company and (y) the exchange of certain indebtedness in the principal amount of $500,000 owed by the Company to Messrs. Ziegler and Webster. 1 o On July 24, 1997, Blackhawk Investors, L.L.C. acquired 100,000 shares of the Company's newly-issued Series B Preferred Stock for $1 million in cash. The Series B Preferred Stock was automatically converted into an aggregate of 1,333,333 shares of Common Stock on January 1, 1998. o On July 18, 1997, the Company acquired Signature Geophysical Services, Inc., a Michigan corporation ("Signature"). Signature, based in Houston, Texas, is engaged in the business of providing 3D seismic surveys of oil and gas properties, focusing primarily on the Gulf Coast of the United States, with particular emphasis on coastal swamp operations. o On January 26, 1998, the Company acquired Reliable Exploration Incorporated, a Montana corporation ("Reliable"). Reliable, based in Billings, Montana, is engaged in the business of providing 2D and 3D seismic surveys to the oil & gas industry, focusing on the Rocky Mountain region of the United States. o On April 30, 1998, the Company completed the acquisition of Geophysical Development Corporation, a Texas corporation ("GDC"). GDC, based in Houston, Texas is a high-end provider of seismic data processing, software and consultation services to the oil and gas industry. o On April 30, 1998, the Company completed a private offering of $40,000,000 of certain securities designated as its 12% Senior Subordinated Notes (the "1998 Notes") to DLJ Investment Partners, L.P. and certain additional investors (the "1998 Purchasers") pursuant to the terms of a Securities Purchase Agreement by and among the Company and the 1998 Purchasers. Additionally, the Company (i) caused certain of its wholly-owned subsidiaries to execute guarantees of the 1998 Notes pursuant to an Indenture executed by each of them, (ii) granted warrants (the "Warrants") to the Purchasers entitling them to purchase up to an aggregate of 7,618,594 shares of Common Stock at a price of $2.00 per share, subject to certain adjustments, and (iii) granted certain registration rights in favor of the Purchasers with respect to the 1998 Notes, the Warrants and the shares of Common Stock which may be acquired upon exercise of the Warrants. The completion of this offering enabled the Company to purchase an additional 3,000 channel I/O RSR System Two and complete the acquisition of GDC. o On July 28, 1999, the Company sold HOC Operating Co., Inc., a wholly owned subsidiary of the Company ("HOC"), to Halex Oil Corporation ("Halex"). Immediately prior to the sale of HOC to Halex, Geokinetics Production Company, Inc., a wholly owned subsidiary of the Company, conveyed to HOC various interests in certain oil and gas properties. These transactions completed the Company's divestment of its oil and gas operations. o On October 1, 1999, the Company completed a restructuring of its 1998 Notes and received an additional $4,000,000 from the holders of the 1998 Notes and $1,000,000 from other investors. On November 30, 1999, the Company received an additional $895,000 from other investors. The restructuring involved the company exchanging the 1998 Notes in the aggregate principal amount of $45,358,000 (the "2005 Notes") and 2 the Company issued $5,895,000 of its 13.5% Senior Secured Notes due 2002 (the "2002 Notes") for the additional funding received on October 1 and November 30, 1999. The company granted security interests covering substantially all of its assets as security for the 2005 Notes and 2002 Notes and caused certain of its wholly-owned subsidiaries to execute guaranties of the 2005 Notes and the 2002 Notes. Concurrently, the Company also completed a restructuring of its debt obligations to its principal equipment supplier for the Company's seismic acquisition operations. o On February 23, 2000, the Company sold Reliable Exploration, Incorporated, a wholly-owned subsidiary of the Company ("Reliable"), to RNS, LLC, a Montana limited liability company. RNS, LLC is wholly-owned by Allen Rein, Kim Nordberg and Scott Schmitt, the persons from whom the Company had previously acquired Reliable in January of 1998. In addition, as a condition to the closing of the sale of Reliable, the Company obtained a release of its guaranty of Reliable's indebtedness to a former shareholder of Reliable. o On April 9, 2001, the Company restructured its obligations under the 2002 Notes and 2005 Notes and entered into a Subordination and Amendment Agreement with the holders of the notes and GeoLease Partners, L.P., a Delaware limited partnership. The restructuring extends the maturity date on the 2002 Notes to September 15, 2003 and permits the Company, at its option, to pay interest on each interest payment date, in the form of cash interest or payment in kind ("PIK") interest (the issuing of additional notes) through, but not including, the maturity dates for the 2002 Notes and 2005 Notes. o On April 9, 2001, concurrently with the transactions contemplated by the Subordination and Amendment Agreement, GeoLease Partners, L.P., purchased the leased equipment and was assigned the rights under that certain Lease Agreement dated as of October 1, 1999 between the Company and Input/Output, Inc., its principal equipment supplier (the "Equipment Lease"). Immediately after the assignment of the Equipment Lease, the Company and GeoLease Partners, L.P. entered into Amendment No. 1 to the Equipment Lease, allowing the Company to defer the monthly installments due on the Equipment Lease until the expiration date of the Equipment Lease (currently October 1, 2002). The Company is obligated to pay interest on any monthly installment not paid when due, and any such accrued interest is due on the expiration date of the Equipment Lease. The industry downturn that significantly hindered the Company's operating results in 1999 continued into 2000. Demand for the Company's seismic acquisition and seismic data processing services remained weak in the first half of 2000. While demand for the Company's services began to increase in the second half of 2000, the prices the Company charges for its services remained at historically low levels due to continuing competitive pressures. It remains unclear as to when the seismic service industry will recover. Until such a recovery occurs, the Company's results will continue to be negatively impacted. However, the Company continues to evaluate opportunities that would allow it to expand its capabilities as a significant provider of land-based seismic acquisition services and to increase the high-end services provided by its seismic data processing and interpretation business. 3 The Company's corporate headquarters is located in Houston, Texas. The Company's address is 8401 Westheimer, Suite 150, Houston, Texas 77063 and its telephone number is (713) 850-7600. FORWARD-LOOKING INFORMATION This report contains forward-looking statements, including statements regarding future financial performance and results and other statements that are not historical facts. Such statements are included in Item 1 ("Business"), Item 2 ("Property"), and Item 6 ("Management's Discussion and Analysis of Financial Condition and Results of Operations"). When used in this report, words such as "anticipate," "believe," "expect," "estimate," "intend," "may," and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, there can be no assurance that actual results or developments anticipated by the Company will be realized or, even if realized, that they will have the expected effects on its business or operations. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors beyond the Company's control. Such factors include, but are not limited to, dependence upon oil and gas industry spending, worldwide prices, demand for oil and gas, technological changes and developments in the seismic acquisition business, operating risks, regulatory changes, and changes in economic conditions both domestic and international. INDUSTRY OVERVIEW Seismic surveys enable oil and gas companies to determine whether subsurface conditions are favorable for finding new oil and gas accumulations and assist oil and gas companies in determining the size and structure of previously identified oil and gas fields. Seismic surveys consist of the acquisition and processing of two dimensional ("2D") and three dimensional ("3D") seismic data, which is used to produce computer generated graphic cross-sections, maps and 3D images of the subsurface. These resulting images are then analyzed and interpreted by geophysicists and are used by oil and gas companies in the acquisition of new leases, the selection of drilling locations on exploratory prospects and in managing and developing producing reservoirs. With the advent of modern 3D technology, the seismic industry has changed profoundly. In the past the role of seismic, in particular 2D surveys, was restricted to that of simply illustrating gross structural features. In contrast, 3D surveys provide detailed views of subsurface geologic structures and much higher resolution of the structures than is available from a 2D survey. Moreover, 3D surveys have proven to be more reliable indicators of the oil and gas potential in the surveyed area than 2D surveys. As a result, drilling based on 3D seismic surveys has improved the economics of discovering oil and gas by reducing risks and finding costs for the oil and gas industry. Consequently, the demand for 3D seismic surveys has significantly increased in the past several years. In technical literature, it is 3D seismic technology that is cited time and again as the technology most impacting exploration and production economics over the last five years. Additionally, as the image quality of 3D seismic has improved, the role of 3D seismic has expanded beyond the identification of exploration drilling prospects and into the realm of field development and production management. Seismic data is acquired by land, transition zone and offshore crews. Seismic data is generated by the propagation of sound waves near the earth's surface by controlled sources, such as dynamite or 4 vibration equipment. The seismic waves radiate into the earth and are reflected back to the surface with the information collected by strategically positioned data collection devices known in the industry as "geophones". This data is then input into a specialized data processing system that enhances the recorded signal by reducing noise and distortion and improving resolution and arranges the input data to produce an image of the subsurface. Practically speaking, 3D seismic surveys collect far more information than previously used seismic methods, generating significantly greater detail about the underlying reservoirs. With advances in equipment and computer power resulting in lower costs, 3D technology is now being applied to virtually all exploration ventures as well as field development and prospect delineation. Since 1988 the offshore seismic data acquisition market has changed from a market that was roughly 50-60% proprietary 3D seismic surveys to one that is predominately multi-client or "spec surveys". The major difference between a proprietary survey and a multi-client survey is the data acquired from a proprietary survey is exclusively owned by the customer whereas the data acquired from a multi-client survey is owned by the contractor and can be resold. The reduced cost which customers generally enjoy from participating in a multi-client survey more than offset the loss of exclusive data ownership. This fact and the general industry perception that seismic acquisition is a commodity business have been the primary reasons for the rapid expansion of multi-client data in the offshore. Most exploration companies use processing, interpretation or other in-house technology as a means of differentiation rather than acquired data. This same circumstance is now occurring on land. In the next few years, as small onshore oil and gas companies become more comfortable with a multi-client business model, it will become the preferred method of acquiring 3D seismic data causing a reduction in proprietary surveys. In the past several years, the seismic service industry has undergone a significant change. 1998 began with an abundance of work, attractive gross margins (20-30%) and a solid oil and gas price premise. However, with the deterioration of the price of oil which began in mid-1998 and continued into early 1999, the industry has experienced a significant downturn. Margins have been reduced significantly, the number of 3D proprietary seismic surveys to be acquired has been greatly reduced, seismic crews have been stacked and a number of seismic service companies are experiencing financial difficulties. Couple this with a continuing trend towards larger crews with a greater number of channels and more technologically capable equipment and it is clear that properly capitalized companies with access to lower costing capital will have a significant advantage in a high capital cost business. These conditions also apply to the seismic data processing segment of the industry. Margins have deteriorated, although not to the levels seen in acquisition, and the number of processing opportunities also has decreased. Seismic data processing companies with proprietary processing techniques, large computing infrastructure and industry recognized staffs will have a significant advantage going forward. The price of oil steadily increased during the second half of 1999 and remains at levels that should be sufficient to allow for oil and gas companies to aggressively explore for hydrocarbons on a worldwide basis. While drilling activity steadily improved during 2000, the level of activity in the seismic service segment continued to lag. Demand for the Company's services was extremely weak in the first half of 2000. The Company began to see an increase in demand for its services in the second half of 2000 but still not near the levels attained prior to the 1999 downturn. It remains unclear as to when the seismic service industry will recover. Until such a recovery occurs, the Company's results will continue to be negatively impacted. 5 SEISMIC ACQUISITION SERVICES The Company is engaged in land-based and transition zone seismic acquisition services on a contract basis for its clients. The Company's equipment is capable of collecting both 2D and 3D seismic acquisition data, has a combined recording capacity of approximately 9,000 channels and can be configured to operate up to 3 crews. A majority of the Company's land and transition zone acquisition services involve 3D surveys. The Company is currently operating two crews. The majority of the Company's seismic acquisition activities has been in the Gulf Coast and Rocky Mountain region of the United States. On a typical land seismic survey, the seismic crew is supported by a surveying crew which lays out the lines to be recorded and identifies the sites for shot-hole placement, a drilling crew which creates the holes for the explosive charges which produce the necessary acoustical impulse or a mechanical vibrating unit in areas where explosives are not utilized. The seismic crew lays out the geophones and recording instruments, directs shooting operations and records the acoustical signal reflected from subsurface strata. The survey crew and drill crew are typically provided by third parties and supervised by Company personnel. A fully staffed 3D seismic crew typically consists of twenty-five to fifty persons, including a party manager, an observer, a head linesman and crew laborers. The number of individuals on each crew is dependent upon the size and nature of the seismic survey requested by the customer. The Company uses helicopters to assist its crews in seismic data acquisition in circumstances where such use will reduce overall costs and improve productivity. These savings are achieved by deploying the crew and its equipment more rapidly and significantly reducing surface damages. SEISMIC DATA PROCESSING The Company currently operates one seismic data processing center in Houston, Texas capable of processing 2D and 3D seismic data acquired from its own crews as well as data acquired by other geophysical crews. A majority of the Company's data processing services is performed on 3D seismic data. Seismic data is processed to produce an image of the earth's subsurface using proprietary computer software and techniques developed by the Company. The Company also reprocesses older seismic data using new techniques designed to enhance the quality of the data. The Company's data processing center operates high capacity, advanced technology data processing systems based primarily on Sun(R) computer systems using high-speed networks. These systems utilize the Company's proprietary data processing software. The Company processes both land and marine seismic data. The geophysical industry is highly technical, and the technological requirements for the acquisition and processing of seismic data have increased continuously over time. Thus, the Company must continually take steps to ensure that its technological capabilities are comparable or superior to those of its competitors, whether through continuing research and development, strategic alliances with equipment manufacturers or by acquiring technology under license from others. The Company has introduced several technological innovations that have become industry-standard products in the seismic data processing business. 6 In August 2000, the Company initiated, in collaboration with TGS-NOPEC (a leading provider of non-exclusive seismic data to the oil and gas industry), the start of a Deep Water Field Study interpretation project. The study encompasses 50 fields in the deep water of the Gulf of Mexico and is designed to provide a comparison of the key elements affecting seismic detection of hydrocarbon bearing reservoirs. The project has been pre-committed by four oil and gas companies, and the Company believes sales will continue as the various phases of the project are delivered throughout 2001. The Company's seismic data processing operations are conducted by Geophysical Development Corporation ("GDC"), its wholly-owned subsidiary. GDC, which was founded in 1981 to provide geophysical processing, interpretation, software and consultation services to the oil and gas industry, was acquired by the Company in April 1998. CAPITAL EXPENDITURES The seismic service industry is capital intensive, and the Company will need to raise additional capital to continue to expand its seismic service capabilities. The cost of sophisticated seismic acquisition equipment has increased significantly over the last several years. The cost of equipping a crew with a state-of-the-art system such as an I/O System Two, can range from $4 to $10 million. The Company's ability to expand its business operations is dependent upon the availability of internally generated cash flow and financing alternatives. Such financing may consist of bank or commercial debt, equity or debt securities or any combination thereof. There can be no assurance that the Company will be successful in obtaining additional financing if and when required on terms acceptable to the Company. Any substantial alteration or increase in the Company's capitalization through the issuance of debt or equity securities or otherwise may significantly increase the leverage and decrease the financial flexibility of the Company. Due to the uncertainties surrounding the changing market for seismic services, increases in technological requirements, and other matters associated with the Company's operations, the Company is unable to estimate the amount of any financing that it may need to acquire, upgrade and maintain seismic equipment and continue its diversification as a full-scale geotechnology enterprise. If the Company is unable to obtain such financing if and when needed, it will be forced to curtail its business objectives, and to finance its business activities with only such internally generated funds as may then be available. OPERATING CONDITIONS The Company's seismic acquisition activities are often conducted under extreme weather, in difficult terrain and under other hazardous conditions. As a result, these activities are subject to risks of injury to Company personnel and loss of seismic acquisition equipment. The Company maintains insurance against the destruction of its seismic acquisition equipment and injury to person and property that may result from its operations and considers the amount of such insurance to be adequate. However, the Company is not fully insured for all risks, either because such insurance is not available or because the Company elects not to obtain insurance coverage because of cost. Fixed costs, including costs associated with operating leases, labor costs, depreciation and interest expense account for a substantial percentage of the Company's costs and expenses. Accordingly, downtime or low productivity resulting from weather interruptions, reduced demand, equipment failures or other causes can result in significant operating losses. 7 The Company believes it will have the opportunity to generate its highest revenues during the third quarter (July 1 through September 30) primarily because this period typically provides for more recording hours due to longer days and less curtailment of operations due to poor weather. Although certain seasons generally provide better working conditions, adverse conditions may impact revenues at any time throughout the year. MARKETING The Company's seismic acquisition and seismic data processing services are marketed from its Houston office. While the Company relies upon the traditional utilization of Company personnel in making sales calls, it anticipates receiving a significant amount of work through word-of-mouth referrals and sales, repeat customer sales and the Company's industry reputation and presence of its personnel. Contracts are obtained either through competitive bidding, in response to invitations to bid, or by direct negotiation with a prospective client. A significant portion of the Company's contracts result from competitive bidding. Contracts are awarded primarily on the basis of price, crew experience and availability, technological expertise and reputation for dependability and safety. Seismic acquisition contracts, whether bid or negotiated, provide for payment on either a turnkey or a time basis or on a combination of both methods. A turnkey contract provides for a fixed fee to be paid per square mile of data acquired. Such a contract causes the Company to bear substantially all the risks of business interruption caused by weather delays and other hazards. Time contracts provide for payments based on agreed rates per units of time, which may be expressed in periods ranging from days to months. This type of contract causes the client to bear substantially all of the business interruption risks. When a combination of both turnkey and time methods is used, the risk of business interruption is shared by the Company and the client. In either case, progress payments are usually required unless it is expected the job can be accomplished in a short period. The Company's contracts for seismic acquisition have been predominantly on a turnkey or combination of turnkey/time basis. The Company's contracts currently provide that the seismic data acquired by the Company is the exclusive property of the Company's client. Substantially all of the Company's data processing contracts are on a turnkey basis. CUSTOMERS The Company's customers include a number of major oil industry companies and their affiliates, including Exxon Mobil, Seitel, Marathon, Texaco and Phillips as well as many smaller, independent oil and gas companies. Seitel accounted for $4,038,000, representing approximately 26% of the Company's revenues during the fiscal year ended December 31, 2000. No other customer accounted for more than 10% of the Company's revenues in 2000. BACKLOG At March 31, 2001, the Company's backlog of commitments for services was $17.7 million. It is anticipated that significantly all of the March 31, 2001 backlog will be completed in the next 12 months. This backlog consists of written orders or commitments believed to be firm. Contracts for services are occasionally varied or modified by mutual consent and in certain instances are cancelable by the customer on short notice without penalty. As a result of these factors, the Company's backlog 8 as of any particular date may not be indicative of the Company's actual operating results for any succeeding fiscal period. COMPETITION The acquisition and processing of seismic data for the oil and gas industry is highly competitive. Although reliable comparative figures are not available, the Company believes its principal competitors have more extensive and diversified operations and also have financial, operating and other resources substantially in excess of those available to the Company. Competitive factors include the type and capability of equipment used to conduct seismic surveys and that equipment's availability. In addition to price, the performance and dependability of a crew significantly affect a potential customer's decision to award a contract to the Company or one of its competitors. The Company's major competitors include WesternGeco, Veritas DGC, Eagle Geophysical, Inc., Dawson Geophysical Company and PGS, Inc. REGULATION The Company's operations are subject to numerous federal, state and local laws and regulations. These laws and regulations govern various aspects of operations, including the discharge of explosive materials into the environment, requiring removal and clean-up of materials that may harm the environment or otherwise relating to the protection of the environment and access to private and governmental land to conduct seismic surveys. The Company believes it has conducted its operations in substantial compliance with applicable laws and regulations governing its activities. TECHNOLOGY The Company relies on certain proprietary information, trade secrets, and confidentiality and licensing agreements (collectively, "Intellectual Property") to conduct its current operations. The Company's future success will depend, in part, on its ability to maintain and preserve its Intellectual Property, without infringing the rights of any third parties. There can be no assurance that the Company will be successful in protecting its Intellectual Property or that its competitors will not develop technologies that are substantially equivalent or superior to the Company's technologies. The Company continues to incur expenses associated with research and development and expects that research and development expenditures will increase as the Company's expansion into other areas of seismic operations develops. EMPLOYEES At March 31, 2001, the Company had approximately 165 full-time employees. None of the Company's employees are parties to a collective bargaining agreement. The Company considers the relations with its employees to be good. 9 ITEM 2. DESCRIPTION OF PROPERTY. In October of 1999, the Company consolidated all of its office operations to what formerly had been its geophysical data processing center, located at 8401 Westheimer, Houston, Texas 77063. Prior to this consolidation, the Company's headquarters and seismic acquisition operations had been located at 5555 San Felipe, Houston, Texas 77056. The Company leases 26,956 square feet of office space at its current headquarters under a lease expiring April 30, 2001. The Company's annual rent under this lease is $243,156; however, rental amounts during 2001 may exceed this amount depending on market conditions at the time of renewal. In addition, the Company owns approximately one acre of property in Brookshire, Texas, which is serving as the Company's maintenance facility for its seismic acquisition operations. The Brookshire, Texas property consists of a facility of approximately 5,400 square feet where maintenance activities are conducted and a smaller storage facility of approximately 1,200 square feet. The Brookshire facility is subject to a Deed of Trust, Security Agreement and Fixtures Financing Statement dated March 1, 1996 from Quantum Geophysical, Inc. (now Quantum Geophysical Services, Inc.), Mortgagor, to Benefit Life Insurance Company, Mortgagee. The Company currently has no plans to renovate, improve or develop any of its forgoing properties, and believes each of the properties is adequately covered by insurance. The Company believes that its present facilities are sufficient for the foreseeable future; however, the Company is unsure whether it will renew the lease at its Westheimer location and is currently evaluating its alternatives for finding replacement facilities in the event the lease is not renewed. The Company does not invest in real estate, interests in real estate or real estate mortgages and does not acquire assets primarily for capital gain or primarily for income. ITEM 3. LEGAL PROCEEDINGS. Neither the Company nor any of its subsidiaries is a party to any pending legal proceedings. Moreover, the Company is not aware of any such legal proceedings that are contemplated by governmental authorities with respect to the Company, any of its subsidiaries, or any of their respective properties. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2000. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock, $.01 par value per share (the "Common Stock") is traded on the Nasdaq OTC Bulletin Board under the trading symbol "GEOK." As of December 31, 2000, the Company had 356 stockholders of record. 10 The following table sets forth the high and low closing prices for the Common Stock during the Company's most recent fiscal quarter and its last two fiscal years as reported by the National Association of Security Dealers on the Nasdaq OTC Bulletin Board.
- --------------------------------------------------------------- ----------------- ------------- High Low - --------------------------------------------------------------- ----------------- ------------- Twelve Months Ended December 31, 2000 - --------------------------------------------------------------- ----------------- ------------- Quarter Ended March 31, 2000 .53 .31 - --------------------------------------------------------------- ----------------- ------------- Quarter Ended June 30, 2000 .50 .25 - --------------------------------------------------------------- ----------------- ------------- Quarter Ended September 30, 2000 .44 .25 - --------------------------------------------------------------- ----------------- ------------- Quarter Ended December 31, 2000 .32 .10 - --------------------------------------------------------------- ----------------- ------------- - --------------------------------------------------------------- ----------------- ------------- Twelve Months Ended December 31, 1999 - --------------------------------------------------------------- ----------------- ------------- Quarter Ended March 31, 1999 .63 .20 - --------------------------------------------------------------- ----------------- ------------- Quarter Ended June 30, 1999 .78 .53 - --------------------------------------------------------------- ----------------- ------------- Quarter Ended September 30, 1999 1.13 .28 - --------------------------------------------------------------- ----------------- ------------- Quarter ended December 31, 1999 1.22 .22 - --------------------------------------------------------------- ----------------- -------------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. GENERAL On April 9, 2001, the Company completed a restructuring of its 13.5% Senior Secured 2002 Notes and 2005 Notes and entered into a Subordination and Amendment Agreement with the holders of the notes and GeoLease Partners, L.P., a Delaware limited partnership. The restructuring extends the maturity date on the 2002 Notes to September 15, 2003 and permits the Company, at its option, to pay interest on each interest payment date, in the form of cash interest or PIK interest (the issuing of additional notes) through, but not including, the maturity dates for the 2002 Notes and 2005 Notes. On April 9, 2001, concurrently with the transactions contemplated by the Subordination and Amendment Agreement, GeoLease Partners, L.P., purchased the leased equipment and was assigned the rights under its Equipment Lease between the Company and Input Output, Inc., its principal equipment supplier. Immediately after the assignment of the Equipment Lease, the Company and GeoLease Partners, L.P. entered into Amendment No. 1 to the Equipment Lease, allowing the Company to defer the monthly installments due on the Equipment Lease until the expiration date of the Equipment Lease (currently October 1, 2002). The Company is obligated to pay interest on any monthly installment not paid when due, and any such accrued interest is due on the expiration date of the Equipment Lease. 11 At December 31, 2000, the Company's financial position reflects (i) the seismic acquisition services being conducted by Quantum Geophysical, Inc. ("Quantum") and (ii) the seismic date processing, software and consultation services being provided by Geophysical Development Corporation ("GDC"). The industry downturn that significantly hindered the Company's operating results in 1999 continued into 2000. Demand for the Company's seismic acquisition and seismic data processing services remained weak in the first half of 2000. While demand for the company's services began to increase in the second half of 2000, the prices the Company charges for its services remained at historically low levels due to continuing competitive pressures. It remains unclear as to when the seismic service industry will recover. Until such a recovery occurs, the Company's results will continue to be negatively impacted. RESULTS OF OPERATIONS Revenues for the 12 months ended December 31, 2000 were $15,672,957 as compared to $14,194,126 for the same period of 1999, an increase of 10%. This increase is attributable to the Company's seismic acquisition activities. Seismic acquisition revenues for 2000 totaled $9,688,646 as compared to $5,407,895 for 1999, an increase of 79%. During 1999, the Company had significant periods where no crews were in operation. In 2000, the Company kept one crew in continuous operation and initiated operations of a second crew in August. However, the Company's seismic data processing activities continued to weaken in 2000. Seismic data processing revenue in 1999 totaled $8,786,231 as compared to revenues of $5,984,311 in 2000, a decrease of 32%. Although the Company's overall revenues increased in 2000, the Company continues to experience significant competition in both its seismic acquisition and seismic data processing segments, resulting in gross margins being held at or near historic lows. The Company's results will continue to suffer until there is a significant improvement in the industry's pricing environment. Operating expenses for 2000 totaled $16,949,811, as compared to $13,922,368 for the same period of 1999, an increase of 22%. This increase is a result of the increased activity in the Company's seismic acquisition segment as well as a restructuring of the Company's debt obligations to the principal equipment supplier for its seismic acquisition operations. This restructuring occurred on October 1, 1999 and resulted in the Company leasing a portion of its seismic acquisition equipment. Expenses associated with this lease are treated as operating expenses and were directly responsible for 14% of the increase in operating expenses in 2000 when compared to operating expenses for 1999. General and administrative expense for the 12 months ended December 31, 2000 were $1,915,061, as compared to $2,817,885 for the same period of 1999, a decrease of 32%. This decrease in general and administrative expenses is a result of the Company's ongoing efforts to limit third party expenditures as well as continuing to operate at reduced staffing levels. Depreciation and amortization expense for 2000 totaled $7,846,705, as compared to $9,907,917 for the same period of 1999, a decrease of 21%. This decrease is primarily the result of the restructuring of the Company's debt obligations to its principal equipment supplier for its seismic acquisition operations. This restructuring resulted in the Company leasing a portion of its seismic acquisition equipment, thus reducing its base of depreciable assets. Interest expense (net of interest income) for the 12 months ended December 31, 2000 totaled $7,790,763, as compared to $7,331,600 for the same period of 1999, an increase of 6%. During 2000, 12 the Company elected to make interest payments due on its 13.5% Senior Secured 2002 Notes and 2005 Notes by issuing additional notes. This resulted in an increase of approximately $6.8 million in the Company's 13.5% Senior Secured 2002 Notes and 2005 Notes. The increased note balance was responsible for the increase in interest expense in 2000. The Company had a net loss of $18,569,262, or ($0.98) per share, for the 12 months ended December 31, 2000, as compared to a net loss of $30,419,897, or ($1.57) per share, for the same period of 1999. During 1999, the Company (i) restructured its Senior Subordinated debt which resulted in the recognition of an $8.3 million loss, (ii) disposed of its oil and gas operations which resulted in the recognition of a $563,000 loss and (iii) recorded an impairment reserve for the disposition of its wholly-owned subsidiary, Reliable Exploration, Inc., resulting in the recognition of a $2.1 million loss. Reliable was sold on February 23, 2000. The Company took these actions in 1999 as part of an overall financial and operational plan to carry the Company's operations through the year 2000. The significant reduction in the Company's net loss during 2000 is primarily due to the Company not incurring the types of extraordinary charges recognized by the Company during 1999 as described above. LIQUIDITY AND CAPITAL RESOURCES The seismic service industry downturn that significantly hindered the Company's operating results in 1999 continued into 2000. Demand for the Company's seismic acquisition and data processing services remained weak in the first half of 2000. While demand for the Company's services began to increase in the second half of 2000, the prices the Company can charge for its services remained at historically low levels due to continuing competitive pressures. It remains unclear as to when the seismic service industry will recover. Until such a recovery occurs, the Company's results will continue to be negatively impacted. As a result of the conditions outlined above, the Company incurred a loss of approximately $18.6 million during 2000 and a loss of approximately $30.4 million in 1999, leaving the Company with an equity deficit of approximately $32.8 million of December 31, 2000. On April 9, 2001, the Company completed a restructuring of its 13.5% Senior Secured 2002 Notes and 2005 Notes and entered into a Subordination and Amendment Agreement with the holders of the notes and GeoLease Partners, L.P., a Delaware limited partnership. The restructuring extends the maturity date on the 2002 Notes to September 15, 2003 and permits the Company, at its option, to pay interest on each interest payment date, in the form of cash interest or PIK interest (the issuing of additional notes) through, but not including, the maturity dates for the Senior Secured 2002 Notes and 2005 Notes. On April 9, 2001, concurrently with the transactions contemplated by the Subordination and Amendment Agreement, GeoLease Partners, L.P. purchased the leased equipment and was assigned the rights as lessor under the Equipment Lease between the Company and Input/Output, Inc., its principal equipment supplier. Immediately after the assignment of the Equipment Lease to GeoLease Partners, L.P., the Company and GeoLease Partners, L.P. entered into Amendment No. 1 to the Equipment Lease, allowing the Company to defer the monthly installments due on the Equipment Lease until the expiration date of the Equipment Lease (currently October 1, 2002). The Company is obligated to pay interest on any monthly installment not paid when due, and any such accrued interest is due on the expiration date of the Equipment Lease. 13 Prior to the foregoing transactions completed on April 9, 2001, the Company had been in default under the Equipment Lease due to its failure to pay monthly installments since October 2000. Amendment No. 1 to the Equipment Lease allows the Company to defer payment of these past due monthly installments in the manner described above. Amendment No. 1 to the Equipment Lease also includes a provision for the payment by the Company of $1.9 million as deferred rent due on the later of (i) September 15, 2003 and (ii) the date that the 13.5% Senior Secured 2002 Notes are paid in full. At December 31, 2000, the Company had cash balances of $1,241,282. The Company believes this cash, anticipated cash flow from its seismic acquisition and seismic data processing operations and the completion of the transactions of April 9, 2001, as described above, will provide sufficient liquidity to continue operations through 2001. The Company anticipates that it will defer making monthly lease installments under the Equipment Lease and avoid making cash interest payments on its 13.5% Senior Secured Notes during 2001. The Company's financial results will continue to be negatively impacted until a recovery in the seismic service industry occurs. The Company is presently unable to predict when such a recovery will occur. The Company's ability to expand its business operations is dependent upon the availability of internally generated cash flow and external financing activities. Such financing may consist of bank or commercial debt, equity or debt securities or any combination thereof. There can be no assurance that the Company will be successful in obtaining additional financing when required. Any substantial alteration or increase in the Company's capitalization through the issuance of debt or equity securities or otherwise may significantly decrease the financial flexibility of the Company. Due to uncertainties regarding the changing market for seismic services, technological changes, and other matters associated with the Company's operations, the Company is unable to estimate the amount of any financing that it may need to acquire, upgrade and maintain seismic equipment and continue its diversification as a full-scale geotechnology enterprise. If the Company is unable to obtain such financing when needed, it will be forced to curtail its business objectives, and to finance its business activities with only such internally generated funds as may then be available. OTHER INFORMATION During 1998, a customer of a subsidiary of the Company defaulted on payment of $2.8 million due the Company for seismic data acquisition services performed by a subsidiary. The Company obtained a judgment against the customer in the amount of the outstanding obligation plus interest and attorney's fees. As a result of the customer's subsequent bankruptcy proceedings, the Company determined that the obligation was not collectible and charged the amount against earnings during the fourth quarter of 1998. On February 17, 2000, the Company entered into a compromise and settlement of all claims it had against the customer and each of the other parties involved. As part of the settlement agreement, the Company received an ownership interest in approximately 200 miles of previously recorded seismic data located in the Atchafalaya Basin of Louisiana. On November 10, 2000, the Company sold this seismic data to a leading provider of non-exclusive seismic data to the oil and gas industry, for consideration totaling $650,000. 14 ITEM 7. FINANCIAL STATEMENTS. The Company's Annual Consolidated Financial Statements, Notes to Consolidated Financial Statements and the report of Fitts, Roberts & Co., P.C., independent certified public accountants, with respect thereto, referred to in the Table of Contents to Consolidated Financial Statements, appear elsewhere in this report beginning on Page F-1. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. DIRECTORS AND OFFICERS Set forth below are the names, ages and positions of the directors and executive officers of the Company. Each of the directors named below were elected at the Company's 1998 Annual Meeting of the Stockholders for a term of one year or until their successors were elected. Each of the directors named below will be nominated at the 2001 Annual Meeting of Stockholders to serve on the Company's Board of Directors for additional one year terms or until their successors are elected.
OFFICE HELD NAME AGE POSITION WITH THE COMPANY SINCE ---- --- ------------------------- ----- William R. Ziegler 58 Chairman (non executive) (since 1997 February 2, 1999) and Director Lynn A. Turner 51 President and Chief Operating 1997 Officer Michael A. Dunn 46 Vice President and 1997 Chief Technology Officer Thomas J. Concannon 47 Vice President and 1997 Chief Financial Officer Michael A. Schott 56 Vice President of Financial 1998 Reporting and Compliance Christopher M. Harte 53 Director 1997 Steven A. Webster 48 Director 1997
There are no family relationships between any of the directors or executive officers of the Company. 15 WILLIAM R. ZIEGLER, age 58, was appointed as the Company's Chairman (non-executive) on February 2, 1999. Mr. Ziegler is of counsel to the law firm of Satterlee Stephens Burke & Burke, LLP, located in New York, New York. Since June 1994, Mr. Ziegler served as Chairman of the New York law firm of Parson & Brown, L.L.P. which merged with Satterlee Stephens Burke & Burke, LLP effective September 1, 1999. Mr. Ziegler was formerly a partner of Whitman Breed Abbott & Morgan, located in New York, New York (1993 - May 1994), and a predecessor law firm, Whitman & Ransom (since 1976). Mr. Ziegler is a director of and Vice Chairman of Grey Wolf, Inc., a director of Flotek Industries Inc. (an oil services equipment supplier) and a general partner of Blackhawk Capital Partners, the managing member of Blackhawk Investors, L.L.C. Mr. Ziegler has served as a member of the Company's Board of Directors since August 1, 1997. LYNN A. TURNER, age 51, has served as the President and Chief Operating Officer of the Company since July 28, 1997. Prior to joining the Company, Mr. Turner was employed for six years by Fairfield Industries, Inc., a provider of seismic acquisition services, most recently as Senior Vice President and Manager of Data Acquisition. Mr. Turner has more than 20 years of experience in the seismic data acquisition business. MICHAEL A. DUNN, age 46, has served as a Vice President and the Chief Technology Officer of the Company since August 18, 1997. On August 1, 1999, Mr. Dunn was appointed President of Geophysical Development Corporation, a wholly-owned subsidiary of the Company. Prior to joining the Company, Mr. Dunn was employed for 18 years by Shell Oil Company, most recently as Technology Manager at its Exploration and Production Research Center. Mr. Dunn has over 20 years background in all aspects of geoscience, including seismic acquisition, seismic processing, exploration and research. THOMAS J. CONCANNON, age 47, has served as a Vice President and the Chief Financial Officer of the Company since July 15, 1997. Prior to joining the Company, Mr. Concannon worked for four years as a private consultant for various energy companies. Prior to that time, Mr. Concannon served as President of NJR Energy, an exploration company and as a director of its parent company, NJ Resources, Inc. Mr. Concannon has over 15 years of energy industry experience. MICHAEL A. SCHOTT, age 56, has served as Vice President of Financial Reporting and Compliance and Secretary since August 5, 1998. Prior to joining the Company, Mr. Schott served eight years as a Vice President and shareholder of a public accounting firm in San Antonio, Texas. Prior to that time Mr. Schott served as Controller, then Senior Vice President and Treasurer of Venus Oil Company. Mr. Schott is a Certified Public Accountant with more than 30 years of experience, including 10 years in the oil and gas exploration industry and 20 years in the practice of public accounting. Mr. Schott is a member of the Texas Society of Public Accountants and the American Institute of CPAs. CHRISTOPHER M. HARTE, age 53, is a private investor. From 1992 to 1994, Mr. Harte was the President of Portland Newspapers, Inc. Mr. Harte is a director of several corporations, including Harte-Hanks Communications, Inc. (a direct marketing and shopper publishing company) and Hi-Port Inc. (a petroleum product contract packaging company), and is an investor member of Blackhawk Investors, L.L.C. Mr. Harte has served as a member of the Company's Board of Directors since August 1, 1997. STEVEN A. WEBSTER, age 48, is the Chairman of Carrizo Oil & Gas, Inc., an independent oil and gas company which is listed on the Nasdaq. From January 1998 to June 1999, Mr. Webster served as the President and Chief Executive Officer of R&B Falcon Corporation, and from November 1991 to 16 December 31, 1997, was the Chairman, Chief Executive Officer and Treasurer of Falcon Drilling Company, Inc., a marine oil and gas drilling contractor that, prior to becoming a wholly-owned subsidiary of R&B Falcon Corporation on January 1, 1998, was listed on the New York Stock Exchange. Mr. Webster is a Managing director of Global Energy Partners, a wholly-owned affiliate of Credit Suisse First Boston. Mr. Webster serves as a director of R&B Falcon Corporation, Grey Wolf, Inc.(an international land drilling company), Crown Resources Corporation (a precious metals mining company), Carrizo Oil & Gas, Inc., and as a trust manager of Camden Property Trust (a real estate investment trust). Mr. Webster is also a general partner of Equipment Asset Recovery Fund (an investment fund), a general partner of Somerset Capital Partners, and a general partner of Blackhawk Capital Partners, the managing member of Blackhawk Investors, L.L.C. Mr. Webster has served as a member of the Company's Board of Directors since August 1, 1997. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company under Rule 16(a)-3(e) during the fiscal year ended December 31, 2000 and Form 5 and amendments thereto furnished to the Company with respect to such period, the Company is not aware of any director, officer, or beneficial owner of more 10% of any class of equity securities of the Company registered pursuant to Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act") that has failed to file on a timely basis, as disclosed in the above forms, reports required by Section 16(a) of the Exchange Act during the Company's most recent fiscal year or prior years. ITEM 10. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION TABLE The following table reflects all forms of compensation paid to the Company's chief executive officer and its other executive officers for each of the Company's last three completed fiscal years. No other director or executive officer received compensation which exceeded $100,000 during any of such periods.
Annual compensation Long term compensation ----------------------------------------------------------------------------------- Awards Payouts - ------------------------------------------------------------------------------------------------------- Other Restricted Securities Name and annual Stock underlying LTIP All other principal position Year Salary Bonus compensation Awards options/SARs payouts compensation ($) ($) ($) ($) (#) ($) ($) (a) (b) (c) (d) (e) (f) (g) (h) (i) - ------------------------------------------------------------------------------------------------------- Lynn A. Turner, 2000 $141,231 - - - - - - President and 1999 $135,000 - - - - - - Chief Operating 1998 $135,000 - - - - - - Officer - ------------------------------------------------------------------------------------------------------- Michael A. Dunn, 2000 $155,769 - - - - - - Vice President 1999 $150,000 - - - - - - and Chief 1998 $150,000 - - - - - - Technology Officer - ------------------------------------------------------------------------------------------------------- Thomas J. 2000 $120,000 - - - - - - Concannon, 1999 $120,000 - - - - - - Vice President and 1998 $120,000 - - - - - - Chief Financial Officer - -------------------------------------------------------------------------------------------------------
17
Annual compensation Long term compensation ---------------------------------------------------------------------------------- Awards Payouts - ------------------------------------------------------------------------------------------------------- Other Restricted Securities Name and annual Stock underlying LTIP All other principal position Year Salary Bonus compensation Awards options/SARs payouts compensation ($) ($) ($) ($) (#) ($) ($) (a) (b) (c) (d) (e) (f) (g) (h) (i) - ------------------------------------------------------------------------------------------------------- Michael A. Schott, 2000 $102,812 - - - - - - Vice President of 1999 $105,000 - - - - - - Financial 1998 - - - - 200,000(1) - - Reporting and Compliance and Secretary - ------------------------------------------------------------------------------------------------------- Jay D. Haber, Chairman and 1999 $165,000 - - - - - - Chief Executive 1998 $165,000 - - - - - - Officer (from August 1, 1997 until February 2, 1999) - ------------------------------------------------------------------------------------------------------- Michael Hale, Vice President 1999 $60,000 - - - - - - and Secretary 1998 $120,000 - - - - - - - -------------------------------------------------------------------------------------------------------
(1) Refers to incentive stock options to purchase 200,000 shares of Common Stock granted to Mr. Schott under the Company's 1997 Stock Awards Plan, in accordance with the employment agreement between Mr. Schott and the Company (See "Certain Relationships and Related Transactions--Employment Agreements" below). OPTION/SAR GRANTS IN LAST FISCAL YEAR The Company did not grant any stock options or stock appreciation rights ("SARs") to any of its executive officers during the fiscal year ended December 31, 2000. AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES None of the Company's executive officers exercised any options during the fiscal year ended December 31, 2000. The Company did not issue any SARs during the fiscal year ended December 31, 2000. As of December 31, 2000, none of the stock options held by the executive officers named above had a value that exceeded the exercise price of any such options. The following table sets forth the number of shares underlying the unexercised options of each of the Company's executive officers as of December 31, 2000: - --------------------------------- ------------------------------ ------------------------------ NAME EXERCISABLE UNEXERCISABLE - --------------------------------- ------------------------------ ------------------------------ Lynn A. Turner 300,000 200,000 - --------------------------------- ------------------------------ ------------------------------ Michael A. Dunn 350,000 200,000 - --------------------------------- ------------------------------ ------------------------------ Thomas J. Concannon 300,000 -0- - --------------------------------- ------------------------------ ------------------------------ Michael A. Schott 120,000 80,000 - --------------------------------- ------------------------------ ------------------------------
18 LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR None of the Company's executive officers were granted awards under any long-term incentive plan during the fiscal year ended December 31, 2000. COMPENSATION OF DIRECTORS Directors of the Company are not currently compensated for their services as directors. Directors, who are not employees or officers of the Company, are reimbursed for their actual expenses incurred in attending meetings of the Board of Directors. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth, as of December 31, 2000, the number of shares of the Company's Common Stock beneficially owned by (i) each person known by the Company (based on filings under Section 13(d) or 13(g) of the Exchange Act) to be the holder of more than five percent of its voting securities, (ii) each director or nominee for election as a director, and (iii) all of the Company's directors and officers as a group. Unless otherwise indicated, each holder has sole voting and investment power with respect to the shares of Common Stock owned by such holder.
NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT AND NATURE OF PERCENT OF OF GROUP TITLE OF CLASS BENEFICIAL OWNERSHIP CLASS (1) - ------------------------------------------------------------------------------------------------ Jay D. Haber Common 1,241,734 shares (2) 6.44% 2310C Nantucket Houston, TX 77057 - --------------------------- ------------------ -------------------------- ---------------------- Steven A. Webster Common 19,791,025 shares (3) 66.45% 14701 St. Mary's Lane Suite 800 Houston, TX 77079 - --------------------------- ------------------ -------------------------- ---------------------- William R. Ziegler Common 19,841,048 shares (4) 66.51% Satterlee Stevens Burke & Burke, LLP 230 Park Avenue New York, NY 10169 - --------------------------- ------------------ -------------------------- ---------------------- Christopher M. Harte Common 479,902 shares (5) 2.46% 217 Commercial Street, Suite 200 Portland, ME 04101 - --------------------------- ------------------ -------------------------- ----------------------
19
NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT AND NATURE OF PERCENT OF OF GROUP TITLE OF CLASS BENEFICIAL OWNERSHIP CLASS (1) - ------------------------------------------------------------------------------------------------ Blackhawk Investors, Common 14,402,178 shares (6) 58.24% L.L.C. 14701 St. Mary's Lane Suite 800 Houston, TX 77079 - --------------------------- ------------------ -------------------------- ---------------------- Blackhawk Capital Partners Common 14,402,178 shares (7) 58.24% 3711 San Felipe, #5G Houston, TX 77027 - --------------------------- ------------------ -------------------------- ---------------------- DLJ Entities Common 22,362,204(8) 54.07% - --------------------------- ------------------ -------------------------- ---------------------- Chase Equity Associates, Common 10,648,669(9) 35.93% L.P. - --------------------------- ------------------ -------------------------- ---------------------- Spindrift Partners, L.P. Common 5,324,334(10) 21.90% - --------------------------- ------------------ -------------------------- ---------------------- MHR Capital Partners, L.P. Common 3,194,601(11) 14.40% - --------------------------- ------------------ -------------------------- ---------------------- All Directors and Common 24,018,983 shares (12) 71.32 % Executive Officers as a Group - --------------------------- ------------------ -------------------------- ----------------------
- -------------- (1) These percentages are calculated on the basis of 18,992,156 shares of Common Stock, that were issued and outstanding on December 31, 2000, plus, with respect to each person, group or entity listed, such number of shares of Common Stock as such person or entity has the right to acquire within 60 days pursuant to options, warrants, conversion privileges or other rights held by such person or entity. Certain shares are deemed beneficially owned by more than one person or entity listed in the table. (2) Includes 290,000 shares of Common Stock purchasable pursuant to options granted to Mr. Haber under the Company's 1995 Stock Option Plan. (3) Includes (i) 2,074,115 shares of Common Stock issuable pursuant to warrants held by Mr. Webster, (ii) 333,326 shares owned of record by Mr. Webster, (iii) (A) 8,666,667 shares of Common Stock owned of record by Blackhawk Investors, L.L.C. ("Blackhawk") and (B) 5,735,511 shares of Common Stock presently exercisable pursuant to the Shadow Warrant issued to Blackhawk, since Mr. Webster is one of two partners of Blackhawk Capital Partners ("BCP"), the managing member of Blackhawk, (iv) 220,592 shares of Common Stock presently exercisable pursuant to the Shadow Warrant issued to Mr. Webster, and (v) 2,760,814 shares of Common Stock issuable 20 pursuant to warrants held by Somerset Capital Partners ("SCP"), since Mr. Webster is one of three general partners of SCP. (4) Includes (i) 2,074,115 shares of Common Stock issuable pursuant to warrants held by Mr. Ziegler, (ii) 333,340 shares owned of record by Mr. Ziegler, (iii) (A) 8,666,667 shares of Common Stock owned of record by Blackhawk (B) 5,735,511 shares of Common Stock presently exercisable pursuant to the Shadow Warrant issued to Blackhawk, since Mr. Ziegler is one of two partners of BCP, the managing member of Blackhawk, (iv) 50,000 shares of Common Stock issuable pursuant to stock options held by Mr. Ziegler, (v) 220,601 shares of Common Stock presently exercisable pursuant to the Shadow Warrant issued to Mr. Ziegler, and (vi) 2,760,814 shares of Common Stock issuable pursuant to warrants held by SCP, since Mr. Ziegler is one of three general partners of SCP. (5) Includes (i) 85,500 shares of Common Stock issuable pursuant to warrants held by Mr. Harte, which warrants were issued in accordance with the terms of that certain promissory note dated March 24, 1998 of the Company payable to Mr. Harte, and (ii) 394,402 shares of Common Stock issuable pursuant to warrants held by Spicewood Family Partners of which Mr. Harte is the general partner. (6) Includes (i) 8,666,667 shares owned of record by Blackhawk and (ii) 5,735,511 shares of Common Stock presently exercisable pursuant to the Shadow Warrant issued to Blackhawk. (7) Includes (i) 8,666,667 shares owned of record by Blackhawk and (ii) 5,735,511 shares of Common Stock presently exercisable pursuant to the Shadow Warrant issued to Blackhawk, which are deemed beneficially owned by BCP as the managing member of Blackhawk. (8) Refers to shares of Common Stock issuable pursuant to warrants beneficially owned by Credit Suisse First Boston, Inc. and its subsidiaries to the extent they constitute a part of the Credit Suisse First Boston business unit ("CSFB business unit"). Pursuant to a Schedule 13D/A filed January 29, 2001, Credit Suisse Group has expressly disclaimed beneficial ownership with respect to shares beneficially owned by its direct and indirect subsidiaries including the CSFB business unit. (9) Refers to shares of Common Stock issuable pursuant to warrants held by Chase Equity Associates, L.P. (10 Refers to shares issuable pursuant to warrants held by Spindrift Partners, L.P. (11) Refers to shares issuable pursuant to warrants held by MHR Capital Partners. (12) Includes an aggregate of (i) 9,333,333 issued and outstanding shares beneficially owned by the directors and executive officers as a group, (ii) 14,685,650 shares of Common Stock that such persons have the right to acquire within 60 days pursuant to options, warrants, conversion privileges or other rights held by such persons (inclusive of 21 6,176,704 shares of Common Stock presently exercisable pursuant to the Shadow Warrants issued to Blackhawk and Messrs. Webster and Ziegler). ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. EMPLOYMENT AGREEMENTS The Company is a party to an employment agreement with Lynn A. Turner, dated July 15, 1997, pursuant to which Mr. Turner serves as the President and Chief Operating Officer of the Company, with overall responsibility for geophysical operations. The compensation payable to Mr. Turner under the employment agreement consists of: (i) a "sign-on" bonus of $156,780 paid on February 13, 1998, (ii) an annual base salary of $135,000 per year, (iii) an annual incentive cash bonus equal to 100% of base salary if the Company's geophysical operations meet certain goals set forth in a plan to be established by the Board of Directors after consultation with Mr. Turner, plus an additional bonus in excess of annual base salary if the financial results of the Company's geophysical operations exceed such goals, and (iv) an option to acquire 500,000 shares of Common Stock, at an exercise price of $0.75 per share, which option vests in equal one-fifth increments of 100,000 shares each on each of July 15, 1998, 1999, 2000, 2001 and 2002, provided that he continues to be employed by the Company on such dates, and he exercises such option prior to or on July 15, 2004. Mr. Turner's employment agreement has a term of five years and is terminable by the Company upon its good faith determination that there has been a willful violation of the terms of the agreement and in certain other events. The Company is a party to an employment agreement with Michael A. Dunn, dated July 15, 1997, pursuant to which Mr. Dunn serves as a Vice President and the Chief Technical Officer of the Company. The compensation payable to Mr. Dunn under the employment agreement consists of: (i) a "sign on" bonus of $90,000, paid upon commencement of employment, (ii) an annual base salary of $150,000 per year, (iii) an annual incentive cash bonus commensurate with his position at the Company in accordance with a plan to be established by the Board of Directors after consultation with Mr. Dunn, and (iv) stock options to acquire (A) 50,000 shares of Common Stock, at an exercise price of $0.75 per share, which option became exercisable on August 18, 1997 and has an expiration date of July 15, 2002, and (B) an additional 500,000 shares of Common Stock, at an exercise price of $0.75 per share, which option vests in equal one-fifth increments of 100,000 shares each on each of July 15, 1998, 1999, 2000, 2001 and 2002, provided that he continues to be employed by the Company on such dates, and he exercises such option prior to or on July 15, 2004. Mr. Dunn's employment agreement has a term of five years and is terminable by the Company upon its good faith determination that there has been a willful violation of the terms of the agreement and in certain other events. The Company was a party to an employment agreement with Thomas J. Concannon dated July 15, 1997, pursuant to which Mr. Concannon served as a Vice President and the Chief Financial Officer of the Company. Mr. Concannon's employment agreement expired on July 15, 2000; however, Mr. Concannon continues to serve as Vice President and the Chief Financial Officer of the Company. The Company is a party to an employment agreement with Michael A. Schott dated August 5, 1998, pursuant to which Mr. Schott serves as a Vice President of Financial Reporting and Compliance. The compensation payable to Mr. Schott under the employment agreement consists of: (i) an annual base salary of $105,000 per year, (ii) participation in any and all current and future employee/officer incentive plans, employee/officer stock plans, employee/officer stock option plans and any and all other 22 employee/officer benefit/compensation plans of the Company, (iii) a stock option to acquire an aggregate of 200,000 shares of Common Stock at an exercise price of $2.625 per share, which option vests in equal one-fifth increments of 40,000 shares on each of August 5, 1998 and August 5, 1999, 2000, 2001 and 2002, provided that he continues to be employed by the Company on such dates, and he exercises such option prior to or on August 5, 2004. Mr. Schott's employment agreement has a term of four years and is terminable by the Company upon its good faith determination that there has been a willful violation of the terms of the agreement and in certain other events. OTHER RELATED TRANSACTIONS The father of a former Vice-President of the Company is a participant in the Company's lease acquisition program with a note balance of $35,000 at December 31, 2000. In connection with certain financing transactions that were completed in April and July of 1997 with William R. Ziegler, Steven A. Webster and Blackhawk Investors, L.L.C. (of which Messrs. Ziegler and Webster serve as the two partners of its sole managing member), the Company entered into a three-year consulting agreement (beginning April 25, 1997) with William R. Ziegler, pursuant to which Mr. Ziegler agreed to provide the Company certain strategic planning and other consulting services. Under Mr. Ziegler's consulting agreement, Mr. Ziegler received a quarterly consulting fee equal to one-half of 1% of the total investment made by him and certain other persons or before July 31, 1997 in debt and equity securities of the Company that were outstanding as of the end of each quarter during the term of the consulting agreement. Mr. Zeigler's consulting agreement expired on April 25, 2000 and was not renewed. As of December 31, 2000 and 1999, respectively, the Company owed Mr. Ziegler $389,873 and $343,207 in consulting fees pursuant to the agreement. In addition, pursuant to the consulting agreement, the Company granted Mr. Ziegler options to purchase 50,000 shares of Common Stock of the Company at a price of $0.75 per share. In addition, the Company entered into an Investment Monitoring Agreement with Blackhawk Capital Partners, the managing member of Blackhawk Investors, L.L.C., pursuant to which Blackhawk Capital Partners was appointed to oversee Blackhawk Investors, L.L.C.'s investments in the Company. Blackhawk Capital Partners is paid a fee of $25,000 per year under this agreement. On March 27, 1998, the Company obtained a $1,500,000 private short-term financing from a group of investors, including William R. Ziegler, Steven A. Webster and Christopher M. Harte and several related family members who collectively provided $1,000,000 of this financing. The Company issued promissory notes, with interest at prime plus 2% to these individuals. Additionally, Christopher M. Harte and the related family members were granted warrants to purchase 150,000 shares of Common Stock of the Company at a purchase price of $2.00 per share. The Company paid these notes in full with interest on May 1, 1998 including interest payments of $11,083 to the related parties and family members. On April 30, 1998, the Company completed a private offering of $40,000,000 of certain securities designated as its 12% Senior Subordinated Notes (the "1998 Notes") to DLJ Investment Partners, L.P. and certain additional investors ("1998 Purchasers") pursuant to the terms of a Securities Purchase Agreement by and among the Company and the Purchasers. Additionally, the Company (i) caused certain of its wholly-owned subsidiaries to execute guarantees of the 1998 Notes pursuant to an Indenture executed by each of them, (ii) granted warrants (the "Warrants") to the 1998 Purchasers entitling them to purchase up to an aggregate of 7,618,594 shares of Common Stock at a price of $2.00 23 per share, subject to certain adjustments, and (iii) granted certain registration rights in favor of the Purchasers with respect to the 1998 Notes, the Warrants and the shares of Common Stock which may be acquired upon exercise of the Warrants. The completion of this offering enabled the Company to purchase an additional 3,000 channel I/O System Two RSR System and complete the acquisition of GDC. On March 5, 1999, the Company and Jay D. Haber entered into a Severance Agreement and Release terminating the Company's employment agreement with Mr. Haber and confirming certain agreements and effecting mutual releases relating to Mr. Haber's resignation as a director, officer and employee of the Company. This agreement provided, among other things, that the Company pay Mr. Haber a severance payment of $165,000 in twelve (12) equal monthly installments (which amounts were paid in full in February 2000). In addition, effective February 2, 1999, stock options entitling Mr. Haber to purchase an aggregate of 240,000 shares of Common Stock at a price of $1.00 per share were deemed vested and exercisable until June 2002. On July 28, 1999, the Company sold all of the outstanding capital stock of HOC Operating Co., Inc., a Texas corporation and wholly-owned subsidiary of the Company ("HOC"), to Halex Oil Corporation ("Halex"), a Texas corporation controlled by Michael Hale, the Company's Vice President and Secretary until June 30, 1999, pursuant to the terms of a Stock Purchase Agreement (the "HOC Agreement") among the Company, HOC and Halex. Pursuant to the HOC Agreement, Halex acquired 1,000 shares of the common stock of HOC (the "HOC shares"), representing 100% of the outstanding capital stock of HOC from the Company in exchange for the assumption by Halex of (i) $75,000 of the Company's obligations under that certain Lease Bank Facility Promissory Note in the principal amount of $110,000 payable by Geokinetics Production Company, Inc., a Texas corporation and wholly-owned subsidiary of the Company ("Geokinetics Production"), to the Dan C. Hale and Donna Jane Hale Trust dated January 17, 1995 (the "Trust"); and (ii) approximately $58,500 of HOC's and Geokinetics Production's accounts payable (as defined in the HOC Agreement). The value of the proved producing oil and gas reserves owned by HOC on the date of the transaction was approximately $136,000. Immediately prior to the sale of HOC's stock to Halex, Geokinetics Production conveyed to HOC various interests in certain oil and gas properties. Further, the Company issued to the Trust a Common Stock Purchase Warrant entitling the Trust to purchase from the Company all or any part of 35,000 shares of fully paid and non-assessable Common Stock at a purchase price of $0.656 per share. The expiration date of this warrant is June 30, 2004. The Company also entered into a Promissory Note with the Trust for $35,000, with an effective interest rate based on the Citibank, N.A. prime rate plus four percent, and expects to pay this Promissory Note in full or before December 31, 2001. On October 1, 1999, the Company restructured its obligations to the holders of the 1998 Notes and entered into a Securities Purchase Agreement (the "1999 Purchase Agreement") with the holders of the 1998 Notes and certain additional investors, including Steven A. Webster and William R. Ziegler, two of the Company's directors (collectively, the "1999 Purchasers"), pursuant to which the Company completed a restructuring of the 1998 Notes, and received $4,000,000 in additional senior secured debt financing from the holders of the 1998 Notes and $1,000,000 from three other investors, including Messrs. Webster and Ziegler (the "Secured Loan"). Pursuant to the 1999 Purchase Agreement, the Company (i) exchanged the 1998 Notes for its 13.5% Senior Secured Notes due 2005 in the aggregate principal amount of $45,358,000 issued to the 1999 Purchasers (the "2005 Notes"), (ii) issued the 1999 Purchasers its 13.5% Senior Secured Notes due 2002 in the aggregate principal amount of up to $6,000,000 (the "2002 Notes"), (iii) granted security interests covering substantially all of the 24 Company's assets as security for the 2005 Notes and the 2002 Notes, (iv) caused certain of the Corporation's wholly-owned subsidiaries to execute guarantees of the 2005 Notes and the 2002 Notes, (v) issued warrants to the 1999 Purchasers of the 2002 Notes (the "2002 Warrants") to purchase 23,250,000 shares of the Common Stock at a price of $0.56 per share, and (vi) issued warrants to the 1999 Purchasers of the 2005 Notes (the "2005 Warrants") to purchase 26,818,594 shares of Common Stock at a price of $0.56 per share (the 2005 Warrants, together with the 2002 Warrants, being the "New Warrants"). The Company issued 7,618,594 of the 2005 Warrants in exchange for 7,618,594 warrants issued to the holders of the 1998 Notes. The New Warrants were issued in accordance with an Amended and Restated Warrant Agreement executed among the Company and the 1999 Purchasers. As a result of the issuance of the New Warrants, the 1999 Purchasers, collectively, have the right to acquire 66.5% of the Company's outstanding Common Stock on a fully diluted basis. On November 30, 1999, the Company completed an additional $895,000 in financing by issuing the remaining $895,000 of the 2002 Notes in accordance with the 1999 Purchase Agreement to certain private investors, including Spicewood Family Partnership of which Christopher M. Harte, one of the Company's directors, is the general partner. In exchange for providing $100,000 in financing to the Company, the Company issued Spicewood Family Partnership (i) 2002 Notes in the aggregate principal amount of $100,000, and (ii) 2002 Warrants to purchase 394,402 shares of the Common Stock, all in accordance with the 1999 Purchase Agreement. On April 9, 2001, the Company restructured its obligations under the 13.5% Senior Secured 2002 Notes and 2005 Notes and entered into a Subordination and Amendment Agreement with the holders of the 2002 Notes and 2005 Notes (including investors comprising the CSFB business unit) and GeoLease Partners, L.P., a Delaware limited partnership (in which persons comprising the CSFB business unit have a controlling interest. The restructuring extends the maturity date on the 2002 Notes to September 15, 2003 and permits the Company, at its option, to pay interest on each interest payment date, in the form of cash interest or PIK interest (the issuing of additional notes) through, but not including, the maturity dates for the 2002 Notes and 2005 Notes. Concurrently, GeoLease Partners, L.P., purchased the leased equipment and was assigned the rights under the Company's Equipment Lease dated as October 1, 1999 between the Company and its principal equipment supplier. Immediately following this transfer, the Company and GeoLease Partners, L.P. entered into Amendment No. 1 to the Equipment Lease, allowing the Company to defer the monthly installments due on the Equipment Lease until the expiration date of the Equipment Lease (currently October 1, 2002). The Company is obligated to pay interest on any monthly installment not paid when due, and any such accrued interest is due on the expiration date of the Equipment Lease. Amendment No. 1 to the Equipment Lease also includes a provision for the payment by the Company of $1.9 million as deferred rent due on the later of (i) September 15, 2003 and (ii) the date that the 13.5% Senior Secured 2002 Notes are paid in full. William R. Ziegler is of counsel to the New York-based law firm of Satterlee Stephens Burke & Burke, LLP, the successor in interest of Parson & Brown, L.L.P. of which Mr. Ziegler was a partner. During the fiscal years ended December 31, 2000 and December 31, 1999, those firms billed the Company $35,104 and $123,218 respectively, for services rendered. 25 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS AND REPORTS ON FORM 8-K. 3.1 Certificate of Incorporation of the Company (incorporated by reference from Exhibit 3(a) to Amendment No. 1 to the Company's Registration Statement on Form S-3, filed with the Securities and Exchange Commission on March 25, 1980 (file no. 000-09268)). 3.2 Certificate of Amendment of Certificate of Incorporation of the Company (incorporated by reference from Exhibit 3.2 to Form 10-KSB filed with the Securities and Exchange Commission on April 24, 1996 (file no. 000-09268)). 3.3 Certificate of Amendment of Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on July 14, 1997 (incorporated by reference from Exhibit 3.3 to Form 10-KSB filed with the Securities and Exchange Commission on March 31, 1998 (file no.000-09268)) 3.4 Certificate of Amendment of Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on November 24, 1997 (incorporated by reference from Exhibit 3.4 to Form 10-KSB filed with the Securities and Exchange Commission on March 31, 1998 (file no.000-09268)). 3.5 Amended and Restated Bylaws of the Company (incorporated by reference from Exhibit 3.5 to Form 10-KSB filed with the Securities and Exchange Commission on March 31, 1998 (file no.000-09268)). 4.1 Statement of Designations of the Company's Series A Preferred Stock (incorporated by reference from Exhibit 4 to Form 8-K filed with the Securities and Exchange Commission on August 5, 1997 (file no.000-09268)). 4.2 Indenture dated as of April 30, 1998, executed by the Company, HOC Production Co., Inc., Geokinetics Production Co., Inc., Quantum Geophysical, Inc., Geoscience Software Solutions, Inc., Signature Geophysical Services, Inc., Reliable Exploration, Incorporated, and Geophysical Development Corporation (incorporated by reference from Exhibit (4.4) to Form 8-K filed with the Securities and Exchange Commission on May 15, 1998 (file no.000-09268)). 4.3 Indenture dated as of October 1, 1999, executed by the Company, Geokinetics Production Co., Inc., Quantum Geophysical, Inc., Geoscience Software Solutions, Inc., Signature Geophysical Services, Inc., Reliable Exploration, Incorporated, and Geophysical Development Corporation (incorporated by reference from Exhibit 4.3 to Form 8-K filed with the Securities and Exchange Commission on October 18, 1999 (file no. 000-09268)). 8.1 Tax Opinion of David E. Hammer, P.C. concerning the deductibility of the Company's net operating loss carryforwards following the Company's acquisition of certain oil and gas properties effective August 1, 1994 (incorporated by reference from Exhibit 8.1 to 26 Form 10-KSB filed with the Securities and Exchange Commission on May 19, 1995 (file no.000-09268)). 10.1 Securities Purchase Agreement dated as of April 25, 1997 among the Company and each of William R. Ziegler and Steven A. Webster. (incorporated by reference from Exhibit II to the Schedule 13D filed with the Securities and Exchange Commission by William R. Ziegler on May 5, 1997 (file no. 005-32355)). 10.2 Form of 12% Senior Secured Promissory Note dated as of April 25, 1997 in the principal amount of $250,000 executed by the Company to each of William R. Ziegler and Steven A. Webster (incorporated by reference from Exhibit III to the Schedule 13D filed with the Securities and Exchange Commission by William R. Ziegler on May 5, 1997 (file no. 005-32355)). 10.3 Registration Rights Agreement dated as of April 25, 1997 executed by the Company and each of the William R. Ziegler and Steven A. Webster (incorporated by reference from Exhibit V to the Schedule 13D filed with the Securities and Exchange Commission by William R. Ziegler on May 5, 1997 (file no. 005-32355)). 10.4 Form of Warrant to Purchase Common Stock dated as of April 25, 1997 issued by the Company to each of William R. Ziegler and Steven A. Webster (incorporated by reference from Exhibit IV to the Schedule 13D filed with the Securities and Exchange Commission by William R. Ziegler on May 5, 1997 (file no. 005-32355)). 10.5 Consulting Agreement dated as of April 25, 1997 executed by the Company and William R. Ziegler (incorporated by reference from Exhibit VI to the Schedule 13D filed with the Securities & Exchange Commission by William R. Ziegler on May 5, 1997 (file no. 005-32355)). 10.6 Securities Purchase and Exchange Agreement dated as of July 18, 1997 among the Company, Blackhawk Investors, L.L.C., William R. Ziegler, and Steven A. Webster (incorporated by reference from Exhibit (2.1) to Form 8-K filed on August 5, 1997 (file no.000-09268)). 10.7 Investment Monitoring Agreement dated July 18, 1997, between the Company and Blackhawk Capital Partners, L.P. (incorporated by reference from Exhibit 10.2 to Form 8-K filed August 5, 1997 (file no.000-09268)). 10.8 Letter Agreement re Additional Investment dated July 24, 1997, between the Company and Blackhawk Investors, L.L.C. (incorporated by reference from Exhibit (2.3) to Form 8-K filed on August 5, 1997 (file no.000-09268)). 10.9 Stock Purchase Agreement dated as of March 24, 1998, among the Company, Geophysical Development Corporation and the holders of all of the capital stock of Geophysical Development Corporation (incorporated by reference from Exhibit 2.1 to Form 8-K filed with the Securities and Exchange Commission on May 15, 1998 (file no.000-09268)). 27 10.10 Employment Agreement dated as of July 15, 1997 between the Company and Lynn A. Turner (incorporated by reference from Exhibit 10.5 to Form 10-KSB filed with the Securities and Exchange Commission on March 31, 1998 (file no.000-09268)). 10.11 Employment Agreement dated as of July 15, 1997 between the Company and Michael A. Dunn (incorporated by reference from Exhibit 10.6 to Form 10-KSB filed with the Securities and Exchange Commission on March 31, 1998 (file no.000-09268)). 10.12 Securities Purchase Agreement dated as of April 30, 1998, among the Company, DLJ Investment Partners, L.P. and certain additional investors (incorporated by reference from Exhibit (4.1) to Form 8-K filed with the Securities and Exchange Commission on May 15, 1998 (file no.000-09268)) 10.13 Warrant Agreement dated as of April 30, 1998, among the Company, DLJ Investment Partners, L.P. and certain additional investors (incorporated by reference from Exhibit (4.2) to Form 8-K filed with the Securities and Exchange Commission on May 15, 1998 (file no.000-09268)). 10.14 Note Registration Rights Agreement dated as of April 30, 1998, among the Company, DLJ Investment Partners, L.P. and certain additional investors (incorporated by reference from Exhibit (4.3) to Form 8-K filed with the Securities and Exchange Commission on May 15, 1998 (file no.000-09268)). 10.15 Tag Along-Drag Along Agreement dated as of April 30, 1998 among the Company, DLJ Investment Partners, L.P. and certain additional investors (incorporated by reference from Exhibit (4.5) to Form 8-K filed with the Securities and Exchange Commission on May 15, 1998 (file no.000-09268)). 10.16 Stock Purchase Agreement, dated July 28, 1999, among Halex Oil Corporation, HOC Operating Co., Inc. and the Company (without exhibits) (incorporated by reference from Exhibit (2.1) to Form 8-K filed with the Securities and Exchange Commission on August 12, 1999 (file no. 000-09268)). 10.17 Securities Purchase Agreement dated as of October 1, 1999, among the Company, DLJ Investment Partners, L.P. and certain additional investors (incorporated by reference from Exhibit 4.1 to Form 8-K filed with the Securities and Exchange Commission on October 18, 1999 (file no. 000-09268)). 10.18 Amended and Restated Warrant Agreement dated as of October 1, 1999, among the Company, DLJ Investment Partners, L.P. and certain additional investors (incorporated by reference from Exhibit 4.2 to Form 8-K filed with the Securities and Exchange Commission on October 18, 1999 (file no. 000-09268)). 10.19 Amended and Restated Tag Along-Drag Along Agreement dated as of September 30, 1999, among the Company, DLJ Investment Partners, L.P. and certain additional investors (incorporated by reference from Exhibit 4.4 to Form 8-K filed with the Securities and Exchange Commission on October 18, 1999 (file no. 000-09268)). 28 10.20 Restructure Agreement dated October 1, 1999, among the Company, Geophysical Services, Inc., Quantum Geophysical Services, Inc., Input/Output, Inc. and Global Charter Corporation (incorporated by reference from Exhibit 99 to Form 8-K filed with the Securities and Exchange Commission on October 18, 1999 (file no. 000-09268)). 10.21 Stock Purchase Agreement dated January 1, 2000, among the Company, RNS, LLC, and Allen Rein, Kim Nordberg and Scott Schmidt (incorporated by reference from Exhibit (2) to Form 8-K filed with the Securities and Exchange Commission on March 9, 2000 (file no. 000-09268)). 10.22 Form of Subordination and Amendment Agreement dated as of April 9, 2001 among the Company, GeoLease Partners, L.P. and the holders of the Company's 13 1/2% Senior Secured Notes. 10.23 Lease Agreement dated October 1, 1999 between the Company and Input/Output, Inc. 10.24 Amendment No. 1 dated as of April 9, 2001 between the Company and GeoLease Partners, L.P. 22 Following is a list of the Company's Subsidiaries:
Other Name Under Which Subsidiary Jurisdiction of Name of Subsidiary Conducts Business Incorporation ------------------ ----------------- ------------- Geokinetics Production Co., Inc. None Texas (formerly HLX Acquisition Corp.) Quantum Geophysical Services, Inc. (formerly Quantum Geophysical, Inc.) None Texas Quantum Geophysical, Inc. None Texas Geophysical Development Corporation None Texas Geoscience Software Solutions, Inc. None Texas
Following is a list of the subsidiaries of Quantum Geophysical, Inc.:
Other Name Under Which Subsidiary Jurisdiction Of Name of Subsidiary Conducts Business Incorporation ------------------ ----------------- ------------- Signature Geophysical, Inc. None Michigan
29 (b) Reports on Form 8-K filed during the last quarter of the period covered by this Form 10-KSB. None. 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 16, 2001 By: /s/ Lynn A. Turner -------------------------------- Lynn A. Turner, President and Chief Operating Officer By: /s/ Thomas J. Concannon -------------------------------- Thomas J. Concannon Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date - --------- ----- ---- /s/ Lynn A. Turner President and Chief Operating April 16, 2001 - ----------------------------- Officer Lynn A. Turner /s/ Thomas J. Concannon Vice President and April 16, 2001 ---------------------------- Chief Financial Officer Thomas J. Concannon /s/ William R. Ziegler Director and Chairman April 16, 2001 - ----------------------------- William R. Ziegler /s/ Steven A. Webster Director April 16, 2001 - ----------------------------- Steven A. Webster /s/ Christopher M. Harte Director April 16, 2001 - ----------------------------- Christopher M. Harte
30 GEOKINETICS INC. AND SUBSIDIARIES ANNUAL CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 Page F-1 TABLE OF CONTENTS CONSOLIDATED FINANCIAL STATEMENTS INDEPENDENT AUDITOR'S REPORT...............................................F-3 CONSOLIDATED BALANCE SHEETS................................................F-4 CONSOLIDATED STATEMENTS OF OPERATIONS......................................F-6 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY............................F-7 CONSOLIDATED STATEMENTS OF CASH FLOWS......................................F-8 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.............................F-9 Page F-2 [LETTERHEAD OF FITTS, ROBERTS & CO., P.C.] INDEPENDENT AUDITOR'S REPORT To the Board of Directors Geokinetics Inc. and Subsidiaries Houston, Texas We have audited the accompanying consolidated balance sheets of Geokinetics Inc. and Subsidiaries as of December 31, 2000 and 1999, and the related statements of operations, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Geokinetics Inc. and Subsidiaries as of December 31, 2000 and 1999, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ Fitts, Roberts & Co., P.C. Houston, Texas April 9, 2001 Page F-3 CONSOLIDATED BALANCE SHEETS
December 31, December 31, 2000 1999 -------------------------- ------------------------ ASSETS CURRENT ASSETS Cash $1,241,282 $2,677,996 Accounts receivable - trade, net 2,692,932 2,010,381 Accounts receivable - officers and employees 9,176 19,930 Work in progress 627,174 1,225,799 Prepaid expenses 526,598 411,489 Accrued income tax refund - 16,000 -------------------------- ------------------------- Total Current Assets 5,097,162 6,361,595 -------------------------- ------------------------- PROPERTY AND EQUIPMENT, net 7,474,722 11,877,927 -------------------------- ------------------------- OTHER ASSETS Deferred charges 73,022 44,534 Note receivable 250,000 - Restricted investments 131,700 106,700 Deposits and other assets 47,879 78,097 Goodwill and other intangibles, net of $7,634,717 amortization in 2000 and $4,923,964 in 1999 and net of impairment reserve of $2,143,635 in 1999 22,161,250 25,781,443 -------------------------- ------------------------- Total Other Assets 22,663,851 26,010,774 -------------------------- ------------------------- TOTAL ASSETS $35,235,735 $44,250,296 ========================== =========================
Page F-4 CONSOLIDATED BALANCE SHEETS
December 31, December 31, 2000 1999 -------------------------- ------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 566,678 $ 713,280 Current portion of capital lease 228,444 - Accounts payable - trade 2,362,060 1,182,144 Accrued income tax payable - 146,327 Accrued liabilities 1,608,904 3,599,099 Customer deposits 3,420 15,000 Notes payable 252,090 398,109 Due to officers and stockholders 477,373 410,268 Advances for lease bank 175,000 185,500 Site restoration costs payable 6,418 6,418 Deferred revenue 294,257 74,188 -------------------------- ------------------------- Total Current Liabilities 5,974,644 6,730,333 SHORT-TERM OBLIGATIONS EXPECTED TO BE REFINANCED 2,286,759 - -------------------------- ------------------------- LONG-TERM DEBT, net of current maturities, net of OID 58,080,462 51,267,997 -------------------------- ------------------------- OTHER LIABILITIES Deferred gain - 359,974 Accrued long-term lease liability 1,713,640 - -------------------------- ------------------------- Total Other Liabilities 1,713,640 359,974 -------------------------- ------------------------- TOTAL LIABILITIES 68,055,505 58,358,304 -------------------------- ------------------------- STOCKHOLDERS' EQUITY Preferred stock, Series B, $10.00 par value, 100,000 shares authorized, none outstanding - - Common stock, $.01 par value, 100,000,000 shares authorized, 18,992,156 shares outstanding at December 31, 2000 and 19,367,156 shares outstanding at December 31, 1999 193,672 193,672 Additional paid-in capital 33,019,248 33,019,248 Retained deficit (65,890,190) (47,320,928) -------------------------- ------------------------- (32,677,270) (14,108,008) Less common stock in treasury at cost, 375,000 shares in 2000 (142,500) - -------------------------- ------------------------- TOTAL STOCKHOLDERS' EQUITY (32,819,770) (14,108,008) -------------------------- ------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $35,235,735 $44,250,296 ========================== =========================
The Accompanying Notes Are An Integral Part of These Consolidated Financial Statements Page F-5 CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2000 December 31, 1999 -------------------------- ------------------------- REVENUES Seismic revenue $ 9,688,646 $ 5,407,895 Data processing revenue 5,984,311 8,786,231 -------------------------- ------------------------- Total Revenues 15,672,957 14,194,126 EXPENSES Seismic operating expenses 11,760,995 7,513,734 Data processing expenses 5,188,816 6,408,634 General and administrative 1,915,061 2,817,885 Depreciation and amortization 7,846,705 9,907,917 Provision for disposition of subsidiary - 2,143,635 -------------------------- ------------------------- Total Expenses 26,711,577 28,791,805 -------------------------- ------------------------- Loss From Operations (11,038,620) (14,597,679) OTHER INCOME (EXPENSE) Interest income 92,495 128,698 Interest expense (7,883,258) (7,460,298) -------------------------- ------------------------- Total Other Expense (7,790,763) (7,331,600) -------------------------- ------------------------- Loss Before Income Tax, Discontinued Operations and Extraordinary Item (18,829,383) (21,929,279) INCOME TAX BENEFIT Current income tax benefit - 197,596 Deferred income tax benefit - 222,045 -------------------------- ------------------------- Total Income Tax Benefit - 419,641 -------------------------- ------------------------- Loss Before Discontinued Operations and Extraordinary Item (18,829,383) (21,509,638) LOSS FROM DISCONTINUED OPERATIONS Loss from oil and gas operations - (71,494) Loss from disposition of oil and gas operations - (563,375) -------------------------- ------------------------- Total Loss From Discontinued Operations - (634,869) -------------------------- ------------------------- Loss Before Extraordinary Item (18,829,383) (22,144,507) EXTRAORDINARY ITEM Income (loss) on extinguishment of debt 260,121 (8,275,390) -------------------------- ------------------------- NET LOSS $(18,569,262) $(30,419,897) ========================== ========================= NET EARNINGS (LOSS) PER COMMON SHARE - BASIC Loss from continuing operations $(0.99) $(1.11) Loss from discontinued operations - (0.03) Extraordinary income (loss) on extinguishment of debt 0.01 (0.43) -------------------------- ------------------------- Net Loss $(0.98) $(1.57) ========================== ========================= Weighted average common shares outstanding 19,046,459 19,348,155 ========================== =========================
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements Page F-6 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Stockholder's Equity ---------------------------------- Preferred Common Shares Preferred Stock Common Stock Shares Issued Issued ----------------- ----------------- ---------------- ----------------- Balance at December 31, 1998 - 19,332,480 - $193,325 Net Loss Warrants Issued Associated with Senior Secured Debt Notes due 2002 Notes due 2005 Exercise of Warrants 34,676 347 ----------------- ----------------- ---------------- ----------------- Balance at December 31, 1999 - 19,367,156 - 193,672 Net Loss Sale of Reliable Exploration Co. (375,000) ----------------- ----------------- ---------------- ----------------- Balance at December 31, 2000 - 18,992,156 - $193,672 ================= ================= ================ ================= Stockholders' Equity ---------------------------------------------------------------------- Additional Treasury Stock Retained Deficit Total Paid-In Capital ---------------------------------- ---------------------------------- Balance at December 31, 1998 $29,112,344 - $(16,901,031) $12,404,638 Net Loss (30,419,897) (30,419,897) Warrants Issued Associated with Senior Secured Debt Notes due 2002 1,860,000 1,860,000 Notes due 2005 2,038,213 2,038,213 Exercise of Warrants 8,691 9,038 ---------------------------------- ---------------------------------- Balance at December 31, 1999 33,019,248 - (47,320,928) (14,108,008) Net Loss (18,569,262) (18,569,262) Sale of Reliable Exploration Co. (142,500) (142,500) ---------------------------------- ---------------------------------- Balance at December 31, 2000 $33,019,248 $(142,500) $(65,890,190) $(32,819,770) ================================== ==================================
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements Page F-7 CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31, December 31, 2000 1999 -------------------------- ------------------------- OPERATING ACTIVITIES Net Loss $(18,569,262) $(30,419,897) Adjustments to reconcile net loss to net cash used by operating activities Depreciation, depletion and amortization 7,846,705 9,916,418 (Gain) loss on disposal of assets Operating assets (116,544) 7,348 Oil and gas operations - 563,375 Reserve for disposition of subsidiary - 2,143,635 Extinguishment of debt, net - 7,818,756 Current and deferred tax benefit - (419,641) Changes in operating assets and liabilities Accounts receivable (1,123,471) 4,840,857 Work in progress 608,335 (711,632) Prepaid expenses and other assets (352,150) 62,609 Accounts payable 1,383,881 (3,640,658) Accrued liabilities and deferred revenue 9,941,273 (152,928) -------------------------- ------------------------- Net Cash Used in Operating Activities (381,233) (9,991,758) INVESTING ACTIVITIES Proceeds from insurance - 21,504 Purchase of capital assets (151,953) (945,083) Proceeds from sale of capital assets - 9,999,337 Proceeds from deposits and other 52,742 - -------------------------- ------------------------- Net Cash Provided (Used) by Investing Activities (99,211) 9,075,758 FINANCING ACTIVITIES Proceeds from long-term debt 120,345 51,253,000 Proceeds from short-term debt 301,049 1,043,582 Proceeds from software financing - 795,997 Principal payments on long-term debt (815,335) (49,399,690) Principal payments on short-term debt (219,457) (2,813,512) Payments on software financing (353,731) - Proceeds from issuance of common stock - 9,038 -------------------------- ------------------------- Net Cash Provided (Used) by Financing Activities (967,129) 888,415 -------------------------- ------------------------- NET DECREASE IN CASH (1,447,573) (27,585) CASH DEFICIT OF SUBSIDIARY SOLD 10,859 - CASH, beginning of year 2,677,996 2,705,581 -------------------------- ------------------------- CASH, end of year $1,241,282 $2,677,996 ========================== ========================= SUPPLEMENTAL DISCLOSURES RELATED TO CASH FLOWS: Income taxes of $935,000 were paid in 1999. Interest of $458,467 and $691,923 was paid in 2000 and 1999, respectively; additional interest of $6,823,422 and $5,358,000 was paid through the issuance of PIK notes (See Note 7)
Page F-8 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF THE ORGANIZATION Geokinetics Inc., a Delaware corporation, founded in 1980, (the "Company") is based in Houston, Texas. The Company has repositioned itself from an oil and gas exploration and production company into a technologically advanced provider of three-dimensional ("3-D") seismic acquisition services to the U.S. land-based oil and gas industry and seismic data processing services to clients involved in both on-shore and off-shore operations on a worldwide basis. Through equipment purchases and acquisition of other companies, the Company currently has the capability of operating three seismic crews in the Rocky Mountain region and on the Gulf Coast. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Geokinetics Inc. and its wholly-owned subsidiaries, HOC Operating Co., Inc. (HOC), Geokinetics Production Co., Inc. (GPCI), Quantum Geophysical, Inc. (Quantum), Quantum Geophysical Services, Inc. (QGS), Reliable Exploration Incorporated (Reliable), Geophysical Development Corporation (GDC) and Signature Geophysical Services, Inc. (Signature). All inter-company items and transactions have been eliminated in the consolidation. BASIS OF ACCOUNTING The consolidated financial statements of the Company have been prepared on the accrual basis of accounting and, accordingly, reflect all significant receivables, payables and other liabilities. USE OF ESTIMATES IN PREPARING CONSOLIDATED FINANCIAL STATEMENTS Management uses estimates and assumptions in preparing consolidated financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect amounts reported in these financial statements and accompanying notes. The more significant areas requiring the use of management estimates relate to the percentage of work completed in determining work in process, evaluating the outcome of uncertainties involving claims against or on behalf of the Company, useful lives for depreciation and amortization and cash flow projections used in the determination of asset impairment. Actual results could differ materially from these estimates. 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. Page F-9 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. IMPAIRMENT OF LONG-LIVED ASSETS In accordance with FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Company records impairment losses on long-lived assets and related intangibles and goodwill related to those assets that are used in operations, when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. The Company has significant investments in seismic acquisition equipment and in the goodwill of subsidiaries acquired, as described in Note 10. The downturn in the seismic service industry caused the Company to review the carrying value of these assets in accordance with FASB 121. The Company's estimate of undiscounted cash flows currently indicates that such carrying amounts are expected to be recovered. However, actual results could vary materially from these estimates should the current downturn in the industry continue. GOODWILL Goodwill represents the aggregate excess cost of companies acquired over the fair value of their net assets at dates of acquisition. Goodwill is amortized using the straight-line method over a period of 40 years for subsidiaries providing seismic acquisition services and 10 years for subsidiaries providing seismic data processing services. In accordance with APB 17, Intangible Assets, the Company continues to evaluate the amortization period to determine whether events or circumstances warrant revised amortization periods. Additionally, the Company considers whether the carrying value of such assets should be reduced based on the future benefits of its intangible assets. Goodwill amortization expense totaled $2,848,469 and $2,927,293 during 2000 and 1999, respectively. Page F-10 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEBT ISSUANCE COSTS The value of detachable warrants issued in relation to debt obligations is reflected as discount which is netted against the face amount of the obligation and is amortized to expense over the term of the obligation. Discount amortization expense totaled $959,700 and $603,700 in 2000 and 1999, respectively. PRE-OPERATING COSTS It is the Company's policy to expense non-recoverable pre-operating costs as they are incurred. RESTRICTED INVESTMENTS AND SITE RESTORATION COSTS Restricted investments represent investments carried at cost, which approximates market. Such investments represent amounts of certificates of deposit or other deposit accounts required by various state and federal agencies in connection with the performance of field operations by the Company and its subsidiaries. The amount of restricted investments was $131,700 and $106,700 at December 31, 2000 and 1999, respectively. 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, 2000 and 1999. INCOME TAX The Company follows Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are computed using the liability method based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred income tax is provided in the accompanying consolidated financial statements as a result of differences related to timing differences in reporting of depreciation and depletion for income tax purposes and consolidated financial statement purposes. A valuation allowance account is maintained to estimate the amount of net operating loss carryforwards and tax credit carryforwards which the Company may not be able to use as a result of the expiration of maximum carryover periods allowed under Internal Revenue tax codes. Page F-11 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) LOSS PER COMMON SHARE Basic loss per common share is computed based on the weighted average number of common shares outstanding during the respective years. Stock options and stock warrants have not been included in the calculation of diluted earnings per share as their effect would be antidilutive. NOTE 2. FINANCIAL RESULTS, LIQUIDITY AND BASIS OF PRESENTATION These financial statements are prepared assuming that the Company will continue as a going concern. They do not include any adjustments relating to the recoverability and classification of recorded assets or the amounts and classification of liabilities that would be necessary in the event the Company cannot continue in existence. During 1999, the seismic service industry experienced an unprecedented downturn which severely constrained the Company's working capital position. During this period, management developed a financial and operational plan to carry the Company's operations through the year 2000 and beyond. One component of this plan included a restructuring of the Company's long term debt as further outlined in Note 11. The restructuring provided the Company with additional funding, in the amount of $5,895,000, and the option, during 2000, to make interest payments due on its 13.5% Senior Secured Notes either in cash or by issuing additional notes. During 2000, the Company elected to make interest payments due on the 13.5% Senior Secured Notes by issuing additional notes. This resulted in an increase of $6,823,421 in the Company's 13.5% Senior Secured Notes due in 2002 and 2005. The plan also included disposing of the Company's oil and gas operations as well as one of its seismic acquisition subsidiaries, as further discussed in Notes 18 and 19. The seismic service industry downturn, outlined above, continued into 2000. Demand for the Company's seismic acquisition and data processing services remained weak in the first half of 2000. While demand for the Company's services began to increase in the second half of 2000, the prices the Company can charge for its services remained at historically low levels due to continuing competitive pressures. As a result of industry conditions and plan implementation, outlined above, the Company incurred a loss of approximately $18.6 million during 2000 in addition to a loss of approximately $30.4 million incurred in 1999, leaving the Company with a deficit equity position of approximately $32.8 million at December 31, 2000. On April 9, 2001, the Company entered into a Subordination and Amendment Agreement with the holders of the Company's 13.5% Senior Secured Notes and GeoLease Partners, L.P. (GeoLease), a Delaware limited partnership. The agreement provides for, among other items, a restructuring of the Company's 13.5% Senior Secured Notes as further outlined in Note 11. Page F-12 NOTE 2. FINANCIAL RESULTS, LIQUIDITY AND BASIS OF PRESENTATION (CONTINUED) Concurrently with the transactions contemplated by the Subordination and Amendment Agreement, GeoLease purchased the equipment and was assigned the rights under that certain Lease Agreement, dated as of October 1, 1999 (Equipment Lease), that the Company had entered into with its primary equipment supplier. Upon completion of this transaction, the Company and GeoLease entered into Amendment No. 1 of the Equipment Lease. This Agreement, more fully detailed in Note 11, allows the Company to defer the monthly installments due on the Equipment Lease until the lease expiration date, October 1, 2002. The Company believes that its cash on hand at December 31, 2000, the anticipated cash flow from continuing operations and the completion of the transactions of April 9, 2001, noted above, will provide sufficient liquidity to continue operations through 2001. The Company anticipates that it will defer making monthly lease installments, due on the equipment lease, and elect not to make cash interest payments on its 13.5% Senior Secured Notes during 2001. The Company's financial results will continue to be negatively impacted until a recovery in the seismic service industry occurs. The Company is presently unable to predict when such a recovery will occur. NOTE 3. PROPERTY AND EQUIPMENT A summary of property and equipment follows:
December 31, December 31, 2000 1999 -------------------------- ------------------------- Field operating equipment $15,053,701 $17,213,247 Vehicles 323,375 735,994 Buildings and improvements 280,945 287,429 Software 979,873 977,913 Data processing equipment 3,228,754 3,219,272 Furniture and equipment 188,274 228,050 -------------------------- ------------------------- 20,054,922 22,661,905 Less accumulated depreciation and amortization 12,603,650 10,807,428 -------------------------- ------------------------- 7,451,272 11,854,477 Land 23,450 23,450 -------------------------- ------------------------- Net Property and Equipment $7,474,722 $11,877,927 ========================== =========================
Page F-13 NOTE 4. ACCRUED LIABILITIES A summary of accrued liabilities follows:
December 31, December 31, 2000 1999 -------------------------- ------------------------- Sales tax payable $56,023 $189,377 Accrued payroll 916,649 647,406 Accrued interest payable 32,949 1,769,687 Accrued operating expense 603,283 992,629 -------------------------- ------------------------- $1,608,904 $3,599,099 ========================== =========================
NOTE 5. NOTES PAYABLE
A summary of notes payable follows: December 31, December 31, 2000 1999 -------------------------- ------------------------- Notes representing financing of insurance premiums for $252,090 $237,037 operating subsidiaries over periods of ten to eleven months at interest rates varying from 9.32% to 9.34% 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. Revised settlement on May 16, 2000 eliminated this liability at no cost to the Company - $158,524 Notes to financial institutions for the purchase of Company vehicles used by marketing and sales personnel secured by vehicles, principal and interest payable monthly - 2,548 -------------------------- ------------------------- $252,090 $398,109 ========================== =========================
NOTE 6. LEASE BANK The Company had previously utilized a revolving credit facility to provide funds to acquire, package and sell oil and gas properties. Notes issued under this facility are payable upon demand one year from the date of the individual notes. If there is no demand, the notes automatically renew on a quarterly basis. The Notes matured on December 31, 1999. The outstanding balance on the advances for Lease Bank was $175,000 at December 31, 2000 and $185,500 at December 31, 1999. The Company made principal payments of $10,000 during 2000 as well as quarterly interest payments at prime plus 4% totaling $23,565. The Company intends to continue to meet its interest obligations, and will make principal payments when possible from available cash. Page F-14 NOTE 7. LONG-TERM DEBT
December 31, December 31, 2000 1999 -------------------------- ------------------------ 13.5% Senior Secured Notes dated October 1, 1999 in the aggregate principal amount of $45,358,000, to certain investors due and payable on September 15, 2005, and interest of 13.5% per annum is payable on each March 15 and September 15, commencing March 15, 2000. The Company exercised its option to make these payments in kind during 2000 by the issuance of additional Notes. A Subordination and Amendment Agreement dated April 9, 2001 permits the Company to make each interest payment in kind through, but not including, the note maturity date of September 15, 2005, and subordinates the Notes to a certain lease agreement dated October 1, 1999. The Company granted security interests covering substantially all of the Company's assets as security for the Notes and caused certain of its wholly-owned subsidiaries to execute guarantees of the Notes. The Company issued to the investors warrants to purchase 26,818,594 shares of the Company's common stock at a price of $0.56 per share. The Company issued 7,618,594 of these warrants in exchange for 7,618,594 warrants previously issued to the investors. For financial statement purposes, the notes are presented net of unamortized discount of $1,613,593 in 2000 and $1,953,289 in 1999 $49,802,039 $43,404,711 Page F-15 NOTE 7. LONG-TERM DEBT (CONTINUED) 13.5% Senior Secured Notes dated October 1 and November 30, 1999 in the aggregate principal amount of $5,895,000, to certain investors originally due and payable on September 15, 2002 and interest of 13.5% per annum is payable on each March 15, and September 15, commencing March 15, 2000. The Company exercised its option to make these payments in kind during 2000 by the issuance of additional Notes. A Subordination and Amendment Agreement dated April 9, 2001 extended the due dates of the Notes to September 15, 2003, permits the Company to make each interest payment in kind through, but not including, the note maturity date of September 15, 2003, and subordinates the Notes to a certain lease agreement dated October 1, 1999. The Company granted security interests covering substantially all of the Company's assets as security for the Notes and caused certain of its wholly-owned subsidiaries to execute guarantees of the Notes. The Company issued to the investors warrants to purchase 23,250,000 shares of the Company's common stock at a price of $0.56 per share. For financial statement purposes, the Notes are presented net of unamortized original issue discount of $1,084,995 in 2000 and $1,704,999 in 1999 5,575,794 4,190,001 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, 2000 were $64,104 including principal and interest at 9.75%), secured by first security interest in a subsidiary's accounts receivable, inventory, property and equipment, oil and gas leases, intangibles, guaranty of the Company and a $4,000,000 guaranty of the Farmers Home Administration of the United States Department of Agriculture 3,180,258 3,616,758 Note to an equipment vendor dated July 7, 2000 payable in 18 monthly installments of $7,339 including principal and interest at 12%, due January 7, 2002, secured by equipment 89,049 - Page F-16 NOTE 7. LONG-TERM DEBT (CONTINUED) Note dated January 8, 1998 payable to an individual in 36 monthly installments of $18,957 including principal and interest at 10% beginning February 8, 1998, secured by certain equipment, accounts receivable and a guaranty of the Company. The subsidiary company with this obligation was sold on February 23, 2000 and the Company's guaranty was released. (See Note 19) - 501,356 Note originally dated June 9, 1998, extended on September 2, 1999, payable to a financial institution in 7 monthly installments of principal in the amount of $53,544 plus accrued interest at prime beginning October 2, 1999 with a final payment of the unpaid principal balance plus accrued interest due on May 2, 2000. The Note is secured by equipment, inventory, accounts receivable, fixtures and a guaranty of the Company - 268,451 -------------------------- ------------------------- 58,647,140 51,981,277 Less Current Maturities 566,678 713,280 -------------------------- ------------------------- $58,080,462 $51,267,997 ========================== =========================
A summary of long-term debt principal maturities follows:
FOR THE YEARS ENDING DECEMBER 31, Amount --------------------------------- ------------------------- 2001 $566,678 2002 542,954 2003 6,167,566 2004 653,672 2005 50,524,224 Thereafter 192,046 ------------------------- $58,647,140 =========================
The 13.5% Senior Secured Notes due 2003 and 2005, as outlined above, have interest payments due and payable on each March 15 and September 15, commencing March 15, 2000. Interest payments of $3,151,142 and $3,672,280 were due on March 15, 2000 and September 15, 2000 respectively. The Company exercised its option to make these interest payments by the issuance of additional notes (payment in kind). On April 9, 2001, the Company entered into a Subordination and Amendment Agreement with the holders of the Company's 13.5% Senior Secured Notes and GeoLease Partners, L.P., a Delaware limited partnership. This agreement provided for, among other items, a restructuring of the Company's 13.5% Senior Secured Notes as further outlined in Note 11. The restructuring extended the maturity date on the 2002 Notes to September 15, 2003 and permits the Company to pay interest when due in the form of cash or by issuing additional notes through, but not including, the maturity dates for the Senior Secured Notes. Page F-17 NOTE 8. INCOME TAX The income tax benefit (expense) charged to continuing operations for the years ended December 31, 2000 and 1999 was as follows:
December 31, December 31, 2000 1999 -------------------------- ------------------------- Current: U.S. Federal - $197,596 State and local - - Foreign - - -------------------------- ------------------------- Total Current - 197,596 -------------------------- ------------------------- Deferred U.S. Federal - 222,045 State and local - - Foreign - - -------------------------- ------------------------- Total Deferred - 222,045 -------------------------- ------------------------- Other Adjustment to valuation allowance - - -------------------------- ------------------------- - $419,641 ========================== =========================
The income tax provision differs from the amount of income tax determined by applying the U.S. Federal Income Tax Rate to pre-tax income from continuing operations for the years ended December 31, 2000 and 1999 due to the following:
December 31, December 31, 2000 1999 -------------------------- ------------------------- Computed "expected" tax benefit $6,313,548 $10,485,445 Non-deductible expenses Goodwill (968,479) (995,280) High yield interest, current (2,517,194) (2,063,000) Adjust prior year high yield interest - (340,000) Amortization and write-off of OID (326,298) (2,902,850) Non-deductible capital loss - (920,380) Adjustment of prior year subsidiary tax liabilities - 419,641 Adjustment of NOL carryforward (892,935) - Depreciation 245,526 (1,438,967) Other adjustments 269,941 (238,381) Change in valuation allowance (2,124,109) (1,586,587) -------------------------- ------------------------- Income Tax Benefit - $419,641 ========================== =========================
Page F-18 NOTE 8. INCOME TAX (CONTINUED) Deferred tax assets at December 31, 2000 and 1999 are comprised primarily of net operating loss carryforwards. Deferred tax liabilities consist primarily of the difference between book and tax basis depreciation. A valuation allowance has been provided for net deferred tax assets that the Company has not yet determined to be more likely than not to be realizable at this time. The Company will continue to review this valuation allowance and make adjustments when deemed appropriate. Following is a summary of deferred tax assets and liabilities.
December 31, December 31, 2000 1999 -------------------------- ------------------------- Deferred tax assets Loss carryforwards $10,279,538 $8,514,485 Tax credits 245,769 132,238 -------------------------- ------------------------- 10,525,307 8,646,723 Deferred tax liabilities Depreciation (1,193,441) (1,438,967) -------------------------- ------------------------- Net Deferred Tax Assets $9,331,866 $7,207,756 ========================== ========================= Valuation Allowance $9,331,866 $7,207,756 ========================== =========================
At December 31, 2000, the Company had net operating loss carryforwards of $30,233,934 and tax credit carryforwards of $245,769 that expire in 2001 through 2020. The computed tax benefit at December 31, 2000 was $9,331,866 and at December 31, 1999 was $7,207,756. The amounts and expiration dates of the carryforwards are as follows:
Net Operating Tax Credit Amount EXPIRATION DATE Loss Amount --------------- -------------------------- ------------------------- Non-expiring credits - $245,769 2001 206,140 - 2002 1,502,500 - 2003 142,273 - 2004 94,586 - 2005 1,134 - 2006 141,998 - 2007 46,928 - 2008 304,632 - 2009 249,844 - 2010 879,151 - 2011 2,613,419 - 2012 2,191,002 - 2018 4,555,128 - 2019 9,230,482 - 2020 8,074,717 - -------------------------- ------------------------- Totals $30,233,934 $245,769 ========================== =========================
Page F-19 NOTE 9. RELATED PARTY TRANSACTIONS The father of a former Vice-President of the Company is a participant in the Company's Lease Bank with a note balance of $35,000 at December 31, 2000. On April 25, 1997, the Company obtained a $500,000 short-term financing from two individuals who were subsequently elected directors at the annual shareholders meeting on November 20, 1997. The Company issued 12% senior notes to the individuals, which were exchanged on July 18, 1997, in connection with the Securities Purchase and Exchange Agreement described in Note 11, for 458,333 shares of the Company's common stock, 15,625 shares of Series A preferred stock and 592,009 shadow warrants. As part of this financing transaction, the Company entered into a consulting agreement with a director on July 18, 1997, pursuant to which, in consideration of certain strategic planning and other consulting services to be provided to the Company and its subsidiaries by that individual, he will be paid a quarterly consulting fee equal to one half of 1% of the total investment made by him and certain other persons in debt and equity securities of the Company that is outstanding as of the end of each quarter during the three-year term of such agreement. This agreement was not renewed after the initial three-year term. As of December 31, 2000 and 1999, respectively, the Company owed the director $389,873 and $343,207 in consulting fees under the terms of the agreement, which are included as amounts due to officers and shareholders in the Company's balance sheet. The Company and the director entered into an option agreement providing for the grant of options to purchase 50,000 shares of common stock of the Company to the director at $0.75 per share. In connection with the private placement offering described in Note 11, the Company entered into an investment monitoring agreement with an investment group, under which the Company will pay the investment group an annual fee of $25,000. Two directors of the Company are the two partners of the sole managing member of the investment group. The Company owed the investment group $87,500 and $62,500 as of December 31, 2000 and 1999, respectively, under the terms of the agreement, which are included as amounts due to officers and shareholders on the Company's balance sheet. A director of the Company is a partner of a law firm which provides legal services to the Company related to financing and private placement offering activities. In connection with these activities the Company incurred legal costs from the director's law firm during the years ended December 31, 2000 and 1999, respectively of $35,104 and $123,218. Page F-20 NOTE 10. ACQUISITION OF WHOLLY-OWNED SUBSIDIARIES On January 26, 1998, the Company acquired, effective January 1, 1998, all of the outstanding capital stock of Reliable Exploration Incorporated, a Montana corporation (Reliable), pursuant to the terms of a Stock Purchase Agreement dated 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, primarily in the Rocky Mountain region of the United States. The acquisition of Reliable was accounted for as a purchase, with results of Reliable's operations included in the Company's financial statements from January 1, 1998 forward. The cost of the Company's investment in Reliable was $2,284,375, and the goodwill of $3,053,075 acquired in the purchase was being amortized on a straight-line basis over a forty-year period. On February 23, 2000, the Company sold all of the outstanding capital stock of Reliable to RNS, LLC, a Montana limited liability company (RNS). RNS is wholly-owned by the individuals from whom the Company had previously acquired Reliable in January 1998. An impairment reserve of $2,143,635 was recorded during 1999 as further discussed in Note 19. On April 30, 1998, the Company acquired all of the outstanding capital stock of Geophysical Development Corporation, a Texas corporation (GDC) pursuant to the terms of a Stock Purchase Agreement (GDC Agreement) among the Company, GDC and the holders of all of the outstanding capital stock of GDC. GDC is a Houston, Texas-based provider of seismic data processing, software and consultation services. Pursuant to the GDC Agreement, the Company acquired 6,750 shares of GDC's common stock (GDC shares), representing 100% of the outstanding capital stock of GDC from the shareholders of GDC in exchange for (i) cash in the amount of $26,000,000 and (ii) 1,000,000 newly-issued shares of the Company's common stock. In addition, the Company granted options entitling certain employees of GDC to purchase up to an aggregate of 1,000,000 shares of common stock at an exercise price of $3.00 per share. On April 30, 2000, these options were repriced at an exercise price of $0.50 per share. In return for lowering the exercise price, all previous vesting was surrendered, and a new three-year vesting period was initiated. Effective April 30, 1998, the Company also entered into employment agreements with certain former GDC shareholders, pursuant to which such former GDC shareholders were granted options to purchase up to an aggregate of 400,000 shares of common stock at an exercise price equal to the closing price per share of the common stock on April 30, 1998. The acquisition by the Company of GDC is accounted for as a purchase, with results of GDC's operations included in the Company's financial statements from May 1, 1998 forward. The cost of the Company's investment in GDC is $30,062,500 and the goodwill of $27,961,807 acquired in the purchase is being amortized on a straight line basis over a ten-year period. Amortization expense from the date of acquisition through December 31, 2000 was $4,660,301. Page F-21 NOTE 11. PRIVATE PLACEMENT OFFERINGS & RESTRUCTURING OF DEBT In order to finance the acquisition of GDC, the Company completed a private offering in the amount of $40,000,000 of certain securities designated as its 12.0% Senior Subordinated Notes (Notes) to DLJ Investment Partners, L.P. (DLJ) and certain additional investors (DLJ and certain other investors being referred to herein collectively as the Purchasers) pursuant to the terms of Securities Purchase Agreement dated as of April 30, 1998, by and among the Company and the Purchasers. In addition, the Company (i) caused certain of its wholly-owned subsidiaries to execute guarantees of the Notes pursuant to an Indenture executed by each of them, (ii) granted warrants (Warrants) to the Purchasers entitling them to purchase up to an aggregate of 7,618,594 shares of Common Stock at a price of $2.00 per share, subject to certain adjustments, and (iii) granted certain rights in favor of the Purchasers with respect to the Notes, the Warrants and the shares of Common Stock which may be acquired upon exercise of the Warrants. On October 1, 1999 the Company entered into a Securities Purchase Agreement (Purchase Agreement) with the Purchasers, pursuant to which the Company completed a restructuring of its $40,000,000 12% Senior Subordinated Notes due April 2005 (Prior Notes) and received an additional $4,000,000 from the Purchasers, the holders of the Prior Notes, and $1,000,000 from other sources. On November 30, 1999, the Company received an additional $895,000 from other investors. The restructuring involved the Company exchanging the Prior Notes for its 13.5% Senior Secured Notes due 2005 in the aggregate principal amount of $45,358,000 (the 2005 Notes) and the Company issued $5,895,000 of its 13.5% Senior Secured Notes due 2002 (the 2002 Notes) for the additional funding received on October 1, 1999 and November 30, 1999. The Company granted a security interest covering substantially all of its assets as security for the 2005 Notes and 2002 Notes and caused certain of its wholly-owned subsidiaries to execute guaranties of the 2005 Notes and 2002 Notes. As additional consideration, the Company issued warrants to the Purchasers to acquire 42,594,674 shares of the Company's common stock and issued warrants to the other investors to acquire 7,473,920 shares of the Company's common stock at an exercise price of $.56 per share. The Company issued 7,618,594 of these warrants in exchange for 7,618,594 warrants previously issued to the Purchasers. The warrants expire on September 15, 2006. The Company also recognized additional interest expense of $758,000 upon completion of the restructuring as a result of the interest rate increasing from 12% to 13.5% on accrued unpaid interest. As a result of the issuance of the warrants, the Purchasers, collectively, have the right to acquire 66.5% of the Company's outstanding common stock on a fully diluted basis. As a consequence of the extinguishment of the Prior Notes, the original issue discount and other loan costs associated with the Prior Notes have been expensed and resulted in an extraordinary loss of $8,275,390 during 1999. Concurrently with the transactions contemplated by the Purchase Agreement, the Company completed a restructuring of its debt obligations to the principal equipment supplier for the Company's seismic acquisition operations through a sale leaseback transaction. Page F-22 NOTE 11. PRIVATE PLACEMENT OFFERINGS & RESTRUCTURING OF DEBT (CONTINUED) On April 9, 2001, the Company entered into a Subordination and Amendment Agreement with the holders of the Company's 13.5% Senior Secured Notes due 2002 and 2005 and GeoLease Partners, L.P. (GeoLease), a Delaware limited partnership, pursuant to which the Company completed a restructuring of its 13.5% Senior Secured Notes. The restructuring extends the maturity dates on the 2002 Notes to September 15, 2003 and permits the Company, at its option, to pay interest on each interest payment date, in the form of cash interest or payment in kind ("PIK") interest (the issuance of additional notes) through, but not including, the maturity dates for the 2002 and 2005 Senior Secured Notes. Accrued interest of $2,286,759 at December 31, 2000 has been classified as obligations expected to be refinanced based on the terms of this Agreement. Concurrently with the transactions contemplated by the Subordination and Amendment Agreement, GeoLease purchased the equipment and was assigned the rights under that certain Lease Agreement, dated as of October 1, 1999 (the Equipment Lease), that the Company had entered into with its primary equipment supplier. Upon completion of this transaction, the Company and GeoLease entered into Amendment No. 1 of the Equipment Lease, allowing the Company to defer monthly installments due on the Equipment Lease until the lease expiration date, October 1, 2002. The Company is obligated to pay interest on any monthly installments not paid when due. Any such accrued interest will also be due on the lease expiration date as outlined above. Prior to these Agreements, the Company had been in default under the Equipment Lease due to its inability to pay monthly installments when due since October 2000. The Amendment allows the Company to defer payment of these past due monthly installments in the manner described above. The unpaid lease payments of approximately $843,000 have been classified as an accrued long term lease liability based on the Amendment. The Amendment also includes a provision for the payment by the Company of $1.9 million as deferred rent due on the later of September 15, 2003 and the date that the 13.5% Senior Secured Notes due 2003 are paid in full. NOTE 12. OUTSTANDING OPTIONS AND WARRANTS Under two plans, the Company may grant stock options and other awards to key executive, management and other personnel at exercise prices equal to or exceeding the market value at the date of grant. In general, options become exercisable over a three to five year period from the date of grant and expire five to seven years after the date of grant. Shares available for future option grants at December 31, 2000, totaled 3,438,001. Page F-23 NOTE 12. OUTSTANDING OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes information about stock option transactions: December 31, 2000 December 31, 1999 ------------------------------------- -------------------------------------- Shares Weighted Average Shares Weighted Average Exercise Price Exercise Price ------------------ ------------------ ------------------ ------------------ Outstanding at beginning of year 4,115,999 $1.59 5,307,000 $1.69 Awards: Granted 940,000 .50 100,000 .50 Exercised - - Forfeited (814,000) 2.75 (1,291,001) 1.89 ------------------ ------------------ ------------------ ------------------ Outstanding at December 31 4,241,999 1.13 4,115,999 $1.59 ================== ================== ================== ================== Exercisable at December 31 2,772,165 1.24 2,538,999 $1.36 ================== ================== ================== ==================
The following table summarizes information about stock options outstanding at December 31, 2000:
Range of Exercise Number of Options Weighted Average Number of Options Weighted Average Prices Outstanding Exercise Price Exercisable Exercise Price ---------------------- ---------------------- --------------------- ------------------------------------------ $0-$1 3,349,000 $0.71 2,081,666 $0.79 $1-$2 107,500 1.52 107,500 1.52 $2-$3 487,498 2.41 369,998 2.38 $3-$4 154,668 3.05 129,668 3.05 $4-$5 143,333 4.07 83,333 4.08 ---------------------- --------------------- 4,241,999 2,772,165 ====================== =====================
As permitted under generally accepted accounting principles, stock-based awards granted to employees are accounted for following APB 25. Accordingly, the Company has not recognized compensation expense for its stock-based awards to employees. Outlined below are pro forma results had compensation costs for the Company's stock-based compensation plans been determined based on the fair value approach of SFAS 123. Page F-24 NOTE 12. OUTSTANDING OPTIONS AND WARRANTS (CONTINUED) The weighted average fair value of options granted during 2000 is $0.15. The weighted average fair value of options granted during 1999 is $0.38. The fair value of each option granted is estimated on the date of grant, using the Black-Scholes option-pricing model. The model assumed expected volatility of 50% and risk-free interest rate of 5.9% in 2000 and volatility of 50% and risk-free interest rate of 5.1% in 1999. As the Company has not declared dividends since it became a public entity, no dividend yield was used. The expected life of the options granted ranges from five to seven years. The following table reflects pro forma net income and earnings per share had the Company elected to adopt the fair value approach of SFAS 123:
December 31, December 31, 2000 1999 -------------------------- ------------------------- Net Loss: As reported $(18,569,262) $(30,419,897) Pro Forma (18,950,857) (30,787,776) Basic Earnings per share: As reported $(.98) $(1.57) Pro Forma (1.00) (1.59)
These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period and additional options may be granted in future years. A summary of outstanding warrants issued in connection with notes payable and private placement offerings is as follows:
WARRANTS Shares Exercise Price ------------------------ ---------------------------- Outstanding at December 31, 1999 54,017,676 0.26-3.30 Warrants issued 5,000 .53 Warrants exercised, surrendered or called 339,058 1.50-1.81 ------------------------ ---------------------------- Outstanding at December 31, 2000 53,683,618 0.25-3.30 ======================== ============================ SHADOW WARRANTS Outstanding at December 31, 2000 6,204,967 .20 ======================== ============================ Exercisable at December 31, 2000 6,176,704 .20 ======================== ============================
Page F-25 NOTE 13. COMMITMENTS OPERATING LEASES In October of 1999, the Company consolidated all of its office operations to what formerly had been its geophysical data processing center, located at 8401 Westheimer, Houston, Texas. Prior to this consolidation, the Company's corporate headquarters and seismic acquisition operations had been located at 5555 San Felipe, Houston, Texas. The Company leased office space under two leases which were to expire on June 30, 2003. The Company was able to exercise an option to cancel one of these leases on November 30, 1999 and has successfully sub-leased a significant portion of the remaining lease. The Company's yearly rent on the remaining lease totals $54,320 net of sub-lease income of approximately $60,000. The Company currently leases office space for its headquarters and subsidiary operations under a lease, which expires April 2001. The Company's annual rent under this lease is $243,156, however, rental amounts during 2001 may exceed this amount depending upon market conditions at the time of renewal. The Company's data processing subsidiary, Geophysical Development Corporation (GDC), entered into a lease agreement for computer hardware and software for a thirty-three month period beginning January 1, 1999. Lease payments of $152,736 are due in 2001. GDC has entered into several additional leases for computer hardware and software. The leases vary in length from month to month up to 36 months. Annual lease payments total $395,652. The Company's seismic acquisition subsidiary leased vehicles for use in field operations under various forty-eight month leases which expire beginning in the year 2001. Rental expense under these leases amounted to $211,875 for the year ended December 31, 2000. The Company entered into a lease agreement for seismic acquisition equipment for a thirty-six month term beginning October 1, 1999. Lease payments of $3,377,400 are due in 2001 and $2,533,000 in 2002. The lease was amended on April 9, 2001, as further outlined in Note 17, allowing the Company to defer the monthly installments due on the lease until the expiration of the lease (currently October 1, 2002). Rental expense under the leases recorded in the consolidated financial statements amounted to $4,008,043 and $2,142,759 for the years ended December 31, 2000 and 1999. Aggregate future minimum rental expense and cash requirements under the various lease agreements including the base rent, the average operating cost and lease amendment are as follows:
LEASE CASH FOR THE YEARS ENDING DECEMBER 31, LEASE EXPENSE REQUIREMENT --------------------------------- ------------- ----------- 2001 $4,262,977 885,577 2002 2,761,315 6,138,715 2003 51,151 51,151 --------------------------------------- $7,075,443 $7,075,443 ========================================
Page F-26 NOTE 14. MAJOR CUSTOMERS Revenues from major customers, which exceeded ten percent of total revenues, are as follows:
For the Years Ended December 31, 2000 December 31, 1999 ---------------------------- --------------------------- Customer A $4,037,568 - Customer B - $1,642,000 Customer C - $2,073,262
NOTE 15. CONCENTRATION OF CREDIT RISK Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of unsecured trade receivables. In the normal course of business, the Company provides credit terms to its customers. Accordingly, the Company performs ongoing credit evaluations of its customers and maintains allowances for possible losses which, when realized, have been within the range of management's expectations. The Company generally provides services to a relatively small group of key customers that account for a significant percentage of the accounts receivable of the Company at any given time. The Company's key customers vary over time. The Company extends credit to various companies in the oil and gas industry, including its key customers, for the acquisition of seismic data, which results in a concentration of risk. This concentration of credit risk may be affected by changes in the economic or other conditions of the Company's key customers and may accordingly impact the Company's overall credit risk. The Company wrote off a receivable from a customer of approximately $2.8 million during 1998 as a result of that company's involuntary bankruptcy proceedings. Historical credit losses incurred on receivables by the Company, except for the above, have been immaterial. The Company has cash in bank and short-term investments which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and short-term investments. Page F-27 NOTE 16. FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amounts and fair values of the Company's financial instruments are determined as described in Note 1, Summary of Significant Accounting Policies, Fair Values of Financial Instruments and are summarized as follows:
December 31, 2000 December 31, 1999 Carrying Amount Fair Value Carrying Amount Fair Value ------------------- ------------------ ------------------ ------------------ Cash $1,241,282 $1,241,282 $2,677,996 $2,677,996 Accounts receivable 2,692,932 2,692,932 2,010,381 2,010,381 Accounts payable 2,362,060 2,362,060 1,182,144 1,182,144 Indebtedness 59,780,047 59,780,047 52,975,154 52,975,154
NOTE 17. SUBSEQUENT EVENTS On April 9, 2001, the Company entered into a Subordination and Amendment Agreement with the holders of the Company's 13.5% Senior Secured Notes due 2002 and 2005 and GeoLease Partners, L.P. (GeoLease), a Delaware limited partnership, pursuant to which the Company completed a restructuring of its 13.5% Senior Secured Notes. The restructuring extends the maturity date on the 2002 Notes to September 15, 2003 and permits the Company, at its option, to pay interest on each interest payment date, in the form of cash interest or payment in kind ("PIK") interest (the issuance of additional notes) through, but not including, the maturity dates for the 2002 and 2005 Senior Secured Notes. Concurrently with the transactions contemplated by the Subordination and Amendment Agreement, GeoLease purchased the equipment and was assigned the rights under that certain Lease Agreement, dated as of October 1, 1999 (the Equipment Lease), that the Company had entered into with its primary equipment supplier. Upon completion of this transaction, the Company and GeoLease entered into Amendment No. 1 of the Equipment Lease, allowing the Company to defer the monthly installments due on the Equipment Lease until the lease expiration date, October 1, 2002. The Company is obligated to pay interest on any monthly installment not paid when due. Any such accrued interest will also be due on the lease expiration date as outlined above. Prior to these Agreements, the Company had been in default under the Equipment Lease due to its inability to pay monthly installments when due since October 2000. The Amendment allows the Company to defer payment of these past due monthly installments in the manner described above. The Amendment also includes a provision for the payment by the Company of $1.9 million as deferred rent due on the later of September 15, 2003 and the date that the 13.5% Senior Secured Notes due 2002 are paid in full. Page F-28 NOTE 18. DISCONTINUED OPERATIONS On July 28, 1999, the Company sold all of the outstanding capital stock of HOC Operating Co., Inc. (HOC), a wholly-owned subsidiary of the Company, to Halex Oil Corporation (Halex), a Texas Corporation owned by a former officer of the Company, pursuant to the terms of a Stock Purchase Agreement (HOC Agreement). Pursuant to the HOC Agreement , Halex acquired all of the capital stock of HOC in exchange for the assumption by Halex of certain debt obligations and accounts payable of HOC and Geokinetics Production Company, Inc., a wholly-owned subsidiary of the Company (Geokinetics Production). Immediately prior to the sale of HOC's stock to Halex, Geokinetics Production conveyed to HOC various interests in certain oil and gas properties as well as certain liabilities. This transaction completes the discontinuance of the Company's oil and gas operations. The Company recognized a charge to earnings (before and after tax) during 1999 in the amount of $563,375 as a result of the transaction. This sale represented all of the Company's oil and gas exploration and production activities and has been accounted for as a discontinued operation. Accordingly, operating results are segregated and reported as discontinued operations in the accompanying consolidated statements of operations and cash flows. Information related to the discontinued oil and gas operations of HOC and Geokinetics Production are as follows:
December 31, 1999 ------------------------- Revenue from oil and gas operations $219,096 Operating and other expenses (333,875) Other income 43,285 ------------------------- Loss before and after income taxes $(71,494) =========================
NOTE 19. IMPAIRMENT RESERVE - DISPOSAL OF SUBSIDIARY During 1999, a decision was made that it was in the best interests of the Company to dispose of its wholly-owned subsidiary, Reliable Exploration, Incorporated (Reliable). On February 23, 2000, the Company sold all of the outstanding capital stock of Reliable to RNS, LLC, a Montana limited liability company (RNS). RNS is wholly-owned by Allen Rein, Kim Nordberg and Scott Schmitt (the Former Shareholders), the persons from whom the Company had previously acquired such Reliable stock in January, 1998. The transaction (the Reliable Sale) was completed pursuant to the terms of a Stock Purchase Agreement, by and among the Company, RNS and the Former Shareholders. The consideration received by the Company in the Reliable Sale consisted of (i) a $250,000 promissory note, payable in 36 monthly installments and bearing interest at a fixed rate of 8% per annum and (ii) 375,000 shares of the Company's Common Stock, $0.01 par value per share. In addition, as a condition to the closing of the Reliable Sale, the Company obtained a release of its guaranty of Reliable's indebtedness, in the amount of $501,356, to a former shareholder of Reliable. Page F-29 NOTE 19. IMPAIRMENT RESERVE - DISPOSAL OF SUBSIDIARY (CONTINUED) An impairment reserve of $2,143,635 was recorded during 1999 to provide for the loss on the disposal of Reliable. The impairment reserve is reflected as a reduction of goodwill in 1999. Following is a summary of the results of operations and assets and liabilities of Reliable included in the accompanying consolidated balance sheet and statements of operations as of December 31, 1999.
December 31, 1999 ------------------------- Revenue from seismic operations $1,662,119 Operating and other expenses (2,281,980) Other income (expense) 2,986 ------------------------- (Loss) before income taxes (616,875) Deferred income tax benefit 488,542 ------------------------- Net (Loss) $(128,333) ========================= ASSETS Cash $(10,859) Accounts receivable-trade 449,818 Accounts receivable-officers and employees 8,145 Work-in-process - Prepaid expenses 37,142 ------------------------- Total Current Assets 484,246 ------------------------- Restricted cash 35,000 Property and equipment (net) 147,831 Deposits and other assets 42,780 Deferred tax assets - ------------------------- Total Assets 709,857 ------------------------- LIABILITIES Accounts payable 203,965 Current portion of long-term debt - Accrued expenses and other liabilities 329,903 Notes payable - Long-term debt 501,356 Deferred income tax - Advances from affiliates (net) - ------------------------- Total Liabilities 1,035,224 ------------------------- LIABILITIES IN EXCESS OF ASSETS $(325,367) =========================
No revenue or expense related to Reliable is included in the Company's operating results for 2000, since the transaction was effective January 1, 2000. Page F-30 NOTE 20. SEGMENT DISCLOSURES AND RELATED INFORMATION DESCRIPTION OF REPORTABLE SEGMENTS The Company has two reportable segments, seismic acquisition and data processing, but also presents information for its oil and gas exploration and production segment. The oil and gas exploration and production segment was sold in July of 1999 and has been reflected as a discontinued operation as more fully described in Note 18. The seismic acquisition segment acquires data for clients by conducting seismic shooting operations in the Rocky Mountain and Gulf Coast regions of North America. The seismic data processing segment operates a processing center in Houston, Texas which processes seismic data for oil and gas exploration companies. The oil and gas exploration and production segment operated oil and gas properties in Texas. MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies. The Company evaluates performance based on earnings or loss from operations before interest, taxes, depreciation and amortization. There are no inter-segment sales or transfers. Investment in acquired subsidiaries, amortization of related goodwill, and interest expenses related to financing of acquired business units are accounted for at the Parent Company. FACTORS MANAGEMENT USED TO IDENTIFY REPORTABLE SEGMENTS The Company's reportable segments are strategic business units that offer different services to clients. Each segment is managed separately, has a different client base, and requires unique and sophisticated technology. Page F-31 NOTE 20. SEGMENT DISCLOSURES AND RELATED INFORMATION (CONTINUED) The following table sets forth the Company's significant information from reportable segments (See Note 18 for disposal of the oil and gas production segment):
For the Year Ended December 31, 2000 ------------------------------------------------------------------------------ Seismic Data Processing Oil & Gas Acquisition Production Totals ------------------- ------------------ ------------------ ------------------ Revenues from external 9,688,646 5,984,311 - 15,672,957 customers Segment earnings before (2,527,178) (14,505) - (2,541,683) interest, taxes, depreciation and amortization Interest and Other 5,296 - - 5,296 Revenue Interest Expense 3,426,273 4,430,212 - 7,856,485 Depreciation and 3,813,905 4,018,200 - 7,832,105 Amortization Income Tax Benefit - - - - Segment Profit (Loss) (9,762,060) (8,462,916) - (18,224,976) Segment Assets 13,770,215 28,514,062 - 42,284,277 Expenditures for Segment 140,510 11,443 - 151,953 Assets
Page F-32 NOTE 20. SEGMENT DISCLOSURES AND RELATED INFORMATION (CONTINUED) The following table sets forth the Company's significant information from reportable segments (See Note 18 for disposal of the oil and gas production segment):
For the Year Ended December 31, 1999 ------------------------------------------------------------------------------ Seismic Data Processing Oil & Gas Acquisition Production Totals ------------------- ------------------ ------------------ ------------------ Revenues from external $5,407,895 $8,786,231 $219,096 $14,413,222 customers Segment earnings before (2,821,076) 1,567,598 (68,740) (1,322,218) interest, taxes, depreciation and amortization Interest and Other 21,618 1,990 43,284 66,892 Revenue Interest Expense 3,482,869 3,976,929 37,537 7,497,335 Depreciation and 5,829,979 3,981,991 8,501 9,820,471 Amortization Income Tax Benefit 197,596 - - 197,596 Segment Profit (Loss) (11,914,709) (6,389,332) (71,494) (18,375,535) Segment Assets 16,332,615 32,496,615 - 48,829,230 Expenditures for Segment $18,151 $922,348 - $940,499 Assets
Annual Revenues from major customers, which exceed ten percent of a segment's total revenues are as follows:
Seismic Data Acquisition Processing ------------------- ------------------ December 31, 2000: Customer A $4,037,568 Customer B 1,176,520 December 31, 1999: Customer A $ 820,506 $1,252,756 Customer B - 1,642,600 Customer C 769,500 -
Page F-33 NOTE 20. SEGMENT DISCLOSURES AND RELATED INFORMATION (CONTINUED) The Company's geographic revenue and asset locations is as follows: All of the Company's revenue and asset locations of long-lived assets were geographically within the United States during 2000 and 1999. RECONCILIATIONS OF REPORTABLE SEGMENT REVENUES, PROFIT OR LOSS AND ASSETS
2000 1999 ------------------------ ------------------------ REVENUES Total revenues for reportable segments $15,672,957 $14,413,222 Revenue included with discontinued oil and gas segment - (219,096) ------------------------ ------------------------ Total consolidated revenues $15,672,957 $14,194,126 ------------------------ ------------------------ EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION, DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM Total for reportable segments $(2,541,683) $(1,322,218) Loss from oil and gas operations - 68,740 Provision for disposition of subsidiary - (2,143,635) Unallocated corporate expense (650,231) (1,292,649) ------------------------ ------------------------ Total consolidated earnings before interest, taxes, $(3,191,914) $(4,689,762) depreciation and amortization ------------------------ ------------------------ PROFIT OR LOSS Total profit or loss for reportable segments $(18,224,976) $(18,375,535) Unallocated amounts: Corporate expenses net of interest earnings (563,033) (1,187,557) Interest expense on corporate indebtedness (26,774) (502) Depreciation and amortization (14,600) (95,947) Loss on disposition of oil and gas segment - (563,375) Gain (loss) on extinguishment of debt 260,121 (8,275,391) Provision for disposition of subsidiary - (2,143,635) Deferred tax benefit - 222,045 ------------------------ ------------------------ Total consolidated loss $(18,569,262) $(30,419,897) ------------------------ ------------------------ INTEREST REVENUE Total interest revenue for reportable segments $5,296 $66,892 Revenue included with discontinued oil and gas segment - (43,284) Unallocated amounts: Corporate consolidated cash management 87,199 105,090 ------------------------ ------------------------ Total consolidated interest revenue $92,495 $128,698 ------------------------ ------------------------
Page F-34 NOTE 20. SEGMENT DISCLOSURES AND RELATED INFORMATION (CONTINUED)
2000 1999 ------------------------ ------------------------ INTEREST EXPENSE Total interest expense for reportable segments $7,856,485 $7,497,334 Interest included with discontinued oil and gas segment - (37,537) Unallocated amounts: Corporate interest expense 26,773 501 ------------------------ ------------------------ Total consolidated interest expense $7,883,258 $7,460,298 ======================== ======================== DEPRECIATION AND AMORTIZATION Total depreciation and amortization for reportable segments $7,832,105 $9,820,471 Depreciation included with discontinued oil and gas segment - (8,501) Unallocated amounts: Depreciation and amortization 14,600 95,947 ------------------------ ------------------------ Total consolidated depreciation and amortization $7,846,705 $9,907,917 ======================== ======================== ASSETS Total assets for reportable segments $42,284,277 $48,829,230 Unallocated corporate assets 1,436,557 2,736,228 Elimination of net receivable from corporate (8,485,098) (5,171,527) Impairment reserve for disposal of subsidiary - (2,143,635) ------------------------ ----------------------- Total consolidated assets $35,235,736 $44,250,296 ======================== =======================
Page F-35 EX-10.22 2 a2045163zex-10_22.txt EXHIBIT 10.22 SUBORDINATION AND AMENDMENT AGREEMENT This SUBORDINATION AND AMENDMENT AGREEMENT (this "AGREEMENT") is entered into as of April 9, 2001, by and among GEOKINETICS INC., a Delaware corporation, and its subsidiaries listed on the signature pages hereof (collectively, the "COMPANY"), the holders of the Company's 13 1/2% Senior Secured Notes listed on the signature pages hereof (the "JUNIOR CREDITORS") and GEOLEASE PARTNERS, L.P., a Delaware limited partnership ("LESSOR"). RECITALS A. Concurrently with the execution hereof, (i) Lessor is purchasing the equipment leased to the Company under the Lease Agreement between Input/Output, Inc., as lessor ("IO"), and the Company, as lessee, dated October 1, 1999, as amended to date (the "LEASE AGREEMENT"), from IO, (ii) IO is assigning its rights under the Lease Agreement to Lessor, (iii) Lessor and the Company are entering into Amendment No. 1 to the Lease Agreement attached hereto as EXHIBIT A ("AMENDMENT NO. 1") and (iv) MHR Capital Partners LP ("MHR") is selling and transferring all of its 2002 Notes (as defined below) and 2002 Warrants (as defined below) to IO. B. As an inducement to and as one of the conditions precedent to the acquisition of IO's interest, Lessor requires the execution and delivery of this Agreement by the Junior Creditors and the Company. NOW, THEREFORE, in order to induce Lessor to acquire IO's interest in the Lease Agreement, and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto hereby agree as follows: 1. DEFINITIONS. The following terms shall have the following meanings in this Agreement: COLLECTION ACTION shall mean (a) to demand, sue for, take or receive (other than as permitted hereunder) from or on behalf of the Company by set-off or in any other manner, the whole or any part of any moneys which may now or hereafter be owing by the Company with respect to the Junior Debt, (b) to initiate or participate with others in any suit, action or proceeding against the Company to (i) enforce payment of or to collect the whole or any part of the Junior Debt or (ii) commence judicial enforcement of any of the rights and remedies under the Junior Debt Documents or applicable law with respect to the Junior Debt or the Junior Debt Documents, or (c) to accelerate any Junior Debt. DISQUALIFIED CAPITAL STOCK shall mean that portion of any capital stock of the Company which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the sole option of the holder thereof on or prior to the maturity date for payment of the Senior Obligations. -2- INDENTURE shall have the meaning ascribed to such term in the Junior Notes. JUNIOR DEBT shall mean all of the obligations of the Company to the Junior Creditors evidenced by the Junior Debt Documents. JUNIOR DEBT DOCUMENTS shall mean the Junior Notes and all other documents and instruments pertaining to all or any portion of the Junior Debt. JUNIOR DEFAULT shall mean an "Event of Default" as defined in the Junior Notes, as the same may be amended, supplemented or otherwise modified from time to time as permitted hereunder. JUNIOR DEFAULT NOTICE shall mean a written notice from the Junior Creditors to Lessor pursuant to which Lessor is notified of the occurrence of a Junior Default, which notice incorporates a reasonably detailed description of such Junior Default. JUNIOR NOTES shall mean the Company's 2002 Notes and 2005 Notes. JUNIOR SECURITY shall mean any capital stock (other than Disqualified Capital Stock), any Qualified Rights and any indebtedness of the Company that (i) is subordinated in right of payment to the Senior Obligations at least to the same extent as the Junior Debt, (ii) has no scheduled installment of principal due, by redemption, sinking fund payment or otherwise, on or prior to (a) the last scheduled date for payment of the Senior Obligations (other than in respect of Deferred Rent (as defined in Amendment No. 1)) and (b) with respect to Junior Debt representing obligations relating to 2005 Notes, the scheduled date for payment of the Deferred Rent, and (iii) has no terms more beneficial in the aggregate to the holders thereof other than those in effect with respect to the Junior Debt on the date of this Agreement, including but not limited to the obligation of the Company to pay interest in cash or additional securities prior to the 2005 Maturity Date (as defined in the Indenture). NON-AFFILIATED NOTEHOLDER shall mean any holder of 2002 Notes who (i) is not an Affiliate (as defined in the Lease Agreement) of the Lessor or the Lessee and (ii) owns at least $300,000 of the 2002 Notes; PROVIDED, that each of DLJ Investment Partners, L.P., DLJ Investment Funding, Inc. and DLJ ESC II L.P. or any of their respective Affiliates, so long as it shall be a holder of at least $300,000 of the 2002 Notes, shall be deemed to be an Affiliate of the Lessor. PERSON shall mean an individual, partnership, corporation, unincorporated organization, trust or joint venture, or a governmental agency or political subdivision thereof. PROCEEDING shall mean any voluntary or involuntary insolvency, bankruptcy, receivership, custodianship, liquidation, dissolution, reorganization, assignment for the benefit of creditors, appointment of a custodian, receiver, trustee or other officer with similar powers or any other proceeding for the liquidation, dissolution or other winding up of a Person. QUALIFIED RIGHTS shall mean options, warrants or other rights to purchase capital stock (other than Disqualified Capital Stock), other than any such rights that, by their terms or upon -3- the happening of any event, are mandatorily redeemable or redeemable at the sole option of the holder thereof on or prior to the last scheduled date for payment of the Senior Obligations. SENIOR COVENANT DEFAULT shall mean any "Lease Event of Default" described in the Lease Agreement other than a Senior Payment Default. SENIOR DEFAULT shall mean any Senior Payment Default or Senior Covenant Default. SENIOR DEFAULT NOTICE shall mean a written notice from Lessor to the Company pursuant to which the Company is notified of the occurrence of a Senior Covenant Default, which notice incorporates a reasonably detailed description of such Senior Covenant Default. SENIOR OBLIGATIONS shall mean (a) with respect to the Junior Notes, all obligations for "Rent" and "Supplemental Rent" described in the Lease Agreement, and all interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable thereunder, together with (i) all complete or partial refinancings of the Senior Obligations and any amendments, modifications, renewals or extensions of any of the foregoing consistent with the terms of this Agreement and (ii) any interest accruing on the foregoing after the commencement of a Proceeding, without regard to whether or not such interest is an allowed claim, and (b) with respect to the 2005 Notes, all obligations for Deferred Rent (as defined in Amendment No. 1), as such obligations shall be amended, modified, renewed or extended, and all interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable thereunder (but subject to Section 3). SENIOR OBLIGATIONS DOCUMENTS shall mean the Lease Agreement and all other documents and instruments evidencing or pertaining to all or any portion of the Senior Obligations. SENIOR PAYMENT DEFAULT shall mean any default in payment of Senior Obligations (whether before or after acceleration thereof). THIRD PARTY HOLDERS shall mean holders of Junior Debt and Warrants, as applicable, other than IO and MHR. 2002 NOTES shall mean the Company's 13 1/2% Senior Secured Notes due 2002 in thE aggregate principal amount of up to $6,837,338, which term shall include the guarantees annexed thereto. 2002 WARRANTS shall mean warrants issued in connection with the issuance of the 2002 Notes. 2005 NOTES shall mean the Company's 13 1/2% Senior Secured Notes due 2005 in the aggregate principal amount of up to $51,687,993, which term shall include the guarantees annexed thereto. 2005 WARRANTS shall mean warrants issued in connection with the issuance of the 2005 Notes. VOTING RIGHTS shall have the meaning ascribed to such term in Section 10. WARRANT AGREEMENT shall mean the Amended and Restated Warrant Agreement among Geokinetics, Inc. and the Junior Creditors dated as of April 30, 1998 and Amended and Restated as of October 1, 1999 pursuant to which the Warrants were issued. WARRANTS shall mean the 2002 Warrants and the 2005 Warrants. 2. SUBORDINATION. 2.1 SUBORDINATION OF JUNIOR DEBT TO SENIOR OBLIGATIONS. The Company covenants and agrees, and each Junior Creditor by its execution of this Agreement or its acceptance of the Junior Notes upon transfer or assignment, likewise covenants and agrees that the payment of any and all of the Junior Debt shall be subordinate and subject in right of payment, to the extent and in the manner hereinafter set forth, to the prior payment in full of the Senior Obligations, and that each holder of Senior Obligations, whether now outstanding or hereafter created, incurred, assumed or guaranteed, shall be deemed to have acquired Senior Obligations in reliance upon the provisions contained in this Agreement. 2.2 PROCEEDINGS. In the event of any Proceeding involving the Company, (a) all Senior Obligations first shall be paid in full in cash before any payment of or with respect to the Junior Debt shall be made, (b) any payment or distribution, whether in cash, property or securities which, but for the terms hereof, otherwise would be payable or deliverable in respect of the Junior Debt (other than Junior Securities), shall be paid or delivered directly to Lessor (to be held and/or applied by Lessor in accordance with the terms of the Lease Agreement) until all Senior Obligations are paid in full, and each Junior Creditor irrevocably authorizes, empowers and directs all receivers, trustees, liquidators, custodians, conservators and others having authority in the premises to effect all such payments and distributions, and each Junior Creditor also irrevocably authorizes, empowers and directs Lessor to demand, sue for, collect and receive every such payment or distribution, (c) each Junior Creditor agrees to execute and deliver to Lessor or its representatives all such further instruments confirming the authorization referred to in the foregoing clause (b), (d) each Junior Creditor agrees not to initiate or prosecute or encourage any other person to initiate or prosecute any claim, action or other proceeding challenging the enforceability of the Senior Obligations or any liens and security interests securing the Senior Obligations, and (e) each Junior Creditor agrees to execute, verify, deliver and file any proofs of claim in respect of the Junior Debt requested by Lessor in connection with any such Proceeding and hereby irrevocably authorizes, empowers and appoints Lessor its agent and attorney-in-fact to (i) execute, verify, deliver and file such proofs of claim in respect of the Junior Debt in connection with such proceeding upon the failure of such Junior Creditor to do so prior to 30 days before the expiration of the time to file any such proof of claim and (ii) vote such claim in any such Proceeding upon the failure of such Junior Creditor to do so prior to 5 business days before the expiration of the time to vote any such claim; PROVIDED, that Lessor shall have no obligation to execute, verify, deliver, file and/or vote any such proof of claim. In the event that Lessor votes any claim in accordance with the authority granted hereby, such Junior Creditor shall not be entitled to change or withdraw such vote. The Senior Obligations shall continue to be treated as Senior Obligations and the provi- -5- sions of this Agreement shall continue to govern the relative rights and priorities of Lessor and Junior Creditors even if all or part of the Senior Obligations or the security interests securing the Senior Obligations are subordinated, set aside, avoided or disallowed in connection with any such Proceeding and this Agreement shall be reinstated if at any time any payment of any of the Senior Obligations is rescinded or must otherwise be returned by any holder of Senior Obligations or any representative of such holder. 2.3 PAYMENT UPON SENIOR DEFAULT. The Company may not make and no Junior Creditor may receive any payment of principal, interest or any other amount due with respect to the Junior Debt (other than Junior Securities) if, at the time of such payment: (a) A Senior Payment Default exists and such Senior Payment Default shall not have been cured or waived in accordance with the terms of the Senior Obligations Documents, or (b) Subject to subsection 2.3(d), (i) the Company shall have received a Senior Default Notice from Lessor stating that a Senior Covenant Default exists or would be created by the making of such payment, (ii) each such Senior Covenant Default shall not have been cured or waived in accordance with the terms of the Senior Obligations Documents, and (iii) 180 days shall not have elapsed since the date such Senior Default Notice was received. Lessor and the Company agree to furnish each Junior Creditor any Senior Default Notice within five business days of the delivery thereof to the Company; PROVIDED, that the failure to provide such notice shall not affect the validity of the provisions of this subsection 2.3. (c) The Company may resume payments (and may make any payments missed due to the application of clause (a) or (b) of this subsection 2.3) in respect of the Junior Debt or any judgment with respect thereto: (1) In the case of a Senior Payment Default referred to in clause (a) of this subsection 2.3, upon a cure or waiver thereof in accordance with the terms of the Senior Obligations Documents; or (2) In the case of a Senior Covenant Default referred to in clause (b) of this subsection 2.3, upon the earlier to occur of (x) the cure or waiver thereof in accordance with the terms of the Senior Obligations Documents or (y) the expiration of such 180-day period described in subsection 2.3(b)(iii). (d) Notwithstanding any provision of this subsection 2.3 to the contrary: (1) The Company shall not be prohibited from making, and the Junior Creditors shall not be prohibited from receiving, payments under clause (b) of this subsection 2.3 for more than an aggregate of 180 days within any period of 360 consecutive days; -6- (2) No Senior Covenant Default existing on the date any notice is given pursuant to clause (b)(i) of this subsection 2.3 shall, unless the same shall have ceased to exist for a period of at least 30 consecutive days, be used as a basis for any subsequent such notice; and (3) The failure of the Company to make any payment with respect to the Junior Debt by reason of the operation of this subsection 2.3 shall not be construed as preventing the occurrence of a Junior Default under the applicable Junior Debt Documents. The provisions of this subsection 2.3 shall not apply to any payment with respect to which subsection 2.2 would be applicable. 2.4 PAYMENTS OTHERWISE PERMITTED. Nothing contained in this Section 2 or elsewhere in this Agreement or in the Junior Debt Documents shall prevent the Company at any time, except during the pendency of any Proceeding referred to in subsection 2.2 or under the conditions referred to in subsection 2.3, from making, or Junior Creditors from receiving, (i) scheduled payments of accrued interest on the Junior Notes, (ii) payments of principal and accrued interest on the Junior Notes at maturity and (iii) other payments (excluding payments of principal or interest on the Junior Notes) with respect to the Junior Debt when and as due under the Junior Debt Documents. 2.5 RESTRICTION ON ACTION BY JUNIOR CREDITOR. (a) Until the Senior Obligations are paid in full in cash, no Junior Creditor shall, without the prior written consent of Lessor, take any Collection Action with respect to the Junior Debt, except as permitted in the following sentence. Upon the earliest to occur of: (i) acceleration of the Senior Obligations; or (ii) a Proceeding involving the Company; or (iii) the passage of 90 days from the date Lessor receives written notice of the occurrence of any Junior Default if such Junior Default shall not have been cured or waived within such period; Junior Creditors owning twenty-five percent of the Junior Debt may, upon five business days' prior written notice to Lessor, accelerate the Junior Debt or take any other Collection Action which is not inconsistent with or in contravention of the enforcement actions taken by the holders of the Senior Obligations and the provisions of this Agreement; PROVIDED, HOWEVER, that if following the acceleration of the Senior Obligations as described in clause (i) above, such acceleration is rescinded, then all Collection Actions taken by Junior Creditor shall likewise be rescinded if such Collection Action is based solely on clause (i) above; PROVIDED, FURTHER, no Collection Action may be taken with respect to a payment blockage period under subsection 2.3(a) or (b), prior to the earlier to occur of the cure or waiver of the event giving rise to such payment blockage period under this Agreement or the expira- -7- tion of 90 days after the commencement of such payment blockage period (although, in each instance, notice of the Junior Creditors' intent to exercise legal remedies may be given during such period). Such five business day notice may be given during the 90-day period described in clause (iii) above. (b) Until the Senior Obligations are paid in full in cash and notwithstanding anything contained in the Junior Debt Documents, the Lease Agreement or the other Senior Obligations Documents to the contrary, the Junior Creditors shall not, without the prior written consent of Lessor, agree to any amendment, modification or supplement to the Junior Debt Documents which (i) increases the maximum principal amount of the Junior Debt or rate of interest on any of the Junior Debt, (ii) makes more restrictive or adds any event of default or any covenant with respect to the Junior Debt, (iii) changes the redemption or prepayment provisions of the Junior Debt, (iv) alters the subordination provisions with respect to the Junior Debt, including, without limitation, subordinating the Junior Debt to any other debt, (v) changes the maturity date of any of the Junior Debt or otherwise alters the repayment terms of the Junior Debt, (vi) grants any liens or security interests in any assets of the Company (other than any such liens or security interests in effect on the date hereof) or (vii) changes or amends any other term of the Junior Debt Documents if such change or amendment would result in a "Lease Default" or "Lease Event of Default" under the Lease Agreement, materially increase the obligations of the Company or confer additional material rights on the Junior Creditors or any other holder of the Junior Debt in a manner adverse to the Company or Lessor. 2.6 INCORRECT PAYMENTS. If any payment or distribution on account of the Junior Debt not permitted to be made by the Company or received by any Junior Creditor under this Agreement is received by such Junior Creditor before all Senior Obligations are paid in full such payment or distribution shall not be commingled with any asset of such Junior Creditor, shall be held in trust by such Junior Creditor for the benefit of Lessor and shall be promptly paid over to Lessor, or Lessor's designated representative, for application (in accordance with the Lease Agreement) to the payment of the Senior Obligations then remaining unpaid, until all of the Senior Obligations are paid in full. 2.7 SALE, TRANSFER, ETC. No Junior Creditor shall sell, assign, pledge, dispose of or otherwise transfer all or any portion of the Junior Debt (a) without giving prior written notice of such action to Lessor, (b) unless prior to the consummation of any such action, the transferee thereof shall execute and deliver to Lessor an agreement substantially identical to this Agreement, providing for the continued subordination and forbearance of the Junior Debt to the Senior Obligations as provided herein and for the continued effectiveness of all of the rights of Lessor arising under this Agreement and (c) unless such sale, assignment, pledge, disposition or other transfer is permitted under the terms of the Junior Debt Documents. Notwithstanding the failure to execute or deliver any such agreement, the subordination effected hereby shall survive any sale, assignment, pledge, disposition or other transfer of all or any portion of the Junior Debt, and the terms of this Agreement shall be binding upon the successors and assigns of the Junior Creditors, as provided in Section 15 below. 2.8 LEGENDS. Until the Senior Obligations are paid in full in cash, at the option of Lessor, the Junior Notes shall contain in a conspicuous manner the following legend: -8- "This Note and the indebtedness evidenced hereby are subordinate, in the manner and to the extent set forth in the Subordination and Amendment Agreement dated as of April 6, 2001 among Geokinetics Inc. and the other parties thereto. Each holder of this Note, by its acceptance hereof, shall be bound by the provisions of the Subordination and Amendment Agreement." 2.9 NO CONTEST BY JUNIOR CREDITORS. Each Junior Creditor agrees that it will not at any time contest the validity, perfection, priority or enforceability of the Senior Obligations, the Senior Obligations Documents, or the liens and security interests of Lessor in the collateral securing the Senior Obligations. 3. MODIFICATIONS TO SENIOR OBLIGATIONS. Lessor may at any time from time to time without the consent of or notice to the Junior Creditors, without incurring liability to the Junior Creditors and without impairing or releasing the obligations of the Junior Creditors under this Agreement, change the manner or place of payment or extend the time of payment of or renew or alter any Senior Obligations in respect of the Lease Agreement, or amend in any manner any agreement, note, guaranty or other instrument evidencing or securing or otherwise relating to any Senior Obligations in respect of the Lease Agreement; PROVIDED, that any such amendment that (i) increases the maximum amount of the Senior Obligations, (ii) shortens the maturity date for payment of the Senior Obligations or (iii) amends any of the other economic terms of the Lease Agreement in a manner which could reasonably be expected to be adverse to the Junior Creditors, shall require the consent of the majority in interest of the Non-Affiliated Noteholders. 4. CONTINUED EFFECTIVENESS OF THIS AGREEMENT. The terms of this Agreement, the subordination effected hereby, and the rights and the obligations of the Junior Creditors or Lessor arising hereunder, shall not be affected, modified or impaired in any manner or to any extent by: (a) any amendment or modification of or supplement to the Lease Agreement, any of the other Senior Obligations Documents or any of the Junior Debt Documents made in accordance with this Agreement; (b) the validity or enforceability of any of such documents; or (c) any exercise or non-exercise of any right, power or remedy under or in respect of the Senior Obligations or the Junior Debt or any of the instruments or documents referred to in clause (a) above. The Junior Creditors and each holder of Junior Debt hereby acknowledge that the provisions of this Agreement are intended to be enforceable at all times, whether before the commencement of, after the commencement of, in connection with or premised on the occurrence of a Proceeding. 5. REPRESENTATIONS AND WARRANTIES OF JUNIOR CREDITORS. Each Junior Creditor, as to itself, hereby severally represents and warrants to Lessor as follows: 5.1 EXISTENCE AND POWER. If not a natural person, such Junior Creditor is a corporation, partnership or limited liability company duly organized, validly existing and in good standing under the laws of the state of its organization. 5.2 AUTHORITY. Such Junior Creditor has full power and authority to enter into, execute, deliver and carry out the terms of this Agreement, all of which have been duly authorized by all proper and necessary action and are not prohibited by its constituent documents. -9- 5.3 BINDING AGREEMENTS. This Agreement, when executed and delivered, will constitute the valid and legally binding obligation of such Junior Creditor enforceable in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by equitable principles. 5.4 CONFLICTING AGREEMENTS; LITIGATION. No provisions of any mortgage, indenture, contract, agreement, statute, rule, regulation, judgment, decree or order binding on such Junior Creditor conflicts with, or requires any consent, which has not already been obtained under, or would in any way prevent the execution, delivery or performance of the terms of this Agreement by such Junior Creditor. 5.5 TITLE. Such Junior Creditor is the current owner and holder of the Junior Notes set forth on SCHEDULE 1 hereto free and clear of any liens, security interests or other encumbrances (other than the provisions of this Agreement). 6. REPRESENTATIONS AND WARRANTIES OF LESSOR. Lessor, hereby represents and warrants to the Junior Creditors, as follows: 6.1 EXISTENCE AND POWER. Lessor is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Delaware. 6.2 AUTHORITY. Lessor has full power and authority to enter into, execute, deliver and carry out the terms of this Agreement, all of which have been duly authorized by all proper and necessary action and are not prohibited by its constituent documents. 6.3 BINDING AGREEMENTS. This Agreement, when executed and delivered, will constitute the valid and legally binding obligation of Lessor enforceable in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by equitable principles. 6.4 CONFLICTING AGREEMENTS; LITIGATION. No provisions of any mortgage, indenture, contract, agreement, statute, rule, regulation, judgment, decree or order binding on Lessor conflicts with, or requires any consent, which has not already been obtained under, or would in any way prevent the execution, delivery or performance of the terms of this Agreement by Lessor. 6.5 TITLE. Lessor is the current owner and holder of the Senior Obligations free and clear of any liens, security interests or other encumbrances (other than the provisions of this Agreement). 7. AMENDMENT AND WAIVER. 7.1 JUNIOR NOTES AND INDENTURE. The Junior Creditors hereby waive all Defaults or Events of Default (as such terms are defined in the Indenture), if any, which have occurred -10- under the Junior Notes or the Indenture through the date of this Agreement, and the Junior Creditors and the Company hereby (i) amend the Indenture to delete Section 4.27 (Cash Maintenance) in its entirety, (ii) amend the 2002 Notes and the Indenture by changing the 2002 Maturity Date (as defined in the Indenture) to September 15, 2003, (iii) amend the 2002 Notes, the 2005 Notes and the Indenture to permit the Company to pay interest on each Interest Payment Date (as defined in the Indenture) to but not including the applicable Maturity Date (as defined in the Indenture) in the form of Cash Interest (as defined in the Indenture) or PIK Interest (as defined in the Indenture) under Section 2.12 (Payment of Interest; Defaulted Interest) of the Indenture and Paragraph 2 (Interest) of each of the Junior Notes, and (iv) amend the Junior Notes and the Indenture by replacing Section 9.02 of the Indenture (incorporated in paragraph 12 of the Junior Notes) in its entirety with the following: "SECTION 9.02.WITH CONSENT OF HOLDERS. (a) Subject to Section 6.07, the Company and the Guarantors, when authorized by a Board Resolution, and the Trustee, together, with the written consent of the Holder or Holders of at least a majority in aggregate principal amount of the outstanding Notes, may amend or supplement this Indenture, the Notes, any Guarantee or any Security Document, without notice to any other Holders. Subject to Section 6.07, the Holder or Holders of a majority in aggregate principal amount of the outstanding Notes may waive compliance by the Company or the Guarantors with any provision of this Indenture, the Notes, the Guarantees or the Security Documents without notice to any other Holder. (b) No amendment, supplement or waiver, including a waiver pursuant to Section 6.04, shall, without the consent of each Holder of each Note affected thereby other than MHR Capital Partners LP and its Affiliates ("MHR") (PROVIDED that the consent of MHR under this Section 9.02(b) shall be required (i) if (a) MHR is then a Holder of 2005 Notes and (b) such amendment, supplement or waiver could reasonably be expected to (x) adversely affect MHR's rights or liabilities in a manner materially different than the rights of other Holders of 2005 Notes (except with respect to the voting rights/consent provisions contained in any instruments into which 2005 Notes may be converted, exercised or exchanged for or into or this Indenture or the 2005 Notes, as such may be amended or supplemented, which in all cases may be similar or no less favorable to MHR in all material respects to those set forth in this Section 9.02(b)) or (y) create an obligation for MHR to contribute additional funds, or (ii) to the extent otherwise required by the TIA if this Indenture is then required to be qualified under the TIA): (1) reduce the amount of Notes whose Holders must consent to an amendment; (2) reduce the rate of or change or have the effect of changing the time for payment of interest, including defaulted interest, on any Notes; -11- (3) reduce the principal of or change or have the effect of changing the fixed maturity of any Notes, or change the date on which any Notes may be subject to redemption or repurchase, or reduce the redemption or repurchase price therefor; (4) make any Notes payable in money other than that stated in the Notes; (5) make any change in provisions of this Indenture protecting the right of each Holder to receive payment of principal of and interest on such Note or Guarantee on or after the due date thereof or to bring suit to enforce such payment, or permitting Holders of a majority in principal amount of Notes to waive Defaults or Events of Default, other than ones with respect to the payment of principal of or interest on the Notes; (6) amend, modify, change or waive any provision of this Section 9.02; (7) amend, modify or change in any material respect the obligation of the Company to make or consummate a Change of Control Offer in the event of a Change of Control or make and consummate a Net Proceeds Offer in respect of any Asset Sale that has been consummated or modify any of the provisions or definitions with respect thereto after a Change of Control has occurred or the subject Asset Sale has been consummated; (8) release any Guarantor from any of its obligations under its Guarantee or this Indenture otherwise than in accordance with the terms hereof; (9) modify Article Eleven or the definitions used in Article Eleven to adversely affect the Holders of the Notes in any material respect; (10) after the original issuance date of the Notes, amend, modify, change or waive the priority in right of payment of the Holders of the 2002 Notes set forth in Sections 3.02, 4.15, 4.16 and 6.10; or (11) effect a recapitalization of securities of the Company or a merger, including but not limited to the conversion or exchange of the 2005 Notes into or for equity or other debt securities of the Company or a successor thereto or any other Person. It shall not be necessary for the consent of the Holders under this Section 9.02 to approve the particular form of any proposed amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof. -12- After an amendment, supplement or waiver under this Section 9.02 becomes effective, the Company shall mail to the Holders affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture." 7.2 WARRANT AGREEMENT. The Junior Creditors and Geokinetics, Inc. hereby amend the Warrant Agreement by replacing Section 15 (Supplements and Amendments) in its entirety with the following: "SECTION 15. SUPPLEMENTS AND AMENDMENTS. The Company may from time to time supplement or amend this Agreement without the approval of any holders of Warrant Certificates in order to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provision herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company may deem necessary or desirable and which shall not in any way adversely affect the interests of the holders of Warrant Certificates. Any amendment or supplement to this Agreement that has an adverse effect on the interests of holders shall require the written consent of registered holders of two-thirds of the then outstanding Warrant Shares issued or issuable upon exercise of the Warrants (excluding Warrant Shares held by the Company or any of its Affiliates). The consent of each holder of a Warrant affected other than MHR Capital Partners LP and its Affiliates ("MHR") (PROVIDED that the consent of MHR under this Section 15 shall be required if (a) MHR is then a holder of 2005 Warrants and (b) such amendment or supplement could reasonably be expected to (x) adversely affect MHR's rights or liabilities in a manner materially different than the rights of other holders of 2005 Warrants (except with respect to the voting rights/consent provisions contained in any instruments into which 2005 Warrants may be converted, exercised or exchanged for or into or this Agreement or the 2005 Warrants, as such may be amended or supplemented, which in all cases may be similar or no less favorable to MHR in all material respects to those set forth in this Section 15) or (y) create an obligation for MHR to contribute additional funds (other than the payment of the Exercise Price applicable to all holders of 2005 Warrants)) shall be required for any amendment pursuant to which the number of Warrant Shares purchasable upon exercise of Warrants would be decreased (other than in accordance with Section 10 or 11 hereof)." 8. CUMULATIVE RIGHTS, NO WAIVERS. Each and every right, remedy and power granted to Lessor hereunder shall be cumulative and in addition to any other right, remedy or power specifically granted herein, in the Lease Agreement or the other Senior Obligations Documents or now or hereafter existing in equity, at law, by virtue of statute or otherwise, and may be exercised by Lessor, from time to time, concurrently or independently and as often and in such order as Lessor may deem expedient. Any failure or delay on the part of Lessor in exercising any such right, remedy or power, or abandonment or discontinuance of steps to enforce the same, shall not operate as a waiver -13- thereof or affect the rights of Lessor thereafter to exercise the same, and any single or partial exercise of any such right, remedy or power shall not preclude any other or further exercise thereof or the exercise of any other right, remedy or power, and no such failure, delay, abandonment or single or partial exercise of the rights of Lessor hereunder shall be deemed to establish a custom or course of dealing or performance among the parties hereto. 9. MODIFICATION. Any modification or waiver of any provision of this Agreement shall not be effective in any event unless the same is in writing and signed by Lessor and the majority in interest of the Junior Creditors (including the majority in interest of such Junior Creditors that are Non-Affiliated Noteholders), and then such modification or waiver shall be effective only in the specific instance and for the specific purpose given. Any notice to or demand on the Junior Creditors in any event not specifically required of Lessor hereunder shall not entitle the Junior Creditors to any other or further notice or demand in the same, similar or other circumstances unless specifically required hereunder. 10. VOTING RIGHTS. IO agrees that upon any vote of holders of Junior Debt and/or Warrants it shall vote all of its interests in such Junior Debt and/or Warrants in accordance with the votes cast by at least 66-2/3% of the interests in such Junior Debt and/or Warrants voted by Third Party Holders (the "VOTING RIGHTS"); PROVIDED, that IO shall not be required to vote its interests under this Section 10 in any manner that would materially adversely affect its rights as a holder of 2002 Notes relative to the rights of other holders of 2002 Notes. IO agrees that the grant of the Voting Rights is irrevocable and deemed coupled with an interest. 11. ADDITIONAL DOCUMENTS AND ACTIONS. The Junior Creditors at any time, and from time to time, after the execution and delivery of this Agreement, promptly will execute and deliver such documents and do such further acts and things as Lessor reasonably may request that may be necessary in order to effect fully the purposes of this Agreement. 12. SUBROGATION TO RIGHTS OF LESSOR. Subject to the payment in full of all Senior Obligations, the Junior Creditors shall be subrogated to the rights of Lessor to receive payments and distributions of cash, property and securities applicable to the Senior Obligations to the extent that distributions otherwise payable to the Junior Creditors have been applied to the Senior Obligations, until all amounts payable under the Junior Debt shall have been paid in full. For purposes of such subrogation, no payments or distributions to Lessor of any cash, property or securities to which the Junior Creditors would be entitled except for the provisions of this Agreement, and no payments over pursuant to the provisions of this Agreement to Lessor by the Junior Creditors shall, as among the Company, its creditors other than Lessor and the Junior Creditors, be deemed to be a payment or distribution by the Company to or on account of the Senior Obligations. 13. NOTICES. Unless otherwise specifically provided herein, any notice or other communication required or permitted to be given shall be in writing addressed to the respective party as set forth below and may be personally served, telecopied or sent by overnight courier service or United States mail certified or registered and shall be deemed to have been given (a) if delivered in person, when delivered; (b) if delivered by telecopy, on the date of transmission if transmitted on a -14- business day before 4:00 p.m. (New York time) or, if not, on the next succeeding business day; (c) if delivered by overnight courier, two business days after delivery to such courier properly addressed; or (d) if by United States mail, four business days after deposit in the United States mail, postage prepaid and properly addressed. Notices shall be addressed as follows: (a) If to the Junior Creditors, to their addresses set forth on SCHEDULE 1 hereto: (b) If to the Company: Geokinetics Inc. 8401 Westheimer, Suite 150 Houston, Texas 77063 Attention: Chief Financial Officer Telecopy: (713) 850-7330 with a copy to: Chamberlain, Hrdlicka, White, Williams & Martin 1200 Smith Street, Suite 1400 Houston, Texas 77002-4310 Attention: James J. Spring III, Esq. Telecopy: (713) 658-2553 (c) If to Lessor: GeoLease Partners, L.P. c/o DLJ Merchant Banking Partners II, Inc. 277 Park Avenue New York, New York 10172 Attention: General Counsel Telecopy: (212) 892-7551 with a copy to: Cahill Gordon & Reindel 80 Pine Street New York, New York 10005 Attention: John Schuster, Esq. Telecopy: (212) 269-5420 or in any case, to such other address as the party addressed shall have previously designated by written notice to the serving party, given in accordance with this Section 13. A notice not given as pro- -15- vided above shall, if it is in writing, be deemed given if and when actually received by the party to whom given. 14. SEVERABILITY. In the event that any provision of this Agreement is deemed to be invalid, illegal or unenforceable by reason of the operation of any law or by reason of the interpretation placed thereon by any court or governmental authority, the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby, and the affected provision shall be modified to the minimum extent permitted by law so as most fully to achieve the intention of this Agreement. 15. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of the successors and assigns of Lessor and shall be binding upon the successors and assigns of the Junior Creditors and the Company. 16. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be an original, but all of which taken together shall be one and the same instrument. 17. DEFINES RIGHTS OF CREDITORS. The provisions of this Agreement are solely for the purpose of defining the relative rights of the Junior Creditors and Lessor and shall not be deemed to create any rights or priorities in favor of any other Person, including, without limitation, the Company. Nothing contained in this Agreement or in the Junior Debt Documents or elsewhere is intended to or shall (a) impair, as among the Company, its creditors other than Lessor and the Junior Creditors, the obligation of the Company, which is absolute and unconditional, to pay to each Junior Creditor the Junior Debt as and when the same shall become due and payable, all in accordance with the terms hereof, or (b) affect the relative rights against the Company of the Junior Creditors and other creditors of the Company, or (c) prevent the Junior Creditors from exercising all remedies otherwise permitted by applicable law upon default under the Junior Notes, subject to the limitations upon such rights set forth under this Agreement for the benefit of Lessor. 18. CONFLICT. In the event of any conflict between any term, covenant or condition of this Agreement and any term, covenant or condition of any of the Junior Notes or the Junior Debt Documents, the provisions of this Agreement shall control and govern. 19. HEADINGS. The paragraph headings used in this Agreement are for convenience only and shall not affect the interpretation of any of the provisions hereof. 20. TERMINATION. This Agreement shall terminate upon the indefeasible payment in full in cash of the Senior Obligations and the termination of the Lease Agreement. 21. APPLICABLE LAW. This Agreement shall be governed by, and be construed and interpreted in accordance with, the internal laws (as opposed to conflict of laws provisions) of the State of New York. -16- 22. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. EACH JUNIOR CREDITOR AND THE COMPANY HEREBY CONSENT TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK AND IRREVOCABLY AGREE THAT, SUBJECT TO ELECTION BY LESSOR, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE JUNIOR NOTES, THE JUNIOR DEBT DOCUMENTS OR THE SENIOR OBLIGATIONS DOCUMENTS SHALL BE LITIGATED IN SUCH COURTS. EACH JUNIOR CREDITOR AND THE COMPANY ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS, AND, SUBJECT TO ITS RIGHT TO APPEAL, IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT, THE JUNIOR NOTES, THE JUNIOR DEBT DOCUMENTS OR THE SENIOR OBLIGATIONS DOCUMENTS. NOTHING HEREIN SHALL LIMIT THE RIGHT OF LESSOR TO BRING PROCEEDINGS AGAINST THE JUNIOR CREDITORS OR THE COMPANY IN THE COURTS OF ANY OTHER JURISDICTION. 23. WAIVER OF JURY TRIAL. EACH JUNIOR CREDITOR, THE COMPANY AND LESSOR HEREBY WAIVES ITS RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, ANY OF THE JUNIOR DEBT DOCUMENTS OR SENIOR OBLIGATIONS DOCUMENTS, OR ANY DEALINGS AMONG THE PARTIES TO THIS AGREEMENT RELATING TO THE SUBJECT MATTER OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, THE SENIOR OBLIGATIONS DOCUMENTS AND THE JUNIOR DEBT DOCUMENTS. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH JUNIOR CREDITOR, LESSOR AND THE COMPANY ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THE SENIOR OBLIGATIONS DOCUMENTS AND THIS AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON THIS WAIVER IN ITS RELATED DEALINGS. EACH JUNIOR CREDITOR, LESSOR AND THE COMPANY FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (UNLESS SUCH WRITING MAKES SPECIFIC REFERENCE TO THIS SECTION 23), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT, THE SENIOR OBLIGATIONS DOCUMENTS, THE JUNIOR NOTES, THE JUNIOR DEBT DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE SENIOR OBLIGATIONS OR THE JUNIOR DEBT. IN THE -17- EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. [Remainder of this page intentionally left blank] IN WITNESS WHEREOF, Junior Creditors, the Company and Lessor have caused this Agreement to be executed as of the date first above written. JUNIOR CREDITORS: DLJ INVESTMENT PARTNERS, L.P. By: DLJ INVESTMENT PARTNERS, INC., its General Partner By: ------------------------------------------- Name: Title: DLJ INVESTMENT FUNDING, INC. By: ------------------------------------------- Name: Title: DLJ ESC II L.P. By: DLJ LBO PLANS MANAGEMENT CORPORATION, its General Partner By: ------------------------------------------- Name: Title: SPINDRIFT PARTNERS, L.P. By: WELLINGTON MANAGEMENT COMPANY, LLP, its Investment Advisor By: ------------------------------------------- Name: Title: SPINDRIFT INVESTORS (BERMUDA) L.P. By: WELLINGTON MANAGEMENT COMPANY, LLP, its Investment Advisor By: ------------------------------------------- Name: Title: J.P. MORGAN (BHCA), L.P. (as successor to CHASE EQUITY ASSOCIATES, L.P.) By: JPMP MASTER FUND MANAGER, L.P., its General Partner By: JPMP CAPITAL CORP., its General Partner By: ------------------------------------------- Name: Title: INPUT/OUTPUT, INC. By: ------------------------------------------- Name: Title: MHR CAPITAL PARTNERS LP By: MHR ADVISORS LLC By: ------------------------------------------- Name: Title: Paul B. Loyd, Jr. By: ------------------------------------------- Name: Paul B. Loyd, Jr. WHITTIER VENTURES LLC By: ------------------------------------------- Name: David A. Dahl Title: President SOMERSET CAPITAL PARTNERS By: ------------------------------------------- Name: William R. Ziegler Title: General Partner Steven A. Webster By: ------------------------------------------- Name: Steven A. Webster William R. Ziegler By: ------------------------------------------- Name: William R. Ziegler LEVANT AMERICA S.A. By: ------------------------------------------- Name: Title: ANS LTD. By: ------------------------------------------- Name: Title: SPICEWOOD FAMILY PARTNERS By: ------------------------------------------- Name: Title: Charles E. Murphy, Jr. By: ------------------------------------------- Name: Charles E. Murphy, Jr. Albert Stickney By: ------------------------------------------- Name: Albert Stickney Susan Stickney By: ------------------------------------------- Name: Susan Stickney Amy & George Goldstein Joint Tenant By: ------------------------------------------- Name: Amy Goldstein By: ------------------------------------------- Name: George Goldstein Lawrence Goldstein By: ------------------------------------------- Name: Lawrence Goldstein Paul Majane By: ------------------------------------------- Name: Paul Majane Gary N. Ross By: ------------------------------------------- Name: Gary N. Ross David King By: ------------------------------------------- Name: David King THE COMPANY: GEOKINETICS INC. By: ------------------------------------------- Name: Title: GEOPHYSICAL DEVELOPMENT CORPORATION By: -------------------------------------------- Name: Title: QUANTUM GEOPHYSICAL, INC. By: ------------------------------------------- Name: Title: GEOKINETICS PRODUCTION CO., INC. By: -------------------------------------------- Name: Title: GEOSCIENCE SOFTWARE SOLUTIONS, INC. By: -------------------------------------------- Name: Title: SIGNATURE GEOPHYSICAL SERVICES, INC. By: -------------------------------------------- Name: Title: LESSOR: GEOLEASE PARTNERS, L.P. By: GEOLEASE GP, INC., its General Partner By: -------------------------------------------- Name: Douglas Mark Ladden Title: President EX-10.23 3 a2045163zex-10_23.txt EXHIBIT 10.23 LEASE AGREEMENT Between INPUT/OUTPUT, INC. AND GEOKINETICS INC. Dated October 1, 1999 TABLE OF CONTENTS
PAGE SECTION 1. DEFINITIONS.................................................1 SECTION 2. LEASE.......................................................1 SECTION 3. CERTAIN COSTS...............................................1 SECTION 4. REPRESENTATIONS AND WARRANTIES..............................1 SECTION 5. FINANCIAL AND OTHER REPORTS OF LESSEE.......................3 SECTION 6. TERM AND RENT...............................................4 Section 6.1. Lease Term.............................................4 Section 6.2. Basic Rent.............................................4 Section 6.3. Supplemental Rent......................................4 Section 6.4. Manner of Payments.....................................4 Section 6.5. Sales Tax..............................................5 SECTION 7. OWNERSHIP AND MARKING OF EQUIPMENT; PERSONAL PROPERTY.......5 Section 7.1. Retention of Title.....................................5 Section 7.2. Insignia...............................................5 Section 7.3. Personal Property......................................5 SECTION 8. DISCLAIMER OF WARRANTIES....................................5 SECTION 9. RETURN OF EQUIPMENT.........................................6 Section 9.1. Return of Equipment....................................6 Section 9.2. Condition of Units.....................................7 SECTION 10. LIENS.......................................................8 SECTION 11. MAINTENANCE AND OPERATION; COMPLIANCE WITH LAWS; SUBLEASES..8 Section 11.1. Maintenance and Operation.............................8 Section 11.2. Compliance with Laws, etc.............................8 Section 11.3. Sublease..............................................9 SECTION 12. MODIFICATIONS AND REPLACEMENTS..............................9 Section 12.1. Required Modifications................................9 Section 12.2. Optional Modifications................................9 Section 12.3. Removal of Property, Replacements....................10 SECTION 13. LOSS, DESTRUCTION OR REQUISITION...........................10 Section 13.1. Event of Loss........................................10 Section 13.2. Replacement upon Event of Loss.......................10 Section 13.3. Replacement of Unit..................................10 Section 13.4. Eminent Domain.......................................11 SECTION 14. INSURANCE..................................................11 Section 14.1. Insurance Coverage...................................11 Section 14.2. Certificates and Policies............................11 Section 14.3. Additional Insurance.................................12 SECTION 15. INSPECTION.................................................12 SECTION 16. LEASE EVENTS OF DEFAULT....................................12 SECTION 17. REMEDIES AND CERTAIN COVENANTS.............................13 Section 17.1. Remedies..............................................13 Section 17.2. Cumulative Remedies...................................15 Section 17.3. No Waiver.............................................16 Section 17.4. Notice of Lease Default...............................16 Section 17.5. Lessee's Duty to Return Equipment Upon Default........16 Section 17.6. Specific Performance; Lessor Appointed Lessee's Agent.16 SECTION 18. LESSEE'S INDEMNITIES.......................................16 Section 18.1. Taxes................................................16 Section 18.2. General Indemnification and Waiver of Certain Claims.17 SECTION 19. FURTHER ASSURANCES.........................................20 SECTION 20. LESSOR'S RIGHT TO PERFORM..................................20 SECTION 21. ASSIGNMENT.................................................20 Section 21.1. Assignment by Lessor.................................20 Section 21.2. Assignment by Lessee.................................21 Section 21.3. Sublessee's Performance and Rights...................21 SECTION 22. NET LEASE, ETC.............................................21 SECTION 23. NOTICES....................................................22 SECTION 24. PURCHASE OPTIONS...........................................23 Section 24.1. Election to Retain or Return Equipment at End of Basic or Term........................................23 Section 24.2. Purchase Option......................................23 SECTION 25. MISCELLANEOUS..............................................23 Section 25.1. Merger Covenant......................................23 Section 25.2. No Impairment of Warranties..........................24 Section 25.3. Governing Law, Severability..........................24 Section 25.4. Execution in Counterparts............................24 Section 25.5. Headings and Table of Contents, Section References...24 Section 25.6. Successors and Assigns...............................24 Section 25.7. True Lease...........................................25 Section 25.8. Amendments and Waivers...............................25 Section 25.9. Survival.............................................25 Section 25.10. Business Days........................................25 Section 25.11. UCC Original.........................................25 Section 25.12. Waiver of Trial by Jury..............................26 Section 25.13. Waivers..............................................26
Attachments to Lease Agreement Appendix A - Definitions Schedules: 2 - Equipment 14.1 - Insurance Exhibits: A - Certificate of Acceptance B - Acknowledgment Agreement LEASE AGREEMENT THIS LEASE AGREEMENT, is hereby entered into and dated October 1, 1999 (this "LEASE"), between INPUT/OUTPUT, INC., a Delaware corporation ("LESSOR"), and GEOKINETICS INC., a Delaware corporation ("LESSEE"). RECITALS SECTION 1. DEFINITIONS. Unless the context otherwise requires, all capitalized terms used herein without definition shall have the respective meanings set forth in Appendix A hereto for all purposes of this Lease. All references in this Lease to Sections, Exhibits and Schedules shall refer to Sections of or Exhibits or Schedules attached to this Lease (as applicable) unless the context expressly provides otherwise. SECTION 2. LEASE. This Lease provides the terms and conditions upon which Lessor will lease to Lessee the Units of Equipment listed in Schedule 2, this Lease to be effective not before Lessee's compliance with the terms and conditions of the Restructure Agreement of this same date entered into herewith. SECTION 3. CERTAIN COSTS. Lessee agrees to pay when due the reasonable expenses (including reasonable legal fees and expenses) of the Lessor incurred subsequent to the Closing Date in connection with any supplements, amendments, modifications, alterations, waivers or consents of or with respect to this Lease that are requested by, or necessitated by action or inaction on the part of, Lessee or by any applicable law or regulation (other than laws or regulations solely relating to the business of Lessor) or entered into in connection with, or as a result of, a Lease Default or Lease Event of Default. SECTION 4. REPRESENTATIONS AND WARRANTIES. Lessee represents and warrants to Lessor that: (a) it is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation, is duly licensed or qualified and in good standing in each jurisdiction in which the failure to so qualify would have a material adverse effect on its ability to carry on its business as now conducted or to enter into and perform its obligations under this Lease, has the corporate power and authority to carry on its business as then conducted and has the requisite power and authority to execute, deliver and perform its obligations under this Lease. (b) this Lease has been duly authorized by all necessary corporate action of Lessee (no stockholder approval being required), and have been duly executed and delivered by Lessee and, assuming the due authorization, execution and delivery by the other parties thereto, constitute the legal, valid and binding obligations of Lessee, enforceable against Lessee in accordance with their respective terms except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally and by general principles of equity. (c) the execution, delivery and performance by Lessee of this Lease and each Lease Schedule, and compliance by Lessee with all of the provisions thereof, do not contravene any law or regulation, or any order of any court or Governmental Authority applicable to or binding on Lessee or any of its properties, or contravene the provisions of, or constitute a default by Lessee under, or result in the creation of any Lien upon the property of Lessee under its certificate of incorporation, by-laws or other organizational documents or any indenture, mortgage, contract or other agreement or instrument to which Lessee is a party or by which Lessee or any of its property is bound or affected. (d) there are no proceedings pending or, to the knowledge of Lessee, threatened against Lessee or any Subsidiary of Lessee in any court or before any Governmental Authority or arbitration board or tribunal that individually or in the aggregate could reasonably be expected to materially and adversely affect the financial condition or business of Lessee and its Subsidiaries, taken as a whole, or impair the ability of Lessee to perform its obligations under this Lease or any lease Schedule, or that question the validity of this Lease or any Lease Schedule or any action taken or to be taken pursuant thereto. Neither Lessee nor any Subsidiary thereof is in default with respect to any order of any court or Governmental Authority or arbitration board or tribunal, the default under which would affect adversely the ability of Lessee to perform its obligations under this Lease and each Lease Schedule. (e) no consent, approval or authorization of, or filing, registration or qualification with, or the giving of notice to, any trustee or any holder of indebtedness of Lessee or any Governmental Authority is required in connection with the execution and delivery by Lessee of this Lease and each Lease Schedule. (f) no Tax Liens have been filed and no claims are being asserted with respect to any material Taxes, fees or other charges that could reasonably be expected to have a materially adverse effect on its ability to perform its obligations under this Lease or any Lease Schedule. (g) no Lease Default or Lease Event of Default has occurred and is continuing and to the knowledge of Lessee, no Event of Loss, or event with which the giving of notice and/or the passage of time would constitute an Event of Loss, has occurred. (h) Lessee is not an "INVESTMENT COMPANY" or an "AFFILIATED PERSON" of an "INVESTMENT COMPANY" within the meaning of the Investment Company Act of 1940. (i) none of the transactions contemplated by the Operative Agreements will result in a violation of Section 7 of the Securities Exchange Act of 1934, as amended, or any regulations issued pursuant thereto, including, without limitation, Regulations G, T, U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II. -2- (j) Lessee is not in violation of any term of any charter instrument, by-law or in any material respect of any other material agreement or instrument to which it is a party or by which it may be bound. Lessee is in compliance with all laws, ordinances, governmental rules and regulations to which it is subject, the failure to comply with which would have a material and adverse effect on its operations or condition, financial or otherwise, or would impair its ability to perform its obligations under this Lease or any Lease Schedule, and has obtained all licenses, permits, franchises and other governmental authorizations material to the conduct of its business. (k) no broker's or finder's or placement fee or commission will be payable with respect to the transactions contemplated by this Lease or any Lease Schedule as a result of any action by Lessee, and Lessee agrees that it will hold Lessor harmless from any claim, demand or liability for any other broker's or finder's or placement fees or commission alleged to have been incurred as a result of any action by Lessee in connection with such transactions. (l) Lessee is not subject to regulation as a "HOLDING COMPANY", an "AFFILIATE" of a "HOLDING COMPANY", or a "SUBSIDIARY COMPANY" of a "HOLDING COMPANY," within the meaning of the Public Utility Holding Company Act of 1935, as amended. SECTION 5. FINANCIAL AND OTHER REPORTS OF LESSEE. Lessee agrees that it will furnish or cause to be furnished directly to the Lessor each of the following: (a) unless included in a Form 10-Q SB delivered pursuant to Section 5(c) within the 60-day period specified in this clause (a), as soon as available and in any event within 60 days after the end of each quarterly period, except the last, of each fiscal year, the consolidated balance sheet of Lessee and its consolidated Subsidiaries as at the end of such period, together with the related consolidated statements of income and cash flows of Lessee and its consolidated Subsidiaries for the period beginning on the first day of such fiscal year and ending on the last day of such quarterly period, setting forth in each case (except for the consolidated balance sheet) in comparative form the figures for the corresponding periods of the previous fiscal year, all in reasonable detail and prepared in accordance with generally accepted accounting principles, except that such statements may be without footnotes and subject to year end revision; (b) unless included in a Form 10-K SB delivered under Section 5(c) within the 120-day period specified in this clause (b), as soon as available and in any event within 120 days after the last day of each fiscal year, a copy of Lessee's audited financial statements covering the operations of Lessee and its consolidated Subsidiaries, including a consolidated balance sheet, and related consolidated statements of income and cash flows of Lessee and its consolidated Subsidiaries for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and prepared in accordance with generally accepted accounting principles applied on a consistent basis, which statements will have been certified by a firm of independent certified public accountants selected by Lessee; -3- (c) as soon as available, one copy of each Annual Report on Form 10-K SB (or any successor form) and Quarterly Report on Form 10-Q SB (or any successor form) filed by Lessee with the Securities and Exchange Commission or any successor agency; (d) within the time period prescribed in Section 5(b), a certificate, signed by the treasurer or principal financial officer of Lessee, to the effect that the signer has reviewed the activities of Lessee during the immediately preceding fiscal year and that the signer is not aware of any default in compliance by Lessee with any of the covenants, terms and provisions of any this Lease (except as specified), and if a default shall exist, specifying such default and the nature and status thereof; and (e) promptly, all material reports or statements that Lessee may make to, or file with, the Securities and Exchange Commission or any successor thereto (excluding such reports or statements that are treated as confidential and not available to the public, in accordance with applicable law, by the Securities and Exchange Commission, for so long as such confidentiality shall be maintained). SECTION 6. TERM AND RENT. SECTION 6.1. LEASE TERM. The Basic Term of the Lease and the Units covered thereby (the "BASIC TERM") shall commence as of the Basic Term Commencement Date set forth in the preamble paragraph on page one hereof, and subject to earlier termination pursuant to other provisions of this Lease shall expire at 11:59 P.M. (Texas time) on the Basic Term Expiration Date for such Lease. SECTION 6.2. BASIC RENT. Lessee hereby agrees to pay the Lessor $130,000 per month for the first 12 months hereof and $260,000 per month thereafter until the later of expiration of the Basic Term or return of all of the Equipment to Lessor per Section 9 hereof. Each monthly payment is due on the first day of each month. At closing, Lessee will pay the prorated rent for the remainder of the calendar month of closing and will then prepay the first and second calendar month's rent in full. In addition to, and by no way in limitation of, any other liens granted to Lessor, Lessee hereby grants Lessor a security interest in any advanced payments of rent to secure any and all obligations due hereunder, including but not limited to, any sums owed to Lessor resulting from any breach of Lessee's obligations hereunder. SECTION 6.3. SUPPLEMENTAL RENT. Lessee also agrees to pay to Lessor, or to whomsoever shall be entitled thereto, any and all Supplemental Rent, promptly as the same shall become due and owing, or where no due date is specified, promptly after demand by the Person entitled thereto. Lessee will also pay, as Supplemental Rent, but without duplication on demand, to the extent permitted by applicable law, an amount equal to interest at the Late Rate on any part of any installment of Basic Rent not paid when due for any period for which the same shall be overdue and on any payment of Supplemental Rent not paid when due or ten days after demanded, as the case may be, for the period from such due date or ten days after demand until the same shall be paid. -4- SECTION 6.4. MANNER OF PAYMENTS. All Rent (other than Supplemental Rent payable to Persons other than Lessor, which shall be payable to such other Persons in accordance with written instructions furnished to Lessee by such Persons) shall be paid by Lessee to Lessor at such address or account in the United States as may be designated in writing by Lessor to Lessee from time to time. All Rent shall be paid by Lessee in funds consisting of lawful currency of the United States of America, which shall be immediately available to the recipient not later than 12:00 noon (Houston, Texas time) on the date of such payment. SECTION 6.5. SALES TAX. Together with all payments of Rent, Lessee shall remit to Lessor, in the manner set forth in Section 6.4 above, all sales and other similar taxes applicable to any Rent payments hereunder pursuant to the Texas Tax Code Section 151.051 and Section 151.052. SECTION 7. OWNERSHIP AND MARKING OF EQUIPMENT; PERSONAL PROPERTY. SECTION 7.1. RETENTION OF TITLE. Lessor shall and hereby does retain full legal title to and beneficial ownership of the Units notwithstanding the delivery to and possession and use of the Units by Lessee hereunder or any sublessee under any sublease permitted hereby. SECTION 7.2. INSIGNIA. At Lessor's request, Lessee shall cause labels, plates or similar items to be attached to the Units reflecting Lessor as the owner of the Units. Lessee may cause the Units to be lettered with the names or initials or other insignia customarily used by Lessee or any permitted sublessees or any of their respective Affiliates for convenience of identification of the right of Lessee to use the Units hereunder or any permitted sublessee to use the Units pursuant to a sublease permitted hereby; provided, such lettering shall in no manner conflict with the labeling performed pursuant to the preceding sentence. SECTION 7.3. PERSONAL PROPERTY. Lessee covenants that each Unit shall remain personal property regardless of whether it becomes affixed or attached to or incorporated into real property or any improvement thereof. Lessee shall not permit any Unit to become so related to any particular real estate or improvement or to be installed in or affixed to other goods so as to become part of such real property or improvement or (unless such goods are also Units covered by the same Lease) an accession to such other goods. Lessee agrees to execute all such agreements and other documents and to obtain the execution thereof by such other persons as Lessor may request, in recordable form, by all parties having an interest in any real property to which any Unit is related, with respect to the identity of such Unit as personal property, and the disclaimer of any interest in such Unit by such other persons. Lessee consents to the recordation of all such agreements and documents. SECTION 8. DISCLAIMER OF WARRANTIES. Without waiving any claim Lessee may have against any seller, supplier, manufacturer or any other Person other than Lessor or its Affiliates, LESSEE ACKNOWLEDGES AND AGREES THAT (i) EACH UNIT IS OF A SIZE, DESIGN, CAPACITY AND MANUFACTURE SELECTED BY AND ACCEPTABLE TO LESSEE, (ii) LESSEE IS SATISFIED THAT EACH UNIT IS SUITABLE FOR ITS PURPOSES AND LESSEE HAS ACCEPTED EACH UNIT, (iii) -5- LESSEE HAS INSPECTED THE UNITS PRIOR TO DELIVERY TO AND ACCEPTANCE BY LESSEE, (iv) EACH UNIT IS LEASED HEREUNDER SUBJECT TO ALL APPLICABLE LAWS AND GOVERNMENTAL REGULATIONS NOW IN EFFECT OR HEREAFTER ADOPTED, AND (v) LESSOR LEASES AND LESSEE TAKES EACH UNIT "AS-IS", "WHERE-IS" AND "WITH ALL FAULTS", IN WHATEVER CONDITION IT MAY BE, AND LESSEE ACKNOWLEDGES THAT LESSOR DOES NOT MAKE NOR SHALL BE DEEMED TO HAVE MADE, AND LESSOR EXPRESSLY DISCLAIMS, ANY AND ALL RIGHTS, CLAIMS, WARRANTIES OR REPRESENTATIONS, EITHER EXPRESS OR IMPLIED, AS TO THE VALUE, CONDITION, FITNESS FOR ANY PARTICULAR PURPOSE, DESIGN, OPERATION, MERCHANTABILITY THEREOF OR AS TO THE TITLE, OF THE UNITS, THE QUALITY OF THE MATERIAL OR WORKMANSHIP THEREOF OR CONFORMITY THEREOF TO SPECIFICATIONS, FREEDOM FROM PATENT, COPYRIGHT OR TRADEMARK INFRINGEMENT, THE ABSENCE OF ANY LATENT OR OTHER DEFECT, WHETHER OR NOT DISCOVERABLE, OR AS TO THE ABSENCE OF ANY OBLIGATIONS BASED ON STRICT LIABILITY IN TORT OR ANY OTHER EXPRESS OR IMPLIED REPRESENTATION OR WARRANTY WHATSOEVER WITH RESPECT THERETO AND LESSOR EXPRESSLY DISCLAIMS SELECTION OF THE UNITS; except that Lessor represents and warrants that Lessor shall have received whatever title to the Units as was conveyed to Lessor. Lessor hereby appoints and constitutes Lessee its agent and attorney-in-fact during the Basic Term to assert and enforce, from time to time, in the name and for the account of Lessor and Lessee, as their interests may appear, but in all cases at the sole cost and expense of Lessee, whatever claims and rights Lessor may have as owner of the Units against the manufacturers or any prior owner thereof; provided, if at any time a Specified Event shall have occurred and be continuing, at Lessor's option, such power of attorney shall terminate, and Lessor may assert and enforce, at Lessee's sole cost and expense, such claims and rights. Lessor shall have no responsibility or liability to Lessee or any other Person with respect to any of the following: (i) any liability, loss or damage caused or alleged to be caused directly or indirectly by any Unit, or by any operation thereof, whether or not permitted by the terms hereof, or by any inadequacy thereof or deficiency or defect therein or by any other circumstances in connection therewith including but not limited to alleged defects in the design or construction of any Unit; (ii) the use, operation or performance of any Unit or any risks relating thereto; (iii) any interruption of service, loss of business or anticipated profits or consequential damages; or (iv) the delivery, operation, servicing, maintenance, repair, improvement or replacement of any Unit. Lessee's delivery of a Lease Schedule shall be conclusive evidence as between Lessee and Lessor that all Units described therein are in all the foregoing respects satisfactory to Lessee. SECTION 9. RETURN OF EQUIPMENT. SECTION 9.1. RETURN OF EQUIPMENT. (a) If Lessee elects not to deliver the notice contemplated by Section 24.1 of its irrevocable election of the purchase option in Section 24.2, Lessee shall deliver to Lessor a notice of its intention to return the Units upon the expiration of the Base Term, such notice to be furnished not less than 90 days prior to the expiration of such Basic Term. Upon the expiration of the lease created by the applicable Lease Schedule or earlier termination of such lease(other than when such Unit is being replaced or sold pursuant to the terms hereof) with respect -6- to a Unit, Lessee, at its own risk and expense, will comply with the dismantling, storage, return, transport and other obligations set forth in this Section 9.1. Upon redelivery the Units shall be free and clear of all Liens except for Lessor Liens. Concurrently with each delivery of a Unit to Lessor hereunder, upon request of Lessor, Lessee will deliver to Lessor all records, if any, in its possession relating to the repair and maintenance history of such Unit, including, without limitation, all logs, schedules and computer data relating to such history of the type maintained in the ordinary course of business of Lessee with respect to Units owned or leased by Lessee. (b) Upon expiration or such earlier termination of the Basic Term with respect to such Unit and compliance with the terms hereof (including Section 9.2), the obligation to pay Basic Rent and all other Rent for such Unit (except for any Rent obligations which have otherwise accrued but not been paid as of the date of the expiration of the Basic Term) shall terminate. (c) Upon the return of any Unit, Lessee shall, at its own cost and expense, have taken all necessary action to assure that such Unit shall be in the condition required by this Section 9.1 and Section 9.2. If Lessor or its agent shall inspect any Unit pursuant to this Section and shall reasonably determine that such Unit is not in the condition required by this Section 9.1 or Section 9.2, Lessee, at no cost to Lessor, shall within 90 days thereafter make such repairs and perform such work as shall be necessary to place such Units in the condition required by this Section 9.1 and Section 9.2 to Lessor's reasonable satisfaction, failing which Lessor may make such repairs and perform such work at Lessee's expense. (d) As to each Unit to be returned by Lessee hereunder, at Lessor's request Lessee shall: (i) detach such Unit from a facility or improvements (if any) to which such Unit may be attached, (ii) disassemble such Unit to the extent necessary to transport the Unit via truck or another mode of transportation selected by Lessor, (iii) repair any damage to the Unit occurring during such detachment or disassembly activities per subparagraph (c) above, and (iv) cause the Unit to be shipped to Lessor's Stafford, Texas, facility and to be insured for no less than its full replacement value during such transport (with Lessor to be the named insured under such insurance). (e) The obligations of Lessee pursuant to Section 9.1 and Section 9.2 shall be at the expense and risk of Lessee. SECTION 9.2. CONDITION OF UNITS. Each Unit when returned to Lessor shall be (except for additions, modifications and improvements which Lessee is entitled or required to make in accordance with the terms of this Lease) in the condition such Unit is required to be maintained pursuant to Section 11.1; provided, each Unit when returned to Lessor pursuant to Section 9.1 shall in all events: (i) have attached or affixed thereto all parts to which Lessor has title hereunder; provided, as to any such parts that are required to be removed during the removal of such Unit, such parts may not be reattached but shall be required to be boxed or crated and kept with such Unit; -7- (ii) be free and clear of all Liens except Lessor Liens; and (iii) be free of any marks or insignia which infringe the proprietary rights of third parties. SECTION 10. LIENS. Lessee will not directly or indirectly create, incur, assume, permit or suffer to exist any Lien on or with respect to any Units or Lessee's leasehold interest therein under this Lease, except Permitted Liens or Lessor Liens, and Lessee shall promptly, at its own expense, take such action or cause such action to be taken as may be necessary to duly discharge (by bonding or otherwise) any such Lien not excepted above if the same shall arise at any time. SECTION 11. MAINTENANCE AND OPERATION; COMPLIANCE WITH LAWS; SUBLEASES. SECTION 11.1. MAINTENANCE AND OPERATION. Lessee shall pay or cause its permitted sublessees to pay all costs, expenses, fees and charges incurred in connection with the use and operation of each Unit. Lessee shall at all times, at its or its sublessee's own expense, maintain or cause to be maintained the Units or cause the Units to be maintained (i) in good operating and physical condition, ordinary wear and tear excepted, and (ii) as shall be necessary to maintain each Unit in compliance with Applicable Law. The foregoing undertaking to maintain the Units shall apply regardless of the cause necessitating repair (whether foreseen or unforeseen) and regardless of whether Lessee has possession of the Units, and as between Lessor on the one hand, and Lessee, on the other hand, all risk of damage to the Units is assumed by Lessee. Lessee will acquire and maintain or cause to be maintained all Permits, records, logs and other materials required by any Governmental Authority having jurisdiction over the Units required to be maintained in respect of any Unit, all as if Lessee were the owner of such Units, including without limitation all permits, records, logs and other materials necessary to authorize construction, operation, repair and modification of the Units. Lessor shall have no responsibility for the maintenance and operation of the Units, and shall likewise have no responsibility to obtain permits or to maintain records required by any Governmental Authority for the acquisition, construction, operation, repair or modification of any Unit. SECTION 11.2. COMPLIANCE WITH LAWS, ETC. (a) So long as no Lease Event of Default shall have occurred and be continuing, Lessee may use the Units in the regular course of its business in any manner which is in compliance with Applicable Law and is consistent with the purpose for which it was designed. Lessee will not do or permit any act or thing which is contrary in any material respect to any Applicable Law. Lessee shall cause to be obtained and maintained all Permits of, and filings and registrations with, any Governmental Authority or other Person necessary for the performance by Lessee of its obligations hereunder or the acquisition, construction, modification, repair, use or operation of the Units. Lessee shall also be responsible at its sole expense to purchase or obtain any emission reduction credits, emission allowances or offsets required under environmental law for the acquisition, construction, modification, repair, use or operation of the Units. -8- (b) Lessee shall, at its own sole cost and expense, promptly and duly execute, deliver, file and record all such documents, statements, filings and registrations, and take such further actions as Lessor shall from time to time reasonably request in a manner consistent with commercial practices at the time in order to preserve and maintain Lessor's title to and interest in the Units in any applicable jurisdiction. (c) Lessee shall use reasonable precautions to prevent loss or damage to the Units and to prevent injury to third persons, in a manner consistent with Lessee's customary practices with respect to its own property similar to the Units. Lessee shall cooperate fully with the reasonable requests of Lessor in the investigation and defense of any claims or suits arising from the operation of the Units; provided, nothing contained in this paragraph (c) shall be construed as imposing on Lessor any duty to investigate or defend any such claims or suits or as a waiver of any of Lessee's rights and obligations with respect thereto. (d) Lessee shall keep according to its customary practice accurate and current records with respect to the Units. To the extent Lessee now or hereafter maintains records with respect to state of repair with respect to any class of equipment or property included within the Units, Lessee shall also do so with respect to the Units. (e) Lessee shall not suffer to exist any judgment, decree or order of any court or other Governmental Authority (i) which has or is reasonably likely to have an adverse effect on any Unit or (ii) which is reasonably likely to interfere with the due and timely payment by Lessee of any sum payable or the exercise of any of its rights or the performance of any of its duties or responsibilities (including without limitation under this Section) under this Lease unless such judgment, decree or order is the subject of a Permitted Contest. Lessee shall, on receipt of notice from Lessor to the effect that any such judgment, decree or order exists, promptly take such action as may be reasonably necessary to prevent or terminate such judgment, decree or order. SECTION 11.3. SUBLEASE. (a) Lessee shall not sublease the Units without the prior written consent of Lessor, which consent Lessor may grant or withhold in its discretion; provided, no consent of Lessor shall be required with respect to a sublease to an Affiliate of Lessee. No sublease shall relieve Lessee from any of its obligations hereunder. (b) So long as no Lease Event of Default has occurred and is continuing, Lessor will not take or authorize others to take any action contrary to the terms of any permitted sublease to deprive the sublessee thereunder of the right to peaceful, quiet and uninterrupted use and enjoyment of the Units so subleased without any interference, hindrance, ejection or molestation by or from Lessor. SECTION 12. MODIFICATIONS AND REPLACEMENTS. SECTION 12.1. REQUIRED MODIFICATIONS. If any Applicable Law requires that any Unit be altered or modified (a "REQUIRED MODIFICATION"), Lessee agrees that it shall, at no cost to Lessor, cause such Required Modification to be made unless such requirement is then the subject of a Permitted Contest by Lessee. Title to any Required Modification shall immediately vest in Lessor. -9- SECTION 12.2. OPTIONAL MODIFICATIONS. Lessee at anytime may in its discretion and at its own cost and expense modify, alter or improve any Unit in a manner which is not required by Section 12.1 (a "MODIFICATION"); provided, no Modification shall diminish the current value and estimated residual value, utility or remaining useful life of such Unit below the current value and estimated residual value, utility or remaining useful life thereof immediately prior to such Modification, other than in a DE MINIMIS manner, assuming such Unit was then in the condition required to be maintained by the terms of this Lease. Title to any Non-Severable Modification shall be immediately vested in Lessor. Title to any Severable Modification shall remain with Lessee unless it is a Required Modification, in which case title shall vest in Lessor pursuant to Section 12.1. Title to any Severable Modification on any Unit not removed by Lessee shall pass to Lessor upon return of such Unit to Lessor. SECTION 12.3. REMOVAL OF PROPERTY, REPLACEMENTS. Lessee may, in the ordinary course of maintenance or repair of any Unit, remove any item of property constituting a part of such Unit, and, unless the removal of such item is required by Section 12.1, Lessee shall replace such item as promptly as practicable with an item of property that is free and clear of all Liens (other than Lessor Liens) and in as good operating condition as, and with a current value and estimated residual value, utility and useful life at least equal to, the current value, estimated residual value, utility and useful life as the item of property being replaced, assuming that such replaced item was in the condition required to be maintained by the terms of this Lease. Any item of property removed from such Unit as provided in the preceding sentence shall remain the property of Lessor free and clear of all rights of Lessee until replaced in accordance with the terms of such sentence, but shall then, without further act, become the property of Lessee. Any such replacement property shall, without further act, become the property of Lessor and be deemed part of such Unit for all purposes. SECTION 13. LOSS, DESTRUCTION OR REQUISITION. SECTION 13.1. EVENT OF LOSS. If any Unit shall (a) suffer damage or contamination which, in Lessee's reasonable judgment, makes repair or modification uneconomic for commercial use, (b) suffer destruction, or shall suffer theft or, for a period exceeding three months, or if earlier, the expiration of the Lease, disappearance, (c) have title thereto taken or appropriated by any Governmental Authority under the power of eminent domain or otherwise, (d) suffer an actual or constructive total loss, (e) in the normal course of commerce, have been prohibited from being used for a continuous period in excess of three months or if earlier, the expiration of this Lease as a result of any rule, regulation, order promulgated, or any other action taken, by any United States Governmental Authority, or (f) be taken or requisitioned for use by any United States Governmental Authority under the power of eminent domain or otherwise, and such taking or requisition is for a period that exceeds 12 months or if earlier, the expiration of the Basic Term or Renewal Term, as applicable (any such occurrence being hereinafter called an "EVENT OF LOSS"), Lessee, in accordance with the terms of Section 13.2, shall fully inform Lessor of such Event of Loss. SECTION 13.2. REPLACEMENT UPON EVENT OF LOSS. On the Rent Payment Date immediately following the occurrence of an Event of Loss, Lessee shall convey or cause to be conveyed to Lessor a Replacement Unit to be leased to Lessee hereunder in place of the Unit, such Replacement -10- Unit to be an identical Unit and free and clear of all Liens (other than Permitted Liens and Lessor Liens), and all terms of this Lease will apply to the Replacement Unit as would apply to the Unit had it not been replaced. SECTION 13.3. REPLACEMENT OF UNIT. For all purposes hereof, upon passage of title thereto to Lessor, each Replacement Unit shall be deemed part of the property pursuant to this Lease, and such Replacement Unit shall be deemed a "UNIT" of Equipment as defined herein. Upon such passage of title, Lessor will transfer to Lessee, without recourse or warranty (except as to Lessor Liens), all of Lessor's right, title and interest in and to the replaced Unit (and shall execute and deliver to Lessee or its designee such bills of sale and other documents and instruments as Lessee may reasonably request to evidence such conveyance). Lessee shall pay or cause to be paid all reasonable out-of- pocket costs and expenses (including reasonable legal fees and expenses) incurred by Lessor in connection with any replacement pursuant to this Section 13.3. SECTION 13.4. EMINENT DOMAIN. If during the Basic Term the use of any Unit is requisitioned or taken by any Governmental Authority under the power of eminent domain or otherwise for a period which does not constitute an Event of Loss, all of Lessee's obligations under the Operative Agreements, including without limitation, Lessee's obligation to pay all installments of Basic Rent, shall continue for the duration of such requisitioning or taking. Lessee shall be entitled to receive and retain for its own account all sums payable for any such period by such Governmental Authority as compensation for the requisitioning or taking of possession. SECTION 14. INSURANCE. SECTION 14.1. INSURANCE COVERAGE. At all times until the Units are returned to Lessor in accordance with the terms of this Lease, Lessee shall maintain, at no cost to Lessor, the insurance described on Schedule 14.1. SECTION 14.2. CERTIFICATES AND POLICIES. (a) CERTIFICATE OF INSURANCE. Lessee shall, prior to the Closing Date, furnish Lessor with a certificate signed by the insurer or an independent insurance broker showing the insurance then maintained by Lessee pursuant to Section 14.1 and that all premiums thereon have been timely paid and any financing thereof is current, or other evidence of maintenance of the insurance required hereunder satisfactory to Lessor and, with respect to any renewal policy or policies, shall furnish certificates or binders evidencing such renewal as soon as practicable (and in any event no later than ten days prior to the stated expiration date of the policies then in effect). Such certificate shall designate Lessee as the insured entity and Lessor as an additional insured entity and as a payee for any insurable loss. (b) POLICY PROVISIONS. All insurance policies required to be maintained pursuant to Section 14.1 shall (and Lessee shall so request of each insurer) (i) provide that the interests of Lessor shall not be invalidated by any action or inaction by Lessee or any other Person (other than Lessor), (ii) insure Lessor regardless of any breach or violation by Lessee or any other Person (other -11- than Lessor) of any warranties, declarations or conditions in such polices, (iii) provide that Lessor will be furnished with at least 30 days prior written notice of any cancellation prior to expiration of coverage, (iv) provide that such insurance is primary without any right of contribution form any other insurance carried by Lessor or any of its Affiliates and shall expressly provide that all provisions, except the limits of liability, shall operate in the same manner as if there were a separate policy covering each such additional insured, (v) provide that the insurers waive any rights of setoff, recoupment, counterclaim, deduction, or subrogation against Lessor, and (vi) acknowledge that any obligation imposed on Lessee (including, without limitation, the liability to pay premiums, calls, commissions or assessments) shall be the sole obligation of Lessee and not the obligation of Lessor. SECTION 14.3. ADDITIONAL INSURANCE. If Lessee shall fail to cause to be maintained the insurance as provided in Section 14.1(a), Lessor may at its option, upon ten days' prior written notice to Lessee, acquire such insurance and, in such event, Lessee shall, upon demand from time to time, reimburse Lessor for the cost thereof together with interest from the date of payment thereof, on the amount of the cost to Lessor of such insurance which Lessee shall have failed to maintain, at the applicable Late Rate. In addition, at any time Lessor may at its own expense carry insurance with respect to its interest in the Units. Any insurance payments received from policies maintained by Lessor pursuant to the preceding sentence shall be retained by Lessor without reducing or otherwise affecting Lessee's obligations hereunder. SECTION 15. INSPECTION. Lessor shall have the right, but not the obligation, at its sole cost and expense, by its authorized representatives, to inspect any Units and Lessee's maintenance records with respect to the Units. No inspection pursuant to this Section 15 shall interfere with the use, operation or maintenance of the Units or the normal conduct of Lessee's business. SECTION 16. LEASE EVENTS OF DEFAULT. The following events shall constitute Lease Events of Default hereunder (whether any such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any Governmental Authority) and each such Lease Event of Default shall be deemed to exist and continue so long as, but only as long as, it shall not have been remedied: (a) Lessee shall fail to make any payment of Basic Rent to be paid by Lessee for any Units pursuant to this Lease within five days after the same shall have become due; or (b) Lessee shall fail to make any payment of any Supplemental Rent (excluding Supplemental Rent covered by clause (a) preceding) to be paid by Lessee pursuant to this Lease after the same shall have become due and such failure shall continue unremedied for ten days after receipt by Lessee of the original demand therefor from Lessor; or -12- (c) any representation or warranty made by Lessee in this Lease is untrue or incorrect in any material respect as of the date of making thereof and such untruth or incorrectness shall be material and unremedied for a period of 30 days after receipt by Lessee of written notice thereof from Lessor; or (d) Lessee shall (i) commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect, or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or (ii) consent to any such relief or to the appointment of or taking possession by any such official in any voluntary case or other proceeding commenced against it, or (iii) admit in writing its inability to pay its debts generally as they come due, or (iv) make a general assignment for the benefit of creditors; or (e) an involuntary case or other proceeding shall be commenced against Lessee seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect, or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or (f) Lessee shall fail to observe or perform in any material respect any other covenants or agreements to be observed or performed by Lessee under this Lease and such failure shall continue unremedied for 30 days after notice from Lessor to Lessee, specifying the failure and demanding the same to be remedied; or (g) Lessee has failed, after the expiration of any applicable notice or cure period or both, to make one or more payments due or has otherwise defaulted on any indebtedness for borrowed money, which failure or default relates to a payment (or a sum of payments); in excess of $500,000; or (h) A Change of Control of Lessee occurs; or (i) Lessee sells or disposes of all, or substantially all, of its assets; or (j) Lessee makes any dividend payment to any common stockholder or repurchases or redeems any equity. SECTION 17. REMEDIES AND CERTAIN COVENANTS. SECTION 17.1. REMEDIES. Upon the occurrence of any Lease Event of Default and at any time thereafter so long as the same shall be continuing, any Lessor may, at its option, declare this Lease and each other Lease entered into pursuant to this Lease to be in default by a written notice to Lessee (except that this Lease and such other Leases shall, without any action on the part of Lessor, -13- be automatically deemed to have been declared in default upon the occurrence of a Lease Event of Default described in Section 16(d) or (e)); and at any time thereafter, unless Lessee shall have remedied all outstanding Lease Events of Default prior to the commencement of the exercise by Lessor of any of its remedies hereunder, Lessor may do one or more of the following as Lessor in its sole discretion shall elect, to the extent permitted by, and subject to compliance with any mandatory requirements of, applicable law then in effect: (a) proceed by appropriate court action or actions, either at law or in equity, to enforce performance by Lessee of the applicable covenants of this Lease or to recover damages for the breach thereof; (b) by notice in writing to Lessee, cancel this Lease, whereupon all rights of Lessee and any sublessee to the possession and use of the Units shall absolutely cease and terminate as though this Lease and such sublease had never been made, but Lessee shall remain liable as hereinafter provided; and thereupon, Lessor may demand that Lessee, and Lessee shall, upon written demand of Lessor and at no cost to Lessor, forthwith return physical possession of and/or all of Lessee's rights to control all or any part of the Units in the manner and condition required by, and otherwise in accordance with all of the provisions in Section 9; or Lessor with or without notice or judicial process may by its agents enter upon the premises where any of the Units at the time may be located and take possession of and remove all or any of the Units, and Lessor may use and employ in connection with such removal any services, aids, equipment, trackage and other facilities as is reasonably required to remove such Units and thenceforth hold, possess and enjoy the same free from any right of Lessee to use such Units for any purpose whatever; (c) sell any Unit at public or private sale by such advertisement or publication, if any, as Lessor may determine, free and clear of any rights of Lessee and without any duty to account to Lessee with respect to such sale or for the proceeds thereof; (d) hold, keep idle or lease to others any Unit as Lessor in its sole discretion may determine, free and clear of any rights of Lessee; (e) whether or not Lessor shall have exercised, or shall thereafter at any time exercise, any of its rights under clause (a), (b), (c) or (d) above with respect to any Unit, Lessor, by written notice to Lessee specifying a payment date, which shall be not earlier than ten days after the date of such notice, may demand that Lessee pay to Lessor, and Lessee shall pay or cause to be paid to Lessor, on the payment date specified in such notice, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the Basic Rent for such Unit attributable to the period after the payment date specified in such notice), all Rent due and payable, or accrued, for such Unit as of the payment date specified in such notice plus whichever of the following amounts Lessor, in its sole discretion, shall specify in such notice: (i) an amount with respect to each such Unit which represents the excess of the present value, at the time of such payment date, of all rentals for such Unit which would otherwise have accrued hereunder from such payment date for the remainder of the Basic Term over the then present value of the then Fair Market Rental Value of such Unit (taking into -14- account its actual condition) for such period, such present value to be computed in each case on a basis of a per annum discount at 12%, compounded on the same periodic basis that Basic Rent is due under this Lease from the respective dates upon which rentals would have been payable hereunder had this Lease not been terminated; or (ii) if Lessor shall not have sold such Unit pursuant to the exercise of its rights under clause (c) above with respect to such Unit, an amount equal to the present value, at the time of such payment date, of all rentals for such Unit which would otherwise have accrued hereunder from such payment date for the remainder of the Basic Term, such present value to be computed on a basis of a per annum discount at 12%, compounded on the same periodic basis that Basic Rent is due under this Lease from the respective dates upon which rentals would have been payable hereunder had this Lease not been terminated, plus the Fair Market Sales Value of such Unit (assuming it is in the condition required by this Lease) as of the payment date specified in such notice, and upon payment by Lessee pursuant to this clause (ii) and of all other amounts payable by Lessee under this Lease and under this Lease in respect of such Unit, Lessor shall transfer "as-is," "where-is," "with all faults," without recourse or warranty except as to the absence of any Lessor Lien, all right, title and interest of Lessor in and to such Unit to Lessee or its designee, and Lessor shall execute and deliver such instruments or documents evidencing such transfer, including a bill of sale, as Lessee shall reasonably request, and the obligation of Lessee to pay Basic Rent for such Unit under the Lease shall cease and the Basic Term for such Unit shall end. (f) if Lessor shall have sold any Unit pursuant to paragraph (c) above, Lessor, in lieu of exercising its rights under paragraph (e) above with respect to such Unit may, if it shall so elect, demand that Lessee pay to Lessor, and Lessee shall pay to Lessor, as liquidated damages for loss of a bargain and not as a penalty, any accrued and unpaid Rent for such Unit as of the date of such sale and, if that date is a Rent Payment Date, the Basic Rent due on that date, plus, the amount, if any, by which the sum of (i) all rentals for such Unit which would otherwise have accrued hereunder, and (ii) the Fair Market Sales Value of such Unit (assuming it is in the condition required by this Lease), both computed as of the Rent Payment Date next preceding the date of such sale or, if such sale occurs on a Rent Payment Date, then computed as of such Rent Payment Date, exceeds the Net Proceeds of such sale; and (g) Lessor may terminate the leasing of any or all Units under this Lease or may exercise any other right or remedy that may be available to it under applicable law. In addition, Lessee shall be liable, except as otherwise provided above, for any and all unpaid Rent attributable to the period before the exercise of any of the foregoing remedies, and for legal fees and other costs and expenses incurred by reason of the occurrence of any Lease Event of Default or the exercise of Lessor's remedies with respect thereto, including without limitation the repayment in full of any costs and expenses necessary to be expended in repairing any Unit in order to cause it to be in compliance with all maintenance and regulatory standards imposed by this Lease. SECTION 17.2. CUMULATIVE REMEDIES. The remedies expressly set forth in this Lease in favor of Lessor shall not be deemed exclusive, but shall be cumulative and shall be in addition to all other remedies in its favor existing at law or in equity. Lessee hereby waives any mandatory requirements -15- of law, now or hereafter in effect, which might limit or modify any of the remedies herein provided, to the extent that such waiver is permitted by law. Lessee hereby waives any and all existing or future claims of any right to assert any offset or counterclaim against the Rent payments due hereunder, and agrees to make the rent payments regardless of any offset or counterclaim or claim which may be asserted by Lessee on its behalf in connection with the lease of the Units. To the extent permitted by applicable law, Lessee hereby waives any rights now or hereafter conferred by statute or otherwise that may require Lessor to sell, lease or otherwise use the Units in mitigation of Lessor's damages as set forth in Section 17.1 or that may otherwise limit or modify any of Lessor's rights and remedies provided in this Section 17.2. SECTION 17.3. NO WAIVER. No delay or omission to exercise any right, power or remedy accruing to Lessor upon any breach or default occurring under this Lease shall impair any such right, power or remedy of Lessor, nor shall any such delay or omission be construed as a waiver of any breach or default, or of any similar breach or default hereafter occurring; nor shall any waiver of a single breach or default be deemed a waiver of any subsequent breach or default. SECTION 17.4. NOTICE OF LEASE DEFAULT. Lessee agrees to furnish to Lessor, promptly upon any Responsible Officer acquiring actual knowledge thereof, written notice of any condition which constituted or constitutes a Lease Default under this Lease, describing such condition and the nature and status thereof. SECTION 17.5. LESSEE'S DUTY TO RETURN EQUIPMENT UPON DEFAULT. If Lessor shall terminate the leasing of any or all Units pursuant to this Section 17 and shall have provided to Lessee the written demand specified in Section 17.1(b) with respect to such Units, Lessee shall forthwith deliver possession of and return such Units to Lessor in accordance with Section 9.1 (except where Lessor has received all amounts payable by Lessee pursuant to any notice provided by Lessor under Section 17.1(e)(iii)). All Units returned shall be in the condition required by Sections 9.1 and 9.2. SECTION 17.6. SPECIFIC PERFORMANCE; LESSOR APPOINTED LESSEE'S AGENT. The obligations of Lessee pursuant to Section 17.5 to comply with the requirements of Sections 9.1 and 9.2 are of the essence of this Lease and, upon application to any court of equity having jurisdiction in the premises, Lessor shall be entitled to a decree against Lessee requiring specific performance of such obligations. Without in any way limiting the obligation of Lessee under the provisions of Section 17.5, Lessee hereby irrevocably appoints Lessor as the agent and attorney of Lessee, with full power and authority, at any time while Lessee is obligated to deliver possession of any Units to Lessor pursuant to this Section 17.6, to demand and take possession of such Unit in the name and on behalf of Lessee from whosoever shall be at the time in possession of such Unit. SECTION 18. LESSEE'S INDEMNITIES. SECTION 18.1. TAXES. (a) PAYMENT OF TAXES: Lessee covenants and agrees to pay to the appropriate taxing authority other than as provided in Section 6.5, and discharge before the same become delinquent, all taxes, fees, or other charges of any nature whatsoever, without pro-ration, together with any related interest or penalties ("Impositions") now or hereafter imposed, assessed or payable during the term of the Lease including any extension thereof (including any holdover) (or an Imposition relating to a record date or status date that fell within the term of the Lease including any extension thereof or is otherwise associated with Lessee's leasing, possession or use of the Equipment) against Lessor, Lessee or the Equipment by any federal, state, county or local government or taxing authority upon or with respect to (i) the Equipment or any Unit, (ii) upon the leasing, ordering, purchase, sale, ownership, use, operation, return or other disposition thereof, (iii) the Monthly Rental or any other sums due hereunder, or (iv) the leasing of the Equipment, excepting only federal, state and local taxes measured by the net income of Lessor or any franchise tax upon Lessor measured by Lessor's capital, capital stock or net worth. Because the payment due date or reimbursement date for an Imposition may occur after the expiration or termination of the term of this Lease, it is understood and agreed that Lessee's liability for such Impositions shall survive the expiration or termination of the term of this Lease. (b) BILLING: Lessee shall, to the extent permitted by law, cause all Impositions to be billed to Lessee. Lessee shall, at its expense, timely file all forms and returns and timely do all things required to be done in connection with the levy, assessment and payment of any Impositions, and Lessor hereby appoints Lessee as Lessor's attorney-in-fact where necessary for such purposes. Lessee shall submit written evidence to Lessor of the payment of all Impositions required to be paid by Lessee hereunder promptly after such payment. Notwithstanding the foregoing, Lessor in its sole discretion, may pay any Imposition itself or file any forms or returns with respect thereto. If Lessor pays any Imposition, Lessee shall, when billed, reimburse Lessor for such payment. (c) CONTEST. Lessee may contest any Imposition by appropriate legal proceedings, provided the nonpayment of such Imposition thereof, or such proceedings, will not, in the opinion of counsel for Lessor, adversely affect the title, property interest or rights of Lessor in the Equipment and provided further that, if requested by Lessor, Lessee has given to Lessor security, sufficient in form and amount in Lessor's reasonable judgment, to fully satisfy the amount of the contested Imposition. SECTION 18.2. GENERAL INDEMNIFICATION AND WAIVER OF CERTAIN CLAIMS. (a) CLAIMS DEFINED. For the purposes of this Section 18.2, "CLAIMS" shall mean any and all costs, expense, liabilities, obligations, losses, damages, penalties, actions or suits or claims of whatsoever kind or nature (whether or not on the basis of negligence, strict or absolute liability or liability in tort) which may be imposed on, incurred by, suffered by, or asserted against an Indemnified Person, as defined herein, or any Unit and, except as otherwise expressly provided in this Section 18.2, shall include, but not be limited to, all reasonable out-of-pocket costs, disbursements and expenses (including legal fees and expenses) paid or incurred by an Indemnified Person in connection therewith or related thereto. "Claims" shall include all Claims brought by or -17- on behalf of any Person, including but not limited to officers, employees, agents, independent contractors, employees of independent contractors, parents, subsidiaries and affiliates of Lessee. (b) INDEMNIFIED PERSON DEFINED. For the purposes of this Section 18.2, "INDEMNIFIED PERSON" means Lessor and its directors, officers, employees, successors and permitted assigns, agents and servants. (c) CLAIMS INDEMNIFIED. Lessee agrees to indemnify, protect, defend and hold harmless each Indemnified Person on an After-Tax Basis against Claims directly or indirectly resulting from or arising out of or alleged to result from or arise out of (whether or not such Indemnified Person shall be indemnified as to such Claim by any other Person): (i) this Lease or any of the transactions contemplated hereby and thereby or any Unit or the ownership, lease, operation, possession, modification, improvement, abandonment, use, non-use, maintenance, sublease, substitution, control, repair, rebuild, refurbishment, storage, alteration, transfer or other application or disposition, return, overhaul, testing, servicing, replacement, permitting or registration or any other Governmental Authorization of any Unit (including, without limitation, injury, death or property damage of passengers, shippers or others, and environmental control, noise and pollution regulations, or the discharge, spillage, release or escape of Hazardous Substances or damage to the environment (including, without limitation, clean-up costs, response costs, costs of corrective actions and natural resource damages) whether assessed by any Governmental Authority or any other Person) whether or not in compliance with the terms of this Lease, or by any of the commodities, items or materials from time to time utilized in or processed through any Unit, whether or not in compliance with the terms of this Lease, or by the inadequacy of any Unit or deficiency or defect in any Unit or by any other circumstances in connection with any Unit, or by the performance of any Unit or any risks relating thereto, or by any interruption of service, loss of business or anticipated profits or consequential damages; (ii) the acquisition, construction, manufacture, financing, refinancing, design, purchase, acceptance, rejection, delivery, non-delivery or condition of any Unit (including, without limitation, latent and other defects, whether or not discoverable, and any claim for patent, trademark or copyright infringement); (iii) any act or omission (whether negligent or otherwise) or any breach of or failure to perform or observe, or any other non-compliance with, any covenant, condition or agreement to be performed by, or other obligation of, Lessee under any of the Operative Agreements, or the falsity of any representation or warranty of Lessee in any of the Operative Agreements or in any document or certificate delivered in connection therewith; or (iv) any violation of law, rule, regulation or order by Lessee or any sublessee or their respective directors, officers, employees, agents or servants. -18- (d) INSURED CLAIMS. In the case of any Claim indemnified by Lessee hereunder which is covered by a policy of insurance maintained by Lessee pursuant to this Lease or otherwise, each Indemnified Person agrees to provide reasonable cooperation to the insurers in the exercise of their rights to investigate, defend or compromise such Claim as may be required to remain the benefits of such insurance with respect to such Claim. (e) CLAIMS PROCEDURE. An Indemnified Person shall, after obtaining knowledge thereof, promptly notify Lessee of any Claim as to which indemnification is sought; provided, the failure to give such notice shall not release Lessee from any of its obligations under this Section 18.2, except to the extent that failure to give notice of any action, suit or proceeding against such Indemnified Person shall have a material adverse affect on Lessee's ability to defend such Claim or recover proceeds under any insurance policies maintained by Lessee hereunder. Lessee shall, after obtaining knowledge thereof, promptly notify each Indemnified Person of any indemnified Claim affecting such Person. Subject to the provisions of the following paragraph, Lessee shall at its sole cost and expense be entitled to control, and shall assume full responsibility for, the defense of such claim or liability; provided, Lessee shall keep the Indemnified Person which is the subject of such proceeding fully apprised of the status of such proceeding and shall provide such Indemnified Person with all information with respect to such proceeding as such Indemnified Person shall reasonably request. Upon the request of Lessee, the Indemnified Person which is the subject of any Claim will cooperate in all reasonable respects, at no expense to such Indemnified Person, in the defense thereof. Notwithstanding any of the foregoing to the contrary, Lessee shall not be entitled to control and assume responsibility for the defense of such claim or liability if (i) a Lease Event of Default shall have occurred and be continuing, (ii) such proceeding will involve any material danger of the sale, forfeiture or loss of, or the creation of any Lien (other than any Lien which is adequately bonded to the satisfaction of such Indemnified Person) on any Unit, (iii) the amounts involved, in the good faith opinion of such Indemnified Person, are likely to have a materially adverse effect on the business of such Indemnified Person other than the ownership, leasing and financing of the Units, (iv) in the good faith opinion of such Indemnified Person, there exists an actual or potential conflict of interest such that it is advisable for such Indemnified Person to retain control of such proceeding or (v) such claim or liability involves the possibility of criminal sanctions or liability to such Indemnified Person. In the circumstances described in clauses (i) - (v) above, the Indemnified Person shall be entitled to control and assume responsibility for the defense of such claim or liability at the expense of Lessee. In addition, any Indemnified Person may participate in any proceeding controlled by Lessee pursuant to this Section 18.2, at its own expense, in respect of any such proceeding as to which Lessee shall have acknowledged in writing its obligation to indemnify the Indemnified Person pursuant to this Section 18.2, and at the expense of Lessee in respect of any such proceeding as to which Lessee shall not have so acknowledged its obligation to the Indemnified Person pursuant to this Section 18.2. Lessee may in any event participate in all such proceedings at its own cost. Nothing contained in this Section 18.2 shall be deemed to require an Indemnified Person to contest any Claim or to assume responsibility for or control of any judicial proceeding with respect thereto. -19- (f) SUBROGATION. If a Claim indemnified by Lessee under this Section 18.2 is paid in full by Lessee and/or an insurer under a policy of insurance maintained by Lessee, Lessee and/or such insurer, as the case may be, shall be subrogated to the extent of such payment to the rights and remedies of the Indemnified Person (other than under insurance policies maintained by such Indemnified Person) on whose behalf such Claim was paid with respect to the transaction or event giving rise to such Claim. So long as no Lease Event of Default shall have occurred and be continuing, should an Indemnified Person receive any refund, in whole or in part, with respect to any Claim paid by Lessee hereunder, it shall promptly pay over the amount reflected (but not in excess of the amount Lessee or any of its insurers has paid) to Lessee. (g) EXPRESS NEGLIGENCE. THE INDEMNIFICATION OBLIGATIONS UNDER AND THE PROVISIONS OF THIS SECTION 18.2 SHALL APPLY NOTWITHSTANDING THE SOLE, JOINT OR CONCURRENT NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT OF ANY INDEMNIFIED PERSON. SECTION 19. FURTHER ASSURANCES. Lessee will duly execute and deliver to Lessor such further documents and assurances and take such further action as Lessor may from time to time reasonably request or as may be required by applicable law or regulation in order to effectively carry out the intent and purpose of this Lease and to preserve and maintain the rights and remedies created or intended to be created in favor of Lessor hereunder, including, without limitation, the execution and delivery of supplements or amendments hereto, subjecting to this Lease any Replacement Unit and, if required to maintain title to the Units in Lessor, the recording or filing of counterparts hereof or thereof in accordance with the laws of any jurisdiction as Lessor may from time to time deem advisable, in each case the cost thereof to be borne and paid by Lessee. SECTION 20. LESSOR'S RIGHT TO PERFORM. If a Lease Default or Lease Event of Default shall have occurred and be continuing and Lessee fails to make any payment required to be made by it hereunder or fails to perform or comply with any of its other agreements contained herein, Lessor may itself make such payment or perform or comply with such agreement, after giving not less than five days' prior notice thereof to Lessee, but shall not be obligated hereunder to do so, and the amount of such payment and of the reasonable expenses of Lessor incurred in connection with such payment or the performance of or compliance with such agreement, as the case may be, together with interest thereon at the Late Rate from such date of payment, to the extent permitted by applicable law, shall be deemed to be Supplemental Rent, payable by Lessee to Lessor on demand. SECTION 21. ASSIGNMENT. Section 21.1. ASSIGNMENT BY LESSOR. This Lease and/or the Rent and other payments due to the Lessor thereunder may be assigned by such Lessor and, if so assigned, the assignee shall have and be entitled to exercise specifically assigned rights and specifically assigned powers of Lessor -20- hereunder, but the assignee shall not be chargeable with any obligations or liabilities of Lessor hereunder or in respect hereof. Lessee will make all claims concerning the Units to the manufacturer or supplier of such Units and not with or against Lessor's assignee hereunder, and Lessor's assignee shall have no liability or obligation arising out of any such claim and Lessee covenants that it will not assert against any assignee of Lessor any defense, counterclaim or offset on account of breach of warranty or otherwise including in any action for payment of Rent or other amounts due hereunder or for possession of the Units brought by any assignee of Lessor. Any payment of Rent or other payment by Lessee to such assignee shall be in full satisfaction of Lessee's obligation to make such payment under this Lease, but Lessee shall be under no obligation to make any payment to any such assignee until Lessor shall give Lessee written notice to make such payment to such assignee. In the event of any assignment or grant of a security interest by Lessor, promptly following request Lessee shall execute and deliver to Lessor an Acknowledgment Agreement substantially in the form of Exhibit C. Section 21.2. ASSIGNMENT BY LESSEE. LESSEE WILL NOT, WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR (WHICH CONSENT MAY BE WITHHELD BY LESSOR IN ITS SOLE DISCRETION), ASSIGN ANY OF ITS RIGHTS OR OBLIGATIONS HEREUNDER. UNLESS EXPRESSLY AGREED IN WRITING BY LESSOR, NO SUCH ASSIGNMENT CONSENTED TO BY LESSEE SHALL RELIEVE LESSEE OF ITS OBLIGATIONS HEREUNDER; RATHER, LESSEE SHALL BE JOINTLY AND SEVERALLY LIABLE WITH SUCH ASSIGNEE FOR THE OBLIGATIONS OF THE "LESSEE" UNDER THIS LEASE. Section 21.3. SUBLESSEE'S PERFORMANCE AND RIGHTS. Any obligation imposed on Lessee in this Lease shall require only that Lessee perform or cause to be performed such obligation, even if stated herein as a direct obligation, and the performance of any such obligation by any permitted assignee or sublessee under an assignment or sublease then in effect and permitted by the terms of this Lease shall constitute performance by Lessee and discharge of such obligation by Lessee. SECTION 22. NET LEASE, ETC. This Lease is a net lease and Lessee's obligation to pay all Rent payable pursuant to the terms and provisions hereof shall be absolute, unconditional and irrevocable and shall not be affected by any circumstance of any character including, without limitation, (a) any set-off, abatement, counterclaim, suspension, recoupment, reduction, rescission, defense or other right that Lessee may have against Lessor, any Affiliate of Lessor, any vendor or manufacturer of any Unit, or any other Person for any reason whatsoever, (b) any defect in or failure of title, merchantability, condition, design, compliance with specifications, operation or fitness for use of all or any part of any Unit, (c) any damage to, or removal, abandonment, requisition, taking, condemnation, loss, theft or destruction of all or any part of any Unit or any interference, interruption, restriction, curtailment or cessation in the use or possession of any Unit by Lessee or any other Person for any reason whatsoever or of whatever duration, (d) any insolvency, bankruptcy, reorganization or similar proceeding by or against Lessee, Lessor or any other Person, (e) the invalidity, illegality or -21- unenforceability of this Lease or any other instrument referred to herein or therein or any other infirmity herein or therein or any lack of right, power or authority of Lessee or Lessor, or any other Person to enter into this Lease or to perform the obligations hereunder or thereunder or consummate the transactions contemplated hereby or thereby or any doctrine of force majeure, impossibility, frustration or failure of consideration, (f) the breach or failure of any warranty or representation made in this Lease by Lessee or Lessor or any other Person, (g) the requisitioning, seizure or other taking of title to or use of such Unit by any government or Governmental Authority or otherwise, whether or not by reason of any act or omission of Lessor or Lessee, or any other deprivation or limitation of use of such Unit in any respect or for any length of time, whether or not resulting from accident and whether or not without fault on the part of Lessee, (h) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, any present or future law to the contrary notwithstanding to the extent permitted by applicable law; provided, nothing contained in this Section 22 shall prevent Lessee from bringing an action for damages suffered by Lessee as a result of the breach by any Person of any obligation owed by it to Lessee or for equitable relief to obtain compliance with such obligation. To the extent permitted by applicable law, Lessee hereby waives any and all rights which it may now have or which at any time hereafter may be conferred upon it, by statute or otherwise, to terminate, cancel, quit or surrender this Lease with respect to any Unit, except in accordance with the express terms hereof. Each payment of Rent made by Lessee hereunder shall be final and Lessee shall not seek or have any right to recover all or any part of such payment from Lessor or any Person for any reason whatsoever except as expressly provided herein. Nothing contained herein shall be construed to alter Lessee's obligations (and the limitations thereon) with respect to Taxes, indemnification for which is provided in Section 18 or to waive any claim which Lessee might have under this Lease or otherwise or to limit the right of Lessee to make any claim it might have against Lessor or any other Person or to pursue such claim in such manner as Lessee shall deem appropriate, except in the manners precluded by this Section 22. SECTION 23. NOTICES. Unless otherwise expressly specified or permitted by the terms hereof, all communications and notices provided for herein shall be in writing or by facsimile capable of creating a written record, and any such notice shall become effective (a) upon personal delivery thereof, including, without limitation, by overnight mail or courier service, (b) in the case of notice by United States mail, certified or registered, postage prepaid, return receipt requested, upon receipt thereof, or (c) in the case of notice by such facsimile, upon confirmation of receipt thereof, provided such transmission is promptly further confirmed in writing by either of the methods set forth in clause (a) or (b), in each case addressed to Lessor or Lessee (as applicable) at its respective address set forth below or such other address as such Person may from time to time designate by written notice to the other Person; IF TO THE I/O ENTITIES: ---------------------- Input/Output, Inc. 11104 W. Airport Boulevard Stafford, Texas 77477 -22- Attention: Rex Reavis WITH A COPY TO: -------------- D. Bobbitt Noel, Jr. Vinson & Elkins L.L.P. 1001 Fannin Street 2300 First City Tower Houston, Texas 77002-6760 IF TO THE GEOKINETICS ENTITIES: ------------------------------ Geokinetics Inc. Marathon Oil Tower 5500 San Felipe, Suite 780 Houston, Texas 77056 Attention: Chief Financial Officer WITH A COPY TO: -------------- Chamberlain, Hrdlicka, White, Williams & Martin 1400 Two Allen Center 1200 Smith Street Houston, Texas 77002-4310 Attention: James J. Spring, III SECTION 24. PURCHASE OPTIONS. SECTION 24.1. ELECTION TO RETAIN OR RETURN EQUIPMENT AT END OF BASIC OR TERM. Not less than 90 days prior to the end of the Basic Term, Lessee shall give Lessor irrevocable written notice of its decision to return or retain all of the Units at the end of the Basic Term. If Lessee fails to timely give the notice required by this Section 24.1, Lessee shall be deemed to have irrevocably elected to return all of the Units at the end of the Basic Term. Any notice given by Lessee pursuant to this Section 24.1 shall be irrevocable. SECTION 24.2. PURCHASE OPTION. Provided that no Lease Default or Lease Event of Default shall have occurred and be continuing either at the time of notice pursuant to Section 24.1 or the expiration of the Basic Term (unless Lessor shall have waived such Lease Event of Default or Lease Default solely for the purpose of this Section 24.2) and Lessee shall have duly given the notice required by Section 24.1, Lessee shall have the right and, upon the timely giving of such notice or the failure to timely give such notice under Section 24.1, the obligation to purchase all of the Units at the expiration of the Basic Term at a price equal to the Fair Market Sales Value of the Units as of the Basic Term Expiration Date. Payment of the purchase price, together with all other amounts due and owing by Lessee under this Lease, shall be made at the place of payment specified in -23- Section 6.4 in immediately available funds against delivery of a bill of sale transferring and assigning to Lessee all right, title and interest of Lessor in and to such Units on an "as-is, where-is, with all faults" basis and without recourse or warranty except against Lessor Liens. Lessor shall deliver such other documents or releases as Lessee reasonably requests. Lessor shall not be required to make any other representation or warranty as to the condition of such Units or any other matters, and may specifically disclaim any such representations or warranties. SECTION 25. MISCELLANEOUS. SECTION 25.1. MERGER COVENANT. Lessee shall not consolidate with or merge into any other Person, or permit any other Person to merge into it, or convey, transfer or lease substantially all of its assets as an entirety to any Person unless (i) the Person formed by such consolidation or surviving such merger (if other than Lessee) or the Person that acquires by conveyance, transfer or lease substantially all of the assets of Lessee, as an entirety (the "SUCCESSOR ENTITY"), shall execute and deliver to Lessor an agreement containing the assumption by such Successor Entity of the due and punctual performance and observance of each covenant and condition of this Lease to be performed or observed by Lessee, (ii) immediately prior to and immediately after giving effect to such transaction, no Lease Default or Lease Event of Default shall have occurred, whether as a result of such consolidation or merger or such conveyance, transfer or lease or otherwise, (iii) Lessee shall have made all filings necessary or appropriate in the reasonable opinion of Lessor in order to preserve and protect the rights of Lessor under this Lease, (iv) the financial condition of the Successor Entity immediately after the consummation of such consolidation, merger or other transaction is equal to or greater than the financial condition of Lessee immediately prior thereto, and (v) there shall have been delivered to Lessor an Officer's Certificate of the Successor Entity, and an opinion of counsel (which may be such Persons' in-house counsel) in form and substance reasonably satisfactory to Lessor, each stating that such consolidation, merger or other transaction mentioned in clause (i) above comply with this Section 25.1 (except that such opinion of counsel shall not be required to address clause (iv) above). Upon consummation of such consolidation, merger or other transaction, the Successor Entity shall succeed to, and be substituted for, and may exercise every right and power of, Lessee under this Lease with the same effect as if such Successor Entity had been named as Lessee herein. SECTION 25.2. NO IMPAIRMENT OF WARRANTIES. From and after the Closing Date and throughout the Basic Term, Lessee shall not take any action (or fail to take any action) if the result of such action (or failure to act) would abrogate or invalidate or otherwise materially adversely affect the validity of any warranties applicable to the Units that would otherwise be available with respect to the Units. SECTION 25.3. GOVERNING LAW, SEVERABILITY. This Lease and any extensions, amendments, modifications, renewals or supplements hereto or thereto shall be governed by and construed in accordance with the internal laws and decisions of the State of Texas. Whenever possible, each provision of the Lease shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of any such lease shall be prohibited by or invalid under the laws of any jurisdiction, such provision, as to such jurisdiction, shall be ineffective to the extent of -24- such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of such lease in any other jurisdiction. SECTION 25.4. EXECUTION IN COUNTERPARTS. This Lease may be executed in any number of counterparts, each executed counterpart constituting an original and in each case such counterparts shall constitute but one and the same instrument; provided, no security interest in this Lease may be created through the transfer or possession of any counterpart thereof other than the manually executed counterpart marked "Counterpart No. 1 of " on the signature page thereof, which counterpart shall constitute the only "original" hereof for purposes of the Uniform Commercial Code. SECTION 25.5. HEADINGS AND TABLE OF CONTENTS, SECTION REFERENCES. The headings of the sections of this Lease and the Table of Contents are inserted for purposes of convenience only and shall not be construed to affect the meaning or construction of any of the provisions hereof. SECTION 25.6. SUCCESSORS AND ASSIGNS. This Lease shall be binding upon and shall inure to the benefit of, and shall be enforceable by, the parties hereto and thereto and their respective permitted successors and assigns. SECTION 25.7. TRUE LEASE. It is the intent of the parties to this Lease hereunder that it will be a true lease and not a "conditional sale," and that Lessor shall at all times be considered to be Lessor or owner (as applicable) of each Unit which is the subject of such lease for all purposes, and that such lease conveys to Lessee no right, title or interest in any Unit except as lessee. Both parties agree that for all purposes, including financial and tax purposes, this Lease will be reported and treated as an operating lease and not a financing lease. To protect Lessor and its successors and assigns in the event any court or other third party determines that this Lease is a financing arrangement, Lessee hereby grants to Lessor a security interest in and lien upon all of the Units covered by such lease and all replacements and substitutions therefor (including, without limitation, Replacement Units) accessories, attachments, modifications and accessions are now hereafter affixed thereto or incorporated therein and proceeds (cash and non-cash), insurance proceeds and any all chattel paper, accounts, contract rights and general intangibles arising from the sale, lease or other disposition of such Units. Upon request by Lessor, Lessee agrees to execute such financing statements and fixture filings as are necessary to perfect the aforesaid security interest in each relevant jurisdiction, in each case at Lessee's cost. SECTION 25.8. AMENDMENTS AND WAIVERS. No term, covenant, agreement or condition of this Lease may be terminated, amended or compliance therewith waived (either generally or in a particular instance, retroactively or prospectively) except by an instrument or instruments in writing executed by each party hereto and thereto. SECTION 25.9. SURVIVAL. All warranties, representations, indemnities and covenants made by either party hereto, herein or in any certificate or other instrument delivered by such party or on the behalf of any such party under this Lease, shall be considered to have been relied upon by the other party hereto and shall survive the consummation of the transactions contemplated hereby on the -25- Closing Date regardless of any investigation made by either such party or on behalf of either such party, and to the extent having accrued and not been paid or relating to or otherwise arising in connection with the transactions contemplated by this Lease, shall survive the expiration or other termination of this Lease. SECTION 25.10. BUSINESS DAYS. If any payment is to be made hereunder or any action is to be taken hereunder on any date that is not a Business Day, such payment or action otherwise required to be made or taken on such date shall be made or taken on the immediately succeeding Business Day with the same force and effect as if made or taken on such scheduled date and as to any payment (provided any such payment is made on such succeeding Business Day) no interest shall accrue on the amount of such payment from and after such scheduled date to the time of such payment on such next succeeding Business Day. SECTION 25.11. UCC ORIGINAL. To the extent that this Lease constitutes chattel paper (as such term is defined in the Uniform Commercial Code), no security interest in this Lease may be created through the transfer or possession of any counterpart hereof, other than the manually executed counterpart hereof marked "Counterpart No. 1 of 2," which counterpart shall constitute the only "original" hereof for purposes of the Uniform Commercial Code. SECTION 25.12. WAIVER OF TRIAL BY JURY. EACH PARTY TO THIS LEASE AND THIS LEASE WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS LEASE. THIS WAIVER IS KNOWINGLY, INTENTIONALLY, AND VOLUNTARILY MADE BY EACH PARTY AND EACH PARTY ACKNOWLEDGES THAT NEITHER THE OTHER PARTY NOR ANY PERSON ACTING ON BEHALF OF THE OTHER PARTY HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF TRAIL BY JURY OR IN ANY WAY TO MODIFY OR NULLIFY ITS EFFECT. EACH PARTY FURTHER ACKNOWLEDGES THAT IT HAS BEEN REPRESENTED (OR HAS HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS LEASE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. EACH PARTY FURTHER ACKNOWLEDGES THAT IT HAS READ AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF THIS WAIVER PROVISION. SECTION 25.13. WAIVERS. NO WAIVER OF ANY PROVISION OF THIS LEASE SHALL BE DEEMED TO BE A CONTINUING WAIVER OF SUCH PROVISION IN THE EVENT THE SAME OR SIMILAR CONDITIONS GIVING RISE TO SUCH WAIVER THEREAFTER OCCUR. [signatures on the following page] -26- -27- IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease to be duly executed and delivered on the day and year first above written. LESSOR: INPUT/OUTPUT, INC. By: /s/ Rex K. Reavis ---------------------------------------- Name: Rex K. Reavis -------------------------------------- Title: V-P Land Division ------------------------------------- LESSEE: GEOKINETICS INC. By: /s/ Thomas J. Concannon ---------------------------------------- Name: Thomas J. Concannon -------------------------------------- Title: Vice President ------------------------------------- -28- Appendix A Lease Agreement DEFINITIONS GENERAL PROVISIONS The following terms shall have the following meanings for all purposes of the Lease to which this Appendix A is attached, unless the context thereof shall otherwise require, and such meanings shall be equally applicable to both the singular and the plural forms of the terms herein defined. In the case of any conflict between the provisions of this Appendix A and the provisions of the main body of the Lease, the provisions of the main body of the Lease shall control the construction of such Lease. Unless the context otherwise requires, (i) references to agreements shall be deemed to mean and include such agreements as the same may be amended, supplemented and otherwise modified from time to time, and (ii) references to parties to agreements shall be deemed to include the permitted successors and assigns of such parties. DEFINED TERMS "AFFILIATE" of any Person shall mean any other Person which directly or indirectly controls, or is controlled by, or is under a common control with, such Person. The term "CONTROL" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise, and the terms "CONTROLLING" and "CONTROLLED" shall have meanings correlative to the foregoing. "AFTER-TAX BASIS" shall mean, with respect to any payment received or accrued by any Person, that the amount of such payment is supplemented by a further payment or payments so that the sum of all such payments, after reduction for all Taxes payable by such Person imposed by any taxing authority (taking into account any reduction in available net operating loss), shall be equal to the payment due to such Person. "APPLICABLE LAW" means (i) when used other than with respect to a Unit or Units, all then existing applicable laws, rules, regulations (including Environmental Laws), statutes, treaties, codes, ordinances, permits, certificates, orders and licenses of and interpretations by, any Governmental Authority and all then existing applicable judgments, decrees, injunctions, writs, orders or like action of any court, arbitrator or other administrative, judicial or quasi judicial tribunal or agency of competent jurisdiction (including those pertaining to health, safety or the environment and those pertaining to the use of the Units and (ii) when used with respect to a Unit or Units, all then existing laws, rules, regulations (including Environmental Laws), statutes, treaties, codes, ordinances, permits, certificates, orders and licenses of any interpretations by, any Governmental Authority Appendix A Page 1 applicable to such Unit or Units in the applicable jurisdiction and all then existing judgments, decrees, injunctions, writs, orders or like action of any court, arbitrator or other administrative, judicial or quasi judicial tribunal or agency of competent jurisdiction (including those pertaining to health, safety or the environment and those pertaining to the use of such Unit or Units) applicable to such Unit or Units in the applicable jurisdiction. "BANKRUPTCY CODE" shall mean the United States Bankruptcy Reform Act of 1978, as amended from time to time, 11 U.S.C. Section 101 et. seq. "BASIC RENT" shall have the meaning specified in Section 6.2 of this Lease. "BASIC TERM" shall mean 36 calendar months commencing as of the Basic Term Commencement Date. "BASIC TERM COMMENCEMENT DATE" shall mean the date of the Lease as reflected in the preamble paragraph on page 1 of the Lease. "BASIC TERM EXPIRATION DATE" shall mean the same calendar day as the Basic Term Commencement Date, 36 months hence, or the first business day thereafter if a holiday. "BUSINESS DAY" shall mean any day other than a Saturday, Sunday or a day on which commercial banking institutions are authorized or required by law, regulation or executive order to be closed in Texas. "CHANGE OF CONTROL" shall mean when any Person or two or more Persons (other than holders of the Lessee's 12.0% Senior Subordinated Notes due 2005) acting in concert, acquires beneficial ownership (within the meaning of Rule 13d3 of the Securities Exchange Act of 1934, as amended), directly or indirectly, of securities of Lessee (or other securities convertible into such securities) representing forty percent (40%) or more of the combined voting power of all outstanding securities of the Lessee entitled to vote in the election of directors. "CLAIMS" shall have the meaning specified in Section 18.2(a) of the Lease. "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor law. "ENVIRONMENTAL LAW" means any and all federal, state, local and foreign laws, statutes, ordinances, orders, codes, rules, regulations, policies, guidance documents, judgments, decrees, injunctions or agreements with any Governmental Authority, relating to the protection of health or the air, surface water, groundwater, land (including land surface or subsurface), fish, wildlife, biota and any other natural resources and/or governing the handling, use, generation, treatment, storage, transportation, disposal, manufacture, distribution, formulation, packaging, labeling or Release or Hazardous Substances, whether now existing or subsequently amended or enacted, and any common Appendix A Page 2 law doctrine, including but not limited to, negligence, nuisance, trespass, personal injury or property damage related to or arising out of the presence, Release or exposure to a Hazardous Substance. "EQUIPMENT" shall mean the equipment and other properties described in this Lease, together with any and all accessions, additions, improvements and replacements from time to time incorporated or installed in any item thereof which are the property of Lessor pursuant to the terms of this Lease. "EVENT OF LOSS" shall have the meaning specified in Section 13.1 of this Lease. "FAIR MARKET RENTAL VALUE" or "FAIR MARKET SALES VALUE" with respect to any Unit of Equipment shall mean the cash rent or cash price, respectively, obtainable for such Unit in an arm's length lease or sale, respectively, between an informed and willing lessee or purchaser, respectively, under no compulsion to lease or purchase, as the case may be, and an informed and willing lessor or seller, under no compulsion to lease or sell, as the case may be, as the same shall be specified by agreement between Lessor and Lessee. If the parties are unable to agree upon a Fair Market Rental Value and/or a Fair Market Sales Value within 30 days after delivery of notice by Lessee pursuant to Section 17.1(e) of the Lease, or otherwise where such determination is required, within a reasonable period of time, such value shall be determined by appraisal. Lessee will within 15 days after such 30-day period provide Lessor the name of an appraiser that would be satisfactory to Lessee, and Lessor and Lessee will consult with the intent of selecting a mutually acceptable appraiser. If a mutually acceptable appraiser is selected, the Fair Market Rental Value or the Fair Market Sales Value, as the case may be, shall be determined by such appraiser and Lessee shall bear the cost thereof. If Lessee and Lessor are unable to agree upon a single appraiser within such 15-day period, two independent qualified appraisers, one chosen by the Lessee and one chosen by the Lessor, shall jointly determine such value, and Lessor shall bear the cost of the appraiser selected by Lessor and Lessee shall bear the cost of the appraiser selected by Lessee. If such appraisers cannot agree on the amount of such value within 15 days of appointment, one independent qualified appraiser shall be chosen by the American Arbitration Association. All three appraisers shall make a determination within a period of 15 days following appointment, and shall promptly communicate such determination in writing to the Lessor and Lessee. If there shall be a panel of three appraisers, the appraisal furthest from the average shall be eliminated, the remaining two appraisals shall be averaged and such resulting average shall be the Fair Market Rental Value or Fair Market Sales Value, as the case may be. The determination made shall be conclusively binding on both the Lessor and Lessee. If there shall be a panel of three appraisers, Lessee and Lessor shall equally share the cost of the third appraiser. If such appraisal is in connection with the exercise of remedies set forth in Section 17 of the Lease, Lessee shall pay the costs of such appraisal. In determining Fair Market Rental Value or Fair Market Sales Value by appraisal or otherwise, it will be assumed that the relevant Unit is in the condition and location in which it is required to be returned to Lessor pursuant to Section 9 of the Lease and unencumbered by a Lease, any sublease or any Liens, except that with respect to Section 17 of this Lease or as otherwise specifically provided therein, a determination of Fair Market Rental Value or Fair Market Sales Value shall be based on "as is, where is" condition. Appendix A Page 3 "GOVERNMENTAL AUTHORITY" shall mean any federal, state, county, municipal, foreign or other governmental or regulatory authority, agency, board, body, commission, instrumentality, court or quasi Governmental Authority. "HAZARDOUS SUBSTANCES" shall mean any hazardous or toxic substances, materials or wastes, including, but not limited to, those substances, materials, and wastes listed in the United States Department of Transportation Hazardous Materials Table (49 CFR 172.10 l) or by the Environmental Protection Agency as hazardous substances (40 CFR part 302) and amendments thereto, or such substances, materials and wastes which are or become regulated under any applicable local, state or federal law or the equivalent under applicable foreign laws including, without limitation, any materials, waste or substance which is (a) petroleum, (b) asbestos, (c) polychlorinated biphenyls, (d) defined as a "hazardous material," "hazardous substance" or "hazardous waste" under applicable local, state or federal law or the equivalent under applicable foreign laws, (e) designated as a "hazardous substance" pursuant to Section 311 of the Clean Water Act, (f) defined as "hazardous waste" pursuant to Section 1004 of the Resource Conservation and Recovery Act, or (g) defined as "hazardous substances" pursuant to Section 101 of the Comprehensive Environmental Response, Compensation, and Liability Act. "INDEMNIFIED PERSON" shall have the meaning specified in Section 18.2(b) of this Lease. "LATE RATE" shall mean, with respect to any Rent or other payment not paid on the date when due, the lesser of (x) 18% per annum and (y) the maximum interest rate from time to time permitted by law. "LEASE" shall mean this Lease Agreement, as amended and supplemented from time to time. "LEASE DEFAULT" shall mean an event or occurrence that upon the giving of notice or lapse of time or both would constitute a Lease Event of Default. "LEASE EVENT OF DEFAULT" shall mean a Lease Event of Default under the applicable Lease as specified in Section 16 of this Lease. "LESSOR LIENS" means any Lien affecting, on or in respect of any Unit, arising as a result of (i) claims against Lessor, not related to the transactions contemplated by the Lease, or (ii) acts or omissions of Lessor not related to the transactions contemplated by the Lease or in breach of any covenant or agreement of Lessor set forth in the Lease, or (iii) taxes imposed against Lessor or the Unit which are not indemnified against by Lessee pursuant to this Lease. "LIEN" shall mean any mortgage, pledge, security interest, lien, encumbrance, lease, disposition of title or other charge of any kind on property. "MODIFICATION" shall have the meaning set forth in Section 12.2 of this Lease. Appendix A Page 4 "NET INCOME" shall have its commonly used meaning under U. S. Generally Accepted Accounting Principles ("GAAP"). "NON-SEVERABLE MODIFICATION" shall mean any Modification that is not readily removable without impairing the current and residual value, utility or remaining useful life of the Unit immediately prior to removal of such modification, other than in a DE MINIMIS nature. "PERMITTED CONTEST" means actions taken by a Person to contest in good faith and by appropriate proceedings diligently conducted, the legality, validity or applicability to any Unit of any Applicable Law; provided, such contest could not reasonably be expected to (i) interfere (other than in a de minimis respect) with the use, possession, operation or return of any Unit or (ii) create a material risk of sale, forfeiture, loss, or loss of or interference with use or possession of any Unit or interference with the payment of Rent or (iii) expose Lessor to criminal sanctions or (iv) relieve Lessee of the obligation to return the Unit in compliance with the provisions of this Lease. "PERMITTED LIENS" with respect to each Unit shall mean (i) any Liens thereon for taxes, assessments, levies, fees and other governmental and similar charges not delinquent or the amount or validity of which is being contested in good faith by appropriate proceedings so long as there exists no material risk of sale, forfeiture, loss, or loss of or interference with use or possession of any Unit or interference with the payment of rent; and (ii) any Liens incurred or arising in the ordinary course of Lessee's (or if a permitted sublease is then in effect, sublessee's) business securing of mechanics, suppliers, materialmen, laborers, employees, repairment and other like Liens which are not delinquent or the amount or validity of which is being contested in good faith by appropriate proceedings so long as there exists no material risk of sale, forfeiture, loss, or loss of or interference with use or possession of any Unit or interference with the payment of Rent. "PERSON" shall mean an individual, partnership, corporation, trust, association or unincorporated organization, and a government or agency or political subdivision thereof. "RELEASE" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, dumping or disposing of a Hazardous Material into the air, surface water, groundwater, land (including land surface or subsurface), fish, wildlife, biota or any other natural resources. "RENT" shall mean all Basic Rent and Supplemental Rent. "RENT PAYMENT DATE" or "PAYMENT DATE" shall mean each monthly payment date of each year occurring during the Basic Term as specified in Section 6 of this Lease; provided, if any such date shall not be a Business Day, then "RENT PAYMENT DATE" or "PAYMENT DATE" shall mean the next succeeding Business Day. "REPLACEMENT UNIT" shall mean any Unit which shall have been substituted for another such Unit of the same type and leased under this Lease. Appendix A Page 5 "REQUIRED MODIFICATION" shall have the meaning set forth in Section 12.1 of this Lease. "SEVERABLE MODIFICATION" shall mean any Modification that is readily removable without causing material damage to any Unit and without diminishing the current or expected residual value, utility or useful life of such Unit below the current and residual value, utility or useful life of such Unit immediately prior to such Modification, assuming that such Unit was then in the condition required to be maintained by the terms of this Lease, other than in a DE MINIMIS nature. "SUBSIDIARY" of any Person shall mean any corporation, association, or other business entity of which more than 50% (by number of votes) of the voting stock at the time outstanding shall at the time be owned, directly or indirectly, by such Person or by any other corporation, association or trust which is itself a Subsidiary within the meaning of this definition, or collectively by such Person and any one or more such Subsidiaries. "SUCCESSOR ENTITY" shall have the meaning set forth in Section 25.1 of this Lease. "SUPPLEMENTAL RENT" shall mean all amounts, liabilities and obligations (other than Basic Rent) which Lessee assumes or agrees to pay under this Lease to or on behalf of any of the other parties thereto. "TAXES" means any and all new or existing governmental or quasi-governmental taxes, assessments, levies, assessments, imposts, duties, fees, charges and withholdings of any kind or nature whatsoever and howsoever described, including, income, gross receipts, franchise, sales, use, property, excise, profits, capital, Btu or energy, gathering, transport, pipeline, utility, employment, stamp, transfer, interest equalization mortgage, intangible, license, filing, recording and activity fees or charges together with any and all penalties, fines, additions or interest thereon. "UNIT" shall mean a unit or item of Equipment. Appendix A Page 6 Schedule 14.1 to Lease Agreement (Insurance) At all times during the term of each Lease and until the Units are returned to Lessor in accordance with Section 9.1, Lessee shall at its cost and expense, maintain or cause to be maintained valid and enforceable insurance of the following character: (i) "all risks" property insurance covering the Units and all replacements and additions thereto, and all other property which constitute part of the Units in a manner consistent with insurance maintained by prudent owners or operators of assets similar to the Units and in any event in amounts not less than the greater of (a) the actual replacement cost of the Units and (b) the Retirement Amount applicable to the Units. (ii) public liability insurance covering legal liability against claims for bodily injury, death or property damage, occurring on, in or about the facilities at which the Units are located and the adjoining land, streets, sidewalks or ways or occurring as a result of construction and use and operation of such facilities or as a result of materials manufactured, processed, constructed or sold, or services rendered from such facilities or the Units in the minimum amount of $1,000,000 and with umbrella excess liability coverage in the amount of $5,000,000. Coverage shall include "premises/operations", "independent contractors", and blanket contractual" liabilities. (iii) insurance during the course of any construction or repair or modification of any Units against "all risks", including collapse and transit coverage, covering the total value of work performed and equipment, supplies and materials furnished, in an amount equal to the greater of (a) the actual replacement cost of such Units and (b) the Retirement Amount applicable to the Units. (iv) worker's compensation insurance (or other similar insurance or self-insurance program permitted and in compliance with Applicable Laws) covering all Persons employed in connection with any work done on or about or with the Units with respect to which claims for death or bodily injury could be asserted against Lessor. (v) such other insurance, in such amounts, against such risks, and with such other provisions as is customarily and generally maintained by operators of similar properties of a financial standing similar to Lessee, including war risk insurance (at and during such times and at such locations as war risk insurance is commonly obtained in the case of property similar to the Units), when and to the extent obtainable; Schedule 14.1 Page 1 Lessee may self insure up to the amount of $100,000 with respect to such risks described in clauses (i), (ii) and (iii) above. Such insurance shall be written by reputable insurance companies of recognized financial standing and which are legally qualified to issue such insurance and shall name Lessee as insured and Lessor as additional insured with respect to insurance described in clause (ii) and, to the extent applicable, clause (v) above, and shall name Lessor as loss payee, for distribution to itself and Lessee, as their interests may appear, with respect to insurance described in clauses (i), (iii) and, to the extent applicable, clause (v) above. Lessee shall obtain such insurance policies from insurance companies with a General Policy Rating of A:X or better in Best's Key Rating Guide. Such insurance may be obtained by Lessee by endorsement on its blanket insurance policies, provided that the Units shall be separately scheduled so that no loss at any other property shall reduce the amount payable with respect to the Units. All liability policies shall be provided on an occurrence policy language form with no punitive damage exclusion and with an unlimited claim discovery period. Each policy shall contain a waiver of subrogation against the Indemnified Persons. Lessee shall be responsible for any obligation incurred as a result of any self-retention or deductible application. Schedule 14.1 Page 2 Exhibit A CERTIFICATE OF ACCEPTANCE Re: Lease Agreement dated October , 1999, executed by Input/Output, Inc. and Geokinetics Inc. (the "Lease"). The undersigned, an authorized officer of Geokinetics Inc., Lessee, certifies that each Unit of Equipment described on Schedule 2 of the Lease has been accepted by Geokinetics Inc. for all purposes. Any capitalized term used but not defined herein shall have the meaning ascribed to such term in the above referenced Lease Agreement. EXECUTED as of . ------------------------ GEOKINETICS INC. By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- Exhibit A Page 1 Exhibit B ACKNOWLEDGMENT AGREEMENT Re: Lease Agreement dated September , 1999 (the "Lease") between Input/Output, Inc., as Lessor and Geokinetics Inc., as Lessee. Lessor hereby gives notice to Lessee that the Lease will be assigned by Lessor to the party identified below (the "Assignee"). Until otherwise instructed in writing, Lessee is hereby instructed to make all payments of Rent under the Lease to: ------------------------------- ------------------------------- ------------------------------- As a material inducement to Assignee to consummate the assignment referenced above, Lessee hereby acknowledges and agrees that: (i) the Lease is in full force and effect and Lessee is not in default thereunder; (ii) Lessee's obligation to make all Rent Payments as set forth in the Lease is unconditional and it will make all of said payments, without any right of setoff, defense or counterclaims, as provided in Section 6 of the Lease; (iii) Assignee shall enjoy all of Lessor's right and privileges under the Lease but shall not be chargeable with any obligations or liabilities under the Lease except to the extent expressly assumed in writing by Assignee; and (iv) any notice which Lessee is required to give Lessor under the Lease shall be sent to Assignee. This Acknowledgment Agreement may be executed in counterparts. The parties have executed this Acknowledgment Agreement as of this day of , . ------- ---------------- ------ LESSEE: LESSOR: GEOKINETICS INC. INPUT/OUTPUT, INC. By: By: ------------------------------- -------------------------------- Name: Name: ----------------------------- ------------------------------ Title: Title: ---------------------------- ----------------------------- Exhibit A Page 2 EX-10.24 4 a2045163zex-10_24.txt EXHIBIT 10.24 AMENDMENT NO. 1 This AMENDMENT NO. 1 (this "AMENDMENT NO. 1") is made as of April 9, 2001 between GeoLease Partners, L.P., a Delaware limited partnership (the "PARTNERSHIP"), and Geokinetics Inc., a Delaware corporation (the "COMPANY"). This Amendment No. 1 is made with reference to that certain Lease Agreement dated as of October 1, 1999 (the "LEASE AGREEMENT") between the Company and Input/Output, Inc., a Delaware corporation ("I/O"). All capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Lease Agreement. WHEREAS, concurrently with the execution hereof, the Partnership is purchasing the Equipment from I/O, and I/O is assigning its rights under the Lease Agreement to the Partnership; WHEREAS, the Company desires to defer Basic Rent under the Lease Agreement; WHEREAS, the Company, the Partnership and the holders of the Company's 13 1/2% Senior Secured Notes outstanding on the date hereof (the "NOTEHOLDERS") have entered into that certain Subordination and Amendment Agreement on the date hereof (the "SUBORDINATION AGREEMENT"); WHEREAS, as consideration for the Noteholders to enter into the Subordination Agreement, the Lease Agreement, as amended by this Amendment No. 1, shall be subject to certain of the provisions contained in the Subordination Agreement; WHEREAS, as consideration for the Partnership purchasing the Equipment from I/O, for becoming the Lessor under the Lease Agreement, for providing the Company with the option to defer the payment of Basic Rent and for other good and valuable consideration contained herein, the Company has agreed to pay the Partnership Deferred Rent (as defined in Section 1.5 below); and WHEREAS, the Company and the Partnership desire to amend certain provisions of the Lease Agreement; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: -2- SECTION 1. AMENDMENT 1.1 Section 6.2 of the Lease Agreement (BASIC RENT) is hereby amended by replacing the second sentence of Section 6.2 with the following: "Each monthly payment is due on the first day of each month; PROVIDED, that payments of Basic Rent may, at the option of Lessee, be deferred until the earlier of the Basic Term Expiration Date or upon the occurrence of a Lease Event of Default which shall not have been cured or waived; PROVIDED, FURTHER, that for the purposes of Section 6.3, all amounts of Basic Rent that are deferred pursuant to this Section 6.2 or are unpaid on the effective date of Amendment No. 1 to this Lease shall be deemed to be installments of Basic Rent not paid when due." 1.2 Section 6.3 of the Lease Agreement (SUPPLEMENTAL RENT) is hereby amended by replacing the second sentence of Section 6.3 with the following: "Lessee will also pay, as Supplemental Rent, but without duplication, to the extent permitted by applicable law, an amount equal to interest at the Late Rate on (x) any part of any installment of Basic Rent not paid when due for any period for which the same shall be overdue on the earlier of the Basic Term Expiration Date or upon the occurrence of a Lease Event of Default which shall not have been cured or waived, and (y) any other payment of Supplemental Rent not paid when due or ten days after demanded, as the case may be, for the period from such date or ten days after demanded, as the case may be, until the same shall be paid, on demand. For the avoidance of doubt, amounts of Basic Rent which are unpaid on the effective date of Amendment No. 1 to this Lease shall accrue interest at the Late Rate." 1.3 Section 6.4 of the Lease Agreement (MANNER OF PAYMENTS) is hereby amended by inserting the following sentence at the end of Section 6.4: "Lessee shall give notice of its intent to make payments of Rent in cash five (5) Business Days prior to such date of payment and shall make such payment by wire transfer from its account in the State of Delaware into Lessor's account in the State of Delaware upon the receipt of wire instructions from Lessor." 1.4 Section 6.5 of the Lease Agreement (SALES TAX) is hereby amended by replacing Section 6.5 in its entirety with the following: -3- "Whether or not Lessee pays Basic Rent in cash, Lessee shall remit to Lessor, in the manner set forth in Section 6.4 above in the lawful currency of the United States of America, all sales and other similar taxes applicable to any Rent payments hereunder pursuant to Texas Tax Code Section 151.051 and Section 151.052." 1.5 The following shall be added as Section 6.6 (DEFERRED RENT) to the Lease Agreement: "SECTION 6.6. DEFERRED RENT. The Company shall pay the Partnership the sum of $1.9 million as deferred rent ("DEFERRED RENT") on the Note Maturity Date by 12:00 noon (Houston, Texas time) in the lawful currency of the United States of America. Any portion of Deferred Rent not paid in cash shall accrue interest at the Late Rate from the Note Maturity Date through such date all obligations in respect of Deferred Rent are paid in full." 1.6 Section 16 of the Lease Agreement (LEASE EVENTS OF DEFAULT) is hereby amended as follows: (i) clause (a) thereof is hereby amended by replacing it in its entirety with "[Intentionally Omitted]"; (ii) clause (b) thereof is hereby amended by replacing it in its entirety with the following: "Lessee shall fail to (i) make any payment of Supplemental Rent (other than Supplemental Rent owing in respect of Basic Rent as provided in Section 6.3) to be paid by Lessee pursuant to this Lease after the same shall have become due and such failure shall continue unremedied for ten days after receipt by Lessee of the original demand from Lessor, or (ii) pay all outstanding Rent (other than Deferred Rent), including Supplemental Rent owing in respect of Basic Rent as provided in Section 6.3, upon the earlier of the Basic Term Expiration Date or upon the occurrence of another Lease Event of Default which shall not have been cured or waived; or"; (iii)clause (j) thereof is amended by replacing the period at the end of clause (j) with "; or"; and (iv) the following shall be added as clause (k): -4- "(k) Deferred Rent is not paid on the Note Maturity Date by 12:00 noon (Houston, Texas time) or there is an acceleration of any of the indebtedness represented by the 13 1/2% Senior Secured Notes of Geokinetics Inc." 1.7 Section 23 of the Lease Agreement (NOTICES) is hereby amended by replacing the notice addresses set forth in Section 23 in their entirety with the following: "If to the Lessor: GeoLease Partners, L.P. c/o DLJ Merchant Banking Partners II, Inc. 277 Park Avenue New York, New York 10172 Attention: General Counsel Telecopy: (212) 892-7551 with a copy to: Cahill Gordon & Reindel 80 Pine Street New York, New York 10005 Attention: John Schuster, Esq. Telecopy: (212) 269-5420" If to the Geokinetics Entities: Geokinetics Inc. 8401 Westheimer, Suite 150 Houston, Texas 77063 Attention: Chief Financial Officer Telecopy: (713) 850-7330 with a copy to: Chamberlain, Hrdlicka, White, Williams & Martin 1200 Smith Street, Suite 1400 Houston, Texas 77002-4310 Attention: James J. Spring III, Esq. Telecopy: (713) 658-2553." 1.8 Section 25.3 of the Lease Agreement (GOVERNING LAW, SEVERABILITY) is hereby amended by replacing the first sentence of Section 25.3 with the following: -5- "This Lease and any extensions, amendments, modifications, renewals or supplements hereto or thereto shall be governed by and construed in accordance with the internal laws and decisions of the State of Delaware." 1.9 APPENDIX A to the Lease Agreement--Definitions--Defined Terms, is hereby amended by replacing the following definitions in their entirety as follows: "`CHANGE OF CONTROL' shall mean any Person or two or more Persons (other than holders of the Lessee's 13 1/2% Senior Secured Notes) acting in concert, acquires beneficial ownership (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended), directly or indirectly, of securities of Lessee (or other securities convertible into such securities) representing forty percent (40%) or more of the combined voting power of all outstanding securities of the Lessee entitled to vote in the election of directors." "`FAIR MARKET VALUE' or `FAIR MARKET SALES VALUE' with respect to any Unit of Equipment shall mean the cash rent or cash price, respectively, obtainable for such Unit in an arm's length lease or sale, respectively, between an informed and willing lessee or purchaser, respectively, under no compulsion to lease or purchase, as the case may be, and an informed and willing lessor or seller, under no compulsion to lease or sell, as the case may be, as the same shall be (i) determined by The R. T. Clark Companies Inc. or another nationally or industry-wide (with respect to the oil and gas exploration industry) recognized independent appraisal firm in the practice of regularly appraising equipment similar to the Equipment selected by Lessor and reasonably acceptable to a majority in interest of the Non-Affiliated Noteholders or (ii) as otherwise agreed with the approval of a majority in interest of the Non-Affiliated Noteholders." 1.10 APPENDIX A to the Lease Agreement--Definitions--Defined Terms, is hereby amended by adding the following definitions: "`DEFERRED RENT' shall have the meaning set forth in Section 6.6 of this Lease." "`NON-AFFILIATED NOTEHOLDER' shall mean any holder of 13 1/2% Senior Secured Notes due 2002 of Geokinetics Inc. who (i) is not an Affiliate of the Lessor or the Lessee and (ii) owns at least $300,000 of such notes; PROVIDED, that each of DLJ Investment Partners, L.P., DLJ Investment Funding, Inc. and DLJ ESC II L.P. or any of their respective Affili- -6- ates, so long as it shall be a holder of at least $300,000 of the 13 1/2% Senior Secured Notes due 2002 of Geokinetics Inc., shall be deemed to be an Affiliate of the Lessor." "`NOTE MATURITY DATE' shall mean one Business Day after the later of (x) September 15, 2003 and (y) the date that the 13 1/2% Senior Secured Notes due 2002 of Geokinetics Inc. are paid in full. For the purposes of calculating interest accruing at the Late Rate pursuant to Section 6.6 of this Lease (DEFERRED RENT), the Note Maturity Date shall be deemed to be the Business Day after September 15, 2003." SECTION 2. RATIFICATION OF the lease AGREEMENT To induce the Partnership to enter into this Amendment No. 1, the Company represents and warrants that, after giving effect to this Amendment No. 1, no violation of the terms of the Lease Agreement exists and all representations and warranties contained in the Lease Agreement are true, correct and complete in all material respects on and as of the date hereof except to the extent such representations and warranties specifically relate to an earlier date in which case they were true, correct and complete in all material respects on and as of such earlier date. SECTION 3. COUNTERPARTS; EFFECTIVENESS This Amendment No. 1 may be executed in any number of counterparts, and all such counterparts taken together shall be deemed to constitute one and the same instrument. Signature pages may be detached from counterpart documents and reassembled to form duplicate executed originals. This Amendment No. 1 shall become effective as of the date hereof upon the execution of the counterparts hereof by the Company and the Partnership. SECTION 4. GOVERNING LAW THIS AMENDMENT NO. 1 SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW. SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to the Lease Agreement to be duly executed, all as of the date first written above. Company: GEOKINETICS INC. By: /s/ Thomas J. Concannon ---------------------------- Name: Thomas J. Concannon Title: Vice President Partnership: GEOLEASE PARTNERS, L.P. By: GEOLEASE GP, INC., its general partner By: /s/ Douglas Mark Ladden ---------------------------- Name: Douglas Mark Ladden Title: President -----END PRIVACY-ENHANCED MESSAGE-----