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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ ] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended September 30, 2002
Commission file number: 333-89863*
GRANT GEOPHYSICAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0548468
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16850 Park Row, Houston, Texas 77084
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 398-9503
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [ ]
As of November 14, 2002, 14,547,055 shares of common stock, par value $.001
per share, were issued and outstanding. As of such date, there was no public
market for the common stock.
- --------------------------------------------------------------------------------
* The Commission file number refers to a Form S-1 registration statement filed
by the registrant under the Securities Act of 1933, which became effective
January 12, 2000.
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GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2002
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2001 and
September 30, 2002 3
Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 2001 and 2002 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2001 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults on Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES AND CERTIFICATIONS 20
2
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, SEPTEMBER 30,
2001 2002
------------ -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 2,471 $ 3,436
Restricted cash 17 17
Accounts receivable:
Trade (net of allowance for doubtful accounts of $790
and $538 at December 31, 2001 and September 30, 2002,
respectively) 14,142 12,989
Other 3,696 2,770
Inventories 447 500
Prepaids and other 2,146 3,000
Work in process 1,511 1,754
---------- ---------
Total current assets 24,430 24,466
Property, plant and equipment 95,423 96,606
Less: accumulated depreciation and amortization 76,370 80,047
---------- ---------
Net property, plant and equipment 19,053 16,559
Multi-client data library -- non current, net 599 457
Other assets 1,843 1,852
---------- ---------
Total assets $ 45,925 $ 43,334
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, current portion of long-term debt and
capital lease obligations $ 63,776 $ 74,546
Term loan - Elliott 7,500 7,500
Accounts payable 12,471 8,532
Accrued expenses 9,402 8,348
Accrued interest 1,854 1,561
Unearned revenue-current 4,349 3,938
Foreign income taxes payable 1,272 853
---------- ---------
Total current liabilities 100,624 105,278
Long-term debt and capital lease obligations 719 387
Unearned revenue -- non current 782 782
Other liabilities and deferred credits 1,399 1,048
Stockholders' equity (deficit):
Preferred stock, $.001 par value. Authorized 5,000,000
shares 8% convertible preferred series, liquidation value
$100 per share issued and outstanding 620,408 shares at
December 31, 2001 and 658,276 shares at September 30,
2002, respectively 62,041 65,828
Common stock, $.001 par value. Authorized 50,000,000
shares; 14,547,055 shares issued and outstanding at
December 31, 2001 and September 30, 2002 15 15
Additional paid-in capital 58,867 58,867
Accumulated deficit (176,194) (186,670)
Accumulated other comprehensive income (2,328) (2,201)
---------- ----------
Total stockholders' equity (deficit) (57,599) (64,161)
---------- ----------
Total liabilities and stockholders' equity (deficit) $ 45,925 $ 43,334
========== =========
See accompanying Notes to Consolidated Financial Statements.
3
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ---------------------------
2001 2002 2001 2002
------------- ------------- ------------- ----------
(UNAUDITED) (UNAUDITED)
Revenues $23,990 $18,238 $ 72,017 $ 63,183
Expenses:
Direct operating expenses 22,057 14,142 46,440 49,196
Selling, general and administrative expenses 2,302 2,358 6,550 6,760
Depreciation and amortization 4,639 2,291 31,869 7,104
------- -------- --------- ---------
Total costs and expenses 28,998 18,791 84,859 63,060
------- -------- --------- ---------
Operating income (loss) (5,008) (553) (12,842) 123
Other income (expense):
Interest, net (1,617) (1,806) (4,954) (5,441)
Other (660) (772) (1,571) (107)
------- --------- ---------- ----------
Total other income (expense) (2,277) (2,578) (6,525) (5,548)
------- --------- ---------- ----------
Loss before taxes (7,285) (3,131) (19,367) (5,425)
Income tax expense 107 183 499 1,264
------- -------- --------- ---------
Net loss (7,392) (3,314) (19,866) (6,689)
Preferred dividend requirements 1,226 1,327 3,569 3,863
------- -------- --------- ---------
Net loss applicable to common stock $(8,618) $ (4,641) $ (23,435) $ (10,552)
======= ======== ========== ==========
LOSS PER COMMON SHARE - BASIC AND DILUTED:
Net loss $ (0.51) $ (0.23) $ (1.37) $ (0.46)
Dividend requirements on pay-in-kind
preferred stock (0.08) (0.09) (0.24) (0.27)
------- --------- --------- ---------
Net loss per common share $ (0.59) $ (0.32) $ (1.61) $ (0.73)
======= ======== ========= =========
See accompanying Notes to Consolidated Financial Statements.
4
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2001 2002
---------- ----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (19,866) $ (6,689)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization expense 13,524 6,957
Multi-client data library amortization expense 18,345 145
(Gain) loss on sale of fixed assets 367 (357)
Provision for doubtful accounts 90 9
Exchange (gain) loss 1,394 709
Other non-cash items 26 26
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN:
Accounts receivable (7,390) 2,070
Inventories (38) (53)
Prepaids (1,375) (855)
Work in process (1,212) (243)
Other assets 220 (62)
INCREASE (DECREASE) IN:
Accounts payable 4,941 (3,924)
Accrued interest and other expenses (9,797) (1,754)
Foreign income tax payable 289 (419)
Other liabilities and deferred credit (67) (351)
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (549) (4,791)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (2,011) (2,342)
Multi-client data library (233) --
Proceeds from sale of assets 222 464
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (2,022) (1,878)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings made 34,236 30,157
Repayment on borrowings (33,254) (21,908)
--------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 982 8,249
EFFECT OF EXCHANGE RATE CHANGES ON CASH (505) (615)
--------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,094) 965
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,654 2,471
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,560 $ 3,436
========== =========
See accompanying Notes to Consolidated Financial Statements.
5
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) INDUSTRY CONDITIONS/LIQUIDITY/GOING CONCERN
The liquidity of Grant Geophysical, Inc. and its subsidiaries ("Grant" or
the "Company") should be considered in light of the cyclical nature of demand
for land and transition zone seismic services. These fluctuations have rapidly
impacted the Company's liquidity as supply and demand factors directly affect
pricing.
The Company's ability to meet its debt service and other obligations depends
on its future performance, which in turn is subject to general economic
conditions, activity levels in the oil and gas exploration sector, and other
factors beyond the Company's control. While management believes there has been a
recent improvement in market conditions for seismic services, especially in
Latin America, funds to finance operations are expected to remain limited
through 2002 and may not permit the Company to continue its operations in the
ordinary course of business. The Company has in the past relied on its majority
stockholder, Elliott Associates, L.P. ("Elliott"), to provide credit support and
interim funding. As of November 10, 2002, $11.7 million has been provided by
Elliott to the Company to provide working capital in the form of a factoring
arrangement for certain foreign receivables, which represents the maximum amount
allowed under the agreement and is due and payable no later than October 31,
2003 (See Note 4). Elliott has indicated to the Company that it will not provide
any additional funding to the Company on this basis. The Company does not expect
to be able to retire these amounts from its operating cash flows. In order to
avoid a default under this agreement, either Elliott will, at its sole and
absolute discretion, elect to post $11.7 million in cash collateral to permit an
advance under the supplemental term loan (See Note 4.) of the Foothill/Elliott
Credit Facility in a like amount, the proceeds of which are used to repay the
Elliott factoring arrangement or the Company will need to otherwise reach an
accommodation with Elliott about the payment of these amounts or obtain
additional financing to refinance the amount payable to Elliott.
On May 24, 2002, the Company completed further modifications to the
Foothill/Elliott Credit Facility whereby, among other things, the maximum amount
of the Foothill revolving facility was reduced from $10.0 million to $8.0
million (subject to additional borrowing base limitations) and Foothill agreed,
subject to conditions, to fund a $16.5 million supplemental term loan. The
revolving facility and supplemental term loan are in addition to the existing
term loans owing to Elliott and Foothill under the Foothill/Elliott Credit
Facility. Advances under the supplemental term loan are conditioned, among other
things, on Elliott having elected, at its sole and absolute discretion, to
deposit cash collateral with Foothill in the amount of such advances to secure
Elliott's guarantee of the supplemental term loan. The supplemental term loan
will bear interest at the 90-day CD rate announced by Wells Fargo. The Foothill
supplemental term loan and all other obligations under the Foothill/Elliott
Credit Facility are secured by substantially all assets of the Company and its
subsidiaries, are guaranteed by Elliott and, except as to the existing Elliott
term loan, may be purchased from Foothill by Elliott at any time on 5 business
days' notice.
On July 8, 2002, the Company completed further modifications to the
Foothill/Elliott Credit Facility whereby, among other things, the maximum amount
of the Foothill supplemental term loan was increased from $16.5 million to $19.5
million. Of the $11.7 million remaining undrawn under the supplemental term
loan, the Company expects Elliott to post cash collateral for $11.7 million
thereof in any event only to the extent the Company's obligations to Elliott
under the factoring arrangement will have been reduced by a like amount at the
time of funding. Consequently, the Company does expects that the
Foothill/Elliott Credit Facility will not be available to fund any of the
Company's working capital needs and would be available only to the extent
Elliott, at its sole and absolute discretion, posts sufficient cash collateral.
There are currently no additional committed sources of financing available to
the Company and no availability under existing facilities. Even if business
conditions substantially improve and cost control initiatives are successful
during 2002, the Company will require substantial cash flow to continue
operations on a satisfactory basis, fund capital expenditures and meet its
principal and interest requirements with respect to the 9 3/4% Senior Notes,
Foothill/Elliott Credit Facility and other indebtedness, and its obligations
under the Elliott factoring arrangement, as those amounts become due.
Under current circumstances other defaults are expected to occur under the
Foothill/Elliott Credit Facility. Accordingly, the Company has classified $20.8
million of otherwise long-term debt under the Foothill/Elliott Credit Facility
as current in the Company's financial statements for the quarter ended September
30, 2002. Upon any events of default under the Foothill/Elliott Credit Facility,
Foothill may accelerate the maturity of amounts outstanding under the
Foothill/Elliott Credit Facility at any time or refuse to advance additional
amounts to the Company under the revolving facility. If Foothill were to
accelerate amounts due under the Foothill/Elliott Credit Facility or upon other
events of default under the indenture for the Company's 9 3/4% Senior Notes due
2008, the trustee could take the steps necessary to cause that debt to become
immediately due and payable. Accordingly, the Company has
6
classified $43.5 million of otherwise long-term debt related to the Senior Notes
as current in the Company's financial statements for the quarter ended September
30, 2002. If any of the Company's debt was accelerated, it would be unlikely
that the Company would be able to continue its operations without seeking
protection from its creditors under the federal bankruptcy code.
The Company will need to attain profitable operating levels in order to
provide sufficient cash flow to service its debt, maintain its operations and
fund capital expenditures. While the Company was able to generate $0.1 million
of operating income in the nine months ended September 30, 2002, the
overcapacity in the seismic service industry and the Company's increasing
reliance on international operations will require that the Company continue to
closely manage its available cash resources. Because of the high costs
associated with equipping and operating crews outside of North America and the
time generally required to process billings and receive payments, the Company
expects to require substantial cash flow to support its international projects.
The Company has approximately $148.3 million of debt and preferred stock
outstanding at September 30, 2002. Currently, the Company's highly leveraged
capital structure negatively impacts and will continue to negatively impact its
profitability and operating cash flow. If the Company is not able to
significantly improve its operations or obtain additional financing, either from
Elliott or other sources, a financial restructuring will be required to allow
the Company to be a viable entity on a long-term basis.
The Company has taken measures to reduce costs through consolidation of
certain locations, reducing the size of its United States operations due to
reduced demand levels, and reductions in overhead personnel. Should such
measures be unsuccessful, or should defaults on any of the Company's debt occur
and amounts be accelerated, there would be substantial doubt about the Company's
ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
those uncertainties.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND INDUSTRY CONDITIONS
The consolidated balance sheet of Grant Geophysical, Inc. and subsidiaries
(the "Company") as of September 30, 2002 and the related consolidated statements
of operations for the three and nine months ended September 30, 2001 and 2002
and the related statements of cash flows for the nine months ended September 30,
2001 and 2002 are unaudited. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements of the Company contain all
adjustments (consisting only of normal, recurring adjustments) necessary to
present fairly the Company's financial position as of September 30, 2002, the
results of its operations for the three and nine months ended September 30, 2001
and 2002, and the results of its cash flows for the nine months ended September
30, 2001 and 2002, respectively. Results of operations for the interim periods
included herein are not necessarily indicative of results of operations for the
full year periods. The consolidated financial statements should be read in
conjunction with the audited financial statements and footnotes for the year
ended December 31, 2001, included in the Company's Annual Report on Form 10-K,
as filed with the Securities and Exchange Commission (the "Commission").
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and all majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Multi-client Data Library
The costs incurred in acquiring and processing multi-client seismic data
owned by the Company are capitalized. During the twelve-month period beginning
at the completion of the acquisition and processing of each multi-client survey,
costs are amortized based on revenues from such survey as a percentage of total
estimated revenues to be realized from such survey. Thereafter, amortization of
remaining capitalized costs is provided at the greater of the percentage of
realized revenues to total estimated revenues or straight line over four years.
On March 23, 2001, the Company completed the sale of a substantial portion of
its multi-client data library, and ongoing rights thereto, in the southern
United States to a third party seismic data broker for $15,000,000 cash,
retaining all of its Canadian multi-client data library as well as several data
surveys in the southern United States. Amortization expense associated with the
Company's multi-client data library was $18.3 million and $0.1 million for the
nine months ended September 30, 2001 and 2002 respectively. As of December 31,
2001 and September 30, 2002, the Company's remaining multi-client data library
was $0.6 million and $0.5 million, respectively.
On a quarterly basis, management estimates the residual value of each survey
and additional amortization is provided if the remaining revenues reasonably
expected to be obtained from any survey are less than the carrying value of such
survey or group of surveys.
7
Asset Impairment
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
long-lived assets and certain identifiable intangibles are written down to their
current fair value whenever events or changes in circumstances indicate that the
carrying amount of these assets is not recoverable. These events or changes in
circumstances may include but are not limited to a significant change to the
extent in which an asset is used, a significant decrease in the market value of
the asset, or a projection or forecast that demonstrated continuing losses
associated with an asset. If an impairment is determined, the asset is written
down to its current fair value and a loss is recognized.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The more significant areas requiring the use of management estimates relate
to expected future sales associated with the Company's multi-client data
library, estimated future cash flows related to long-lived assets and valuation
allowances for deferred tax assets. Actual results could differ materially from
these estimates making it reasonably possible that a change in these estimates
could occur in the near term.
Loss Per Common Share
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share," basic loss per common share is computed based upon the
weighted average number of common shares outstanding during each period without
any dilutive effects considered. Diluted loss per common share reflects dilution
for all potentially dilutive securities, including warrants and convertible
securities. The loss is adjusted for cumulative preferred stock dividends in
calculating net loss applicable to the common stockholders.
The Company has not issued any common shares during 2002. Accordingly, the
weighted average number of common shares is the current number of shares
outstanding. Furthermore, options, warrants or securities are currently
anti-dilutive and have not been included in the weighted average for dilutive
shares outstanding.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," that requires all business combinations
initiated after September 30, 2001 to be accounted for as purchases. The Company
adopted SFAS No. 141 as required on July 1, 2001. The adoption did not have a
material impact on the Company's financial position or results of operations.
In July 2001, the FASB also issued SFAS No. 142, "Goodwill and Other
Intangible Assets," requiring that all intangible assets without a contractual
life no longer be amortized but reviewed annually, or as warranted by triggering
events, for impairment in accordance with specific determination and measurement
provisions. The Company has adopted SFAS No. 142 when required to do so on
January 1, 2002; however, goodwill and intangible assets acquired subsequent to
September 30, 2001, were subject immediately to the provisions of this standard.
Due to impairments recorded in 2001, the Company has no remaining goodwill at
September 30, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," was issued. SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of," and Accounting Principles Board Opinion ("APB") No. 30,
"Reporting the Results of Operations - Reporting the Effects of the Disposal of
a Segment Business and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions." SFAS No. 144 establishes a single accounting model for assets
to be disposed of by sale whether previously held and used or newly acquired.
SFAS No. 144 retains the provisions of APB No. 30 for presentation of
discontinued operations in the income statement, but broadens the presentation
to include a component of an entity. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001, and the interim periods within. The Company
has adopted SFAS No. 144 on January 1, 2002 and does not believe that the
adoption of SFAS No. 144 will have a material impact on its financial position,
results of operations or cash flows.
8
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4, 44
and 64, Amendment of SFAS Statement No. 13, and Technical Corrections." This
statement rescinds the following statement of SFAS 4, "Reporting Gains and
Losses from Extinguishment of Debt," and its amendment SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking Fund Requirements," as well as,
SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." The statement
also amends SFAS No. 13, "Accounting for Leases," by eliminating an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002. Management does not
believe that this statement will have a material impact on its financial
position, results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which nullifies Emerging Issues Task Force
("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring)." Under the terms of SFAS No. 146, the statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred rather than at the date an entity
commits to an exit plan. The effective date of the statement is for exit or
disposal activities initiated after December 31, 2002 with early application
encouraged. Management does not believe that this statement will have a material
impact on its financial position, results of operations or cash flows.
(3) PROPERTY, PLANT AND EQUIPMENT
Effective January 1, 2002, the Company extended the useful lives of certain
of its assets to properly match the depreciation expense with the future
revenues expected to be obtained from the assets. The assets are primarily
recording systems used to acquire seismic data in the Company's international
locations. The impact on depreciation resulting from the asset life extensions
was $500,000 and $120,000 for the nine and three months ended September 30,
2002, respectively.
(4) DEBT
On January 7, 2002, the agreement for purchase and assignment of foreign
accounts receivable with Elliott was modified to extend the term of the
agreement to September 30, 2002 (subsequently extended to October 31, 2003) and
to increase the maximum amount allowable to be purchased by Elliott from the
Company to $5,250,000. Furthermore, on February 5, 2002, March 5, 2002 and March
21, 2002, additional modifications were made to the Elliott agreement to
increase the maximum amount allowable to be purchased by Elliott from the
Company to $7,500,000, $10,900,000 and $11,700,000, respectively. Additionally,
the March 21, 2002 amendment expanded the scope of the agreement to include
receivables for all of the Company's South American locations. On May 24, 2002,
the Company completed further modifications to the Elliott factoring agreement
whereby the Company granted a lien to Elliott on substantially all of the assets
of the Company and its subsidiaries to secure the Company's obligations to
Elliott.
On July 8, 2002, the Company also completed further modifications to the
Elliott factoring agreement. As amended, the factoring agreement provides, among
other things, for the sale to Elliott, subject to conditions, of all billed and
unbilled/work in progress non-U.S. dollar denominated foreign accounts
receivable, subject to the parties' agreement that the aggregate face amount of
accounts that Elliott will purchase thereunder at any time will not exceed $11.7
million divided by the factoring discount rate of 0.991667, or approximately
$11.8 million. Elliott is obligated to pay for purchased accounts at a
discounted rate of 0.991667 per dollar based on the invoice before value-added
tax. If any receivable is not collected within 30 days, the Company is obligated
to pay Elliott an additional discount at a monthly rate of 0.8333.
Effective September 30, 2002, an additional modification was made to extend
the term of the agreement to October 31, 2003. Under the factoring agreement,
the Company is required, among other things, to remit any payment received by
the Company on any account purchased by Elliott on a mutually agreed timetable
but in any event no later than October 31, 2003. As of November 10, 2002, $11.7
million was outstanding under the factoring agreement. Elliott has indicated to
the Company that it will not provide any additional funding to the Company on
this basis. The Company does not expect to be able to retire these amounts from
its operating cash flows. In order to avoid a default under this agreement,
either Elliott will, at its sole and absolute discretion, elect to post $11.7
million in cash collateral to permit an advance under the supplemental term loan
of the Foothill/Elliott Credit Facility in a like amount, the proceeds of which
are used to repay the Elliott factoring arrangement or the Company will need to
otherwise reach an accommodation with Elliott about the payment of these amounts
or obtain additional financing to refinance the amount payable to Elliott.
On May 24, 2002, the Company completed further modifications to the
Foothill/Elliott Credit Facility whereby, among other things, the maximum amount
of the Foothill revolving facility was reduced from $10.0 million to $8.0
million (subject to additional
9
borrowing base limitations) and Foothill agreed, subject to conditions, to fund
a $16.5 million supplemental term loan. Additionally, on July 8, 2002, the
Company completed additional modifications to the Foothill/Elliott Credit
Facility whereby, among other things, the maximum amount of the Foothill
supplemental term loan was increased from $16.5 million to $19.5 million.
Advances under the supplemental term loan are conditioned, among other things,
on Elliott having elected, at its sole and absolute discretion, to deposit cash
collateral with Foothill in the amount of such advances to secure Elliott's
guarantee of the supplemental term loan. The supplemental term loan will bear
interest at the 90-day CD rate announced by Wells Fargo. The Foothill
supplemental term loan and all other obligations under the Foothill/Elliott
Credit Facility are secured by substantially all assets of the Company and its
subsidiaries, are guaranteed by Elliott and, except as to the existing Elliott
term loan, may be purchased from Foothill by Elliott at any time on 5 business
days' notice.
The modifications to the Foothill/Elliott Credit Facility made on July 8,
2002 also include a new mandatory prepayment provision with respect to the $6.9
million Foothill term loan. In brief, the new provision generally requires the
Company, upon any net movement of equipment outside the United States and
Canada, to prepay the Foothill term loan so that the remaining outstanding
balance thereof is no greater than two-thirds of the appraised value of the
equipment remaining in the United States and Canada in which Foothill has a
perfected security interest.
Elliott has not committed to post any cash collateral in respect of the
supplemental term loan and may refuse to do so in its sole and absolute
discretion. The Company expects Elliott to review and consider Company requests
that Elliott post cash collateral based upon, among other things, the recent
performance of the Company at the time of each request. As of November 10, 2002,
Elliott has posted $7.8 million of cash collateral, and the Company has borrowed
a like amount under the supplemental term loan, $2.4 million in proceeds from
which have been used to repay overadvances under the Foothill revolving facility
in excess of the borrowing base. Of the $11.7 million remaining undrawn under
the supplemental term loan as of November 10, 2002, the Company expects Elliott
to post cash collateral for $11.7 million thereof in any event only to the
extent the Company's obligations to Elliott under the factoring arrangement will
have been reduced by a like amount at time of funding. Consequently, as of
November 10, 2002, the Company expects the amended Foothill/Elliott Credit
Facility will not be available to fund any of the Company's working capital
needs and only to the extent Elliott, at its sole and absolute discretion, posts
sufficient cash collateral. There are currently no additional committed sources
of financing available to the Company and no availability under existing
facilities. Even if the entire $19.5 million of the supplemental term loan is
made available to the Company and even if business conditions substantially
improve and cost control initiatives are successful during 2002, the Company
will require substantial cash flow to continue operations on a satisfactory
basis, fund capital expenditures and meet its principal and interest
requirements with respect to the 9 3/4% Senior Notes due 2008, the
Foothill/Elliott Credit Facility and other indebtedness and its obligations
under the Elliott factoring arrangement, as those amounts become due.
Under current circumstances other defaults are expected to occur under the
Foothill/Elliott Credit Facility. Accordingly, the Company has classified $20.8
million of otherwise long-term debt under the Foothill/Elliott Credit Facility
as current in the Company's financial statements for the quarter ended September
30, 2002. Upon any events of default under the Foothill/Elliott Credit Facility,
Foothill may accelerate the maturity of amounts outstanding under the
Foothill/Elliott Credit Facility at any time or refuse to advance additional
amounts to the Company under the revolving facility. If Foothill were to
accelerate amounts due under the Foothill/Elliott Credit Facility or upon other
events of default under the indenture for the Company's 9 3/4% Senior Notes due
2008, the trustee could take the steps necessary to cause that debt to become
immediately due and payable. Accordingly, the Company has classified $43.5
million of otherwise long-term debt related to the Senior Notes as current in
the Company's financial statements for the quarter ended September 30, 2002. If
any of the Company's debt was accelerated, it would be unlikely that the Company
would be able to continue its operations without seeking protection from its
creditors under the federal bankruptcy code.
(5) MULTI-CLIENT DATA SALE
On March 23, 2001, the Company completed the sale of a substantial portion
of its multi-client data library, and ongoing rights thereto, in the southern
United States to a third party seismic data broker for $15,000,000 cash,
retaining all of its Canadian multi-client data library as well as several data
surveys in the southern United States. The sale proceeds of $15,000,000 were
recorded as revenues with a corresponding charge to amortization in the same
amount for the three months ended March 31, 2001. Revenues from aggregate sales
of multi-client data were $0.2 million and $0.4 million and amortization of
related costs were $0.1 million and $0.1 million for the three and nine months
ended September 30, 2002, respectively.
10
(6) SUPPLEMENTAL SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
2001 2002
------ -------
(DOLLARS IN THOUSANDS)
CASH PAID FOR INTEREST AND TAXES WAS AS FOLLOWS:
Taxes, net of refunds $1,619 $3,803
Interest 4,444 4,601
(7) SEGMENT INFORMATION
The Company has determined that its reportable segments are based on the
Company's method of internal reporting, which disaggregates its one
product/service line (geophysical services) further into four geographic
regions: the United States, Canada, Latin America and the Far East.
The Company evaluates the performance of its segments and allocates
resources to them, in part, based on operating income (loss). There are no
intersegment revenues.
The tables below present information about the Company's reported segments
for the periods indicated (dollars in thousands):
UNITED LATIN
STATES CANADA AMERICA FAR EAST TOTAL
------ ------ ------- -------- -----
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002:
Revenues $ 3,672 $ 8,840 $50,620 $ 51 $ 63,183
Operating Income (Loss) (6,608) (698) 7,542 (113) 123
Depreciation and Amortization 1,639 1,775 3,689 1 7,104
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001:
Revenues $ 29,399(1) $ 9,696 $30,948 $ 1,974 $ 72,017
Operating Income (Loss) (13,011) (1,678) 1,610 237 (12,842)
Depreciation and Amortization 25,063(1) 3,508 2,975 323 31,869
- ----------
(1) Includes $19,000 in revenues from multi-client data library sales and
$17,800 in associated amortization.
(8) COMMITMENTS AND CONTINGENCIES
The Company is a party to a lawsuit filed in August 2000, which alleges,
among other things, that the defendants wrongfully acquired geophysical data
from plaintiff's mineral estates after January 1, 1998. The Plaintiffs seek
unspecified damages and injunctive relief. The Company filed a motion for
summary judgment and an amended motion for summary judgment which was heard and
taken under advisement by the Court. On August 23, 2002, after due
consideration, the 229th Judicial District Court, Starr County, Texas ruled in
favor of Grant Geophysical, Inc. and Grant Geophysical Corp.'s amended motion
for summary judgment on this matter. The Court, after considering the amended
motion for summary judgment, the responses and the argument of counsel, ruled in
favor of the Company. The Plaintiffs have appealed the judge's decision and the
Company has filed the necessary Fourth Court Addendum to Civil Docketing
Statement, which will allow the Court to consider an alternative dispute
resolution. The Company believes that the allegations of the Lawsuit are without
merit and intends to defend the Lawsuit vigorously. Management does not believe
this lawsuit will have a material adverse impact on the Company's financial
position, results of operations or cash flows.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Grant is a provider of seismic data acquisition services in land and
transition zone environments in selected markets, including the United States,
Canada, Latin America and the Far East. The Company also markets seismic data
acquisition services in the Middle East and Africa. The Company's seismic data
acquisition services typically are provided on an exclusive contract basis to
domestic and international oil and gas exploration and production companies and
seismic data marketing companies. The Company also provides seismic data
processing services through its international support facilities.
The market for seismic land acquisition, both domestically and in Canada,
remained significantly depressed throughout the first nine months of 2002.
Additionally, demand for land and transition zone seismic data acquisition
services are primarily determined by oil and gas industry capital expenditures,
budgets and spending patterns. These spending patterns are affected by
individual oil and gas company budgets as well as industry-wide conditions.
Overcapacity in the seismic service industry continues to suppress pricing and
activity levels and has materially adversely affected the Company's results of
operations. Management has implemented a business plan in 2002 with the specific
objectives of improving profitability and generating positive operating cash
flow through intensified sales and marketing, tighter cost controls and reduced
overhead expenses. Additionally, due to the competitive markets and decreased
demand in the United States and Canada, the Company has increased its reliance
on its international land and transition zone operations in areas where higher
demand levels exist.
As of November 10, 2002, the Company was operating or mobilizing 1 crew in
the United States, 5 crews in Latin America, 1 crew in Canada and 0 crews in the
Far East. For the three months ended September 30, 2002, the Company's total
revenues were $18.2 million, with approximately 9.9% from the United States,
84.6% from Latin America, 4.9% from Canada and 0.6% from the Far East. For the
nine months ended September 30, 2002 the Company's total revenues were $63.2
million, with approximately 5.9% from the United States, 80.0% from Latin
America, 0.2% from the Far East and 13.9% from Canada.
RESULTS OF OPERATIONS
FOR THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2002 COMPARED WITH THE
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2001
Revenues. Revenues for the three months ended September 30, 2002 were $18.2
million, compared with $24.0 million for the three months ended September 30,
2001. The net decrease during the third quarter of 2002 of $5.8 million, or 24%,
was primarily the result of decreased revenues in the United States because of
reduced demand levels, combined with slightly decreased activity levels in Latin
America.
Revenues from United States data acquisition operations decreased $3.6
million, or 67%, from $5.4 million for the three months ended September 30, 2001
to $1.8 million for the three months ended September 30, 2002. The decline in
data acquisition revenues is due to the Company reducing the size of its United
States operations as a result of reduced demand levels.
Revenues from seismic data processing operations were nominal for the third
quarter of 2002 and $0.1 million for the third quarter of 2001. The Company has
closed its Houston and Dallas data processing centers and has consolidated its
international data acquisition and data processing services.
Revenues from the Canadian data acquisition operations increased $0.1
million, or 3% from $0.7 million in the third quarter of 2001 to $0.8 million in
the three months ended September 30, 2002. During the third quarter of 2001, a
range of one to two land seismic crews were operating in Canada. During the
third quarter of 2002 one land seismic crew was operating in Canada, but on a
slightly larger program.
Revenues from sales of the data library for the three months ended September
30, 2002 were $0.2 million, compared to $0.5 million for the three months ended
September 30, 2001. The decline is primarily due to reduced sales from the
Company's Canadian data library.
Revenues for data acquisition operations in Latin America decreased $1.8
million, or 10%, from $17.2 million for the third quarter of 2001 to $15.4
million for the third quarter of 2002. This revenue decrease is attributable to
slight decreases in working crew levels in the area.
12
Data acquisition operations in the Far East were essentially inactive for
both the 2001 and 2002 quarters.
Expenses. Direct operating expenses for the three months ended September 30,
2002 decreased $8.0 million, or 36%, to $14.1 million, compared to $22.1 million
for the three months ended September 30, 2001. This decrease is primarily a
result of decreased data acquisition activities in the United States due to the
Company reducing the size of its United States operations as a result of reduced
demand levels.
Selling, general and administrative expenses increased $0.1 million, or 2%,
to $2.4 million for the three months ended September 30, 2002 from $2.3 million
for the three months ended September 30, 2001. This slight increase is the
result of increased data acquisition activities in Latin America partially
offset by the Company's ongoing efforts to reduce support and overhead personnel
in all of its operating regions and at the corporate office level.
Depreciation and amortization decreased $2.3 million, or 50%, to $2.3
million in the three months ending September 30, 2002 from $4.6 million for the
three months ended September 30, 2001. This decrease in 2002 is due to reduced
depreciation resulting from the Company's impairment of certain fixed assets in
the fourth quarter of 2001 and asset life extensions in 2002. (See Note 3.)
Other Income (Expenses). Interest expense, net, increased $0.2 million to
$1.8 million in the third quarter of 2002 from $1.6 million in the third quarter
of 2001. This increase is primarily due to additional debt outstanding during
the 2002 quarter. Included in the third quarter of 2002 are foreign exchange
losses of $0.8 million compared to $0.5 million in the 2001 quarter.
Tax Provision. The income tax provisions for the 2001 and 2002 quarters
consisted of foreign income taxes. No benefit for United States federal income
tax loss carry forwards was recorded in either period, given the uncertainty of
realization of such tax benefits.
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2002 COMPARED WITH THE NINE-MONTH
PERIOD ENDED SEPTEMBER 30, 2001
Revenues. Revenues for the nine months ended September 30, 2002 were $63.2
million, compared with $72.0 million for the nine months ended September 30,
2001. The net decrease of $8.8 million, or 12%, was primarily due to the 2001
sale of a substantial portion of its multi-client data library and to the
Company reducing the size of its United States operations due to reduced demand
levels. This decrease was partially offset by increased Latin America data
acquisition revenues.
Revenues from United States data acquisition operations decreased $6.6
million, or 66%, from $10.0 million for the nine months ended September 30, 2001
to $3.4 million for the nine months ended September 30, 2002. This sharp decline
in data acquisition revenues is due to the Company reducing the size of its
United States operations due to reduced demand levels. During the first nine
months of 2001, the Company performed $6.1 million of data acquisition services
for an affiliated oil and gas exploration and production company.
Revenues from seismic data processing operations were $0.4 million and $0.2
million for the first nine months of 2001 and 2002 respectively. The decrease is
primarily due to the closing of the Company's Dallas and Houston processing
centers and consolidating its international data acquisition and data processing
services.
Revenues from the Canadian data acquisition operations were $8.5 million for
the first nine months of 2001and 2002.
Revenues from sales of the data library for the first nine months of 2002
were $0.4 million, compared to $20.2 million for the first nine months of 2001.
In March 2001 the Company sold for $15.0 million cash a substantial portion of
its multi-client data library, and ongoing rights thereto, in the southern
United States to a third party seismic data broker. The Company retained its
entire Canadian multi-client data library as well as several data surveys in the
southern United States.
Revenues for data acquisition operations in Latin America increased $19.7
million, or 64%, from $30.9 million in the first nine months of 2001 to $50.6
million in the first nine months of 2002. The revenue increase is attributable
to increased working crew levels in the area resulting from increases in the
activity levels of customers' exploration operations.
Revenues for data acquisition operations in the Far East decreased $1.9
million, or 95%, from $2.0 million in the nine months ended September 30, 2001
to $0.1 million in the nine months ended September 30, 2002. During the first
nine months of 2001 the Company operated one crew in New Zealand although the
crew was not active for the entire period. The Company performed a nominal
amount of work in the Far East during the nine months ended September 30, 2002.
13
Expenses. Direct operating expenses for the nine months ended September 30,
2002 increased $2.8 million, or 6%, to $49.2 million, compared to $46.4 million
for the nine months ended September 30, 2001. This is primarily a result of
increased data acquisition activities in Latin America, partially offset by the
Company reducing the size of its United States operations due to reduced demand
levels.
Selling, general and administrative expenses increased $0.2 million, or 3%,
to $6.8 million for the nine months ended September 30, 2002 from $6.6 million
for the nine months ended September 30, 2001. This increase is the result of the
Company's increased activity levels in Latin America partially offset by the
Company's ongoing efforts to reduce support and overhead personnel in all of its
operating regions and at the corporate office level.
Depreciation and amortization decreased $24.8 million, or 78%, to $7.1
million in the first nine months of 2002 from $31.9 million for the first nine
months of 2001. This decrease reflects the impact of additional amortization as
a result of the sale of a substantial portion of its multi-client data library,
and ongoing rights thereto, in the first quarter of 2001 combined with reduced
depreciation resulting from the Company's life extensions in 2002. (See Note 3.)
Other Income (Expenses). Interest expense, net, increased $0.4 million to
$5.4 million in the first nine months of 2002 from $5.0 million in the first
nine months of 2001 primarily due to increased outstanding debt. Included in the
2001 and 2002 amounts are foreign exchange losses of $1.4 million and $0.7
million, respectively.
Tax Provision. The income tax provision consisted of foreign income taxes.
No benefit for United States federal income tax loss carry forwards was recorded
in either period, given the uncertainty of realization of such tax benefits.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity of the Company should be considered in light of the cyclical
nature of demand for land and transition zone seismic services. These
fluctuations have rapidly impacted the Company's liquidity as supply and demand
factors directly affect pricing.
The Company's ability to meet its debt service and other obligations depends
on its future performance, which in turn is subject to general economic
conditions, activity levels in the oil and gas exploration sector, and other
factors beyond the Company's control. While management believes there has been a
recent improvement in market conditions for seismic services, especially in
Latin America, funds to finance operations are expected to remain limited
through 2002 and may not permit the Company to continue its operations in the
ordinary course. As previously discussed, the Company has in the past relied on
its majority stockholder, Elliott, to provide credit support and interim
funding. As of November 10, 2002, $11.7 million had been provided by Elliott to
the Company to provide working capital in the form of a factoring arrangement
for certain foreign receivables, which represents the maximum amount allowed
under the agreement and is due and payable no later than October 31, 2003 (See
Note 4). Elliott has indicated to the Company that it will not provide any
additional funding to the Company on this basis. The Company does not expect to
be able to retire these amounts from its operating cash flows. In order to avoid
a default under this agreement, either Elliott will, at its sole and absolute
discretion, elect to post $11.7 million in cash collateral to permit an advance
under the supplemental term loan (See Note 4). of the Foothill/Elliott Credit
Facility in a like amount, the proceeds of which are used to repay the Elliott
factoring arrangement or the Company will need to otherwise reach an
accommodation with Elliott about the payment of these amounts or obtain
additional financing to refinance the amount payable to Elliott.
Of the $11.7 million remaining undrawn under the supplemental term loan as
of November 10, 2002, the Company expects Elliott to post cash collateral for
$11.7 million thereof in any event only to the extent the Company's obligations
to Elliott under the factoring arrangement will have been reduced by a like
amount at the time of funding. Consequently, the Company expects that the
Foothill/Elliott Credit Facility will not be available to fund any of the
Company's working capital needs and would be available only to the extent
Elliott, at its sole and absolute discretion, posts sufficient cash collateral.
There are currently no additional committed sources of financing available to
the Company and no availability under existing facilities. Even if business
conditions substantially improve and cost control initiatives are successful
during 2002, the Company will require substantial cash flow to continue
operations on a satisfactory basis, fund capital expenditures and meet its
principal and interest requirements with respect to the 9 3/4% Senior Notes,
Foothill/Elliott Credit Facility and other indebtedness, and its obligations
under the Elliott factoring arrangement, as those amounts become due.
14
Under current circumstances other defaults are expected to occur under the
Foothill/Elliott Credit Facility. Accordingly, the Company has classified $20.8
million of otherwise long-term debt under the Foothill/Elliott Credit Facility
as current in the Company's financial statements for the quarter ended September
30, 2002. Upon any events of default under the Foothill/Elliott Credit Facility,
Foothill may accelerate the maturity of amounts outstanding under the
Foothill/Elliott Credit Facility at any time or refuse to advance additional
amounts to the Company under the revolving facility. If Foothill were to
accelerate amounts due under the Foothill/Elliott Credit Facility or upon other
events of default under the indenture for the Company's 9 3/4% Senior Notes due
2008, the trustee could take the steps necessary to cause that debt to become
immediately due and payable. Accordingly, the Company has classified $43.5
million of otherwise long-term debt related to the Senior Notes as current in
the Company's financial statements for the quarter ended September 30, 2002. If
any of the Company's debt was accelerated, it would be unlikely that the Company
would be able to continue its operations without seeking protection from its
creditors under the federal bankruptcy code.
The Company has taken measures to reduce costs through consolidation of
certain locations, resizing its United States operations due to reduced demand
levels, and reductions in overhead personnel. Should such measures be
unsuccessful or should additional defaults occur and any of the Company's debt
be accelerated, there would be substantial doubt about the Company's ability to
continue as a going concern. The accompanying financial statements do not
include any adjustments that might result from the outcome of those
uncertainties.
The Company's ongoing capital requirements arise primarily from its need to
service debt, fund its international projects and to acquire, maintain or
improve equipment. During the nine months ended September 30, 2002, $4.8 million
was used in operating activities, a significant increase from the same period
last year when the Company used $0.5 million in operating activities. This
increase in funds used in operating activities was principally due to the fact
that the 2001 period included the $15.0 million data library sale mentioned
below. This is partially offset by cash generated from increased activity levels
in Latin America. During the nine months ended September 30, 2002, $8.2 million
was provided by financing activities, which was primarily due to additional
funding provided under the Foothill supplemental term loan and amounts advanced
under the Elliott factoring arrangement partially offset by payback on the
Company's debt. This compares to the same period in 2001 when $1.0 million was
provided by financing activities. During the nine months ended September 30,
2002, $1.9 million was used in investing activities, primarily due to $4.5
million of capital expenditures, $2.2 million of which is financed and will be
paid during the remainder of 2002 and beyond. This compares to $2.0 million used
in investing activities in the same period in 2001.
The Company will need to attain profitable operating levels in order to
provide sufficient cash flow to service its debt, maintain its operations and
fund capital expenditures. While the Company was able to generate operating
income in the nine months ended September 30, 2002, the overcapacity in the
seismic service industry and the Company's increasing reliance on international
operations will require that the Company continue to closely manage its
available cash resources. Because of the high costs associated with equipping
and operating crews outside of North America and the time generally required to
process billings and receive payments, the Company expects to require
significant amounts of liquidity to support its international projects.
In 2001, Elliott advanced approximately $4.9 million to the Company through
a depository agreement and a factoring arrangement, as discussed below, and as
of December 31, 2001, $4.0 million remained outstanding under the factoring
arrangement. Already in 2002, Elliott has advanced an additional $7.7 million to
the Company under the factoring arrangement representing the maximum advance
allowed under this arrangement. At November 10, 2002, the amount outstanding
under this arrangement was $11.7 million and all amounts are due and payable no
later than October 31, 2003. The Company does not expect to be able to retire
these amounts from its operating cash flows. In order to avoid a default under
this agreement, the Company will either need to reach an accommodation with
Elliott about the payment of these amounts or obtain additional financing to
refinance the amount payable to Elliott.
In March 2001, the Company sold a substantial portion of its multi-client
data library in the southern United States to a third party seismic data broker
for $15.0 million. The sales proceeds from the March 2001 sale were used to
retire $9.4 million cash advanced by Elliott in 2000 and 2001, including $1.9
million advanced under the depository agreement, plus accrued preferred return
thereon with the balance used to reduce outstanding borrowings under the Credit
Facility. Subsequent to the sale, the Company wrote down the remaining portion
of its multi-client data library to $0.6 million. As a result, the Company does
not expect that any additional potential sales of its multi-client data library
will result in significant amounts of proceeds that can fund operating
activities.
15
Capital expenditures for the nine months ended September 30, 2002 were
approximately $4.5 million and were used primarily to upgrade and expand the
Company's seismic data acquisition and recording equipment. The Company's 2002
business plan contemplates up to $8.3 million of capital expenditures primarily
to upgrade and replace seismic data acquisition and recording equipment. Actual
capital expenditures will, however, be limited to an amount that can be funded
from available cash and any equipment financing provided by manufacturers.
As of September 30, 2002, the Company had approximately $82.4 million of
indebtedness consisting of $43.5 million principal amount of the Senior Notes,
$23.8 million outstanding borrowings under the Foothill/Elliott Credit Facility,
$11.7 million payable under the Elliott factoring arrangement and $3.4 million
of loans and capitalized leases primarily incurred to fund capital expenditures.
In addition to the Company's indebtedness, the Company has approximately $65.8
million of preferred stock outstanding at September 30, 2002. Currently, the
Company's highly leveraged capital structure negatively impacts and will
continue to negatively impact its profitability and operating cash flow. If the
Company is not able to significantly improve its operations or obtain additional
financing, either from Elliott or other sources, a financial restructuring will
be required to allow the Company to be a viable entity on a long-term basis.
FOREIGN CURRENCY RISK
The Company conducts a substantial portion of its business in currencies
other than the U.S. or Canadian dollars, particularly various Latin American
currencies, and its international operations are subject to fluctuations in
foreign currency exchange rates. Accordingly, the Company's international
contracts could be significantly affected by fluctuations in exchange rates.
International contracts requiring payment in currency other than U.S. or
Canadian dollar typically are indexed to inflationary tables and generally are
used for local expenses. With the exception of the Company's Canadian
subsidiary, the functional currency for each of the Company's subsidiaries or
branches is the U.S. dollar. The Company attempts to structure the majority of
its international contracts to be partially billed and paid in U.S. dollars.
The Company's operating results were impacted by foreign exchange losses of
approximately $0.7 million and $1.4 million for the nine months ended September
30, 2002 and 2001, respectively.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
From time to time, information provided by the Company, statements by its
employees or information included in written material, such as press releases
and filings (including this Form 10-Q Quarterly Report) with the Commission
(including portions of the "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and certain other sections
contained in such filings) may contain "forward-looking" statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable; it can give no assurance that such
expectations will prove to be correct. Such forward-looking statements are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize, or should any of the underlying
assumptions prove incorrect, actual results of current and future operations may
vary materially from those anticipated, estimated or projected. Investors are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of their dates.
Among the factors that will have a direct bearing on the Company's results
of operations and the oil and gas services industry in which it operates are the
effects of rapidly changing technology; the presence of competitors with greater
financial resources; operating risks inherent in the oil and gas services
industry; regulatory uncertainties; worldwide political stability and economic
conditions and other risks associated with international operations, including
foreign currency exchange risk; and the Company's successful execution of its
strategy and internal operating plans.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's debt consists of both fixed-interest and variable-interest
rate debt; consequently, the Company's results of operations and cash flows, as
well as the fair values of its fixed-rate debt instruments, are subject to
interest-rate risk. The Company has performed sensitivity analyses to assess the
impact of this risk based on a hypothetical ten-percent increase in market
interest rates. Market rate volatility is dependent on many factors that are
impossible to forecast, and actual interest rate increases could be more severe
than the hypothetical ten-percent increase. The Company estimates that if
prevailing market interest rates had been ten percent higher throughout the
first, second, and third quarters of 2002 and all other factors affecting the
Company's debt remained the same, the Company's pretax loss would have been
increased by approximately $0.2 million and $0.6 million, respectively for the
three and nine months ended September 30, 2002. With respect to the fair value
of the Company's fixed-interest rate debt, if prevailing market interest rates
had been ten percent higher during the first nine months of 2002, and all other
factors affecting the Company's debt remained the same, fair value of the
Company's fixed-rate debt, as determined on a present-value basis, would have
been lower by approximately $3.9 million at September 30, 2002. Given the
composition of the Company's debt structure, the Company does not hedge its
interest rate risk.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this quarterly report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's Disclosure Controls and Procedures (as defined in Rules 13a-14c and
15d-14c under the Securities Exchange Act of 1934). Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
Company's Disclosure Controls and Procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
17
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to a lawsuit filed in August 2000, which alleges,
among other things, that the defendants wrongfully acquired geophysical data
from plaintiff's mineral estates after January 1, 1998. The Plaintiffs seek
unspecified damages and injunctive relief. The Company filed a motion for
summary judgment and an amended motion for summary judgment which was heard and
taken under advisement by the Court. On August 23, 2002, after due
consideration, the 229th Judicial District Court, Starr County, Texas ruled in
favor of Grant Geophysical, Inc. and Grant Geophysical Corp.'s amended motion
for summary judgment on this matter. The Court, after considering the amended
motion for summary judgment, the responses and the argument of counsel, ruled in
favor of the Company. The Plaintiffs have appealed the judge's decision and the
Company has filed the necessary Fourth Court Addendum to Civil Docketing
Statement, which will allow the Court to consider an alternative dispute
resolution. The Company believes that the allegations of the Lawsuit are without
merit and intends to defend the Lawsuit vigorously. Management does not believe
this lawsuit will have a material adverse impact on the Company's financial
position, results of operations or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In July 2002, the Company issued 12,873 shares of its 8% convertible
preferred stock to satisfy payment in-kind dividend requirements on such stock
issue. The issuance of these securities were deemed to be exempt from
registration under the Securities Act of 1933, as amended, in reliance on
Section 4(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Under current circumstances other defaults are expected to occur under the
Foothill/Elliott Credit Facility. Accordingly, the Company has classified $20.8
million of otherwise long-term debt under the Foothill/Elliott Credit Facility
as current in the Company's financial statements for the quarter ended September
30, 2002. Upon any events of default under the Foothill/Elliott Credit Facility,
Foothill may accelerate the maturity of amounts outstanding under the
Foothill/Elliott Credit Facility at any time or refuse to advance additional
amounts to the Company under the revolving facility. If Foothill were to
accelerate amounts due under the Foothill/Elliott Credit Facility or upon other
events of default under the indenture for the Company's 9 3/4% Senior Notes due
2008, the trustee could take the steps necessary to cause that debt to become
immediately due and payable. Accordingly, the Company has classified $43.5
million of otherwise long-term debt related to the Senior Notes as current in
the Company's financial statements for the quarter ended September 30, 2002. If
any of the Company's debt was accelerated, it would be unlikely that the Company
would be able to continue its operations without seeking protection from its
creditors under the federal bankruptcy code.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
EXHIBIT NO.
-----------
99.1* -- Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
99.2* -- Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
* Filed Herein
18
(b) Reports on Form 8-K
On October 16, 2002, the Company filed a current report on Form 8-K
related to the disclosure of Amendment Six to the Elliott factoring
arrangement.
19
..
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRANT GEOPHYSICAL, INC.
Date: November 14, 2002
By: /s/ RICHARD F. MILES
-----------------------------------------------
Richard F. Miles
President, Chief Executive Officer and Director
(Principal Executive Officer)
By: /s/ JAMES BLACK
-----------------------------------------------
James Black
Chief Financial Officer
(Principal Financial Officer)
By: /s/ SCOTT A. MCCURDY
-----------------------------------------------
Scott A. McCurdy
Controller
(Principal Accounting Officer)
CERTIFICATIONS
I, Richard F. Miles, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Grant
Geophysical, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weakness.
Date: November 14, 2002
/s/ RICHARD F. MILES
Richard F. Miles
President and Chief Executive Officer
I, James Black, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Grant
Geophysical, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weakness.
Date: November 14, 2002
/s/ JAMES BLACK
James Black
Chief Financial Officer
20
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
99.1 -- Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of
2002
99.2 -- Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of
2002
23