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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 333-89863*
GRANT GEOPHYSICAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0548468
(State of 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant: (1) has filed all reports 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
requirement for the past 90 days. [ ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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 Annual Report on Form 10-K or any
amendment to this Form 10-K. [ ]
As of June 10, 2003, 14,547,055 shares of the Registrant's Common Stock,
$.001 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
* 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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1
GRANT GEOPHYSICAL, INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business................................................................................. 3
Item 2. Properties............................................................................... 9
Item 3. Legal Proceedings........................................................................ 9
Item 4. Submission of Matters to a Vote of Security Holders...................................... 9
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters..................... 10
Item 6. Selected Financial Data.................................................................. 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................... 11
Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................... 19
Item 8. Financial Statements and Supplementary Data.............................................. 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................................... 20
PART III
Item 10. Directors and Executive Officers of the Registrant....................................... 21
Item 11. Executive Compensation................................................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 24
Item 13. Certain Relationships and Related Transactions........................................... 25
Item 14. Controls and Procedures.................................................................. 25
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................... 26
2
PART I
ITEM 1. BUSINESS.
OVERVIEW
Grant Geophysical, Inc., a Delaware corporation (together with its
subsidiaries, "Grant," or the "Company"), is a leading provider of seismic data
acquisition services in land and transition zone environments in the United
States, Latin America and Canada. Grant also markets seismic data acquisition
services in the Middle East and the Far East. The Company has participated in
the seismic data acquisition services business in the United States and Latin
America since the 1940s, the Far East since the 1960s and Canada since the
1970s. 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. Grant
also provides seismic data processing services through its international support
facilities.
The Company utilizes sophisticated equipment to perform specialized 3D and
2D seismic surveys. All of the Company's seismic data acquisition crews are
capable of performing surveys in land environments and two are equipped to
perform surveys in transition zone environments. Transition zone environments
are swamps, marshes and shallow water areas that require specialized equipment
and must be surveyed with minimal disruption to the natural environment.
The market for seismic land acquisition, both domestically and in the
international areas where the Company was active, remained significantly
depressed throughout 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. The Company's world-wide seismic crew count
ranged from 5 to 10 crews during 2002. As of April 30, 2003, the Company had 9
active crews. Management has implemented a business plan in 2003 with the
specific objectives of improving profitability and generating positive operating
cash flow through intensified sales and marketing, tighter cost controls,
downsizing the Company's Canadian operation and reduced overhead expenses. (See
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources and Note 1 of Notes to
Consolidated Financial Statements).
As of April 30, 2003, the Company was operating 1 crew in the United States
and operating or mobilizing 5 crews in Latin America, 2 crews in Canada and 1
crew in the Far East. For the year ended December 31, 2002, the Company's total
revenues were $89 million, with approximately 5.7% from the United States, 82.9%
from Latin America, 0.1% from the Far East and 11.3% from Canada. International
operations, excluding Canada, accounted for approximately 83% of consolidated
revenues and 84% of data acquisition revenues for the year ended December 31,
2002.
Grant's principal executive office is located at 16850 Park Row, Houston,
Texas 77084 and its telephone number is 281-398-9503.
LAND AND TRANSITION ZONE SEISMIC DATA ACQUISITION
A land or transition zone seismic data acquisition crew typically consists
of; (i) a surveying crew that marks out the lines to be recorded and marks the
sites for energy source or geophone placement and equipment location; (ii) an
explosive or mechanical vibrating or compressed air unit crew; (iii) and a
recording crew that lays out the geophones and field recording boxes, directs
shooting operations and records the seismic energy reflected from subsurface
structures. A land seismic data acquisition crew utilizing an explosives unit is
supported by several drill crews, either internally provided or furnished by
third parties under short-term contracts. Drill crews operate in advance of the
seismic data acquisition crew and bore shallow holes for small explosive charges
that, when detonated, produce the necessary seismic impulse. In locations where
conditions dictate or where the use of explosives is precluded due to
regulatory, topographical or ecological factors, a mechanical vibrating unit or
compressed air unit is substituted for explosives as the seismic energy source.
The Company also employs specialized crew mobilization equipment to improve
productivity in certain applications, including helicopters for rugged terrain
or in agricultural areas, small watercraft for transition zone applications, and
man-portable equipment in jungle and other environments where vehicular access
is limited. Depending on the size of the seismic survey, the location and other
logistical factors, a seismic data acquisition crew operated by the Company may
involve from as few as 30 to as many as 1,500 employees.
One of the challenges inherent in land seismic data acquisition is
operating in difficult logistical environments without disrupting the sensitive
ecosystems in which surveys are frequently located. The Company currently
operates approximately 12,000 channels of
3
remote digital seismic equipment, which can be deployed without the use of
conventional seismic cables, thereby allowing access to such environments.
Remote digital seismic equipment, which uses radio signals to transmit data, is
typically used in transition zone and other logistically challenging
environments such as highly populated regions with numerous topographic
obstructions and areas where conventional cable-based recording systems are
impractical. The Company has over 20 years of experience operating in transition
zone environments in the Gulf Coast region of the United States, Latin America,
the Far East and Africa.
Once recorded by the seismic data acquisition crew, seismic data is
computer processed to enhance the recorded signal by reducing noise and
distortion and improving resolution to produce a representation of the survey
site's subsurface structures. The Company provides seismic data processing
services through its international support facilities.
The Company markets its seismic data acquisition services from its Houston
and Calgary corporate offices and from its regional and international
administrative centers by personnel whose duties include technical, supervisory
or executive responsibilities. The Company primarily acquires seismic data on a
turnkey basis for oil and gas companies which provides for a fixed fee for each
project. The Company has also in the past acquired seismic data on a term basis,
which provided for a periodic fee during the term of the project, and on a
cost-plus basis, which provided that the costs of a project, plus a percentage
fee, were borne by the customer.
In addition the Company, in the United States and Canada, has in the past
acquired and owns multi-client seismic data surveys, and remaining surveys are
marketed on a non-exclusive basis to oil and gas companies.
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 operations are subject to fluctuations in foreign currency
exchange rates. Accordingly, the Company's results from performing international
contracts could be significantly affected by fluctuations in exchange rates. The
Company's international contracts requiring payment in currency other than U.S.
or Canadian dollars typically are indexed to inflationary tables and partially
used to fund local expenses. The Company attempts to structure the majority of
its international contracts to be partially billed and paid in U.S. dollars.
MARKET AREAS
During the last three years, the Company conducted seismic operations in
the United States, Canada, Latin America and the Far East. The following table
sets forth the Company's revenues by geographic area, for the years ended
December 31, 2000, 2001 and 2002:
YEAR ENDED DECEMBER 31,
-----------------------------------
2000 2001 2002
--------- -------- ---------
(DOLLARS IN THOUSANDS)
United States............ $ 26,825 $ 34,848(1) $ 5,089
Canada................... 14,984 12,502 10,088
Latin America............ 20,183 44,127 73,787
Far East................. 4,160 1,974 51
--------- -------- ---------
$ 66,152 $ 93,451 $ 89,015
========= ======== =========
(1) Includes the $15 million sale of a substantial portion of the Company's
multi-client data library, with ongoing rights thereto, in the southern United
States. See Note 6 of Notes to Consolidated Financial Statements.
As part of the Company's 2003 business plan, the Company is resizing the
Canadian operation to reduced current demand levels. The Company expects
Canadian revenues to be decreased in 2003 and expects that revenues from
international operations, excluding Canada, will be increased as a percentage of
the Company's consolidated revenues.
BACKLOG
As of December 31, 2002, the Company estimated that its total contractual
backlog for services was approximately $42 million, all of which is expected to
be completed in 2003. As of May 1, 2003 the Company estimated that its total
backlog was approximately $16 million. The decrease in backlog is primarily the
result of 2003 activity. Most of the Company's contracts are terminable by the
customer upon relatively short notice and, in some cases, without penalty. The
Company's backlog as of any particular date is not indicative of the likely
operating results for any succeeding period, and there can be no assurance that
any amount of backlog will ultimately be realized as revenue.
4
CAPITAL EXPENDITURES AND TECHNOLOGY
The Company's ability to compete and maintain a significant market position
in the land and transition zone seismic data acquisition business is partially
driven by its ability to provide technology comparable to that of its primary
competitors. Accordingly, the Company continually maintains and periodically
upgrades its seismic data acquisition equipment to maintain its competitive
position. Due to the depressed state of the seismic industry, the Company's
operating results and lack of funding, the Company made $5.0 million and $15.4
million in capital expenditures in 2001 and 2002, respectively. The level of
future capital expenditures will depend on the availability of funding and
market requirements as dictated by industry activity levels.
Over the past several years, the Company has focused its efforts on
developing operating procedures and acquiring equipment that will enhance the
efficiency of its seismic data acquisition crews and reduce the time required to
complete projects. The Company's strategy relies on the use of third-party
equipment suppliers to provide equipment, although certain equipment may be
customized to the Company's specifications to enhance operating efficiency.
Certain of the equipment, processes and techniques used by the Company are
subject to the patent rights of others, and the Company holds non-exclusive
licenses with respect to a number of such patents. While the Company regards as
beneficial its access to third-party technology through licensing, the Company
believes that substantially all presently licensed technology could be replaced
without significant disruption to its business.
LICENSING OF MULTI-CLIENT DATA
The Company has in the past acquired and processed seismic data for its own
account by conducting surveys either partially or wholly funded by multiple
customers. In this mode of operation, ownership of the data is retained by the
Company and the data is licensed on a non-exclusive basis. Due to the depressed
demand for seismic services, an inability to secure adequate initial customer
underwriting and a lack of sufficient liquidity, the Company, in the first
quarter of 2000, curtailed its strategy of building a multi-client data library
in the southern United States.
On March 23, 2001, the Company completed the sale of a substantial portion
of its multi-client data library in the southern United States 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. Although the Company may selectively
continue to build a data library if adequate liquidity exists, it is unlikely
that the Company will undertake any multi-client seismic projects without
significant underwriting levels.
CUSTOMERS AND PROJECTS
The Company's customers consist of domestic and international oil and gas
companies and seismic data marketing companies. As is the case for many service
companies in the oil and gas industry, a relatively small number of customers or
a limited number of significant projects may account for a large percentage of
the Company's net revenues in any given year. Moreover, such customers and
projects may, and often do, vary from year to year. During 2002, the Company's
five largest customers accounted for approximately $56.3 million, or 63.3% of
revenues and 3 of these customers accounted for $14.3 million (16.1% of total
revenues), $14.0 million (15.7%), and $13.9 million (15.6%) respectively. During
2001, the Company's five largest customers accounted for approximately $49.3
million, or 52.7% of revenues, and two of these customers accounted for $15.7
million (16.8% of total revenues) and $14.8 million (15.8%), respectively, of
revenues.
COMPETITION
The acquisition of seismic data for the oil and gas industry is highly
competitive worldwide. In the current market environment, competition is based
primarily on price, but is also affected by crew availability, prior
performance, technology, safety, quality, dependability and the contractor's
expertise in the particular area where the survey is to be conducted. The
Company's principal competitors are PGS - Petroleum Geo Services ASA; Veritas
DGC, Inc.; and Western Geco, a joint venture between Schlumberger Limited and
Baker Hughes, Inc. The Company competes against these three companies for most
of its seismic data acquisition contracts in North America. The Company believes
that its principal competitors have financial, operating and other resources in
excess of its own. Also in North America, the Company competes with
approximately 20 smaller companies that target narrow market segments. In Latin
America and the Far East, the Company competes with Western Geco, CGG -
Compagnie General de Geophysique, PGS - Petroleum Geo Services ASA and a few
smaller local competitors.
EMPLOYEES
As of April 30, 2003, the Company employed approximately 217 full-time and
approximately 1,849 temporary contract personnel
5
worldwide. None of the Company's employees is subject to collective bargaining
agreements. The Company considers its relations with its employees to be good.
ENVIRONMENTAL MATTERS/GOVERNMENTAL REGULATION
The Company's domestic operations are subject to a variety of federal,
state and local laws and regulations relating to the protection of human health
and the environment, the violation of which may result in civil or criminal
penalties. The Company invests financial and managerial resources to comply with
such laws and regulations, and management believes that it is in compliance in
all material respects with applicable environmental laws and regulations.
Although such environmental expenditures by the Company historically have not
been significant, there can be no assurance that these laws and regulations will
not change in the future or that the Company will not incur significant costs in
the future performance of its operations. The Company is not involved in any
legal proceedings concerning environmental matters and is not aware of any
claims or potential liability concerning environmental matters that could have a
material adverse impact on the Company's financial position, cash flows or
results of operations.
The Company's operations outside of the United States are subject to
similar environmental regulations. Management believes that the Company is in
material compliance with the existing environmental requirements of these
foreign governmental bodies. The Company has not incurred any significant
environmental costs in connection with the performance of its foreign
operations; however, any regulatory changes that impose additional environmental
restrictions or requirements on the Company or its customers could adversely
affect the Company through increased operating costs and decreased demand for
the Company's services.
CAUTIONARY STATEMENTS
Certain statements made in this Annual Report on Form 10-K that are not
historical facts are "forward-looking statements". Forward-looking statements
may include, without limitation, the following:
- statements regarding the Company's business strategy, plans and
objectives;
- statements expressing the beliefs and expectations of management of
the Company regarding future demand for the Company's seismic services
and other events and conditions that may influence demand for the
Company's services and its performance in the future; and
- statements concerning the Company's business strategy and
expectations, industry conditions, market position, backlog, future
operations, margins, profitability, liquidity and capital resources.
Forward-looking statements can generally be identified by such terminology
as "may," "will," "expect," "believe," "anticipate," "project," "estimate" or
similar expressions. Such statements are based on certain assumptions and
analyses made by the Company's management in light of its experience and its
perception of historical trends, current conditions, expected future
developments and other factors that it believes to be appropriate. The Company
cautions that such statements are only current expectations and not guarantees
of future performance and that actual results, developments and business
decisions may differ from those envisioned by the forward-looking statements.
All phases of the Company's operations are subject to a number of
uncertainties, risks and other influences, many of which are beyond the control
of the Company. Any one of such influences, or a combination, could materially
affect the accuracy of the forward-looking statements and the projections on
which the statements are based. Some important factors that could cause actual
results to differ materially from the anticipated results or other expectations
expressed in the Company's forward-looking statements include the following:
Debt and Liquidity Limitations.
The Company currently has substantial indebtedness. The level of the
Company's indebtedness and the Company's current level of cash flow generated
from its operations (i) has not allowed for the Company to meet its debt service
requirements and the Company does not expect to be able to without refinancing
its current debt or reaching an accommodation with the holders of that debt;
(ii) makes it extremely difficult for the Company to obtain any additional debt
or equity financing for any purpose; (iii) requires that a substantial portion
of the Company's available cash be dedicated to debt service and, accordingly,
is not available for use in its business; (iv) limits the Company's flexibility
in planning for, or reacting to, changes in its business; (v) results in the
Company being more highly leveraged than most of its competitors, which places
it at a competitive disadvantage in pursuing contract opportunities;
6
and (vi) makes it more vulnerable to current business conditions in the seismic
services industry.
The Company is currently in default under its credit facility (the "Credit
Facility"), with Elliott Associates, L.P. ("Elliott") as well as under the
indenture under which the 9 3/4% Senior Notes due 2008 (the "Senior Notes") were
issued. As a result of the event of default under the indenture, the trustee, or
the holders of a specified percentage in aggregate principal amount of the
Senior Notes, could take the steps necessary to cause the Senior Notes to become
immediately due and payable. As of the date of this report, neither the trustee
nor such holders has exercised this right. Additionally, the event of default
under the Senior Notes constitutes an event of default under the Credit
Facility, which entitles Elliott to accelerate the maturity of all amounts owing
under the Credit Facility and to exercise remedies to collect such amounts as
provided under the Credit Facility and the related security agreements. As of
the date of this report, Elliott has not exercised this right. Accordingly, the
Company has classified both the $43.5 million of otherwise long-term debt
related to the Senior Notes and the $24.2 million of otherwise long-term debt
related to the Credit Facility as current and expects to continue to do so for
the foreseeable future. If the maturity of 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. Additionally, as a result of the defaults, the Company does not
expect that any additional amounts will be made available to the Company under
the Credit Facility.
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. The Company has incurred net losses for
the past three years and, given the continuing low activity level in the United
States and Canada for land data seismic acquisition services and cash
constraints on the Company, the Company expects to continue to incur net losses
through 2003. While management believes there has been a recent improvement in
market conditions for seismic services, especially in Latin America and the Far
East, our ability to finance operations will remain limited through 2003 and
financing may not be available at all to allow the Company to continue its
operations in the ordinary course of business if the Company cannot refinance
its debt, reach an accommodation with its lenders or obtain additional financing
or credit support.
There are currently no additional committed sources of financing available
to the Company and no availability under its existing facilities. The Company
has in the past relied on its majority stockholder, Elliott, to provide credit
support and interim funding. Elliott has indicated to the Company that it will
not commit to provide additional financial and credit support to the Company
during 2003. Even if the Company's operating results continue to improve and
cost control initiatives are successful during 2003, the Company will require
additional financing, or waivers on current debt obligations, to sustain its
operations and meet its debt service requirements as those amounts become due.
There can be no assurance that amounts that become due in 2003 can be paid or
refinanced or that any additional financing can be obtained to meet the
Company's needs.
Dependence on the Oil and Gas Industry; Industry Volatility.
The Company's business depends in large part on the conditions of the oil
and gas industry and, specifically, on the capital expenditures of the Company's
customers. Demand for land and transition zone seismic acquisition services
remains severely depressed over levels experienced in the past. The Company is
unable to predict with any certainty when and the extent to which the market for
seismic services is likely to improve and, until such time, will continue to
experience operating losses.
Intense Price Competition in a Depressed Market.
Competition among seismic contractors is intense. Competitive factors have
in recent years included price, crew experience, equipment availability,
technological expertise and reputation for quality and dependability. Certain of
the Company's competitors operate more data acquisition crews than the Company
does and have substantially greater financial and other resources. These larger
and better capitalized companies enjoy an advantage over the Company in the
current competitive environment for contract awards where competition is
characterized principally by intense price competition.
Risks of High Levels of Fixed Costs.
The Company's business has high fixed costs, and downtime or low
productivity due to reduced demand, weather interruptions, equipment failures or
other causes could result in significant operating losses.
7
Technology Risks.
Seismic data acquisition and processing is a capital-intensive and
technological business. The development of seismic data acquisition and
processing equipment has been characterized by rapid technological advancements
in recent years, and the Company expects this trend to continue. Manufacturers
of seismic equipment may develop new systems that have competitive advantages
over systems now in use that could render the Company's current equipment
obsolete or require the Company to make significant capital expenditures to
maintain its competitive position. Under such circumstances, there can be no
assurance that the Company would have the necessary funds or be able to obtain
the necessary financing required.
Dependence upon Significant Customers.
The Company derives a significant amount of its revenue from a small number
of major and independent oil and gas companies. The inability of the Company to
continue to perform services for a number of its large existing customers, if
not offset by contracts with new or other existing customers, could have a
material adverse effect on the Company's business and operations.
Intense Competition.
The Company competes in a highly competitive segment of the oil field
services industry. The Company's services are sold in a highly competitive
market and its revenues and earnings may be affected by the following factors:
- changes in competitive prices;
- fluctuations in the level of activity and major markets;
- general economic conditions; and
- governmental regulation.
The Company competes with the oil and gas industry's largest seismic
service providers. Management of the Company believes that the principal
competitive factors in the market areas served by the Company are product and
service quality and availability, technical proficiency and price.
Risks of International Operations.
The Company's international operations, which are expected to continue to
contribute materially to revenues, are subject to risks inherent in doing
business in foreign countries. These risks include, but are not limited to:
- operating risks;
- sourcing and retaining qualified personnel;
- commodity prices for oil and natural gas;
- political changes;
- expropriation;
- currency restrictions and changes in currency exchange rates;
- taxes; and
- boycotts and other civil disturbances.
8
Dependence on Key Personnel.
The Company depends on the continued services of key management and
operating personnel. If the Company were to lose a significant number of these
personnel, this could adversely affect its operations.
ITEM 2. PROPERTIES.
The Company owns a 30,000 square foot building and storage yard in Houston,
Texas, which serves as its corporate headquarters. In Calgary, Alberta (Canada),
the Company owned an 18,000 square foot office building and storage yard, that
was sold subsequent to year-end, that served as the Company's Canadian
headquarters. In addition, the Company leases office, warehouse and storage
space in areas throughout the world as may be required from time to time to
market and support the Company's operations.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to a class action 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
case is currently in the appellate level process. 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 flow.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
As of May 30, 2003, there were 14,547,055 shares of the Company's common
stock, $.001 par value per share (the "Common Stock"), outstanding and
approximately 22 shareholders. See Item 12 for the number of shares of Common
Stock owned by the Company's executive officers, directors and each person known
to the Company to own beneficially more than 5% of the outstanding shares of
Common Stock. The Common Stock is not listed on any stock exchange or qualified
for trading in any other market. The Company does not anticipate paying cash
dividends with respect to the common stock in the future. In addition, the
payment of cash dividends is currently prohibited by the indenture governing the
Company's 9 3/4% Senior Notes Due 2008 and credit agreements governing the
Company's other indebtedness for borrowed money. The Company is currently
issuing paid-in-kind preferred stock to satisfy its dividend requirements on its
8% convertible preferred stock.
ITEM 6. SELECTED FINANCIAL DATA.
The statement of operations data for each of the years in the four-year
period ended December 31, 2002 and the balance sheet data of the Company at
December 31, 1998, 1999, 2000, 2001 and 2002 are derived from the consolidated
financial statements of the Company. The selected historical financial data set
forth below should be read in conjunction with the consolidated financial
statements and the notes thereto included in Item 8 of this Form 10-K. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
YEAR ENDED DECEMBER 31,
1998 1999 2000 2001 2002
--------- --------- --------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues......................................... $ 175,512 $ 66,047 $ 66,152 $ 93,451(2) $ 89,015
Depreciation and Amortization.................... 23,809 26,147 26,916 35,735 9,810
Charge for Asset Impairments..................... 3,762 5,028 3,299 38,507(3) -
Operating income (loss).......................... 6,346 (33,113) (30,591) (57,228) 4,556
Other income (expense) - net..................... (10,120) (11,404) (6,688) (9,058) (6,725)
Loss from continuing operations.................. (7,698) (45,753) (37,622) (67,397) (5,578)
Net loss applicable to common stock.............. $ (8,138) $ (46,049) $ (41,926) $ (72,217) $ (10,795)
========= ========= ========= ========= =========
LOSS PER COMMON SHARE - BASIC AND DILUTED:
Continuing operations......................... $ (.54) $ (3.16) $ (2.59) $ (4.63) $ (.38)
Dividend requirement on pay-in-kind
preferred stock............................. (.03) (.02) (.29) (.33) (.36)
--------- --------- --------- --------- ---------
Net loss per common share..................... $ (.57) $ (3.18) $ (2.88) $ (4.96) $ (.74)
========= ========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted............................. 14,257 14,458 14,547 14,547 14,547
CASH FLOW DATA:
Cash provided by (used in) operating
activities..................................... $ 17,338 $ (977) $ 9,516 $ 2,032 $ (1,088)
Cash used in investing activities................ (32,828) (31,495) (2,998) (3,269) (3,986)
Cash provided by (used in) financing
activities..................................... 16,821 27,163 (5,487) 707 9,470
Capital expenditures............................. 23,866 9,496 3,453 4,971 15,433
BALANCE SHEET DATA:
Working capital (deficit)........................ $ 14,373 $ (4,929) $ (4,448) $ (76,194)(4) $ (85,147)(4)
Total assets..................................... 166,441 149,996 109,755 45,925 53,938
Notes payable, current portion of long-term debt
and capital lease obligations.................. 2,522 8,247 8,230 71,276(4) 88,245(4)
Long-term debt, subordinated debt and capital
lease obligations, excluding current
portion(1)..................................... 110,817 119,709 58,735 719(4) 3,890(4)
Total stockholders' equity (deficit)(1).......... 22,002 (7,360) 9,750 (57,599) (62,943)
10
(1) See Note 9 of Notes to Consolidated Financial Statements regarding the
January 2000 exchange of $56.3 million of Senior Notes plus accrued
interest therein for 389,772 shares of Convertible Preferred Stock.
(2) Includes $15 Million sale of substantial portion of the Company's
multi-client data library, with ongoing rights thereto, in the southern
United States see Note 6 of Notes to Consolidated Financial Statements.
(3) Charge for asset impairment related to the Company's goodwill, fixed
assets, and multi-client data library, see Note 4 of Notes to Consolidated
Financial Statements.
(4) See Note 9 of Notes to Consolidated Financial Statements regarding the
classification of the Foothill/Elliott credit facility and the 9 3/4%
Senior Notes.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company was formed in September 1997. On September 30, 1997, the
Company acquired substantially all of the assets and assumed certain liabilities
of GGI as part of GGI's Chapter 11 reorganization plan, confirmed in September
1997.
The Company's business activities involve the performance of land and
transition zone seismic data acquisition services in selected markets worldwide,
including the United States, Canada, Latin America and the Far East. The Company
primarily acquires seismic data on a turnkey basis for oil and gas companies,
which provide for a fixed fee for each project. The Company has also in the past
acquired seismic data on a term basis, which provided for a periodic fee during
the term of the project, and a cost-plus basis, which provided that the costs of
a project, plus a percentage fee, were borne by the customer.
In addition, in the United States and Canada, the Company has in the past
acquired multi-client seismic data surveys, and remaining surveys are marketed
on a non-exclusive basis to oil and gas companies.
The Company's results are influenced 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.
The Company has relied on financial and credit support provided by Elliott
for the past three years to supplement its cash flow and obtain third party
financing. Elliott has indicated to the Company that it will not commit to
provide additional financial and credit support to the Company during 2003. The
Company has also experienced significant operating losses for the past four
years, has operated with a working capital deficiency and there is uncertainty
surrounding the sufficiency and timing of the Company's future cash flows.
Although Elliott has not taken the steps to accelerate the maturity of amounts
outstanding under the Foothill/Elliott Credit Facility, the Company is in
default of certain of its non-financial obligations under the Foothill/Elliott
Credit Facility. All of these factors have caused the Company's independent
accountants to issue their audit report for the fiscal year ended December 31,
2002 with a "going concern" qualification. The Company cannot make any assurance
that its cash flow or ability to obtain financing will allow it to continue its
business in the ordinary course during 2003.
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto and the other financial
information contained in the Company's periodic reports previously filed with
the commission and incorporated herein by reference.
11
The historical results of operations of the Company for the years ended
December 31, 2000, 2001 and 2002 are presented below.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 2001 2002
----------- ----------- -----------
(IN THOUSANDS)
Revenues.......................................... $ 66,152 $ 93,451 $ 89,015
Expenses:
Direct operating expenses...................... 52,725 67,097 65,580
Selling, general and administrative expenses... 9,982 9,340 9,069
Depreciation and amortization.................. 26,916 35,735 9,810
Cost of contractual rights purchase............ 3,821 -- --
Charge for asset impairments................... 3,299 38,507 --
---------- ----------- -----------
Total costs and expenses................. 96,743 150,679 84,459
---------- ----------- -----------
Operating income (loss).................. (30,591) (57,228) 4,556
Other income (expense):
Interest expense, net.......................... (7,557) (6,619) (7,381)
Other.......................................... 869 (2,439) 656
---------- ----------- -----------
Total other expenses..................... (6,688) (9,058) (6,725)
---------- ----------- -----------
Loss before income tax expense................. (37,279) (66,286) (2,169)
Income tax expense................................ 343 1,111 3,409
---------- ----------- -----------
Net loss.......................................... (37,622) (67,397) (5,578)
Preferred dividends............................... (4,304) (4,820) (5,217)
---------- ----------- -----------
Net loss applicable to common stock............... $ (41,926) $ (72,217) $ (10,795)
========== =========== ===========
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2001
Revenues. Revenues for 2002 were $89.0 million, compared with $93.5 million
for 2001. The decrease is primarily due to the sale, on March 23, 2001, of a
substantial portion of the Company's multi-client data library, and ongoing
rights thereto, in the southern United States for $15.0 million cash combined
with reductions in the Company's United States operations, partially offset by
significantly increased activity levels in Latin America.
Revenues from United States data acquisition operations decreased $10.1
million, or 68% from $15.0 million in 2001 to $4.9 million in 2002. This decline
in data acquisition revenues is primarily due to the Company reducing operations
in North America because of continued low levels of demand for seismic services
in the southern United States. Backlog for United States data acquisition
projects at December 31, 2002 was $0.5 million. The Company has taken measures
to resize its United States operations to reduced current demand levels
including reducing crew support personnel, consolidating administrative offices
and support facilities and reducing overhead. The Company expects that revenues
from United States data acquisition operations in 2003 will be decreased over
levels experienced in 2001 and 2002. As of March 31, 2003, the Company has
backlog for United States data acquisition projects of $0.3 million.
Revenues from seismic data processing operations were $0.2 for 2002
compared to $0.6 million for 2001. The decrease is due to closing the Company's
Houston and Dallas data processing centers and consolidating its international
data acquisition and data processing centers.
Revenues from Canadian data acquisition operations decreased $1.8 million,
or 15.8%, from $11.4 million in 2001 to $9.6 million in 2002. This is because
during 2001, a range of one to four land seismic crews were operating in Canada
compared to a range of one to three in 2002.
12
The Company began its multi-client data acquisition activities in the
United States and Canada during 1998. Multi-client crew operations began in the
second quarter of 1998 and continued through 1999 and into 2000. During that
time, 17 projects were completed in Texas, California, Wyoming and Canada
covering a total of 1,648 square miles. Due to depressed demand for the
Company's proprietary data in 2000, an inability to secure adequate initial
customer underwriting and a lack of sufficient liquidity, the Company in the
first quarter of 2000 curtailed its strategy of building a multi-client data
library in the southern United States. Revenues associated with the underwritten
portion of multi-client data programs are recognized as a component of the data
acquisition revenues discussed above. Revenue from sales of the data library for
2002 were $.5 million, compared to $20.4 million for 2001. On March 23, 2001,
the Company completed the sale for $15.0 million cash ($15.0 million of related
amortization) of a substantial portion of its multi-client data library in the
southern United States, retaining all of its Canadian multi-client data library
as well as several data surveys in the southern United States. The Company may
selectively continue adding to its remaining data library if adequate liquidity
exists; however, management will be very selective in its decision to
participate in projects that are not substantially underwritten by customers.
Revenues in Latin America increased $29.7 million, or 67.3%, from $44.1
million in 2001 to $73.8 million in 2002. During 2001, a range of two to six
crews operated in Latin America. During 2002, a range of two to six crews also
operated in Latin America but the scope and size of 2002 projects were larger
than that of 2001 projects. As of April 30, 2003, there were five land
acquisition and transition zone seismic crews operating or mobilizing in this
region.
Revenues from the Far East decreased $1.9 million, or 95.0%, from $2.0
million in 2001 to $.1 million in 2002. During 2001, the Company operated one
crew in New Zealand for approximately three months. During 2002, the Company
operated one crew in Indonesia for approximately one month.
Expenses. Direct operating expenses for 2002 decreased $1.5 million, or
2.3%, to $65.6 million (73.7% of revenues) from $67.1 million (71.8% of
revenues) in 2001. The absolute decrease in operating expenses is a result of
decreased activity levels in North America and the Far East. The increase in
operating expenses as a percentage of revenues from 2001 to 2002 is primarily
due to the decreased amount of multi-client data sale revenues, primarily due to
the sale for $15.0 million cash ($15.0 million of related amortization) of a
substantial portion of its multi-client data library in 2001 with the associated
cost included in depreciation and amortization.
General and administrative expenses decreased $0.2 million, or 2.9%, to
$9.1 million (10.2% of revenues) in 2002 from $9.3 million (9.9% of revenues) in
2001. The absolute reduction is the result of the Company's effort to reduce
support and overhead personnel in all of its operating regions and at the
corporate office level.
Depreciation and amortization decreased $25.9 million, or 72.5%, to $9.8
million in 2002 from $35.7 million for 2001. Capital expenditures were $15.4
million and $5.0 million for 2002 and 2001, respectively. The decrease is due to
the amortization associated with the sale in 2001 of a substantial portion of
the Company's multi-client data library, and ongoing rights thereto, in the
southern United States for $15.0 million cash.
The Company recorded charges for asset impairment of $38.5 million for
2001. The 2001 charge was related to: 1.) an impairment recognized on the
Company's goodwill of $31.3 million due to revised estimates of future operating
cash flows due to depressed exploration activity resulting in decreased demand
for the Company's data acquisition and data processing services in the United
States and Canada and 2.) a charge of $7.2 million to impair certain of the
Company's fixed assets due primarily to technological obsolescence and
reductions in demand for services in the United States as well as a charge to
reduce the carrying value of the Company's multi-client data library to net
realizable value based on revised future licensing prospects for such data in
view of the ongoing reduced demand for multi-client data in general and the
Company's recent sales experience for such data. Triggering events requiring the
assessments include significant recurring losses and the Company's decision to
resize its United States operations to reduced current demand levels. 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.
Other Income (Expenses). Interest expense, net, increased $0.8 million from
$6.6 million in 2001 to $7.4 million in 2002. The increase is primarily due to
an increase in debt outstanding.
Tax Provision. The income tax provision consisted of income taxes in
foreign countries for 2002 and 2001. No benefit for United States federal or
Canadian income tax loss carry-forwards was recorded in either period, given the
uncertainty of realization of such tax benefits.
13
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2000
Revenues. Revenues for 2001 were $93.5 million, compared with $66.2 million
for 2000. The increase is primarily due to the sale, on March 23, 2001, of a
substantial portion of the Company's multi-client data library, and ongoing
rights thereto, in the southern United States for $15.0 million cash.
Revenues from United States data acquisition operations decreased $0.4
million, or 2.6%, from $15.4 million in 2000 to $15.0 million in 2001. This
slight decline in data acquisition revenues is due to continued low levels of
demand for seismic services in the southern United States. Backlog for United
States data acquisition projects at December 31, 2001 was $0.3 million.
Revenues from seismic data processing operations were $0.6 million for 2001
compared to $0.5 million for 2000. In January 2001, the Company opened a data
center in Quito, Ecuador to service customer requirements in South America. In
December 2001, the Company closed down its data center in Dallas, Texas and
consolidated it with the Company's Houston, Texas data center.
Revenues from Canadian data acquisition operations decreased $1.9 million,
or 14.3%, from $13.3 million in 2000 to $11.4 million in 2001. During 2000, a
range of one to five land seismic crews were operating in Canada compared to a
range of one to four in 2001.
The Company began its multi-client data acquisition activities in the
United States and Canada during 1998. Multi-client crew operations began in the
second quarter of 1998 and continued through 1999 and into 2000. During that
time, 17 projects were completed in Texas, California, Wyoming and Canada
covering a total of 1,648 square miles. Due to depressed demand for the
Company's proprietary data in 2000, an inability to secure adequate initial
customer underwriting and a lack of sufficient liquidity, the Company in the
first quarter of 2000 curtailed its strategy of building a multi-client data
library in the southern United States. Revenues associated with the underwritten
portion of multi-client data programs are recognized as a component of the data
acquisition revenues discussed above. Revenue from sales of the data library for
2001 were $20.4 million, compared to $12.6 million for 2000. On March 23, 2001,
the Company completed the sale for $15.0 million cash ($15.0 million of related
amortization) of a substantial portion of its multi-client data library in the
southern United States, retaining all of its Canadian multi-client data library
as well as several data surveys in the southern United States. The Company may
selectively continue adding to its remaining data library if adequate liquidity
exists; however, management will be very selective in its decision to
participate in projects that are not substantially underwritten by customers.
Revenues in Latin America increased $23.9 million, or 118.3%, from $20.2
million in 2000 to $44.1 million in 2001. During 2000, a range of two to five
crews operated in Latin America. During 2001, a range of two to six crews
operated in Latin America. The scope and size of 2001 projects were larger than
that of 2000 projects. As of May 1, 2002, there were five land acquisition
seismic crews operating or mobilizing in this region.
Revenues from the Far East decreased $2.2 million, or 52.4%, from $4.2
million in 2000 to $2.0 million in 2001. During 2000, the Company operated one
crew in Indonesia for approximately six months. During 2001, the Company
operated one crew in New Zealand for approximately three months.
Expenses. Direct operating expenses for 2001 increased $14.4 million, or
27.3%, to $67.1 million (71.8% of revenues) from $52.7 million (79.6% of
revenues) in 2000. The absolute increase in operating expenses is a result of
increased activity levels in Latin America. The large decrease in operating
expenses as a percentage of revenues from 2000 to 2001 is primarily due to the
increased amount of multi-client data sale revenues, primarily due to the sale
for $15.0 million cash ($15.0 million of related amortization) of a substantial
portion of its multi-client data library in 2001 with the associated cost
included in depreciation and amortization.
General and administrative expenses decreased $0.7 million, or 7.0%, to
$9.3 million (9.9% of revenues) in 2001 from $10.0 million (15.1% of revenues)
in 2000. The absolute reduction is the result of the Company's effort beginning
during the second quarter of 2000, and continued throughout 2001, to reduce
support and overhead personnel in all of its operating regions and at the
corporate office level.
Depreciation and amortization increased $8.8 million, or 32.7%, to $35.7
million in 2001 from $26.9 million for 2000. Capital expenditures were $5.0
million and $3.5 million for 2001 and 2000, respectively. The increase is due to
the amortization associated with the sale of a substantial portion of the
Company's multi-client data library, and ongoing rights thereto, in the southern
United States for $15.0 million cash.
14
In March 2000, the Company completed the purchase of contractual rights
held by a broker having multiple-year marketing rights for certain of the
Company's multi-client data surveys. For financial reporting purposes, the
Company recorded a non-recurring charge to operations of $3.8 million consisting
of the monetary consideration paid of $3.0 million and the net estimated fair
value of property interests exchanged of $0.8 million.
The Company recorded charges for asset impairment of $38.5 million and $3.3
million for 2001 and 2000, respectively. The 2001 charge was related to: 1.) an
impairment recognized on the Company's goodwill of $31.3 million due to revised
estimates of future operating cash flows due to depressed exploration activity
resulting in decreased demand for the Company's data acquisition and data
processing services in the United States and Canada and 2.) a charge of $7.2
million to impair certain of the Company's fixed assets due primarily to
technological obsolescence and reductions in demand for services in the United
States as well as a charge to reduce the carrying value of the Company's
multi-client data library to net realizable value based on revised future
licensing prospects for such data in view of the ongoing reduced demand for
multi-client data in general and the Company's recent sales experience for such
data. Triggering events requiring the assessments include significant recurring
losses and the Company's decision to resize its United States operations to
reduced current demand levels. The 2000 charge was made to reduce the carrying
value of the Company's multi-client data library to net realizable value, based
on revised future licensing prospects for such data in view of the ongoing
reduced demand for multi-client data in general and the Company's recent sales
experience for such data. The impairment provision during the quarter ended
December 31, 2000 included approximately $2.5 million of book loss that would
have resulted from the March 2001 data sale for $15.0 million discussed above.
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.
Other Income (Expenses). Interest expense, net, decreased $1.0 million from
$7.6 million in 2000 to $6.6 million in 2001. The decrease is primarily due to
Elliott Associates, L.P. ("Elliott") and Elliott International, L.P. (formerly
known as Westgate International, L.P.) exchanging $56,320,000 of 9 3/4% Senior
Notes for Convertible Preferred Stock on January 19, 2000. Additionally
contributing to the decrease were decreased interest rates in 2001, reducing
interest expense on the Company's variable rate debt.
Tax Provision. The income tax provision consisted of income taxes in
foreign countries for 2000 and 2001. No benefit for United States federal or
Canadian 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 and the Far East, funds to finance operations are expected to
remain limited through 2003 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. Through May 15, 2003, no cash for working capital has been
provided to the Company by Elliott. Elliott has indicated to the Company that it
will not commit to provide additional financial and credit support to the
Company during 2003.
The Company is currently in default under its credit facility with Elliott
as well as under the indenture under which the 9 3/4% Senior Notes due 2008 were
issued. As a result of the event of default under the indenture, the trustee, or
the holders of a specified percentage in aggregate principal amount of the
Senior Notes, could take the steps necessary to cause the Senior Notes to become
immediately due and payable. As of the date of this report, neither the trustee
nor such holders has exercised this right. Additionally, the event of default
under the Senior Notes constitutes an event of default under the Credit
Facility, which entitles Elliott to accelerate the maturity of all amounts owing
under the Credit Facility and to exercise remedies to collect such amounts as
provided under the Credit Facility and the related security agreements. As of
the date of this report, Elliott has not exercised this right. Accordingly, the
Company has classified both the $43.5 million of otherwise long-term debt
related to the Senior Notes and the $24.2 million of otherwise long-term debt
related to the Credit Facility as current and expects to continue to do so for
the foreseeable future. If the maturity of any of the Company's debt was
accelerated, it would be unlikely that the Company would be able to continue its
15
operations without seeking protection from its creditors under the federal
bankruptcy code. Additionally, as a result of the defaults, the Company does not
expect that any additional amounts will be made available to the Company under
the Credit Facility.
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 2003, the Company will require substantial cash flow, or waivers on
current debt obligations, 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, the Credit Facility and other indebtedness
as those amounts become due.
The Company's management is currently in discussions with the ad hoc
steering committee of the holders of the Senior Notes and Elliott concerning a
debt-for-equity exchange or other comprehensive restructuring of the Company's
indebtedness that, among other things, would resolve the interest payment
default under the Senior Notes, and because other defaults have been waived
through June 15, 2003, would eliminate Elliott's right to accelerate amounts
outstanding under the Credit Facility through the date of the existing waiver.
Additionally, the Company has taken measures to reduce costs through
consolidation of certain locations, resizing its United States and Canadian
operations to reduced current demand levels, and reductions in overhead
personnel. Should such measures be unsuccessful, or should any of the Company's
debtors exercise their right to accelerate their amounts outstanding, 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 cash requirements primarily to support its international
projects and to acquire, maintain or improve equipment. During 2002, $1.1
million was used by operating activities, a significant decrease from last year
when the Company generated $2.0 million from operating activities. This decrease
in funds generated from operating activities was principally due to a $6.2
million decrease in accounts payable. During 2002, $9.5 million was provided by
financing activities. This compares to 2001 when $0.7 million was provided by
financing activities, which was due to a $9.5 million net increase of debt.
During 2002, $4.0 million was used in investing activities, primarily due to
$15.4 million of capital expenditures, $10.6 million of which is financed and
will be paid in 2003 and beyond. This compares to $3.3 million used in investing
activities in 2001, which was due principally to $3.5 million used to fund
capital expenditures and multi-client data acquisitions, offset in part by $0.2
million of asset sales.
The Company has incurred significant net losses during each of the past
three years and has operated with working capital deficits during this period.
As a result, the Company's capital requirements during 2002 were funded
primarily through $7.7 million in funds provided by Elliott pursuant to a
factoring arrangement and $8.2 million of funds provided by Foothill, and cash
collateralized by Elliott, under the supplemental term loan of the Credit
Facility, in combination with close management of the Company's accounts
receivable and payables.
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 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 2002, Elliott advanced approximately $7.7 million to the Company through
a factoring arrangement, as discussed below, and as of December 31, 2002, $11.7
million remained outstanding. No additional amounts have been made available to
the Company under this arrangement and all amounts become due and payable on
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.
Capital expenditures for 2002 were approximately $15.4 million and were
used primarily to upgrade and expand the Company's seismic data acquisition and
recording equipment as well as the purchase of a new recording system for its
Latin American operations. The Company's 2003 business plan contemplates up to
$7.1 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 December 31, 2002, the Company's had approximately $92.1 million of
indebtedness consisting of (i) the $43.5 million
16
principal amount of the Senior Notes, (ii) $27.2 million of outstanding
borrowings under the Credit Facility, (iii) $11.7 million payable under the
Elliott factoring arrangement and (iv) $9.7 million of loans and capitalized
leases primarily incurred to fund capital expenditures. The following table
summarizes the Company's payment obligations with respect to these long-term
liabilities as well as the Company's operating leases over the next five years
(in thousands):
2003 2004 2005 2006 2007 THEREAFTER
---------- ------ ----- ---- ---- ----------
Notes payable, long-term debt and
capital lease obligations............ $ 88,245(1) $3,828 $ 58 $ 4 $ $ --
Operating Leases...................... 585 359 103 68 68 --
-------- ------ ----- ---- --- ----
$ 88,830 $4,187 $ 161 $ 72 $68 $ --
======== ====== ===== ==== === ====
- ------------
(1) See Note 9 of Notes to Consolidated Financial Statements regarding the
classification of the Elliott credit facility and the 9 3/4% Senior Notes.
The Company has approximately $159.3 million of debt and preferred stock
outstanding at December 31, 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.
EFFECT OF INFLATION
Current economic conditions indicate that the costs of exploration and
production for oil and gas are increasing. The oil and gas industry historically
has experienced periods of rapid cost increases within short periods of time as
demand for drilling rigs, drilling pipe and other materials and supplies
increases. Increases in exploration and production costs over increases in
commodity prices of oil and natural gas could lead to a decrease in such
activities by oil and gas exploration and production companies, which would have
an adverse effect on the demand for the Company's services.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and
results of operations are based on its consolidated financial statements. The
preparation of these financial statements requires the Company's management to
make estimates and judgements that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent assets
and liabilities. Actual results may differ from these estimates under different
assumptions or conditions.
The Company considers certain accounting policies to be critical policies
due to the significant judgements, estimation processes and uncertainties
involved for each in the preparation of its consolidated financial statements.
The Company believes the following represents its critical accounting policies.
Revenue Recognition
Revenue from cancelable exclusive seismic surveys is recognized as the
services are performed or, when applicable, in accordance with contractual
milestones then chargeable to the customer in accordance with contract terms.
Anticipated losses on survey contracts are recognized when such losses are
determinable. Revenue from non-cancelable exclusive and non-exclusive seismic
surveys is recognized in accordance with the percentage of completion method of
accounting based upon costs incurred as a percentage of total estimated costs.
The Company does not currently have any non-cancelable contracts and they are
not common for the Company.
Revenue from the licensing of multi-client data surveys is recognized upon
issuance of license when the Company obtains a non-cancelable commitment from
the customer.
Revenue from the Company's data processing services is recognized as the
services are performed.
17
Asset Impairment
In accordance with Statement of Financial Accounting Standards (SFAS) No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" the
Company evaluates the recoverability of property and equipment, and other
long-lived assets, if facts and circumstances indicate that any of those assets
might be impaired. If an evaluation is required the estimated future
undiscounted cash flows associated with the asset are compared to the assets
carrying amount to determine if an impairment of such property is necessary. The
effect of any impairment would be to expense the difference between the fair
value of such property and its carrying value.
Mobilization Cost
Transportation and other direct expenses incurred prior to and at the
commencement of geophysical operations in an area or on a specific contract,
that would not have been incurred otherwise, are deferred and recognized over
either the lesser of the term of the related contract (in the case of costs
related to a specific contract this method is always used) or backlog of
contracts in that area, or one year.
Goodwill
Goodwill, representing the excess of purchase price over fair value of net
assets acquired, was previously amortized on a straight-line basis over the
expected periods to be benefited. Accumulated amortization was approximately
$6.2 million as of December 31, 2001. The Company assessed the recoverability of
this intangible asset by determining whether the goodwill balance was expected
to be recovered through undiscounted future operating cash flows of the acquired
operation over the remaining estimated life of the goodwill. The amount of
goodwill impairment, if any, was measured based on projected discounted future
operating cash flows using a discount rate reflective of Grant's average cost of
capital. The assessment of the recoverability of goodwill was impacted if
estimated future operating cash flows were not achieved. Based on the fourth
quarter 2001 assessment, the remaining net book value of the goodwill created in
the purchase of GGI's assets, previously being amortized over 30 years, the
goodwill created in the acquisition of Solid State's minority interest,
previously being amortized over 20 years and the goodwill created in the
purchase of the remaining interest in ISI, previously being amortized over 30
years, was fully impaired in 2001 (see Note 4) in accordance with the applicable
accounting standards at that time. As a result of the above mentioned
impairments, no goodwill remains at December 31, 2002.
Foreign Exchange Gains and Losses
The United States ("U.S.") dollar is the Company's primary functional
currency in all foreign locations with the exception of its Canadian
subsidiaries. Accordingly, those foreign entities (other than Canada) translate
property and equipment (and related depreciation) and inventories into U.S.
dollars at the exchange rate in effect at the time of their acquisition while
other assets and liabilities are translated at year-end rates. Operating results
(other than depreciation) are translated at the average rates of exchange
prevailing during the year. Re-measurement gains and losses are included in the
determination of net income and are reflected in other income (expense). The
Canadian subsidiaries use the Canadian dollar as their functional currency and
translate all monetary assets and liabilities at year-end exchange rates and
operating results at average exchange rates prevailing during the year in
accordance with SFAS No. 52, "Foreign Currency Translation". Adjustments
resulting from the translation of Canadian assets and liabilities are recorded
in the accumulated other comprehensive loss account in stockholders' equity.
RECENT ACOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143") which covers all legally enforceable
obligations associated with the retirement of tangible long-lived assets and
provides the accounting and reporting requirements for such obligations. SFAS
No. 143 is effective for the Company beginning January 1, 2003. Management does
not believe the adoption of SFAS No. 143 will have a material impact on
Company's consolidated financial position or results of operations.
In December 2002, the FASB issued Accounting for Stock-Based Compensation
("SFAS No. 148") amending SFAS No. 123, to provide alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation. The three methods provided in SFAS No. 148 include (1) the
prospective method which is the method currently provided for in SFAS No. 123,
(2) the retroactive restatement method which would allow companies to restate
all periods presented and (3) the modified prospective method which would allow
companies to present the recognition provisions of all outstanding stock-based
employee compensation
18
instruments as of the beginning of the fiscal year of adoption. In addition,
SFAS No. 148 amends the disclosure provisions of SFAS No. 123 to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. SFAS No. 148 does not amend SFAS No. 123 to require companies to
account for their employee stock-based awards using the fair value method.
However, the disclosure provisions are required for all companies with
stock-based employee compensation, regardless of whether they utilize the fair
method of accounting described in SFAS No. 123 or the intrinsic value method
described in APB Opinion No. 25, Accounting for Stock Issued to Employees. The
Company does not intend on adopting the fair value method of accounting for
stock-based compensation of SFAS No. 123, and accordingly SFAS No. 148 is not
expected to have a material impact on the Company's reported results of
operations or financial position in 2003.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN No. 46), which addresses consolidation by
business enterprises of variable interest entities. FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company does not expect
to identify any variable interest entities that must be consolidated and thus
the Company does not expect the requirements of FIN No. 46 to have a material
impact on its financial condition or result of operations.
In April 2003, the FASB issued Statement of Financial Accounting Standard
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities," ("FAS 149") which amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under FAS 133. FAS 149 is
effective for contracts entered into or modified after June 30, 2003 except for
the provisions that were cleared by the FASB in prior pronouncements. The
Company does not expect the provision of this statement to have a significant
impact on the Company's results of operations or financial position.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity, (" FAS 150"). This statement establishes standards
for how an issuer classifies and measures in its statement of financial position
certain financial instruments with characteristics of both liabilities and
equity. In accordance with the standard, financial instruments that embody
obligations for the issuer are required to be classified as liabilities. This
Statement shall be effective for financial instruments entered into or modified
after May 31, 2003, and otherwise shall be effective at the beginning of the
first interim period beginning after June 15, 2003. The Company does not expect
the provision of this statement to have a significant impact on the Company's
results of operations or financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK
The Company's debt consists of both fixed-interest and variable-interest
rate debt; consequently, the Company's earnings 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 2001 and 2002, and all other factors affecting the
Company's debt remained the same, the operating losses before taxes would have
been increased by $.5 and $.8 million in 2001 and in 2002, respectively. With
respect to the fair value of the Company's fixed-interest rate debt, if
prevailing market interest rates had been ten percent higher at year-end 2002,
and all other factors affecting the Company's debt remained the same, the fair
value of the Company's fixed-rate debt, as determined on a present-value basis,
would have been lower by approximately $4.0 million at December 31, 2002. Given
the composition of the Company's debt structure, the Company does not hedge its
interest rate risk.
19
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 dollars typically are indexed to inflationary tables and generally are
used for local expenses. The Company attempts to structure the majority of its
international contracts to be billed and paid at a favorable U.S. dollar
conversion rate.
The Company's operating results were negatively impacted by foreign
exchange loss of approximately $628,000 and $1,600,000 and foreign exchange gain
of approximately $48,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is submitted in a separate section of this report
following the signature page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 12, 2002 the Company reported on Form 8-K the removal of Arthur
Andersen, LLP as the Company's independent auditors.
On August 26, 2002 the Company reported on Form 8-K/A that on August 22,
2002, Mann Frankfort Stein & Lipp CPA's were retained to serve as independent
auditors for the Company.
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The name, age and current principal position of each director and executive
officer of the Company at May 30, 2003 are as follows:
NAME AGE POSITION
---- --- --------
James Devine.............. 44 Chairman of the Board
Richard F. Miles.......... 54 President, Chief Executive Officer
& Director
James Black............... 55 Chief Financial Officer
Narciso M. Chiquillo...... 54 Vice President - Latin America
William H. Freeman........ 54 Treasurer
Jonathan D. Pollock....... 39 Director
Lee Parker................ 34 Vice President - Technology
Richard J. Dunlop......... 41 Vice President - Transition Zone
Scott A. McCurdy.......... 27 Vice President - Finance & Controller
A. Marizza Glancey........ 38 Corporate Counsel & Corporate Secretary
Executive officers are elected by and serve at the discretion of the Board
of Directors until their successors are duly elected and qualified. There are no
family relationships between or among any directors or executive officers of the
Company. See "Certain Relationships and Related Transactions" for a description
of certain other relationships between or among directors and executive officers
of the Company.
James Devine has served as a director of the Company and Chairman of the
Board since December 2000. Mr. Devine has been a commercial consultant to the
oil and gas industry since 1996. He served as Corporate Vice President and
General Counsel of Colflexip Stena Offshore Group from 1994 to 1996. Mr. Devine
served as Chairman of the Board of Directors of Horizon Offshore, Inc., an
offshore marine construction company, from 1999 to 2002.
Richard F. Miles has served as President, Chief Executive Officer (CEO) and
director of the Company since February 2001. Mr. Miles served as Executive Vice
President of Sercel Inc. from December 15, 1999 until January of 2001 after
GeoScience/Syntron was merged with CGG/Sercel. Prior to the merger, Mr. Miles
was Chairman, President and CEO of Syntron, Inc., which he joined in January
1990. Syntron was a provider of geophysical acquisition equipment, and a
subsidiary of GeoScience, of which Mr. Miles was also President and CEO from its
formation in 1996 until the merger in December 1999. GeoScience, with its other
subsidiaries, Cogniseis and Symtronix, provided data loading, formatting
services and data processing and interpretation software for the oil exploration
industry. Prior to 1990, Mr. Miles was involved in seismic data acquisition and
processing in various management positions with continually increasing positions
of responsibility. Mr. Miles is also a director of Kelman Technologies Inc.
James Black has served as Chief Financial Officer of the Company since
November 2002. Mr. Black previously served as Financial Consultant to a
subsidiary Company, Solid State Geophysical, from February 2002. He served in
various senior finance and commercial roles worldwide in the upstream oil & gas
industry principally 23 years in engineering and construction with Halliburton.
Narciso M. Chiquillo has served as Vice President - Latin America since
August 1999. For the previous 10 years, Mr. Chiquillo was employed with the
Company with varying levels of increasing management responsibility for Latin
American operations.
William H. Freeman has served as Treasurer since February 2000. For the
previous 6 years, Mr. Freeman was employed by the Company in various financial
management positions of increasing responsibility. He was an Area Controller for
Halliburton Geophysical prior to joining Grant. Mr. Freeman is a Certified
Public Accountant.
Jonathan D. Pollock has served as a director of the Company since September
30, 1997 and as Chairman of its Board of Directors from September 1997 until
April 1998. Mr. Pollock has served for more than five years as a Portfolio
Manager with Elliott Management Corporation. Mr. Pollock is also a director of
Prime Natural Resources, Inc. and Chairman of the Board of Odyssea Marine, Inc.
Lee Parker has served as Vice President - Technology since March 2001. Mr.
Parker has been employed by the Company in various countries for the past 10
years with varying levels of increasing management responsibility for its
worldwide technical and
21
field operations.
Richard John Dunlop has served as Vice President - Transition Zone
Operations since July, 2002. For the previous 20 years, Mr. Dunlop was employed
with the Company with varying levels of increasing management responsibility,
within Grants International Operations. Much of Mr. Dunlop's earlier career was
spent in Australia and the Far East.
Scott A. McCurdy has served as Vice President - Finance & Controller since
March 2003. For the previous two years, Mr. McCurdy was employed by the Company
as Controller. Prior to joining Grant, Mr. McCurdy worked in public accounting,
with a client base primarily made up of companies in the oil field services
industry. Mr. McCurdy is a Certified Public Accountant in Texas.
A. Marizza Glancey has served as General Counsel and Corporate Secretary of
the company since June 2001. Ms. Glancey is also Human Resources Director for
the Company. Ms. Glancey has worked in the oil and gas industry since 1994. She
has served as Corporate Counsel for Torch, Inc. an offshore pipeline service
company and Vice President of Human Resources and Administration for Smedvig
America, LLC., a subsidiary of Smedvig, with corporate offices in Stavanger,
Norway; Smedvig specializes in ultra-deepwater drilling and production. Ms.
Glancey holds a J.D. of Law (Doctorate of Jurisprudence).
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes information concerning the compensation of
the Company's Chief Executive Officer and the four highest compensated executive
officers for 2002 (the "Named Executive Officers"). No restricted stock awards
were awarded for 2002.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- ------------
NAME AND OTHER ANNUAL OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY COMPENSATION AWARDS COMPENSATION
- ---------------------------------------- ---- -------- ------------ ------ ------------
Richard F. Miles(1)..................... 2002 $268,268 $ 35,000 -- --
President & Chief Executive Officer 2001 $225,961 -- 500,000 --
Narciso M. Chiquillo.................... 2002 $144,008 -- -- --
Vice President, Latin America 2001 $126,839 -- 34,000 --
2000 $115,511 -- 20,000 --
William H. Freeman...................... 2002 $122,431 -- -- --
Treasurer 2001 $115,000 -- -- --
2000 $109,055 -- 20,000 --
Richard Dunlop.......................... 2002 $127,409 -- -- --
Vice President - Transition Zone 2001 $ 99,617 -- 31,000 --
2000 $100,027 -- -- --
Marizza Glancey(2)...................... 2002 $123,020 -- 25,000 --
General Counsel & Corporate Secretary 2001 $ 64,135 -- -- --
- ----------
(1) Mr. Miles' employment as President and Chief Executive Officer began in
February 2001.
(2) Ms. Glancey's employment as General Counsel and Company Secretary began in
June 2001.
The following table sets forth information with respect to the unexercised
options to purchase shares of common stock which were granted in 2001 or a prior
year under the Company's 1997 Equity and Performance Incentive Plan to the Named
Executive Officers and held by them at December 31, 2001. None of the Named
Executive Officers exercised any stock options during 2002.
22
AGGREGATED OPTION EXERCISES IN 2002
AND 2002 YEAR-END OPTION VALUES
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT YEAR-END AT YEAR-END(1)
-------------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Richard F. Miles................ 166,667 333,333 $ -- $ --
Narciso M. Chiquillo............ 45,666 29,334 -- --
William H. Freeman.............. 18,433 6,667 -- --
Richard J. Dunlop............... 19,333 20,667 -- --
A. Marizza Glancey.............. 8,333 16,667 -- --
- ----------
(1) There is no trading market for the Common Stock.
EMPLOYMENT AGREEMENTS
Effective February 5, 2001, the Company retained Richard F. Miles to serve
as President and Chief Executive Officer of the Company for an annual base
salary of $225,000. The Company entered into an agreement effective August 1,
2001 with Mr. Miles. The agreement has an initial term through July 31, 2004
provided, however, that on August 1 of each year, commencing August 1, 2003, the
agreement is automatically renewed for successive one-year periods unless either
party provides the other with written notice of non-renewal prior to June 30 of
that year. Through amendments to this agreement, Mr. Miles annual base salary
has been increased to $302,494. Mr. Miles also agreed not to compete against the
Company throughout the term of his employment and for one year thereafter, and
not to disclose any confidential information during and after the term of his
employment.
Narciso Chiquillo. Effective August 1, 2001, the Company entered into an
employment agreement with Narciso M. Chiquillo, pursuant to which Mr. Chiquillo
has agreed to serve as Vice President - Latin America of the company. Mr.
Chiquillo's employment agreement has an initial term through August 1, 2004 and
provides for an annual base salary of $134,200. Through amendments to this
agreement, Mr. Chiquillo's annual base salary has been increased to $162,406.
Mr. Chiquillo also agreed not to compete against the Company throughout the term
of his employment and for six months thereafter, and not to disclose any
confidential information during and after the term of his employment.
Richard Dunlop. Effective August 1, 2001, the Company entered into an
employment agreement with Richard J. Dunlop, pursuant to which Mr. Dunlop has
agreed to serve as Manager - Transition Zone Operations of the Company. Mr.
Dunlop's employment agreement has an initial term through August 1, 2004 and
provides for an annual base salary of $90,000. Through amendments to this
agreement, Mr. Dunlop's position has changed to Vice President - Transition Zone
and his annual base salary has been increased to $141,814. Mr. Dunlop also
agreed not to compete against the Company throughout the term of his employment
and for six months thereafter, and not to disclose any confidential information
during and after the term of his employment.
Effective August 1, 2001, the Company entered into an employment agreement
with Lee Parker, pursuant to which Mr. Parker has agreed to serve as Vice
President - Technology of the company. Mr. Parker's employment agreement has an
initial term through August 1, 2004 and provides for an annual base salary of
$93,300. Through amendments to this agreement, Mr. Parker's annual base salary
has increased to $119,974. Mr. Parker also agreed not to compete against the
Company throughout the term of his employment and for six months thereafter, and
not to disclose any confidential information during and after the term of his
employment.
Effective March 21, 2003, the Company entered into an employment agreement
with Scott A. McCurdy, pursuant to which Mr. McCurdy has agreed to serve as
Controller of the Company. Mr. McCurdy's employment agreement has an initial
term through March 21, 2006 and provides for an annual base salary of $121,056.
Through amendments to this agreement, Mr. McCurdy's position has changed to Vice
President - Finance and Controller. Mr. McCurdy also agreed not to compete
against the Company throughout the term of his employment and for six months
thereafter, and not to disclose any confidential information during and after
the term of his employment.
23
COMPENSATION OF DIRECTORS
Effective January 1, 2001, one of the Company's subsidiaries entered into a
consulting agreement with a term through December 31, 2003, with Crossbay
Ventures Ltd. ("Crossbay") & James Devine, the Company's Chairman of the Board,
whereby Crossbay Ventures Ltd. Agreed to provide the consultancy and advisory
services of Mr. Devine, in exchange for an annual fee of $125,000. Through
amendments to this agreement the annual fee has increased to $150,000. In 2002,
a total of $132,395 was paid by the Company's subsidiary to Crossbay under this
agreement. Additionally, in 2001, Mr. Devine was granted 300,000 options to
purchase the Company's stock subject to certain vesting requirements. In April
2003, these options were cancelled and 400,000 options were issued in
consideration for consultancy services received.
1997 EQUITY AND PERFORMANCE INCENTIVE PLAN
The 1997 Equity and Performance Incentive Plan (the "Incentive Plan") was
adopted by the Board of Directors and approved by Grant's stockholders in
December 1997. The Incentive Plan currently provides for issuance of 2,750,000
shares. The Incentive Plan provides for the grant to officers (including
officers who are also directors), employees, consultants and non-employee
directors of Grant and its subsidiaries. These individuals may be granted awards
of "incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, non-statutory stock options, stock appreciation rights and
restricted shares and deferred shares of Grant common stock.
The Board of Directors, or a committee of the Board of Directors consisting
of at least two non-employee directors, is required to administer the Incentive
Plan. The Board of Directors currently administers the Incentive Plan and
decides to whom awards may be granted, the type of award to be granted and
determine, as applicable, the number of shares to be subject to each award, the
exercise price and the vesting. In making such determinations, the Board of
Directors will take into account the employee's present and potential
contributions to the Company's success and other relevant factors. As of
December 31, 2002, the Board of Directors had granted outstanding awards
covering 2,323,700 shares. In addition, as of May 30, 2003, a total of 57,000
restricted shares (36,000 in 1998, 18,000 in 1999, and 3,000 in 2000) were
granted to non-employee directors, with 54,000 of such shares being
unrestricted, subject to the satisfaction of conditions set forth under the
Incentive Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock at March 28, 2003 by (i) each person
known to the Company to own beneficially more than 5% of the outstanding shares
of the Common Stock, (ii) each current director and executive officer and (iii)
all current executive officers and directors as a group, including persons
deemed to share voting and investment power.
AMOUNT
AND PERCENT
NATURE OF OF
BENEFICIAL COMMON
NAME OF BENEFICIAL OWNER OWNERSHIP STOCK
------------------------ --------- -----
Elliott Associates, L.P.(1).................................. 19,397,501(3) 55.1%
Elliott International, L.P.(2)............................... 13,735,559(4) 37.8%
Richard F. Miles............................................. 166,667 *
Narciso Chiquillo............................................ 45,666 *
William H. Freeman........................................... 18,433 *
Jonathan D. Pollock.......................................... 9,000 *
James Devine................................................. 100,000 *
Lee Parker................................................... 23,400 *
Richard J. Dunlop............................................ 19,333 *
Scott A. McCurdy............................................. 8,333 *
A. Marizza Glancey........................................... 8,333 *
All executive officers and directors as a group (9 persons).. 399,165 *
- ----------
* Less than 1%.
(1) Paul E. Singer and Elliott Capital Advisors L.P., which is controlled by Mr.
Singer, are the general partners of Elliott. The business address of Elliott
is 712 Fifth Avenue, 36th Floor, New York, New York 10019.
24
(2) Hambledon, Inc., which is controlled by Mr. Singer, is the sole general
partner of Elliott International. Elliott Capital Advisors, Inc., which is
controlled by Mr. Singer, is the investment manager for Elliott
International. Hambledon, Inc. and Elliott Capital Advisors expressly
disclaim beneficial ownership of any shares of Common Stock. The business
address of Elliott International is c/o Midland Bank Trust Corporation
(Cayman) Limited, P.O. Box 1109, Mary Street, Grand Cayman, Cayman Islands,
British West Indies.
(3) Includes 13,242,834 shares that could be obtained through conversion of its
397,285 shares of 8% convertible preferred stock.
(4) Includes 7,431,067 shares that could be obtained through conversion of its
222,932 shares of 8% convertible preferred stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On May 24, 2002, the Company completed modifications of the Loan and
Security Agreement with Foothill and Elliott whereby, among other things, the
maximum amount of the revolving facility was reduced from $10.5 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.
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 of the
assets of the Company and its subsidiaries, are guaranteed by Elliott and,
except as to the existing Elliott term loan, could 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. At December 31, 2002, $7.5 million and $6.0 million
were outstanding under the Elliott term loan and the Foothill term loan,
respectively, $5.4 million was outstanding under the Foothill revolving credit
line, and $8.2 million was outstanding under the Foothill supplemental term
loan. Based on the Company's borrowing base and current Elliott cash collateral
levels at December 31, 2002, these amounts represent the maximum amount then
allowable at such date under the respective facilities.
On August 3, 2001, the Company completed an agreement with Elliott
International, L.P. for the sale, with recourse retained, of certain of its
foreign accounts receivable. The agreement allows the Company to sell, at its
election, both billed and unbilled receivables arising out of data acquisition
and processing services rendered by Grant's branch operations in South America.
The agreement was amended on January 7, 2002 to increase the maximum amount
available under the agreement to $5.25 million and to extend the agreement
through September 30, 2002 with all payments required by that time. Additional
amendments were completed February 5, 2002, March 5, 2002 and March 21, 2002 to
increase the maximum amount available under the agreement to $7.5 million, $10.9
million, and $11.7 million, 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 (see Note 21). On September 30, 2002, the
agreement was further modified to extend the term of the arrangement to October
31, 2003. As of April 15, 2003, $11.7 million was outstanding under the
agreement.
Effective January 1, 2001, one of the Company's subsidiaries entered into a
consulting agreement with a term through December 31, 2003, with Crossbay
Ventures Ltd. ("Crossbay") & James Devine, the Company's Chairman of the Board,
whereby Crossbay Ventures Ltd. Agreed to provide the consultancy and advisory
services of Mr. Devine, in exchange for an annual fee of $125,000. Through
amendments to this agreement the annual fee has increased to $150,000. In 2002,
a total of $132,395 was paid by the Company's subsidiary to Crossbay under this
agreement. Additionally, in 2001, Mr. Devine was granted 300,000 options to
purchase the Company's stock subject to certain vesting requirements. In April
2003, these options were cancelled and 400,000 options were issued in
consideration for consultancy services received.
See Note 9 and Note 21 for further discussion on transactions with Elliott.
During 2002, payment in kind stock dividends aggregating 32,750 shares and
18,377 shares of Convertible Preferred Stock were issued to Elliott and Elliott
International, respectively.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this 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-14(c)
25
and 15d-14(c) under 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.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following financial statements are filed as part of this report:
1. Financial Statements
PAGE
----
Reports of Independent Public Accountants................................................. 31
Consolidated Balance Sheets as of December 31, 2001 and 2002.............................. 33
Consolidated Statements of Operations for the years ended December 31, 2000,
2001 and 2002........................................................................ 34
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 2000, 2001 and 2002..................................................... 35
Consolidated Statements of Cash Flows for the years ended December 31, 2000,
2001 and 2002........................................................................ 36
Notes to Consolidated Financial Statements................................................ 37
Supplementary Financial Information - Quarterly Data...................................... 56
2. Financial Statement Schedules
Other schedules have not been included because they are not applicable, are
immaterial or the information has been included in the financial statements or
notes thereto.
3. Exhibits
See Index to Exhibits on page 57. The Company will furnish to any eligible
stockholder, upon written request, a copy of any exhibit listed, upon payment of
a reasonable fee equal to our expenses in furnishing such exhibit.
(b) Reports on Form 8-K:
On June 13, 2002, the Company filed a current report on Form 8-K
related to the disclosure of Amendment Seven to the Foothill/Elliott credit
facility and Amendment Five the Elliott factoring arrangement.
On July 30, 2002, the Company filed a current report on Form 8-K
related to the disclosure of Amendment Eight to the Foothill/Elliott credit
facility and Amendment Six to the Elliott factoring arrangement.
On August 12, 2002, the Company filed a current report on Form 8-K
related to the dismissal of Arthur Andersen LLP as the Company's
independent auditors.
On August 21, 2002, the Company filed a current report on Form 8-K
related to the default in interest payment to holders of the 9 3/4% Senior
Notes due 2008 and the failure to timely file quarterly report on Form 10-Q
for the period ending June 30, 2002.
On August 26, 2002, the Company filed an amendment to its current
report on Form 8-K filed on August 12, 2002 to disclose the fact that the
Company has retained MANN FRANKFORT STEIN & LIPP CPAs, L.L.P. as the
Company's independent auditors.
26
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.
On December 5, 2002, the Company filed a current report on Form 8-K
related to the retention of CIBC World Markets Corp. as its financial
advisor in connection with its review of strategic alternatives to
rationalize its capital structure.
On January 22, 2003, the Company filed a current report on Form 8-K
related to an event of default on the Foothill/Elliott credit facility and
the subsequent buyout of Foothill by Elliott and the disclosure of
Amendment No. 9 to the Foothill/Elliott credit facility.
On February 10, 2003, the Company filed a current report on Form 8-K
related to the disclosure of the Supplement to Ninth Amendment of the
Foothill/Elliott credit facility and the Second Supplement to Ninth
Amendment of the Foothill/Elliott credit facility.
On February 27, 2003, the Company filed a current report on Form 8-K
related to the default on interest payment to holders of 9 3/4% Senior
Notes due 2008 and the disclosure of the Third Supplement to Ninth
Amendment of the Foothill/Elliott credit facility.
On March 18, 2003, the Company filed a current report on Form 8-K
related to the Fourth Supplement to Ninth Amendment of the Foothill/Elliott
credit facility and the Fifth Supplement to Ninth Amendment of the
Foothill/Elliott credit facility.
On April 1, 2003, the Company filed a current report on Form 8-K
related to the event of default on the interest payment to the holders of 9
3/4% Senior Notes due 2008.
27
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, on the 10th day of
June 2003.
GRANT GEOPHYSICAL, INC.
By: /s/ RICHARD F. MILES
-------------------------------------------
Richard F. Miles
President and Chief Executive 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 indicated on the 10th day of June 2003.
SIGNATURE TITLE
--------- -----
/s/ RICHARD F. MILES President, Chief Executive Officer and Director
- ----------------------------- (Principal Executive Officer)
Richard F. Miles
/s/ JAMES BLACK Chief Financial Officer
- ----------------------------- (Principal Financial Officer)
James Black
/s/ SCOTT A. MCCURDY Controller (Principal Accounting Officer)
- -----------------------------
Scott A. McCurdy
/s/ JAMES DEVINE Chairman of the Board and Director
- -----------------------------
James Devine
/s/ JONATHAN D. POLLOCK Director
- -----------------------------
Jonathan D. Pollock
28
I, Richard F. Miles, certify that:
1. I have reviewed this annual report on Form 10-K of Grant Geophysical, Inc.;
2. Based on my knowledge, this annual 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 annual 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 annual 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 annual 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
annual report (the Evaluation Date); and
c) presented in this annual 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
annual 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: June 10, 2003
/s/ RICHARD F. MILES
Richard F. Miles
President and Chief Executive Officer
29
I, James Black, certify that:
1. I have reviewed this annual report on Form 10-K of Grant Geophysical, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements and other financial
information included in this annual 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 annual 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 annual 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
annual report (the Evaluation Date); and
c) presented in this annual 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
annual 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: June 10, 2003
/s/ JAMES BLACK
James Black
Chief Financial Officer
30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Grant Geophysical, Inc.
We have audited the accompanying consolidated balance sheet of Grant
Geophysical, Inc. and subsidiaries as of December 31, 2002, and the related
consolidated statements of operations, cash flows, and stockholders equity
(deficit) for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit. The
consolidated financial statements of Grant Geophysical, Inc. as of December 31,
2001, and for each of the two years in the period ended December 31, 2001, were
audited by other auditors who have ceased operations. Those auditors expressed
an unqualified opinion, modified for a going concern uncertainty, on those
financial statements in their report dated May 3, 2002.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the 2002 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Grant Geophysical, Inc. and subsidiaries as of December 31, 2002,
and the consolidated results of their operations and their cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States.
The accompanying consolidated financial statements have been prepared
assuming that the company will continue as a going concern. As discussed in Note
(1) to the consolidated financial statements, the Company continues to have a
net capital deficiency, has a current significant net working capital deficit,
is currently in default on the majority of its debt agreements, and current
uncertainties surrounding the sufficiency and timing of its future cash flows
raise substantial doubt about the ability of the Company to continue as a going
concern. Management's plans in regards to these matters are also described in
Note (1). The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty
Mann, Frankfort Stein & Lipp CPAs, LLP
Houston, Texas
May 13, 2003
31
This report is a copy of a previously issued report, the predecessor
auditor has not reissued this report. The previously included report refers to
financial statements not physically included in this document.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Grant Geophysical, Inc.:
We have audited the accompanying consolidated balance sheets of Grant
Geophysical, Inc. and subsidiaries (a Delaware corporation) as of December 31,
2001 and 2000, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the two years in the
period ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Grant Geophysical, Inc. and subsidiaries as of December 31, 2001 and 2000, and
the consolidated results of their operations and their cash flows for each of
the two years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has experienced recurring
losses for the past several years and these losses are continuing into 2002.
Additionally, the Company has a stockholders' deficit, negative working capital
and is currently in default of certain non-financial covenants with respect to
its Foothill/Elliott Credit Facility. There are no additional commitments to
provide financing in place at this time. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The accompanying
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
Arthur Andersen LLP
Houston, Texas
May 3, 2002
32
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
---------------------------
2001 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 2,471 $ 6,405
Restricted cash and short-term investments............................................ 17 858
Accounts receivable:
Trade (net of allowance for doubtful accounts of $790 and $538 at
December 31, 2001 and 2002, respectively)......................................... 14,142 11,358
Other............................................................................... 3,696 4,560
Inventories........................................................................... 447 511
Prepaids.............................................................................. 2,146 2,186
Work in process....................................................................... 1,511 1,107
------------ ------------
Total current assets............................................................ 24,430 26,985
Property, plant and equipment:
Land.................................................................................. 392 375
Buildings and improvements............................................................ 1,587 1,605
Plant facilities and store fixtures................................................... 1,308 1,380
Machinery and equipment............................................................... 92,136 100,881
------------ ------------
Total property, plant and equipment............................................. 95,423 104,241
Less accumulated depreciation......................................................... 76,370 79,399
------------ ------------
Net property, plant and equipment............................................... 19,053 24,842
Multi-client data library - non current, net............................................ 599 404
Other assets............................................................................ 1,843 1,707
------------ ------------
Total assets.................................................................... $ 45,925 $ 53,938
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable, current portion of long-term debt and capital lease obligations........ $ 63,776 $ 80,745
Term loan - affiliate................................................................. 7,500 7,500
Accounts payable...................................................................... 12,471 6,301
Accrued expenses...................................................................... 9,402 8,414
Accrued interest...................................................................... 1,854 2,929
Unearned revenue - current............................................................ 4,349 3,727
Foreign income taxes payable.......................................................... 1,272 2,516
------------ ------------
Total current liabilities....................................................... 100,624 112,132
Long-term debt and capital lease obligations............................................ 719 3,890
Unearned revenue - non current.......................................................... 782 391
Other liabilities and deferred credits.................................................. 1,399 468
Stockholders' equity (deficit):
Preferred stock, $.001 par value. Authorized 1,000,000 shares
8% convertible preferred series, liquidation value $100 per share; issued and
outstanding 620,408 and 671,550 at December 31, 2001 and 2002, respectively......... 62,041 67,155
Common stock, $.001 par value. Authorized 50,000,000 shares; issued and
outstanding 14,547,055 shares at December 31, 2001 and 2002......................... 15 15
Additional paid-in capital.............................................................. 58,867 58,867
Accumulated deficit..................................................................... (176,194) (186,886)
Accumulated other comprehensive loss.................................................... (2,328) (2,094)
------------ ------------
Total stockholders' equity (deficit)............................................ (57,599) (62,943)
------------ ------------
Total liabilities and stockholders' equity (deficit)............................ $ 45,925 $ 53,938
============ ============
See accompanying notes to consolidated financial statements.
33
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-------------------------------------
2000 2001 2002
---------- ----------- ----------
Revenues....................................................... $ 66,152 $ 93,451 $ 89,015
Expenses:
Direct operating expenses.................................... 52,725 67,097 65,580
Selling, general and administrative expenses................. 9,982 9,340 9,069
Depreciation and amortization................................ 26,916 35,735 9,810
Cost of contractual rights purchase.......................... 3,821 -- --
Charge for asset impairments................................. 3,299 38,507 --
---------- ----------- ----------
Total costs and expenses............................. 96,743 150,679 84,459
---------- ----------- ----------
Operating income (loss).............................. (30,591) (57,228) 4,556
Other income (expense):
Interest expense............................................. (7,953) (6,725) (7,458)
Interest income.............................................. 396 106 77
Other........................................................ 869 (2,439) 656
---------- ----------- ----------
Total other expense.................................. (6,688) (9,058) (6,725)
---------- ----------- ----------
Loss before income tax expense....................... (37,279) (66,286) (2,169)
Income tax expense............................................. 343 1,111 3,409
---------- ----------- ----------
Net loss............................................. (37,622) (67,397) (5,578)
Preferred dividends............................................ (4,304) (4,820) (5,217)
---------- ----------- ----------
Net loss applicable to common stock.................. $ (41,926) $ (72,217) $ (10,795)
========== =========== ==========
LOSS PER COMMON SHARE -- BASIC AND DILUTED:
Net loss....................................................... $ (2.59) $ (4.63) $ (.38)
Dividend requirement on pay-in-kind preferred stock............ (.29) (.33) (.36)
---------- ----------- ----------
Net loss per common share...................................... $ (2.88) $ (4.96) $ (.74)
========== =========== ==========
See accompanying notes to consolidated financial statements
34
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CUMULATIVE ACCUMULATED
PAY-IN-KIND ADDITIONAL OTHER TOTAL
PREFERRED COMMON PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT LOSS EQUITY (DEFICIT)
----------- ------ ---------- ----------- ------------- ----------------
Balances at December 31, 1999....... $14,968 $ 15 $ 42,111 $ (63,074) $(1,380) $ (7,360)
Net loss...................... -- -- -- (37,622) -- (37,622)
Conversion of subordinated notes
to preferred stock............. 38,972 -- 16,747 -- -- 55,719
Issuance of preferred stock
dividends...................... 3,376 -- -- (3,376) -- --
Issuance of 3,000 shares of
common stock to non-employee
directors...................... -- -- 9 -- -- 9
Translation adjustment............ -- -- -- -- (996) (996)
------- ----- -------- --------- ------- --------
Balances at December 31, 2000....... $57,316 15 $ 58,867 $(104,072) $(2,376) $ 9,750
Net loss.......................... -- -- -- (67,397) -- (67,397)
Issuance of preferred stock
dividends...................... 4,725 -- -- (4,725) -- --
Translation adjustment............ -- -- -- -- 48 48
------- ----- -------- --------- ------- --------
Balances at December 31, 2001....... $62,041 $ 15 $ 58,867 $(176,194) $(2,328) $(57,599)
Net loss.......................... -- -- -- (5,578) -- (5,578)
Issuance of preferred stock 5,114 -- -- (5,114) -- --
dividends......................
Translation adjustment............ -- -- -- -- 234 234
------- ----- -------- --------- ------- --------
Balances at December 31, 2002....... $67,155 $ 15 $ 58,867 $(186,886) $(2,094) $(62,943)
======= ===== ======== ========= ======= ========
See accompanying notes to consolidated financial statements
35
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------------
2000 2001 2002
---------- ---------- ----------
Cash flows from operating activities:
Net loss..................................................... $ (37,622) $ (67,397) $ (5,578)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Charge for asset impairment................................ 3,299 38,507 --
Provision for doubtful accounts............................ 200 370 9
Depreciation and amortization expense...................... 21,146 17,349 9,607
Cost of contractual rights purchase represented by non-
cash consideration....................................... 1,470 -- --
Amortization of multi-client data library.................. 5,770 18,386 203
(Gain) loss on the sale of fixed assets.................... (69) 446 (643)
Exchange loss (gain)....................................... (48) 1,640 628
Other non-cash items....................................... 394 34 48
Changes in operating assets and liabilities:
Restricted cash............................................ -- -- (858)
Accounts receivable........................................ 7,572 (6,899) 1,911
Inventories................................................ 21 (22) (64)
Prepaids................................................... 3,352 (1,105) (40)
Work-in-process............................................ 440 (381) 404
Other assets............................................... 1,143 325 68
Accounts payable........................................... (6,284) 5,879 (6,170)
Accrued expenses........................................... 7,459 (5,645) (535)
Foreign income taxes payable............................... (916) 933 1,244
Other liabilities and deferred credits..................... 2,189 (388) (1,322)
---------- ---------- ----------
Net cash provided by (used in) operating activities...... 9,516 2,032 (1,088)
Cash flows from investing activities:
Capital expenditures, net.................................... (2,185) (3,071) (4,817)
Multi-client data............................................ (1,940) (438) --
Proceeds from the sale of assets............................. 1,127 240 814
Restricted cash.............................................. -- -- 17
---------- ---------- ----------
Net cash used in investing activities.................... (2,998) (3,269) (3,986)
Cash flows from financing activities:
Debt issue costs............................................. -- -- --
Preferred stock issue costs.................................. (462) -- --
Issuance of common stock..................................... 9 -- --
Dividends paid............................................... -- -- --
Borrowings made during the period............................ 39,607 44,959 39,706
Repayment on borrowings during the period.................... (44,641) (44,252) (30,236)
---------- ---------- ----------
Net cash provided by (used in) financing activities...... (5,487) 707 9,470
Effect of exchange rate changes on cash........................ (80) (653) (462)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents..... 951 (1,183) 3,934
Cash and cash equivalents at beginning of period............... 2,703 3,654 2,471
---------- ---------- ----------
Cash and cash equivalents at end of period..................... $ 3,654 $ 2,471 $ 6,405
========== ========== ==========
SEE NOTE 19 FOR SUPPLEMENTAL SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements
36
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) INDUSTRY CONDITIONS/LIQUIDITY/GOING CONCERN
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 and the Far East, funds to finance operations are expected to
remain limited through 2003 and may not permit the Company to continue its
operations in the ordinary course of business.
The Company is currently in default under its credit facility (the "Credit
Facility"), with Elliott Associates, L.P. ("Elliott") as well as under the
indenture under which the 9 3/4% Senior Notes due 2008 (the "Senior Notes") were
issued. As a result of the event of default under the indenture, the trustee, or
the holders of a specified percentage in aggregate principal amount of the
Senior Notes, could take the steps necessary to cause the Senior Notes to become
immediately due and payable. As of the date of this report, neither the trustee
nor such holders has exercised this right. Additionally, the event of default
under the Senior Notes constitutes an event of default under the Credit
Facility, which entitles Elliott to accelerate the maturity of all amounts owing
under the Credit Facility and to exercise remedies to collect such amounts as
provided under the Credit Facility and the related security agreements. As of
the date of this report, Elliott has not exercised this right. Accordingly, the
Company has classified $43.5 million of otherwise long-term debt related to the
Senior Notes and $24.2 million of otherwise long-term debt related to the Credit
Facility as current and expects to continue to do so for the foreseeable future.
If the maturity of 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.
Additionally, as a result of the defaults, the Company does not expect that any
additional amounts will be made available to the Company under the Credit
Facility.
There are currently no additional committed sources of financing available
to the Company and no availability under its existing facilities. The Company
has in the past relied on its majority stockholder, Elliott, to provide credit
support and interim funding. Elliott has indicated to the Company that it will
not commit to provide additional financial and credit support to the Company
during 2003. Even if the Company's operating results continue to improve and
cost control initiatives are successful during 2003, the Company will require
additional financing, or waivers on current debt obligations, to sustain its
operations and meet its debt service requirements as those amounts become due.
There can be no assurance that amounts that become due in 2003 can be paid or
refinanced or that any additional financing can be obtained to meet the
Company's needs.
The Company has incurred significant net losses during each of the past
three years and has operated with working capital deficits during this period.
As a result, the Company's capital requirements during 2002 were funded
primarily through $7.7 million in funds provided by Elliott pursuant to a
factoring arrangement and $8.2 million of funds provided by Foothill, and cash
collateralized by Elliott, under the supplemental term loan of the Credit
Facility, in combination with close management of the Company's accounts
receivable and payables.
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 an operating
income in 2002, the overcapacity in the seismic service industry and the
Company's increased 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.
The Company has approximately $159.3 million of debt and preferred stock
outstanding at December 31, 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's management is currently in discussions with the ad hoc
steering committee of the holders of the Senior Notes and
37
Elliott concerning a debt-for-equity exchange or other comprehensive
restructuring of the Company's indebtedness that, among other things, would
resolve the interest payment default under the Senior Notes, and because other
defaults have been waived through June 15, 2003, would eliminate Elliott's right
to accelerate amounts outstanding under the Credit Facility through the date of
the existing waiver. Additionally, the Company has taken measures to reduce
costs through consolidation of certain locations, resizing its United States
operations to reduced current demand levels, and reductions in overhead
personnel. Should such measures be unsuccessful, or should any of the Company's
debtors exercise their right to accelerate their amounts outstanding, 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.
(2) BASIS OF PRESENTATION
Grant Geophysical, Inc., a Delaware corporation (together with its
subsidiaries, "Grant," or the "Company"), is a provider of seismic data
acquisition services in land and transition zone environments in selected
markets, including the United States, Canada, Latin America, the Middle East and
the Far East. Through its predecessors, including GGI Liquidating Corporation
("GGI"), and its acquired subsidiary, Solid State Geophysical, Inc. ("Solid
State"), together with their respective subsidiaries, the Company has
participated in the seismic data acquisition services business in the United
States, Canada, Latin America, the Far East, the Middle East, and Africa.
On December 6, 1996 (the "Petition Date"), GGI filed for protection under
the United States Bankruptcy Code and began its reorganization under the
supervision of the Bankruptcy Court. The reorganization was precipitated by
several factors, including overly rapid and under-financed expansion in the
United States and Latin American markets, costs related to the development of a
proprietary data recording system and poor operational results in the United
States and certain international markets. These factors impaired GGI's ability
to service its indebtedness, finance its existing capital expenditure
requirements and meet its working capital needs. In addition, GGI was unable to
raise additional equity, causing a disproportionate reliance on debt financing
and equipment leasing. In connection with the reorganization, GGI replaced its
senior management, disposed of unprofitable operations and developed the plan of
reorganization (the "Plan"), which was consummated on September 30, 1997 (the
"Effective Date") with the purchase by Grant of substantially all of the assets
and the assumption of certain liabilities of GGI. GGI is currently in
liquidation and will distribute all of its assets pursuant to the Plan. Upon the
completion of its asset distribution, GGI will dissolve and cease to exist.
On the Effective Date, in connection with the Plan, Grant, which was
formerly known as Grant Acquisition Corporation, acquired substantially all of
the assets and assumed certain liabilities of GGI, which was formerly known as
Grant Geophysical, Inc., Elliott and Elliott International owned 84.6% of the
issued and outstanding common stock of Grant at December 31, 2000 and 2001.
Elliott International owned all of the preferred stock that was outstanding in
1998. This preferred stock was redeemed on June 5, 1998 and all authorized
shares have been canceled. Elliott owned all of the outstanding shares of the 8%
Exchangeable Preferred Stock at December 31, 1999. The general partners of
Elliott are Paul E. Singer and Elliott Capital Advisors, L.P. The general
partner of Elliott International is Hambledon, Inc., a corporation controlled by
Mr. Singer. Elliott and Elliott International are each managed by Elliott
Management Corporation (formerly Stonington Management Corporation), a
corporation controlled by Mr. Singer. For financial statement purposes, the
purchase of GGI's assets by Grant was accounted for as a purchase acquisition.
The purchase price was allocated between the fair value of the GGI assets
purchased and liabilities assumed, and Grant recorded goodwill of approximately
$21.3 million. The effects of the acquisition are reflected in Grant's assets
and liabilities as of the effective date.
The acquisition of Solid State by Grant during the fourth quarter of 1997
occurred in two parts: the initial acquisition of a majority interest accounted
for as a purchase and the acquisition of the minority interest. As of September
30, 1997 the Principal Stockholders owned a controlling interest in both Solid
State (approximately 64%) and Grant (100%). As such, at that date, the Principal
Stockholders were deemed to have transferred their ownership in Solid State to
Grant. The acquisition of the majority interest in Solid State was accounted for
as an exchange of ownership interests between entities under common control, and
the assets and liabilities of Solid State were transferred to Grant's Financial
Statements at historical cost in a manner similar to a pooling-of-interests. The
acquisition of the unaffiliated minority interest began in November 1997 when
Grant initiated a tender offer (the "Tender Offer") for all the outstanding
common shares of Solid State not held by Grant. In connection with the Tender
Offer, the Principal Stockholders transferred their ownership of Solid State to
Grant and agreed to loan Grant $15.8 million to pay for the shares tendered in
the Tender Offer. The Tender Offer expired on December 19, 1997 and the
acquisition was completed on December 23, 1997, after which Solid State became a
wholly owned subsidiary of Grant. The acquisition of the unaffiliated minority
interest in Solid State was accounted for as a purchase, resulting in
approximately $15.3 million in goodwill, the balance of that which was remaining
at December 31, 2001 was fully impaired.
As a result of the aforementioned transactions, Grant's consolidated
balance sheets as of December 31,
38
2001 and December 31, 2002 and statements of operations and cash flows for years
ended December 31, 2000, 2001 and 2002 are presented using the basis of
accounting discussed above.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and all of their respective majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Revenues
Revenue from cancelable exclusive seismic surveys is recognized as the
services are performed or, when applicable, in accordance with contractual
milestones then chargeable to the customer in accordance with contract terms.
Anticipated losses on survey contracts are recognized when such losses are
determinable. Revenue from non-cancelable exclusive and non-exclusive seismic
surveys is recognized in accordance with the percentage of completion method of
accounting based upon costs incurred as a percentage of total estimated costs.
The Company does not currently have any non-cancelable contracts and they are
not common for the Company.
Revenue from the licensing of multi-client data surveys is recognized upon
issuance of license when the Company obtains a non-cancelable commitment from
the customer.
Revenue from the Company's data processing services is recognized as the
services are performed.
Cash and Cash Equivalents
For purposes of the consolidated statement of cash flows, all highly liquid
investments with an original maturity of three months or less are considered to
be cash equivalents.
Restricted Cash
At December 31, 2002 and 2001, restricted cash included contractually
restricted customer advances totaling $858,000 and a certificate of deposit
totaling $17,000, respectively which were pledged as collateral for letters of
credit.
Allowance for Doubtful Accounts
A reconciliation of the allowance for doubtful accounts is provided below
(in thousands).
YEAR ENDED DECEMBER 31,
------------------------------
2000 2001 2002
----- ----- ------
Balance at beginning of period............ $ 352 $ 461 $ 790
Charged to costs and expenses............. 200 370 9
Amounts charged off....................... (91) (41) (261)
----- ----- ------
Balance at end of period.................. $ 461 $ 790 $ 538
===== ===== ======
Inventories
Inventories, which consist primarily of miscellaneous supplies, are stated
at the lower of cost or market. Cost is determined using the specific
identification method.
Prepaids
Prepaid expenses are recognized over the period in which benefits are
obtained from the expenditure.
Work in Process
39
Expenses related to the work in progress of seismic crews are deferred and
recognized over the performance of the contract.
Mobilization Cost
Transportation and other direct expenses incurred prior to and at the
commencement of geophysical operations in an area or on a specific contract,
that would not have been incurred otherwise, are deferred and recognized over
either the lesser of the term of the related contract (in the case of costs
related to a specific contract this method is always used) or backlog of
contracts in that area, or one year.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Plant and equipment under
capital leases are stated at the present value of future minimum lease payments
at the inception of the lease.
Depreciation is provided principally by the straight-line method over the
estimated useful lives of the various classes of assets as follows:
YEARS
-----
Buildings and improvements................................... 5-20
Data processing equipment.................................... 3-5
Plant facilities and office fixtures......................... 5-10
Seismic exploration and transportation equipment............. 3-10
Plant and equipment held under capital leases are amortized by the
straight-line method over the shorter of the lease term or estimated useful life
of the asset. Expenditures for maintenance and repairs are charged to
operations. Betterments and major renewals are capitalized. Amortization of
assets recorded under capital leases is included with depreciation and
amortization expense.
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 (inclusive of
underwriting fees) 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. Amortization expense
associated with the Company's multi-client data library was $18.4 million and
$0.2 million for the years ended December 31, 2001 and 2002, respectively. As of
December 31, 2001 and 2002, accumulated amortization related to the Company's
multi-client data library was $29.0 million and $29.2 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 or group of surveys are less
than the carrying value of such survey or group of surveys (see Note 4).
Asset Impairment
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for Impairment or Disposal of Long-Lived Assets" the Company
evaluates the recoverability of property and equipment, and other long-lived
assets if facts and circumstances indicate that any of those assets might be
impaired. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the assets carrying amount to
determine if an impairment of such property is necessary. The effect of any
impairment would be to expense the difference between the fair value of such
property and its carrying value.
Goodwill
Goodwill, representing the excess of purchase price over fair value of net
assets acquired, is amortized on a straight-line basis over the expected periods
to be benefited. Accumulated amortization was approximately $6.2 million as of
December 31, 2001. The Company assessed the recoverability of this intangible
asset by determining whether the goodwill balance was expected to be
40
recovered through undiscounted future operating cash flows of the acquired
operation over the remaining estimated life of the goodwill. The amount of
goodwill impairment, if any, was measured based on projected discounted future
operating cash flows using a discount rate reflective of Grant's estimated
average cost of capital. The assessment of the recoverability of goodwill was
impacted if estimated future operating cash flows were not achieved. Based on
the fourth quarter 2001 assessment, the remaining net book value of the goodwill
created in the purchase of GGI's assets, previously being amortized over 30
years, the goodwill created in the acquisition of Solid State's minority
interest, previously being amortized over 20 years and the goodwill created in
the purchase of the remaining interest in ISI, previously being amortized over
30 years, was fully impaired during 2001 (see Note 4) in accordance with the
applicable accounting standards at that time. As a result of the above-mentioned
impairments, no goodwill remains at December 31, 2002.
Use of Estimates
The preparation of 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 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 estimated future net cash flows related to long-lived assets, valuation
allowances for deferred tax assets and expected future sales associated with the
Company's multi-client data library. Actual results could differ materially from
these estimates making it reasonably possible that a change in these estimates
could occur in the near term.
Foreign Exchange Gains and Losses
The United States ("U.S.") dollar is the Company's primary functional
currency in all foreign locations with the exception of its Canadian
subsidiaries. Accordingly, those foreign entities (other than Canada) translate
property and equipment (and related depreciation) and inventories into U.S.
dollars at the exchange rate in effect at the time of their acquisition while
other assets and liabilities are translated at year-end rates. Operating results
(other than depreciation) are translated at the average rates of exchange
prevailing during the year. Re-measurement gains and losses are included in the
determination of net income and are reflected in other income (expense). The
Canadian subsidiaries use the Canadian dollar as their functional currency and
translate all monetary assets and liabilities at year-end exchange rates and
operating results at average exchange rates prevailing during the year in
accordance with SFAS No. 52, "Foreign Currency Translation". Adjustments
resulting from the translation of Canadian assets and liabilities are recorded
in the accumulated other comprehensive loss account in stockholders' equity
(deficit).
Income Taxes
Under the asset and liability method required by SFAS No. 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. The Company considers the undistributed
earnings of its foreign subsidiaries to be permanently reinvested. The Company
has not provided deferred U.S. income tax on those earnings to the extent such
earnings are either remitted or deemed remitted as dividends or if the Company
should sell its stock in these foreign subsidiaries.
Income (Loss) Per Common Share
In accordance with SFAS No. 128, "Earnings per Share," basic income (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 income (loss) per common share reflects dilution for all potentially
dilutive securities, including warrants and convertible securities. The income
(loss) is adjusted for cumulative preferred stock dividends in calculating net
income (loss) attributable to common shareholders.
Stock-Based Compensation
As allowed by SFAS No. 123, "Accounting for Stock Based Compensation" the
Company has elected to continue to follow the
41
accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations, whereby
compensation expense is recognized only in situations where stock compensation
plans award intrinsic value to recipients at the date of grant, rather than
following the fair value method of SFAS No. 123. Pro forma disclosure of the
estimated effects on net income (loss) and income (loss) per common share had
the fair value method prescribed by SFAS No. 123 been followed is included in
Note 12.
Segment Information
The Company follows the provisions of SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information." The management approach
required by SFAS No. 131 designates the internal organization used by management
for making operating decisions and assessing performance as the basis for
determining the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major customers
(see Note 5).
(4) CHARGE FOR ASSET IMPAIRMENT
In the fourth quarter of 2000, the Company wrote down certain multi-client
data surveys in the amount of $3.3 million to reflect estimated recoverable
value. This impairment position included approximately $2.2 million of book loss
that resulted from the March 2001 data sale for $15.0 million cash (see Note 5).
In the third and fourth quarters of 2001, the Company wrote down certain
multi-client data surveys in the amounts of $97,000 and $746,000, respectively.
Additionally, the Company wrote down the remaining net book value of the
goodwill created in the purchase of GGI's assets, in the acquisition of Solid
State's minority interest and in the purchase of the remaining interest in ISI
in the amounts of $18.0 million, $11.3 million and $2.0 million respectively, in
December 2001. Finally, the Company wrote-down certain of its fixed assets in
the amount of $6.4 million.
The multi-client data survey impairments in 2000 and 2001 were due to
revised estimates of future licensing prospects for such data due to reduced
interest in the area by oil and gas companies and depressed exploration
activities in the oil and gas exploration and production industry sector. The
impairment of goodwill in 2001 resulted from revised estimates of projected
discounted future operating cash flows due to depressed exploration activity
resulting in decreased demand for the Company's data acquisition and data
processing services in the United States and Canada. The impairment of fixed
assets in 2001 was due to technological obsolescence of certain of the Company's
assets.
No impairments were made in 2002.
(5) SEGMENT INFORMATION
Grant has determined that its reportable segments are those based on the
Company's method of internal reporting, which disaggregates its one
product/service line (geophysical services) into four geographic regions: the
United States, Canada, Latin America and the Far East.
The accounting policies of the segments are the same as those described in
Note 3 - Summary of Significant Accounting Policies for Segment Information.
Grant evaluates the performance of its segments and allocates resources to them
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 (in thousands):
42
LATIN
UNITED STATES CANADA AMERICA FAR EAST TOTAL
------------- ------ ------- -------- -----
FOR THE YEAR ENDED DECEMBER 31, 2002
Revenues ............................. $ 5,089 $ 10,088 $ 73,787 $ 51 $ 89,015
Operating Income (Loss) .............. (8,760) (1,427) 14,906 (163) 4,556
Depreciation and Amortization ........ 2076 2,318 5,412 4 9,810
FOR THE YEAR ENDED DECEMBER 31, 2001
Revenues ............................. $ 34,848 (1) 12,502 $ 44,127 $ 1,974 $ 93,451
Operating Income (Loss) .............. (42,295) (14,685) (608) 360 (57,228)
Depreciation and Amortization ........ 26,734 4,483 4,208 310 35,735
Revenues and identifiable assets by country are as follows as of and for
the periods indicated (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------------
2000 2001 2002
--------- --------- ---------
Total revenues
United States............ $ 26,825 $ 34,848 (1) $ 5,089
Canada................... 14,984 12,502 10,088
Latin America............ 20,183 44,127 73,787
Far East................. 4,160 1,974 51
--------- --------- ---------
$ 66,152 $ 93,451 $ 89,015
========= ========= =========
DECEMBER 31,
----------------------
2001 2002
--------- ---------
Identifiable assets:
United States..................... $ 5,771 $ 7,665
Canada............................ 10,615 4,893
Latin America..................... 23,173 36,941
Far East.......................... 42 114
--------- ---------
Total identifiable assets......... 39,601 49,613
Corporate assets.................. 6,324 4,325
--------- ---------
$ 45,925 $ 53,938
========= =========
(1) Includes sale for $15.0 million of substantial portion of multi-client
data library in the Southern U.S.
For the year 2000, revenues from two oil companies were approximately $10.1
million (15% of total revenues) and $9.7 million (15%). During 2001, revenues
from two oil companies were approximately $15.7 million (17% of total revenues)
and $14.8 million (16%). During 2002, revenues from three oil companies were
approximately $14.3 million (16% of total revenues), $14.0 million (16%) and
13.9 million (16%).
(6) 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 for $15,000,000 cash to a third party seismic data broker,
retaining all of its Canadian multi-client data library as well as several data
surveys in the southern United States. The sales proceeds were utilized to
retire cash advanced in 2000 and 2001 by Elliott amounting to $9,350,000 plus
accrued preferred return thereon with the remaining balance used to reduce
borrowings outstanding under the Company's revolving credit facility. The sales
proceeds of $15,000,000 were recorded as revenues with a corresponding charge to
amortization in the same amount for the year ended December 31, 2001. In view of
this sale, as well as other multi-client data library sales completed subsequent
to December 31, 2000, $16,678,000 of cost basis in the multi-client data library
was classified in current assets at December 31, 2000 in the accompanying
consolidated balance sheet. Revenues from aggregate sales of multi-client data
were $20,432,000 and amortization of related costs were $18,386,000 for the year
ended December 31, 2001.
(7) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows:
43
ACCUMULATED
COST DEPRECIATION
--------- ------------
(IN THOUSANDS)
DECEMBER 31, 2001
Land....................................... $ 392 $ --
Buildings and improvements................. 1,587 456
Plant facilities and store fixtures........ 1,308 1,150
Machinery and equipment.................... 92,136 74,764
--------- ---------
$ 95,423 $ 76,370
========= =========
DECEMBER 31, 2002
Land....................................... $ 375 $ --
Buildings and improvements................. 1,605 567
Plant facilities and store fixtures........ 1,380 1,183
Machinery and equipment.................... 100,881 77,649
--------- ---------
$ 104,241 $ 79,399
========= =========
Depreciation expense on property, plant and equipment for the years ended
December 31, 2000, 2001, and 2002 was $19.6 million, $15.9 million and $7.7
million, respectively. Additionally, effective January 1, 2002, the Company has
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 2002 impact on depreciation expense resulting from the asset life
extensions is a reduction of approximately $750,000.
(8) INCOME TAXES
The amounts of income (loss) before income taxes attributable to domestic
and foreign operations follow (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------------
2000 2001 2002
---------- ---------- ----------
Domestic........... $ (25,131) $ (46,863) $ (13,144)
Foreign............ (12,148) (19,423) 10,975
---------- ---------- ----------
$ (37,279) $ (66,286) $ (2,169)
========== ========== ==========
The components of income tax expense follow (in thousands):
YEAR ENDED DECEMBER 31,
---------------------------
2000 2001 2002
----- ------- -------
Current:
State..................... $ -- $ -- $ --
Federal................... -- -- --
Foreign................... 343 1,111 3,409
Deferred:
State..................... -- -- --
Federal................... -- -- --
Foreign................... -- -- --
----- ------- -------
Income tax expense............ $ 343 $ 1,111 $ 3,409
===== ======= =======
The total income tax expense (benefit) is different from the amount
computed by applying the U.S. Federal income tax rate to income before income
taxes. The reasons for these differences were as follows (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------------
2000 2001 2002
---------- ---------- ----------
Income tax expense (benefit) at U.S.
federal rate................................... $ (13,048) $ (23,200) $ (759)
Increases (reductions) in taxes from:
Foreign income taxed at more (less)
than U.S. rate................................. 269 132 693
Losses with no tax benefit expected............. 13,122 24,179 3,475
---------- ---------- ----------
Income tax expense recorded..................... $ 343 $ 1,111 $ 3,409
========== ========== ==========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below (in thousands):
44
YEAR ENDED DECEMBER 31,
------------------------------------
2000 2001 2002
---------- ---------- ----------
Deferred tax assets:
Plant and equipment, principally due to differences
in depreciation.................................... $ 4,240 $ 10,675 $ 10,812
Goodwill amortization................................. -- 5,959 5,444
Financing costs....................................... 34 6 5
Research and development costs........................ 476 448 428
Allowance for doubtful accounts and other accruals.... 161 276 188
Net capital loss carryforwards........................ 533 -- 513
Net operating loss carryforwards...................... 36,314 33,268 36,396
---------- ---------- ----------
Total......................................... 41,758 50,632 53,786
Deferred tax liabilities:
Goodwill amortization................................. (803) -- --
Plant and equipment, principally due
to differences in depreciation..................... -- -- --
---------- ---------- ----------
Net deferred tax asset................................ 40,955 50,632 53,786
Valuation allowance................................... (40,955) (50,632) (53,786)
---------- ---------- ----------
Net deferred tax asset
(liability)................................. $ -- $ -- $ --
========== ========== ==========
A valuation allowance is established when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The
valuation allowance is then adjusted when the realization of deferred tax assets
becomes more likely than not. Adjustments are also made to recognize the
expiration of net operating loss carryforwards, with equal and offsetting
adjustments to the related deferred tax asset. The increase in the valuation
allowance during 2001 and 2002 of approximately $9,677,000 and $3,154,000,
respectively, resulted primarily from current period net operating losses.
As of December 31, 2002, Grant has U.S. ($91,985,507) and non-U.S.
($10,626,480) net operating loss carryforwards of approximately $102,611,987.
Such tax loss carryforwards expire in varying amounts during the periods from
2003 through 2022, except for $802,608 of the non-U.S. loss which has an
indefinite carryforward period.
Internal Revenue Service regulations restrict the utilization of U.S. net
operating loss carryforwards and other tax benefits for any company in which an
"ownership change" (as defined in Section 382 of the Internal Revenue Code) has
occurred. Grant has concluded that two "ownership changes" have occurred. The
first occurred in connection with the GGI reorganization on September 30, 1997.
The utilization of GGI's U.S. net operating loss carryforwards existing at this
date is limited to approximately $704,000 per year. The second "ownership
change" occurred on December 30, 1997 as a result of the reorganization of Solid
State. The utilization of Solid State's U.S. net operating losses at this date
is limited to approximately $125,000 per year.
(9) DEBT AND OTHER FINANCINGS
A summary of notes payable, long-term debt, and capital lease obligations
was as follows (in thousands):
DECEMBER 31,
------------------------
2001 2002
---------- ----------
Term loan -- affiliate:
Prime plus 1.5%, minimum 7% (5.75% at December 31, 2002), due May 11, 2005.......... $ 7,500 $ 7,500
========== ==========
Revolving Credit Line and Term Loans:
Term loan -- prime plus 1.5%, (5.75% at December 31, 2002),
due January 1, 2005............................................................... $ 9,250 $ 6,048
Term loan -- 8% at December 31, 2002, due May 11, 2005 $ 8,183
Revolving credit line -- prime plus 1.5%, (5.75% at
December 31, 2002), due May 11, 2005.............................................. 4,061 5,420
Senior Notes -- 9.75%, due February 15, 2008.......................................... 43,469 43,504
Agreement for sale with recourse - affiliate - 10% due October 31, 2003............... 4,000 11,700
Equipment notes payable - prime plus 4.05% (8.3% at December 31, 2002), due
December 31, 2003................................................................. 2,263 861
45
Other notes payable 2003 -- 8% to 10.38%, due 2003-2005............................... 591 333
Capital lease obligations - 3.0% to 10%, due 2003-2006................................ 861 8,586
---------- ----------
Total long-term debt.................................................................. 64,495 84,635
Less current portion.................................................................. (63,776) (80,745)
---------- -----------
Notes payable, long-term debt and capital lease
obligations excluding current portion.......................................... $ 719 $ 3,890
========== ==========
On May 11, 1999, the Company entered into a Loan and Security Agreement
(the "Credit Facility") with Foothill Capital Corporation and Elliott
(collectively the "Lenders"), pursuant to which the Company could borrow up to
$6.0 million through a revolving facility and up to $19.0 million through two
term loans. Proceeds were used to repay all of the Company's outstanding
indebtedness to Elliott ($14.8 million) and to provide additional liquidity and
working capital to support the Company's operations. The Foothill/Elliott Credit
Facility imposes certain limitations on the ability of the Company and its
subsidiaries to, among other things, incur additional indebtedness, incur liens,
pay dividends or make other distributions in cash or certain property,
consummate certain asset sales, enter into certain transactions with affiliates,
merge or consolidate with any other persons or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of the assets of the
Company or its subsidiaries, make investments (as defined in the
Foothill/Elliott Credit Facility) and maintain a minimum EBITDA (earnings before
interest, tax, depreciation and amortization) level. The interest rate on the
loans is 1.5% over prime with a minimum interest rate of 7%.
On February 14, 2000, the Company completed significant modifications to
the Loan and Security Agreement with Foothill and Elliott whereby the credit
facility was increased from $25 million to $29 million by means of increasing
commitments under the revolving credit facility from $6 million to $10 million,
subject to borrowing base limitations. The term loan, which had been reduced
through periodic payments to $10.1 million, was increased to the original
outstanding balance of $11.5 million.
On March 22, 2001, the Company completed modifications of the Loan and
Security Agreement with Foothill/Elliott whereby the credit facility was
modified and extended through May 11, 2005.
On June 28, 2001, the Company completed further modifications to the Credit
Facility whereby the credit facility was decreased from $29.0 million to $28.0
million by means of decreasing the original commitment under the term loan. The
original term loan of $11.5 million, which had been reduced through periodic
payments to $6.1 million, was increased to an outstanding balance of $10.5
million. Additional modifications were made to the agreement to revise the
repayment period on the Foothill term loan. Under the amended agreement, the
final principal payment on the term loan will be made January 2005.
On May 24, 2002, the Company completed further modifications to the Credit
Facility whereby, among other things, the maximum amount of the revolving
facility was reduced from $10.5 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. 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. At December 31, 2002, $7.5 million and $6.0 million
were outstanding under the Elliott term loan and the Foothill term loan,
respectively, $5.4 million was outstanding under the Foothill revolving credit
line, and $8.2 million was outstanding under the Foothill supplemental term
loan. Based on the Company's borrowing base and current Elliott cash collateral
levels at December 31, 2002, these amounts represent the maximum amount then
allowable at such date under the respective facilities.
On January 2, 2003, Elliott exercised its right to buy out Foothill and
become the sole agent and lender under the Credit Facility (see Note 21). The
Company is in default of certain payment provisions under the Credit Facility.
Elliott has granted the Company
46
numerous waivers of the payment defaults (see Note 21) subsequent to year-end
and certain payment defaults are currently waived through June 15, 2003.
However, the Company's event of default on it's 9 3/4% Senior Notes (described
below) has created an event oF default under the Credit Facility that has not
been waived (see below discussion for further discussion of default and
Elliott's rights).
The Company's equipment notes payable and capital lease obligations
represent installment loans or capital lease obligations primarily related to
the acquisition of seismic recording equipment.
On February 18, 1998, Grant completed an offering of $100 million face
value 9 3/4% Senior Notes due and payable in a lump sum on February 15, 2008.
The Senior Notes bear interest from February 18, at a rate per annum set forth
above payable semi-annually on February 15 and August 15 of each year,
commencing August 15, 1998. The net proceeds to Grant from the sale of the
Senior Notes was approximately $95.2 million after deducting the Initial
Purchaser's discount and certain other estimated fees and expenses. Grant used
the proceeds to repay approximately $74.5 million of the outstanding balance of
debt ($73.0 million) and interest ($1.5 million) existing at December 31, 1997.
Total debt issue costs of $4.3 million were incurred in connection with the
offering and are being amortized over the term of the notes. The unamortized
portion of the debt issue costs, included in the Company's other assets, is $1.3
million at December 31, 2001.
The Senior Notes were issued under an indenture (the "Indenture") entered
into among the Company, as issuer, the Subsidiary Guarantors, and LaSalle Bank
National Association, as trustee, dated as of February 18, 1998. The Indenture
imposes certain limitations on the ability of the Company and its Restricted
Subsidiaries (as defined in the Indenture) to, among other things, incur
additional indebtedness (including capital leases), incur liens, pay dividends
or make certain other restricted payments, consummate certain asset sales, enter
into certain transactions with affiliates, issue preferred stock, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of the Company or
any of its Restricted Subsidiaries. Additionally, the indenture provides for an
event of default, if a default resulting in the acceleration of indebtedness of
the Company greater than $5.0 million occurs. As of April 15, 2002, the Company
was not being held in default by any of its lenders but due to the event of
default on the Foothill/Elliott credit facility mentioned above, the Company has
classified $43.5 million of otherwise long-term debt as current in the Company's
financial statements for the fiscal year ended December 2001.
In order to improve its liquidity and supplement its operating activities,
pursuant to a registration statement originally filed on October 28, 1999 and
declared effective on January 12, 2000, the Company offered to exchange (the
"Exchange Offer") $100,000,000 aggregate principal amount of its outstanding
Senior Notes for shares of its Convertible Preferred Stock with an aggregate
liquidation value equal to 65% of the aggregate principal amount of the Senior
Notes tendered, plus 100% of the accrued and unpaid interest thereon through the
date of the exchange. On January 19, 2000, a total of $56,320,000 of the Senior
Notes, together with $2,364,000 of accrued and unpaid interest, were exchanged
for 389,722 shares of Convertible Preferred Stock. The Senior Notes exchanged
represent all of the Senior Notes previously held by Elliott and Elliott
International. No other Senior Notes were tendered and the Exchange Offer
expired on February 7, 2000. The consummation of the Exchange Offer has
increased the Company's liquidity by reducing its principal payment obligations
with respect to the Senior Notes and reducing the negative cash flow impact of
its interest payment obligations on the Senior Notes. The Company intends to pay
dividends on the Convertible Preferred Stock in additional shares of Convertible
Preferred Stock until further notice. In connection with the Exchange Offer, the
Company solicited and obtained requisite consents from the holders of its Senior
Notes in order to amend definitions and to modify certain restrictive covenants
in the indenture governing the Senior Notes. As evidenced by market
transactions, the estimated fair value of the Senior Notes was $10.8 million at
December 31, 2002.
The Company is currently in default under the Senior Notes and a resulting
default has occurred under the Credit Facility. As a result of the event of
default under the indenture, the trustee, or the holders of a specified
percentage in aggregate principal amount of the Senior Notes, could take the
steps necessary to cause the Senior Notes to become immediately due and payable.
As of the date of this report, neither the trustee nor such holders has
exercised this right. Additionally, the event of default under the Senior Notes
constitutes an event of default under the Credit Facility, which entitles
Elliott to accelerate the maturity of all amounts owing under the Credit
Facility and to exercise remedies to collect such amounts as provided under the
Credit Facility and the related security agreements. As of the date of this
report, Elliott has not exercised this right. Accordingly, the Company has
classified $43.5 million of otherwise long-term debt related to the Senior Notes
and $24.2 million of otherwise long-term debt related to the Credit Facility as
current and expects to continue to do so for the foreseeable future. If the
maturity of 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. Additionally, as a result
of the defaults, the Company does not expect that any additional amounts will be
made available to the Company under the Credit Facility.
47
In August 2000, the Company entered into an agreement with Elliott to
assign, from time to time, a net revenue interest in certain geological and
geophysical data included in the U.S. multi-client data library for an amount up
to $7.5 million. Proceeds from net revenue interest sales, together with a
computed preferred return of 1% per month are payable from future sales of
multi-client data. In November 2000, the Company entered into a depository
agreement with Elliott whereby Elliott made cash deposits aggregating $1,000,000
with the Company to be applied toward the purchase of an undivided mineral
interest and related seismic data in a prospect developed by the Company during
2000. In January of 2001, this agreement was amended to increase the amount to
$1,850,000. For financial reporting purposes, at December 31, 2000 cumulative
proceeds to the Company of $8,500,000, together with applicable preferred
return, have been classified in current liabilities as advanced data sales
liability in the accompanying consolidated balance sheet. Elliott was repaid in
full for these fundings on March 23, 2001 from a portion of the proceeds from
the sale of a substantial portion of the Company's southern U.S. multi-client
data library (see Note 6).
On August 3, 2001, the Company completed an agreement with Elliott for the
sale, with recourse retained, of certain of its foreign accounts receivable. The
agreement allows the Company to sell, at its election, both billed and unbilled
receivables arising out of data acquisition and processing services rendered by
Grant's branch operations in Ecuador and Colombia. The maximum amount available
for Elliott to purchase is $4.0 million and the agreement extends through
February 2002, with all repayments to Elliott required by that time. As of
December 31, 2001, the Company's obligation under the agreement was $4.0
million. 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 and to increase the maximum amount allowable to
be purchased by Elliott from the Company to $5,250,000. 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 September 30, 2002, the agreement was further modified to extend
the term of the arrangement to October 31, 2003. As of May 15, 2003, $11,700,000
was outstanding under the agreement all of which is due and payable on October
31, 2003.
There are no additional formal commitments to provide financing in place at
this time. Should business conditions not improve or cost control initiatives
not be successful during 2003, the Company would require additional sources of
financing to sustain operational activities. There can be no assurance that
Elliott will continue to provide credit support and working capital funding, or
that alternative financing will be available on commercially acceptable terms or
that such financing will be available at all.
As of December 31, 2002, the maturities of the Company's notes payable,
long-term debt and capital lease obligations (in thousands) are as follows:
YEARS ENDED
DECEMBER 31 AMOUNT
- --------------- --------
2003......... $ 88,245(1)
2004......... 3,828
2005......... 58
2006......... 4
2007......... 0
Thereafter 0
--------
$ 92,135
========
- ------------
(1) See above for discussion on classification of the Foothill/Elliott credit
facility and the 9 3/4% Senior Notes.
(10) LEASES
The Company had under capital and operating leases office and warehouse
space and equipment with remaining terms ranging from approximately one to five
years. The future minimum lease payments under Grant's various capital and
non-cancelable operating leases are as follows (in thousands):
48
CAPITAL OPERATING
YEARS LEASES LEASES
- ----- ------- ---------
2003............................................... $ 5,182 $ 585
2004............................................... 3,980 359
2005............................................... 29 103
2006............................................... 4 68
2007............................................... -- 68
------- ---------
Total minimum lease payments........................ 9,195 1,181
Less interest....................................... 609 --
------- ---------
Present value of net minimum lease payments.... $ 8,585 $ 1,181
======= =========
Accumulated amortization for capitalized leases was $1.1 million and $2.3
million at December 31, 2001 and 2002, respectively. Rental expense was $2.4
million, $1.6 million and $1.2 million for 2000, 2001 and 2002 respectively.
(11) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Methodology and assumptions used to assess fair value of classes of
financial instruments follows:
Cash and short-term financial instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate fair value because of the
short-term maturities of such instruments.
Long-term debt
The carrying values of the Company's long-term debt instruments approximate
their fair values. Grant's long-term debt has been estimated based on current
quoted market prices for the same or similar issues, or on the current rates
offered to Grant for debt of the same remaining maturities.
(12) STOCK-BASED COMPENSATION
The 1997 Equity and Performance Incentive Plan (the "Incentive Plan") was
adopted by the Board of Directors and approved by Grant's stockholders in
December 1997. The Incentive Plan was amended in September 1998 to increase the
number of shares reserved for issuance under the Incentive Plan from 1,450,000
shares of Grant common stock to 1,900,000 shares of Grant common stock and
subsequently, in February 1999, to 2,000,000 shares of Grant common stock. The
Incentive Plan provides for the grant to officers (including officers who are
also directors), employees, and non-employee directors of Grant and its
subsidiaries, of "incentive stock options" (within the meaning of Section 422 of
the Internal Revenue Code of 1986 (the "Code")), nonstatutory stock options,
stock appreciation rights and restricted shares. The Incentive Plan is not a
deferred compensation plan under Section 401(a) of the Code and is not subject
to the provisions of the Employee Retirement Income Security Act of 1974.
The Incentive Plan was amended in June 2001 to increase the number of
shares reserved for issuance under the Incentive Plan from 2,000,000 shares of
Grant common stock to 2,750,000 shares of Grant common stock. Additionally,
effective June 30, 2001, the Board of Directors approved the repricing of
certain original options outstanding with exercise prices between $3.00 and
$6.84 per share to $2.00 per share. No compensation cost resulted from the
repricing because, as of the repricing date, the exercise price of the repriced
options was not estimated to be less than the fair value of the underlying
shares. The Company has adopted the variable method of accounting for the
related options effective June 30, 2001. No compensation cost has been
recognized for the year ended December 31, 2002 related to these options, as the
exercise price of the repriced options is not estimated to have exceeded the
fair value of the underlying shares during the period beginning June 30, 2001
and ending December 31, 2002.
The Incentive Plan is required to be administered by the Board of Directors
or by a committee of the Board of Directors consisting of at least two
non-employee directors. The Board of Directors or its designated committee will
select the employees and non-employee directors to whom awards may be granted
and the type of award to be granted and determine, as applicable, the number of
shares to be subject to each award, the exercise price and the vesting. In
making such determinations, the Board of Directors or its designated committee
will take into account the employee's present and potential contributions to the
success of the Company and other relevant factors. As of December 31, 2002,
awards covering 1,504,300 shares have been made by the Board of Directors.
During 2002, there were 838,100 option cancellations due to terminations. All
such options were granted at a price equal to or in excess of the then estimated
fair market value of the Company's stock at the date of grant. Such options have
an average exercise price of $3.11 per share (range of $2.00 to $5.76 per
share), subject to adjustment in certain circumstances. There were no awards of
options in 2002. In addition, 57,000 total restricted shares (36,000 in 1998,
18,000 in 1999 and 3,000 in 2000) were granted to each non-employee
49
director subject to the satisfaction of certain conditions set forth under the
Incentive Plan. The Company recognized no compensation expense in 2001 and 2002,
in relation to such restricted shares, based on its estimate of fair market
value pursuant to SFAS No. 123. As of March 31, 2003, 54,000 of such shares were
unrestricted.
Stock Options
A summary of the status of stock options granted is presented below.
NUMBER WEIGHTED
OF SHARES AVERAGE
UNDER OPTION EXERCISE PRICE
------------ --------------
Shares under option at December 31, 1999.... 1,766,400 $ 5.03
Granted.................................... 705,000 $ 2.79
Exercised.................................. -- --
Canceled................................... 337,700 $ 5.68
--------- ------
Shares under option at December 31, 2000.... 2,133,700 $ 4.14
Granted.................................... 1,288,800 $ 2.00
Exercised.................................. -- --
Canceled................................... 1,080,100 $ 3.86
--------- ------
Shares under option at December 31, 2001.... 2,342,400 $ 2.42
Granted.................................... -- --
Exercised.................................. -- --
Canceled................................... 838,000 $ 3.11
--------- ------
Shares under option at December 31, 2002.... 1,504,300 $ 2.13
========= ======
Options exercisable at December 31:
2001....................................... 735,933 $ 3.41
2002....................................... 684,100 $ 2.28
The following table summarizes information with respect to stock options
outstanding at December 31, 2002
NUMBER WEIGHTED NUMBER
RANGE OF OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
EXERCISE AT REMAINING AVERAGE AT AVERAGE
PRICES 12/31/02 CONTRACTUAL LIFE EXERCISE PRICE 12/31/02 EXERCISE PRICE
- ---------------- ----------- ---------------- -------------- ----------- --------------
$ 4.75 to $ 6.84 50,000 5.32 $ 5.76 50,000 $ 5.76
$ 2.00 1,454,300 3.69 $ 2.00 634,100 $ 2.00
--------- ------- -------
1,504,300 684,100 $ 2.28
========= =======
As permitted by SFAS No. 123 "Accounting for Stock-Based Compensation", the
Company applies Accounting Principles Board Opinion 25 in accounting for its
share-based compensation plans. Accordingly, no compensation cost has been
recognized under these plans, with the exception noted above, because, as of the
measurement date, which in this case is the grant date, the exercise price of
granted options is equal to or in excess of the fair value of the underlying
shares. Had compensation cost for the Company's share-based compensation plans
been determined based on the fair values of the options granted after January 1,
1998, consistent with the provisions of SFAS No. 123, the Company's net loss and
loss per share would have increased as follows (in thousands, except per share
amounts):
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002
------------ ------------ -------------
Net loss to common stockholders as reported ..... $ (41,926) $ (72,217) $ (10,795)
Less total stock based employer compensation
expense determined under fair value based
method for all awards, net of tax related
effects ........................................ $ -- $ -- $ --
Pro forma net loss to common stockholders ....... $ (41,926) $ (72,217) $ (10,795)
Basic and diluted (loss)
Per share as reported ................... $ (2.88) $ (4.96) $ (0.74)
Pro forma ............................... $ (2.88) $ (4.96) $ (0.74)
The estimated weighted average fair value of options granted during both
2000 and 2001 was $0 determined in conformity with the Black-Scholes option
pricing model in all material respects.
(13) EMPLOYEE BENEFIT PLANS
50
Employee Retirement Savings Plan
GGI had established a defined contribution plan covering substantially all
U.S. and certain foreign employees whereby participants could elect to
contribute between 1% and 15% of their annual salary. Participants could not
make contributions in excess of $11,000 per year (as adjusted annually by the
cost of living adjustment factor). On the Effective Date, GGI assumed and
assigned the plan to Grant. Under the plan, the employer may contribute, on a
discretionary basis, one-half of the participant's contribution percentage up to
6% (limited to 3% of any employee's annual salary). The plan was amended in June
1997 to eliminate the employer's option to contribute common stock so that
discretionary contributions may be made only in the form of cash. Cash
contributions to the plan by Grant for years ended December 31, 2000, 2001 and
2002 totaled $51,000, $43,000,and $49,000 respectively.
Other Post Retirement Benefits
GGI sponsored a defined contribution post-retirement plan which, pursuant
to the Plan, was assumed by GGI and assigned to Grant. The post-retirement plan
is contributory and is structured to provide medical coverage for eligible
retirees and their dependents (as defined in the post-retirement plan).
Generally, employees who have completed 10 years of continuous service with the
Company, are between 55 and 65 years of age, and are ineligible for Medicare are
eligible for plan participation. On December 19, 2001, the post-retirement plan
was amended to eliminate this medical coverage benefit from the post-retirement
plan effective February 1, 2002. Liabilities for post-retirement health care
benefits are not material to the Company's results of operations or financial
position.
(14) STOCKHOLDERS' EQUITY
Preferred Stock
On June 5, 1998, the Company redeemed all of the outstanding 10,000 shares
of Cumulative Preferred Stock with a par value $0.00 per share and a liquidation
preference of $1,000 per share that were held by Elliott International,
representing the liquidation amount of all such outstanding shares of Cumulative
Preferred Stock, together with all accumulated, accrued and unpaid dividends
payable in kind at an annual rate of 10.5% of approximately $702,000, for a
total of $10.7 million cash. Upon redemption, the Cumulative Preferred Stock was
canceled, retired and eliminated from the shares that the Company is authorized
to issue.
On October 25, 1999, holders of greater than a majority of the outstanding
common stock voting power of the Company acted, by written consent, to further
amend the Amended and Restated Certificate of Incorporation to decrease the
number of authorized aggregate shares of capital stock of the Company from
60,000,000 to 55,000,000 shares, thus, decreasing the number of authorized
shares of the Company's preferred stock from 10,000,000 to 5,000,000 shares.
Dividend requirements on Grant's pay-in-kind preferred stock were $4.3
million, $4.8 million and $5.2 million for the years ended December 31, 2000,
2001, and 2002 respectively.
In 2000, 2001 and 2002, the Company issued payment in kind dividends
aggregating 41,803, 47,247 and 51,142 shares of Convertible Preferred Stock,
respectively.
Common Stock
At December 31, 2002, Grant had authorized 50,000,000 shares of common
stock, par value $.001 per share, of which 14,547,055 were issued and
outstanding at December 31, 2001 and 2002.
COMMON STOCK
--------------------
SHARES AMOUNT
---------- ------
Balance, December 31, 2000.................................... 14,547,055 $ 15
---------- ----
Balance, December 31, 2001.................................... 14,547,055 $ 15
========== ====
Balance, December 31, 2002.................................... 14,547,055 $ 15
========== ====
(15) COMMITMENTS AND CONTINGENCIES
On December 11, 1997, certain holders of interests under the Plan, acting
through an "ad hoc" committee, (the "Plaintiffs") commenced a lawsuit in the
Bankruptcy Court against Grant, GGI, Elliott, Elliott International and Solid
State. The lawsuit alleged that (i) GGI and Elliott breached their obligations
under the Plan by seeking to complete the Solid State acquisition prior to
commencing an offering of the Company's common stock, par value $.001 per share
("Common Stock"), to certain holders of claims and other interests under the
Plan (the "Subscription Offering"), (ii) the Solid State acquisition and certain
related transactions were unfair to the Plaintiffs because they diluted the
value of the Common Stock to be issued to them under the Subscription Offering
and impaired the Company's equity value and (iii) the Solid State acquisition
and certain related transactions could and should have been, but were not,
adequately disclosed in the disclosure statement filed with the Bankruptcy Court
regarding the Plan. The Plaintiffs requested (i) compensatory and punitive
damages in an unstated amount and (ii) revocation of the Plan. In addition, the
Plaintiffs
51
sought to enjoin completion of the Solid State acquisition and certain related
transactions pending a trial on the merits. This request for injunctive relief
was denied by the Bankruptcy Court on December 16, 1997, and was denied on
appeal by the United States District Court for the District of Delaware on
December 19, 1997. During the discovery process for the lawsuit, the parties
began to discuss a settlement. These discussions led to a settlement of the
lawsuit on June 19, 1998 (the "Settlement"). Under the terms of the Settlement,
in exchange for a full and complete release of all of the Plaintiffs' claims
against Elliott, Elliott International, the Company and their respective
officers, directors, partners, employees, agents, subsidiaries, affiliates,
successors and assigns relating to or arising out of the bankruptcy proceedings
of GGI and a dismissal of the lawsuit, Elliott paid the Plaintiffs $150,000 for
reimbursement of legal expenses and permitted the Plaintiffs to purchase Grant
Common Stock in the Subscription Offering at a discounted subscription purchase
price of $4.75 per share. The Company recorded $635,000 in litigation expense
associated with the Settlement, representing the cash paid by Elliott and the
$0.25 discount permitted the Plaintiffs to purchase Grant Common Stock in the
Subscription Offering. In addition, Elliott agreed to indemnify Grant against
any liability that they may incur in connection with the lawsuit. Nevertheless,
other eligible subscribers in the Subscription Offering who did not execute a
release in connection with the Subscription Offering could commence other
lawsuits related to the Plan, which may not be subject to indemnification by
Elliott, and which could have an adverse effect on Grant's business, reputation,
financial position, results of operations or cash flows.
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 matter is in the early stages of
discovery and no dates have been set for a class certification hearing or trial
on the merits. The Company believes that the allegations of the lawsuit are
without merit and intends to vigorously defend the lawsuit. Management does not
believe the outcome of this lawsuit will have a material adverse impact on the
Company's financial position, results of operations or cash flows.
Additionally, Grant is involved in various claims and legal actions arising
in the ordinary course of business. GGI is involved in various claims and legal
actions arising in the bankruptcy and related to the Plan. Management of GGI and
management of Grant are of the opinion that none of the claims and actions will
have a material adverse impact on GGI's or Grant's financial position, results
of operations or cash flows.
(16) RELATED PARTY TRANSACTIONS
During 2000 and 2001, the Company performed data acquisition and processing
services for an affiliated oil and gas exploration and production company.
Further, this affiliated company participated in 2000 as an underwriter in one
of the Company's multi-client data library programs. Revenues for these services
were approximately $10,092,000 and $1,480,000 for 2000 and 2001, respectively,
and related accounts receivable outstanding at December 31, 2001 were $200,000.
The Company did not perform any services for any affiliated companies in 2002.
Management of the Company believes such operations were conducted under terms
and conditions comparable to third-party customers.
Effective January 1, 2001, one of the Company's subsidiaries entered into a
consulting agreement with a term through December 31, 2003, with Crossbay
Ventures Ltd. ("Crossbay") & James Devine, the Company's Chairman of the Board,
whereby Crossbay Ventures Ltd. Agreed to provide the consultancy and advisory
services of Mr. Devine, in exchange for an annual fee of $125,000. Through
amendments to this agreement the annual fee has increased to $150,000. In 2002,
a total of $132,395 was paid by the Company's subsidiary to Crossbay under this
agreement. Additionally, in 2001, Mr. Devine was granted 300,000 options to
purchase the Company's stock subject to certain vesting requirements. In April
2003, these options were cancelled and 400,000 options were issued in
consideration for consultancy services received.
See Note 20 for a discussion of the subscription offering and Notes 1, 9,
14 and 21 for discussion of financing with Elliott.
(17) LOSS PER SHARE
Loss per common share-basic and diluted is computed as follows (in
thousands, except per share amounts):
YEAR ENDED DECEMBER 31,
------------------------------------
2000 2001 2002
---------- ---------- ----------
Net loss applicable to common stock........... $ (41,926) $ (72,217) $ (10,795)
========== ========== ==========
Weighted average common shares................ 14,547 14,547 14,547
========== ========== ==========
Loss per common share -- basic and diluted.... $ (2.88) $ (4.96) $ (.74)
========== ========== ==========
Options on shares of common stock totaling 705,000 in 2000, 1,288,800 in
2001, and 0 in 2002, were not included in computing diluted earnings per share
because their effects were anti-dilutive.
Dividend requirements on Grant's pay-in-kind preferred stock were $4.3
million, $4.8 million and $5.2 million for the years ended December 31, 2000,
2001, and 2002 respectively.
(18) COMPREHENSIVE INCOME (LOSS)
Effective January 1, 1998, Grant adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components, including foreign currency translation
adjustments and unrealized
52
gains (losses) on marketable securities classified as available-for-sale.
Grant's total comprehensive gain (loss) is as follows for the periods presented.
No tax benefit (after consideration of the valuation allowance required under
SFAS No. 109) has been allocated to "Other comprehensive loss -- foreign
currency translation adjustments" for any of the reported periods
YEAR ENDED DECEMBER 31,
-------------------------------------
2000 2001 2002
---------- ---------- ----------
(IN THOUSANDS)
Net loss applicable to common stock................... $ (41,926) $ (72,217) $ (10,795)
Other comprehensive gain (loss) - foreign currency
translation adjustments............................. (996) 48 234
---------- ---------- ----------
Total comprehensive loss.................... $ (42,922) $ (72,169) $ (10,561)
========== ========== ==========
(19) SUPPLEMENTAL SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------
2000 2001 2002
------- ------- -------
(IN THOUSANDS)
CASH PAID FOR INTEREST AND TAXES:
Taxes, net of refunds.......................... $ 218 $ 3,155 $ 4,653
Interest....................................... 4,822 4,539 6,383
Non-cash investing and financing activities consisted of the following:
YEAR ENDED DECEMBER 31,
--------------------------------
2000 2001 2002
------- ------- ---------
(IN THOUSANDS)
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property, plant and equipment acquired through debt
Issuance...................................................... $ 1,268 $ 1,900 $ 10,626
Dividends paid in preferred stock in-kind....................... 3,376 4,725 5,114
(20) SUBSCRIPTION OFFERING
Pursuant to the Plan of Reorganization discussed in Note 1, the Company was
required to conduct a subscription offering (the "Subscription Offering") of
4,750,000 shares of Grant Common Stock to certain holders of claims and other
interests under the Plan for an aggregate purchase price of $23,750,000. The
Plan provided that (i) Eligible Class 5 Claim Holders; (ii) Eligible Class 7
Interest Holders; and (iii) Eligible Class 8 Interest Holders, each as defined
in the Plan (Collectively, the "Eligible Subscribers") could participate in the
Subscription Offering. Because Elliott and certain of its affiliates, as
interest holders under the Plan, were entitled to purchase 1,356,231 shares of
Grant Common Stock in an offering by the Company, the Principal Stockholders
offered the balance of such shares of Grant Common Stock to the Eligible
Subscribers pursuant to the Subscription Offering. The Company registered the
shares of Grant Common Stock with the Commission pursuant to the Subscription
Offering. The registration statement became effective on July 7, 1998, and
rights to subscribe for shares of Common Stock pursuant to the Subscription
Offering expired if not exercised on August 24, 1998. As a result of the
Subscription Offering, a total of 2,080,722 of shares were subscribed. The total
purchase price for these shares received by the Principal Shareholders was
approximately $9,918,000.
(21) SUBSEQUENT EVENTS
On January 2, 2003, principal on the Foothill term loan ($250,000) and
interest ($100,000) on the combined loans outstanding under the Company's credit
in the aggregate amount of $350,000 became due and payable. Due to cash flow
constraints, the Company did not fulfill its obligations to Foothill and Elliott
under the Credit Facility to pay such amount with cash on hand; as permitted
under the Credit Facility, Foothill made an advance to the Company under the
Foothill revolving facility allowing the Company to make the required payment,
however, the advance to the Company resulted in the amount outstanding under the
Foothill revolving facility being in excess of the Company's availability under
the Foothill revolving facility by $190,000 (the "Overadvance"). The Overadvance
became due and payable immediately (or, to the extent of the $100,000 portion
thereof used to fund interest that was due and payable on January 2, 2003, on
January 9, 2003). The Company did not immediately repay any portion
53
of the Overadvance and, pursuant to the terms of the Credit Facility, the
failure to immediately repay the portion of the Overadvance used to fund the
principal payment due on January 2, 2003 constituted an event of default under
the Credit Facility.
On January 3, 2003, Elliott elected to exercise its option under the
Credit Facility to purchase all of the $19.8 million in outstanding loans owing
to Foothill under the Credit Facility (consisting of $5.8 million outstanding
under the Foothill revolving facility, $5.8 million outstanding under the
Foothill term loan and $8.2 million outstanding under the supplemental term
loan) and all of Foothill's other rights under the Credit Facility and Elliott
replaced Foothill as agent under the Credit Facility (the "Foothill Buyout"). As
a result of the Foothill Buyout, as of January 3, 2003, Elliott became the agent
and sole lender under the Credit Facility under which the Company had a total of
$27.3 million in outstanding loans (consisting of $19.8 million in purchased
loans together with $7.5 million outstanding under the preexisting Elliott term
loan).
In connection with the Foothill Buyout, the Credit Facility was amended
as of January 3, 2003 to suspend through and including January 24, 2003 the
Company's obligation to remit proceeds of accounts received that would have
otherwise had to be submitted to Elliott under the agreement. Additionally, in
connection with the Foothill Buyout, the Company agreed to pay Elliott as part
of the obligations payable by the Company under the Credit Facility all amounts
paid by Elliott to Foothill in connection with the Foothill Buyout in excess of
the amounts otherwise owing by the Company to Foothill under the Credit Facility
(whether or not the Company was otherwise obligated to pay such amounts and
specifically including the $210,716 early termination payment Elliott was
required to pay to Foothill in connection with the Foothill Buyout (for which
Elliott was not entitled to reimbursement from the Company)) (all such amounts
being referred to as the "Waiver Fee"). The subsidiary guarantors of the Company
under the Credit Facility guaranteed payment of the Waiver Fee. In connection
with the Foothill Buyout, Elliott, the Company and the subsidiary guarantors
under the Credit Facility released Foothill from any liability in respect of the
Credit Facility, Foothill released Elliott from its guaranty of the Company's
obligations to Foothill under the Credit Facility and the subsidiary guarantors
reaffirmed their guaranty of the obligations of the Company to Elliott.
On January 24th, the Credit Facility was supplemented to extend the
Company's obligation to remit proceeds of accounts received that would have
otherwise had to be submitted to Elliott under the agreement to February 5,
2003. Additionally, the Credit Facility was amended to allow for any payments
due on account of the Obligations under the Credit Facility from and after
January 24, 2003 to and including February 5, 2003 to be due and payable on
February 5, 2003. This agreement was subsequently supplemented numerous times to
continue to extend the waiver period for remitting the proceeds of accounts
received and making payments on its obligations (the "Waiver Period"). As of May
15, 2003, the above mentioned Waiver Period has been extended to June 15, 2003,
with all amounts becoming due and payable on June 16, 2003.
Due to insufficient cash on hand and lack of availability under the
Credit Facility, the Company was not able to make the $2.1 million interest
payment on the 9 3/4% Senior Notes due 2008 (the "Senior Notes") due on February
18, 2003 within the 30 day gracE period ending March 20th, 2003 as required by
the indenture under which the notes were issued. The failure to pay the interest
installment within the 30 day grace period constitutes an event of default under
the indenture.
The Company does not expect to be able to fulfill the interest payment
obligation through its cash flow from operations and as of the date of this
report, Elliott has refused to make any additional credit available to the
Company for the purpose of making the interest payment. Further, due to the
current financial condition of the Company, it is unlikely that any alternative
financing will be able to be obtained. Therefore, unless Elliott, in its sole
and absolute discretion, permits the Company to borrow additional amounts under
the Credit Facility or alternative financing is obtained, the Company is
unlikely to be able to make the interest payment in the foreseeable future.
As a result of the event of default under the indenture, the trustee,
or the holders of a specified percentage in aggregate principal amount of the
Senior Notes, could take the steps necessary to cause the Senior Notes to become
immediately due and payable. As of the date of this report, neither the trustee
nor such holders has exercised this right. Additionally, the failure to make the
interest payment within the grace period constitutes an event of default under
the Credit Facility, which entitles Elliott to accelerate the maturity of all
amounts owing under the Credit Facility and to exercise remedies to collect such
amounts as provided under the Credit Facility and the related security
agreements. As of the date of this report, Elliott has not exercised this right.
Accordingly, the Company expects to continue to classify any otherwise long-term
debt related to the Senior Notes and the Credit Facility as current in the
Company's financial statements for the foreseeable future. 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.
54
The Company's management is currently in discussions with the ad hoc
steering committee of the holders of the Senior Notes and Elliott concerning a
debt-for-equity exchange or other comprehensive restructuring of the Company's
indebtedness that, among other things, would resolve the interest payment
default. No understanding or agreement has been reached with the committee or
Elliott as of the date of this report and the Company can make no assurance that
any such resolution will be achieved.
55
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ------------
2001
Revenues............................... $ 36,075 $ 11,952 $ 23,990 $ 21,434
Operating loss......................... (2,830) (5,004) (5,008)(1) (44,386)(2)
Net loss............................... (5,592) (6,882) (7,392) (47,531)
Net loss applicable to common stock.... (6,745) (8,072) (8,618) (48,782)
LOSS PER COMMON SHARE -
BASIC AND DILUTED:
Net loss per common share.............. $ (.46) $ (.55) $ (.59) $ (3.36)
2002
Revenues............................... $ 29,313 $ 15,631 $ 18,238 $ 25,833
Operating income/(loss)................ 1,481 (806) (553) 4,434
Net income/(loss)...................... (1,040) (2,334) (3,314) 1,110
Net loss applicable to common stock.... (2,288) (3,621) (4,641) (245)
LOSS PER COMMON SHARE -
BASIC AND DILUTED:
Net loss per common share.............. $ (0.16) $ (0.25) $ (0.32) $ (0.02)
- ----------
(1) Includes a $97 charge for asset impairment on the multi-client data library
(see Note 4 to consolidated financial statements).
(2) Includes a $745 charge for asset impairment on the multi-client data
library, a $31,390 charge for impairment of goodwill and a $6,372 charge for
a net impairment on certain of the Company's fixed assets. (see Note 4 to
consolidated financial statements).
56
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 -- Amended and Restated Certificate of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed with the
Commission on August 19, 1999).
3.2 -- Articles of Amendment to the Amended and Restated Certificate of Incorporation of the
Registrant. (incorporated by reference to Exhibit 3.2 of the Registrant's Registration
Statement on Form S-1, File No. 333-89863, originally filed with the commission on October
28, 1999).
3.3 -- Amended and Restated By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 of
the Registrant's Current Report on Form 8-K filed with the Commission on August 19, 1999).
4.1 -- Certificate of Designations of 8% Exchangeable Preferred Stock of the Registrant
(incorporated by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K
filed with the Commission on August 19, 1999).
4.2 -- Certificate of Designations of 8% Convertible Preferred Stock of the Registrant.
(incorporated by reference to Exhibit 4.2 of the Registrant's Registration Statement on Form
S-1, File No. 333-89863, originally filed with the Commission on October 28, 1999).
4.3 -- Specimen Certificate for the Common Stock, par value $.001 per share, of the Registrant
(incorporated by reference to Exhibit 4.1 of the Registrant's Registration Statement on Form
S-1, File No. 333-43219, originally filed with the Commission on December 24, 1997).
4.4 -- Specimen Certificate for the 8% Exchangeable Preferred Stock, par value $.001 per share, of
the Registrant. (incorporated by reference to Exhibit 4.4 of the Registrant's Registration
Statement on Form S-1, File No. 333-89863, originally filed with the Commission on October
28, 1999).
4.5 -- Specimen Certificate for the 8% Convertible Preferred Stock, par value $.001 per share, of
the Registrant. (incorporated by reference to Exhibit 4.5 of the Registrant's Registration
Statement on Form S-1, File No. 333-89863, originally filed with the Commission on October
28, 1999).
4.6 -- Indenture dated as of February 18, 1998, by and among the Registrant, LaSalle National Bank,
as trustee, and the subsidiary guarantors, as defined therein (incorporated by reference to
Exhibit 4.6 of the Registrant's Registration Statement on Form S-1, File No. 333-43219,
originally filed with the Commission on December 24, 1997).
4.7 -- First Supplemental Indenture, dated as of January 19, 2000, by and among the Registrant,
LaSalle Bank National Association, as trustee, and the subsidiary guarantors, as defined
therein.
10.1 -- Registration Rights Agreement between the Registrant and Elliott Associates, L.P. dated
September 19, 1997 (incorporated by reference to Exhibit 4.2 of the Registrant's
Registration Statement on Form S-1, File No. 333-43219, originally filed with the Commission
on December 24, 1997).
10.2 -- Amendment No. 1 to Registration Rights Agreement between the Registrant and Elliott
Associates, L.P., dated October 1, 1997 (incorporated by reference to Exhibit 4.3 of the
Registrant's Registration Statement on Form S-1, File No. 333-43219, originally filed with
the Commission on December 24, 1997).
57
10.3 -- Amendment No. 2 to Registration Rights Agreement between the Registrant and Elliott
Associates, L.P., dated December 17, 1997 (incorporated by reference to Exhibit 4.4 of the
Registrant's Registration Statement on Form S-1, File No. 333-43219, originally filed with
the Commission on December 24, 1997).
10.4 -- Amendment No. 3 to Registration Rights Agreement between the Registrant and Elliott
Associates, L.P., dated October 25, 1999. (incorporated by reference to Exhibit 10.6 of the
Registrant's Registration Statement on Form S-1, File No. 333-89863, originally filed with
the Commission on October 28, 1999).
10.5 -- Grant Geophysical, Inc. 1997 Equity and Performance Incentive Plan, as amended.
(incorporated by reference to Exhibit 10.6 of the Registrant's Registration Statement on
Form S-1, File No. 333-89863, originally filed with the Commission on October 28, 1999).
10.6 -- Loan and Security Agreement dated as of May 11, 1999 by and among the Registrant, Elliott
Associates, L.P. and Foothill Capital Corporation (incorporated by reference to Exhibit 4.1
of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, filed
with the Commission on August 13, 1999).
10.7 -- Amendment No. 1 to Loan and Security Agreement, dated as of August 12, 1999, by and among
the Registrant, Elliott Associates, L.P. and Foothill Capital Corporation (incorporated by
reference to Exhibit 10.11 of the Registrant's Registration Statement on Form S-1, File No.
333-89863, originally filed with the Commission on October 28, 1999).
10.8 -- Amendment No. 2 to Loan and Security Agreement, dated as of September 23, 1999, by and among
the Registrant, Elliott Associates, L.P., and Foothill Capital Corporation. (incorporated by
reference to Exhibit 10.12 of the Registrant's Registration Statement on Form S-1, File No.
333-89863, originally filed with the Commission on October 28, 1999).
10.9 -- Amendment No. 3 to Loan and Security Agreement, dated as February 14, 2000, by and among the
Registrant, Elliott Associates, L.P. and Foothill Capital Corporation. (incorporated by
reference to Exhibit 10.13 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001, originally filed with the Commission on April 16, 2001).
10.10 -- Form of Indemnity Agreement between the Registrant and its directors (incorporated by
reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed with the
Commission on August 19, 1999).
10.11 -- Amended and Restated Receipt, Assignment and Conveyance of Net Revenue Interest as of August
30, 2000 by and between Grant Geophysical Corp. and Elliott Associates, L.P. (incorporated
by reference to Exhibit 10.01 of the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000, originally filed with the Commission on August 22, 2000.
10.12 -- Depository Agreement for Purchase Option as of December 1, 2000 by and between Grant
Geophysical Corp. and Elliott Associates, L.P. (incorporated by reference to Exhibit 10.18
of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001,
originally filed with the Commission on April 16, 2001.
10.13 -- Amendment to Depository Agreement for Purchase Option as of January 25, 2001 by and between
Grant Geophysical Corp. and Elliott Associates, L.P. (incorporated by reference to Exhibit
10.19 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001,
originally filed with the Commission on April 16, 2001).
10.14 -- Second Amendment to Depository Agreement for Purchase Option as of February 20, 2001 by and
between Grant Geophysical Corp. and Elliott Associates, L.P. (incorporated by reference to
Exhibit 10.20 of the Registrant's Annual Report on Form 10-K for the year ended December 31,
2001, originally filed with the Commission on April 16, 2001).
58
10.15 -- Third Amendment to Depository Agreement for Purchase Option as of February 22, 2001 by and
between Grant Geophysical Corp. and Elliott Associates, L.P. (incorporated by reference to
Exhibit 10.21 of the Registrant's Annual Report on Form 10-K for the year ended December 31,
2001, originally filed with the Commission on April 16, 2001).
10.16 -- Amendment No. 4 to Loan and Security Agreement and Consent effective February 2001 by and
among Grant Geophysical Inc., Foothill Capital Corporation and Elliott Associates, L.P.
Third Amendment to Depository Agreement for Purchase Option as of February 22, 2001 by and
between Grant Geophysical Corp. and Elliott Associates, L.P. (incorporated by reference to
Exhibit 10.22 of the Registrant's Annual Report on Form 10-K for the year ended December 31,
2001, originally filed with the Commission on April 16, 2001).
10.17 -- Amendment Number Five to Loan and Security Agreement and Consent effective as of March 21,
2001 by and among Grant Geophysical Inc., Foothill Capital Corporation and Elliott
Associates, L.P. (incorporated by reference to Exhibit 10.23 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2001, originally filed with the
Commission on April 16, 2001).
10.18 -- Amendment Number Six to Loan and Security Agreement and Consent effective as of June 28,
2001 by and among Grant Geophysical, Inc., Foothill Capital Corporation and Elliott
Associates, L.P. (incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2001, originally filed with the
Commission on November 14, 2001).
10.19 -- Agreement for Purchase and Assignment of Foreign Accounts Receivable By and between Grant
Geophysical (Int'l), Inc. and Elliott Associates, L.P. (incorporated by reference to Exhibit
10.2 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30,
2001, originally filed with the Commission on November 14, 2001).
10.20 -- Guaranty Agreement by Grant Geophysical Corp. in favor of Elliott Associates, L.P.
(incorporated by reference to Exhibit 10.3 of the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001, originally filed with the Commission on November
14, 2001).
10.21 -- Amendment Number One to Agreement for Purchase and Assignment of Foreign Accounts Receivable
by and between Grant Geophysical (Int'l), Inc. and Elliott Associates, L.P. (incorporated by
reference to Exhibit 10.24 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001, originally filed with the Commission on May 3, 2002).
10.22 -- Amendment Number Two to Agreement for Purchase and Assignment of Foreign Accounts Receivable
by and between Grant Geophysical (Int'l), Inc. and Elliott Associates, L.P. (incorporated by
reference to Exhibit 10.25 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001, originally filed with the Commission on May 3, 2002).
10.23 -- Amendment Number Three to Agreement for Purchase and Assignment of Foreign Accounts
Receivable by and between Grant Geophysical (Int'l), Inc. and Elliott Associates, L.P.
(incorporated by reference to Exhibit 10.26 of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2001, originally filed with the Commission on May 3, 2002).
10.24 -- Amendment Number Four to Agreement for Purchase and Assignment of Foreign Accounts
Receivable by and between Grant Geophysical (Int'l), Inc. and its designated affiliates, and
Elliott Associates, L.P. (incorporated by reference to Exhibit 10.27 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2001, originally filed with the
Commission on May 3, 2002.)
10.25 -- Employment Agreement between the Registrant and Richard F. Miles, dated August 1,
59
2001. (incorporated by reference to Exhibit 10.28 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 2001, originally filed with the Commission on May
3, 2002.)
10.26 -- Amendment No. 7 to Loan and Security Agreement, dated as of May 24, 2002, by and among the
Registrant, Elliott Associates, L.P. and Foothill Capital Corporation. (incorporated by
reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K originally filed
with the Commission on June 13, 2002.)
10.27 -- Amendment Number Five to Agreement for Purchase and Assignment of Foreign Accounts
Receivable, dated May 24, 2002, by and between Grant Geophysical (Int'l), Inc. and its
designated affiliates, and Elliott Associates, L.P. (incorporated by reference to Exhibit
10.2 of the Registrant's Current Report on Form 8-K originally filed with the Commission on
June 13, 2002.)
10.28 -- Cash Collateral Agreement, dated May 24, 2002, by and among the Registrant, Elliott
Associates, L.P. and Foothill Capital Corporation. (incorporated by reference to Exhibit
10.3 of the Registrant's Current Report on Form 8-K originally filed with the Commission on
June 13, 2002.)
10.29 -- Amendment No. 8 to Loan and Security Agreement, dated as of July 8, 2002, by and among the
Registrant, Elliott Associates, L.P. and Foothill Capital Corporation. (incorporated by
reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K originally filed
with the Commission on July 30, 2002.)
10.30 -- Amendment Number Six to Agreement for Purchase and Assignment of Foreign Accounts
Receivable, dated as of July 8, 2002, by and between Grant Geophysical (Int'l), Inc. and its
designated affiliates, and Elliott Associates, L.P. (incorporated by reference to Exhibit
10.2 of the Registrant's Current Report on Form 8-K originally filed with the Commission on
July 30, 2002.)
10.31 -- Amendment Number Seven to Agreement for Purchase and Assignment of Foreign Accounts
Receivable, dated September 30, 2002, by and between Grant Geophysical (Int'l), Inc. and its
designated affiliates and Elliott Associates L.P. (incorporated by reference to Exhibit 10.1
of the Registrant's Current Report on Form 8-K originally filed with the Commission on
October 16, 2002.)
10.32 -- Amendment No. 9 to Loan and Security Agreement, dated as of January 3, 2003, by and among
the Registrant and Elliott Associates, L.P. (incorporated by reference to Exhibit 10.1 of
the Registrant's Current Report on Form 8-K originally filed with the Commission on January
22, 2003.)
10.33 -- Acknowledgement and Release, dated as of January 3, 2003, by Elliott Associates, L.P., the
Registrant and certain subsidiaries of the Registrant. (incorporated by reference to Exhibit
10.1 of the Registrant's Current Report on Form 8-K originally filed with the Commission on
January 22, 2003.)
10.34 -- Supplement to Ninth Amendment to Loan and Security Agreement, dated as of January 24, 2003,
by and among the Registrant and Elliott Associates, L.P. (incorporated by reference to
Exhibit 10.1 of the Registrant's Current Report on Form 8-K originally filed with the
Commission on February 10, 2003.)
10.35 -- Second Supplement to Ninth Amendment to Loan and Security Agreement, dated as of February 4,
2003, by and among the Registrant and Elliott Associates, L.P. (incorporated by reference to
Exhibit 10.2 of the Registrant's Current Report on Form 8-K originally filed with the
Commission on February 10, 2003.)
10.36 -- Third Supplement to Ninth Amendment to Loan and Security Agreement, dated as of February 20,
2003, by and among the Registrant and Elliott Associates, L.P.
60
(incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K
originally filed with the Commission on February 27, 2003.)
10.37 -- Fourth Supplement to Ninth Amendment to Loan and Security Agreement, dated as of March 7,
2003, by and among the Registrant and Elliott Associates, L.P. (incorporated by reference to
Exhibit 10.1 of the Registrant's Current Report on Form 8-K originally filed with the
Commission on March 18, 2003.)
10.38 -- Fifth Supplement to Ninth Amendment to Loan and Security Agreement, dated as of March 13,
2003, by and among the Registrant and Elliott Associates, L.P. (incorporated by reference to
Exhibit 10.2 of the Registrant's Current Report on Form 8-K originally filed with the
Commission on March 18, 2003.)
10.39* -- Amendment to Sixth Supplement to Ninth Amendment to Loan and Security Agreement (No Sixth
Supplement was completed, Amendment to Sixth supplement was erroneously titled and represents
Sixth Supplement), dated as of April 14, 2003, by and among the Registrant and Elliott
Associates, L.P.
10.40* -- Seventh Supplement to Ninth Amendment to Loan and Security Agreement, dated as of May 13,
2003, by and among the Registrant and Elliott Associates, L.P.
10.41* -- Employment Agreement between the Registrant and Narciso Chiquillo, dated August 1, 2001.
10.42* -- Employment Agreement between the Registrant and Lee Parker, dated August 1, 2001.
10.43* -- Employment Agreement between the Registrant and Richard J. Dunlop, dated August 1, 2001.
10.44* -- Employment Agreement between Grant Geophysical (Int'l), Inc. and Scott A. McCurdy, dated
March 21, 2003.
10.45* -- Stock Option Agreement between the Registrant and James Devine, dated March 31, 2003.
10.46* -- Novation Agreement between Grant Geophysical (Int'l), Inc. and Richard F. Miles
10.47* -- Novation Agreement between Grant Geophysical (Int'l), Inc. and Narciso Chiquillo
10.48* -- Novation Agreement between Grant Geophysical (Int'l), Inc. and Richard J. Dunlop
10.49* -- Novation Agreement between Grant Geophysical (Int'l), Inc. and Lee Parker
21.1 -- Subsidiaries of the Registrant. (incorporated by reference to the Registrant's Registration
Statement on Form S-1, originally filed with the Commission on October 28, 1999).
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.
* field herein
61