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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended March 31, 2003
Commission file number: 333-89863*
GRANT GEOPHYSICAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0548468
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16850 Park Row, Houston, Texas 77084
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 398-9503
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [ ]
As of July 15, 2003, 14,547,055 shares of common stock, par value $.001 per
share, were issued and outstanding. As of such date, there was no public market
for the common stock.
- -------------------------------------------------------------------------------
* The Commission file number refers to a Form S-1 registration statement
filed by the registrant under the Securities Act of 1933, which became
effective January 12, 2000.
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1
GRANT GEOPHYSICAL, INC.
INDEX TO FORM 10-Q
QUARTER ENDED MARCH 31, 2003
PAGE(S)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2002
and March 31, 2003 3
Consolidated Statements of Operations for the Three
Months Ended March 31, 2002 and 2003 4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2002 and 2003 5
Notes to Consolidated Financial Statements 6
Item 2. Management's
Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 16
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults on Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
PART III. SIGNATURES & CERTIFICATIONS 19
2
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, MARCH 31,
2002 2003
---------- ----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 6,405 $ 3,960
Restricted cash 858 --
Accounts receivable:
Trade (net of allowance for doubtful
accounts of $538 and $509 at
December 31, 2002 and March 31, 2003, respectively) 11,358 17,653
Other 4,560 5,238
Inventories 511 336
Prepayments and other 2,186 1,971
Work in process 1,107 2,818
---------- ----------
Total current assets 26,985 31,976
Property, plant and equipment, at cost 104,241 93,905
Less: accumulated amortization 79,399 69,796
---------- ----------
Net property, plant and equipment 24,842 24,109
Multi-client data library - non current 404 384
Other assets 1,707 1,489
---------- ----------
Total assets $ 53,938 $ 57,958
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, current portion of long-term
debt and capital lease obligations $ 80,745 $ 79,676
Term loan - affiliate 7,500 7,500
Accounts payable 6,301 10,401
Accrued expenses 8,414 7,666
Accrued interest 2,929 4,486
Unearned revenue-current 3,727 1,051
Foreign income taxes payable 2,516 2,617
---------- ----------
Total current liabilities 112,132 113,397
Long-term debt and capital lease obligations 3,890 5,508
Unearned revenue - non current 391 391
Other liabilities and deferred credits 468 468
Stockholders' equity:
Preferred stock, $.001 par value. Authorized
1,000,000 shares 8% convertible preferred series,
liquidation value $100 per share issued and
outstanding 671,550 shares at December 31, 2002
and 685,090 shares at March 31, 2003, respectively 67,155 68,509
Common stock, $.001 par value. Authorized 50,000,000;
shares issued and outstanding 14,547,055 shares at
December 31, 2002 and March 31, 2003 15 15
Additional paid-in capital 58,867 58,867
Accumulated deficit (186,886) (187,267)
Accumulated other comprehensive income (2,094) (1,930)
---------- ----------
Total stockholders' equity (62,943) (61,806)
---------- ----------
Total liabilities and stockholders' equity $ 53,938 $ 57,958
========== ==========
See accompanying Notes to Consolidated Financial Statements.
3
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
-----------------------
2002 2003
-------- --------
(UNAUDITED)
Revenues $ 29,313 $ 28,805
Expenses:
Direct operating expenses 23,347 20,588
Selling, general and administrative
expenses 2,158 3,000
Depreciation and amortization 2,327 2,669
-------- --------
Total costs and expenses 27,832 26,257
-------- --------
Operating income 1,481 2,548
Other income (expense):
Interest, net (1,742) (2,011)
Other 3 951
-------- --------
Total other expense (1,739) (1,060)
-------- --------
Income (loss) before taxes (258) 1,488
Income tax expense 782 516
-------- --------
Net income (loss) (1,040) 972
Preferred dividend requirements 1,248 1,353
-------- --------
Net loss applicable to common stock $ (2,288) $ (381)
======== ========
LOSS PER COMMON SHARE - BASIC AND DILUTED:
Net income (loss) $ (0.07) $ 0.07
Dividend requirements on pay-in-kind
Preferred stock (0.09) (0.09)
-------- --------
Net income(loss) per common share $ (0.16) $ (0.02)
======== ========
See accompanying Notes to Consolidated Financial Statements.
4
GRANT GEOPHYSICAL, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2002 2003
-------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (1,040) $ 972
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation and amortization expense 2,283 2,623
Multi-client data library amortization expense 44 46
(Gain) loss on sale of fixed assets (20) (998)
Provision for doubtful accounts 9 9
Exchange loss 144 (49)
Other non-cash items 10 9
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN:
Restricted cash -- 858
Accounts receivable (3,629) (6,982)
Inventories 208 175
Prepaids (20) 215
Work in process 1,003 (1,711)
Other assets 80 218
INCREASE (DECREASE) IN:
Accounts payable (1,624) 4,101
Accrued interest and other expenses (4,630) (1,868)
Foreign income tax payable 774 101
Other liabilities and deferred credit (24) -
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (6,432) (2,281)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (1,145) 103
Multi-client data library -- --
Proceeds from sale of assets 34 1,959
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,111) 2,062
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings made 14,645 1,613
Repayment on borrowings (8,469) (3,824)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 6,176 (2,211)
-------- --------
EFFECT OF EXCHANGE RATE USED IN CHANGES ON CASH (114) (15)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,481) (2,445)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,471 6,405
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 990 $ 3,960
======== ========
See accompanying Notes to Consolidated Financial Statements.
5
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) INDUSTRY CONDITIONS/LIQUIDITY/GOING CONCERN
The liquidity of 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. The market for seismic services
domestically and in Canada remain depressed, but management believes there has
been recent improvement in market conditions in Latin America and the Far East,
however 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 Company's 9 3/4% Senior Notes due 2008 (the "Senior
Notes") were issued. The Company has not made any payment of principal or
interest to Elliott in 2003, and the Company did not make the February 18, 2003
scheduled interest payment on the Senior Notes. 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, as well as 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, fund
capital expenditures and service existing equipment financing obligations. While
the Company was able to generate 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 $161.2 million of debt and preferred stock
outstanding at March 31, 2003. Currently, the Company's highly leveraged capital
structure negatively impacts and will continue to negatively impact its
profitability and 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.
6
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 30, 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 Canadian operation in reaction
to reduced current demand levels, and to reduce overhead personnel. Should such
measures be unsuccessful, or should any of the Company's creditors exercise
their right to accelerate their amounts outstanding, there would be substantial
doubt about the Company's ability to continue as a going concern. 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. The accompanying financial
statements do not include any adjustments that might result from the outcome of
those uncertainties.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND INDUSTRY CONDITIONS
The consolidated balance sheets of the Company as of March 31, 2003 and the
related consolidated statements of operations and cash flows for the three
months ended March 31, 2002 and 2003 are unaudited. In the opinion of
management, the accompanying unaudited condensed financial statements of the
Company and its consolidated subsidiaries contain all adjustments (consisting
only of normal, recurring adjustments) necessary to present fairly the Company's
financial position as of March 31, 2003 and the results of its operations and
cash flows for the three months ended March 31, 2002 and 2003, respectively.
Results of operations for the interim periods included herein are not
necessarily indicative of results of operations for the full year periods. The
consolidated financial statements should be read in conjunction with the audited
financial statements and footnotes for the year ended December 31, 2002,
included in the Company's Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission (the "Commission").
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and all majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
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.
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 March 31, 2003, restricted cash balances were
$858,000 and $0, respectively, which included contractually restricted customer
advances.
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.
7
Prepaids
Prepaid expenses are recognized over the period in which benefits are
obtained from the expenditure.
Work in Process
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 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
$44,000 and $46,000 for the three months ended March 31, 2002 and 2003,
respectively. As of December 31, 2002 and March 31, 2003, accumulated
amortization related to the Company's multi-client data library was
approximately $29.2 million and 29.3 million, respectively.
On a quarterly basis, management estimates the residual value of each
survey, and additional amortization is provided if the remaining revenues
reasonably expected to be obtained from any survey are less than the carrying
value of such survey or group of surveys.
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 asset's carrying amount to
determine if an impairment of such property is
8
necessary. The effect of any impairment would be to expense the difference
between the fair value of such property and its carrying value.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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 expected future sales associated with the Company's multi-client data
library, estimated future cash flows related to long-lived assets and valuation
allowances for deferred tax assets. Actual results could differ materially from
these estimates making it reasonably possible that a change in these estimates
could occur in the near term.
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.
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).
Recent Accounting Pronouncements
9
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" 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 SFAS No. 148 "Accounting for Stock-Based
Compensation" 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 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 (FIN) No. 46, "Consolidation
of Variable Interest Entities", 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" 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". 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.
(3) SEGMENT INFORMATION
The Company 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 Company evaluates the performance of its segments and allocates
resources to them based on operating income (loss). There are no intersegment
revenues.
10
The tables below present information about the Company's reported segments
for the periods indicated (dollars in thousands):
UNITED LATIN
STATES CANADA AMERICA FAR EAST TOTAL
--------- ------ ------- -------- ---------
FOR THE THREE MONTHS ENDED MARCH 31, 2003:
Revenues $ 1,896 $ 3,274 $ 21,981 $ 1,654 $ 28,805
Operating Income (Loss) (1,769) (686) 5,182 (179) 2,548
Depreciation and Amortization 368 578 1,573 150 2,669
FOR THE THREE MONTHS ENDED MARCH 31, 2002:
Revenues $ 1,023 $ 7,302 $ 20,988 $ 0 $ 29,313
Operating Income (Loss) (2,211) 851 2,874 (33) 1,481
Depreciation and Amortization 591 643 1,093 0 2,327
(4) DEBT AND OTHER FINANCINGS
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 requires the Company to 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 is scheduled to 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
11
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 March 31, 2003, $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 buyout Foothill and
become the sole agent and lender under the Credit Facility. The Company is in
default of certain payment provisions under the Credit Facility. Elliott has
granted the Company numerous waivers of the payment defaults subsequent to
year-end and certain payment defaults are currently waived through July 15,
2003. However, the Company's event of default on its 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 $1.0 million at March
31, 2003.
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.
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. 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 interest 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 $43.5 million aggregate principal amount of Senior Notes
outstanding at December 31, 2002 was $10.8 million.
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
12
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.
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
the Company'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 June 27, 2003,
$11,700,000 was outstanding under the agreement all of which is due and payable
on October 31, 2003. The Company does not expect to be able to retire these
amounts through its operating cash flows by October 31, 2003. Therefore, the
Company will need to obtain additional financing or reach accommodations with
Elliott to avoid a default under this agreement. There can be no assurance that
additional financing or such accommodations will be able to be obtained. 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.
There are no commitments to provide additional 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.
(5) SUPPLEMENTAL SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
---------------------
2002 2003
(DOLLARS IN THOUSANDS)
CASH PAID FOR INTEREST AND TAXES WAS AS FOLLOWS:
Taxes, net of refunds $ 1,537 $ 1,011
Interest 2,197 296(1)
(1) The Company did not make its February, 2003 semi-annual interest payment on
the Senior Notes. See Note 4 for discussion of default.
(6) COMMITMENTS AND CONTINGENCIES
The Company is a party, defendant 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 this lawsuit will have a material adverse effect on the Company's
financial position, results of operations or cash flows.
Additionally, the Company is involved in various claims and legal actions
arising in the ordinary course of business. Management is of the opinion that
none of the claims and actions will have a material adverse effect on the
Company's financial position, results of operations or cash flows.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Grant is a provider of seismic data acquisition services in land and
transition zone environments in selected markets, including the United States,
Canada, Latin America and the Far East. The Company also markets seismic data
acquisition services in the Middle East. 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 market for seismic land acquisition, both domestically and in Canada,
remained significantly depressed throughout the first three months of 2003.
Additionally, demand for land and transition zone seismic data acquisition
services are primarily determined by oil and gas industry capital expenditures,
budgets and spending patterns. These spending patterns are affected by
individual oil and gas company budgets as well as industry-wide conditions.
Overcapacity in the seismic service industry continues to suppress pricing and
activity levels and has materially adversely affected the Company's results of
operations. Management has implemented a business plan in 2003 with the specific
objectives of improving profitability and generating positive operating cash
flow through intensified sales and marketing, tighter cost controls and reduced
overhead expenses. Additionally, due to the competitive markets and decreased
demand in the United States and Canada, the Company has increased its reliance
on its Latin American and Far East land and transition zone operations, areas
where higher demand levels exist.
As of June 19, 2003, the Company was operating one crew in the United
States, operating two crews in Latin America, and mobilizing one crew in the Far
East. For the three months ended March 31, 2003, the Company's total revenues
were $28.8 million, with approximately 6.6% from the United States, 76.3% from
Latin America, 11.4% from Canada and 5.7% from the Far East.
RESULTS OF OPERATIONS
THE THREE-MONTH PERIOD ENDED MARCH 31, 2003 COMPARED WITH THE THREE-MONTH
PERIOD ENDED MARCH 31, 2002
Revenues. Revenues for the three months ended March 31, 2003 were $28.8
million, compared with $29.3 million for the three months ended March 31, 2002.
The net decrease during the first quarter of 2003 of $0.5 million, or 1.7 %, was
primarily due to the significant reduction in Canadian seismic data acquisition
revenue; partially offset by increased Latin America data acquisition revenues
and a new crew operating in the Far East.
Revenues from United States data acquisition operations increased $0.2
million, or 22.2%, from $0.9 million for the three months ended March 31, 2002
to $1.1 million for the three months ended March 31, 2003. The increase in data
acquisition revenues is due to the relative size and number of programs awarded
to the Company.
Revenues from seismic data processing operations were $0.0 million for the
first three months of 2003 compared to $0.1 million for the first three months
of 2002. The reduction is due to the closing of the Company's Houston processing
center in June 2002.
Revenues from Canadian data acquisition operations decreased $4.0 million,
or 54.8% from $7.3 million in the first three months of 2002 to $3.3 million in
the first three months of 2003. During the first quarter of 2003, two land
seismic crews were operating in Canada. During the first quarter of 2002, three
land seismic crews were operating in Canada.
Revenues from sales of the data library for the first three months of 2003
were $756,000, compared to $47,000 for the first three months of 2002. At March
31, 2003, the remaining book value of the Company's multi-client data library is
$ 384,000.
Revenues for data acquisition operations in Latin America increased $1.0
million, or 4.8%, from $21.0 million in the first three months of 2002 to $22.0
million in the first three months of 2003. This revenue increase is attributable
to an additional seismic crew working in Ecuador; partially offset by a decrease
in operating crews in Colombia.
Revenues for data acquisition operations in the Far East increased $1.7
million from $0.0 million in the three months ended March 31, 2002 to $1.7
million in the three months ended March 31, 2003. During the first three months
of 2003, the Company mobilized
14
and operated one crew in India. No crews were in operation in the Far East
during the first three months of 2002.
Expenses. Direct operating expenses for the three months ended March 31,
2003 decreased $2.7 million, or 11.6%, to $20.6 million, compared to $23.3
million for the three months ended March 31, 2002. This decrease is primarily a
result of decreased data acquisition activities in Canada in the first quarter
of 2003.
Selling, general and administrative expenses increased $0.8 million, or
36.4%, to $3.0 million for the three months ended March 31, 2003 from $2.2
million for the three months ended March 31, 2002. This increase is the result
of the Company incurring higher professional costs primarily associated with the
Company's efforts towards a debt restructure.
Depreciation and amortization increased $0.3 million, or 13.0%, to $2.6
million in the first three months of 2003 from $2.3 million for the first three
months of 2002. Capital expenditures were $2.6 million and $2.0 million for the
first three months of 2003 and 2002, respectively.
Other Income (Expenses). Interest expense, net, was $2.0 million in the
first three months of 2003 and $1.7 million for the first three months of 2002.
Other income (expense) in the 2003 quarter includes gains on the sale of fixed
assets, which included the sale of the Company's office building in Canada, of
$1.0 million compared to $0.02 million for the 2002 quarter.
Tax Provision. The income tax provisions for the 2002 and 2003 quarters
consisted of foreign income taxes. No benefit for United States federal income
tax loss carryforwards was recorded in either period, given the uncertainty of
realization of such tax benefits.
LIQUIDITY AND CAPITAL RESOURCES
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 meet such obligations
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; 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 maintain its operations and fund capital
expenditures 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 and upon completing a
comprehensive restructuring of its outstanding debt. 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 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.
15
During the first quarter the Company raised a total of $1.6 million of
working capital through the refinancing and subsequent sale of the Company's
office building in Canada and refinancing the Company's office building in
Houston, Texas.
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 30, 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 Canadian operation in reaction
to reduced current demand levels, and to reduce overhead personnel. Should such
measures be unsuccessful, or should any of the Company's creditors exercise
their right to accelerate their amounts outstanding, there would be substantial
doubt about the Company's ability to continue as a going concern. 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. The accompanying financial
statements do not include any adjustments that might result from the outcome of
those uncertainties.
There are currently no committed additional 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.
FOREIGN CURRENCY RISK
The Company conducts a substantial portion of its business in currencies
other than the U.S. or Canadian dollars, particularly various Latin American
currencies, and its international operations are subject to fluctuations in
foreign currency exchange rates. Accordingly, the Company's international
contracts could be significantly affected by fluctuations in exchange rates.
International contracts requiring payment in currency other than U.S. or
Canadian 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 positively impacted by foreign exchange
gain of approximately $49,000 for the three months ended March 31, 2003 and
negatively impacted by foreign exchange loss of approximately $144,000 for the
three months ended March 31, 2002.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
From time to time, information provided by the Company, statements by its
employees or information included in written material, such as press releases
and filings (including this Form 10-Q Quarterly Report) with the Commission
(including portions of the "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and certain other sections
contained in such filings) may contain "forward-looking" statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable it can give no assurance that such
expectations will prove to be correct. Such forward-looking statements are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize, or should any of the underlying
assumptions prove incorrect, actual results of current and future operations may
vary materially from those anticipated, estimated or projected. Investors are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of their dates.
Among the factors that will have a direct bearing on the Company's results
of operations and the oil and gas services industry in which it operates are the
effects of rapidly changing technology; the presence of competitors with greater
financial resources; operating risks inherent in the oil and gas services
industry; regulatory uncertainties; worldwide political stability and economic
conditions and other risks associated with international operations, including
foreign currency exchange risk; and the Company's successful execution of its
strategy and internal operating plans.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's debt consists of both fixed-interest and variable-interest
rate debt; consequently, the Company's results of operations and cash flows, as
well as the fair values of its fixed-rate debt instruments, are subject to
interest-rate risk. The Company has performed sensitivity analyses to assess the
impact of this risk based on a hypothetical ten-percent increase in market
interest rates. Market rate volatility is dependent on many factors that are
impossible to forecast, and actual interest rate increases could be more severe
than the hypothetical ten-percent increase. The Company estimates that if
prevailing market interest rates had been ten percent higher throughout the
first three months of 2003 and all other factors affecting the Company's debt
remained the same, the Company's pretax loss would have been increased by
approximately $0.2 million for the first three months of 2003. With respect to
the fair value of the Company's fixed-interest rate debt, if prevailing market
interest rates had been ten percent higher during the first three months of
2003, and all other factors affecting the Company's debt remained the same, fair
value of the Company's fixed-rate debt, as determined on a present-value basis,
would have been lower by approximately $3.6 million at March 31, 2003. Given the
composition of the Company's debt structure, the Company does not hedge its
interest rate risk.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this 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) 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 II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party defendant 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
decision 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 effect on the Company's financial position, results of
operations or cash flow.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In January 2003, the Company issued 13,510 shares and in February, 2003
issued 3 shares of its 8% convertible preferred stock to satisfy payment in-kind
dividend requirements on such stock issue. These securities were issued without
registration under the Securities Act of 1933, as amended, in reliance on
Section 4(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
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 Company's 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
17
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
EXHIBIT NO.
10.1* -- Eighth supplement to the Ninth Amendment to the Elliott
credit facility.
10.2* -- Ninth supplement to the Ninth Amendment to the Elliott
credit facility.
99.1* -- Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to section 906
of the Sarbanes-Oxley Act of 2002
99.2* -- Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to section 906
of the Sarbanes-Oxley Act of 2002
* Filed herein
(b) Reports on Form 8-K
On January 22, 2003 , the Company filed a current report on Form 8-K
related to the disclosure of Amendment Nine to the Elliott credit facility.
On February 10, 2003, the Company filed a current report on Form 8-K
related to the first and second supplement to the Ninth Amendment to the Elliott
credit facility.
On February 27, 2003, the Company filed a current report on Form 8-K
related to the third supplement to the Ninth Amendment to the Elliott credit
facility.
On March 18, 2003, the Company filed a current report on Form 8-K
related to the fourth and fifth supplement to the Ninth Amendment to the Elliott
credit facility.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRANT GEOPHYSICAL, INC.
Date: July 15, 2003
By: /s/ RICHARD F. MILES
-------------------------------------
Richard F. Miles
President and Chief Executive Officer
By: /s/ JAMES BLACK
-------------------------------------
James Black
Chief Financial Officer
(Principal Financial Officer)
By: /s/ SCOTT A. MCCURDY
-------------------------------------
Scott A. McCurdy
Controller
(Principal Accounting Officer)
19
I, Richard F. Miles, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Grant Geophysical,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weakness.
Date: July 15, 2003
/s/ RICHARD F. MILES
Richard F. Miles
President and Chief Executive Officer
20
I, James Black, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Grant Geophysical,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weakness.
Date: July 15, 2003
/s/ JAMES BLACK
James Black
Chief Financial Officer
21
INDEX TO EXHIBIT
EXHIBIT NO.
10.1* -- Eighth supplement to the Ninth Amendment to the Elliott credit
facility.
10.2* -- Ninth supplement to the Ninth Amendment to the Elliott credit
facility.
99.1* -- Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
99.2* -- Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
* Filed herein
22