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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, 1998
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: 333-48799*
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 checkmark 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 checkmark 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 March 31, 1999, 14,426,055 shares of the Registrant's Common Stock,
$.001 par value per share, were outstanding.
Documents incorporated by reference: None
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* The Commission file number refers to a Form S-4 registration statement filed
by the Company under the Securities Act of 1933, which became effective May 13,
1998.
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GRANT GEOPHYSICAL, INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business............................................................................... 1
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 the Company's Common Equity and Related Stockholder Matters................. 10
Item 6. Selected Financial Data................................................................ 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................................ 12
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 Company........................................ 21
Item 11. Executive Compensation................................................................. 22
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 25
Item 13. Certain Relationships and Related Transactions......................................... 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 27
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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 selected
markets, including the United States, Canada, Latin America 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 subsidiaries, 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 has
conducted operations in each of these markets, as well as in the Middle East and
Africa, in the past three years. The Company's seismic data acquisition services
typically are provided on an exclusive contract basis to domestic and
international oil and gas companies and seismic data marketing companies. The
Company also owns interests in certain multi-client seismic data covering
selected areas in the United States and Canada that is marketed broadly on a
non-exclusive basis to oil and gas companies.
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 four are equipped to
perform surveys in transition zone environments. Transition zone environments
include swamps, marshes and shallow water areas that require specialized
equipment and must be surveyed with minimal disruption to the natural
environment.
Grant purchased, effective July 1, 1998, all of the outstanding partnership
interests in Interactive Seismic Imaging ("ISI"), a seismic data processing
company, for $3.6 million in cash. Grant had been a 10% owner of ISI since its
formation in 1994. ISI provides seismic data processing services through offices
located in Midland, Dallas and Houston, Texas. Grant believes that the purchase
of ISI will complement its existing services and improve its competitive
position with existing and potential customers.
The Company owns a library of multi-client seismic data that is licensed to
oil and gas companies on a non-exclusive basis and has a small interest in
certain multi-client data that is owned by third parties. Over the past several
years, as oil and gas companies have moved toward multi-client surveys to reduce
finding costs, the Company has significantly increased its participation in the
activity and has expanded the library of multi-client data to include projects
located in Texas, California, Wyoming and Canada. Factors considered by the
Company when determining whether to undertake a multi-client survey include the
availability of customer commitments to offset a percentage of the survey cost,
the number of potential customers for the completed data, the location to be
surveyed, the probability and timing of future lease, concession, exploration
and development activity in the area, and the availability, quality and price of
competing data.
The price of oil and gas has deteriorated significantly over the past year.
Capital spending by oil and gas companies on oilfield related activities,
including seismic data acquisition and processing, has substantially decreased.
As a result, beginning late in the third quarter of 1998, the Company's global
seismic crew count, which includes both U.S. and foreign contracts, has
decreased significantly. As of March 26, 1999 the Company was operating or
mobilizing ten seismic data acquisition crews utilizing approximately 21,300
seismic recording channels. The Company's current seismic recording channel
capacity is slightly more than 32,000. By contrast, as of March 26, 1998, the
Company was operating or mobilizing 22 seismic data acquisition crews,
consisting of 18 land and four transition zone crews, utilizing approximately
30,000 seismic recording channels.
The current industry downturn has prompted the Company to undertake
activities it believes will both preserve financial strength and position itself
to respond when market demand increases. Those activities include a worldwide
reduction in personnel, a corporate restructuring and a restricted capital
expenditure program. Personnel reductions began in the fourth quarter of 1998
and have continued throughout the first quarter of 1999. Overall personnel have
been reduced from 863 full-time and 2,162 temporary at September 30, 1998 to 670
full-time and
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387 temporary personnel at March 26, 1999. The corporate restructuring is the
result of changing market conditions and is designed to better utilize all the
Company's assets. The restructuring places a greater emphasis on acquiring
multi-client data in the United States and Canada and refocuses the
international marketing efforts on the Company's established foreign markets.
Capital expenditures in 1999 are expected to be limited primarily to those
required to maintain the existing seismic acquisition and processing equipment.
As of March 26, 1999, the Company was operating or mobilizing a total of
four land crews in the United States, one land crew and one transition zone crew
in Latin America, three land crews in Canada and one land crew in the Far East.
For the twelve months ended December 31, 1998, the Company's total revenues were
$175.5 million, with approximately 44.8% from the United States, 30.0% from
Latin America, 17.1% from the Far East and 8.1% from Canada. As of December 31,
1998, the Company estimates that its total backlog was approximately $38.2
million, with all of such amount expected to be completed in 1999.
The Company was formed in September 1997. On September 30, 1997, Grant
acquired substantially all of the assets and assumed certain liabilities of GGI
pursuant to GGI's Second Amended Plan of Reorganization (the "Plan"), which was
confirmed by the United States Bankruptcy Court for the District of Delaware
(the "Bankruptcy Court") on September 15, 1997. Unless the context otherwise
requires, proforma data contained herein gives effect to Grant's purchase of
GGI's assets and certain related transactions and the Acquisition, as defined
herein, as if they were completed as of January 1, 1997.
Grant's principal executive office is located at 16850 Park Row, Houston,
Texas 77084 and its telephone number is 281-398-9503.
THE INDUSTRY
Oil and gas companies regularly use seismic data acquisition services to
image and identify underground geological structures likely to trap
hydrocarbons, both to aid in the exploration for and development of new
hydrocarbon reservoirs and to enhance production from existing reservoirs.
Seismic data has been used in the exploration for oil and gas since the late
1920s, and the application of seismic technology frequently has led to
significant discoveries of new oil and gas reservoirs. Seismology encompasses
the generation and recording of reflected or refracted seismic energy that, when
computer processed, produces 3D images or 2D cross sections of the earth's
subsurface structures. The computer processed seismic data is used by
geoscientists to identify geological characteristics favorable for the
accumulation of oil and gas and to evaluate the potential for commercial
production of oil and gas. More recently, seismic data has been used to monitor
and optimize the production of existing oil and gas reservoirs. During the last
fifty years, seismology has become the leading method used by oil and gas
companies to identify and image underground geological structures favorable for
hydrocarbon accumulation.
Seismic data acquisition services companies acquire seismic data in land
and transition zone environments by deploying thousands of seismic sensors,
called geophones, over a portion of the area to be covered by the survey. An
energy source, such as a small explosive charge or mechanical vibrating unit, is
used to generate seismic energy that moves through the earth's subsurface and is
reflected by various underlying rock layers to the surface, where it is detected
by the geophones. For 2D seismic data acquisition, the typical configuration of
geophones and energy sources is a single line with an energy source and small
groups or strings of geophones placed at even intervals every few hundred feet
along the line. A geophone string typically consists of six to twelve geophones
connected by a cable. For 3D seismic data acquisition the typical configuration
is generally a grid of perpendicular lines spaced a few hundred to a few
thousand feet apart, with geophone strings spaced at intervals every few hundred
feet along one set of parallel lines and energy sources spaced at intervals
every few hundred feet along the perpendicular lines. Recording configurations
must be carefully designed to provide optimal imaging of the targeted subsurface
structures, while taking into account surface obstructions such as oil and gas
wells and pipelines, or restricted areas where permits to enter cannot be
obtained.
As many as eight geophone strings are connected to a field recording box,
which collects the seismic data from those geophones. The electrical output of
each geophone string becomes the electrical input for one recording channel, or
"trace," of seismic data. Once the geophones and field recording boxes are
deployed over a portion of the survey area, an energy source is activated, the
reflected seismic energy is detected by the geophones, and the
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signals from the geophones are collected and digitized by the field recording
boxes. These boxes in turn transmit the seismic data by cable, radio telemetry
or through hand-held data collection units to a central recording system. The
geophones and field recording boxes from one end of the single recording line in
the case of 2D seismic data, or an area of multiple recording lines in the case
of 3D seismic data, are then removed and relocated elsewhere in the survey area.
The seismic energy source is again activated and the entire process is repeated,
moving a few hundred feet at a time, until the entire survey area is covered.
Historically, the acquisition of 2D seismic data was the principal seismic
data acquisition technique. However, with the advancement and miniaturization of
seismic data recording equipment and the improvement of computer technology in
the past ten years, high-density surveys, or 3D seismic data, which provide a
much more comprehensive subsurface image, have become the industry standard.
Recent technical advances in seismic data acquisition and computer processing
have also resulted in the acquisition of higher-resolution surveys using
three-component geophones, known as 3C-3D, which permit the recording of shear
wave information, in addition to conventional vertical profile seismic data. In
addition, the industry is increasingly utilizing time-lapse 3D, or 4D, seismic
data acquisition techniques, where surveys are periodically reacquired to
monitor and optimize production of existing reservoirs.
Technical advances in the seismic services industry have increased the
probability of oil and gas exploration success and improved the delineation of
subsurface geological structures, which have in turn lowered overall exploration
and development costs and increased worldwide demand for seismic services. In
addition, the industry is experiencing growing demand for non-exclusive
multi-client seismic data due to the high cost and risk of drilling exploration
wells and the relatively high cost of acquiring and processing 3D seismic data.
Multi-client data allows numerous oil and gas companies to purchase the same
seismic data, thereby expanding the overall market for such data while lowering
the price charged each customer.
LAND AND TRANSITION ZONE SEISMIC DATA ACQUISITION
A land or transition zone seismic data acquisition crew typically consists
of a surveying crew that lays out the lines to be recorded and marks the sites
for energy source or geophone placement and equipment location, an explosives or
mechanical vibrating or compressed air unit crew, 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, generally 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 challenging logistical environments without disrupting the
sensitive ecosystems in which surveys are frequently located. The Company
currently operates approximately 10,000 channels of 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, 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
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subsurface structures. The Company presently has three data processing centers
at which it performs seismic data processing services. These centers are located
in Houston, Dallas and Midland, Texas.
The Company markets its seismic data acquisition and processing services
from its Houston and Calgary corporate offices and its regional and
international administrative centers by personnel whose duties include
technical, supervisory or executive responsibilities. The Company generally
acquires seismic data on an exclusive contract basis for oil and gas companies
on (i) a turnkey basis, which provides a fixed fee for each project, (ii) a term
basis, which provides for a periodic fee during the term of the project or (iii)
a cost-plus basis, which provides that the costs of a project, plus a percentage
fee, are borne by the customer. In addition, in the United States and Canada,
the Company acquires and owns certain multi-client seismic data that is marketed
broadly on a non-exclusive basis to oil and gas companies. Over the past year,
as oil and gas companies have moved toward multi-client surveys to reduce
finding costs, Grant has significantly increased its participation in the
activity and has expanded its library of multi-client data to include projects
located in Texas, California, Wyoming and the Canadian provinces of British
Colombia and Ontario.
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, certain of the Company's international contracts
could be significantly affected by fluctuations in exchange rates, particularly
in Brazil and Colombia. The Company's 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 certain U.S. dollar conversion rate.
MARKET AREAS
In 1998, the Company conducted seismic operations in the United States,
Canada, Latin America and the Far East and has conducted activities in the
Middle East and West Africa within the last three years. The following table
sets forth the Company's revenues by geographic area, on a pro forma basis for
the years ended December 31, 1996 and 1997 and on an actual basis for the year
ended December 31, 1998, for the periods shown:
YEAR ENDED DECEMBER 31,
------------------------------------
1996(1) 1997(1) 1998
---------- ---------- ----------
(dollars in thousands)
United States ....................... $ 53,485 $ 61,630 $ 78,659
Canada .............................. 15,824 19,591 14,175
Latin America ....................... 60,688 69,877 52,604
Far East ............................ 5,412 13,482 30,074
Africa and Middle East .............. 2,746 9,285 --
---------- ---------- ----------
$ 138,155 $ 173,865 $ 175,512
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(1) Solid State's fiscal year end was August 31 prior to December 31, 1998 when
it was changed to a calendar year. For pro forma purposes, revenues for Solid
State have been adjusted to reflect the periods December 1 through November 30
for the year ended 1996 and to reflect the period December 1, 1996 through
August 31, 1997 to combine with GGI's year ended 1996 and the nine months ended
September 30, 1997 and the Company's three months ended December 31, 1997. The
revenues for the three months ended December 31, 1997 include the combined
operations of Solid State and Grant. See Notes 1 and 4 to the Consolidated
Financial Statements of the Company and GGI for additional geographic
information.
BACKLOG
The Company's backlog for seismic data acquisition services represents the
revenues anticipated to be received by the Company in connection with
commitments for contracted services received from its customers. As of December
31, 1998, the Company estimates that its total backlog was approximately $38.2
million, all of which is expected to be completed in 1999. This compares to the
Company's estimated total backlog as of December 31, 1997 of approximately
$144.4 million. The decrease reflects the overall decline in demand, as
described above, for seismic data acquisition and processing services on a
worldwide basis. Most of the Company's contracts are terminable by the customer
upon relatively short notice and, in some cases, without penalty. The Company's
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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.
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. The Company spent approximately $36.3 million on capital expenditures
for the fifteen-month period ending December 31, 1998. This included
approximately $12.4 million in the fourth quarter of 1997 and approximately
$23.9 million during 1998. These expenditures were used principally to upgrade
and expand the Company's seismic data acquisition equipment. Due to the current
downturn in the seismic industry, the Company has budgeted between $3.0 million
and $5.5 million in capital expenditures, depending on the level of crew
activity, for the purposes of capital maintenance for 1999. 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 does not contemplate the development
of proprietary seismic data acquisition equipment, but instead relies on the use
of third-party equipment suppliers to provide such equipment, although certain
equipment will 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 acquires and processes seismic data for its own account by
conducting surveys, either partially or wholly funded by multiple customers. In
this mode of operation, the Company retains ownership of the data and licenses
the data on a non-exclusive basis. The Company plans to continue its recent and
increasing emphasis on the acquisition of multi-client seismic data by
conducting additional surveys that are partially or wholly funded by multiple
customers. For 1998, total revenue recognized (customer commitments and late
sales) for multi-client data acquisition and processing was $19.1 million. In
1998, the Company committed approximately $26.2 million of expenditures for
seven multi-client data acquisition projects totaling 624 square miles
principally located in Texas with one project located in Canada. Customer
commitments for completed or in-process surveys are averaging approximately 77%
of the project costs. Net investment by the Company for these projects was $5.1
million and the carrying value of the seismic data asset on the balance sheet at
December 31, 1998 was $10.0 million. The Company recognizes these customer
commitments as revenue as the project is acquired. In addition, late sale
revenues are recognized in the period the sale occurs.
In addition to the data described above, the Company owns a small library
of multi-client seismic data that was acquired in the purchases of GGI and Solid
State. GGI and Solid State acquired this data prior to 1998 in three principal
areas: southern Louisiana, New Mexico and western Canada. At December 31, 1998,
the carrying value of this multi-client data was approximately $900,000.
The total carrying value of all of the Company's multi-client data at
December 31, 1998 was approximately $10.9 million.
The Company has budgeted approximately $39.1 million of expenditures,
before customer commitments, for nine multi-client data acquisition projects in
1999. The Company has obtained sufficient initial underwriting to proceed with
five of the projects and is actively pursuing customer commitments for the
remaining projects.
Factors considered by the Company when determining whether to undertake a
multi-client survey include the availability of customer commitments to offset a
percentage of the project cost, the number of potential customers
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for the completed data, the location to be surveyed, the probability and timing
of future lease, concession, exploration and development activity in the area,
and the availability, quality and price of competing data. Although the Company
anticipates obtaining commitments for a substantial majority of the cost of any
future multi-client data survey and conducts thorough market and cost analyses
to determine the market demand and necessary funding prior to undertaking a
project, the Company still may not be able to fully recoup its costs if it
substantially underestimates the cost or overestimates market demand for such
multi-client data survey.
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 1998, the five
largest customers of the Company accounted for approximately 28.8% of the
Company's net sales, and no single customer accounted for 10% or more of the
Company's revenues. In the first nine months of 1997, GGI had revenues from a
foreign national oil company of approximately $14.0 million (15%) and also from
a U.S. based exploration company of approximately $9.9 million (11%). During
1997, on a pro forma basis, the five largest customers of the Company accounted
for approximately 31.9% of the Company's net sales. During 1997, on a pro forma
basis, no customer accounted for 10% or more of the Company's combined revenues.
During 1996, GGI's five largest customers accounted for approximately 42.3% of
net sales. GGI, during 1996, had revenues from a U.S. based international oil
company of approximately $14.8 million (14%). The Company has had long-term
relationships with numerous customers. The continuation of these relationships
is primarily dependent on the customers' needs for the Company's services and
the customers' ongoing satisfaction with the price, quality, dependability and
availability of the Company's services.
COMPETITION
The acquisition and processing of proprietary and multi-client seismic data
for the oil and gas industry is highly competitive worldwide. However, as a
result of changing technology and increased capital requirements, the seismic
industry has consolidated substantially since the late 1980s, thereby reducing
the number of competitors. The Company's principal competitors in North America
are Western Atlas, Inc. ("Western Atlas"), a subsidiary of Baker Hughes, Inc.,
Veritas DGC, Inc., Geco-Prakla Inc. ("Geco-Prakla"), a subsidiary of
Schlumberger Limited, and several regional competitors. In Latin America and the
Far East, the Company competes with Western Atlas, Compagnie General de
Geophysique, Geco-Prakla, and several other local competitors. Competition is
based primarily on price, crew availability, prior performance, technology,
safety, quality, dependability and the contractor's expertise in the particular
area where the survey is to be conducted.
EMPLOYEES
As of March 26, 1999 the Company employed approximately 670 full-time and
387 temporary contract personnel 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.
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The Company's operations outside of the United States are subject to
similar environmental regulation in a number of foreign locations, including
Canada, Latin America, and the Far East. 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 cost 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 STATEMENT
Certain statements made in this Annual Report on Form 10-K that are not
historical facts are "forward-looking statements" as defined in Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Such forward-looking statements may include, without limitation,
statements that relate to:
o statements regarding the Company's business strategy, plans and
objectives;
o 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
o statements concerning the Company's business strategy and
expectations, industry conditions, market position, future operations,
margins, profitability, liquidity and capital resources.
Also, 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 it believes to be appropriate. The Company
cautions that such statements are only predictions 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:
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. As a result of the recent decline in oil and gas prices, the level of
overall oil and gas industry activity has declined from levels experienced in
recent years. If the Company's customers' capital spending continues to decrease
in line with overall recent industry trends, it will likely have a significant
adverse effect upon the demand for the Company's services and the results of its
operations and cash flows.
The Company's business could be adversely affected by intense price competition
in a slack market.
Competition among seismic contractors historically is and will continue to
be 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 financed operators could
enjoy an advantage over the Company if the competitive environment for contract
awards shifts to one characterized principally by intense price competition.
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Multi-client data library could become impaired due to weak demand or
technological obsolescence.
The Company has invested significant amounts in acquiring and processing
multi-client data, and expects to continue doing so for the foreseeable future.
Although management of the Company expects to recover all the costs of such
surveys, there is no assurance that the Company will be able to do so in the
future. Technological, regulatory or other industry or general economic
developments could render all or portions of the Company's library of
multi-client data obsolete or otherwise impair its value.
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 can result in significant operating losses.
Technology Risks.
Seismic data acquisition and processing is a capital intensive 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 unplanned capital expenditures to maintain its
competitive position. Under such circumstances, there can be no assurance that
the Company would be able to obtain necessary financing on favorable terms.
Risks of Rapid Growth.
The Company has grown rapidly over the last two years through internal
growth and acquisitions of other companies. Managing the rapid growth
experienced by the Company will be important for the Company's future success
and will demand increased responsibility for management personnel. The following
factors could present difficulties to the Company:
o the lack of sufficient executive-level personnel;
o increased administrative burdens; and
o the increased logistical problems of large, expansive operations.
If the Company does do not manage these potential difficulties
successfully, they could have a material adverse effect on the Company's
financial condition and results of operations. The historical financial
information included in this Annual Report on Form 10-K is not necessarily
indicative of the results that would have been achieved had the Company been
operated on a fully integrated basis or the results that may be realized in the
future.
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 sales to 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 area of the oilfield 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:
o changes in competitive prices;
o fluctuations in the level of activity and major markets;
o general economic conditions; and
o governmental regulation.
8
11
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 are subject to risks inherent in
doing business in foreign counties. These risks include, but are not limited to:
o political changes;
o expropriation;
o currency restrictions and changes in currency exchange rates;
o taxes; and
o boycotts and other civil disturbances.
Although it is impossible to predict the likelihood of such occurrences or
their effect on the operations of the Company, the management of the Company
believes that these risks are acceptable. However, the occurrence of any one of
these events could have a material adverse effect on the Company's operations.
Dependence on Key Personnel.
The Company depends on the continued services of its executive officers and
other key management personnel. If the Company would lose any of these officers
or other management 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 and leases a 60,000 square foot
building, also in Houston, Texas, that serves as a warehouse and staging
facility. The Company also owns an office, staging and repair facility located
on a two-acre tract in New Iberia, Louisiana. In Calgary, Alberta, Canada, the
Company owns an 18,000 square foot building and storage yard that serves 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 support the Company's operations.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in or threatened with other various legal
proceedings from time to time arising in the ordinary course of business.
Management of the Company does not believe that any liabilities resulting from
any such current proceedings will have a material adverse effect on its
financial position, cash flows, or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
9
12
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of March 31, 1999, there were 14,426,055 shares of the Company's common
stock, $.001 par value per share (the "Common Stock"), outstanding. 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 on any other market. The
Company has retained its earnings for future growth and, therefore, does not
anticipate paying cash dividends with respect to the common stock in the future.
In addition, the payment of dividends is restricted 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.
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13
ITEM 6. SELECTED FINANCIAL DATA.
The statement of operations data of GGI presented below as of the end of
each of the years in the three-year period ended December 31, 1996 and the
nine-month period ended September 30, 1997 and the balance sheet data of GGI at
December 31, 1994, 1995 and 1996 are derived from the consolidated financial
statements of GGI. The statement of operations data for the three-month period
ended December 31, 1997 and the year ended December 31, 1998 and the balance
sheet data of the Company at December 31, 1997 and December 31, 1998 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."
GGI GRANT
---------------------------------------------------------- --------------------------
NINE MONTHS THREE MONTHS YEAR
YEAR ENDED DECEMBER 31, ENDED ENDED ENDED
------------------------------------------ SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1994 1995 1996 1997 1997 1998
----------- ----------- ----------- ---------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS |
DATA: |
Revenues ............................... $ 73,691 $ 91,996 $ 105,523 $ 92,705 | $ 37,868 $ 175,512
Operating income (loss) ................ (9,241) 4,999 (65,970) 6,794 | (5,033) 6,346
Income (loss) from continuing |
operations .......................... (11,438) 3,162 (76,027) (425) | (5,666) (7,698)
Net loss applicable to |
common stock ........................ | $ (6,143) $ (8,138)
=========== =========== =========== =========== | =========== ===========
LOSS PER COMMON |
SHARE--ASSUMING BASIC |
AND DILUTED: |
Continuing operations ............... | $ (1.18) $ (.54)
Dividend requirement on pay-in- |
kind preferred stock ............. | (.10) (.03)
| ----------- -----------
Net loss per common share ........... | $ (1.28) $ (.57)
| =========== ===========
WEIGHTED AVERAGE COMMON |
SHARES OUTSTANDING: |
Basic and diluted ................... | 4,798 14,257
CASH FLOW DATA: |
Cash provided by (used in) operating |
activities .......................... $ 3,170 $ 2,759 $ (9,346) $ 4,526 | $ 5,386 $ 15,815
Cash used in investing |
activities .......................... (9,698) (9,272) (10,181) (6,731) | (19,715) (31,305)
Cash provided by financing activities .. 5,260 6,929 25,667 1,289 | 15,072 16,821
Capital expenditures ................... 8,463 14,921 25,799 4,154 | 12,400 23,866
BALANCE SHEET DATA: |
Working capital ........................ $ 3,022 $ 8,033 $ 22,421 | $ 16,190 $ 14,373
Total assets ........................... 61,609 86,932 70,123 | 155,704 166,441
Pre-petition liabilities subject to |
chapter 11 case ..................... -- -- 90,244 | -- --
Notes payable, current portion of |
long-term debt and capital lease |
obligations ......................... 14,495 18,430 589 | 1,158 2,522
Long-term debt, subordinated debt |
and capital lease obligations |
excluding current portion .......... 4,917 8,789 -- | 75,195 110,817
Total stockholders' equity ............. 26,399 29,715 (34,213) | 41,992 22,002
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Grant was formed in September 1997, and on September 30, 1997, acquired
substantially all of the assets and assumed certain liabilities of GGI. On
December 23, 1997, Grant acquired all of the outstanding shares of Solid State
(the "Acquisition").
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
generally acquires seismic data on an exclusive contract basis for oil and gas
companies on (i) a turnkey basis, which provides a fixed fee for each project,
(ii) a term basis, which provides for a periodic fee during the term of the
project or (iii) a cost-plus basis, which provides that the costs of a project,
plus a percentage fee, are borne by the customer. In addition, in the United
States and Canada, the Company acquires and owns certain multi-client seismic
data that is marketed broadly on a non-exclusive basis to oil and gas companies.
Over the past year, as oil and gas companies have moved toward multi-client
surveys to reduce finding costs, Grant has significantly increased its
participation in such activity and has expanded its library of multi-client data
to include projects located in Texas, California, Wyoming and the Canadian
provinces of British Colombia and Ontario.
The Company purchased, effective July 1, 1998, all of the outstanding
partnership interests in Interactive Seismic Imaging ("ISI"), a seismic data
processing company, for $3.6 million in cash. Grant had been a 10% owner of ISI
since its formation in 1994. ISI provides seismic data processing services
through offices located in Midland, Dallas and Houston, Texas. Grant believes
that the purchase of ISI will complement its existing services and thereby
improve its competitive position with existing and potential customers.
In December 1996, GGI filed for protection under the United States
Bankruptcy Code and began its reorganization under the supervision of the
Bankruptcy Court. In connection with its reorganization, GGI replaced its senior
management, disposed of unprofitable operations, operated as debtor in
possession and developed the Plan, which was confirmed by the Bankruptcy Court
on September 15, 1997 and consummated on September 30, 1997 (the "Effective
Date"), with Grant's purchase of substantially all of the assets and assumption
of certain liabilities of GGI.
The price of oil and gas has deteriorated significantly over the past year.
Capital spending by oil and gas companies on oilfield related activities,
including seismic data acquisition and processing, has substantially decreased.
As a result, beginning late in the third quarter of 1998, the Company's global
seismic crew count, which includes both U.S. and foreign contracts, decreased
significantly. As of March 26, 1999 the Company was operating or mobilizing ten
seismic data acquisition crews utilizing approximately 21,300 seismic recording
channels. The Company's current seismic recording channel capacity is slightly
more than 32,000. By contrast, as of March 26, 1998, the Company was operating
or mobilizing 22 seismic data acquisition crews, consisting of 18 land and four
transition zone crews, utilizing approximately 30,000 seismic recording
channels.
The current industry downturn has prompted the Company to undertake
activities it believes will both preserve financial strength and position itself
to respond when market demand increases. Those activities include a worldwide
reduction in personnel, a corporate restructuring and a restricted capital
expenditure program. Personnel reductions began in the fourth quarter of 1998
and have continued throughout the first quarter of 1999. Overall personnel have
been reduced from 863 full time and 2,162 temporary at September 30, 1998 to 670
full time and 387 temporary personnel at March 26, 1999. The corporate
restructuring is the result of changing market conditions and is designed to
better utilize all the Company's assets. The restructuring places a greater
emphasis on acquiring multi-client data in the United States and Canada and
refocuses the international marketing efforts on the Company's established
foreign markets. Capital expenditures in 1999 are expected to be limited
primarily to those required to maintain the existing seismic acquisition and
processing equipment.
The historical results of operations of the Company for the twelve months
ended December 31, 1998 are presented below and are not directly comparable to
the results of operations of GGI or the combined results of GGI and the Company
for the twelve months ended December 31, 1997 due to the effects of the
Acquisition.
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15
RESULTS OF OPERATIONS
THE THE
GGI COMPANY COMBINED COMPANY
---------------------------- | ------------ ------------ ------------
YEAR NINE MONTHS | THREE MONTHS TWELVE MONTHS YEAR
ENDED ENDED | ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, | DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 | 1997 1997 1998
------------ ------------ | ------------ ------------ ------------
|(IN THOUSANDS)
|
STATEMENT OF OPERATIONS |
DATA: |
|
Revenues ............................... $ 105,523 $ 92,705 | $ 37,868 $ 130,573 $ 175,512
|
Expenses: |
Direct operating expenses ............ 136,326 71,006 | 28,431 99,437 128,962
Selling, general and |
administrative expenses ......... 17,865 6,473 | 3,507 9,980 14,156
Depreciation and amortization ........ 11,500 8,432 | 4,594 13,026 22,286
Charge for asset impairment .......... 5,802 -- | 6,369 6,369 3,762
------------ ------------ | ------------ ------------ ------------
Total costs and expenses .......... 171,493 85,911 | 42,901 128,812 169,166
------------ ------------ | ------------ ------------ ------------
Operating income (loss) ........... (65,970) 6,794 | (5,033) 1,761 6,346
|
Other income (expense): |
|
Interest expense, net ................ (7,522) (3,758) | (1,362) (5,120) (9,300)
Reorganization costs ................. (412) (3,543) | -- (3,543) --
Other ................................ (502) 2,266 | (1,262) 1,004 (820)
------------ ------------ | ------------ ------------ ------------
Total other expenses .............. (8,436) (5,035) | (2,624) (7,659) (10,120)
------------ ------------ | ------------ ------------ ------------
Income (loss) before income |
taxes .............................. (74,406) 1,759 | (7,657) (5,898) (3,774)
Income tax expense ..................... (1,621) (2,184) | (856) (3,040) (3,924)
------------ ------------ | ------------ ------------ ------------
|
Loss from continuing |
operations before minority |
interest ............................ (76,027) (425) | (8,513) (8,938) (7,698)
Minority interest ...................... -- -- | 2,847 2,847 --
------------ ------------ | ------------ ------------ ------------
|
Net loss ............................... $ (76,027) $ (425) | $ (5,666) $ (6,091) $ (7,698)
============ ============ | ============ ============ ============
The Company for the Twelve-Month Period Ended December 31, 1998 Compared With
The Company and GGI Combined Twelve-Month Period Ended December 31, 1997
The following analysis compares the operating results of the Company for
the twelve-month period ended December 31, 1998 with combined operating results
of the Company for the three-month period ended December 31, 1997 (including the
operating results of Solid State for such period) and the operating results of
GGI for the nine-month period ended September 30, 1997. As described above,
Grant began operations immediately following its acquisition of substantially
all of the assets and certain liabilities of GGI on September 30, 1997 and Grant
acquired Solid State in December 1997. Because of the significant changes in
Grant's control and management and scope of operations following the
consummation of the Plan, comparisons may not be meaningful.
Revenues. Revenues of the Company for the twelve months ended December 31,
1998 were $175.5 million compared with $130.6 million of combined revenue for
GGI and the Company for the twelve months ended December 31, 1997. The increase
of $44.9 million, or 34.4%, was the result of growth in revenues in both the
United States and the Far East and the inclusion of a full year of Solid State's
results of operations in 1998 compared to only three months in 1997.
13
16
Revenues from the United States operations increased $24.9 million, or
46.4%, from $53.7 million to $78.7 million in 1998. Revenues from the United
States data acquisition operations increased $24.0 million, or 44.7%, from $53.7
million in 1997 to $77.8 million in 1998. This increase was due primarily to the
addition of two Solid State crews in the northern United States for the entire
year versus only one crew for three months in 1997 and the addition of new and
more efficient recording instrumentation. Productivity was enhanced by
increasing the seismic recording channel count per crew and, whenever possible,
utilizing a twenty-four hour recording schedule. During 1998 there were as many
as eight seismic crews operational in the United States versus only six to seven
crews operational in 1997. Beginning late in the third quarter of 1998, due
primarily to the low oil and gas prices, demand for data acquisition recording
services in the United States and elsewhere began to decline. By the end of
December 1998 there were six crews operating or mobilizing in the U.S. and the
Company anticipates only three to four active crews in the region during most of
the first quarter of 1999.
Revenues from data processing were $957,000 for 1998. The Company purchased
the data processing operations in July 1998; therefore, there are no comparable
results for 1997. The Company operated processing centers in Midland and Dallas,
Texas for the entire six months and began operations in a newly established
Houston, Texas center during the fourth quarter of 1998.
Revenues from the Canadian data acquisition operations increased $9.7
million, or 217.3%, from $4.5 million in 1997 to $14.2 million in 1998. The
Company acquired these operations from Solid State effective September 30, 1997.
The increase in 1998 is the result, therefore, of including a full year of
operations in the results of 1998 versus only three months in 1997. From time to
time during 1998, the Company operated as many as six land seismic crews
throughout Canada.
The Company began its multi-client data acquisition activities in the
United States and Canada during 1998. Crew operations began in the second
quarter with significant activity occurring in both the third and fourth
quarters. The Company has completed or is conducting eleven data library
projects totaling approximately 1,237 square miles in Texas, California, Wyoming
and Canada. At December 31, 1998, 624 square miles had been completed and an
additional 246 square miles are scheduled to be completed by March 31, 1999. The
remaining 367 square miles are to be completed later in 1999. Average
underwriting on the programs completed and in progress at March 26, 1999 is
approximately 77%. The Company continues to expand its strategy of building a
strong multi-client data library and has identified and is currently evaluating
projects totaling an additional 900 square miles for possible acquisition in
1999 and beyond. The Company and GGI had no multi-client data activity in 1997.
Revenues associated with the underwriters' portion of multi-client data programs
are recognized as part of the data acquisition revenues discussed above in the
southern United States, northern United States and Canada.
Revenues in Latin America decreased $5.9 million, or 10.2%, from $58.6
million in 1997 to $52.6 million in 1998. During 1998, the Company operated as
many as eight land seismic crews in Brazil, Guatemala, Colombia, Ecuador and
Bolivia. During 1997, combined Latin American operations for GGI and the
Company, while operating in the same countries, consisted of as many as ten land
seismic data acquisition crews. The Brazilian operations were completed in March
1998 and the equipment was moved to work in Guatemala. The Colombian operations
were completed in the third quarter of 1998 and both the Guatemalan and Bolivian
contracts were finished in the fourth quarter of 1998. Ecuadorian operations
were completed in February 1999. The Company currently has one land crew
mobilizing to a project in Guatemala and one transition zone crew mobilizing in
Brazil. There are currently no active crews operating in Latin America.
Revenues from the Far East increased $16.6 million, or 123.1%, from $13.5
million in 1997 to $30.1 million in 1998. During 1998, the Company operated as
many as five crews in the region: one land and two transition zone crews in
Bangladesh and one land and one transition zone crew in Indonesia. During 1997,
in Bangladesh, GGI and the Company operated one crew for the entire year and
mobilized one additional transition zone crew that began operations in July
1997. By December 1998 there were three active crews in the region. As of March
26, 1999 the Company's Far East operations consisted of one land crew operating
in Bangladesh.
Expenses. Direct operating expenses for the twelve months ended December
31, 1998 increased $29.5 million, or 29.7%, to $129.0 million compared with
$99.4 million for the twelve months ended December 31, 1997. Direct operating
expenses as a percentage of revenues decreased to 73.5% in 1998 from 76.2% in
1997. The overall dollar
14
17
increase was the result of increased crew activity in the southern United States
and the Far East and the inclusion of a full year of Solid State's results in
1998 versus only three months in 1997. The percentage decrease is the result of
improvements in operating efficiencies primarily in the United States. These
improvements were the results of upgrading and expanding the Company's seismic
data recording equipment, careful and detailed project cost analysis and
management's ability to properly assess operating risk.
Selling, general and administrative expenses for the twelve months ended
December 31, 1998 increased $4.2 million to $14.2 million from $10.0 million in
1997. Selling, general and administrative expenses as a percentage of revenue
increased only marginally to 8.1% in 1998 from 7.6% in 1997. The overall dollar
increase was primarily due to an approximate $1.5 million increase as a result
of the inclusion of Solid State for a full year in 1998 versus only three months
in 1997, $1.1 million of additional costs incurred to develop international and
domestic markets and $537,000 for corporate provisions for doubtful accounts and
incentive bonuses and the remainder related to a general increase in corporate
support services.
Depreciation and amortization increased $9.3 million to $22.3 million in
1998 from $13.0 million for 1997. The increase was due to an increase of
approximately $3.8 million due to the inclusion of Solid State for a full year
in 1998 versus only three months in 1997, $1.5 million for the amortization of
goodwill and $3.8 million of depreciation on newly purchased assets.
The charge for asset impairment was $3.8 million for 1998 compared to $6.4
million in 1997. At December 31, 1998 the Company recorded a special charge of
$3.2 million to reduce the carrying value of its multi-client data, acquired
through the purchase of Solid State during the fourth quarter of 1997, to its
net realizable value based on current estimates of future licensing prospects
for such data. The charge for asset impairment recorded in 1997 included a
special charge of $5.9 million to write down the acquired Solid State
multi-client data to its then estimated net realizable value. Also included in
1998 was a charge of $564,000 relating to the write-down in the carrying value
of certain non-operating depreciable fixed assets to salvage value. The
remaining 1997 charge relates to a $247,000 write-down in the carrying value of
certain non-operating depreciable fixed assets to salvage value and a $253,000
write-down in the carrying value of certain other investments and joint
ventures.
Other Income (Expenses). Interest expense, net, increased $4.2 million to
$9.3 million in 1998 from $5.1 million in 1997. This increase was the result of
interest on debt both incurred and assumed by the Company as a result of the
Solid State acquisition and from the sale on February 18, 1998 of $100 million
of 9 3/4% senior notes due 2008 (the "Senior Notes"). Proceeds from the sale
were used to retire substantially all of the Company's outstanding indebtedness,
to fund capital expenditures and to provide working capital for general
corporate purposes.
Reorganization costs of $3.5 million in 1997 related to charges incurred in
connection with GGI's reorganization, which began in December 1996 and was
completed in September 1997. No comparable reorganization charges were incurred
by the Company in the three months ended December 1997 or for the twelve months
ended December 31, 1998. No comparable reorganization costs are expected to be
incurred in the future.
Other income of $1.0 million for 1997 was the result of settlement of a
longstanding dispute between one of GGI's Brazilian subsidiaries and a former
customer relating to services rendered on contracts dating back to 1983. In
settlement of all claims, GGI received payment, net of related costs and
expenses, of approximately $2.4 million in July 1997. Income from that
settlement was offset by approximately $767,000 in costs associated with the
Acquisition and approximately $289,000 of foreign currency exchange losses,
primarily related to US dollar based loans owed by Solid State prior to the
Acquisition. In 1998, 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 (see Note 13 to the Consolidated Financial Statements).
Tax Provision. The income tax provision in both periods consisted of income
taxes in foreign countries. The increase in 1998 compared with 1997 is a result
of higher taxable income in Indonesia and Guatemala. No provision for United
States federal income tax was made in 1997 as GGI and the Company each had
taxable losses for which no benefit was recorded under FAS 109. In 1998, the
Company provided for approximately $100,000 of alternative minimum tax in the
United States.
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18
The Company and GGI Combined Twelve-Month Period Ended December 31, 1997
Compared With GGI's Year Ended December 31, 1996
The following analysis compares the combined operating results of the
Company for the three-month period ended December 31, 1997 (including the
operating results of Solid State for such period) and the operating results of
GGI for the nine-month period ended September 30, 1997 with the operating
results of GGI for the twelve months ended December 31, 1996. As described
above, Grant began operations immediately following its acquisition of
substantially all of the assets and certain liabilities of GGI, and Grant
acquired Solid State in December 1997. Because of the significant changes in
Grant's corporate structure and scope of operations and the consummation of the
Plan, comparisons may not be meaningful.
Revenues. Combined revenue of GGI and the Company for the twelve months
ended December 31, 1997 were $130.6 million compared with $105.5 million of
revenue realized by GGI for the twelve months ended December 31, 1996. The
increase of $25.1 million, or 23.7%, was the result of growth in revenues in
both the United States and Bangladesh and the inclusion of Solid State's results
of operations for the quarter ended December 31, 1997.
Revenues from the United States data acquisition operations increased $11.6
million, or 27.6%, from $42.1 million in 1996 to $53.7 million in 1997. This
increase was primarily attributed to two transition zone crews operating along
the Gulf Coast and the addition of two Solid State crews for the quarter ended
December 31, 1997. From time to time during each period, GGI and the Company
operated as many as seven seismic data acquisition crews in the United States
compared with a peak of 8 crews in 1996.
Revenues in Latin America increased $1.4 million, or 2.5%, from $57.1
million in 1996 to $58.6 million in 1997. During 1997, combined Latin American
operations for GGI and the Company consisted of as many as ten land seismic data
acquisition crews operating in Colombia, Ecuador, Brazil, Guatemala, Bolivia,
and Venezuela. The Company completed operations in Venezuela in early October
1997 and transferred personnel and equipment to Canada. From time to time during
1996, GGI operated as many as nine seismic crews in the region, including four
in Peru, two in Colombia and one in each of Bolivia, Brazil and Ecuador.
Revenues from the Far East increased $8.1 million, or 149%, from $5.4
million in 1996 to $13.5 million in 1997. During 1997, GGI and the Company
operated one crew for the entire year and mobilized one additional transition
zone crew that began operations in Bangladesh in July 1997. GGI mobilized and
operated one land seismic data acquisition crew in Bangladesh during 1996.
Revenues from Canadian data acquisition operations were $4.5 million in
1997 compared to zero in 1996. The Company (through Solid State) operated as
many as five land seismic crews in Canada during 1997 while GGI had no
operations in Canada during 1996.
Expenses. The combined direct operating expenses for GGI and the Company
for the twelve months ended December 31, 1997 decreased $36.9 million to $99.4
million compared with $136.3 million for GGI's twelve months ended December 31,
1996. Direct operating expenses as a percentage of revenues decreased to 76.2%
in 1997 from 129.2% in 1996. During 1996 GGI experienced significant cost
overruns, which increased direct operating expenses on several crews operating
in the United States. Most notable were higher than anticipated costs incurred
by a transition zone crew as a result of adverse weather conditions and costs
associated with the unsuccessful deployment of a proprietary data recording
system. The proprietary data recording system was abandoned in November 1996.
Also in 1996, GGI's Peruvian operations experienced crew costs significantly
higher than originally projected primarily due to a combination of modified job
parameters that were not accurately reflected in the turnkey contract price and
a lack of effective crew oversight.
Selling, general and administrative expenses for GGI and the Company for
the twelve months ended December 31, 1997 decreased $7.9 million to $10.0 in
1997 from $17.9 million in 1996. Selling, general and administrative expenses
also decreased as a percentage of revenue to 7.6% in 1997 from 17.0% in 1996.
The decrease was primarily the result of general expense reduction initiatives
in 1997 and the accrual of certain nonrecurring charges and allowances in 1996,
including an approximate $5.5 million increase in reserves for doubtful
accounts.
Depreciation and amortization increased $1.5 million to $13.0 in 1997 from
$11.5 million for 1996. This increase was the result of depreciation on the
Solid State assets for the quarter ended December 31, 1997.
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The charge for asset impairment was $6.4 million for 1997 compared to $5.8
million in 1996. At December 31, 1997 the Company recorded a special charge of
$5.9 million to reduce the carrying value of its multi-client data to net
realizable value based on future licensing prospects for such data. The
remaining 1997 charge relates to a $247,000 write-down in the carrying value of
certain non-operating depreciable fixed assets to salvage value and a $253,000
write-down in the carrying value of certain other investments and joint
ventures. At December 31, 1996, GGI recorded a special charge for asset
impairment of $5.8 million. The charge relates solely to the write-down of the
carrying value of a proprietary data recording system that GGI was developing
for use by its seismic data acquisition crews, but which was abandoned in
November of 1996.
Other Income (Expenses). Interest expense, net, decreased $2.4 million to
$5.1 million in 1997 from $7.5 million in 1996. This was the result of a $3.3
million decrease due to a reduction in the use of credit facilities in Latin
America during all of 1997 and in the United States during the quarter ended
December 31, 1997. This decrease was partially offset by $981,000 of interest
expense incurred by Solid State during the quarter ended December 31, 1997.
Reorganization costs of $412,000 in 1996 and $3.5 million for 1997 related
to charges incurred in connection with GGI's reorganization, which began in
December 1996 and was completed in September 1997. The Company incurred no
reorganization charges in the three months ended December 1997.
Other income for 1997 of $1.0 million was the result of the aforementioned
settlement of a longstanding dispute between one of GGI's Brazilian subsidiaries
and a former customer relating to services rendered on contracts dating back to
1983. In settlement of all claims, GGI received payment, net of related costs
and expenses, of approximately $2.4 million in July 1997. Income from that
settlement was offset by approximately $767,000 costs associated with the
Acquisition and approximately $289,000 of foreign currency exchange losses,
primarily related to US dollar based loans owed by Solid State prior to the
Acquisition.
Tax Provision. The income tax provision in both periods consisted of income
taxes in foreign countries. The increase in 1997 compared with 1996 is a result
of higher taxable income in Colombia and Ecuador. No provision for United States
federal income tax was made in either period as GGI and the Company each had
taxable losses for which no benefit was recorded under FAS 109.
SEASONALITY
The Company's land and transition zone seismic data acquisition activities
are traditionally seasonal in nature, with decreased revenues experienced during
the first quarter of each year due to the effects of weather conditions in the
United States and delays by customers in committing their annual geophysical
expenditure budgets to specific projects.
LIQUIDITY AND CAPITAL RESOURCES
The Company's internal sources of liquidity are its cash balances ($1.2
million at March 26, 1999) and cash flow from operations. External sources
include the unutilized portion of the Company's credit facility entered into
with Elliott (the "Credit Facility") ($2 million at March 26, 1999), equipment
financing and trade credit. The Credit Facility contained a $15 million
revolving credit facility, which currently provides for borrowings at an
interest rate per annum of the prime rate plus 2%, secured by liens on
substantially all of the assets of the Company and certain of its subsidiaries.
In April, 1999, the Credit Facility was extended to $20.0 million. In addition
to its borrowing under the Credit Facility, the Company periodically enters into
equipment financing agreements with sellers of seismic data acquisition
equipment to pay all or a portion of the purchase price of such equipment and
regularly utilizes normal trade credit in connection with certain of its
purchases of goods and services to support its ongoing field crew activities. At
December 31, 1998, the Company had violated a covenant in the Credit Facility
which limited the capital expenditures for any one year to a maximum of $14
million. The Company obtained a consent and waiver to the default from Elliott
effective December 31, 1998.
The Company has outstanding $100 million aggregate principal amount of
Senior Notes. The Senior Notes are governed by an indenture, dated February 18,
1998, between the Company, its subsidiary guarantors and LaSalle National Bank,
as trustee (the "Indenture"). The Notes bear interest at 9 3/4% per annum,
payable semiannually, and were sold at a discount to yield 9 7/8% per annum. The
net proceeds from the sale of the Notes were used to
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retire substantially all of Grant's then outstanding indebtedness, purchase
certain leased equipment and provide for working capital.
At March 26, 1999, the Company's total indebtedness was approximately
$117.6 million. The Company's total indebtedness is comprised of $99.3 million
aggregate principal amount of the Senior Notes, $13.0 million outstanding on the
Credit Facility and $5.3 million of combined loans and capitalized leases
incurred for the purpose of financing capital expenditures.
The Company's principal uses of liquidity will be to provide working
capital, finance capital expenditures, make principal and interest payments
required by the terms of its indebtedness and fund expenses associated with the
implementation of its business strategy, including the acquisition and
processing of multi-client data. Because of the traditionally longer period
required to collect receivables and the high costs associated with equipping and
operating crews outside of the United States and Canada, the Company requires
significant levels of working capital to fund its international operations.
These operations accounted for 47.1% of total revenues for the twelve months
ended December 31, 1998.
Combined capital expenditures for the twelve months ended December 31, 1998
were $23.9 million. Capital expenditures are used primarily by the Company to
upgrade and expand its seismic data acquisition equipment. The projected capital
budget for 1999 is estimated to be between $3 million and $5.5 million and is
dependent on future crew activity. In 1999, such expenditures are required
primarily to maintain the Company's seismic data acquisition and recording
equipment. For 1998, the Company committed approximately $26.2 million of
expenditures for seven multi-client data acquisition projects principally
located in Texas with one project located in Canada. Customer commitments for
completed or in-process surveys are averaging approximately 77% of the project
costs. Net investment by the Company for these projects was $5.1 million. In
1999, the Company projects committing approximately $39.1 million, before
customer commitments, for nine multi-client data acquisition projects located in
Texas, California, Wyoming and Canada. Final commitment by the Company to these
projects is dependent on securing adequate initial customer underwriting.
The Company will require substantial cash flow to continue operations on a
satisfactory basis, complete its capital expenditure program, fully implement
its business strategy and meet its principal and interest obligations with
respect to the Notes and its other indebtedness. The Company anticipates that
available cash, cash flow generated from operations, borrowings under the Credit
Facility and borrowings to be negotiated in the near future will provide
sufficient liquidity to fund these requirements for the foreseeable future.
However, 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 and other factors beyond the Company's control. If the Company is
unable to generate sufficient cash flow from operations or otherwise comply with
the terms of the Indenture, the Credit Facility or its other debt instruments,
it may be required to refinance all or a portion of its existing debt or obtain
additional financing. There can be no assurance that such refinancing or
additional financing will be available on terms acceptable to the Company.
FOREIGN EXCHANGE GAINS AND LOSSES
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, certain of the Company's international contracts
could be significantly affected by fluctuations in exchange rates, particularly
in Brazil and Colombia. The Company's 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 certain U.S. dollar conversion rate. Grant is presently using a
forward contract to hedge the value of the U.S. dollar on a 30 to 60 day basis.
The notional amount hedged is approximately $427,000 at December 31, 1998.
GGI's operating results were negatively impacted by foreign exchange losses
of approximately $251,000 for the twelve months ended December 31, 1996, and
$98,000 during the nine months ended September 30, 1997. The Company's operating
results were negatively impacted by foreign exchange losses of approximately
$289,000 and $485,000 during the three months ended December 31, 1997 and the
year ended December 31, 1998, respectively.
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EFFECTS OF INFLATION
Current economic conditions indicate that the costs of exploration and
production for oil and gas are decreasing. The oil and gas industry historically
has experienced periods of cost decreases within short periods of time as demand
for drilling rigs, drilling pipe and other materials and supplies decreases. The
oil and gas industry is currently experiencing such decreases in demand, which
have historically led to decreases in costs. The Company does not anticipate any
immediate benefit from the decreases in exploration and production costs due to
the adverse effect resulting from the overall decrease in demand.
YEAR 2000 COMPLIANCE
The Company has developed a formal plan to address Year 2000 ("Y2K") issues
as they relate to the Company's business and its operations. In accordance with
that plan, the Company is taking inventory of, assessing, testing and
remediating where necessary, all hardware and software used in its business. The
Company is similarly identifying all external relationships, including vendors,
suppliers and customers, and will contact all of those entities considered
important or critical to its ongoing operations, to determine their own level of
Y2K readiness. In addition, the Company is preparing contingency plans to
address failures in unidentified systems or temporary disturbances in local
utilities and infrastructure. The Company estimates that it will complete its
plan, including remedial action, by the end of the third quarter of 1999.
Incremental out-of-pocket costs incurred to date to address the Y2K issue
amount to approximately $950,000. The Company anticipates that an additional
$1.0 million will be expended during 1999 relating to this issue. These costs
have been, and are expected to continue to be, funded by cash flows from
operations.
To date, 90% of critical items have been inventoried and assessed,
primarily by third party vendors. Internal business units are expected to have
completed all inventory by the end of April 1999. Internal assessment, testing
and remediation of critical components is expected to be complete by the end of
the second quarter, with the exception of some business applications, which are
expected to be tested and deployed by the end of the third quarter 1999. It is
anticipated that contingency planning and change control procedures will
continue until the end of 1999. Inventory and assessment of critical vendors /
suppliers is underway and expected to be complete by the end of April 1999.
While the Company believes that it has a readiness plan that will mitigate
the risk that the Y2K issue will have a material adverse effect on its business,
the ultimate impact of this issue on the Company is uncertain. Long term
interruptions in suppliers' ability to deliver critical components, third
parties' ability to supply utilities or telecommunications to the Company's
offices or field locations; or the Company's failure to complete, in a timely
manner, the remediation of its non-compliant computer-controller equipment,
could result in delayed delivery of products to customers, resulting in a
material adverse effect on earnings and cash flow. Therefore, there can be no
assurance that the Y2K issue will not have a material effect on the Company's
financial position, results of operations or cash flows.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. The Company will apply the guidance set forth in this SOP
effective January 1, 1999, and, based on current circumstances, does not believe
that the effect of this SOP will be material to the Company's financial
position, results of operations or cash flows.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative financial
instrument be recorded in the balance sheet as either an asset or a liability
measured at its fair value, with certain changes in fair value
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recognized currently in earnings. The Company will be required to adopt SFAS No.
133 in the first quarter of 2000, and has not yet determined the impact of
adoption.
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.
None
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The name, age and current principal position of each director, executive
officer and significant employee of the Company at March 26, 1999 are as
follows:
NAME AGE POSITION
---- --- --------
Donald W. Wilson.................... 51 Chairman of the Board
Richard H. Ward..................... 55 President and Chief Executive Officer
Stephen H. Wood..................... 58 Vice President and Chief Operating Officer
Ben L. Roberts ..................... 53 Vice President and Chief Financial Officer
Michael P. Keirnan.................. 47 Vice President, Assistant to the President
Barry K. Burt ..................... 49 Vice President - International Operations
W. Richard Anderson................. 45 Director
James R. Brock ..................... 39 Director
J. Kelly Elliott.................... 68 Director
Jonathan D. Pollock................. 35 Director
Donald G. Russell................... 67 Director
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 -- Principal
Stockholders" for a description of certain other relationships between or among
directors and executive officers of the Company.
DONALD W. WILSON has served as Chairman of the Board of the Company since
April 28, 1998 and as a director of the Company since January 1998. Since
October 1998, Mr. Wilson has served as President and Chief Operating Officer of
Odyssea Marine, Inc., a marine services and power generation company. Mr. Wilson
served as President and Chief Executive Officer of Prime Natural Resources, Inc.
(formerly F-W Oil Interests, Inc.), an oil and gas exploration and production
company, from January 1996 until October 1998. From January 1995 through
December 1995, Mr. Wilson served as Executive Vice President -- Worldwide
Operations of J. Ray McDermott, S.A., a marine engineering and construction
company. From December 1992 through December 1994, Mr. Wilson served as
President of OPI International, Inc., a subsidiary of Offshore Pipelines, Inc.
an international marine construction company.
RICHARD H. WARD has held senior management positions at several oilfield
companies, including Western Atlas, Landmark Graphics and Geosource, and with
international oil companies, including YPF S.A. and Canadian Hunter. Mr. Ward
has served as President and Chief Executive Officer since February 1999.
STEPHEN H. WOOD has served in all facets of the geophysical business
globally and has held senior management positions at Geosource, Halliburton
Geophysical, VorTex and Universal Seismic. Mr. Wood has served as Vice President
and Chief Operating Officer since February 1999.
BEN L. ROBERTS has served as Vice President and Chief Financial Officer of
Grant Geophysical, Inc. since August 1998. From 1995 through 1998, Mr. Roberts
was engaged in private consulting and investment banking primarily in the energy
and energy services industries. Mr. Roberts served as founding Corporate
Treasurer of Sterling Chemicals, Inc. from 1986 until 1994. From 1975 until 1986
Mr. Roberts was with Roy M. Huffington, Inc. (HUFFCO) where he served as both
Controller and Vice President and Chief Financial and Administrative Officer of
Huffco's Indonesia Joint Venture business for approximately five of his ten year
tenure there.
MICHAEL P. KEIRNAN has served as Assistant to the President since August
1998 and as Vice President and Chief Financial Officer of the Company from
September 30, 1997 until August 1998. He was Vice President and Chief Financial
Officer of GGI from February 1997 until September 30, 1997. From March 1996
until February 1997, Mr. Keirnan served as Manager of Treasury Operations of
Gundle/SLT Environmental, Inc., a plastic lining
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manufacturing company. Mr. Keirnan also served as Controller and Treasurer of
GGI from June 1993 through March 1996 and held other senior financial management
positions with GGI since 1988.
BARRY K. BURT has served as Vice President-International Operations of the
Company since September 30, 1997, and was Vice President-International
Operations of GGI from December 1996 until September 30, 1997. From 1986 through
December 1996, Mr. Burt held a variety of management positions with GGI in
international operations.
W. RICHARD ANDERSON has served as a director of the Company since January
1998. Mr. Anderson previously served as a director of Solid State from December
1996 through December 1997. He has served as a partner, and later as a managing
partner, of Hein & Associates LLP, a certified public accounting firm. He is
currently the Executive Vice President and Chief Financial Officer and a
director of Prime Natural Resources, Inc., an oil and gas exploration and
production company.
JAMES R. BROCK has served as a director of the Company since January 1998.
Since October 1998, Mr. Brock has served as Executive Vice President and Chief
Financial Officer of Odyssea Marine, Inc., a marine services and power
generation company. From January 1995 through October 1998, Mr. Brock served as
Executive Vice President and Chief Financial Officer of Prime Natural Resources,
Inc. (formerly F-W Oil Interests, Inc.), an oil and gas exploration and
production company, and also served as a director of that Company through
February 1998. From January 1993 until January 1995, Mr. Brock served as Vice
President-Treasurer of Offshore Pipelines, Inc., an international marine
construction company and also as its Corporate Controller and Chief Accounting
Officer from 1990. He was employed by Arthur Andersen & Co., from 1981 to 1990.
J. KELLY ELLIOTT has served as a director of the Company since September
30, 1997. Until that time, Mr. Elliott was Chairman of the Board of GGI
beginning on November 20, 1996. He previously served as Chairman of the Board of
GGI from June 1993 through November 1995. Mr. Elliott has served as Chairman,
President, and Chief Executive Officer of Sigma Electronics, Inc., an
electronics and manufacturing company, since 1991. Mr. Elliott is also Chairman
of Seaboard International, a wellhead and valve manufacturing company. Mr.
Elliott has no affiliation with Elliott Associates or Westgate.
JONATHAN D. POLLOCK has served as a director of the Company since September
30, 1997 and as Chairman of the Board of the Company from September 30, 1997
until April 28, 1998. Mr. Pollock has served as a Portfolio Manager with
Stonington Management Corporation, the management company of Elliott and
Westgate since 1989. Mr. Pollock is also a director of Tatham Offshore, Inc., an
oil and gas exploration services company, Chairman of Prime Natural Resources,
Inc., an oil and gas exploration and production company, Chairman of the Board
of Horizon Offshore, Inc., an offshore oil and gas pipeline construction
company, and Chairman of the Board of Odyssea Marine, Inc., a marine services
company.
DONALD G. RUSSELL has served as a director of the Company since September
30, 1997 and a director of GGI from February 1997 until September 30, 1997 and
from July 1993 through November 1995. Mr. Russell served as Chairman of the
Board and Chief Executive Officer of Sonat Exploration Company, an oil and gas
exploration company, from 1988 until May 1998, and a director of Sonat, Inc., a
diversified energy company, from 1994 until May 1998. He has been Chairman of
the Russell Companies since May 1998.
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes information concerning the compensation of
the Company's Chief Executive Officer and the other four most highly compensated
executive officers for 1998 (the "Named Executive Officers"). The Company was
organized in September 1997 and did not conduct any operations or have any
employees before the Effective Date. As a result, the Company does not have any
executive officers with respect to whom disclosure of executive compensation is
required under the Securities Act or the rules and regulations promulgated
thereunder for 1997.
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SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
Name and ---------------------------------- ------------
Principal Other Annual Awards All Other
Position Year Salary Compensation Options Compensation
-------- ---- -------- ------------ ----------- ------------
Larry E. Lenig, Jr(1)............................. 1998 $180,000 340,000 $ 8,700
Chief Executive Officer
Ben L. Roberts (2) ............................... 1998 $ 42,308 51,000 --
Vice President, Chief Financial Officer
Michael P. Keirnan(3)............................. 1998 $ 97,000 36,000 $ 1,391
Vice President and Assistant to the President
Barry K. Burt..................................... 1998 $112,600 36,000 $ 7,667
Vice President, International Operations
D. Hugh Fraser (4)................................ 1998 $104,400 36,000 $ 8,727
Vice President, Southern U.S. Operations
(1) Mr. Lenig became President and Chief Executive Officer effective September
30, 1997. In conjunction with his appointment, Mr. Lenig was awarded stock
options. Mr. Lenig resigned as President and Chief Executive Officer on
January 27, 1999.
(2) Mr. Roberts became Chief Financial Officer effective August 25, 1998.
(3) Mr. Keirnan was Chief Financial Officer and became Assistant to the
President effective August 25, 1998.
(4) Mr. Fraser, effective March 12, 1999, became the Director of Sales and
Marketing. The following table sets forth additional information with
respect to stock options granted in 1998 under the Company's Incentive Plan
to the Named Executive Officers.
OPTION GRANTS IN 1998
INDIVIDUAL GRANTS
POTENTIAL REALIZABLE VALUE AT
% OF TOTAL ASSUMED ANNUAL RATES
OPTIONS OF STOCK PRICE APPRECIATION
GRANTED TO EXERCISE OR FOR OPTION TERM
OPTIONS EMPLOYEES IN BASE PRICE ------------------------------
NAME GRANTED FISCAL YEAR ($/SH) EXPIRATION DATE 5% 10%
---- ------- ----------- ------ --------------- -- ---
Larry E. Lenig, Jr......... 240,000 15.3% 5.76 February 18, 2008 $391,000 $622,000
100,000 6.4% 4.75 September 22, 2000 110,000 121,000
Ben L. Roberts............. 51,000 3.3% 5.76 August 19, 2008 83,000 132,000
Michael P. Keirnan......... 36,000 2.3% 5.76 February 18, 2008 59,000 93,000
Barry K. Burt.............. 36,000 2.3% 5.76 February 18, 2008 59,000 93,000
D. Hugh Fraser............. 36,000 2.3% 5.76 February 18, 2008 59,000 93,000
The following table sets forth information with respect to the unexercised
options to purchase shares of common stock which were granted in 1998 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, 1998. None of the Named
Executive Officers exercised any stock options during 1998.
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AGGREGATED OPTION EXERCISES IN 1998
AND 1998 YEAR-END OPTION VALUES
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTION
OPTIONS AT YEAR-END AT YEAR-END(1)
------------------------------ -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------- ------------- -------------
Larry E. Lenig, Jr........................... 80,000 260,000 $ -- --
Ben L. Roberts............................... -- 51,000 -- --
Michael P. Keirnan........................... 12,000 24,000 -- --
Barry K. Burt................................ 12,000 24,000 -- --
D. Hugh Fraser............................... 12,000 24,000 -- --
- -------------
(1) There is no trading market for the Common Stock
EMPLOYMENT AGREEMENTS
On January 27, 1999, the Company entered into a Separation Agreement and
Release (the "Separation Agreement") with Larry E. Lenig, Jr. in connection with
his resignation as the Company's President and Chief Executive Officer. Under
the terms of the Separation Agreement, Mr. Lenig will receive $15,000 per month,
plus health benefits, from March 1999 through December 2001 and $7,500 per
month, plus health benefits, from January 2002 through December 2003. Mr. Lenig
also received a bonus of $180,000, which was earned pursuant to his employment
agreement with the Company based upon the Company's 1998 results, and was
allowed to retain one-third (80,000) of the stock options awarded to him under
the 1997 Equity and Performance Incentive Plan. The stock options retained by
Mr. Lenig are exercisable until February 2002. Mr. Lenig agreed that, for a
five-year period, he would not (i) compete with the Company, (ii) contact the
Company's customers or (iii) solicit any of the Company's employees to leave the
Company. The Separation Agreement replaced and superseded the Restated and
Amended Employment Agreement between the Company and Mr. Lenig dated October 1,
1997.
Effective February 3, 1999, Grant entered into an employment agreement with
Richard H. Ward, pursuant to which Mr. Ward agreed to serve as President and
Chief Executive Officer of the Company. Mr. Ward's employment agreement has an
initial term through February 3, 2002, and provides for an annual base salary of
$225,000. In the event Mr. Ward is terminated without "cause" (as defined in his
employment agreement), the Company must make base salary payments for the
remainder of the term of his agreement. In the event the Company terminates Mr.
Ward's employment because the Board of Directors reasonably determines that Mr.
Ward has failed to perform his obligations under his employment agreement in a
manner consistent with the Board's expectations, the Company must make payments
of 50% of the base salary for the remainder of the term of his agreement. Mr.
Ward also agreed not to compete against the Company throughout the term of his
employment and for two years thereafter, and not to disclose any confidential
information during and after the term of his employment.
Effective February 24, 1999, Grant entered into an employment agreement
with Stephen H. Wood, pursuant to which Mr. Wood agreed to serve as Chief
Operating Officer of the Company. Mr. Wood's employment agreement has an initial
term through February 24, 2002, and provides for an annual base salary of
$200,000. In the event Mr. Wood is terminated without "cause" (as defined in his
employment agreement), the Company must make payments of 50% of the base salary
for the remainder of the term of his agreement. Mr. Wood also agreed not to
compete against the Company throughout the term of his employment and for two
years thereafter, and not to disclose any confidential information during and
after the term of his employment.
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 was amended in September 1998 to
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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, consultants and nonemployee 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 and deferred
shares of Grant Common Stock (collectively, the "Awards"). The Incentive Plan is
not a qualified 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 is required to be administered by the Board of Directors
or by a committee of the Board of Directors consisting of at least two
nonemployee 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, 1998,
Awards covering 1,662,300 shares had been made by the Board of Directors. During
1998, there were 57,600 cancellations due to termination. The Awards outstanding
consist of 1,568,700 nonstatutory stock options that will vest annually in equal
one-third increments beginning on December 31, 1998. All options have an average
exercise price of $5.76 per share (range of $4.75 to $6.84 per share), subject
to adjustment in certain circumstances. In addition, 6,000 restricted shares
(36,000 total restricted shares) were granted to each non-employee director.
One-half (or 3,000) of such shares became unrestricted on August 18, 1998 and
the remaining 3,000 became unrestricted on February 18, 1999, subject to the
satisfaction of certain 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 26, 1999 by (i) each person
known to the Company to own beneficially more than 5% of the outstanding shares
of the Common Stock, (ii) each director and executive officer and (iii) all
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).................. 6,154,667 42.7%
Westgate International, L.P.(2)............... 6,154,666 42.7%
Donald W. Wilson.............................. 6,000 *
Richard H. Ward............................... -- *
Steven H. Wood................................ -- *
Ben L. Roberts................................ -- *
Michael P. Keirnan............................ -- *
Barry K. Burt................................. -- *
W. Richard Anderson........................... 6,000 *
James R. Brock................................ 6,000 *
J. Kelly Elliott.............................. 6,000 *
Jonathan D. Pollock........................... 6,000 *
Donald G. Russell............................. 6,000 *
All executive officers and
directors as a group
(11 persons)............................... 36,000 *
- -------------
* Less than 1%.
(1) Paul E. Singer and Braxton Associates 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.
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(2) Hambledon, Inc., which is controlled by Mr. Singer, is the sole general
partner of Westgate. Martley International, Inc. ("Martley"), which is
controlled by Mr. Singer, is the investment manager for Westgate. Martley
expressly disclaims equitable ownership of and pecuniary interest in any
shares of Common Stock. The business address of Westgate is Westgate
International, L.P. c/o Midland Bank Trust Corporation (Cayman) Limited,
P.O. Box 1109, Mary Street, Grand Cayman, Cayman Islands, British West
Indies.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On February 18, 1998, the Company issued $100 million aggregate principal
amount of Senior Notes, which are guaranteed by certain subsidiaries of the
Company. The proceeds received by the Company from the issuance of the Senior
Notes were used in part to repay certain indebtedness of the Company held by
Elliott, including the Subordinated Note in the principal amount of
approximately $9.8 million, the Acquisition Financing in the principal amount of
$15.8 million, and $1.6 million of revolving loans under the Credit Facility.
Proceeds from the issuance of the Senior Notes were also used in part to repay
certain indebtedness of the Company, which was incurred by Solid State, to
Elliott and Westgate (the "Principal Shareholders"), in the aggregate principal
amount of approximately $16.7 million and approximately $1.6 million of accrued
interest. The proceeds of the issuance of the Senior Notes were also used by the
Company to redeem the 10,000 shares of its Preferred Stock, described below, in
the aggregate amount of $10.7 million.
On June 5, 1998, the Company redeemed 10,000 shares of Preferred Stock held
by Westgate, representing all of the then issued and outstanding shares of
Preferred Stock, for the redemption price of $10.7 million. The redemption price
represented the liquidation amount of such shares of Preferred Stock, together
with all accumulated, accrued and unpaid dividends. Upon redemption, the shares
of Preferred Stock were canceled, retired and eliminated from the shares that
the Company is authorized to issue.
On June 5, 1998, in connection with the transaction to redeem the 10,000
shares of Preferred Stock, the Company and Elliott amended the Credit Facility
to increase the Company's maximum borrowing capacity from $5 million to $15
million and to extend the term of the facility from March 31, 1999 to March 31,
2000. The Company is required to pay interest on the outstanding principal
balance under the Credit Facility at a rate per annum equal to the prime rate
plus 2%. The indebtedness under the Credit Facility is secured by liens on
substantially all of the assets of the Company and its subsidiaries and by a
pledge by the Company of certain notes and all of the outstanding stock of its
subsidiaries. Certain subsidiaries of the Company have guaranteed the Company's
obligations under the Credit Facility. Each such subsidiary has pledged its
assets in favor of Elliott to secure its obligations under its respective
guaranty. As of March 26, 1999, the amount outstanding under the Credit Facility
is $13.0 million. In April 1999, the Credit Facility was extended to $20.0
million. At December 31, 1998, the Company had violated a covenant in the Credit
Facility which limited the capital expenditures for any one year to a maximum of
$14 million. The Company obtained a consent and waiver to the default from
Elliott effective December 31, 1998.
Pursuant to the Plan, in 1998 the Company was required to conduct a
subscription offering (the "Subscription Offering") of shares of Common Stock to
certain holders of claims and other interests under the Plan. The Principal
Shareholders exercised their right under that certain registration rights
agreement among the Company and the Principal Shareholders, dated September 19,
1997, as amended, to participate in the Subscription Offering. On July 7, 1998,
the Company's registration statement on Form S-1 to register 3,459,414 shares of
Common Stock held by the Principal Shareholders was declared effective. A total
of 2,080,722 shares of Common Stock were subscribed for in the Subscription
Offering, representing 14.6% of the outstanding common stock of the Company. The
Company did not receive any proceeds from the Subscription Offering. The total
proceeds received by the Principal Shareholders was approximately $9.9 million.
Jonathan Pollock, a director of the Company, is a Portfolio Manager with
Stonington Management Corporation, the management company of Elliott and
Westgate. Donald W. Wilson, director and Chairman of the Board of Directors,
James R. Brock and Richard Anderson, each directors of the Company, all serve as
officers of affiliates of Elliott.
26
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) AND (2) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
See "Index to Financial Statements and Financial Statement Schedule" set
forth on Page F-1.
No schedule or schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are required,
or such schedules are not applicable, and therefore, have been omitted.
(3) EXHIBITS
The exhibits filed as part of this Form 10-K are listed on the Index to
Exhibits immediately preceding such exhibits, which index is incorporated herein
by reference.
(b) REPORTS ON FORM 8-K
On November 30, 1998, the Company filed a current report on Form 8-K
related to the appointment of PricewaterhouseCoopers LLP as independent
accountants to replace KPMG LLP.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT
No annual report or proxy statement covering the Company's last fiscal year
has been or will be circulated to security holders.
27
30
SIGNATURES
Pursuant to the requirements of Section 13 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 6th day of April 1999.
GRANT GEOPHYSICAL, INC.
By: /s/ RICHARD H. WARD
----------------------------------
Richard H. Ward
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 this 6th day of April 1999.
SIGNATURE TITLE
/s/ RICHARD H. WARD President, Chief Executive Officer and Director (Principal
- ------------------------------------- Executive Officer)
Richard H. Ward
/s/ BEN L. ROBERTS Chief Financial Officer, Treasurer and Secretary
- ------------------------------------- (Principal Financial Officer)
Ben L. Roberts
/s/ CHARLES H. ACKERMAN
- ------------------------------------- Controller (Principal Accounting Officer)
Charles H. Ackerman
/s/ DONALD W. WILSON
- ------------------------------------- Chairman of the Board and Director
Donald W. Wilson
/s/ W. RICHARD ANDERSON
- ------------------------------------- Director
W. Richard Anderson
/s/ JAMES R. BROCK
- ------------------------------------- Director
James R. Brock
/s/ J. KELLY ELLIOTT
- ------------------------------------- Director
J. Kelly Elliott
/s/ JONATHAN D. POLLOCK
- ------------------------------------- Director
Jonathan D. Pollock
/s/ DONALD G. RUSSELL
- ------------------------------------- Director
Donald G. Russell
31
INDEX TO FINANCIAL STATEMENTS
PAGE
----
GRANT GEOPHYSICAL, INC. AND GGI LIQUIDATING CORPORATION
Report of Independent Accountants:
Grant Geophysical, Inc............................................................... F-1
Independent Auditors' Report:
Grant Geophysical, Inc................................................................F-2
GGI Liquidating Corporation...........................................................F-3
Consolidated Balance Sheets:
Grant Geophysical, Inc. as of December 31, 1997 and 1998..............................F-4
Consolidated Statement of Operations:
GGI Liquidating Corporation for the year ended December 31, 1996 and for
the nine-month period ended September 30, 1997....................................F-6
Grant Geophysical, Inc. for the three-month period ended December 31, 1997 and
the year ended December 31, 1998..................................................F-6
Consolidated Statement of Stockholders' Equity (Deficit):
GGI Liquidating Corporation for the year ended December 31, 1996......................F-7
Grant Geophysical, Inc. for the three-month period ended December 31, 1997
and the year ended December 31, 1998..............................................F-8
Consolidated Statement of Cash Flows:
GGI Liquidating Corporation for the years ended December 31, 1996 and for
the nine-month period ended September 30, 1997...................................F-10
Grant Geophysical, Inc. for the three-month period ended December 31, 1997 and
for the year ended December 31, 1998..............................................F-10
Notes to Consolidated Financial Statements.................................................F-12
Supplementary Financial Information........................................................F-36
32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Grant Geophysical, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position
of Grant Geophysical, Inc. and its subsidiaries at December 31, 1998 and
the results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the company's management;
our responsibility is to express an opinion on these financial statements
based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
April 6, 1999
F-1
33
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Grant Geophysical, Inc.
We have audited the accompanying consolidated balance sheet of Grant
Geophysical, Inc. and subsidiaries as of December 31, 1997 and the related
consolidated statement of operations, stockholders' equity, and cash flows
for the three-month period 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.
We conducted our audit in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above
presents fairly, in all material respects, the financial position of Grant
Geophysical, Inc. and subsidiaries, as of December 31, 1997, and the
results of their operations and their cash flows for the three-month period
then ended in conformity with generally accepted accounting principles.
KPMG LLP
Houston, Texas
March 18, 1998
F-2
34
INDEPENDENT AUDITORS' REPORT
The Board of Directors
GGI Liquidating Corporation
We have audited the accompanying consolidated statements of
operations, stockholders' equity (deficit), and cash flows of GGI
Liquidating Corporation (a debtor-in-possession as of December 31, 1996)
(formerly Grant Geophysical, Inc.) and subsidiaries for the year ended
December 31, 1996 and the nine month period ended September 30, 1997. These
consolidated financial statements are the responsibility of GGI Liquidating
Corporation's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 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 results of operations and
cash flows of GGI Liquidating Corporation and subsidiaries for the year
ended December 31, 1996, and the nine month period ended September 30,
1997, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements and financial
statement schedule have been prepared assuming that GGI Liquidating
Corporation will continue as a going concern which contemplates among other
things, the realization of assets and liquidation of liabilities in the
ordinary course of business. As discussed in Note 1 to the consolidated
financial statements, GGI Liquidating Corporation (the Petitioning Company)
filed a voluntary petition for reorganization under chapter 11 of the
United States Bankruptcy Code on December 6, 1996. The chapter 11 case of
the Petitioning Company is administered by the United States Bankruptcy
Court for the District of Delaware (the "Court"). The Petitioning Company
is operating the business as debtor-in-possession which requires certain of
its actions to be approved by the Court. In September 1997 the Court
approved the "Second Amended Plan of Reorganization" (the "Plan") filed by
GGI Liquidating Corporation. The Plan was consummated on September 30,
1997, with the purchase by Grant Geophysical, Inc. of substantially all of
the assets and the assumption of certain liabilities of GGI Liquidating
Corporation. GGI Liquidating Corporation is currently in liquidation and
will distribute all of its assets pursuant to the Plan. Upon the completion
of its asset distribution, GGI Liquidating Corporation will dissolve and
cease to exist. The consolidated financial statements and financial
statement schedule do not include any adjustments relating to the
recoverability and classification of reported asset amounts or the amounts
and classification of liabilities that might result from the Plan and the
distribution of assets pursuant thereto.
KPMG LLP
Houston, Texas
December 22, 1997
F-3
35
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 7,093 $ 7,921
Restricted cash ................................................. 321 106
Accounts receivable:
Trade (net of allowance for doubtful accounts of $158 and
$86 at December 31, 1997 and 1998, respectively) .......... 29,495 25,918
Other ........................................................ 2,487 1,663
Inventories ..................................................... 530 512
Prepaids ........................................................ 4,190 4,639
Work in process ................................................. 2,779 4,062
------------ ------------
Total current assets ...................................... 46,895 44,821
Property, plant and equipment:
Land ............................................................ 427 411
Buildings and improvements ...................................... 1,548 1,932
Plant facilities and store fixtures ............................. 876 1,142
Machinery and equipment ......................................... 70,151 89,779
------------ ------------
Total property, plant and equipment ....................... 73,002 93,264
Less accumulated depreciation ................................... 8,498 27,359
------------ ------------
Net property, plant and equipment ......................... 64,504 65,905
Multi-client data, net ............................................. 5,736 10,899
Goodwill, net ...................................................... 36,304 36,592
Other assets ....................................................... 2,265 8,224
------------ ------------
Total assets .............................................. $ 155,704 $ 166,441
============ ============
(Continued on next page)
F-4
36
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, current portion of long-term debt and
capital lease obligations .............................................. $ 1,158 $ 2,522
Accounts payable ......................................................... 16,422 15,316
Accrued expenses ......................................................... 10,168 6,621
Accrued interest ......................................................... 150 3,798
Foreign income taxes payable ............................................. 2,807 2,191
------------ ------------
Total current liabilities .............................................. 30,705 30,448
Revolving line of credit-affiliate .......................................... 800 8,000
Long-term debt and capital lease obligations ................................ 64,609 102,817
Unearned revenue ............................................................ 5,443 2,115
Other liabilities and deferred credits ...................................... 2,369 1,059
Subordinated note ........................................................... 9,786 --
Stockholders' equity:
Cumulative pay-in-kind preferred stock, $.001 par value. Authorized 20,000
shares; issued and outstanding 10,000 shares at December 31, 1997
Authorized, issued and outstanding zero
at December 31, 1998 ..................................................... 10,000 --
Common stock, $.001 par value. Authorized 25,000,000
shares; issued and outstanding 14,152,555 and 14,426,055
shares at December 31, 1997 and 1998, respectively ....................... 14 14
Additional paid-in capital ............................................... 41,278 41,727
Accumulated deficit ...................................................... (8,833) (17,253)
Accumulated other comprehensive loss ..................................... (467) (2,486)
------------ ------------
Total stockholders' equity ............................................. 41,992 22,002
------------ ------------
Total liabilities and stockholders' equity ............................. $ 155,704 $ 166,441
============ ============
See accompanying notes to consolidated financial statements.
F-5
37
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
GGI GRANT
------------------------------ ------------------------------
YEAR NINE MONTHS THREE MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
------------- ------------- ------------- -------------
1996 1997 1997 1998
------------- ------------- | ------------- -------------
|
Revenues .............................................. $ 105,523 $ 92,705 | $ 37,868 $ 175,512
|
Expenses: |
Direct operating expenses .......................... 136,326 71,006 | 28,431 128,962
Selling, general and administrative expenses ....... 17,865 6,473 | 3,507 14,156
Depreciation and amortization ...................... 11,500 8,432 | 4,594 22,286
Charge for asset impairment ........................ 5,802 -- | 6,369 3,762
------------- ------------- | ------------- -------------
Total costs and expenses ........................ 171,493 85,911 | 42,901 169,166
------------- ------------- | ------------- -------------
|
Operating income (loss) ......................... (65,970) 6,794 | (5,033) 6,346
|
Other income (expense): |
Interest expense ................................... (7,558) (4,037) | (1,431) (10,380)
Reorganization costs ............................... (412) (3,543) | -- --
Interest income .................................... 36 279 | 69 1,080
Other .............................................. (502) 2,266 | (1,262) (820)
------------- ------------- | ------------- -------------
Total other expense ............................. (8,436) (5,035) | (2,624) (10,120)
------------- ------------- | ------------- -------------
|
Income (loss) before taxes and minority |
interest ...................................... (74,406) 1,759 | (7,657) (3,774)
Income tax expense .................................... (1,621) (2,184) | (856) (3,924)
------------- ------------- | ------------- -------------
|
Loss before minority interest ................... (76,027) (425) | (8,513) (7,698)
Minority interest ..................................... -- -- | 2,847 --
------------- ------------- | ------------- -------------
Net loss ........................................ $ (76,027) $ (425) | $ (5,666) $ (7,698)
============= ============= | ============= =============
Net loss applicable to common stock ................... $ (82,390) $ (425) | $ (6,143) $ (8,138)
============= ============= | ============= =============
LOSS PER COMMON SHARE - BASIC
AND DILUTED:
Net loss .............................................. $ (1.18) $ (.54)
Dividend requirement on pay-in-kind
preferred stock ..................................... (.10) (.03)
------------- -------------
Net loss per common share ............................. $ (1.28) $ (.57)
============= =============
See accompanying notes to consolidated financial statements
F-6
38
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
GGI
----------------------------------------------------------------
$2.4375
CONVERTIBLE SERIES A
EXCHANGEABLE CONVERTIBLE JUNIOR CUMULATIVE
PREFERRED PREFERRED PREFERRED PAY-IN-KIND
STOCK STOCK STOCK PREFERRED STOCK
------------- ------------- ------------- ---------------
Balances at December 31,
1995 ................................. 22 -- 1,490 --
Net loss ............................. -- -- -- --
Common stock issued
in connection with
obtaining equipment
and short- and long-
term financing ..................... -- -- -- --
Issuance of 143,000
shares of $2.4375
convertible
exchangeable
preferred stock, net
of non-cash issuance
costs of $171,000 .................. 1 -- -- --
Issuance of 70,000 shares
of Series A convertible
preferred stock .................... -- 1 -- --
Conversion of
convertible
debentures ......................... -- -- -- --
Conversion of Series A
convertible preferred
stock .............................. -- (1) -- --
Proceeds from the
exercise of 200,000
warrants ........................... -- -- -- --
Restricted common stock
issued under the Incentive
Stock Option Plan .................. -- -- -- --
Proceeds from sale of
125,000 shares under
Incentive Stock Option
Plan .............................. -- -- -- --
Restricted common
stock issued under
the Employee
Retirement Savings
Plan ............................... -- -- -- --
------------- ------------- ------------- -------------
Balances at December 31,
1996 ................................. $ 23 $ -- $ 1,490 $ --
------------- ------------- ------------- -------------
GGI
-----------------------------------------------------------------
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL DEFICIT EQUITY (DEFICIT)
------------- ------------- ------------- ----------------
Balances at December 31,
1995 ................................. 24 112,122 (83,943) 29,715
Net loss ............................. -- -- (76,027) (76,027)
Common stock issued
in connection with
obtaining equipment
and short- and long-
term financing ..................... -- 389 -- 389
Issuance of 143,000
shares of $2.4375
convertible
exchangeable
preferred stock, net
of non-cash issuance
costs of $171,000 .................. -- 1,372 -- 1,373
Issuance of 70,000 shares
of Series A convertible
preferred stock .................... -- 6,999 -- 7,000
Conversion of
convertible
debentures ......................... 7 2,767 -- 2,774
Conversion of Series A
convertible preferred
stock .............................. 9 (8) -- --
Proceeds from the
exercise of 200,000
warrants ........................... 1 150 -- 151
Restricted common stock
issued under the Incentive
Stock Option Plan .................. -- 129 -- 129
Proceeds from sale of
125,000 shares under
Incentive Stock Option
Plan .............................. -- 145 -- 145
Restricted common
stock issued under
the Employee
Retirement Savings
Plan ............................... -- 138 -- 138
------------- ------------- ------------- -------------
Balances at December 31,
1996 ................................. $ 41 $ 124,203 $ (159,970) $ (34,213)
------------- ------------- ------------- -------------
F-7
See accompanying notes to consolidated financial statements.
39
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
GRANT
--------------------------------------------------------------
CUMULATIVE
PAY-IN-KIND ADDITIONAL
PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT
------------- ------------- ------------- -------------
Beginning balances .................... $ -- $ -- $ -- $ --
Net loss ......................... -- -- -- (5,666)
Common stock, one share issued .... -- -- -- --
Cumulative preferred stock issued . 19,571 -- -- --
Effective issuance of 4,590,055
shares of common stock for
majority investment in
Solid State ..................... -- 5 7,195 --
"As if" pooling effect of Solid
State .......................... -- -- -- (2,952)
Common stock, one share issued .... -- -- -- --
Issuance of 62,500 shares of
common stock for principal
shareholders' exchange of
warrants in Solid State ....... -- -- 144 --
Issuance of 9,499,998 shares to
principal stockholders in
accordance with the Plan ....... -- 9 33,939 --
Conversion of 9,571 preferred
shares to Subordinated Note .... (9,571) -- -- --
Payment of preferred stock
dividend ....................... -- -- -- (215)
Accumulated other
comprehensive loss ............. -- -- -- --
------------- ------------- ------------- -------------
Balances at December 31, 1997 ......... $ 10,000 $ 14 $ 41,278 $ (8,833)
============= ============= ============= =============
GRANT
-------------------------------
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
LOSS EQUITY
------------- -------------
Beginning balances .................... $ -- $ --
Net loss ......................... -- (5,666)
Common stock, one share issued .... -- --
Cumulative preferred stock issued . -- 19,571
Effective issuance of 4,590,055
shares of common stock for
majority investment in
Solid State ..................... -- 7,200
"As if" pooling effect of Solid
State .......................... -- (2,952)
Common stock, one share issued .... -- --
Issuance of 62,500 shares of
common stock for principal
shareholders' exchange of
warrants in Solid State ....... -- 144
Issuance of 9,499,998 shares to
principal stockholders in
accordance with the Plan ....... -- 33,948
Conversion of 9,571 preferred
shares to Subordinated Note .... -- (9,571)
Payment of preferred stock
dividend ....................... -- (215)
Accumulated other
comprehensive loss ............. (467) (467)
------------- -------------
Balances at December 31, 1997 ......... $ (467) $ 41,992
============= =============
(Continued on next page)
F-8
40
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
GRANT
------------------------------------------------------------------------------------
CUMULATIVE ACCUMULATED
PAY-IN-KIND ADDITIONAL OTHER TOTAL
PREFERRED COMMON PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT LOSS EQUITY
---------- ----------- ------------ ------------ ----------- --------------
Balances at December 31, 1997................ $10,000 $ 14 $ 41,278 $ (8,833) $ (467) $ 41,992
Net loss ................................. -- -- -- (7,698) -- (7,698)
Redemption of cumulative
pay-in-kind preferred stock ........... (10,000) -- -- -- -- (10,000)
Issuance of 237,500 shares of
common stock to principal
shareholders in satisfaction of the
Registration Rights Agreement ......... -- -- -- -- -- --
Payment of dividends ..................... -- -- -- (722) -- (722)
Stock issue costs for registration
rights ............................... -- -- (336) -- -- (336)
Issuance of 36,000 shares of
common stock to non-employee
directors ............................. -- -- 150 -- -- 150
Non-cash litigation costs ................ -- -- 635 -- -- 635
Accumulated other
comprehensive loss .................... -- -- -- -- (2,019) (2,019)
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1998 ............... $ -- $ 14 $ 41,727 $ (17,253) $ (2,486) $ 22,002
========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-9
41
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
GGI GRANT
---------------------------- -----------------------------
YEAR NINE MONTHS THREE MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
------------ ------------ | ------------ ------------
1996 1997 | 1997 1998
------------ ------------ | ------------ ------------
|
Cash flows from operating activities: |
Net loss ...................................... $ (76,027) $ (425)| $ (5,666) $ (7,698)
Adjustments to reconcile net loss to |
net cash provided by operating activities: |
Charge for asset impairment ................. 5,802 -- | 6,369 3,762
Provision for doubtful accounts ............. 5,511 -- | -- 194
Depreciation and amortization expense ....... 11,500 8,432 | 4,594 22,286
Deferred costs amortization ................. 29,528 -- | -- --
Loss on sale of subsidiaries ................ 198 -- | -- --
(Gain) loss on the sale of fixed assets ..... (25) 39 | 132 (189)
Exchange loss (gain) ........................ 251 98 | (77) 485
Non-cash litigation costs ................... -- -- | -- 635
Other non-cash items ........................ 328 225 | (2,544) 68
Changes in assets and liabilities, |
excluding effects of divestitures: |
Accounts receivable ......................... 13,346 2,375 | 694 3,046
Inventories ................................. 914 (27)| -- 18
Prepaids .................................... 1,228 (538)| (1,220) 737
Work-in-process ............................. (24,969) (268)| (1,101) (1,283)
Other assets ................................ 1,846 (1,031)| 983 (414)
Accounts payable ............................ 9,328 3,143 | (1,237) (1,149)
Accrued expenses ............................ 5,059 830 | 1,759 331
Foreign income taxes payable ................ 390 1,767 | 487 (616)
Other liabilities and deferred credits ...... 7,973 (2,320)| 2,213 (4,398)
Change in pre-petition liabilities subject |
to Chapter 11 case: |
Accounts payable ............................ -- (2,226)| -- --
Accrued expenses ............................ (125) (1,732)| -- --
Foreign income tax payable .................. -- (194)| -- --
Other liabilities and deferred costs ........ (1,402) (3,622)| -- --
------------ ------------ | ------------ ------------
Net cash provided by (used in) operating |
activities .............................. (9,346) 4,526 | 5,386 15,815
(Continued on next page)
F-10
42
GRANT GEOPHYSICAL INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
GGI GRANT
-------------------------------- ---------------------------------
YEAR NINE MONTHS THREE MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
-------------- -------------- -------------- --------------
1996 1997 1997 1998
-------------- -------------- | -------------- --------------
|
Cash flows from investing activities: |
Capital expenditures ............................... $ (10,339) $ (6,751) | $ (3,994) $ (20,666)
Multi-client data .................................. -- -- | -- (8,500)
Proceeds from the sale of assets ................... 25 20 | 182 634
Proceeds from the sale of subsidiaries / |
businesses ...................................... 39 -- | -- --
Acquisition of the minority interest in |
Solid State ..................................... -- -- | (15,903) --
Acquisition of Interactive Seismic Imaging ......... -- -- | -- (2,988)
Restricted cash .................................... 94 -- | -- 215
-------------- -------------- | -------------- --------------
Net cash used in investing activities ........ (10,181) (6,731) | (19,715) (31,305)
|
Cash flows from financing activities: |
Debt issue costs ................................... -- -- | -- (4,629)
Common stock issue costs ........................... -- -- | -- (336)
Issuance of common stock ........................... | 150
Redemption of preferred stock ...................... -- -- | -- (10,000)
Dividends paid ..................................... -- -- | -- (722)
Proceeds from the exercise of stock options |
and warrants .................................... 296 -- | -- --
Proceeds from issuance of $2.4375 preferred |
stock, net of issuance costs .................... 1,544 -- | -- --
Proceeds from issuance of Series A |
preferred stock ................................. 7,000 -- | -- --
Borrowings made during the period .................. 122,354 4,207 | 31,270 119,335
Repayment on borrowings during the period .......... (105,757) (1,838) | (15,363) (86,977)
Proceeds from the issuance of common stock ......... -- -- | 33,948 --
Repayment of debt due to GGI ....................... -- -- | (34,783) --
Pre-petition liabilities subject to Chapter 11 case: |
Borrowings under credit facility ................ 3,612 49,385 | -- --
Repayment on borrowings ......................... (3,382) (50,465) | -- --
-------------- -------------- | -------------- --------------
Net cash provided by financing activities ....... 25,667 1,289 | 15,072 16,821
Effect of exchange rate changes on cash ............... (415) (238) | 160 (503)
-------------- -------------- | -------------- --------------
|
Net increase (decrease) in cash and cash equivalents 5,725 (1,154) | 903 828
Cash and cash equivalents at beginning of period ..... 1,047 6,772 | 6,190 7,093
-------------- -------------- | -------------- --------------
Cash and cash equivalents at end of period ............ $ 6,772 $ 5,618 | $ 7,093 $ 7,921
============== ============== | ============== ==============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES. SEE NOTE 18.
See accompanying notes to consolidated financial statements
F-11
43
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997, AND 1998
(1) BASIS OF PRESENTATION
Effective September 30, 1997 ("the Effective Date"), in connection with the
plan of reorganization (the "Plan"), Grant Geophysical, Inc. ("Grant"), which
was formerly known as Grant Acquisition Corporation, acquired substantially all
of the assets and assumed certain liabilities of GGI Liquidating Corporation
("GGI"), which was formerly known as Grant Geophysical, Inc. Elliott Associates
L.P. ("Elliott") and Westgate International, L.P. ("Westgate") ("collectively
known as "the Principal Stockholders") own 85.4% of the issued and outstanding
common stock of Grant at December 31, 1998. Westgate owned all of the preferred
stock that had been outstanding during 1997 and 1998. This preferred stock was
redeemed on June 5, 1998 and all authorized shares have been canceled. The
general partners of Elliott are Paul E. Singer and Braxton Associates, L.P. The
general partner of Westgate is Hambledon, Inc., a corporation controlled by
Braxton Associates, L.P. Elliott and Westgate are each managed by 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 at that date.
At September 30, 1997, Elliott held 5,888,565 shares or 40.7% and Westgate
held 3,291,544 shares, or 23.3% of the outstanding common shares of Solid State
Geophysical, Inc. ("Solid State Stock"). As of September 30, 1997, Elliott and
Westgate combined owned a controlling interest in both Solid State Geophysical,
Inc. ("Solid State") and Grant. As such, as of that date, Elliott and Westgate
were deemed to have transferred their ownership in Solid State to Grant in
exchange for 4,590,055 shares of Grant Common Stock. This transaction was
accounted for as an exchange of ownership interests between entities under
common control and the assets and liabilities transferred were accounted for at
historical cost in a manner similar to a pooling-of-interests. In November 1997,
Grant, through a wholly owned Canadian subsidiary, initiated a tender offer (the
"Tender Offer") for all of the outstanding common shares of Solid State not held
by Grant. In connection with the tender offer, Elliott and Westgate transferred
their ownership in Solid State to Grant in exchange for 4,652,555 shares of
Grant Common Stock and agreed to loan Grant $15.8 million to pay for shares
tendered in the Tender Offer and costs incurred in connection with the Tender
Offer. Upon the expiration of the Tender Offer on December 19, 1997, Grant held
approximately 99% of the outstanding shares of Solid State Stock. Because Grant
acquired over 90% of the outstanding shares of Solid State Stock not previously
held, Grant qualified to exercise its statutory right under Canadian law to
acquire the remaining shares of Solid State Stock on the same terms and at the
same price as the Tender Offer. Grant completed such acquisition on December 23,
1997, after which Solid State became an indirect wholly owned subsidiary of
Grant. The acquisition of the unaffiliated minority interest under the Tender
Offer was accounted for under the purchase method of accounting at the date of
acceptance. Grant recorded goodwill of approximately $15.3 million in connection
with the acquisition of the unaffiliated minority interest.
As a result of the aforementioned transactions, Grant's consolidated
balance sheet as of December 31, 1997 and December 31, 1998 and statement of
operations and cash flows for the three-months ended December 31, 1997 and the
year ended December 31, 1998 are presented using Grant's new basis of
accounting, while the consolidated statements of operations and cash flows for
the year ended December 31, 1996 and the nine-months ended September 30, 1997
are presented using GGI's historical cost basis of accounting.
Grant purchased, effective July 1, 1998, all of the outstanding partnership
interests in Interactive Seismic Imaging ("ISI"), a seismic data processing
company, for $3.6 million in cash. Grant had been a 10% owner of ISI since its
formation in 1994 and will integrate the ISI operation into its domestic
operational entity. The following working capital items were acquired in the
purchase: cash and cash equivalents - $628,000, accounts receivable - $364,000,
accounts payable - $43,000 and accrued expenses - $36,000.
F-12
44
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Presented below is the unaudited pro forma effect of the combination of
Solid State and Grant. Pro forma adjustments have been made to record the
consummation of the Plan and certain related transactions, the issuance of a
subordinated note in exchange for 9,571.162 shares of Grant preferred stock (see
Note 7 for a discussion of the subordinated note), the Acquisition, which
includes the transfer of shares of Solid State Stock to Grant by the Principal
Stockholders, which has been accounted for as an exchange of ownership interest
between entities under common control (an "as-if-pooling") and the acquisition
of the unaffiliated minority interest of Solid State, which has been accounted
for as a purchase. The unaudited pro forma information gives effect to the
aforementioned transactions as if they were completed as of January 1, 1996.
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues ......................................... $ 138,155 $ 173,865
================ ================
Net Loss ......................................... $ (84,569) $ (8,522)
================ ================
Net Loss applicable to common stock .............. $ (85,619) $ (9,572)
================ ================
Basic loss per share ............................. $ (5.95) $ (0.67)
================ ================
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 underfinanced 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,
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.
Grant is a holding company with no independent operations other than its
investments in its subsidiaries. Grant Geophysical Corp., Grant Geophysical do
Brasil Ltda., Grant Geophysical (Int'l), Inc., P.T. Grant Geophysical Indonesia,
Recuros Energeticos Ltda., Advanced Seismic Technology, Inc., Solid State
Geophysical Inc., Solid State Internacional Ingenieria C.A., Solid State
Geophysical Corp., and SSGI Acquisition Corp. (the "Subsidiary Guarantors")
represent all of the indirect and direct wholly owned subsidiaries of Grant.
Grant conducts all of its operations through its subsidiaries. The Notes (see
Note 7) are fully, unconditionally, jointly and severally guaranteed by the
Subsidiary Guarantors, and therefore, separate financial statements of the
Subsidiary Guarantors will not be presented. Management has determined that the
information presented by such separate financial statements of the Subsidiary
Guarantors is not material to investors.
F-13
45
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Going Concern Considerations--GGI
The accompanying financial statements of GGI have been prepared on a going
concern basis, which contemplates the realization of assets and the liquidation
of liabilities in the ordinary course of business. As described earlier, GGI is
in the process of distributing its assets pursuant to the Plan and will be
dissolved. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of reported asset amounts or
the amounts and classification of liabilities that may result from the Plan and
the distribution of assets pursuant thereto.
Principles of Consolidation
Each of the consolidated financial statements include the accounts of GGI
or Grant and all of their respective majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Minority Interest
The minority interest calculated on the Consolidated Statement of
Operations was computed based on the minority ownership percentage in Solid
State during the fourth quarter of 1997. This minority interest was extinguished
by the Tender Offer which resulted in Solid State becoming a wholly owned
subsidiary of Grant.
Revenues
Revenues from data acquisition are recognized based on contractual rates
set forth in the related contract. If the contract only provides a rate for the
completed service, revenue and any unearned revenue recorded is recognized based
on the percentage of the work effort completed compared with the total work
effort involved in the contract.
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. Such investments totaled $510,000 and $2,880,000 at
December 31, 1997 and 1998, respectively.
Restricted Cash
At December 31, 1997 and 1998, restricted cash included certificates of
deposit totaling $321,000 and $106,000, respectively, which were pledged as
collateral for letters of credit.
Inventories
Inventories, which consist primarily of miscellaneous supplies, are stated
at lower of cost or market. Cost is determined using the specific identification
method.
F-14
46
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Work in Process
Expenses related to the work in progress of seismic crews are deferred and
recognized over the performance of the contract.
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
Office equipment................................................. 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.
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.
As of December 31, 1997 and 1998, accumulated amortization related to the
Company's multi-client data library was zero and $1.3 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. See Note 3.
Asset Impairment
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of", long-lived assets and certain identifiable intangibles are
written down to their current fair value whenever events or changes in
circumstances indicate that the carrying amount of these assets are not
recoverable. These events or changes in circumstances may include but are not
limited to a significant change to the extent in which an assets is used, a
significant decrease in the market value of the asset, or a projection or
forecast that demonstrates continuing losses associated with an asset. If an
impairment is determined, the asset is written down to its current fair value
and a loss is recognized. See Note 3.
F-15
47
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Goodwill
Goodwill, which represents 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 $175,000 and
$1,723,000 as of December 31, 1997 and 1998, respectively. Grant assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. The amount
of goodwill impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflective of Grant's average cost of
funds. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved. The goodwill created in
the purchase of GGI's assets and the purchase of the remaining interest in ISI
is being amortized over 30 years and the goodwill created in the acquisition of
Solid State is being amortized over 20 years.
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 net 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.
Reorganization Costs
Reorganization costs consisting of professional fees and similar types of
expenditures directly related to GGI's chapter 11 bankruptcy proceeding were
expensed as incurred. During 1996 and the nine months ended September 30, 1997,
GGI incurred approximately $412,000 and $3,543,000 of reorganization costs.
Foreign Exchange Gains and Losses
Grant has determined that the United States ("U.S.") dollar is its 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. Remeasurement gains and losses are included in the
determination of net income and are reflected in other income (deductions) (See
Note 15). The Canadian subsidiaries use the Canadian dollar as their functional
currency and translate all assets and liabilities at year-end exchange rates and
operating results at average exchange rates prevailing during the year.
Adjustments resulting from the translation of assets and liabilities are
recorded in the accumulated other comprehensive loss account in stockholders'
equity. Grant is presently using a forward contract to hedge the value of the
U.S. dollar on a 30 to 60 day basis. The notional amount hedged is approximately
$427,000 at December 31, 1998.
Income Taxes
Under the asset and liability method of 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
F-16
48
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, as it is not practicable to estimate the amount of additional
tax that might be payable should these earnings be remitted or deemed remitted
as dividends or if the Company should sell its stock in the subsidiaries.
Post-Employment Benefits
SFAS No. 112, "Employer's Accounting for Post-Employment Benefits,"
requires companies to account for benefits to former or inactive employees after
employment but before retirement on the accrual basis of accounting.
Post-employment benefits include every form of benefit provided to former or
inactive employees, their beneficiaries and covered dependents. Benefits
include, but are not limited to, salary continuation, supplemental unemployment
benefits, severance benefits, disability-related benefits (including workers'
compensation), job training and counseling, and continuation of benefits such as
health care benefits and life insurance coverage.
Income (Loss) Per Common Share
In accordance with Statement of Financial Accounting Standards 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 the common
shareholder. Earnings per share data have not been presented for GGI as this
information is not meaningful.
Stock Based Compensation
As allowed by SFAS No. 123, the Company has elected to continue to follow
the accounting prescribed by Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees," whereby compensation costs are
recognized only in situations where stock compensation plans award intrinsic
value to recipients at the date of grant, rather than the fair value method of
SFAS No. 123. Pro forma disclosure of the estimated effects on net income and
earnings per share had the fair value method prescribed by SFAS No. 123 been
followed are included in Note 10.
Reclassifications
Certain amounts previously reported have been reclassified in order to
ensure comparability between the periods reported.
Current Vulnerability Due to Certain Concentrations
The Company competes in a highly competitive sector of the oil field
services industry. 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. As a result of the recent decline in
oil and gas prices, the level of overall oil and gas industry activity has
declined from levels experienced in recent years. The Company's results of
operations and cash flows could be adversely affected by continued decreased
capital spending levels and depressed oil and gas prices.
F-17
49
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) CHARGE FOR ASSET IMPAIRMENT
GGI
In 1994 GGI began development of a proprietary data recording system, which
was intended to replace an older recording system used in transition zone areas.
Problems with software design and hardware availability resulted in numerous
delays and substantial cost overruns. In addition, the completed system did not
meet performance expectations. Consequently, at December 31, 1996, GGI reduced
the carrying value of the proprietary data recording systems which was not
expected to generate future cash flows adequate to support current carrying
values. Accordingly, a $5,802,000 charge for asset impairment was recorded
during the fourth quarter of 1996.
GRANT
In the fourth quarter of 1997 certain assets of Solid State were written
down to reflect their fair value in accordance with the Company's asset
impairment policy. Fair market value was determined by discounting the assets'
projected future cash flows. Accordingly, Grant recorded a $6,369,000 special
charge for asset impairment in the fourth quarter of 1997. This charge primarily
consisted of $5,869,000 relating to the multi-client data library and $500,000
relating to miscellaneous assets held by Solid State.
In the fourth quarter of 1998, the Company wrote down certain
non-productive fixed assets to fair market value in the amount of $564,000 and
certain multi-client data surveys in the amount of $3.2 million. The impairment
of the multi-client data in 1997 and 1998 was due to reductions in estimates of
future licensing prospects for such data due to reduced interest in the area by
oil and gas companies and the current downturn in the industry.
F-18
50
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) SUMMARY OF OPERATIONS
All of the Company's operations consist of geophysical services which are
grouped by major geographical areas. A summary of operations by geographical
area follows (dollars in thousands):
GGI GRANT
---------------------------------- ----------------------------------
YEAR NINE MONTHS THREE MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
--------------- --------------- --------------- ---------------
1996 1997 1997 1998
--------------- --------------- | --------------- ---------------
|
Total revenues |
United States ............................ $ 42,074 $ 41,267 | $ 12,458 $ 78,659
Canada ................................... -- -- | 4,468 14,175
Colombia ................................. 12,722 19,797 | 2,836 17,948
Guatemala ................................ -- 300 | 2,277 12,765
Bolivia .................................. 6,364 -- | 4,262 10,491
Ecuador .................................. 2,840 10,878 | 2,491 8,337
Brazil ................................... 7,717 8,896 | 2,852 3,063
Peru ..................................... 27,490 2,696 | -- --
Other Latin America ...................... -- -- | 1,265 --
Bangladesh ............................... 5,076 8,871 | 4,611 15,775
Indonesia ................................ 336 -- | -- 14,299
Europe, Middle East and Africa ........... 904 -- | 348 --
--------------- --------------- | --------------- ---------------
$ 105,523 $ 92,705 | $ 37,868 $ 175,512
=============== =============== | =============== ===============
Operating income (loss): |
United States ............................ $ (35,920) $ (1,924) | $ (7,634) $ (2,741)
Canada ................................... -- -- | (1,488) (2,076)
Colombia ................................. (94) 4,750 | 137 3,591
Guatemala ................................ -- 69 | 370 3,208
Bolivia .................................. 39 (429) | 613 2,003
Ecuador .................................. (1,012) 2,283 | 904 1,390
Brazil ................................... (2,783) (15) | 89 (1,863)
Peru ..................................... (19,804) 4 | -- --
Other Latin America ...................... (988) (289) | 371 (15)
Bangladesh ............................... 1,034 2,800 | 1,822 1,204
Indonesia ................................ (1,095) (455) | (148) 1,623
Europe, Middle East and Africa ........... (5,347) -- | (69) 22
--------------- --------------- | --------------- ---------------
$ (65,970) $ 6,794 | $ (5,033) $ 6,346
=============== =============== | =============== ===============
F-19
51
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
GRANT
---------------------------
DECEMBER 31,
---------------------------
1997 1998
------------ ------------
Identifiable assets:
United States ............................... $ 79,089 $ 103,265
Canada ...................................... 35,278 25,811
Colombia .................................... 9,750 6,526
Guatemala ................................... 2,572 3,071
Bolivia ..................................... 6,533 2,451
Ecuador ..................................... 3,919 4,705
Brazil ...................................... 6,564 685
Other Latin America ......................... 1,942 220
Bangladesh .................................. 5,688 10,258
Indonesia ................................... 1,663 6,736
Europe, Middle East and Africa .............. 965 --
------------ ------------
Total identifiable assets ................ 153,963 163,728
Corporate assets ............................ 1,741 2,713
------------ ------------
$ 155,704 $ 166,441
============ ============
Revenues from a U.S. based international oil company was approximately
$20,233,000 (19%) for the year ended December 31, 1996. For the nine months
ended September 30, 1997, revenues from three oil companies, one domestic and
two international, were approximately $14,008,000 (15%), $9,924,000 (11%),
$8,895,000 (10%). During 1998, the Company did not derive more than 10% of its
revenue from any single customer.
(5) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows:
ACCUMULATED
COST DEPRECIATION
----------- ------------
(DOLLARS IN THOUSANDS)
December 31, 1997
Land...................................................... $ 427 $ --
Buildings and improvements................................ 1,548 42
Plant facilities and store fixtures....................... 876 170
Machinery and equipment................................... 70,151 8,286
----------- ----------
$ 73,002 $ 8,498
=========== ==========
ACCUMULATED
COST DEPRECIATION
----------- ------------
(DOLLARS IN THOUSANDS)
December 31, 1998
Land...................................................... $ 411 $ --
Buildings and improvements................................ 1,932 175
Plant facilities and store fixtures....................... 1,142 434
Machinery and equipment................................... 89,779 26,750
----------- ----------
$ 93,264 $ 27,359
=========== ==========
F-20
52
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES
The composition of income tax expense follows (dollars in thousands):
GGI GRANT
--------------------------------- ---------------------------------
NINE MONTHS THREE MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
--------------- --------------- --------------- ---------------
1996 1997 1997 1998
--------------- --------------- | --------------- ---------------
|
Current: |
State ............................... $ -- $ -- | $ -- $ --
Federal ............................. -- -- | -- 100
Foreign ............................. 1,621 2,184 | 856 3,824
Deferred: |
State ............................... -- -- | -- --
Federal ............................. -- -- | -- --
Foreign ............................. -- -- | -- --
--------------- --------------- | --------------- ---------------
Income tax expense .................. $ 1,621 $ 2,184 | $ 856 $ 3,924
=============== =============== | =============== ===============
At December 31, 1996, GGI had net operating losses ("NOLs") of
approximately $173,000,000 available for carryforward for U.S. Federal income
tax purposes. Since GGI will, in accordance with the Plan, be liquidated,
approximately $150,000,000 of these NOLs will not be used and will expire at
such time as GGI ceases to exist.
Grant acquired approximately $23,000,000 of GGI's U.S. NOLs on September
30, 1997. At December 31, 1998, $1,977,950 of these NOLs have expired unused and
the remainder, if unused, will expire between 1999 and 2011. Future utilization
of these NOLs will be restricted due to the change of ownership resulting from
the Plan. Based on current valuations, use of these NOLs would be limited to
approximately $704,000 annually.
Grant also acquired approximately $13,536,000 of Solid State's U.S. NOLs on
December 30, 1997. At December 31, 1998, none of these NOLs have expired or been
utilized. If unused, they will expire between 1999 and 2011. Future utilization
of approximately $9,760,000 of these NOLs will be restricted due to a change of
ownership which occurred on February 25, 1997. Based on current valuations, the
restriction would be approximately $125,000 annually.
In addition, Grant acquired approximately $7,800,000 of Solid State's
Canadian NOLs on December 30, 1997. The NOLs, if unused, will expire between
2000 and 2005. Future utilization of these NOLs is restricted to income arising
in Canada from the same type of business operations that generated them.
All of these acquired NOLs, when utilized, will first reduce goodwill and
other noncurrent intangible assets related to the acquisition to zero, with any
remaining tax benefits recognized as a reduction of income tax expense.
F-21
53
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The total income tax expense 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 (dollars in thousands):
GGI GRANT
-------------------------------- --------------------------------
YEAR NINE MONTHS THREE MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
-------------- -------------- -------------- --------------
1996 1997 1997 1998
-------------- -------------- -------------- --------------
|
Income tax expense (benefit) |
at U.S. Federal rate ............................... $ (25,298) $ 616 | $ (2,680) $ (810)
Increases (reductions) in taxes from: |
Foreign income taxed at more (less) |
than U.S. rate ..................................... 4,712 741 | 1,648 (79)
Losses with no tax benefit is expected ................ 22,207 827 | 1,888 4,813
-------------- -------------- | -------------- --------------
Income tax expense recorded ........................... $ 1,621 $ 2,184 | $ 856 $ 3,924
============== ============== | ============== ==============
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below (dollars in thousands):
GGI GRANT
---------------------------------- ----------------------------------
YEAR NINE MONTHS THREE MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
--------------- --------------- --------------- ---------------
1996 1997 1997 1998
--------------- --------------- --------------- ---------------
|
Deferred tax asset: |
Plant and equipment, principally due to |
differences in depreciation .............. $ 3,841 $ 5,042 | $ 666 $ 1,190
Financing costs ............................. -- -- | 244 127
Research and development costs .............. -- -- | 499 466
Allowance for doubtful accounts and |
other accruals ........................... 3,042 -- | 58 146
Net operating loss carryforwards ............ 58,795 8,026 | 10,720 11,311
--------------- --------------- | --------------- ---------------
Total .................................... 65,678 13,068 | 12,187 13,240
Deferred tax liability: |
Plant and equipment, principally due |
to differences in depreciation ........... -- -- | (339) (88)
--------------- --------------- | --------------- ---------------
Net deferred tax asset ...................... 65,678 13,068 | 11,848 13,152
Valuation allowance ......................... (65,678) (13,068) | (11,848) (13,152)
--------------- --------------- | --------------- ---------------
Net deferred tax asset (liability) .......... $ -- $ -- | $ -- $ --
=============== =============== | =============== ===============
The valuation allowance for deferred tax assets as of January 1, 1996 was
$38,409,000. The net change in the total valuation allowance for the year ended
December 31, 1996, the nine months ended September 30, 1997, the three months
ended December 31, 1997 and the year ended December 31, 1998, was an increase of
$27,269,000, a decrease of $52,610,000, a decrease of $1,220,000 and an increase
of $1,304,000, respectively. A full valuation allowance was applied against the
$3,152,234 in NOLs generated in 1998, due to the uncertainty of their
realization under SFAS No. 109.
F-22
54
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) DEBT
A summary of notes payable, long-term debt, and capital lease obligations
was as follows (dollars in thousands):
DECEMBER 31,
----------------------------
1997 1998
------------ ------------
Revolving lines of credit - affiliate:
Prime plus 2%, due March 31, 2000 at December 31, 1998 9.75% ........ $ 800 $ 8,000
============ ============
Revolving lines of credit:
Term note - prime plus 2% at December 31, 1997 10.5% ................ 15,800 --
Prime plus .75%, due February 17, 1998 at December 31, 1997 6.75%.... 2,565 --
Senior Notes - 9.75%, due February 15, 2008 ............................ -- 99,283
Equipment notes payable--10.02%, due 2001 .............................. 13,989 2,810
Other notes payable--6.74% to 10.38%, due 1999-2005 .................... 25,051 994
Capital lease obligations--10.46% to 11.09%, due 1999-2000 ............. 8,362 2,252
Subordinated Note--10.5% due March 31, 1999 ............................ 9,786 --
------------ ------------
Total long-term debt ................................................... 75,553 105,339
Less current portion ................................................... (1,158) (2,522)
------------ ------------
Notes payable, long-term debt, capital lease obligations
and subordinated note, excluding current portion ........... $ 74,395 $ 102,817
============ ============
On March 18, 1998, all of the then-outstanding debt of Grant, with the
exception of approximately $3.6 million relating to one capital lease obligation
and one note payable, was paid off with the proceeds of the Senior Notes (see
below).
On October 1, 1997, Grant and Elliott entered into a credit facility
providing for a revolving loan facility under which Grant could borrow up to an
aggregate principal amount of $5 million (at December 31, 1997, $4.2 million was
available for borrowing). Grant is required to pay interest on the outstanding
principal balance of revolving loans at a rate per annum equal to the prime rate
plus 2%. On December 18, 1997, the credit facility was amended to provide for a
term loan of $15.8 million in addition to the revolving loans. The proceeds of
the term loan were used by Grant to purchase all of the stock of Solid State not
already owned by Grant (see Note 1). This original credit facility was due to
expire on March 31, 1999 at which time all obligations of Grant under the credit
facility were due and payable. In connection with the redemption of the
cumulative pay-in-kind preferred stock, par value $.001 per share ("Preferred
Stock") (see Note 12), held by Westgate, on June 5, 1998, Elliott agreed to
amend the Credit Facility to increase the maximum borrowing capacity from $5
million to $15 million and to extend the term of the facility from March 31,
1999 to March 31, 2000. In April 1999, the Credit Facility was further extended
to $20.0 million. At December 31, 1998, there was $7 million available for
borrowing. The loans under the credit facility are collateralized by all of
Grant's assets and a pledge by Grant of certain notes and all the outstanding
shares of capital stock of its subsidiaries. Each subsidiary of Grant has
executed a guaranty in favor of Elliott, each of which guarantees payment of all
Grant's obligations owed to Elliott under the credit facility. Each subsidiary
has pledged its assets in favor of Elliott to secure its obligations under its
respective guaranty. The credit facility contains restrictions which, among
other things, prohibit Grant's right to pay dividends and limit its right to
borrow money, purchase fixed assets or engage in certain types of transactions
without the consent of the lender. The $15.8 million term loan was paid in full
on February 18, 1998 with the proceeds of the Senior Notes. (See below) At
December 31, 1998, the Company had violated a covenant in the Credit Facility
which limited the capital expenditures for any one year to a maximum of
$14 million. The Company obtained a consent and waiver to the default from
Elliott effective December 31, 1998.
F-23
55
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1997, a foreign credit facility between Solid State and its
subsidiaries and a Canadian bank was in effect. Under this revolving facility
Grant could borrow up to a principal amount of $3.6 million, collateralized by
substantially all the assets of Solid State and by assignment of receivables and
bearing interest at Canadian prime rate plus .75%. There was approximately $2.6
million outstanding at December 31, 1997. This facility was paid in full on
February 18, 1998 and was terminated. Following repayment of this note, the
Solid State assets have been pledged by Grant to collateralize the loans from
Elliott described above and each Solid State subsidiary has executed a guaranty
in favor of Elliott in the form described above.
On December 19, 1997 Elliott and Westgate exchanged 9,571.162 shares of
preferred stock with a liquidation value of $9,571,162, plus accrued dividends
of $215,000, for a subordinated note which bears interest at an annual rate of
10.5%. The subordinated note was paid in full on February 18, 1998 with the
proceeds of the Senior Notes. (See below)
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. These instruments, with the
exception of the $3.6 million noted above, were paid in full on February 18,
1998 with the proceeds of the Senior Notes. (See below)
At December 31, 1997, other notes payable included approximately $16.7
million due to Elliott from term loans entered into by Solid State during the
period February 1997 through October 1997. An additional $6.5 million note was
due from Solid State to the same Canadian bank that has the revolver. The
remainder of the other notes payable consists of local short-term credit lines
in certain foreign subsidiaries. These instruments were paid in full on February
18, 1998 with the proceeds of the Senior Notes. (See below)
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 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 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 Notes were issued under an indenture (the "Indenture") entered into
among the Company, as issuer, the Subsidiary Guarantors, and LaSalle National
Bank, 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. In addition, the Credit Facility limits the Company
from taking, without the consent of the lender, certain actions, including
creating indebtedness in excess of specified amounts and declaring and paying
dividends.
F-24
56
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) LEASES
Grant has entered into various non-cancelable operating leases which
provide for future minimum rental payments as follows:
1999--$449; 2000--$347; 2001--$208; 2002--$208; and 2003--$104.
Rental expense for each of the periods included in the accompanying
financial statements was as follows (dollars in thousands):
GGI GRANT
----------------------------- -----------------------------
YEAR NINE MONTHS THREE MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31 SEPTEMBER 30 DECEMBER 31, DECEMBER 31,
----------- ------------- | ------------- ------------
1996 1997 | 1997 1998
---- ---- | ---- ----
|
$2,089 $830 | $996 $2,556
(9) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments.
Cash and short-term financial instruments
The carrying amount approximates fair value due to the short maturities of
these instruments.
Long-term notes receivable
The fair value has been estimated using the expected future cash flows
discounted at market interest rates which approximate its carrying value.
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.
(10) 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"
F-25
57
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 is required to be administered by the Board of Directors
or by a committee of the Board of Directors consisting of at least two
nonemployee 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, 1998,
Awards covering 1,662,300 shares have been made by the Board of Directors.
During 1998, there were 57,600 option cancellations due to terminations. The
Awards consist of 1,568,700 nonstatutory stock options that will vest annually
in equal one-third increments beginning on December 31, 1998. All such options
were granted at a price equal to or in excess of the fair market value of the
Company's stock at the date of grant. Such options have an average exercise
price of $5.76 per share (range of $4.75 to $6.84 per share), subject to
adjustment in certain circumstances. In addition, 6,000 restricted shares
(36,000 total restricted shares) were granted to each non-employee director.
One-half (or 3,000) of such shares became restricted on August 18, 1998 and the
remaining 3,000 will become unrestricted on February 18, 1999, subject to the
satisfaction of certain conditions set forth under the Incentive Plan. The
Company recognized approximately $150,000 in compensation expense in 1998 in
relation to such restricted shares, based on its estimate of fair market value
pursuant to SFAS No. 123.
The Company applies Accounting Principles Board Opinion 25 in accounting
for its share-based compensation plans and has adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
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 awarded at the grant dates, consistent with the provisions
of SFAS No. 123, the Company's net loss and loss per share would have been
reduced to the pro forma amounts indicated below.
GGI
Had GGI adopted SFAS No. 123 for options granted after January 1, 1995,
GGI's net loss for the year ended December 31, 1996 would have been increased as
follows (in thousands):
GGI
----------------------------
1996
----------------------------
AS
REPORTED PROFORMA
--------- -----------
Net loss applicable to common stock.......................................... $ (82,390) $ (82,612)
F-26
58
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For purposes of determining compensation costs using the provisions of SFAS
123, the fair value of option grants were determined using the Black-Scholes
option-valuation model. The key input variables used in valuing the options
were: risk-free interest rate of 8.5%; dividend yield of zero; stock price
volatility of 70%; expected option lives of four years.
Pursuant to the Plan, GGI's capital stock was canceled on the Effective
Date. As a result, GGI's Amended 1989 Long-Term Incentive Plan was also
canceled. Therefore, the effects of SFAS No. 123 for the nine months ended
September 30, 1997 have not been presented.
GRANT
During the three months ended December 31, 1997 Grant did not grant any
awards under the 1997 Equity and Performance Plan. Therefore, the effects of
SFAS No. 123 for the three months ended December 31, 1997 have not been
presented.
Had Grant adopted SFAS No. 123 for options granted after January 1, 1998,
Grant's net loss for the year ended December 31, 1998 would have increased as
follows:
GRANT
-----------------------
1998
-----------------------
AS
REPORTED PRO FORMA
--------- ---------
Net loss applicable to common stock.............. $ (8,138) $(11,293)
Loss per common share - basic and diluted........ $ (.57) $ (.79)
The weighted average fair value of options granted during 1998 was $1.94.
The fair value of each option award is estimated on the grant date using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1998: expected volatility of zero, risk-free
interest rate of 5.5%, an expected life of nine years and a dividend yield of
zero.
(11) EMPLOYEE BENEFIT PLANS
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 $10,000 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. Contributions
made by GGI for the year ended December 31, 1996 consisted of 58,395 shares of
GGI Common Stock with a market value of $138,000. At December 31, 1996, the plan
held 82,861 shares of GGI Common Stock. Due to the cancellation of GGI's Common
Stock on the Effective Date, the plan administrator reduced the carrying value
of the shares held by the plan to zero and the trustee returned the certificates
to GGI. Cash contributions to the plan by Grant for the three-month period ended
December 31, 1997 and the twelve-month period ended December 31, 1998 totaled
$39,000 and $188,000, respectively.
Other Postretirement Benefits
GGI sponsored a defined contribution postretirement plan which, pursuant to
the Plan, was assumed by GGI and assigned to Grant on the Effective Date. The
plan provides medical coverage for eligible retirees and their dependents (as
defined in the plan).
F-27
59
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Following is a reconciliation of the changes in the plan's benefit
obligations and fair values of assets during 1997 and 1998 and a statement of
the funded status of this plan as of December 31 of each year.
GRANT
----------------------
1997 1998
--------- ---------
(THOUSANDS OF DOLLARS)
CHANGE IN BENEFIT OBLIGATION
Accumulated postretirement benefit obligation, beginning of year... $ (368) $ (453)
Service cost ...................................................... (69) (74)
Interest cost ..................................................... (26) (32)
Participant contributions ......................................... -- --
Amendments ........................................................ -- --
Actuarial (loss)/gain ............................................. -- (36)
Benefits paid ..................................................... 10 10
--------- ---------
Accumulated postretirement benefit obligation at end of year ...... $ (453) $ (585)
========= =========
GRANT
----------------------
1997 1998
--------- ---------
(THOUSANDS OF DOLLARS)
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year .................... $ -- $ --
Actual return on plan assets ...................................... -- --
Employer contribution ............................................. 10 10
Participant contributions ......................................... -- --
Benefits paid ..................................................... (10) (10)
--------- ---------
Fair value of plan assets at end of year .......................... $ -- $ --
========= =========
Funded status at end of year ...................................... $ (453) $ (585)
Unrecognized net actuarial (loss)/gain ............................ 17 53
Unrecognized prior service cost ................................... -- --
Unrecognized net transition obligation ............................ 111 103
--------- ---------
Accrued postretirement benefit cost ............................... $ (325) $ (429)
========= =========
F-28
60
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net periodic postretirement benefit cost included the following components:
GGI GRANT
---------------------------- ---------------------------
YEAR NINE MONTHS THREE MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
|
Service cost .......................................... $ 66 $ 52 | $ 17 $ 74
Interest cost ......................................... 21 20 | 6 32
Amortization of transition |
obligation over 20 years ........................... 7 5 | 2 7
Amortization of gain .................................. -- -- | -- --
Other amortization .................................... -- -- | -- --
--------- --------- | --------- ---------
Net periodic postretirement |
benefit cost ................................. $ 94 $ 77 | $ 25 $ 113
========= ========= | ========= =========
For measurement purposes, a 6.5% annual rate of increase in the per capita
cost of medical benefits was assumed for the year ended 1996. The rate was
assumed to decrease gradually to 5% for 2001 and remain at that level
thereafter.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% and 6.75% as of December 31, 1997,
and 1998, respectively.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the retiree health care plan. A one-percentage-point change
in assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
--------------- ---------------
(thousands of dollars)
Effect on total of service and interest cost........................... $ 19 $ (16)
Effect on postretirement benefit obligation............................ 88 (76)
(12) STOCKHOLDERS' EQUITY
GRANT
Cumulative Preferred Stock
Grant had authorized 20,000 shares of cumulative pay-in-kind preferred
stock (the "Cumulative Preferred Stock"), par value $0.001 per share, with a
liquidation preference of $1,000 per share of which 10,000 shares were
outstanding as of December 31, 1997. Dividends accrued and were cumulative from
September 30, 1997, the date on which such shares were issued. Dividends accrued
at an annual rate of 10.5% of the liquidation value and were payable annually on
September 30 of each year. Unpaid dividends associated with the Cumulative
Preferred Stock, at December 31, 1997 and at June 5, 1998, were approximately
$262,000 and $440,000, respectively.
F-29
61
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On June 5, 1998 the Company redeemed the 10,000 shares of Cumulative
Preferred Stock, held by Westgate, representing all such outstanding shares, in
the aggregate amount of $10.7 million, representing the liquidation amount of
such shares of Cumulative Preferred Stock, together with all accumulated,
accrued and unpaid dividends. Upon redemption, the Cumulative Preferred Stock
was canceled, retired and eliminated from the shares that the Company is
authorized to issue.
Common Stock
At December 31, 1998, Grant has authorized 25,000,000 shares of common
stock, par value $.001 per share, of which 14,426,055 shares are issued and
outstanding. The changes in common stock for the three months ended December 31,
1997 and the year ended December 31, 1998 are as follows (dollars in thousands):
COMMON STOCK
------------------------
SHARES AMOUNT
---------- --------
Balance September 30, 1997............................................ 4,590,056 $ 5
Common stock issued to directors...................................... 1 --
Common stock issued in exchange for warrants in Solid State........... 62,500 --
Common stock issued in connection with the reorganization plan........ 9,499,998 9
---------- -----
Balance December 31, 1997............................................. 14,152,555 $ 14
Common stock issued to directors...................................... 36,000 --
Common stock issued in connection with the underwriting of the
subscription offering............................................... 237,500 --
----------- -----
Balance, December 31, 1998............................................ 14,426,055 $ 14
========== =====
(13) 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, Westgate and Solid State. The
lawsuit alleged that (i) GGI and Elliott breached their obligations under the
Plan by seeking to complete the 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 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 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 sought to enjoin completion of the 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, Westgate, 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
F-30
62
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 has 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.
In October 1998, Zurich American Insurance Company ("Zurich") made a demand
on Grant for the payment of $694,000 claimed to be due Zurich under the terms of
certain insurance policies issued by Zurich to GGI in 1996, which policies were
allegedly assumed by Grant at the conclusion of its bankruptcy reorganization in
1997. Subsequent to December 31, 1998, a settlement has been agreed to by the
parties subject only to the execution of a definitive Settlement Agreement and
funding of the settlement at a cost to Grant of $290,000. This amount has been
accrued at December 31, 1998.
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. Other than the Plan and
actions commenced pursuant thereto or in connection therewith, management of GGI
and management of Grant are of the opinion that none of the claims and actions
are likely to have a material adverse impact on GGI's or Grant's financial
position, results of operations or cash flow.
The Court generally has jurisdiction over all of GGI's property, as defined
in section 541 of the Bankruptcy Code, held on the Petition Date or acquired
thereafter. GGI may not engage in transactions except pursuant to the Plan
without prior approval of the Court.
GGI and Grant are subject to review by various taxing authorities for the
purpose of verifying compliance with numerous local tax laws and regulations. As
a result of one of these reviews, GGI was notified that, during 1995, it had
neglected to collect a certain tax from several clients and remit those
collections to the local government. The total amount of the potential
assessment, including penalties and interest, is approximately $6,000,000. GGI
believes the tax authority's claim is without merit. Moreover, such assessment
was not filed as a claim in GGI's chapter 11 case. As a result, GGI has made no
provision for payment on the assessment. GGI intends to vigorously protest any
attempted enforcement of the assessment; however, there can be no assurances
regarding the outcome of any such protest.
(14) RELATED PARTY TRANSACTIONS
During 1996, GGI entered into an exclusive agreement with Macdonald & King,
Incorporated, a financial services firm, for the purpose of assisting GGI in
securing additional sources of financing, including equipment financing and
short and long-term financing. Mr. William C. Macdonald, a former director of
GGI, is the Chairman of the Board and sole shareholder of Macdonald & King,
Incorporated. Pursuant to the terms of the agreement, GGI issued 155,499 shares
of GGI Common Stock with a market value of approximately $388,748 to Macdonald &
King, Incorporated in connection with financing obtained by GGI prior to Mr.
Macdonald's resignation from GGI's Board of Directors effective August 8, 1996.
F-31
63
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On March 20, 1996, GGI issued 143,000 shares of GGI's $2.4375 Preferred to
Westgate, an affiliate of Elliott, a holder of more than 5% of the $2.4375
Preferred, for an aggregate purchase price of $1,573,000. Westgate subsequently
sold its shares of $2.4375 Preferred to Liverpool Limited Partners, which also
is an affiliate of Elliott.
In November 1996, GGI borrowed an aggregate of $3,149,000 from Westgate and
Elliott for working capital purposes. The borrowings were in the form of
unsecured promissory notes and remained outstanding at December 31, 1996, and
are therefore classified in pre-petition liabilities subject to the chapter 11
case.
A former senior vice-president of Grant loaned approximately CDN $500,000
for a two-year term at 10% interest to an entity in which the Company held, at
the time, an 18% common equity interest. Additionally, Grant owned $268,000 of
redeemable, cumulative preferred shares in the same entity. Currently, the
Company holds a 14.5% common equity and no preferred shares. During 1998, Grant
recorded a $271,000 write-down to reduce the carrying value of its investment in
this entity to zero due to the entity's uncertain financial condition. The
Company used this entity periodically to perform survey services. The senior
vice president resigned in January 1998. During the three months ended December
31, 1997, Grant paid approximately $364,000 to this entity.
The Company's Chairman of the Board ("Chairman") is an officer of an
affiliate of the Principal Stockholders of Grant. On April 28, 1998, Elliott
granted to the Chairman options to purchase 100,000 shares of Common Stock from
Elliott. Additionally, the Chairman has entered into a consulting agreement,
dated April 28, 1998, with Grant (the "Consulting Agreement") which provides for
an annual consulting fee of $100,000 for as long as he remains Chairman. Under
the Consulting Agreement, the Chairman was also granted options by the Company
to purchase 50,000 shares of Common Stock under the Incentive Plan at exercise
prices equal to or in excess of the fair market value of the Company's stock on
date of grant. These options will vest annually in equal one-third increments
beginning on December 31, 1998, and have an average exercise price of $6.07 per
share.
See the discussion of debt financing with Elliott in Notes 7 and 12.
See discussion of the Subscription Offering in Note 19.
F-32
64
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) OTHER INCOME (EXPENSE)
Other Income (Expense) consisted of the following:
GGI GRANT
---------------------------------- ----------------------------------
YEAR NINE MONTHS THREE MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
--------------- --------------- --------------- ---------------
1996 1997 1997 1998
----- ----- ---- ----
(DOLLARS IN THOUSANDS)
|
Gain (loss) on the sale of fixed assets.. $ 25 $ (67) | $ 50 $ 189
Net gain (loss) on foreign exchange ... (251) (98) | (289) (485)
Loss on sale of subsidiaries .......... (198) -- | -- --
Foreign credit insurance .............. (8) -- | -- --
Gain on insurance settlement .......... -- 11 | -- --
Merger costs .......................... -- -- | (767) --
Investment income ..................... -- -- | 46 99
Legal settlements ..................... -- 2,359(1) | (66) (635)
Canadian investment write-off ......... -- -- | -- (271)
GGI administrative fee ................ -- -- | -- 60
Miscellaneous ......................... (70) 61 | (236) 223
--------------- --------------- | --------------- ---------------
Total ................................. $ (502) $ 2,266 | $ (1,262) $ (820)
=============== =============== | =============== ===============
- ---------------
(1) On July 15, 1997, GGI's Brazilian subsidiary finalized an agreement with a
former customer that resolved a long-standing dispute relating to services
rendered on contracts dating back to 1983. In settlement of all claims, GGI
received payment, net of related costs and expenses, of approximately
$2,359,000.
(16) LOSS PER SHARE
Loss per common share-basic and diluted is computed as follows (in
thousands, except per share amounts):
GGI | GRANT
------------------------------- | -----------------------------
YEAR NINE MONTHS | THREE MONTHS YEAR
ENDED ENDED | ENDED ENDED
DECEMBER 31, SEPTEMBER 30, | DECEMBER 31, DECEMBER 31,
----------- ------------- | ------------ ------------
1996 1997 | 1997 1998
----------- ------------- | ------------ ------------
|
Net loss applicable to common stock..... $ (82,390) $ (425) | $ (6,143) $ (8,138)
=========== ============= | ============ ============
|
Weighted average common shares.......... | 4,798 14,257
| ============ ============
|
Loss per common share - basic and |
diluted.............................. | $ (1.28) $ (.57)
| ============ ============
Loss per share data for GGI have not been presented as this information is
not meaningful.
Dividends on GGI's $2.4375 convertible exchangeable preferred stock were $6.4
million for the year ended December 31, 1996. Dividends on Grant's pay-in-kind
preferred stock were $477,000 and $440,000 in the three months ended December
31, 1997 and the year ended December 31, 1998, respectively.
F-33
65
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) COMPREHENSIVE INCOME (LOSS)
Effective January 1, 1998, Grant adopted Statement of Financial Accounting
Standards 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 gains (losses) on
marketable securities classified as available-for-sale. Grant's and GGI's total
comprehensive loss is as follows for the periods presented.
GGI GRANT
------------------------------- | -----------------------------
YEAR NINE MONTHS | THREE MONTHS YEAR
ENDED ENDED | ENDED ENDED
DECEMBER 31, SEPTEMBER 30, | DECEMBER 31, DECEMBER 31,
----------- ------------- | ------------ ------------
1996 1997 | 1997 1998
----------- ------------- | ------------ ------------
|
Net loss applicable to common stock..... $ (82,390) $ (425) | $ (6,143) $ (8,138)
Other comprehensive loss - foreign |
currency translation adjustments..... -- -- | ( 467) (2,019)
---------- ----------- | ---------- ----------
|
Total comprehensive loss................ $ (82,390) $ (425) | $ (6,610) $ (10,157)
========== ========== | ========== ==========
(18) SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Non Cash investing and financing activities consisted of the following (in
thousands):
GGI GRANT
--------------------------------- ---------------------------------
YEAR NINE MONTHS THREE MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
--------------- --------------- --------------- ---------------
1996 1997 1997 1998
--------------- --------------- | --------------- ---------------
|
CASH PAID FOR INTEREST AND TAXES WAS AS FOLLOWS: |
Taxes, net of refunds .......................... $ 3,496 $ 2,037 | $ 785 $ 3,624
Interest, net of amounts capitalized ........... 6,106 3,742 | 595 7,822
|
NONCASH INVESTING AND FINANCING ACTIVITIES: |
Property, plant and equipment acquired |
through debt issuance ...................... 19,718 1,483 | 8,406 3,200
Common Stock issued in exchange of warrants |
in Solid State ............................. -- -- | 144 --
Converted 9,571 Preferred Shares to A |
Subordinated Note ........................... -- -- | 9,571 --
Dividend-- Preferred Stock ..................... -- -- | 215 --
Debenture conversion ........................... 2,774 -- | -- --
Fair value of divestitures, net of cash held ... 493 -- | -- --
Receivables acquired in connection with |
divestitures ................................ 255 -- | -- --
Prepaid insurance debt additions ............... $ -- $ -- | $ -- $ 1,186
F-34
66
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(19) SUBSCRIPTION OFFERING
Pursuant to the Plan, 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.
(20) SUBSEQUENT EVENTS
On January 27, 1999, the Company's then President and CEO, resigned. The
former president's termination agreement provides for him to continue employment
through February 26, 1999 ("Termination Date") at which time he would begin a
five-year non-compete period during which the Company would pay him $15,000 per
month plus benefits from March 1999 through December 2001 and $7,500 per month
plus benefits per month from January 2002 through December 2003. In addition,
the former President was paid a one-time cash bonus of $180,000 and was allowed
to keep-one-third (80,000) of the stock options awarded to him under the 1997
Equity and Performance Incentive Plan. The options are exercisable for a
three-year period after Termination Date.
F-35
67
GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
AND
GGI LIQUIDATING CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Quarterly financial information of GGI is summarized as follows:
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
1997
Revenues .............................................................. $ 30,295 $ 36,873 $ 25,537
Operating income ...................................................... 2,070 3,532 1,192
Net income (loss) ..................................................... (275) 138 (287)
Net income (loss) applicable to
common stock ....................................................... (275) 138 (287)
Quarterly financial information of Grant is summarized as follows:
1997
Revenues .............................................................. $ -- $ -- $ -- $ 37,868
Operating income ...................................................... -- -- -- (5,033)(1)
Net income (loss) ..................................................... -- -- -- (5,666)
Net income (loss) applicable to
common stock ....................................................... -- -- -- (6,143)
INCOME (LOSS) PER COMMON SHARE--
BASIC AND DILUTED:
Net income (loss) per common stock .................................... -- -- -- $ (1.28)
1998
Revenues .............................................................. $ 47,895 $ 48,467 $ 50,995 $ 28,155
Operating income ...................................................... 4,064 4,867 3,485 (6,070)(2)
Net income (loss) ..................................................... 733 1,205 157 (9,793)
Net income (loss) applicable to
common stock ....................................................... 469 1,029 157 (9,793)
INCOME (LOSS) PER COMMON SHARE--
BASIC AND DILUTED:
Net income (loss) per common stock .................................... $ .03 $ .08 $ .01 $ (.69)
- --------------
(1) Includes a $6,369 charge for asset impairment (see Note 3 of Notes to the
Consolidated Financial Statements). $5,869 is related to the impaired
multi-client data library and $500 is related to miscellaneous assets held by
Solid State.
(2) Includes a $3,762 charge for asset impairment (see Note 3 of
Notes to the Consolidated Financial Statements). $3,198 is related to the
impaired multi-client data library and $564 is related to non-productive asset
write-downs.
F-36
68
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- ------------------------
2.1 GGI's Second Amended Plan of Reorganization under chapter 11 of
the Bankruptcy Code (incorporated by reference to Exhibit 2.1 of
the Subscription Offering Registration Statement, filed with the
Commission on December 24, 1997).
2.2 Offer to Purchase for Cash all of the Common Shares of Solid
State not already held by or on behalf of SSGI or its Affiliates
at a price of Cdn $3.50 per Common Share by SSGI (incorporated by
reference to Exhibit 2.2 of the Subscription Offering
Registration Statement, filed with the Commission on December 24,
1997).
3.1 (i) Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1(i) of the Subscription
Offering Registration Statement, filed with the Commission on
December 24, 1997).
3.1 (ii) Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.1(ii) of the Subscription Offering
Registration Statement, filed with the Commission on December 24,
1997).
4.1 Registration Rights Agreement between Grant and Elliott, dated
September 19, 1997 (incorporated by reference to Exhibit 4.2 of
the Subscription Offering Registration Statement, filed with the
Commission on December 24, 1997).
4.2 Amendment No. 1 to Registration Rights Agreement between Grant
and Elliott, dated October 1, 1997 (incorporated by reference to
Exhibit 4.3 of the Subscription Offering Registration Statement,
filed with the Commission on December 24, 1997).
4.3 Amendment No. 2 to Registration Rights Agreement between Grant
and Elliott, dated December 17, 1997 (incorporated by reference
to Exhibit 4.4 of the Subscription Offering Registration
Statement, filed with the Commission on December 24, 1997).
4.4 Registration Rights Agreement among the Company, the Subsidiary
Guarantors and the Initial Purchaser, dated February 18, 1998
(incorporated by reference to Exhibit 4.5 of Amendment No. 2 to
the Subscription Offering Registration Statement, filed with the
Commission on March 26, 1998).
4.5 Indenture among the Company, the Subsidiary Guarantors and
LaSalle National Bank, as Trustee, dated February 18, 1998
(incorporated by reference to Exhibit 4.6 of Amendment No. 2 to
the Subscription Offering Registration Statement, filed with the
Commission on March 27, 1998).
10.1 Loan and Security Agreement between Grant and Elliott, dated
October 1, 1997 (incorporated by reference to Exhibit 10.1 of the
Subscription Offering Registration Statement, filed with the
Commission on December 24, 1997).
10.2 First Amendment to Loan and Security Agreement between Grant and
Elliott, dated December 19, 1997 (incorporated by reference to
Exhibit 10.2 of the Subscription Offering Registration Statement,
filed with the Commission on December 24, 1997).
10.3 Demand Promissory Note from Grant to Elliott, dated November 26,
1997 (incorporated by reference to Exhibit 10.3 of the
Subscription Offering Registration Statement, filed with the
Commission on December 24, 1997).
10.4 Subordinated Promissory Note from Grant to Elliott, dated
December 18, 1997 (incorporated by reference to Exhibit 10.4 of
the Subscription Offering Registration Statement, filed with the
Commission on December 24, 1997).
10.5 Stock Purchase Agreement among the Company, Elliott and Westgate,
dated December 19, 1997 (incorporated by reference to Exhibit
10.5 of Amendment No. 1 to the Subscription Offering Registration
Statement, filed with the Commission on February 4, 1998).
10.6 Restated and Amended Employment Agreement between Grant and Larry
E. Lenig, Jr., dated October 1, 1997 (incorporated by reference
to Exhibit 10.6 of the Subscription Offering Registration
Statement, filed with the Commission on December 24, 1997).
10.7 Executive Employment Agreement between Solid State and Mitchell
L. Peters, dated November 24, 1997 (incorporated by reference to
Exhibit 10.7 of the Subscription Offering Registration Statement,
filed with the Commission on December 24, 1997).
10.8 Grant Geophysical, Inc. 1997 Equity and Performance Incentive
Plan (incorporated by reference to Exhibit 10.8 of Amendment No.
2 to the Subscription Offering Registration Statement, filed with
the Commission on March 27, 1998).
69
10.9 Loan Agreement among Elliott, Westgate, Solid State and the U.S.
Subsidiary, dated October 16, 1996 (incorporated by reference to
Exhibit 10.9 of the Subscription Offering Registration Statement,
filed with the Commission on December 24, 1997).
10.10 Form of Promissory Note from the U.S. Subsidiary to Elliott
(incorporated by reference to Exhibit 10.10 of the Subscription
Offering Registration Statement, filed with the Commission on
December 24, 1997).
10.11 Letter Agreement among Elliott, Westgate, Solid State and the
U.S. Subsidiary, dated June 17, 1997 (incorporated by reference
to Exhibit 10.11 of the Subscription Offering Registration
Statement, filed with the Commission on December 24, 1997).
10.12 Letter Agreement among Elliott, Westgate, Solid State and the
U.S. Subsidiary, dated September 4, 1997 (incorporated by
reference to Exhibit 10.12 of the Subscription Offering
Registration Statement, filed with the Commission on December 24,
1997).
10.13 Letter Agreement among Elliott, Westgate, Solid State and the
U.S. Subsidiary, dated October 17, 1997 (incorporated by
reference to Exhibit 10.13 of the Subscription Offering
Registration Statement, filed with the Commission on December 24,
1997).
10.14 Letter Agreement among Elliott, Westgate, Solid State and the
U.S. Subsidiary, dated November 30, 1997 (incorporated by
reference to Exhibit 10.14 of the Subscription Offering
Registration Statement, filed with the Commission on December 24,
1997).
10.15 Letter Agreement between Elliott and Mitchell L. Peters, dated
November 24, 1997 (incorporated by reference to Exhibit 10.15 of
the Subscription Offering Registration Statement, filed with the
Commission on December 24, 1997).
10.16* Letter Agreement between Grant and Larry E. Lenig, Jr., dated
January 27, 1999.
10.17* Employment Agreement between Grant and Richard H. Ward, dated
February 3, 1999.
10.18* Employment Agreement between Grant and Stephen H. Wood, dated
February 24, 1999.
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit
21.1 of Amendment No. 2 to the Subscription Offering Registration
Statement, filed with the Commission on March 27, 1998).
27.1 * Financial Data Schedule.
- -------------------
* Filed herein