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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 333-89863*
GRANT GEOPHYSICAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0548468
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16850 PARK ROW, HOUSTON, TEXAS 77084
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 398-9503
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant: (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirement for the past 90 days. [ ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Annual Report on Form 10-K or any
amendment to this Form 10-K. [ ]
As of June 10, 2003, 14,547,055 shares of the Registrant's Common Stock,
$.001 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
* The Commission file number refers to a Form S-1 registration statement
filed by the Registrant under the Securities Act of 1933, which became
effective January 12, 2000.
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1
GRANT GEOPHYSICAL, INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business................................................................................. 3
Item 2. Properties............................................................................... 9
Item 3. Legal Proceedings........................................................................ 9
Item 4. Submission of Matters to a Vote of Security Holders...................................... 9
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters..................... 10
Item 6. Selected Financial Data.................................................................. 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................... 11
Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................... 19
Item 8. Financial Statements and Supplementary Data.............................................. 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................................... 20
PART III
Item 10. Directors and Executive Officers of the Registrant....................................... 21
Item 11. Executive Compensation................................................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 24
Item 13. Certain Relationships and Related Transactions........................................... 25
Item 14. Controls and Procedures.................................................................. 25
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................... 26
2
PART I
ITEM 1. BUSINESS.
OVERVIEW
Grant Geophysical, Inc., a Delaware corporation (together with its
subsidiaries, "Grant," or the "Company"), is a leading provider of seismic data
acquisition services in land and transition zone environments in the United
States, Latin America and Canada. Grant also markets seismic data acquisition
services in the Middle East and the Far East. The Company has participated in
the seismic data acquisition services business in the United States and Latin
America since the 1940s, the Far East since the 1960s and Canada since the
1970s. The Company's seismic data acquisition services typically are provided on
an exclusive contract basis to domestic and international oil and gas
exploration and production companies and seismic data marketing companies. Grant
also provides seismic data processing services through its international support
facilities.
The Company utilizes sophisticated equipment to perform specialized 3D and
2D seismic surveys. All of the Company's seismic data acquisition crews are
capable of performing surveys in land environments and two are equipped to
perform surveys in transition zone environments. Transition zone environments
are swamps, marshes and shallow water areas that require specialized equipment
and must be surveyed with minimal disruption to the natural environment.
The market for seismic land acquisition, both domestically and in the
international areas where the Company was active, remained significantly
depressed throughout 2002. Additionally, demand for land and transition zone
seismic data acquisition services are primarily determined by oil and gas
industry capital expenditures, budgets and spending patterns. These spending
patterns are affected by individual oil and gas company budgets as well as
industry-wide conditions. Overcapacity in the seismic service industry continues
to suppress pricing and activity levels and has materially adversely affected
the Company's results of operations. The Company's world-wide seismic crew count
ranged from 5 to 10 crews during 2002. As of April 30, 2003, the Company had 9
active crews. Management has implemented a business plan in 2003 with the
specific objectives of improving profitability and generating positive operating
cash flow through intensified sales and marketing, tighter cost controls,
downsizing the Company's Canadian operation and reduced overhead expenses. (See
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources and Note 1 of Notes to
Consolidated Financial Statements).
As of April 30, 2003, the Company was operating 1 crew in the United States
and operating or mobilizing 5 crews in Latin America, 2 crews in Canada and 1
crew in the Far East. For the year ended December 31, 2002, the Company's total
revenues were $89 million, with approximately 5.7% from the United States, 82.9%
from Latin America, 0.1% from the Far East and 11.3% from Canada. International
operations, excluding Canada, accounted for approximately 83% of consolidated
revenues and 84% of data acquisition revenues for the year ended December 31,
2002.
Grant's principal executive office is located at 16850 Park Row, Houston,
Texas 77084 and its telephone number is 281-398-9503.
LAND AND TRANSITION ZONE SEISMIC DATA ACQUISITION
A land or transition zone seismic data acquisition crew typically consists
of; (i) a surveying crew that marks out the lines to be recorded and marks the
sites for energy source or geophone placement and equipment location; (ii) an
explosive or mechanical vibrating or compressed air unit crew; (iii) and a
recording crew that lays out the geophones and field recording boxes, directs
shooting operations and records the seismic energy reflected from subsurface
structures. A land seismic data acquisition crew utilizing an explosives unit is
supported by several drill crews, either internally provided or furnished by
third parties under short-term contracts. Drill crews operate in advance of the
seismic data acquisition crew and bore shallow holes for small explosive charges
that, when detonated, produce the necessary seismic impulse. In locations where
conditions dictate or where the use of explosives is precluded due to
regulatory, topographical or ecological factors, a mechanical vibrating unit or
compressed air unit is substituted for explosives as the seismic energy source.
The Company also employs specialized crew mobilization equipment to improve
productivity in certain applications, including helicopters for rugged terrain
or in agricultural areas, small watercraft for transition zone applications, and
man-portable equipment in jungle and other environments where vehicular access
is limited. Depending on the size of the seismic survey, the location and other
logistical factors, a seismic data acquisition crew operated by the Company may
involve from as few as 30 to as many as 1,500 employees.
One of the challenges inherent in land seismic data acquisition is
operating in difficult logistical environments without disrupting the sensitive
ecosystems in which surveys are frequently located. The Company currently
operates approximately 12,000 channels of
3
remote digital seismic equipment, which can be deployed without the use of
conventional seismic cables, thereby allowing access to such environments.
Remote digital seismic equipment, which uses radio signals to transmit data, is
typically used in transition zone and other logistically challenging
environments such as highly populated regions with numerous topographic
obstructions and areas where conventional cable-based recording systems are
impractical. The Company has over 20 years of experience operating in transition
zone environments in the Gulf Coast region of the United States, Latin America,
the Far East and Africa.
Once recorded by the seismic data acquisition crew, seismic data is
computer processed to enhance the recorded signal by reducing noise and
distortion and improving resolution to produce a representation of the survey
site's subsurface structures. The Company provides seismic data processing
services through its international support facilities.
The Company markets its seismic data acquisition services from its Houston
and Calgary corporate offices and from its regional and international
administrative centers by personnel whose duties include technical, supervisory
or executive responsibilities. The Company primarily acquires seismic data on a
turnkey basis for oil and gas companies which provides for a fixed fee for each
project. The Company has also in the past acquired seismic data on a term basis,
which provided for a periodic fee during the term of the project, and on a
cost-plus basis, which provided that the costs of a project, plus a percentage
fee, were borne by the customer.
In addition the Company, in the United States and Canada, has in the past
acquired and owns multi-client seismic data surveys, and remaining surveys are
marketed on a non-exclusive basis to oil and gas companies.
The Company conducts a substantial portion of its business in currencies
other than the U.S. or Canadian dollars, particularly various Latin American
currencies, and its operations are subject to fluctuations in foreign currency
exchange rates. Accordingly, the Company's results from performing international
contracts could be significantly affected by fluctuations in exchange rates. The
Company's international contracts requiring payment in currency other than U.S.
or Canadian dollars typically are indexed to inflationary tables and partially
used to fund local expenses. The Company attempts to structure the majority of
its international contracts to be partially billed and paid in U.S. dollars.
MARKET AREAS
During the last three years, the Company conducted seismic operations in
the United States, Canada, Latin America and the Far East. The following table
sets forth the Company's revenues by geographic area, for the years ended
December 31, 2000, 2001 and 2002:
YEAR ENDED DECEMBER 31,
-----------------------------------
2000 2001 2002
--------- -------- ---------
(DOLLARS IN THOUSANDS)
United States............ $ 26,825 $ 34,848(1) $ 5,089
Canada................... 14,984 12,502 10,088
Latin America............ 20,183 44,127 73,787
Far East................. 4,160 1,974 51
--------- -------- ---------
$ 66,152 $ 93,451 $ 89,015
========= ======== =========
(1) Includes the $15 million sale of a substantial portion of the Company's
multi-client data library, with ongoing rights thereto, in the southern United
States. See Note 6 of Notes to Consolidated Financial Statements.
As part of the Company's 2003 business plan, the Company is resizing the
Canadian operation to reduced current demand levels. The Company expects
Canadian revenues to be decreased in 2003 and expects that revenues from
international operations, excluding Canada, will be increased as a percentage of
the Company's consolidated revenues.
BACKLOG
As of December 31, 2002, the Company estimated that its total contractual
backlog for services was approximately $42 million, all of which is expected to
be completed in 2003. As of May 1, 2003 the Company estimated that its total
backlog was approximately $16 million. The decrease in backlog is primarily the
result of 2003 activity. Most of the Company's contracts are terminable by the
customer upon relatively short notice and, in some cases, without penalty. The
Company's backlog as of any particular date is not indicative of the likely
operating results for any succeeding period, and there can be no assurance that
any amount of backlog will ultimately be realized as revenue.
4
CAPITAL EXPENDITURES AND TECHNOLOGY
The Company's ability to compete and maintain a significant market position
in the land and transition zone seismic data acquisition business is partially
driven by its ability to provide technology comparable to that of its primary
competitors. Accordingly, the Company continually maintains and periodically
upgrades its seismic data acquisition equipment to maintain its competitive
position. Due to the depressed state of the seismic industry, the Company's
operating results and lack of funding, the Company made $5.0 million and $15.4
million in capital expenditures in 2001 and 2002, respectively. The level of
future capital expenditures will depend on the availability of funding and
market requirements as dictated by industry activity levels.
Over the past several years, the Company has focused its efforts on
developing operating procedures and acquiring equipment that will enhance the
efficiency of its seismic data acquisition crews and reduce the time required to
complete projects. The Company's strategy relies on the use of third-party
equipment suppliers to provide equipment, although certain equipment may be
customized to the Company's specifications to enhance operating efficiency.
Certain of the equipment, processes and techniques used by the Company are
subject to the patent rights of others, and the Company holds non-exclusive
licenses with respect to a number of such patents. While the Company regards as
beneficial its access to third-party technology through licensing, the Company
believes that substantially all presently licensed technology could be replaced
without significant disruption to its business.
LICENSING OF MULTI-CLIENT DATA
The Company has in the past acquired and processed seismic data for its own
account by conducting surveys either partially or wholly funded by multiple
customers. In this mode of operation, ownership of the data is retained by the
Company and the data is licensed on a non-exclusive basis. Due to the depressed
demand for seismic services, an inability to secure adequate initial customer
underwriting and a lack of sufficient liquidity, the Company, in the first
quarter of 2000, curtailed its strategy of building a multi-client data library
in the southern United States.
On March 23, 2001, the Company completed the sale of a substantial portion
of its multi-client data library in the southern United States for $15,000,000
cash, retaining all of its Canadian multi-client data library as well as several
data surveys in the southern United States. Although the Company may selectively
continue to build a data library if adequate liquidity exists, it is unlikely
that the Company will undertake any multi-client seismic projects without
significant underwriting levels.
CUSTOMERS AND PROJECTS
The Company's customers consist of domestic and international oil and gas
companies and seismic data marketing companies. As is the case for many service
companies in the oil and gas industry, a relatively small number of customers or
a limited number of significant projects may account for a large percentage of
the Company's net revenues in any given year. Moreover, such customers and
projects may, and often do, vary from year to year. During 2002, the Company's
five largest customers accounted for approximately $56.3 million, or 63.3% of
revenues and 3 of these customers accounted for $14.3 million (16.1% of total
revenues), $14.0 million (15.7%), and $13.9 million (15.6%) respectively. During
2001, the Company's five largest customers accounted for approximately $49.3
million, or 52.7% of revenues, and two of these customers accounted for $15.7
million (16.8% of total revenues) and $14.8 million (15.8%), respectively, of
revenues.
COMPETITION
The acquisition of seismic data for the oil and gas industry is highly
competitive worldwide. In the current market environment, competition is based
primarily on price, but is also affected by crew availability, prior
performance, technology, safety, quality, dependability and the contractor's
expertise in the particular area where the survey is to be conducted. The
Company's principal competitors are PGS - Petroleum Geo Services ASA; Veritas
DGC, Inc.; and Western Geco, a joint venture between Schlumberger Limited and
Baker Hughes, Inc. The Company competes against these three companies for most
of its seismic data acquisition contracts in North America. The Company believes
that its principal competitors have financial, operating and other resources in
excess of its own. Also in North America, the Company competes with
approximately 20 smaller companies that target narrow market segments. In Latin
America and the Far East, the Company competes with Western Geco, CGG -
Compagnie General de Geophysique, PGS - Petroleum Geo Services ASA and a few
smaller local competitors.
EMPLOYEES
As of April 30, 2003, the Company employed approximately 217 full-time and
approximately 1,849 temporary contract personnel
5
worldwide. None of the Company's employees is subject to collective bargaining
agreements. The Company considers its relations with its employees to be good.
ENVIRONMENTAL MATTERS/GOVERNMENTAL REGULATION
The Company's domestic operations are subject to a variety of federal,
state and local laws and regulations relating to the protection of human health
and the environment, the violation of which may result in civil or criminal
penalties. The Company invests financial and managerial resources to comply with
such laws and regulations, and management believes that it is in compliance in
all material respects with applicable environmental laws and regulations.
Although such environmental expenditures by the Company historically have not
been significant, there can be no assurance that these laws and regulations will
not change in the future or that the Company will not incur significant costs in
the future performance of its operations. The Company is not involved in any
legal proceedings concerning environmental matters and is not aware of any
claims or potential liability concerning environmental matters that could have a
material adverse impact on the Company's financial position, cash flows or
results of operations.
The Company's operations outside of the United States are subject to
similar environmental regulations. Management believes that the Company is in
material compliance with the existing environmental requirements of these
foreign governmental bodies. The Company has not incurred any significant
environmental costs in connection with the performance of its foreign
operations; however, any regulatory changes that impose additional environmental
restrictions or requirements on the Company or its customers could adversely
affect the Company through increased operating costs and decreased demand for
the Company's services.
CAUTIONARY STATEMENTS
Certain statements made in this Annual Report on Form 10-K that are not
historical facts are "forward-looking statements". Forward-looking statements
may include, without limitation, the following:
- statements regarding the Company's business strategy, plans and
objectives;
- statements expressing the beliefs and expectations of management of
the Company regarding future demand for the Company's seismic services
and other events and conditions that may influence demand for the
Company's services and its performance in the future; and
- statements concerning the Company's business strategy and
expectations, industry conditions, market position, backlog, future
operations, margins, profitability, liquidity and capital resources.
Forward-looking statements can generally be identified by such terminology
as "may," "will," "expect," "believe," "anticipate," "project," "estimate" or
similar expressions. Such statements are based on certain assumptions and
analyses made by the Company's management in light of its experience and its
perception of historical trends, current conditions, expected future
developments and other factors that it believes to be appropriate. The Company
cautions that such statements are only current expectations and not guarantees
of future performance and that actual results, developments and business
decisions may differ from those envisioned by the forward-looking statements.
All phases of the Company's operations are subject to a number of
uncertainties, risks and other influences, many of which are beyond the control
of the Company. Any one of such influences, or a combination, could materially
affect the accuracy of the forward-looking statements and the projections on
which the statements are based. Some important factors that could cause actual
results to differ materially from the anticipated results or other expectations
expressed in the Company's forward-looking statements include the following:
Debt and Liquidity Limitations.
The Company currently has substantial indebtedness. The level of the
Company's indebtedness and the Company's current level of cash flow generated
from its operations (i) has not allowed for the Company to meet its debt service
requirements and the Company does not expect to be able to without refinancing
its current debt or reaching an accommodation with the holders of that debt;
(ii) makes it extremely difficult for the Company to obtain any additional debt
or equity financing for any purpose; (iii) requires that a substantial portion
of the Company's available cash be dedicated to debt service and, accordingly,
is not available for use in its business; (iv) limits the Company's flexibility
in planning for, or reacting to, changes in its business; (v) results in the
Company being more highly leveraged than most of its competitors, which places
it at a competitive disadvantage in pursuing contract opportunities;
6
and (vi) makes it more vulnerable to current business conditions in the seismic
services industry.
The Company is currently in default under its credit facility (the "Credit
Facility"), with Elliott Associates, L.P. ("Elliott") as well as under the
indenture under which the 9 3/4% Senior Notes due 2008 (the "Senior Notes") were
issued. As a result of the event of default under the indenture, the trustee, or
the holders of a specified percentage in aggregate principal amount of the
Senior Notes, could take the steps necessary to cause the Senior Notes to become
immediately due and payable. As of the date of this report, neither the trustee
nor such holders has exercised this right. Additionally, the event of default
under the Senior Notes constitutes an event of default under the Credit
Facility, which entitles Elliott to accelerate the maturity of all amounts owing
under the Credit Facility and to exercise remedies to collect such amounts as
provided under the Credit Facility and the related security agreements. As of
the date of this report, Elliott has not exercised this right. Accordingly, the
Company has classified both the $43.5 million of otherwise long-term debt
related to the Senior Notes and the $24.2 million of otherwise long-term debt
related to the Credit Facility as current and expects to continue to do so for
the foreseeable future. If the maturity of any of the Company's debt was
accelerated, it would be unlikely that the Company would be able to continue its
operations without seeking protection from its creditors under the federal
bankruptcy code. Additionally, as a result of the defaults, the Company does not
expect that any additional amounts will be made available to the Company under
the Credit Facility.
The Company's ability to meet its debt service and other obligations
depends on its future performance, which in turn is subject to general economic
conditions, activity levels in the oil and gas exploration sector, and other
factors beyond the Company's control. The Company has incurred net losses for
the past three years and, given the continuing low activity level in the United
States and Canada for land data seismic acquisition services and cash
constraints on the Company, the Company expects to continue to incur net losses
through 2003. While management believes there has been a recent improvement in
market conditions for seismic services, especially in Latin America and the Far
East, our ability to finance operations will remain limited through 2003 and
financing may not be available at all to allow the Company to continue its
operations in the ordinary course of business if the Company cannot refinance
its debt, reach an accommodation with its lenders or obtain additional financing
or credit support.
There are currently no additional committed sources of financing available
to the Company and no availability under its existing facilities. The Company
has in the past relied on its majority stockholder, Elliott, to provide credit
support and interim funding. Elliott has indicated to the Company that it will
not commit to provide additional financial and credit support to the Company
during 2003. Even if the Company's operating results continue to improve and
cost control initiatives are successful during 2003, the Company will require
additional financing, or waivers on current debt obligations, to sustain its
operations and meet its debt service requirements as those amounts become due.
There can be no assurance that amounts that become due in 2003 can be paid or
refinanced or that any additional financing can be obtained to meet the
Company's needs.
Dependence on the Oil and Gas Industry; Industry Volatility.
The Company's business depends in large part on the conditions of the oil
and gas industry and, specifically, on the capital expenditures of the Company's
customers. Demand for land and transition zone seismic acquisition services
remains severely depressed over levels experienced in the past. The Company is
unable to predict with any certainty when and the extent to which the market for
seismic services is likely to improve and, until such time, will continue to
experience operating losses.
Intense Price Competition in a Depressed Market.
Competition among seismic contractors is intense. Competitive factors have
in recent years included price, crew experience, equipment availability,
technological expertise and reputation for quality and dependability. Certain of
the Company's competitors operate more data acquisition crews than the Company
does and have substantially greater financial and other resources. These larger
and better capitalized companies enjoy an advantage over the Company in the
current competitive environment for contract awards where competition is
characterized principally by intense price competition.
Risks of High Levels of Fixed Costs.
The Company's business has high fixed costs, and downtime or low
productivity due to reduced demand, weather interruptions, equipment failures or
other causes could result in significant operating losses.
7
Technology Risks.
Seismic data acquisition and processing is a capital-intensive and
technological business. The development of seismic data acquisition and
processing equipment has been characterized by rapid technological advancements
in recent years, and the Company expects this trend to continue. Manufacturers
of seismic equipment may develop new systems that have competitive advantages
over systems now in use that could render the Company's current equipment
obsolete or require the Company to make significant capital expenditures to
maintain its competitive position. Under such circumstances, there can be no
assurance that the Company would have the necessary funds or be able to obtain
the necessary financing required.
Dependence upon Significant Customers.
The Company derives a significant amount of its revenue from a small number
of major and independent oil and gas companies. The inability of the Company to
continue to perform services for a number of its large existing customers, if
not offset by contracts with new or other existing customers, could have a
material adverse effect on the Company's business and operations.
Intense Competition.
The Company competes in a highly competitive segment of the oil field
services industry. The Company's services are sold in a highly competitive
market and its revenues and earnings may be affected by the following factors:
- changes in competitive prices;
- fluctuations in the level of activity and major markets;
- general economic conditions; and
- governmental regulation.
The Company competes with the oil and gas industry's largest seismic
service providers. Management of the Company believes that the principal
competitive factors in the market areas served by the Company are product and
service quality and availability, technical proficiency and price.
Risks of International Operations.
The Company's international operations, which are expected to continue to
contribute materially to revenues, are subject to risks inherent in doing
business in foreign countries. These risks include, but are not limited to:
- operating risks;
- sourcing and retaining qualified personnel;
- commodity prices for oil and natural gas;
- political changes;
- expropriation;
- currency restrictions and changes in currency exchange rates;
- taxes; and
- boycotts and other civil disturbances.
8
Dependence on Key Personnel.
The Company depends on the continued services of key management and
operating personnel. If the Company were to lose a significant number of these
personnel, this could adversely affect its operations.
ITEM 2. PROPERTIES.
The Company owns a 30,000 square foot building and storage yard in Houston,
Texas, which serves as its corporate headquarters. In Calgary, Alberta (Canada),
the Company owned an 18,000 square foot office building and storage yard, that
was sold subsequent to year-end, that served as the Company's Canadian
headquarters. In addition, the Company leases office, warehouse and storage
space in areas throughout the world as may be required from time to time to
market and support the Company's operations.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to a class action lawsuit filed in August 2000,
which alleges, among other things, that the defendants wrongfully acquired
geophysical data from plaintiff's mineral estates after January 1, 1998. The
plaintiffs seek unspecified damages and injunctive relief. The Company filed a
motion for summary judgment and an amended motion for summary judgment which was
heard and taken under advisement by the Court. On August 23, 2002, after due
consideration, the 229th judicial District Court, Starr County, Texas ruled in
favor of Grant Geophysical, Inc. and Grant Geophysical Corp.'s amended motion
for summary judgment on this matter. The Court, after considering the amended
motion for summary judgment, the responses and the argument of counsel, ruled in
favor of the Company. The plaintiffs have appealed the judge's decision and the
case is currently in the appellate level process. The Company believes that the
allegations of the lawsuit are without merit and intends to defend the lawsuit
vigorously. Management does not believe this lawsuit will have a material
adverse impact on the Company's financial position, results of operations or
cash flow.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
As of May 30, 2003, there were 14,547,055 shares of the Company's common
stock, $.001 par value per share (the "Common Stock"), outstanding and
approximately 22 shareholders. See Item 12 for the number of shares of Common
Stock owned by the Company's executive officers, directors and each person known
to the Company to own beneficially more than 5% of the outstanding shares of
Common Stock. The Common Stock is not listed on any stock exchange or qualified
for trading in any other market. The Company does not anticipate paying cash
dividends with respect to the common stock in the future. In addition, the
payment of cash dividends is currently prohibited by the indenture governing the
Company's 9 3/4% Senior Notes Due 2008 and credit agreements governing the
Company's other indebtedness for borrowed money. The Company is currently
issuing paid-in-kind preferred stock to satisfy its dividend requirements on its
8% convertible preferred stock.
ITEM 6. SELECTED FINANCIAL DATA.
The statement of operations data for each of the years in the four-year
period ended December 31, 2002 and the balance sheet data of the Company at
December 31, 1998, 1999, 2000, 2001 and 2002 are derived from the consolidated
financial statements of the Company. The selected historical financial data set
forth below should be read in conjunction with the consolidated financial
statements and the notes thereto included in Item 8 of this Form 10-K. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
YEAR ENDED DECEMBER 31,
1998 1999 2000 2001 2002
--------- --------- --------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues......................................... $ 175,512 $ 66,047 $ 66,152 $ 93,451(2) $ 89,015
Depreciation and Amortization.................... 23,809 26,147 26,916 35,735 9,810
Charge for Asset Impairments..................... 3,762 5,028 3,299 38,507(3) -
Operating income (loss).......................... 6,346 (33,113) (30,591) (57,228) 4,556
Other income (expense) - net..................... (10,120) (11,404) (6,688) (9,058) (6,725)
Loss from continuing operations.................. (7,698) (45,753) (37,622) (67,397) (5,578)
Net loss applicable to common stock.............. $ (8,138) $ (46,049) $ (41,926) $ (72,217) $ (10,795)
========= ========= ========= ========= =========
LOSS PER COMMON SHARE - BASIC AND DILUTED:
Continuing operations......................... $ (.54) $ (3.16) $ (2.59) $ (4.63) $ (.38)
Dividend requirement on pay-in-kind
preferred stock............................. (.03) (.02) (.29) (.33) (.36)
--------- --------- --------- --------- ---------
Net loss per common share..................... $ (.57) $ (3.18) $ (2.88) $ (4.96) $ (.74)
========= ========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted............................. 14,257 14,458 14,547 14,547 14,547
CASH FLOW DATA:
Cash provided by (used in) operating
activities..................................... $ 17,338 $ (977) $ 9,516 $ 2,032 $ (1,088)
Cash used in investing activities................ (32,828) (31,495) (2,998) (3,269) (3,986)
Cash provided by (used in) financing
activities..................................... 16,821 27,163 (5,487) 707 9,470
Capital expenditures............................. 23,866 9,496 3,453 4,971 15,433
BALANCE SHEET DATA:
Working capital (deficit)........................ $ 14,373 $ (4,929) $ (4,448) $ (76,194)(4) $ (85,147)(4)
Total assets..................................... 166,441 149,996 109,755 45,925 53,938
Notes payable, current portion of long-term debt
and capital lease obligations.................. 2,522 8,247 8,230 71,276(4) 88,245(4)
Long-term debt, subordinated debt and capital
lease obligations, excluding current
portion(1)..................................... 110,817 119,709 58,735 719(4) 3,890(4)
Total stockholders' equity (deficit)(1).......... 22,002 (7,360) 9,750 (57,599) (62,943)
10
(1) See Note 9 of Notes to Consolidated Financial Statements regarding the
January 2000 exchange of $56.3 million of Senior Notes plus accrued
interest therein for 389,772 shares of Convertible Preferred Stock.
(2) Includes $15 Million sale of substantial portion of the Company's
multi-client data library, with ongoing rights thereto, in the southern
United States see Note 6 of Notes to Consolidated Financial Statements.
(3) Charge for asset impairment related to the Company's goodwill, fixed
assets, and multi-client data library, see Note 4 of Notes to Consolidated
Financial Statements.
(4) See Note 9 of Notes to Consolidated Financial Statements regarding the
classification of the Foothill/Elliott credit facility and the 9 3/4%
Senior Notes.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company was formed in September 1997. On September 30, 1997, the
Company acquired substantially all of the assets and assumed certain liabilities
of GGI as part of GGI's Chapter 11 reorganization plan, confirmed in September
1997.
The Company's business activities involve the performance of land and
transition zone seismic data acquisition services in selected markets worldwide,
including the United States, Canada, Latin America and the Far East. The Company
primarily acquires seismic data on a turnkey basis for oil and gas companies,
which provide for a fixed fee for each project. The Company has also in the past
acquired seismic data on a term basis, which provided for a periodic fee during
the term of the project, and a cost-plus basis, which provided that the costs of
a project, plus a percentage fee, were borne by the customer.
In addition, in the United States and Canada, the Company has in the past
acquired multi-client seismic data surveys, and remaining surveys are marketed
on a non-exclusive basis to oil and gas companies.
The Company's results are influenced by oil and gas industry capital
expenditures, budgets and spending patterns. These spending patterns are
affected by individual oil and gas company budgets as well as industry-wide
conditions. Overcapacity in the seismic service industry continues to suppress
pricing and activity levels and has materially adversely affected the Company's
results of operations.
The Company has relied on financial and credit support provided by Elliott
for the past three years to supplement its cash flow and obtain third party
financing. Elliott has indicated to the Company that it will not commit to
provide additional financial and credit support to the Company during 2003. The
Company has also experienced significant operating losses for the past four
years, has operated with a working capital deficiency and there is uncertainty
surrounding the sufficiency and timing of the Company's future cash flows.
Although Elliott has not taken the steps to accelerate the maturity of amounts
outstanding under the Foothill/Elliott Credit Facility, the Company is in
default of certain of its non-financial obligations under the Foothill/Elliott
Credit Facility. All of these factors have caused the Company's independent
accountants to issue their audit report for the fiscal year ended December 31,
2002 with a "going concern" qualification. The Company cannot make any assurance
that its cash flow or ability to obtain financing will allow it to continue its
business in the ordinary course during 2003.
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto and the other financial
information contained in the Company's periodic reports previously filed with
the commission and incorporated herein by reference.
11
The historical results of operations of the Company for the years ended
December 31, 2000, 2001 and 2002 are presented below.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 2001 2002
----------- ----------- -----------
(IN THOUSANDS)
Revenues.......................................... $ 66,152 $ 93,451 $ 89,015
Expenses:
Direct operating expenses...................... 52,725 67,097 65,580
Selling, general and administrative expenses... 9,982 9,340 9,069
Depreciation and amortization.................. 26,916 35,735 9,810
Cost of contractual rights purchase............ 3,821 -- --
Charge for asset impairments................... 3,299 38,507 --
---------- ----------- -----------
Total costs and expenses................. 96,743 150,679 84,459
---------- ----------- -----------
Operating income (loss).................. (30,591) (57,228) 4,556
Other income (expense):
Interest expense, net.......................... (7,557) (6,619) (7,381)
Other.......................................... 869 (2,439) 656
---------- ----------- -----------
Total other expenses..................... (6,688) (9,058) (6,725)
---------- ----------- -----------
Loss before income tax expense................. (37,279) (66,286) (2,169)
Income tax expense................................ 343 1,111 3,409
---------- ----------- -----------
Net loss.......................................... (37,622) (67,397) (5,578)
Preferred dividends............................... (4,304) (4,820) (5,217)
---------- ----------- -----------
Net loss applicable to common stock............... $ (41,926) $ (72,217) $ (10,795)
========== =========== ===========
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2001
Revenues. Revenues for 2002 were $89.0 million, compared with $93.5 million
for 2001. The decrease is primarily due to the sale, on March 23, 2001, of a
substantial portion of the Company's multi-client data library, and ongoing
rights thereto, in the southern United States for $15.0 million cash combined
with reductions in the Company's United States operations, partially offset by
significantly increased activity levels in Latin America.
Revenues from United States data acquisition operations decreased $10.1
million, or 68% from $15.0 million in 2001 to $4.9 million in 2002. This decline
in data acquisition revenues is primarily due to the Company reducing operations
in North America because of continued low levels of demand for seismic services
in the southern United States. Backlog for United States data acquisition
projects at December 31, 2002 was $0.5 million. The Company has taken measures
to resize its United States operations to reduced current demand levels
including reducing crew support personnel, consolidating administrative offices
and support facilities and reducing overhead. The Company expects that revenues
from United States data acquisition operations in 2003 will be decreased over
levels experienced in 2001 and 2002. As of March 31, 2003, the Company has
backlog for United States data acquisition projects of $0.3 million.
Revenues from seismic data processing operations were $0.2 for 2002
compared to $0.6 million for 2001. The decrease is due to closing the Company's
Houston and Dallas data processing centers and consolidating its international
data acquisition and data processing centers.
Revenues from Canadian data acquisition operations decreased $1.8 million,
or 15.8%, from $11.4 million in 2001 to $9.6 million in 2002. This is because
during 2001, a range of one to four land seismic crews were operating in Canada
compared to a range of one to three in 2002.
12
The Company began its multi-client data acquisition activities in the
United States and Canada during 1998. Multi-client crew operations began in the
second quarter of 1998 and continued through 1999 and into 2000. During that
time, 17 projects were completed in Texas, California, Wyoming and Canada
covering a total of 1,648 square miles. Due to depressed demand for the
Company's proprietary data in 2000, an inability to secure adequate initial
customer underwriting and a lack of sufficient liquidity, the Company in the
first quarter of 2000 curtailed its strategy of building a multi-client data
library in the southern United States. Revenues associated with the underwritten
portion of multi-client data programs are recognized as a component of the data
acquisition revenues discussed above. Revenue from sales of the data library for
2002 were $.5 million, compared to $20.4 million for 2001. On March 23, 2001,
the Company completed the sale for $15.0 million cash ($15.0 million of related
amortization) of a substantial portion of its multi-client data library in the
southern United States, retaining all of its Canadian multi-client data library
as well as several data surveys in the southern United States. The Company may
selectively continue adding to its remaining data library if adequate liquidity
exists; however, management will be very selective in its decision to
participate in projects that are not substantially underwritten by customers.
Revenues in Latin America increased $29.7 million, or 67.3%, from $44.1
million in 2001 to $73.8 million in 2002. During 2001, a range of two to six
crews operated in Latin America. During 2002, a range of two to six crews also
operated in Latin America but the scope and size of 2002 projects were larger
than that of 2001 projects. As of April 30, 2003, there were five land
acquisition and transition zone seismic crews operating or mobilizing in this
region.
Revenues from the Far East decreased $1.9 million, or 95.0%, from $2.0
million in 2001 to $.1 million in 2002. During 2001, the Company operated one
crew in New Zealand for approximately three months. During 2002, the Company
operated one crew in Indonesia for approximately one month.
Expenses. Direct operating expenses for 2002 decreased $1.5 million, or
2.3%, to $65.6 million (73.7% of revenues) from $67.1 million (71.8% of
revenues) in 2001. The absolute decrease in operating expenses is a result of
decreased activity levels in North America and the Far East. The increase in
operating expenses as a percentage of revenues from 2001 to 2002 is primarily
due to the decreased amount of multi-client data sale revenues, primarily due to
the sale for $15.0 million cash ($15.0 million of related amortization) of a
substantial portion of its multi-client data library in 2001 with the associated
cost included in depreciation and amortization.
General and administrative expenses decreased $0.2 million, or 2.9%, to
$9.1 million (10.2% of revenues) in 2002 from $9.3 million (9.9% of revenues) in
2001. The absolute reduction is the result of the Company's effort to reduce
support and overhead personnel in all of its operating regions and at the
corporate office level.
Depreciation and amortization decreased $25.9 million, or 72.5%, to $9.8
million in 2002 from $35.7 million for 2001. Capital expenditures were $15.4
million and $5.0 million for 2002 and 2001, respectively. The decrease is due to
the amortization associated with the sale in 2001 of a substantial portion of
the Company's multi-client data library, and ongoing rights thereto, in the
southern United States for $15.0 million cash.
The Company recorded charges for asset impairment of $38.5 million for
2001. The 2001 charge was related to: 1.) an impairment recognized on the
Company's goodwill of $31.3 million due to revised estimates of future operating
cash flows due to depressed exploration activity resulting in decreased demand
for the Company's data acquisition and data processing services in the United
States and Canada and 2.) a charge of $7.2 million to impair certain of the
Company's fixed assets due primarily to technological obsolescence and
reductions in demand for services in the United States as well as a charge to
reduce the carrying value of the Company's multi-client data library to net
realizable value based on revised future licensing prospects for such data in
view of the ongoing reduced demand for multi-client data in general and the
Company's recent sales experience for such data. Triggering events requiring the
assessments include significant recurring losses and the Company's decision to
resize its United States operations to reduced current demand levels. On a
quarterly basis, management estimates the residual value of each survey, and
additional amortization is provided if the remaining revenues reasonably
expected to be obtained from any survey are less than the carrying value of such
survey.
Other Income (Expenses). Interest expense, net, increased $0.8 million from
$6.6 million in 2001 to $7.4 million in 2002. The increase is primarily due to
an increase in debt outstanding.
Tax Provision. The income tax provision consisted of income taxes in
foreign countries for 2002 and 2001. No benefit for United States federal or
Canadian income tax loss carry-forwards was recorded in either period, given the
uncertainty of realization of such tax benefits.
13
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2000
Revenues. Revenues for 2001 were $93.5 million, compared with $66.2 million
for 2000. The increase is primarily due to the sale, on March 23, 2001, of a
substantial portion of the Company's multi-client data library, and ongoing
rights thereto, in the southern United States for $15.0 million cash.
Revenues from United States data acquisition operations decreased $0.4
million, or 2.6%, from $15.4 million in 2000 to $15.0 million in 2001. This
slight decline in data acquisition revenues is due to continued low levels of
demand for seismic services in the southern United States. Backlog for United
States data acquisition projects at December 31, 2001 was $0.3 million.
Revenues from seismic data processing operations were $0.6 million for 2001
compared to $0.5 million for 2000. In January 2001, the Company opened a data
center in Quito, Ecuador to service customer requirements in South America. In
December 2001, the Company closed down its data center in Dallas, Texas and
consolidated it with the Company's Houston, Texas data center.
Revenues from Canadian data acquisition operations decreased $1.9 million,
or 14.3%, from $13.3 million in 2000 to $11.4 million in 2001. During 2000, a
range of one to five land seismic crews were operating in Canada compared to a
range of one to four in 2001.
The Company began its multi-client data acquisition activities in the
United States and Canada during 1998. Multi-client crew operations began in the
second quarter of 1998 and continued through 1999 and into 2000. During that
time, 17 projects were completed in Texas, California, Wyoming and Canada
covering a total of 1,648 square miles. Due to depressed demand for the
Company's proprietary data in 2000, an inability to secure adequate initial
customer underwriting and a lack of sufficient liquidity, the Company in the
first quarter of 2000 curtailed its strategy of building a multi-client data
library in the southern United States. Revenues associated with the underwritten
portion of multi-client data programs are recognized as a component of the data
acquisition revenues discussed above. Revenue from sales of the data library for
2001 were $20.4 million, compared to $12.6 million for 2000. On March 23, 2001,
the Company completed the sale for $15.0 million cash ($15.0 million of related
amortization) of a substantial portion of its multi-client data library in the
southern United States, retaining all of its Canadian multi-client data library
as well as several data surveys in the southern United States. The Company may
selectively continue adding to its remaining data library if adequate liquidity
exists; however, management will be very selective in its decision to
participate in projects that are not substantially underwritten by customers.
Revenues in Latin America increased $23.9 million, or 118.3%, from $20.2
million in 2000 to $44.1 million in 2001. During 2000, a range of two to five
crews operated in Latin America. During 2001, a range of two to six crews
operated in Latin America. The scope and size of 2001 projects were larger than
that of 2000 projects. As of May 1, 2002, there were five land acquisition
seismic crews operating or mobilizing in this region.
Revenues from the Far East decreased $2.2 million, or 52.4%, from $4.2
million in 2000 to $2.0 million in 2001. During 2000, the Company operated one
crew in Indonesia for approximately six months. During 2001, the Company
operated one crew in New Zealand for approximately three months.
Expenses. Direct operating expenses for 2001 increased $14.4 million, or
27.3%, to $67.1 million (71.8% of revenues) from $52.7 million (79.6% of
revenues) in 2000. The absolute increase in operating expenses is a result of
increased activity levels in Latin America. The large decrease in operating
expenses as a percentage of revenues from 2000 to 2001 is primarily due to the
increased amount of multi-client data sale revenues, primarily due to the sale
for $15.0 million cash ($15.0 million of related amortization) of a substantial
portion of its multi-client data library in 2001 with the associated cost
included in depreciation and amortization.
General and administrative expenses decreased $0.7 million, or 7.0%, to
$9.3 million (9.9% of revenues) in 2001 from $10.0 million (15.1% of revenues)
in 2000. The absolute reduction is the result of the Company's effort beginning
during the second quarter of 2000, and continued throughout 2001, to reduce
support and overhead personnel in all of its operating regions and at the
corporate office level.
Depreciation and amortization increased $8.8 million, or 32.7%, to $35.7
million in 2001 from $26.9 million for 2000. Capital expenditures were $5.0
million and $3.5 million for 2001 and 2000, respectively. The increase is due to
the amortization associated with the sale of a substantial portion of the
Company's multi-client data library, and ongoing rights thereto, in the southern
United States for $15.0 million cash.
14
In March 2000, the Company completed the purchase of contractual rights
held by a broker having multiple-year marketing rights for certain of the
Company's multi-client data surveys. For financial reporting purposes, the
Company recorded a non-recurring charge to operations of $3.8 million consisting
of the monetary consideration paid of $3.0 million and the net estimated fair
value of property interests exchanged of $0.8 million.
The Company recorded charges for asset impairment of $38.5 million and $3.3
million for 2001 and 2000, respectively. The 2001 charge was related to: 1.) an
impairment recognized on the Company's goodwill of $31.3 million due to revised
estimates of future operating cash flows due to depressed exploration activity
resulting in decreased demand for the Company's data acquisition and data
processing services in the United States and Canada and 2.) a charge of $7.2
million to impair certain of the Company's fixed assets due primarily to
technological obsolescence and reductions in demand for services in the United
States as well as a charge to reduce the carrying value of the Company's
multi-client data library to net realizable value based on revised future
licensing prospects for such data in view of the ongoing reduced demand for
multi-client data in general and the Company's recent sales experience for such
data. Triggering events requiring the assessments include significant recurring
losses and the Company's decision to resize its United States operations to
reduced current demand levels. The 2000 charge was made to reduce the carrying
value of the Company's multi-client data library to net realizable value, based
on revised future licensing prospects for such data in view of the ongoing
reduced demand for multi-client data in general and the Company's recent sales
experience for such data. The impairment provision during the quarter ended
December 31, 2000 included approximately $2.5 million of book loss that would
have resulted from the March 2001 data sale for $15.0 million discussed above.
On a quarterly basis, management estimates the residual value of each survey,
and additional amortization is provided if the remaining revenues reasonably
expected to be obtained from any survey are less than the carrying value of such
survey.
Other Income (Expenses). Interest expense, net, decreased $1.0 million from
$7.6 million in 2000 to $6.6 million in 2001. The decrease is primarily due to
Elliott Associates, L.P. ("Elliott") and Elliott International, L.P. (formerly
known as Westgate International, L.P.) exchanging $56,320,000 of 9 3/4% Senior
Notes for Convertible Preferred Stock on January 19, 2000. Additionally
contributing to the decrease were decreased interest rates in 2001, reducing
interest expense on the Company's variable rate debt.
Tax Provision. The income tax provision consisted of income taxes in
foreign countries for 2000 and 2001. No benefit for United States federal or
Canadian income tax loss carry-forwards was recorded in either period, given the
uncertainty of realization of such tax benefits.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity of the Company should be considered in light of the cyclical
nature of demand for land and transition zone seismic services. These
fluctuations have rapidly impacted the Company's liquidity as supply and demand
factors directly affect pricing.
The Company's ability to meet its debt service and other obligations
depends on its future performance, which in turn is subject to general economic
conditions, activity levels in the oil and gas exploration sector, and other
factors beyond the Company's control. While management believes there has been a
recent improvement in market conditions for seismic services, especially in
Latin America and the Far East, funds to finance operations are expected to
remain limited through 2003 and may not permit the Company to continue its
operations in the ordinary course. As previously discussed, the Company has in
the past relied on its majority stockholder, Elliott, to provide credit support
and interim funding. Through May 15, 2003, no cash for working capital has been
provided to the Company by Elliott. Elliott has indicated to the Company that it
will not commit to provide additional financial and credit support to the
Company during 2003.
The Company is currently in default under its credit facility with Elliott
as well as under the indenture under which the 9 3/4% Senior Notes due 2008 were
issued. As a result of the event of default under the indenture, the trustee, or
the holders of a specified percentage in aggregate principal amount of the
Senior Notes, could take the steps necessary to cause the Senior Notes to become
immediately due and payable. As of the date of this report, neither the trustee
nor such holders has exercised this right. Additionally, the event of default
under the Senior Notes constitutes an event of default under the Credit
Facility, which entitles Elliott to accelerate the maturity of all amounts owing
under the Credit Facility and to exercise remedies to collect such amounts as
provided under the Credit Facility and the related security agreements. As of
the date of this report, Elliott has not exercised this right. Accordingly, the
Company has classified both the $43.5 million of otherwise long-term debt
related to the Senior Notes and the $24.2 million of otherwise long-term debt
related to the Credit Facility as current and expects to continue to do so for
the foreseeable future. If the maturity of any of the Company's debt was
accelerated, it would be unlikely that the Company would be able to continue its
15
operations without seeking protection from its creditors under the federal
bankruptcy code. Additionally, as a result of the defaults, the Company does not
expect that any additional amounts will be made available to the Company under
the Credit Facility.
There are currently no additional committed sources of financing available
to the Company and no availability under existing facilities. Even if business
conditions substantially improve and cost control initiatives are successful
during 2003, the Company will require substantial cash flow, or waivers on
current debt obligations, to continue operations on a satisfactory basis, fund
capital expenditures and meet its principal and interest requirements with
respect to the 9 3/4% Senior Notes, the Credit Facility and other indebtedness
as those amounts become due.
The Company's management is currently in discussions with the ad hoc
steering committee of the holders of the Senior Notes and Elliott concerning a
debt-for-equity exchange or other comprehensive restructuring of the Company's
indebtedness that, among other things, would resolve the interest payment
default under the Senior Notes, and because other defaults have been waived
through June 15, 2003, would eliminate Elliott's right to accelerate amounts
outstanding under the Credit Facility through the date of the existing waiver.
Additionally, the Company has taken measures to reduce costs through
consolidation of certain locations, resizing its United States and Canadian
operations to reduced current demand levels, and reductions in overhead
personnel. Should such measures be unsuccessful, or should any of the Company's
debtors exercise their right to accelerate their amounts outstanding, there
would be substantial doubt about the Company's ability to continue as a going
concern. The accompanying financial statements do not include any adjustments
that might result from the outcome of those uncertainties.
The Company's ongoing capital requirements arise primarily from its need to
service debt, fund cash requirements primarily to support its international
projects and to acquire, maintain or improve equipment. During 2002, $1.1
million was used by operating activities, a significant decrease from last year
when the Company generated $2.0 million from operating activities. This decrease
in funds generated from operating activities was principally due to a $6.2
million decrease in accounts payable. During 2002, $9.5 million was provided by
financing activities. This compares to 2001 when $0.7 million was provided by
financing activities, which was due to a $9.5 million net increase of debt.
During 2002, $4.0 million was used in investing activities, primarily due to
$15.4 million of capital expenditures, $10.6 million of which is financed and
will be paid in 2003 and beyond. This compares to $3.3 million used in investing
activities in 2001, which was due principally to $3.5 million used to fund
capital expenditures and multi-client data acquisitions, offset in part by $0.2
million of asset sales.
The Company has incurred significant net losses during each of the past
three years and has operated with working capital deficits during this period.
As a result, the Company's capital requirements during 2002 were funded
primarily through $7.7 million in funds provided by Elliott pursuant to a
factoring arrangement and $8.2 million of funds provided by Foothill, and cash
collateralized by Elliott, under the supplemental term loan of the Credit
Facility, in combination with close management of the Company's accounts
receivable and payables.
The Company will need to attain profitable operating levels in order to
provide sufficient cash flow to service its debt, maintain its operations and
fund capital expenditures. While the Company was able to generate operating
income in 2002, the overcapacity in the seismic service industry and the
Company's increasing reliance on international operations, will require that the
Company continue to closely manage its available cash resources. Because of the
high costs associated with equipping and operating crews outside of North
America and the time generally required to process billings and receive
payments, the Company expects to require significant amounts of liquidity to
support its international projects.
In 2002, Elliott advanced approximately $7.7 million to the Company through
a factoring arrangement, as discussed below, and as of December 31, 2002, $11.7
million remained outstanding. No additional amounts have been made available to
the Company under this arrangement and all amounts become due and payable on
October 31, 2003 . The Company does not expect to be able to retire these
amounts from its operating cash flows. In order to avoid a default under this
agreement, the Company will either need to reach an accommodation with Elliott
about the payment of these amounts or obtain additional financing to refinance
the amount payable to Elliott.
Capital expenditures for 2002 were approximately $15.4 million and were
used primarily to upgrade and expand the Company's seismic data acquisition and
recording equipment as well as the purchase of a new recording system for its
Latin American operations. The Company's 2003 business plan contemplates up to
$7.1 million of capital expenditures primarily to upgrade and replace seismic
data acquisition and recording equipment. Actual capital expenditures will,
however, be limited to an amount that can be funded from available cash and any
equipment financing provided by manufacturers.
As of December 31, 2002, the Company's had approximately $92.1 million of
indebtedness consisting of (i) the $43.5 million
16
principal amount of the Senior Notes, (ii) $27.2 million of outstanding
borrowings under the Credit Facility, (iii) $11.7 million payable under the
Elliott factoring arrangement and (iv) $9.7 million of loans and capitalized
leases primarily incurred to fund capital expenditures. The following table
summarizes the Company's payment obligations with respect to these long-term
liabilities as well as the Company's operating leases over the next five years
(in thousands):
2003 2004 2005 2006 2007 THEREAFTER
---------- ------ ----- ---- ---- ----------
Notes payable, long-term debt and
capital lease obligations............ $ 88,245(1) $3,828 $ 58 $ 4 $ $ --
Operating Leases...................... 585 359 103 68 68 --
-------- ------ ----- ---- --- ----
$ 88,830 $4,187 $ 161 $ 72 $68 $ --
======== ====== ===== ==== === ====
- ------------
(1) See Note 9 of Notes to Consolidated Financial Statements regarding the
classification of the Elliott credit facility and the 9 3/4% Senior Notes.
The Company has approximately $159.3 million of debt and preferred stock
outstanding at December 31, 2002. Currently, the Company's highly leveraged
capital structure negatively impacts and will continue to negatively impact its
profitability and operating cash flow. If the Company is not able to
significantly improve its operations or obtain additional financing, either from
Elliott or other sources, a financial restructuring will be required to allow
the Company to be a viable entity on a long-term basis.
EFFECT OF INFLATION
Current economic conditions indicate that the costs of exploration and
production for oil and gas are increasing. The oil and gas industry historically
has experienced periods of rapid cost increases within short periods of time as
demand for drilling rigs, drilling pipe and other materials and supplies
increases. Increases in exploration and production costs over increases in
commodity prices of oil and natural gas could lead to a decrease in such
activities by oil and gas exploration and production companies, which would have
an adverse effect on the demand for the Company's services.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and
results of operations are based on its consolidated financial statements. The
preparation of these financial statements requires the Company's management to
make estimates and judgements that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent assets
and liabilities. Actual results may differ from these estimates under different
assumptions or conditions.
The Company considers certain accounting policies to be critical policies
due to the significant judgements, estimation processes and uncertainties
involved for each in the preparation of its consolidated financial statements.
The Company believes the following represents its critical accounting policies.
Revenue Recognition
Revenue from cancelable exclusive seismic surveys is recognized as the
services are performed or, when applicable, in accordance with contractual
milestones then chargeable to the customer in accordance with contract terms.
Anticipated losses on survey contracts are recognized when such losses are
determinable. Revenue from non-cancelable exclusive and non-exclusive seismic
surveys is recognized in accordance with the percentage of completion method of
accounting based upon costs incurred as a percentage of total estimated costs.
The Company does not currently have any non-cancelable contracts and they are
not common for the Company.
Revenue from the licensing of multi-client data surveys is recognized upon
issuance of license when the Company obtains a non-cancelable commitment from
the customer.
Revenue from the Company's data processing services is recognized as the
services are performed.
17
Asset Impairment
In accordance with Statement of Financial Accounting Standards (SFAS) No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" the
Company evaluates the recoverability of property and equipment, and other
long-lived assets, if facts and circumstances indicate that any of those assets
might be impaired. If an evaluation is required the estimated future
undiscounted cash flows associated with the asset are compared to the assets
carrying amount to determine if an impairment of such property is necessary. The
effect of any impairment would be to expense the difference between the fair
value of such property and its carrying value.
Mobilization Cost
Transportation and other direct expenses incurred prior to and at the
commencement of geophysical operations in an area or on a specific contract,
that would not have been incurred otherwise, are deferred and recognized over
either the lesser of the term of the related contract (in the case of costs
related to a specific contract this method is always used) or backlog of
contracts in that area, or one year.
Goodwill
Goodwill, representing the excess of purchase price over fair value of net
assets acquired, was previously amortized on a straight-line basis over the
expected periods to be benefited. Accumulated amortization was approximately
$6.2 million as of December 31, 2001. The Company assessed the recoverability of
this intangible asset by determining whether the goodwill balance was expected
to be recovered through undiscounted future operating cash flows of the acquired
operation over the remaining estimated life of the goodwill. The amount of
goodwill impairment, if any, was measured based on projected discounted future
operating cash flows using a discount rate reflective of Grant's average cost of
capital. The assessment of the recoverability of goodwill was impacted if
estimated future operating cash flows were not achieved. Based on the fourth
quarter 2001 assessment, the remaining net book value of the goodwill created in
the purchase of GGI's assets, previously being amortized over 30 years, the
goodwill created in the acquisition of Solid State's minority interest,
previously being amortized over 20 years and the goodwill created in the
purchase of the remaining interest in ISI, previously being amortized over 30
years, was fully impaired in 2001 (see Note 4) in accordance with the applicable
accounting standards at that time. As a result of the above mentioned
impairments, no goodwill remains at December 31, 2002.
Foreign Exchange Gains and Losses
The United States ("U.S.") dollar is the Company's primary functional
currency in all foreign locations with the exception of its Canadian
subsidiaries. Accordingly, those foreign entities (other than Canada) translate
property and equipment (and related depreciation) and inventories into U.S.
dollars at the exchange rate in effect at the time of their acquisition while
other assets and liabilities are translated at year-end rates. Operating results
(other than depreciation) are translated at the average rates of exchange
prevailing during the year. Re-measurement gains and losses are included in the
determination of net income and are reflected in other income (expense). The
Canadian subsidiaries use the Canadian dollar as their functional currency and
translate all monetary assets and liabilities at year-end exchange rates and
operating results at average exchange rates prevailing during the year in
accordance with SFAS No. 52, "Foreign Currency Translation". Adjustments
resulting from the translation of Canadian assets and liabilities are recorded
in the accumulated other comprehensive loss account in stockholders' equity.
RECENT ACOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143") which covers all legally enforceable
obligations associated with the retirement of tangible long-lived assets and
provides the accounting and reporting requirements for such obligations. SFAS
No. 143 is effective for the Company beginning January 1, 2003. Management does
not believe the adoption of SFAS No. 143 will have a material impact on
Company's consolidated financial position or results of operations.
In December 2002, the FASB issued Accounting for Stock-Based Compensation
("SFAS No. 148") amending SFAS No. 123, to provide alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation. The three methods provided in SFAS No. 148 include (1) the
prospective method which is the method currently provided for in SFAS No. 123,
(2) the retroactive restatement method which would allow companies to restate
all periods presented and (3) the modified prospective method which would allow
companies to present the recognition provisions of all outstanding stock-based
employee compensation
18
instruments as of the beginning of the fiscal year of adoption. In addition,
SFAS No. 148 amends the disclosure provisions of SFAS No. 123 to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. SFAS No. 148 does not amend SFAS No. 123 to require companies to
account for their employee stock-based awards using the fair value method.
However, the disclosure provisions are required for all companies with
stock-based employee compensation, regardless of whether they utilize the fair
method of accounting described in SFAS No. 123 or the intrinsic value method
described in APB Opinion No. 25, Accounting for Stock Issued to Employees. The
Company does not intend on adopting the fair value method of accounting for
stock-based compensation of SFAS No. 123, and accordingly SFAS No. 148 is not
expected to have a material impact on the Company's reported results of
operations or financial position in 2003.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN No. 46), which addresses consolidation by
business enterprises of variable interest entities. FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company does not expect
to identify any variable interest entities that must be consolidated and thus
the Company does not expect the requirements of FIN No. 46 to have a material
impact on its financial condition or result of operations.
In April 2003, the FASB issued Statement of Financial Accounting Standard
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities," ("FAS 149") which amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under FAS 133. FAS 149 is
effective for contracts entered into or modified after June 30, 2003 except for
the provisions that were cleared by the FASB in prior pronouncements. The
Company does not expect the provision of this statement to have a significant
impact on the Company's results of operations or financial position.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity, (" FAS 150"). This statement establishes standards
for how an issuer classifies and measures in its statement of financial position
certain financial instruments with characteristics of both liabilities and
equity. In accordance with the standard, financial instruments that embody
obligations for the issuer are required to be classified as liabilities. This
Statement shall be effective for financial instruments entered into or modified
after May 31, 2003, and otherwise shall be effective at the beginning of the
first interim period beginning after June 15, 2003. The Company does not expect
the provision of this statement to have a significant impact on the Company's
results of operations or financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK
The Company's debt consists of both fixed-interest and variable-interest
rate debt; consequently, the Company's earnings and cash flows, as well as the
fair values of its fixed-rate debt instruments, are subject to interest-rate
risk.
The Company has performed sensitivity analyses to assess the impact of this
risk based on a hypothetical ten-percent increase in market interest rates.
Market rate volatility is dependent on many factors that are impossible to
forecast, and actual interest rate increases could be more severe than the
hypothetical ten-percent increase.
The Company estimates that if prevailing market interest rates had been ten
percent higher throughout 2001 and 2002, and all other factors affecting the
Company's debt remained the same, the operating losses before taxes would have
been increased by $.5 and $.8 million in 2001 and in 2002, respectively. With
respect to the fair value of the Company's fixed-interest rate debt, if
prevailing market interest rates had been ten percent higher at year-end 2002,
and all other factors affecting the Company's debt remained the same, the fair
value of the Company's fixed-rate debt, as determined on a present-value basis,
would have been lower by approximately $4.0 million at December 31, 2002. Given
the composition of the Company's debt structure, the Company does not hedge its
interest rate risk.
19
CURRENCY RISK
The Company conducts a substantial portion of its business in currencies
other than the U.S. or Canadian dollars, particularly various Latin American
currencies, and its international operations are subject to fluctuations in
foreign currency exchange rates. Accordingly, the Company's international
contracts could be significantly affected by fluctuations in exchange rates.
International contracts requiring payment in currency other than U.S. or
Canadian dollars typically are indexed to inflationary tables and generally are
used for local expenses. The Company attempts to structure the majority of its
international contracts to be billed and paid at a favorable U.S. dollar
conversion rate.
The Company's operating results were negatively impacted by foreign
exchange loss of approximately $628,000 and $1,600,000 and foreign exchange gain
of approximately $48,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is submitted in a separate section of this report
following the signature page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 12, 2002 the Company reported on Form 8-K the removal of Arthur
Andersen, LLP as the Company's independent auditors.
On August 26, 2002 the Company reported on Form 8-K/A that on August 22,
2002, Mann Frankfort Stein & Lipp CPA's were retained to serve as independent
auditors for the Company.
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The name, age and current principal position of each director and executive
officer of the Company at May 30, 2003 are as follows:
NAME AGE POSITION
---- --- --------
James Devine.............. 44 Chairman of the Board
Richard F. Miles.......... 54 President, Chief Executive Officer
& Director
James Black............... 55 Chief Financial Officer
Narciso M. Chiquillo...... 54 Vice President - Latin America
William H. Freeman........ 54 Treasurer
Jonathan D. Pollock....... 39 Director
Lee Parker................ 34 Vice President - Technology
Richard J. Dunlop......... 41 Vice President - Transition Zone
Scott A. McCurdy.......... 27 Vice President - Finance & Controller
A. Marizza Glancey........ 38 Corporate Counsel & Corporate Secretary
Executive officers are elected by and serve at the discretion of the Board
of Directors until their successors are duly elected and qualified. There are no
family relationships between or among any directors or executive officers of the
Company. See "Certain Relationships and Related Transactions" for a description
of certain other relationships between or among directors and executive officers
of the Company.
James Devine has served as a director of the Company and Chairman of the
Board since December 2000. Mr. Devine has been a commercial consultant to the
oil and gas industry since 1996. He served as Corporate Vice President and
General Counsel of Colflexip Stena Offshore Group from 1994 to 1996. Mr. Devine
served as Chairman of the Board of Directors of Horizon Offshore, Inc., an
offshore marine construction company, from 1999 to 2002.
Richard F. Miles has served as President, Chief Executive Officer (CEO) and
director of the Company since February 2001. Mr. Miles served as Executive Vice
President of Sercel Inc. from December 15, 1999 until January of 2001 after
GeoScience/Syntron was merged with CGG/Sercel. Prior to the merger, Mr. Miles
was Chairman, President and CEO of Syntron, Inc., which he joined in January
1990. Syntron was a provider of geophysical acquisition equipment, and a
subsidiary of GeoScience, of which Mr. Miles was also President and CEO from its
formation in 1996 until the merger in December 1999. GeoScience, with its other
subsidiaries, Cogniseis and Symtronix, provided data loading, formatting
services and data processing and interpretation software for the oil exploration
industry. Prior to 1990, Mr. Miles was involved in seismic data acquisition and
processing in various management positions with continually increasing positions
of responsibility. Mr. Miles is also a director of Kelman Technologies Inc.
James Black has served as Chief Financial Officer of the Company since
November 2002. Mr. Black previously served as Financial Consultant to a
subsidiary Company, Solid State Geophysical, from February 2002. He served in
various senior finance and commercial roles worldwide in the upstream oil & gas
industry principally 23 years in engineering and construction with Halliburton.
Narciso M. Chiquillo has served as Vice President - Latin America since
August 1999. For the previous 10 years, Mr. Chiquillo was employed with the
Company with varying levels of increasing management responsibility for Latin
American operations.
William H. Freeman has served as Treasurer since February 2000. For the
previous 6 years, Mr. Freeman was employed by the Company in various financial
management positions of increasing responsibility. He was an Area Controller for
Halliburton Geophysical prior to joining Grant. Mr. Freeman is a Certified
Public Accountant.
Jonathan D. Pollock has served as a director of the Company since September
30, 1997 and as Chairman of its Board of Directors from September 1997 until
April 1998. Mr. Pollock has served for more than five years as a Portfolio
Manager with Elliott Management Corporation. Mr. Pollock is also a director of
Prime Natural Resources, Inc. and Chairman of the Board of Odyssea Marine, Inc.
Lee Parker has served as Vice President - Technology since March 2001. Mr.
Parker has been employed by the Company in various countries for the past 10
years with varying levels of increasing management responsibility for its
worldwide technical and
21
field operations.
Richard John Dunlop has served as Vice President - Transition Zone
Operations since July, 2002. For the previous 20 years, Mr. Dunlop was employed
with the Company with varying levels of increasing management responsibility,
within Grants International Operations. Much of Mr. Dunlop's earlier career was
spent in Australia and the Far East.
Scott A. McCurdy has served as Vice President - Finance & Controller since
March 2003. For the previous two years, Mr. McCurdy was employed by the Company
as Controller. Prior to joining Grant, Mr. McCurdy worked in public accounting,
with a client base primarily made up of companies in the oil field services
industry. Mr. McCurdy is a Certified Public Accountant in Texas.
A. Marizza Glancey has served as General Counsel and Corporate Secretary of
the company since June 2001. Ms. Glancey is also Human Resources Director for
the Company. Ms. Glancey has worked in the oil and gas industry since 1994. She
has served as Corporate Counsel for Torch, Inc. an offshore pipeline service
company and Vice President of Human Resources and Administration for Smedvig
America, LLC., a subsidiary of Smedvig, with corporate offices in Stavanger,
Norway; Smedvig specializes in ultra-deepwater drilling and production. Ms.
Glancey holds a J.D. of Law (Doctorate of Jurisprudence).
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes information concerning the compensation of
the Company's Chief Executive Officer and the four highest compensated executive
officers for 2002 (the "Named Executive Officers"). No restricted stock awards
were awarded for 2002.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- ------------
NAME AND OTHER ANNUAL OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY COMPENSATION AWARDS COMPENSATION
- ---------------------------------------- ---- -------- ------------ ------ ------------
Richard F. Miles(1)..................... 2002 $268,268 $ 35,000 -- --
President & Chief Executive Officer 2001 $225,961 -- 500,000 --
Narciso M. Chiquillo.................... 2002 $144,008 -- -- --
Vice President, Latin America 2001 $126,839 -- 34,000 --
2000 $115,511 -- 20,000 --
William H. Freeman...................... 2002 $122,431 -- -- --
Treasurer 2001 $115,000 -- -- --
2000 $109,055 -- 20,000 --
Richard Dunlop.......................... 2002 $127,409 -- -- --
Vice President - Transition Zone 2001 $ 99,617 -- 31,000 --
2000 $100,027 -- -- --
Marizza Glancey(2)...................... 2002 $123,020 -- 25,000 --
General Counsel & Corporate Secretary 2001 $ 64,135 -- -- --
- ----------
(1) Mr. Miles' employment as President and Chief Executive Officer began in
February 2001.
(2) Ms. Glancey's employment as General Counsel and Company Secretary began in
June 2001.
The following table sets forth information with respect to the unexercised
options to purchase shares of common stock which were granted in 2001 or a prior
year under the Company's 1997 Equity and Performance Incentive Plan to the Named
Executive Officers and held by them at December 31, 2001. None of the Named
Executive Officers exercised any stock options during 2002.
22
AGGREGATED OPTION EXERCISES IN 2002
AND 2002 YEAR-END OPTION VALUES
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT YEAR-END AT YEAR-END(1)
-------------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Richard F. Miles................ 166,667 333,333 $ -- $ --
Narciso M. Chiquillo............ 45,666 29,334 -- --
William H. Freeman.............. 18,433 6,667 -- --
Richard J. Dunlop............... 19,333 20,667 -- --
A. Marizza Glancey.............. 8,333 16,667 -- --
- ----------
(1) There is no trading market for the Common Stock.
EMPLOYMENT AGREEMENTS
Effective February 5, 2001, the Company retained Richard F. Miles to serve
as President and Chief Executive Officer of the Company for an annual base
salary of $225,000. The Company entered into an agreement effective August 1,
2001 with Mr. Miles. The agreement has an initial term through July 31, 2004
provided, however, that on August 1 of each year, commencing August 1, 2003, the
agreement is automatically renewed for successive one-year periods unless either
party provides the other with written notice of non-renewal prior to June 30 of
that year. Through amendments to this agreement, Mr. Miles annual base salary
has been increased to $302,494. Mr. Miles also agreed not to compete against the
Company throughout the term of his employment and for one year thereafter, and
not to disclose any confidential information during and after the term of his
employment.
Narciso Chiquillo. Effective August 1, 2001, the Company entered into an
employment agreement with Narciso M. Chiquillo, pursuant to which Mr. Chiquillo
has agreed to serve as Vice President - Latin America of the company. Mr.
Chiquillo's employment agreement has an initial term through August 1, 2004 and
provides for an annual base salary of $134,200. Through amendments to this
agreement, Mr. Chiquillo's annual base salary has been increased to $162,406.
Mr. Chiquillo also agreed not to compete against the Company throughout the term
of his employment and for six months thereafter, and not to disclose any
confidential information during and after the term of his employment.
Richard Dunlop. Effective August 1, 2001, the Company entered into an
employment agreement with Richard J. Dunlop, pursuant to which Mr. Dunlop has
agreed to serve as Manager - Transition Zone Operations of the Company. Mr.
Dunlop's employment agreement has an initial term through August 1, 2004 and
provides for an annual base salary of $90,000. Through amendments to this
agreement, Mr. Dunlop's position has changed to Vice President - Transition Zone
and his annual base salary has been increased to $141,814. Mr. Dunlop also
agreed not to compete against the Company throughout the term of his employment
and for six months thereafter, and not to disclose any confidential information
during and after the term of his employment.
Effective August 1, 2001, the Company entered into an employment agreement
with Lee Parker, pursuant to which Mr. Parker has agreed to serve as Vice
President - Technology of the company. Mr. Parker's employment agreement has an
initial term through August 1, 2004 and provides for an annual base salary of
$93,300. Through amendments to this agreement, Mr. Parker's annual base salary
has increased to $119,974. Mr. Parker also agreed not to compete against the
Company throughout the term of his employment and for six months thereafter, and
not to disclose any confidential information during and after the term of his
employment.
Effective March 21, 2003, the Company entered into an employment agreement
with Scott A. McCurdy, pursuant to which Mr. McCurdy has agreed to serve as
Controller of the Company. Mr. McCurdy's employment agreement has an initial
term through March 21, 2006 and provides for an annual base salary of $121,056.
Through amendments to this agreement, Mr. McCurdy's position has changed to Vice
President - Finance and Controller. Mr. McCurdy also agreed not to compete
against the Company throughout the term of his employment and for six months
thereafter, and not to disclose any confidential information during and after
the term of his employment.
23
COMPENSATION OF DIRECTORS
Effective January 1, 2001, one of the Company's subsidiaries entered into a
consulting agreement with a term through December 31, 2003, with Crossbay
Ventures Ltd. ("Crossbay") & James Devine, the Company's Chairman of the Board,
whereby Crossbay Ventures Ltd. Agreed to provide the consultancy and advisory
services of Mr. Devine, in exchange for an annual fee of $125,000. Through
amendments to this agreement the annual fee has increased to $150,000. In 2002,
a total of $132,395 was paid by the Company's subsidiary to Crossbay under this
agreement. Additionally, in 2001, Mr. Devine was granted 300,000 options to
purchase the Company's stock subject to certain vesting requirements. In April
2003, these options were cancelled and 400,000 options were issued in
consideration for consultancy services received.
1997 EQUITY AND PERFORMANCE INCENTIVE PLAN
The 1997 Equity and Performance Incentive Plan (the "Incentive Plan") was
adopted by the Board of Directors and approved by Grant's stockholders in
December 1997. The Incentive Plan currently provides for issuance of 2,750,000
shares. The Incentive Plan provides for the grant to officers (including
officers who are also directors), employees, consultants and non-employee
directors of Grant and its subsidiaries. These individuals may be granted awards
of "incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, non-statutory stock options, stock appreciation rights and
restricted shares and deferred shares of Grant common stock.
The Board of Directors, or a committee of the Board of Directors consisting
of at least two non-employee directors, is required to administer the Incentive
Plan. The Board of Directors currently administers the Incentive Plan and
decides to whom awards may be granted, the type of award to be granted and
determine, as applicable, the number of shares to be subject to each award, the
exercise price and the vesting. In making such determinations, the Board of
Directors will take into account the employee's present and potential
contributions to the Company's success and other relevant factors. As of
December 31, 2002, the Board of Directors had granted outstanding awards
covering 2,323,700 shares. In addition, as of May 30, 2003, a total of 57,000
restricted shares (36,000 in 1998, 18,000 in 1999, and 3,000 in 2000) were
granted to non-employee directors, with 54,000 of such shares being
unrestricted, subject to the satisfaction of conditions set forth under the
Incentive Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock at March 28, 2003 by (i) each person
known to the Company to own beneficially more than 5% of the outstanding shares
of the Common Stock, (ii) each current director and executive officer and (iii)
all current executive officers and directors as a group, including persons
deemed to share voting and investment power.
AMOUNT
AND PERCENT
NATURE OF OF
BENEFICIAL COMMON
NAME OF BENEFICIAL OWNER OWNERSHIP STOCK
------------------------ --------- -----
Elliott Associates, L.P.(1).................................. 19,397,501(3) 55.1%
Elliott International, L.P.(2)............................... 13,735,559(4) 37.8%
Richard F. Miles............................................. 166,667 *
Narciso Chiquillo............................................ 45,666 *
William H. Freeman........................................... 18,433 *
Jonathan D. Pollock.......................................... 9,000 *
James Devine................................................. 100,000 *
Lee Parker................................................... 23,400 *
Richard J. Dunlop............................................ 19,333 *
Scott A. McCurdy............................................. 8,333 *
A. Marizza Glancey........................................... 8,333 *
All executive officers and directors as a group (9 persons).. 399,165 *
- ----------
* Less than 1%.
(1) Paul E. Singer and Elliott Capital Advisors L.P., which is controlled by Mr.
Singer, are the general partners of Elliott. The business address of Elliott
is 712 Fifth Avenue, 36th Floor, New York, New York 10019.
24
(2) Hambledon, Inc., which is controlled by Mr. Singer, is the sole general
partner of Elliott International. Elliott Capital Advisors, Inc., which is
controlled by Mr. Singer, is the investment manager for Elliott
International. Hambledon, Inc. and Elliott Capital Advisors expressly
disclaim beneficial ownership of any shares of Common Stock. The business
address of Elliott International is c/o Midland Bank Trust Corporation
(Cayman) Limited, P.O. Box 1109, Mary Street, Grand Cayman, Cayman Islands,
British West Indies.
(3) Includes 13,242,834 shares that could be obtained through conversion of its
397,285 shares of 8% convertible preferred stock.
(4) Includes 7,431,067 shares that could be obtained through conversion of its
222,932 shares of 8% convertible preferred stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On May 24, 2002, the Company completed modifications of the Loan and
Security Agreement with Foothill and Elliott whereby, among other things, the
maximum amount of the revolving facility was reduced from $10.5 million to $8.0
million (subject to additional borrowing base limitations) and Foothill agreed,
subject to conditions, to fund a $16.5 million supplemental term loan.
Additionally, on July 8, 2002, the Company completed additional modifications to
the Foothill/Elliott Credit Facility whereby, among other things, the maximum
amount of the Foothill supplemental term loan was increased from $16.5 million
to $19.5 million. Advances under the supplemental term loan are conditioned,
among other things, on Elliott having elected, at its sole and absolute
discretion, to deposit cash collateral with Foothill in the amount of such
advances to secure Elliott's guarantee of the supplemental term loan. The
supplemental term loan will bear interest at the 90-day CD rate announced by
Wells Fargo. The Foothill supplemental term loan and all other obligations under
the Foothill/Elliott Credit Facility are secured by substantially all of the
assets of the Company and its subsidiaries, are guaranteed by Elliott and,
except as to the existing Elliott term loan, could be purchased from Foothill by
Elliott at any time on 5 business days' notice.
The modifications to the Foothill/Elliott Credit Facility made on July 8,
2002 also include a new mandatory prepayment provision with respect to the $6.9
million Foothill term loan. In brief, the new provision generally requires the
Company, upon any net movement of equipment outside the United States and
Canada, to prepay the Foothill term loan so that the remaining outstanding
balance thereof is no greater than two-thirds of the appraised value of the
equipment remaining in the United States and Canada in which Foothill has a
perfected security interest. At December 31, 2002, $7.5 million and $6.0 million
were outstanding under the Elliott term loan and the Foothill term loan,
respectively, $5.4 million was outstanding under the Foothill revolving credit
line, and $8.2 million was outstanding under the Foothill supplemental term
loan. Based on the Company's borrowing base and current Elliott cash collateral
levels at December 31, 2002, these amounts represent the maximum amount then
allowable at such date under the respective facilities.
On August 3, 2001, the Company completed an agreement with Elliott
International, L.P. for the sale, with recourse retained, of certain of its
foreign accounts receivable. The agreement allows the Company to sell, at its
election, both billed and unbilled receivables arising out of data acquisition
and processing services rendered by Grant's branch operations in South America.
The agreement was amended on January 7, 2002 to increase the maximum amount
available under the agreement to $5.25 million and to extend the agreement
through September 30, 2002 with all payments required by that time. Additional
amendments were completed February 5, 2002, March 5, 2002 and March 21, 2002 to
increase the maximum amount available under the agreement to $7.5 million, $10.9
million, and $11.7 million, respectively. Additionally, the March 21, 2002
amendment expanded the scope of the agreement to include receivables for all of
the Company's South American locations (see Note 21). On September 30, 2002, the
agreement was further modified to extend the term of the arrangement to October
31, 2003. As of April 15, 2003, $11.7 million was outstanding under the
agreement.
Effective January 1, 2001, one of the Company's subsidiaries entered into a
consulting agreement with a term through December 31, 2003, with Crossbay
Ventures Ltd. ("Crossbay") & James Devine, the Company's Chairman of the Board,
whereby Crossbay Ventures Ltd. Agreed to provide the consultancy and advisory
services of Mr. Devine, in exchange for an annual fee of $125,000. Through
amendments to this agreement the annual fee has increased to $150,000. In 2002,
a total of $132,395 was paid by the Company's subsidiary to Crossbay under this
agreement. Additionally, in 2001, Mr. Devine was granted 300,000 options to
purchase the Company's stock subject to certain vesting requirements. In April
2003, these options were cancelled and 400,000 options were issued in
consideration for consultancy services received.
See Note 9 and Note 21 for further discussion on transactions with Elliott.
During 2002, payment in kind stock dividends aggregating 32,750 shares and
18,377 shares of Convertible Preferred Stock were issued to Elliott and Elliott
International, respectively.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this Report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rules 13a-14(c)
25
and 15d-14(c) under Securities Exchange Act of 1934). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. There were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following financial statements are filed as part of this report:
1. Financial Statements
PAGE
----
Reports of Independent Public Accountants................................................. 31
Consolidated Balance Sheets as of December 31, 2001 and 2002.............................. 33
Consolidated Statements of Operations for the years ended December 31, 2000,
2001 and 2002........................................................................ 34
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 2000, 2001 and 2002..................................................... 35
Consolidated Statements of Cash Flows for the years ended December 31, 2000,
2001 and 2002........................................................................ 36
Notes to Consolidated Financial Statements................................................ 37
Supplementary Financial Information - Quarterly Data...................................... 56
2. Financial Statement Schedules
Other schedules have not been included because they are not applicable, are
immaterial or the information has been included in the financial statements or
notes thereto.
3. Exhibits
See Index to Exhibits on page 57. The Company will furnish to any eligible
stockholder, upon written request, a copy of any exhibit listed, upon payment of
a reasonable fee equal to our expenses in furnishing such exhibit.
(b) Reports on Form 8-K:
On June 13, 2002, the Company filed a current report on Form 8-K
related to the disclosure of Amendment Seven to the Foothill/Elliott credit
facility and Amendment Five the Elliott factoring arrangement.
On July 30, 2002, the Company filed a current report on Form 8-K
related to the disclosure of Amendment Eight to the Foothill/Elliott credit
facility and Amendment Six to the Elliott factoring arrangement.
On August 12, 2002, the Company filed a current report on Form 8-K
related to the dismissal of Arthur Andersen LLP as the Company's
independent auditors.
On August 21, 2002, the Company filed a current report on Form 8-K
related to the default in interest payment to holders of the 9 3/4% Senior
Notes due 2008 and the failure to timely file quarterly report on Form 10-Q
for the period ending June 30, 2002.
On August 26, 2002, the Company filed an amendment to its current
report on Form 8-K filed on August 12, 2002 to disclose the fact that the
Company has retained MANN FRANKFORT STEIN & LIPP CPAs, L.L.P. as the
Company's independent auditors.
26
On October 16, 2002, the Company filed a current report on Form 8-K
related to the disclosure of Amendment Six to the Elliott factoring
arrangement.
On December 5, 2002, the Company filed a current report on Form 8-K
related to the retention of CIBC World Markets Corp. as its financial
advisor in connection with its review of strategic alternatives to
rationalize its capital structure.
On January 22, 2003, the Company filed a current report on Form 8-K
related to an event of default on the Foothill/Elliott credit facility and
the subsequent buyout of Foothill by Elliott and the disclosure of
Amendment No. 9 to the Foothill/Elliott credit facility.
On February 10, 2003, the Company filed a current report on Form 8-K
related to the disclosure of the Supplement to Ninth Amendment of the
Foothill/Elliott credit facility and the Second Supplement to Ninth
Amendment of the Foothill/Elliott credit facility.
On February 27, 2003, the Company filed a current report on Form 8-K
related to the default on interest payment to holders of 9 3/4% Senior
Notes due 2008 and the disclosure of the Third Supplement to Ninth
Amendment of the Foothill/Elliott credit facility.
On March 18, 2003, the Company filed a current report on Form 8-K
related to the Fourth Supplement to Ninth Amendment of the Foothill/Elliott
credit facility and the Fifth Supplement to Ninth Amendment of the
Foothill/Elliott credit facility.
On April 1, 2003, the Company filed a current report on Form 8-K
related to the event of default on the interest payment to the holders of 9
3/4% Senior Notes due 2008.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 10th day of
June 2003.
GRANT GEO