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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D C 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
Commission file number 0-27564
3-D GEOPHYSICAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3841601
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer identification No.)
8226 Park Meadows Drive
Littleton, Colorado 80124
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (303) 858-0500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Each Class)
Indicate by check mark whether the registrant (1) has filed all
reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ X ] NO [ ]
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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 Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant based upon the average of the closing high and low price of
the Common Stock as of March 25, 1998 (as reported by the Nasdaq) was
approximately $113,023,619 (See Item 12). On that date, there were 11,916,666
shares of 3-D Geophysical, Inc. Common Stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Items 10 through 13 of Part III hereof is
incorporated by reference to the Registrant's definitive proxy statement to be
filed with the Commission pursuant to Regulation 14A of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended ("Regulation
14A"), not later than 120 days after the end of the fiscal year ended December
31, 1997.
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3-D GEOPHYSICAL, INC.
FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1997
Page
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PART I.
Item 1. Business 4-10
Item 2. Properties 10
Item 3. Legal Proceedings 10-11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 14-22
Item 8. Financial Statements and Supplementary Data 23-46
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 47
PART III.
Item 10. Directors and Executive Officers of the Registrant 48
Item 11. Executive Compensation 48
Item 12. Security Ownership of Certain Beneficial Owners and Management 48
Item 13. Certain Relationships and Related Transactions 48
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 49-51
Signatures 52
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PART I.
ITEM 1. BUSINESS
RECENT DEVELOPMENTS
On March 8, 1998, the Company entered into a definitive Agreement and
Plan of Merger with Western Atlas Inc. ("Western") and WAI Acquisition Corp., a
wholly-owned subsidiary of Western, pursuant to which the Company will become a
wholly-owned subsidiary of Western. The agreement was unanimously approved by
the Company's Board of Directors. Pursuant to the agreement, Western Atlas,
through WAI Acquisition Corp, has commenced a tender offer for any and all
outstanding shares of 3-D common stock at a purchase price of $9.65 per share in
cash. The tender offer is subject to the satisfaction of a number of customary
conditions. Western Atlas has received early termination of the waiting period,
effective March 26, 1998, under the Heart-Scott-Rodino Antitrust Improvements
Act of 1976 with respect to the tender offer and the merger.
The statements in this Annual Report on Form 10-K relating to matters
that are not historical facts are forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements reflect numerous assumptions, involve a number of
risks and uncertainties and actual results may vary materially. Among the
factors that could cause actual results to differ materially are: a material
delay with respect to, or a failure to consummate, the tender offer and merger
transaction with Western Atlas Inc.; adverse weather conditions; dependence on
energy industry spending; worldwide prices and demand for oil and gas;
increased competition on the Company's markets; technological changes and
developments; operating risks inherent in the oilfield services industry;
regulatory uncertainties; worldwide political stability and economic
conditions; operating risks associated with international activities; and other
risks and uncertainties detailed from time to time in the Company's filings
with the Securities and Exchange Commission.
GENERAL
3-D Geophysical, Inc. was formed in March, 1995 to facilitate the
acquisition and consolidation of land-based and shallow water seismic data
acquisition businesses. Unless the context indicates otherwise, all references
herein to the "Company" or to "3-D Geophysical" mean 3-D Geophysical, Inc. and
its subsidiaries, the principal ones of which operate four seismic data
acquisition businesses (collectively, the "Operating Subsidiaries") -
Geoevaluaciones, S.A. de C.V. ("Geoevaluaciones"), Northern Geophysical of
America, Inc. ("Northern"), 3-D Geophysical of Latin America, Inc. ("3-D Latin
America") and J.R.S. Exploration Company Limited ("J.R.S. Exploration").
Geoevaluaciones also processes seismic data. Concurrently with the consummation
of the Company's initial public offering (the "Initial Public Offering") in
February 1996, 3-D Geophysical acquired Geoevaluaciones, Northern, Paragon
Geophysical, Inc. ("Paragon") and Kemp Geophysical Corporation ("Kemp"). In
December 1996, Paragon and Kemp were merged with and into Northern. In this
document, unless otherwise indicated, references to "dollars", "U.S.$", and "$"
are to United States dollars, references to pesos and "N$" are to Mexican pesos
and references to "Canadian dollars" and "C$" are to Canadian dollars, and the
terms "United States" and "U.S." mean the United States of America, its states,
territories and possessions and all areas subject to its jurisdiction.
Geoevaluaciones and Procesos Interactivos Avanzados, S.A. de C.V.
("PIASA"), Mexican corporations, were organized in 1977 and 1993, respectively.
For accounting purposes, the acquisition of Geoevaluaciones and PIASA has been
treated as a recapitalization of Geoevaluaciones and PIASA with Geoevaluaciones
(combined with PIASA) as the acquiror of 3-D Geophysical, Inc. and, therefore,
as the predecessor company (the "Predecessor Company").
On January 27, 1997 the Company consummated the purchase of J.R.S.
Exploration, a Canadian seismic data acquisition company, by acquiring all of
the issued and outstanding stock of several intermediate holding companies
which existed solely as holding companies for the stock of J.R.S. Exploration.
On that same date, in a separate transaction, the Company purchased all of the
issued and outstanding stock of Siegfried & Siegfried Resource Consultants
Limited ("Siegfried & Siegfried"), a Canadian company owned by a key employee
of J.R.S. Exploration, that leased certain seismic data acquisition equipment
to J.R.S. Exploration. These acquisitions were effected through a newly -
formed subsidiary of the Company, 3-D Geophysical of Canada, Inc. ("3-D
Canada"), whereby shares of 3-D
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Canada, which are exchangeable into shares of the Company on a one-for-one
basis, and cash were exchanged for the stock of the acquired companies.
The consolidated financial statements of the Company include the
operations of J.R.S. Exploration and Siegfried & Siegfried (the "Canadian
Operations") from January 1, 1997, which is the date that management of the
Company and the former shareholders of the acquired companies deem to be the
date upon which the Company assumed effective control of the Canadian
Operations. Due to the acquisition of the Canadian Operations in January 1997
and the acquisitions of Northern, Paragon, and Kemp in February 1996, the
Company's condensed consolidated financial statements as of and for the year
ended December 31, 1997 are not comparable to the financial statements of the
Company as of and for the year ended December 31, 1996.
3-D Geophysical, Inc. is one of the leading providers of land-based
and shallow water 3-D seismic data acquisition services to the oil and gas
industry in the Western Hemisphere. As of March 24, 1998 the Company's 11
crews operated land-based and shallow water seismic data acquisition systems,
primarily utilizing state-of-the-art, 24-bit equipment, with a total of
approximately 26,000 channels, in three distinct geographical regions. These
geographical segments include the United States ("the United States
Operations") comprised primarily of Alaska, Texas, the Rocky Mountain, West
Coast and Appalachian regions, Latin America ("the Latin American Operations")
comprised of Mexico, Peru, Bolivia and Ecuador, and Canada.
The seismic data acquisition services industry is currently
experiencing several significant changes, including a continuing consolidation
of service providers. The Company believes that this consolidation is due in
part to the trend by oil and gas exploration and production companies to rely
on third-party seismic contractors to provide increasingly more sophisticated
and extensive 3-D seismic surveys. These surveys require a greater number of
recording channels and therefore substantial capital expenditures. This trend
is creating a competitive advantage for companies with extensive 3-D channel
capacity and greater financial resources.
INDUSTRY OVERVIEW
Seismic data is the principal source of information used by
geoscientists to map potential or existing oil and gas bearing formations and
the geologic structures that surround them. Seismic data is acquired over a
specified area by deploying a network of electronic cables over the area to
which electronic receivers, or geophones, are attached. Once this network is
deployed, an energy source, such as vibroseis or dynamite, is used to generate
seismic waves through a pre-determined set of frequencies that move through the
rock formation under the area and reverberate back to the surface in
milliseconds. The geophones capture the changing velocity and character of
these seismic waves as they travel down and back through the earth's surface
and transmit this information a short distance along a channel to a remote
signal conditioner. The remote signal conditioner digitizes the analog data and
transmits it to a central electronics unit that stores the acquired data. The
data is then sent to a processing center where mathematical algorithms are
applied to separate signals from interference and to correct distortion.
Migration techniques are also applied to produce a spatial representation of
the subsurface formations that were surveyed. After processing, the data is
transferred to a computer workstation that allows the data to be viewed and
reconfigured by a geoscientist who interprets the data with computer-aided
exploration techniques in order to plot features and map the structures of the
subsurface area.
In the past, a 2-D survey was the standard technique utilized to
acquire seismic data. 2-D seismic data can be visualized as a single vertical
plane of subsurface information. 3-D seismic surveys produce data that is best
visualized as a cube of information that can be sliced into numerous planes.
Thus, 3-D surveys provide different views of subsurface geologic structure and
much higher resolution of the structure than is available from a 2-D survey and
have proven to be more reliable indicators of the oil and gas potential in the
area surveyed. As a result, drilling based on 3-D seismic surveys has improved
the economics of finding oil and gas. Consequently, demand for 3-D seismic
surveys, and for surveys that cover wide areas and utilize a greater number of
channels, has increased in the past several years. Furthermore, due to the
enhanced information provided, 3-D surveys have proven to be a cost effective
and efficient tool for oil and gas exploration and, increasingly, the
development of existing reserves.
The oil and gas industry relies upon seismic data for the exploration
of new oil and gas reserves and for delineating the size and structure of
previously identified oil and gas fields to improve the development of those
fields. Seismic data, once acquired and processed, results in
computer-generated representations of the earth's subsurface. 2-D
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seismic data is collected in a linear fashion along the surface of the earth
(typically using 120 recording channels). The acquisition of 3-D seismic data
involves the use of at least 480 recording channels, allows a greater volume of
seismic data to be gathered and yields dense, 3-D grids, with a higher degree
of resolution of the earth's subsurface than a 2-D seismic survey can produce.
The amount of data that can be acquired and the ability to record,
process and represent seismic data are dependent upon the type of equipment
used during the seismic data acquisition process. Seismic acquisition systems
are either traditional or distributed systems. In traditional systems, such as
a DFS-VTM system, signals received from the energy source are transmitted to a
central electronics unit in analog (nondigital) form with each channel
requiring its own set of wires, consequently increasing the cable weight.
Traditional systems are limited to 480 channels and are used primarily for 2-D
seismic surveys. The traditional system uses a 16-bit converter to translate
signals from analog to digital data.
Alternatively, in a state-of-the-art distributed system, received
signals are amplified, filtered and converted into digital data by means of a
24-bit analog-to-digital converter at remote signal conditioners before they
are transmitted to the central electronics unit on a single set of wires.
Certain distributed systems can be expanded to approximately 10,000 channels,
although the Company believes that the average distributed system currently
used in the land-based seismic data acquisition industry is significantly less
than 10,000 channels. The 24-bit analog-to-digital converter extends the
decibel range of seismic recording and reduces system distortion to provide
superior signal fidelity. This technological innovation provides higher
resolution data, which is especially beneficial for 3-D surveys in geologically
complex or noisy areas, and substantially reduces power consumption. In
addition, the lighter weight cables allow a crew to acquire greater volumes of
data, as required in 3-D surveys, over a wider area with fewer people and in
less time. Distributed systems are used primarily for 3-D surveys.
SEISMIC DATA ACQUISITION SERVICES
The Company is engaged in land-based and shallow water seismic data
acquisition primarily on a contract basis for its customers. In addition,
during 1997, the Company has entered into two contracts whereby seismic data
has been acquired in anticipation of future sales to multi-clients. Also, in
July 1997 the Company entered into an agreement with a third party whereby the
Company has received approximately a 5% interest in an oil and gas property in
exchange for the acquisition of 2-D seismic data.
As of March 24, 1998, the Company operated a total of 11 working
seismic crews which were utilizing state-of-the-art, 24-bit seismic data
acquisition systems with a total of approximately 26,000 channels. Of the 11
crews, three operated in Alaska, three in the remainder of the United States,
two in Latin America, and three in Canada. Each crew is either land
transportable or heliportable, or both. The Company attempts to shift entire
crews and equipment from one geographic location to another in order to
capitalize on the varying seismic exploration operating seasons in the
Company's regions of operation and to maximize the Company's efficient use of
human resources and equipment. Most of the Company's data acquisition systems,
which include remote signal conditioners, cables, geophones and central
electronics units, can be readily interchanged and relocated, depending upon
the needs of the Company's customers.
A seismic crew typically consists of a supervisor, permitting agents
who secure permission to enter a landowner's property, surveyors who mark the
locations for the placement of geophones and other equipment, general laborers
who place and move the geophones and other equipment, a drill crew to drill
holes and shooters to detonate the dynamite, if dynamite is used as the energy
source, or a vibroseis crew to operate the vibroseis trucks, if vibroseis is
used as the energy source, and an observer who operates the central electronics
unit and controls the recording of the seismic data.
SEISMIC DATA PROCESSING AND INTERPRETATION
The processing of seismic data involves the conversion of such data,
by means of sophisticated computer software designed for this purpose, into
graphic representations of cross-sections of the earth's subsurface.
Geoevaluaciones currently provides data processing and interpretation services
to Petroleos Mexicanos ("PEMEX"), Mexico's national oil company. The Company
continues to review expansion of its processing and interpretative
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services in other geographic regions, but has not yet developed a formal
business plan to implement this intention, and there can be no assurance that
any such attempted expansion will be successful.
Geographic Areas of Operation
The Company's seismic data acquisition operations are conducted
throughout the United States (including Alaska), Latin America and Canada.
Geoevaluaciones primarily conducts its operations in Mexico and provides its
primary customer, PEMEX, with a full complement of seismic data acquisition,
processing and interpretation services and reservoir characterization. The
Company established a presence in other parts of Latin America by opening
branch offices in Peru, Bolivia and Ecuador and by completing a seismic data
acquisition contract in Peru and commencing work on a seismic data acquisition
contract in Ecuador. The Company's presence in Canada was established by the
acquisition of J.R.S. Exploration in January 1997.
The following table presents certain financial information about the
operations of the Company for each of the years ended December 31, 1996 and
1997:
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
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NET REVENUES $ 51,754 100.0% $ 101,016 100.0%
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United States Operations 39,373 76.1% 64,212 63.6%
Latin American Operations 12,381 23.9% 24,909 24.7%
Canadian Operations * * 11,895 11.7%
OPERATING INCOME $ 1,614 100.0% $ 1,649 100.0%
---------- ------ --------- ------
United States Operations 4,973 308.1% 2,936 178.0%
Latin American Operations (1,071) (66.4%) (468) (28.4%)
Canadian Operations * * 1,203 73.0%
Corporate (2,288) (141.7%) (2,022) (122.6%)
TOTAL ASSETS $ 77,433 100.0% $ 115,745 100.0%
---------- ------ --------- ------
United States Operations 43,994 56.8% 68,490 59.2%
Latin American Operations 14,913 19.3% 27,526 23.8%
Canadian Operations * * 18,215 15.7%
Corporate 18,526 23.9% 1,514 1.3%
* Not applicable
CAPITAL EXPENDITURES
There are many competitors in the land-based seismic data acquisition
business and substantial financial and other resources are required to maintain
the state-of-the-art technology necessary to permit effective competition in
bidding for contracts. Seismic data acquisition technology has progressed
rapidly over recent years and the Company expects this trend to continue. The
cost of sophisticated seismic data acquisition equipment and related crew
training has increased significantly over the last several years. The cost of
equipping a crew with a state-of-the-art system, such as an I/O SYSTEM TWO TM
(including training and ancillary equipment), can range from approximately $3.0
to $10.0 million, the largest component of which is attributable to the channel
boxes.
OPERATING CONDITIONS
The Company's crews often conduct operations in extreme weather, in
difficult terrain that is not easily accessible and under other hazardous
conditions. Accordingly, the Company's operations are subject to risks of
injury to personnel and loss of equipment. Fixed costs, including costs
associated with operating leases, labor costs and depreciation, account for
more than half of the Company's costs and expenses. As a result, low
productivity resulting from weather interruptions, equipment failures or other
causes such as fires and accidental explosions resulting from the handling of
equipment and supplies can result in significant operating losses.
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The Company's seismic data acquisition operations historically have
been subject to seasonal fluctuations, with the greatest volume of data
acquisition occurring during the summer and fall in the United States. The
formation of the Company in the United States and Mexico and its expansion into
other parts of Latin America and Canada has enabled the Company to deploy its
crews and utilize its equipment in disparate regions. As a result, the Company
expects to conduct its operations year round with fewer days of down-time
caused by inclement weather by working during the favorable operating seasons
of different regions.
MARKETING AND CUSTOMERS
Marketing. The Company markets to existing customers on a regional
basis in order to preserve these long-term relationships. The Company has
established a corporate marketing center in Littleton, Colorado, which is
responsible for (i) coordinating marketing and communication activities, (ii)
expanding the Company's marketing to integrated and multinational oil and gas
companies, and (iii) standardizing and coordinating submission of bids.
Contracts. The Company provides its services to customers pursuant to
contracts which are occasionally varied or modified by mutual consent. In many
instances, such contracts are cancelable by the customer on short notice
without penalty. Contracts are obtained by the Company either through
competitive bidding, in response to invitations for bids, or by direct
negotiation with a prospective customer.
Most of the Company's contracts result from competitive bidding. Most
frequently, customers invite bidders to provide quotations on the cost to
gather seismic data for a specified region within a specified period of time.
Some customers, primarily large oil companies, require at least three bids in
order to award a contract. Contracts are awarded primarily on the basis of
price, crew experience and equipment availability, technological expertise and
reputation for dependability and safety.
Contract terms, whether bid or negotiated, generally provide for
payment by the customer on either a "turnkey" or a "term" basis or on a
combination of both methods. Under a turnkey contract, payments for data
acquisition services are based upon a fixed fee for each unit of data
collected, and the Company bears substantially all of the risk of business
interruption due to inclement weather and other hazards. Many of the Company's
turnkey contracts contain clauses where weather related risks are shared with
its customers. Term contracts, on the other hand, provide for payment based on
agreed rates per unit of time, which may be expressed in periods ranging from
days to months, and most of the risk of business interruption (except for
interruptions caused by failure of the Company's equipment) is borne by the
customer. In each case, progress payments are usually required unless it is
anticipated that the job will be completed in less than 30 days.
Geoevaluaciones' contracts are procured from a bidding process that is
regulated by Mexican law. PEMEX, as a government-owned company, prepares
specification of projects for which seismic-related services are required.
Geoevaluaciones' contracts with PEMEX contain price terms which are fixed at
the time the contracts are signed and in the past have been denominated in
pesos. These contracts contain cost adjustment provisions which are triggered
upon the occurrence of certain economic events such as a devaluation of the
peso, a change in the rate of inflation or an increase in the statutory minimum
wage rate. The adjustments may be requested by Geoevaluaciones, but only with
respect to the direct costs incurred by Geoevaluaciones under a contract that
are affected by the economic event. While these adjustment features protect
Geoevaluaciones against partial declines in its peso-denominated profit margin,
they do not protect Geoevaluaciones from a decline in the dollar value of its
profits or net assets.
Customers. The Company's customers include and have included a number
of major oil companies and their affiliates, including PEMEX and BP Exploration
(Alaska), Inc. ("BP Alaska"), as well as many smaller, independent oil and gas
companies. The table below sets forth customers that accounted for more than
10% of the Company's revenues in 1996 and 1997.
FOR THE YEAR ENDING DECEMBER 31,
1996 1997
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(IN MILLIONS OF DOLLARS)
PEMEX $ 11.9 23.0% $ 20.7 20.5%
BP Alaska $ 8.8 16.9% $ 16.4 16.2%
Seitel, Inc. $ 7.3 14.1% $ .7 0.7%
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No other single customer accounted for more than 10% of the Company's
net revenues in those periods. The loss of PEMEX or BP Alaska as a customer
would have a material adverse effect on the Company's financial condition, cash
flows and results of operations.
A large portion of the Company's net revenues in any period may be
attributable to a limited number of customers, even though the mix of customers
changes over time as contracts are awarded and completed. The Company has a
number of customers for which, over the years, services have been repeatedly
provided.
Safety and Environmental Program. Certain of the Company's customers,
including PEMEX and other large oil and gas companies, require, as a condition
of awarding contracts, that a safety program designed to reduce the hazards
associated with acquiring seismic data be in place. The Company employs a
full-time safety officer who is in charge of implementing a Company-wide
health, safety and environmental program intended to comply with the
requirements of major oil and gas companies and applicable regulatory
authorities.
Backlog. At March 16, 1998 the Company's backlog of data acquisition
surveys was approximately $83.3 million. Approximately 67% of the backlog was
attributable to the Company's operations in the United States, approximately
31% of such backlog related to the Latin American Operations and approximately
2% related to the Canadian Operations. The majority of such backlog consisted
of written orders or commitments; however, contracts for services are
occasionally varied or modified by mutual consent and, in many instances, are
subject to cancellation by the customer on short notice without penalty.
Backlog could be negatively impacted by a decline in oil and gas prices.
Consequently, the Company's backlog as of any particular date may not be
indicative of the Company's actual operating results for any succeeding fiscal
period. Subject to the foregoing, the Company anticipates that approximately
71% of the orders and commitments included in backlog will be completed during
1998 and it is expected that the balance will be completed by the end of the
year 2000.
COMPETITION
The Company has extensive competition in each of the regions in which
it operates. Contracts for seismic data acquisition services generally are
awarded on the basis of price, crew experience, equipment availability,
technological expertise and reputation for dependability and safety.
Competition is particularly intense for providers of more technologically
advanced seismic data. Certain of the Company's major competitors have more
crews and provide data acquisition, processing and interpretation services,
have far greater financial and other resources than the Company and have more
extensive relationships with major integrated and multinational oil and gas
companies. These resources enable these competitors to maintain
state-of-the-art technology and certain other advantages relating to costs that
may provide them with an advantage over the Company in bidding for contracts.
In addition, certain competitors of the Company take an economic interest in
oil and gas exploration and development projects for which they perform
services for their customers. There can be no assurance that the Company will
be able to compete successfully against its competitors for contracts to
conduct seismic surveys.
EMPLOYEES
As of March 24, 1998 the Company employed approximately 1,355 people,
of whom 42 performed management and marketing functions, 80 performed
administrative services or clerical functions, 41 were geophysicists or
rendered engineering or other technical services and approximately 1,192 were
members of the Company's seismic crews or performed other functions. None of
the Company's employees are represented by a labor union or are direct or
indirect parties to a collective bargaining agreement. Subject to the
uncertainties caused by the merger with Western Atlas, Inc., the Company
believes it has good relations with its employees.
REGULATION
Seismic data acquisition operations are subject to various laws and
regulations in the United States, Mexico, Peru, Bolivia, Ecuador and Canada, as
well as other countries in which the Company may operate in the future. Such
laws and regulations govern various aspects of operations, including the
discharge of explosive materials into the environment, requiring removal and
cleanup of materials that may harm the environment or otherwise relating to the
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protection of the environment, access to private and governmental land to
conduct seismic surveys and use of local employees and suppliers by foreign
contractors. The Company believes that it has conducted its operations in
substantial compliance with applicable environmental laws and regulations
governing its activities.
ITEM 2. PROPERTIES
BUILDING
AREA ANNUAL
OWNED OR APPROXIMATE LEASE
LOCATION LEASED PURPOSE SQUARE FEET PAYMENTS
- ------------------------- -------- --------------------------------- ------------ --------
Littleton, Colorado Leased Corporate headquarters 17,000 $177,000
Anchorage, Alaska Leased Field crew office 5,000 $ 48,000
Prudhoe Bay, Alaska Leased Field crew office 4,000 $ 60,000
Houston, Texas Leased Field crew office 2,000 $ 20,000
Grand Junction, Colorado Leased Repair shop and storage facility 11,000 $ 36,000
Liberal, Kansas Leased Field crew office 4,000 $ 11,000
Mexico City, D.F., Mexico Leased Company headquarters of
Geoevaluaciones, S.A. de C.V. 10,100 $ 83,400
Poza Rica, Mexico Leased Field crew office and repair shop 69,500 $107,000
General Bravo, Mexico Leased Field office and warehouse 52,300 37,400
Soledad de Doblado, Mexico Leased Field office, warehouse and
repair shops 69.400 106,700
Lima, Peru Leased Peru branch office headquarters 5,000 $ 42,000
Santa Cruz, Bolivia Leased Bolivia field crew office 2,400 $ 16,800
Calgary, Canada Leased Company headquarters of J.R.S.
Exploration 11,120 $ 56,000
New York, New York Leased Office of the Chairman of the
Board 4,000 $165,000 *
* See discussion in Note 15 to the Consolidated Financial Statements
In July 1997, the Company entered into an agreement with Hockley
Production Company, L.L.C. ("Hockley") whereby the Company earned an interest
in an oil and gas property in Harris County, Texas in exchange for the
acquisition of 2-D seismic data over the surrounding area. As of December 31,
1997, the Company had a $476,000 interest in oil and gas property as a result
of this agreement. This property remained under development at December 31,
1997.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in or party to a number of lawsuits arising
in the ordinary course of its business. While the outcome of these lawsuits
cannot be predicted with certainty, the Company does not believe that any of
these lawsuits will have a material adverse effect on its operations, cash
flows or financial position.
On September 23, 1997, Geoevaluaciones was served with a notice of a
lawsuit filed in the 1th Federal District Court in Mexico City by Kelman
Technologies, Inc., formerly Capilano International, Inc. (Capilano) claiming
damages of approximately $8 million (plus interest, legal fees and other
expenses) pursuant to a non-binding Letter of Intent executed by and between
Capilano and Geoevaluaciones on June 3, 1991 and superseded by the parties on
June 1, 1992 with the execution of a Technical Assistance Agreement. The
Company filed a timely response to the complaint, denying in its entirety
Capilano's right to any of the claimed damages, interest and expenses, and
contesting Capilano's complaints as either not grounded in fact or as
misconstructions of actual events. While the Company, is not able to estimate
the effect, if any, on Geoevaluaciones's results of operations and financial
position which may result from the resolution of this matter, the Company
believes that Geoevaluaciones has meritorious defenses to each of Capilano's
allegations. The former shareholders of Geoevaluaciones have pledged 60,000
shares of common stock to provide for any costs incurred by the Company in
connection with this lawsuit.
During November and December of 1997, SUNAT (the revenue branch of the
Peruvian government) began a review of the 1996 and 1997 operations in Peru.
On December 2, 1997, as a result of this review, the Company was served with a
notice of embargo for $478,507 relating to the Company's alleged non-compliance
with certain provisions of Peruvian tax law relating to value-added taxes. On
December 12, 1997, payment was made to the SUNAT, and
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subsequently, the embargo was released. Additionally, the Company made payments
directly to the SUNAT of approximately $32,000. On the December 24, 1997, the
Company's attorney presented a petition claiming a refund of the money as,
pursuant to Peruvian law, the SUNAT had failed to respond with a payment order
in a timely manner. Payment orders were subsequently issued by the SUNAT and
approximately $137,000, the excess of the embargoed amount over the payment
orders, was refunded to the Company in 1998. The Company recorded a fourth
quarter charge of $190,000 relating to this matter and was carrying
approximately $321,000 as a prepaid expense at December 31, 1997. Although
there can be no assurance of a positive outcome, the Company believes it has
meritorious defenses to the SUNAT's allegations and is actively disputing the
claims against it.
On March 11, 1998, the Company and its directors were served with a
class action complaint by an individual shareholder, alleging, in part, a
failure by the directors to observe their fiduciary obligations in connection
with the proposed merger between the Company and Western Atlas, Inc. (see Note
16 to Consolidated Financial Statements). The complaint alleges failure to (i)
undertake an appropriate evaluation of the Company's net worth as a
merger/acquisition candidate and (ii) engage in a meaningful auction with third
parties in an attempt to obtain the best value for the Company's shareholders.
On March 17, 1998 the plaintiffs filed (i) an amended complaint, (ii) a motion
seeking a preliminary injunction to enjoin the Company from consummating the
tender offer and to require the Company to supplement their materials furnished
to the Company's stockholders in connection with the tender offer, and (iii) a
motion seeking expedited proceedings with respect to the preliminary injunction.
On March 27, 1998 the Company, Western, and WAI Acquisition entered into a
memorandum of understanding (the "Settlement") with respect to this lawsuit.
Pursuant to the Settlement, the Company and Western have agreed to amend their
previously announced merger agreement to provide, effective immediately, that
the termination fee payable under certain circumstances by 3-D Geophysical, Inc.
to Western shall be reduced from $5.5 million to $4.0 million. In addition, in
connection with the Settlement, 3-D announced that it would mail to its
stockholders of record information reflecting its results of operations for the
three and twelve months ended December 31, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since the initial public offering on February 9, 1996 at $7.50 per share, the
Common Stock has been traded on the Nasdaq National Market under the symbol
"TDGO". The following table sets forth, for the periods indicated, the high
and low sale prices per share for the Common Stock as reported by the Nasdaq
National Market:
High Low
---- ---
1996
----
First Quarter (February 9 through March 31) $ 10.38 $ 7.44
Second Quarter 12.50 8.50
Third Quarter 11.75 6.75
Fourth Quarter 10.00 7.50
1997
----
First Quarter 10.50 5.38
Second Quarter 6.88 4.75
Third Quarter 7.50 3.63
Fourth Quarter 8.88 5.00
1998
----
First Quarter (through March 25, 1998) $ 9.50 $ 5.75
On March 25, 1998, the last reported sale price of the Common Stock as reported
by the Nasdaq National Market was $9.47.
3-D Geophysical's Certificate of Incorporation provides for authorized
capital stock of 25,000,000 shares of Common Stock, par value $.01 per share,
of which 11,916,666 shares were outstanding at March 25, 1998, and 1,000,000
shares of Preferred Stock, $.01 par value per share, of which no shares were
outstanding at March 25, 1998.
As of March 25, 1998, there were 82 holders of record of Common Stock.
On November 17, 1997, the Company entered into a credit agreement with
Sanwa Business Credit Corporation ("SBCC") that restricts the payment of
dividends and the redemption of capital stock. It is not management's intention
to declare or pay dividends in the near future.
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ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS)
The following table of selected financial data includes the operating
results of the Predecessor Company's operations for all of the periods, the
operating results of Northern, Kemp and Paragon for the period beginning
February 9, 1996, and the operating results of J.R.S Exploration for the period
beginning January 1, 1997. Therefore, the information as set out below is
comparable for the three years ended December 31, 1995, but is not comparable
thereafter.
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1996 1997
------- ------- ------ ------- --------
Net revenues $17,638 $17,660 $9,825 $51,754 $101,016
======= ======= ====== ======= ========
Income before extraordinary item $1,075 $1,904 $1,607 $829 $280
======= ======= ====== ======= ========
Income before extraordinary
item, per share
Basic $0.12 $0.02
======= ========
Dilutive $0.11 $0.02
======= ========
Total assets $7,533 $6,448 $4,547 $77,433 $115,745
======= ======= ====== ======= ========
Long-term debt $305 $309 - $4,677 $16,632
======= ======= ====== ======= ========
Cash dividends declared per share - -
======= ========
Weighted average shares outstanding
Basic 7,097 11,917
======= ========
Dilutive 7,224 11,978
======= ========
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
TRANSACTION WITH WESTERN ATLAS, INC.
On March 8, 1998, the Company entered into a definitive Agreement and Plan of
Merger with Western Atlas Inc. and WAI Acquisition Corp., a wholly-owned
subsidiary of Western, pursuant to which the Company will become a wholly-owned
subsidiary of Western. The agreement was unanimously approved by the Company's
Board of Directors. Pursuant to the agreement, Western Atlas, through WAI
Acquisition Corp, has commenced a tender offer for any and all outstanding
shares of 3-D common stock at a purchase price of $9.65 per share in cash. The
tender offer is subject to the satisfaction of a number of customary conditions.
Western Atlas has received early termination of the waiting period, effective
March 26, 1998, under the Heart-Scott-Rodino Antitrust Improvements Act of 1976
with respect to the tender offer and the merger.
Upon consummation of the proposed Plan of Merger with Western Atlas, Inc., the
Company will be recording expenses in the first quarter of 1998 related to
termination benefits related to employment contracts and the vesting of employee
options, lease terminations, potential fees related to prepayment of debt and
other potential costs.
CONSOLIDATED RESULTS OF OPERATIONS
The following discussion has been divided into two sections. The first section
contains the consolidated results of operations of the Company for the periods
indicated. For accounting purposes, the operations of Geoevaluaciones and
PIASA are considered the predecessor company, and the combined financial
statements include the operating results of the Latin American Operations for
all of the periods, the operating results of Northern, Paragon and Kemp (the
"Purchased Companies") only for the period beginning February 9, 1996 and the
operating results of J.R.S. Exploration only for the period beginning January
1, 1997. As a result, the Company's results of operations and cash flows for
the year ended December 31, 1997 are not comparable to the Company's results of
operations and cash flows for the year ended December 31, 1996 and the
Company's results of operations and cash flows for the year ended December 31,
1996 are not comparable to the Company's results of operations and cash flows
for the year ended December 31, 1995. The second section contains a discussion
of the liquidity and capital resources of the Company, the impact of the
Mexican economy and certain other matters. The following discussion of the
results of operations and the financial position of 3-D Geophysical, Inc. and
of the Operating Subsidiaries and PIASA should be read in connection with the
consolidated financial statements, including the notes thereto, appearing
elsewhere in this Annual Report on Form 10-K.
Year Ended December 31, 1997 compared to Year Ended December 31, 1996
NET REVENUES. Net revenues for the Company increased 95.2% to $101.0
million in the year ended December 31, 1997 from $51.8 million in the year
ended December 31, 1996. The increase is primarily attributable to the
inclusion of $11.9 million of net revenues from the Canadian Operations, the
inclusion of a full year of performance for the United States Operations which
amounts to an additional $4.6 million of revenues in 1997 and a general
increase in seismic activity in the Company's markets. Net revenues for the
United States Operations increased 63.1% to $64.2 million from $39.4 million,
primarily as a result of two large contracts with customers in the North Slope
region and the Cook Inlet of Alaska, the addition of one crew in California and
the inclusion of a full year of performance. Revenues from the Latin American
Operations increased to $24.9 million from $12.4 million due to three large
contracts in Mexico and a contract in Peru, which were substantially completed
in 1997. Net revenues in the year ended December
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31, 1997 include contractual adjustments related to increased costs due to the
devaluation of the Mexican peso of $395,000 as compared to similar contractual
adjustments of $1.0 million for the year ended December 31, 1996.
COST OF DATA ACQUISITION. Cost of data acquisition for the Company
increased 99.9% to $80.0 million in the year ended December 31, 1997 from $40.0
million in the year ended December 31, 1996. The increase is primarily
attributable to the inclusion of $8.9 million of cost of data acquisition from
the Canadian Operations, the inclusion of a full year of performance for the
United States Operations which amounts to an additional $4.2 million of costs
in 1997 and costs associated with the increase in volume.
Gross margins (hereafter defined as revenues less cost of data acquisition) for
the Company declined to 20.8% of net revenues for the year ended December 31,
1997 from 22.6% for the year ended December 31, 1996. The Canadian Operations
contributed gross margins of 25.2% for the year ended December 31, 1997. Gross
margins for the United States Operations decreased to 21.3% in the year ended
December 31, 1997 from 26.3% in the year ended December 31, 1996 primarily due
to projects in the North Slope and the Cook Inlet in Alaska, decreased
productivity in the Rocky Mountain region, and the completion of smaller, less
profitable jobs principally in the Ohio region. The projects in Alaska had
lower margins than anticipated due to the use of leased, rather than owned,
equipment, but did not result in a negative impact on the Company's return on
assets. The decline in productivity in the Rocky Mountain region was primarily
a result of weather delays and was slightly offset by improved productivity in
the Company's operations in Texas and California. Gross margins for the Latin
American Operations increased to 17.3% in the year ended December 31, 1997 from
11.1% in the year ended December 31, 1996 due to improved margins in Mexico. In
addition, gross margins were negatively impacted for the year ended December
31, 1996 due a $740,000 fourth quarter charge which resulted from the
cancellation of a large contract in Peru.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
Company increased to $9.9 million for the year ended December 31, 1997 from
$4.1 million for the year ended December 31, 1996. The increase is attributable
to the inclusion of $668,000 of depreciation and amortization from the Canadian
Operations and purchases of approximately $38.8 million of new seismic data
acquisition and related equipment during the past twelve months, including
equipment purchased through the assumption of capital lease obligations and
notes payable. The Company's channel count has increased from approximately
18,000 channels in 1996 to approximately 26,000 channels currently.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the Company increased 57.8% to $9.5 million in the year ended
December 31, 1997 from $6.0 million in the year ended December 31, 1996. The
increase is partially attributable to the inclusion of $1.2 million of general
and administrative expenses from the Canadian Operations. General and
administrative expenses for the United States Operations increased 20.6% to $5.5
million for the year ended December 31, 1997 from $4.6 million for the year
ended December 31, 1996 due to the Company's rate of growth and the inclusion of
a full year of general and administrative expenses in 1997 which amounts to
additional expenses of $437,000. General and administrative expenses for the
Latin American Operations increased to $2.8 million for the year ended December
31, 1997 from $1.4 million for the year ended December 31, 1996 primarily due to
the addition of support staff needed to complete awarded contracts in Mexico and
the opening of the Company's branch offices in Peru, Bolivia and Ecquador.
INTEREST INCOME. Interest income increased by 32.5% to $611,000 for
the year ended December 31, 1997 from $461,000 for the year ended December 31,
1996. This increase is partially due to interest income earned on a $3 million
advance payment received in Mexico in December 1996 and interest income earned
on two receivable balances from customers for which payment terms were extended
during 1997. As of March 16, 1998, there were no receivable balances outstanding
for which the payment terms have been extended.
INTEREST EXPENSE. The Company's interest expense increased 79.8% to
$1.8 million for the year ended December 31, 1997 from $1.0 million for the
year ended December 31, 1996. The increase is primarily attributable to
interest charges on weighted-average borrowings of $20.6 million for the year
ended December 31, 1997 compared to interest charges on weighted-average
borrowings of $12.3 million for the year ended December 31, 1996.
FOREIGN CURRENCY LOSS. The Company experienced foreign currency
losses of $68,000 for the year ended December 31, 1997 as compared to losses of
$91,000 for the year ended December 31, 1996. The cumulative inflation
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16
rate in Mexico, as measured by the consumer price index, exceeded 100% for each
three year period ended December 31, 1996 and 1997. Accordingly, the Company
has adopted the dollar as the functional currency for Geoevaluaciones beginning
January 1, 1997 as prescribed by Statement of Financial Accounting Standards
No. 52 ("Statement 52"). Using the dollar as the functional currency results
in adjustments to the consolidated statement of operations for foreign currency
translation gains and losses. In 1996, these amounts were included in
cumulative foreign currency translation adjustments, reflected in stockholders'
equity, and were not charged to earnings.
The Company does not hedge against fluctuations in foreign currencies
in the countries in which it operates and is therefore at risk to currency
fluctuations. A significant change could have a material impact on the
Company's results of operations.
The foreign currency loss recognized during the year ended December
31, 1997 is attributable to the decline of the Peso/Dollar exchange rate from
7.88 at December 31, 1996 to 8.07 at December 31, 1997. As of March 24, 1998,
the Peso/Dollar exchange rate declined by approximately 5.8% from December 31,
1997. In the event that this trend continues, the Company could be adversely
affected by foreign currency losses in 1998.
MISCELLANEOUS INCOME (EXPENSE). The Company's miscellaneous income
increased by 2.4% to $344,000 for the year ended December 31, 1997 from
$336,000 for the year ended December 31, 1996. The Canadian Operations
contributed $268,000 of miscellaneous income, which was primarily generated
from the rental of idle equipment. This additional income was offset by a loss
of $190,000 recognized for the Latin American Operations pursuant to
allegations from the SUNAT, the Peruvian taxing authority, compounded with
lower gains from the sale of equipment in 1997 as compared to 1996. See
Footnote 12 to the Consolidated Financial Statements.
INCOME TAX EXPENSE. The Company provided $420,000 for income tax
expense from operations in the year ended December 31, 1997 as compared to
$470,000 in the year ended December 31, 1996. The Company's effective tax rate
for 1997 was 60% as compared to an effective tax rate of 36% for 1996. The
increase in the effective tax rate is primarily due to a shift in the mix of
income to Canada where the effective tax rate was 50% in 1997 from the United
States where the effective tax rate was 25% in 1996, partially offset by the
reduction of an existing valuation allowance relating to the Company'
operations in Peru. The Company believes it is more likely than not that the
benefits from its net operating loss carryforwards will be realized through the
reversal of timing differences as well as anticipation of having sufficient
taxable income in future periods to utilize such benefits.
EXTRAORDINARY ITEM NET OF INCOME TAX BENEFIT. The Company recognized a
$139,000 extraordinary loss in the year ended December 31, 1997, net of a tax
benefit of $85,000, as compared to an extraordinary gain of $57,000 recognized
for the year ended December 31, 1996, net of tax expense of $36,000. The
extraordinary items recognized in 1997 and 1996 result from the early
extinguishment of two separate credit agreements.
Year Ended December 31, 1996 compared to Year Ended December 31, 1995
NET REVENUES. Net revenues for the Company increased 426.8% to $51.8
million in the year ended December 31, 1996 from $9.8 million in the year ended
December 31, 1995. The increase is primarily attributable to the inclusion of
$39.4 million of net revenues of the Company's United States Operations and a
26.0% increase to $12.4 million in the year ended December 31, 1996 from $9.8
million in the year ended December 31, 1995 for the Latin American Operations.
Net revenues in the year ended December 31, 1995 include $2.6 million of
contractual adjustments related to increased costs due to the devaluation of
the Mexican peso which occurred in December of 1994. Net revenues in the year
ended December 31, 1996 include similar contractual adjustments of $1.0
million.
COST OF DATA ACQUISITION. Cost of data acquisition for the Company
increased 570.8% to $40.0 million in the year ended December 31, 1996 from $6.0
million in the year ended December 31, 1995. The increase is primarily
attributable to the inclusion of $28.9 million of cost of data acquisition of
the Company's United States Operations and an 84.4% increase to $11.0 million
in the year ended December 31, 1996, from $6.0 million in the year ended
December 31, 1995, for the Latin American Operations. The decrease in gross
margin for the Latin American Operations for the year ended December 31, 1996
compared to the year ended December 31, 1995 is primarily due to cost overruns
on Geoevaluaciones's first 3-D seismic survey. The decrease in gross margins
for the Latin American Operations is further
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attributable to larger price adjustments realized during the year ended
December 31, 1995 and the impact in the year ended December 31, 1996 of the
Southern Services crew (a drilling and field services crew operating in
Southern Mexico) which did not commence work in 1995 until November. Further
contributing to the decline in gross margins in the Latin American Operations
was the notification to the Company by Atlantic Richfield Company ("ARCO") of
its intention to delay indefinitely the seismic survey which was under contract
with the Company in Peru. Based on this notification, the Company recorded a
$740,000 charge in the fourth quarter of 1996, including a $100,000 reserve
against future losses attributable to this contract.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
Company increased 520.2% to $4.1 million in the year ended December 31, 1996
from $662,000 in the year ended December 31, 1995. The increase is primarily
attributable to the inclusion of $3.0 million of depreciation and amortization
of the Company's United States Operations, including $362,000 of goodwill
amortization attributable to the acquisitions of Northern and Kemp. This is in
addition to a 57.9% increase to $1.0 million in the year ended December 31,
1996, from $662,000 in the year ended December 31, 1995, for the Latin American
Operations.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the Company increased 478.2% to $6.0 million in the year ended
December 31, 1996 from $1.0 million in the year ended December 31, 1995. The
increase is primarily attributable to the inclusion of $4.6 million of general
and administrative expenses from the Company's United States Operations, and a
35.2 % increase to $1.4 million in the year ended December 31, 1996, from $1.0
million in the year ended December 31, 1995, for the Latin American Operations.
General and administrative expenses for the Company have increased due to the
added costs associated with being a publicly traded company and increased
marketing costs.
OPERATING INCOME. Operating income for the Company decreased 25.2% to
$1.6 million in the year ended December 31, 1996 from $2.2 million in the year
ended December 31, 1995. The operating income of the Latin American Operations
decreased 149.7% in the year ended December 31, 1996 to an operating loss of
$1.1 million from $2.2 million of operating income in the year ended December
31, 1995. The decrease in operating income for the Latin American Operations
in the year ended December 31, 1996 compared to the year ended December 31,
1995 is primarily due to cost overruns on Geoevaluaciones's first 3-D seismic
survey. The decrease in operating income is also due to contractual revenue
adjustments of $2.6 million, which were realized during the year ending
December 31, 1995, attributable to increased costs resulting from the
devaluation of the Mexican peso during December of 1994. This is contrasted
with contractual revenue adjustments of $1.0 million realized during the year
ended December 31, 1996. Further contributing to the decline in gross margins
in the Latin American Operations was the notification to the Company by ARCO of
its intention to indefinitely delay the seismic survey which was under contract
with the Company in Peru. Based on notification of this information, the
Company recorded a $740,000 charge in the fourth quarter of 1996 relating to
its Latin American Operations. This charge includes the recognition of a
$100,000 reserve against future losses attributable to this contract. The
decrease in operating income of the Latin American Operations was partially
offset by the inclusion of $2.6 million of operating income of the Company's
United States Operations for the year ended December 31, 1996.
INTEREST INCOME. The Company's interest income increased 74.0% to
$461,000 in the year ended December 31, 1996 from $265,000 in the year ended
December 31, 1995. The increase is primarily the result of interest income in
Mexico due to higher interest rates available in Mexico, interest income from
the investment of the proceeds of the Initial Public Offering and interest
income from the conversion of a trade receivable to an interest-bearing note
receivable.
INTEREST EXPENSE. The Company's interest expense increased 27.1% to
$1.0 million in the year ended December 31, 1996 from $803,000 in the year
ended December 31, 1995. The increase is due to interest charges on borrowings
of approximately $12.0 million under a credit facility with the Company's
principal lender during the year ended December 31, 1996 compared to borrowings
of approximately $300,000 during the year ended December 31, 1995.
FOREIGN CURRENCY TRANSACTION LOSSES. The Company recognized a foreign
currency loss of $91,000 in the year ended December 31, 1996 compared to a
foreign currency loss of $120,000 in the year ended December 31, 1995.
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These losses are primarily due to unfavorable fluctuations in the Peso/U.S.
dollar exchange rate as such fluctuations increased the peso value of U.S.
dollar liabilities for the Latin American Operations.
MISCELLANEOUS INCOME. The Company recognized miscellaneous income of
$336,000 in the year ended December 31, 1996 compared to miscellaneous income of
$238,000 in the year ended December 31, 1995. The increase is due to rental
income on equipment coupled with a value-added tax refund, partially offset by a
decrease in gains on equipment disposition.
INCOME TAX EXPENSE. The Company recognized income tax expense from
operations of $470,000 in the year ended December 31, 1996 compared to income
tax expense of $130,000 in the year ended December 31, 1995. The effective
income tax rate for the Company for the year ended December 31, 1996 is 36%.
This rate is increased over the effective rate for the year ended December 31,
1995 of 7% primarily due to the recognition of a full valuation allowance on
the tax benefit relating to the fourth quarter charge of $740,000 which was
recognized in the Company's Latin American Operations. The increase is also
due to the Company's United States Operations being taxed at a 25% effective
tax rate, which is substantially higher than the rate recognized in the
Company's 1995 results. The effective tax rate for the Company's United
States Operations is lower than the statutory tax rate of 34% due to a change
in the valuation allowance previously established with respect to net operating
loss carryforwards.
EXTRAORDINARY ITEM NET OF INCOME TAX EXPENSE. The Company recognized
a $57,000 extraordinary item in the year ended December 31, 1996, net of tax
expense of $36,000. The extraordinary item is due to a gain recognized on the
early extinguishment of debt. No extraordinary items were recognized in the
year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
From December 31, 1996 to December 31, 1997, total assets of the
Company increased from $77.4 million to $115.8 million, total liabilities
increased from $29.3 million to $61.8 million and total stockholders' equity
increased from $48.2 million to $54.0 million. These changes are primarily
due to the acquisition of the Canadian Operations, the exercise of the
underwriters' overallotment option relating to the Company's second public
offering and increased debt.
On December 17, 1996, the Company completed a second public offering
of 3,500,000 shares of common stock at a price to the public of $7.50 per
share. Subsequently, on January 2, 1997, the underwriters exercised their
overallotment option to purchase an additional 525,000 shares at a price to the
public of $7.50 per share. The proceeds, net of the underwriters' discount and
offering costs, were approximately $27.2 million. Of these net proceeds, $4.0
million was used to pay the cash portion of the purchase price for the Canadian
Operations and to retire certain existing debt obligations of the Canadian
Operations, $3.0 million was used to retire certain debt obligations
outstanding under a loan agreement with Wells Fargo Bank Texas, N. A., formerly
First Interstate Bank of Texas, N. A., and $20.2 million has been used to
purchase additional seismic data acquisition equipment and for working capital
purposes.
At December 31, 1997 the Company had $2.7 million of cash. The
Company utilized $5.2 million net cash from operating activities in the year
ended December 31, 1997 compared with $3.8 million of cash provided from
operating activities in the year ended December 31, 1996. The increase in net
cash utilized from operating activities is primarily due to an increase in net
receivables of $15.6 million, net of the acquired balance from the Canadian
Operations. The increase in receivables at December 31, 1997 is due to
billings for work completed in the fourth quarter for two large projects in
Alaska and work in progress for large projects in Alaska and Mexico.
Net cash used in investing activities decreased to $16.3 million in
the year ended December 31, 1997 from $33.2 million in the prior year. The
decrease reflects a decline in consideration paid for acquisitions to $2.5
million in the year ended December 31, 1997 compared to $10.3 million for the
year ended December 31, 1996. Additionally, equipment purchases decreased to
$15.2 million during the year ended December 31, 1997 from $22.3 million during
the year ended December 31, 1996.
Net cash provided by financing activities decreased to $6.6 million
for the year ended December 31, 1997 from $46.4 million in the year ended
December 31, 1996 due to the completion of the Company's initial and secondary
public
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offerings in 1996.
On November 17, 1997, the Company entered into a $30 million credit
agreement (the "Credit Agreement") with Sanwa Business Credit Corporation
("SBCC") which replaced the Company's existing $18 million facility with Wells
Fargo Bank. The Credit Agreement provides for a term loan of $10 million, a
capital expenditures line of credit of up to $10 million to fund required
capital expenditures, of which $9.8 million was available as of December 31,
1997, and a revolving line of credit of up to $10 million to use for working
capital requirements, of which $3.5 million was available as of December 31,
1997. The Credit Agreement is collateralized by a lien on the Company's
accounts receivable, equipment, machinery, fixtures, inventory, goods, chattel
paper, documents, instruments, investment property, general intangibles and
other personal property, whether then owned or thereafter acquired, and all
products and proceeds thereof, and by guarantees by certain of the Company's
subsidiaries.
The term loan is repayable in 59 equal consecutive monthly
installments through October, 2002, based on an 84 month amortization, with the
remaining principal and interest due in November, 2002. The term loan bears a
variable interest rate, which was approximately 9.5% at December 31, 1997. The
capital expenditures line of credit is available to fund up to 85% of the
purchase price of equipment. Draws under the capital expenditures line are
repayable based on a 60 month amortization, with the remaining principal and
interest due in November, 2002. The capital expenditures line bears a variable
interest rate , which was approximately 9.5% at December 31, 1997. The
revolving line of credit may be drawn down from time to time through November,
2002 in an amount of up to 80% of the Company's "Eligible Accounts" (as defined
in the Credit Agreement). The revolving line of credit is payable in full in
November, 2002, and bears a variable interest rate, which was approximately
9.0% at December 31, 1997.
In addition to certain customary affirmative covenants, the Credit
Agreement contains restrictions on the Company with respect to (I) incurring
"Debt" (as defined in the Credit Agreement), (ii) incurring or permitting to
exist "Liens" (as defined in the Credit Agreement) on its property, assets or
revenues, (iii) declaring or paying any dividends or other distributions on its
capital stock (or acquiring any of its capital stock), (iv) issuing capital
stock, (v) entering into certain transactions with affiliates, (vi) disposing
of assets, and (vii) certain other matters. The Credit Agreement also contains
financial covenants with respect to net income, minimum tangible net worth, the
ratio of indebtedness to tangible net worth and the ratio of cash flow
coverage.
At March 16, 1998, the Company's estimated backlog of commitments for
services totaled $83.3 million. The Company expects to complete approximately
$59.3 million of these commitments during 1998 and it is expected that the
balance will be completed by the end of the year 2000; however, commitments are
subject to cancellation at the option of the Company's customers on short
notice and sometimes without penalty. Backlog could be negatively impacted by
a decline in oil and gas prices.
The Company believes that its planned capital expenditures and
operating requirements for the next 12 months will be funded from cash from
operations and, to the extent available, borrowings under the Credit Agreement,
and refinancing of capital leases. The Company may revise its plans in response
to future changes in the oil and gas industry in general and the demand for its
services in particular, its results of operations, its other capital
requirements and other relevant factors. The Company believes that significant
changes in the economic environment, such as oil and natural gas prices or
interest rates, could materially effect the Company, including with respect to
such matters as its ability to finance its capital expenditures.
IMPACT OF MEXICAN ECONOMY
For the years ended December 31, 1995, 1996 and 1997 pro forma net
revenues from the Latin American Operations were 26.0%, 21.5% and 20.4%,
respectively, of pro forma net revenues of the Company. The Company's financial
performance is, and will continue to be, affected by economic conditions in
Mexico.
The level of land-based seismic data acquisition services in Mexico
has in the past been vulnerable to economic downturns and changes in government
policies and public spending. Since December 1994, Mexico has experienced an
economic crisis characterized by a significant devaluation of the peso,
exchange rate instability, increased inflation, high domestic interest rates,
negative economic growth, reduced consumer purchasing power and high
unemployment.
19
20
Inflation in Mexico for the years ended December 31, 1995, 1996 and 1997 was
approximately 52.0%, 27.7%, and 15.7%, respectively, based on the consumer
price index.
The December 1994 devaluation of the peso has had a number of effects
on the Mexican economy that have adversely affected the financial condition of
Mexican companies, including Geoevaluaciones. The devaluation caused the peso
value of Geoevaluaciones' dollar denominated indebtedness, which consists
primarily of intercompany financing, to increase significantly, and also
greatly increased the rate of inflation, resulting in a sharp rise in nominal
interest rates on peso denominated financing as well as a general tightening of
available credit in the Mexican economy.
The prices Geoevaluaciones pays for certain equipment, energy and
other materials are set, in part, by reference to international prices
denominated in currencies other than pesos. Pursuant to Geoevaluaciones'
contracts with PEMEX, certain of the costs incurred by Geoevaluaciones may be
adjusted to take into account economic events such as inflation and devaluation
of the peso. Geoevaluaciones' results of operations, denominated in pesos, are
translated into U.S. dollars for inclusion in the Company's consolidated
financial statements. However, increases in the peso to dollar exchange rate
will result in a reduction of the dollar value of peso-based revenues of the
Company as well as the dollar value of peso-based expenses of the Company.
Likewise, decreases in such rate will result in increases in the dollar value
of such revenues and expenses. As a result, such fluctuations could have a
material adverse effect on the financial condition and results of operations of
the Company. The table below sets forth the peso to dollar exchange rate during
the periods indicated (based on the average of the closing rates published by
Banco Mexicano de Comercio Exterior for each business day during such period)
and the closing rate for the last day of each such period.
PESO TO DOLLAR EXCHANGE RATE
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
---- ---- ----
Average ...................... 6.42 7.60 7.91
Period end ................... 7.68 7.88 8.07
While the Company may from time to time evaluate methods to reduce
foreign exchange risks, the adoption of any particular method will depend on
existing market conditions. The Company cannot reasonably predict what method,
if any, it will adopt to reduce foreign exchange risks, and there can be no
assurance that it will adopt any such method or that, if adopted, any such
method will reduce such risks.
The financial statements of Geoevaluaciones for the year ended
December 31, 1995 and the results of Geoevaluaciones for the year ended
December 31, 1996, which are included in the Company's consolidated financial
statements, have been prepared using the peso as the functional currency as
prescribed by Statement of Financial Accounting Standards No. 52 ("Statement
52"). Statement 52 requires that an entity's reporting currency, should be used
as the functional currency if inflation in the primary economic environment
exceeds 100% over a three-year period. If the financial statements of
Geoevaluaciones had been prepared using the dollar as the functional currency
for the two years ended December 31, 1996, net income would have been lower.
The cumulative inflation rate in Mexico, as measured by the consumer
price index, exceeded 100% for each three year period ended December 31, 1996
and 1997. Accordingly, the Company adopted the dollar as the functional
currency beginning January 1, 1997 in accordance with Statement 52 and
anticipates continuing with this method of accounting during 1998. Using the
dollar as the functional currency resulted in adjustments to the consolidated
statement of operations in 1997 for foreign currency translation gains and
losses. In 1996, these amounts were included as amounts in cumulative foreign
currency translation adjustments, reflected in stockholders' equity, and were
not charged to earnings.
Year 2000
The Company recognized the importance of ensuring that neither its
customers nor its business operations are disrupted as a result of Year 2000
software failures. The Company is communicating with customers, suppliers,
financial institutions and other vendors with which it does business to
coordinate Year 2000 conversion efforts. At the present time, the Company
believes that its systems are substantially Year 2000 compliant and does not
expect Year 2000 issues to materially affect its services, competitive position
or financial performance. However, there can be no assurance that
20
21
this will be the case. The ability of third parties with which the Company
transacts business to adequately address their Year 2000 issues is outside the
Company's control. There can be no assurance that the failure of such third
parties to adequately address their respective Year 2000 issues will not have a
material adverse effect on the Company's business, financial condition, cash
flows and results of operations.
Seismic Data Libraries
The Company shares with various third parties an interest in seismic
data libraries that are licensed to oil and gas companies on a non-exclusive
basis. At December 31, 1997, such data had a gross value of $2.0 million, of
which $1.4 million had been amortized. Costs are amortized on a project by
project basis in proportion to management's estimates of total anticipated
revenues. This data was acquired by the Company in 1997 in McKenzie County,
North Dakota and Alberta, Canada. Risk factors considered when determining
whether to undertake this project include the number of potential customers for
the completed data, the probability and timing of future lease, concession,
exploration and development activity in the area, and the availability, quality
and price of competing data. Upon entering into these commitments, the Company
obtained commitments for a majority of the anticipated costs of obtaining the
data, however the Company cannot be certain that it will fully recoup its costs
if it substantially underestimates the cost or market demand for such
multi-client projects.
Interest in Oil and Gas Property
In July 1997, the Company entered into an agreement with Hockley
Production Company, L.L.C. ("Hockley") whereby the Company earned approximately
a 5% interest in an oil and gas property in Harris County, Texas in exchange
for the acquisition of 2-D seismic data over the surrounding area. As of
December 31, 1997, the Company had a $476,000 interest in the oil and gas
property as a result of this agreement. This property remains under development
at December 31, 1997 and the Company cannot be certain that all capitalized
costs will be recovered.
FEDERAL INCOME TAXES
Provisions for income taxes are based on pretax income reported for
financial statement purposes. Such provisions differ from amounts currently
payable because certain items of income and expenses are recognized for income
tax purposes in periods different from the periods for financial statement
purposes. The tax effects of these timing differences, primarily with respect
to depreciation and amortization, are reflected as deferred income taxes. The
Company's income from the Latin American Operations will be subject to the
statutory tax rate in Mexico of 34%, net of applicable inflation adjustments.
Any Mexican income tax paid will be available as a credit against the Company's
United States federal income taxes upon the repatriation of any Mexican
earnings to the United states pursuant to tax treaties between Mexico and the
United States.
IMPACT OF PRICING, INFLATION AND SEASONALITY
The general availability of seismic data equipment and crews, and the
level of exploration activity in the oil and gas industry, directly affect the
cost of acquiring seismic data. The pricing of the Company's seismic data
acquisition services is primarily a function of these factors. The Company
believes that inflationary trends had no material impact on the results of its
United States Operations during the three years ended December 31, 1997. The
Latin American Operations in these periods were affected by the inflationary
pressure on the Mexican economy insofar as the peso was devalued, the cost of
peso-denominated financing rose sharply and the Mexican government sought to
curb public spending. Inflation in Mexico for the years ended December 31,
1995, 1996, and 1997 was approximately 52.0%, 27.7% and 15.7% respectively,
based on the consumer price index. As a result, net revenues decreased once
revenues from the Company's operations in Mexico were translated from pesos to
dollars.
The Company's seismic data acquisition operations historically have
been subject to seasonal fluctuation, with the greatest volume of data
acquisition occurring during the summer and fall. The consolidation of the
Operating Subsidiaries and the expansion into Alaska, Latin America and Canada
may enable the Company to deploy its crews and utilize its equipment in
disparate regions. The Company will attempt to conduct operations year-round
with fewer days
21
22
of down-time caused by inclement weather by working during the favorable
operating seasons in different regions. The Company believes that the
geographical diversification of its operations may reduce the impact of
seasonal fluctuations.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS 128") was issued. This statement was adopted in the
fourth quarter of 1997. SFAS 128 simplified the standards for computing and
presenting earnings per share ("EPS") under existing accounting principles and
improved comparability to international accounting standards. SFAS 128
required the restatement of prior period EPS data. The adoption of this
standard did not have a significant impact on the Company's financial
statements.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS 130"), which
establishes standards for reporting and display of comprehensive income and its
components. The components of comprehensive income refer to revenues,
expenses, gains, and losses that are excluded from net income under current
accounting standards, including foreign currency translation items, minimum
pension liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities. SFAS 130 requires that all items
that are recognized under accounting standards as components of comprehensive
income be reported in a financial statement displayed in equal prominence with
other financial statements; the total of other comprehensive income for a
period is required to be transferred to a component of equity that is
separately displayed in a statement of financial position at the end of an
accounting period. SFAS 130 is effective for both interim and annual periods
beginning after December 15, 1997. Management has determined that the adoption
of this standard will not have a significant impact on the Company's financial
statements.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"). SFAS 131 establishes standards for the way public
enterprises are to report information about operating segments in annual
financial statements and requires the reporting of selected information about
operating segments in interim financial reports issued to stockholders. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS 131 is effective for periods
beginning after December 15, 1997. Management has determined that the adoption
of this standard will not have a significant impact on the Company's financial
statements.
22
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
3-D Geophysical, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of 3-D
Geophysical Inc. and Subsidiaries (the "Company"), as of December 31, 1996 and
1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of 3-D Geophysical, Inc. and Subsidiaries as of December 31, 1996 and
1997 and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
As discussed in Note 16, on March 8, 1998, the Company, Western Atlas,
Inc. ("Western") and WAI Acquisition Corp., a wholly-owned subsidiary of
Western, entered into a definitive merger agreement providing for Western to
acquire the Company. The merger is subject to the tender of a majority of the
Company's outstanding shares of Common Stock and certain customary conditions.
Coopers & Lybrand LLP
Denver, Colorado
March 25, 1998
23
24
CONSOLIDATED BALANCE SHEETS
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
- --------------------------------------------------------------------------------
(in thousands, except share amounts) DECEMBER 31, DECEMBER 31,
1996 1997
ASSETS (Successor) (Successor)
Current assets:
Cash and cash equivalents $ 17,624 $ 2,706
Restricted cash 820 --
Accounts receivable billed, net of
the allowance for doubtful accounts of $49
and $130, respectively 11,268 27,143
Accounts receivable, unbilled 2,933 6,230
Other receivables 282 354
Deferred income taxes 108 243
Prepaid expenses and other 999 3,625
--------- ---------
Total current assets 34,034 40,301
Property and equipment, net of accumulated
depreciation of $5,525 and $14,656,
respectively 35,529 66,020
Goodwill, net of accumulated amortization of
$362 and $973, respectively 6,115 8,201
Other assets 1,755 1,223
--------- ---------
Total assets $ 77,433 $ 115,745
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital
leases $ 7,646 $ 23,937
Accounts payable 12,912 16,504
Accrued liabilities 1,560 3,703
Deferred revenue 1,536 648
--------- ---------
Total current liabilities 23,654 44,792
Long-term debt and capital leases, net of current maturities 4,677 16,632
Deferred income taxes 937 371
Commitments and contingencies (see Notes 12 and 16)
Stockholders' equity:
Common stock, $.01 par value, 25,000,000
shares authorized, 11,100,000 shares and 11,916,666
shares issued and outstanding as of December 31,
1996 and 1997, respectively 111 119
Preferred stock, $.01 par value,
1,000,000 shares authorized, none issued
and outstanding -- --
Additional paid in capital 51,426 57,096
Retained earnings
739 880
Cumulative foreign currency translation adjustment
(4,111) (4,145)
--------- ---------
Total stockholders' equity 48,165 53,950
--------- ---------
Total liabilities and stockholders' equity $ 77,433 $ 115,745
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
24
25
CONSOLIDATED STATEMENTS OF OPERATIONS
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
- --------------------------------------------------------------------------------
(in thousands, except per share amounts)
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
----------------- ------------------- -------------------
(Predecessor) (Successor) (Successor)
Net revenues $ 9,825 $ 51,754 $ 101,016
Expenses
Cost of data acquisition 5,968 40,032 80,029
Depreciation and amortization 662 4,106 9,868
General and administrative expenses 1,038 6,002 9,470
----------------- ------------------- -------------------
7,668 50,140 99,367
----------------- ------------------- -------------------
Operating income 2,157 1,614 1,649
Other income (expense):
Interest income 265 461 611
Interest expense (803) (1,021) (1,836)
Foreign currency
transaction/translation losses (120) (91) (68)
Miscellaneous 238 336 344
----------------- ------------------- -------------------
(420) (315) (949)
----------------- ------------------- -------------------
Income before provision for income taxes
and extraordinary item 1,737 1,299 700
Provision for income taxes 130 470 420
----------------- ------------------- -------------------
Income before extraordinary item 1,607 829 280
Extraordinary item, net of tax expense of $36
and income tax benefit of $85 - 57 (139)
----------------- ------------------- -------------------
Net income $ 1,607 $ 886 $ 141
================= =================== ===================
Income per share before extraordinary item
Basic $ 0.12 $ 0.02
------------------- -------------------
Dilutive 0.11 0.02
------------------- -------------------
Extraordinary item per share, net of tax expense
Basic 0.01 (0.01)
------------------- -------------------
Dilutive 0.01 (0.01)
------------------- -------------------
Net earnings per share
Basic 0.13 0.01
------------------- -------------------
Dilutive $ 0.12 $ 0.01
------------------- -------------------
Weighted average shares outstanding
Basic 7,097 11,917
=================== ===================
Dilutive
7,224 11,978
=================== ===================
The accompanying notes are an integral part of these consolidated financial
statements.
25
26
CONSOLIDATED STATEMENTS OF CASH FLOWS
3-D GEOPHYISICAL, INC. and SUBSIDIARIES
- --------------------------------------------------------------------------------
(in thousands)
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------------ --------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES: (Predecessor) (Successor) (Successor)
Net income $ 1,607 $ 886 $ 141
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Depreciation and amortization 662 4,106 9,868
Gain on sale of fixed assets (350) (192) (138)
Bad debt expense - - 107
Deferred income taxes 130 (15) (701)
Extraordinary loss (gain) on extinguishment of debt (93) 225
Foreign currency transaction losses 91 68
Changes in operating assets and liabilities, net of investing and
financing activities:
Effect of change in exchange rate on operating assets and 197 1 (195)
liabilities
(Increase) decrease in receivables, net of the allowance for 504 (5,834) (15,614)
doubtful accounts
(Increase) in prepaid expenses and other current assets - (551) (1,350)
(Increase) decrease in other assets 66 (1,294) 616
Increase (decrease) in accounts payable (1,156) 5,733 936
Increase (decrease) in accrued liabilities 13 (576) 1,723
Increase (decrease) in deferred revenue - 1,536 (888)
----------------- --------------- ----------------
Total adjustments 66 2,900 (5,343)
----------------- --------------- ----------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 1,673 3,786 (5,202)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (147) (22,264) (15,212)
Cash consideration paid to acquire Operating
Subsidiaries, net of cash acquired - (10,328) (2,528)
Cash received from sale of property and equipment 350 245 609
Net change in restricted cash - (820) 820
----------------- --------------- ----------------
Net cash provided (used) by investing activities 203 (33,167) (16,311)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from public offerings, net of underwriting discounts - 56,760 3,701
Cash paid in connection with the public offerings - (4,768) -
Issuance of predecessor common stock 28 - -
Cash paid to retire indebtedness of the Operating Subsidiaries - (4,599) (1,219)
Principal payments on notes payable and capital leases (542) (13,709) (31,415)
Cash paid for debt financing costs - (167) (508)
Cash proceeds from borrowings under notes payable and capital leases - 15,051 36,070
Cash dividend paid to owners of predecessor company (702) (3,510) -
Net borrowings under factor agreements (207) - -
Cash received from overdraft balance - 1,348 -
----------------- --------------- ----------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (1,423) 46,406 6,629
Net increase (decrease) in cash 453 17,025 (14,884)
Cash at beginning of period 242 609 17,624
Effect of change in exchange rate on cash (86) (10) (34)
----------------- --------------- ----------------
CASH AT END OF PERIOD $ 609 $ 17,624 $ 2,706
================= =============== ================
The accompanying notes are an integral part of these
consolidated financial statements.
26
27
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
- --------------------------------------------------------------------------------
(in thousands)
Cumulative
Foreign
Additional Currency
Common Paid-In Retained Translation
Shares Stock Capital Earnings Adjustments Total
-------- -------- -------- -------- ----------- --------
Predecessor:
Balance, December 31, 1994 1,401 $ 292 $ -- $ 3,458 $ (2,117) $ 1,633
Foreign currency
translation Adjustment -- -- -- -- (739) (739)
Net income for the year -- -- -- 1,607 -- 1,607
Capital contribution -- 29 -- -- -- 29
Dividend paid to
Shareholders -- -- -- (702) -- (702)
Predecessor:
-------- -------- -------- -------- -------- --------
Balance, December 31, 1995 1,401 $ 321 $ -- $ 4,363 $ (2,856) $ 1,828
Successor:
Foreign currency
translation Adjustment -- -- -- -- (1,255) (1,255)
Recapitalization of
Predecessor company 246 (304) 304 -- -- --
Issuance of common
stock in connection
with the Acquisition of
Paragon 1,314 13 (1,083) -- -- (1,070)
Issuance of common
stock in connection
with the Acquisition
of Kemp 39 -- 294 -- -- 294
Public offerings of stock,
net of underwriting
discounts and
offering costs 8,100 81 51,911 -- -- 51,992
Dividend to predecessor
company shareholders -- -- -- (4,510) -- (4,510)
Net income for the year -- -- -- 886 -- 886
-------- -------- -------- -------- -------- --------
Balance, December 31, 1996 11,100 $ 111 $ 51,426 $ 739 $ (4,111) $ 48,165
Issuance of common
stock for underwriter's
overallotment in
connection with
secondary offering 525 5 3,696 -- -- 3,701
Issuance of common
stock in connection
with the Acquisition
of J.R.S. Exploration,
net of acquisition
costs 292 3 1,974 -- -- 1,977
Foreign currency translation
adjustment -- -- -- -- (34) (34)
Net Income for the year -- -- -- 141 -- 141
-------- -------- -------- -------- -------- --------
Balance, December 31, 1997 11,917 $ 119 $ 57,096 $ 880 $ (4,145) $ 53,950
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
27
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
1. ORGANIZATION AND BASIS OF PRESENTATION
The Company is engaged in the provision of land-based and shallow water
three-dimensional and two-dimensional seismic data acquisition services to the
oil and gas industry in the Western Hemisphere.
On February 9, 1996, 3-D Geophysical, Inc. (the "Company") consummated an
initial public offering (the "Initial Public Offering") and simultaneously
acquired in separate transactions, in exchange for cash, notes and shares of
common stock, Geoevaluaciones, S.A. de C.V. ("Geoevaluaciones"), Processos
Interactivos Avanzados, S.A. de C.V. ("PIASA"), certain assets and liabilities
of the land seismic business of Northern Geophysical of America, Inc.
("Northern"), Paragon Geophysical, Inc. ("Paragon") and Kemp Geophysical
Corporation ("Kemp") (collectively, with J.R.S. Exploration Company, Limited,
which was subsequently acquired in January 1997, referred to as the "Operating
Subsidiaries").
For accounting purposes the acquisitions of Geoevaluaciones and PIASA have been
treated as a recapitalization of Geoevaluaciones and PIASA with Geoevaluaciones
(combined with PIASA) deemed to be the acquiror of the Company and considered
the predecessor company. For purposes of identification and description, the
Company is referred to as the "Predecessor" for the period prior to the Initial
Public Offering and the acquisition of the Operating Subsidiaries as described
below, the "Successor" for the period subsequent to the Initial Public Offering
and the acquisition of the Operating Subsidiaries and the "Company" for both
periods. The Company's operations in Latin America (the "Latin American
Operations") are comprised of the operations of Geoevaluaciones, 3-D
Geophysical of Latin America Inc. and 3-D Geophysical, Inc.
The acquisitions of Northern, Paragon and Kemp were treated as business
combinations accounted for by the purchase method of accounting as prescribed
by Accounting Principles Board Opinion No. 16 and SEC Staff Accounting Bulletin
No. 48. Northern and Kemp were valued at the fair market value of
consideration given. In connection with the acquisitions of Northern and Kemp,
the excess of consideration given over the fair market value of net assets
acquired (goodwill)is being amortized on a straight-line basis over 15 years.
The acquisition of Paragon's common stock in exchange for shares of the
Company's Common Stock was accounted for at Paragon's historical costs. The
accompanying consolidated financial statements include the accounts of
Northern, Kemp and Paragon from February 9, 1996, the date of the acquisitions.
As a result, the Company's statement of operations for the year ended December
31, 1996 is not comparable to the statements of operations for the years ended
December 31, 1995 and 1994, and the Company's balance sheet as of December 31,
1996 is not comparable to its balance sheet as of December 31, 1995.
On January 27, 1997 the Company consummated the purchase of J.R.S. Exploration
Company, Limited ("J.R.S. Exploration"), a Canadian seismic data acquisition
company, by acquiring all of the issued and outstanding stock of several
intermediate holding companies which existed solely as holding companies for
the stock of J.R.S. Exploration. On that same date, in a separate transaction,
the Company purchased all of the issued and outstanding stock of Siegfried &
Siegfried Resource Consultants, Limited ("Siegfried & Siegfried"), a Canadian
company owned by a key employee of J.R.S. Exploration, that leased certain
seismic data acquisition equipment to J.R.S. Exploration. These acquisitions
were effected through a newly-formed subsidiary of the Company, 3-D Geophysical
of Canada, Inc. ("3-D Canada"), whereby shares of 3-D Canada, which have since
been exchangeed into shares of the Company on a one-for-one basis, and cash
were exchanged for the stock of the acquired companies. These acquisitions are
being treated for accounting purposes as purchase business combinations, with
the excess of consideration paid to acquire these companies over the fair
market value of the assets acquired being accounted for as goodwill, which is
being amortized over 15 years on a straight-line basis.
The condensed consolidated financial statements of the Company include the
operations of J.R.S. Exploration and Siegfried & Siegfried (the "Canadian
Operations") from January 1, 1997, which is the date that management of the
Company and the former shareholders of the acquired companies deem to be the
date upon which the Company assumed effective control of the Canadian
Operations. Due to the acquisition of the Canadian Operations in January 1997
and the
28
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
acquisitions of Northern, Paragon and Kemp after the end of the first month in
the year ended December 31, 1996, and due to the fact that the financial
statements reflect a full year of performance for the United States Operations
during 1997, the Company's condensed consolidated financial statements as of
and for the year ended December 31, 1997 is not comparable to the financial
statements of the Company as of and for the year ended December 31, 1996.
The consideration paid to the former owners of the Canadian Operations and the
allocation of such consideration to the acquired assets is as follows:
(in thousands)
-------------------
Cash paid for the stock and assets of the acquired companies $ 2,665
Stock issued to the former owners of the Canadian Operations
at a price of $9.00 per share before considering acquisition 2,625
costs of $648
Liabilities assumed:
Bank overdraft 637
Accounts payable 2,019
Accrued and other current liabilities 420
Current debt assumed 1,139
-------------------
Amounts allocated to acquired assets $ 9,505
===================
Allocation of the purchase price to the acquired assets:
Cash $ 137
Accounts receivable, trade 3,516
Prepaid expenses and other current assets 28
Property and equipment 3,082
Goodwill 2,742
-------------------
$ 9,505
===================
29
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
Pro Forma Information (unaudited)
The accompanying summarized pro forma information for the Company for the year
ended December 31, 1996 represents the operations of the Company as if the
public offerings and the acquisition of the Operating Subsidiaries had occurred
on January 1, 1996.
For the Year Ended
December 31, 1996
(pro forma)
------------
Net sales $ 64,769
============
Extraordinary item, net of tax expense $ 57
============
Net income $ 903
============
Income per share before extraordinary item
Basic $ 0.11
============
Dilutive 0.11
============
Extraordinary item per share, net of tax
Basic 0.01
============
Dilutive 0.01
============
Earnings per share
Basic 0.12
============
Dilutive $ 0.12
============
Weighted Average Shares
Basic 7,526
============
Dilutive 7,652
============
The summarized pro forma information is not necessarily indicative of the
actual results that would have been achieved if the Initial Public Offering and
acquisitions of the Operating Subsidiaries had occurred on the date indicated
or which may be realized in the future.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and all of its domestic and foreign subsidiaries. The accounts of
foreign subsidiaries have been adjusted to conform to U.S. generally accepted
accounting principles and practices and converted to appropriate U.S. dollar
equivalents. All material inter-company accounts and transactions have been
eliminated in consolidation.
Revenue Recognition and Revenue Adjustments
The Company generates revenue through performing seismic data acquisition and
geophysical services. Revenues from seismic data acquisition and geophysical
services are recognized as the work progresses on the percentage of completion
method.
Net sales for the years ended December 31, 1996 and 1997 include contractual
revenue adjustments of $1.0 million and $395,000 from the Latin American
Operations, for which the related seismic data acquisition and geophysical
services have been provided. These revenue adjustments are based on
independent economic data, primarily the Mexican inflation rate as measured by
the consumer price index. Certain of these revenue adjustments recognized for
the year ended December 31, 1997, for which the Company has the contractual
right to invoice, have not been invoiced pending
30
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
final review by the Company's major customer in Mexico. The Company,
historically, has been able to collect these revenue adjustments and,
accordingly, the Company has not recorded a valuation allowance against these
amounts as of December 31, 1997.
The costs of mobilization and demobilization of equipment to job sites have
been deferred and are being amortized over the life of the project and/or
contract.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investment with original
maturities of three months or less.
Restricted Cash
The Company's restricted cash, due to a compensating balance arrangement as of
December 31, 1996 was invested in short- term, highly-liquid investments. The
carrying amount approximated fair value due to the short-term maturity of these
investments.
Seismic Data Libraries
The costs incurred in the acquisition of proprietary seismic data, which is
marketed to potential users of the data, are capitalized and included in other
assets. Seismic data costs are amortized for each project in the proportion
that its revenue for a period relates to management's estimate of total
anticipated revenues. On a periodic basis, the carrying value is compared to
the estimated future revenues and, if appropriate, is reduced to its estimated
net realizable value.
Property and Equipment
Property and equipment are stated at cost. Maintenance and repairs costs are
expensed in the period incurred. Major improvements to existing property and
equipment are capitalized. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, ranging from 3 to 7
years. Upon retirement or sale, the cost of assets disposed and the related
accumulated depreciation are eliminated. The related gains or losses are
reflected in income.
The Company has accounted for its 5% interest in an oil and gas property which
the Company earned in 1997 through an agreement entered into in 1997 using the
full cost method of accounting. Under this method, all costs associated with
the acquisition, exploration and development of oil and gas reserves are
capitalized, including directly related overhead costs, and interest costs
related to its properties under development which are not currently being
amortized. For the year ended December 31, 1997, exploration and development
related overhead costs and interest costs of $26,000 and $33,000, respectively,
have been capitalized to oil and gas properties. The Company has not begun
amortization on its properties as related properties are currently in the
development stage.
Lease Obligations
The Company acquires equipment and vehicles under capital leases. Lease terms
generally range up to two years for equipment and five years for vehicles. The
majority of the leases contain bargain purchase options at the end of the lease
term. In addition, the Company rents facilities, field and office equipment
under operating leases.
31
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
Translation of Foreign Currencies
Assets and liabilities of subsidiaries whose functional currency is deemed to
be other than the U.S. dollar are translated at year end rates of exchange and
revenues and expenses are translated at rates of exchange prevailing during the
year. Resulting translation adjustments are accumulated in the currency
translation adjustments component of stockholders' equity. Currency
transaction gains and losses are recognized in income currently.
The cumulative inflation rate in Mexico, as measured by the consumer price
index, exceeded 100% for each three year period ended December 31, 1996 and
1997. Accordingly, the Company adopted the dollar as the functional currency
beginning January 1, 1997 in accordance with Statement 52 and anticipates
continuing with this method of accounting during 1998. Using the dollar as the
functional currency resulted in adjustments to the consolidated statement of
operations in 1997 for foreign currency translation gains and losses. In 1996,
these amounts were included as amounts in cumulative foreign currency
translation adjustments, reflected in stockholders' equity, and were not
charged to earnings.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the differences between the financial statement
carrying value of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured by using enacted tax
rates that are applicable to the future years in which deferred tax assets or
liabilities are expected to be realized or settled. The effect of a change in
tax rates on deferred tax assets and liabilities is recognized in earnings in
the period in which the tax rate change is enacted. The Company establishes a
valuation allowance when it is more likely than not that a deferred tax asset
will not be recovered.
Goodwill
Goodwill, principally derived from the acquisition of the land-based seismic
division of Northern and the acquisition of J.R.S. Exploration, represents the
excess of cost over fair value of net assets acquired and is being amortized
over 15 years using the straight-line method.
The recoverability of non-current operating assets is periodically assessed by
comparing estimated expected undiscounted future cash flows generated by those
assets with their carrying value. If the carrying value exceeds the
undiscounted cash flows, goodwill will be eliminated before reducing the
carrying amounts of non-current operating assets.
Earnings Per Share
The Company has adopted the Statement of Financial Accounting Standards No.
128, "Earnings Per Share" in the year ended December 31, 1997 and all
historical income per share data presented has been restated to conform to the
provisions of this statement. This statement established new standards for
computing and presenting earnings per share ("EPS"). Basic EPS is calculated by
dividing net income (loss) by the weighted average common shares outstanding.
Dilutive EPS is calculated by dividing net income (loss) by the weighted
average common shares and potentially dilutive securities outstanding during
the period. See Note 14.
Supplemental Disclosure of Cash Flow Information
The following table contains supplemental disclosures of cash flow information
and disclosure of certain non-cash investing and financing activities:
32
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
1995 1996 1997
(Predecessor) (Successor) (Successor)
------------------ ------------------ ------------------
Cash paid for interest $ 789 $ 972 $ 1,668
Cash paid for income taxes $ 26 $ 616 $ 494
Non-cash investing and financing activities
Purchase of equipment and vehicles through the
assumption of capital lease obligations and
notes payable $ 863 $ 1,618 $ 23,591
Dividend to Predecessor shareholders $ - $ 1,000 $ -
Forgiveness of debt $ - $ 93 $ -
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates, such as amounts
relating to unbilled accounts receivable, deferred revenues, seismic data
libraries and an interest in oil and gas property, and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
2. PUBLIC OFFERINGS OF COMMON STOCK
On February 9, 1996, the Company completed an initial public offering of
4,000,000 shares of common stock at a price to the public of $7.50 per share.
Subsequently, on February 21, 1996, the underwriters exercised their
overallotment option to purchase an additional 600,000 shares at a price to the
public of $7.50 per share. The proceeds, net of the underwriters' discounts
and offering costs, were approximately $28,457,000. Of these net proceeds,
$3,510,000 was treated, for accounting purposes, as a dividend to the former
stockholders of Geoevaluaciones and PIASA, approximately $10,328,000 was used
to purchase the land seismic assets of Northern and all of the capital stock of
Kemp, approximately $4,599,000 was used to retire certain indebtedness of the
Operating Subsidiaries, $152,000 was used to retire capital leases and
$1,149,000 was paid subsequent to the closing of the acquisitions as a purchase
price adjustment for the purchase of the land seismic assets of Northern. The
Company recognized $57,000 of extraordinary gain (or $.01 per share) in the
year ended December 31, 1996, net of tax, from the retirement of a certain
portion of the acquired debt.
On December 17, 1996, the Company completed a second public offering of
3,500,000 shares of Common Stock at a price to the public of $7.50 per share.
Subsequently, on January 2, 1997, the underwriters exercised their
overallotment option to purchase an additional 525,000 shares at a price to the
public of $7.50 per share. The net proceeds to the Company (after deducting
underwriting discounts and commissions and offering expense) were approximately
$27,200,000. Of this amount, $20.2 million was used for capital expenditures,
$4.0 million was used to fund the cash portion of the purchase price for J.R.S.
Exploration and to retire certain existing debt obligations of J.R.S.
Exploration, and $3.0 million was used to retire indebtedness incurred under
the Loan Agreement with Wells Fargo Bank of Texas, N.A.
3. CONCENTRATIONS OF CREDIT RISK and BUSINESS SEGMENTS
During the year ended December 31, 1995, which included only the operations of
Geoevaluaciones and PIASA, one customer accounted for 100.0% of net sales. For
the year ended December 31, 1996, three customers accounted for 23.0%, 16.9%,
and 14.0% of net sales, respectively, and for the year ended December 31, 1997,
two customers accounted for 20.5% and 16.2% of net sales, respectively.
33
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
3. CONCENTRATIONS OF CREDIT RISK and BUSINESS SEGMENTS
As of December 31, 1996, two customers accounted for 33.3% and 12.6% of
accounts receivable, respectively, and as of December 31, 1997, three customers
accounted for 35.2%, 12.7% and 11.4% of accounts receivable, respectively.
The following table presents certain financial information about the operations
of the Company during the years ended December 31, 1996 and 1997.
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
(in thousands) (in thousands)
NET REVENUES $ 51,754 $ 101,016
========= =========
United States Operations 39,373 64,212
Latin American Operations 12,381 24,909
Canadian Operations * 11,895
OPERATING INCOME $ 1,614 $ 1,649
========= =========
United States Operations 4,973 2,936
Latin American Operations (1,071) (468)
Canadian Operations * 1,203
Corporate (2,288) (2,022)
TOTAL ASSETS $ 77,433 $ 115,745
========= =========
United States Operations 43,994 68,490
Latin American Operations 14,913 27,526
Canadian Operations * 18,215
Corporate 18,526 1,514
* Not applicable
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments". The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents, receivables and accounts payable: The carrying
value amounts reported in the balance sheet for cash and cash equivalents,
receivables and accounts payable approximate their fair value.
Long and short-term debt: The carrying amounts of debt instruments approximate
their fair value due to rates of interest being charged on those instruments
being substantially similar to market rates.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1997. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date, and current estimates of fair value
may differ significantly from the amounts presented herein.
34
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ("SFAS 130"), which establishes standards
for reporting and display of comprehensive income and its components. The
components of comprehensive income refer to revenues, expenses, gains and
losses that are excluded from net income under current accounting standards,
including foreign currency translation items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. SFAS 130 requires that all items that are recognized under
accounting standards as components of comprehensive income be reported in a
financial statement displayed in equal prominence with other financial
statements; the total of other comprehensive income for a period is required to
be transferred to a component of equity that is separately displayed in a
statement of financial position at the end of an accounting period. SFAS 130
is effective for both interim and annual periods beginning after December 15,
1997. Management has determined that the adoption of this standard will not
have a significant impact on the Company's financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"). SFAS 131 establishes standards for the way public enterprises are to
report information about operating segments in annual financial statements and
requires the reporting of selected information about operating segments in
interim financial reports issued to stockholders. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. SFAS 131 is effective for periods beginning after
December 15, 1997. Management has determined that the adoption of this standard
will not have a significant impact on the Company's financial statements.
6. COST AND BILLINGS ON UNCOMPLETED CONTRACTS
The following represents cost incurred and billings on uncompleted contracts:
DECEMBER 31,
------------
1996 1997
(Successor) (Successor)
(in thousands)
---------------------------------------
Cost incurred and estimated earnings on
uncompleted contracts $ 4,932 $ 27,706
Billings on uncompleted contracts 1,999 21,476
------------------ ---------------
Unbilled accounts receivable $ 2,933 $ 6,230
================== ===============
Billings on uncompleted contracts $ 2,282 $ 3,932
Cost incurred and estimated earnings on
uncompleted contracts 746 3,285
------------------ ---------------
Deferred revenue $ 1,536 $ 648
================== ===============
Unbilled accounts receivable represents services which the Company has
performed for which it has not yet invoiced customers. Deferred revenue
represents invoices which have been submitted to customers for services which
have yet to be performed.
35
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
7. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consist of the following:
DECEMBER 31,
------------
1996 1997
(Successor) (Successor)
(in thousands)
---------------------------------------
Mobilization costs $ 466 $ 366
Prepaid insurance 325 515
Deposits 145 2,136
Inventory 50 188
Prepaid taxes 13 420
------------------ ------------------
Total prepaid expenses and other current
assets $ 999 $ 3,625
================== ==================
Bank financing charges $ 167 $ 391
Seismic data library, net - 577
Prepaid expenses 507 -
J.R.S. Exploration acquisition costs 374 -
Information system costs 200 133
Mobilization costs 270 -
Deposits 177 81
Other 60 41
------------------ ------------------
Total non-current other assets $ 1,755 $ 1,223
================== ==================
Seismic Data Libraries
The Company shares an interest with various third parties in seismic data
libraries that is licensed to oil and gas companies on a non-exclusive basis.
At December 31, 1997, such data had a gross value of $2.0 million, of which
$1.4 million had been amortized. Costs are amortized on a project by project
basis in proportion to management's estimate of total anticipated revenue. This
data was acquired by the Company in 1997 in McKenzie County, North Dakota and
Alberta, Canada. Risk factors considered when determining whether to undertake
this project include the number of potential customers for the completed data,
the probability and timing of future lease, concession, exploration and
development activity in the area, and the availability, quality and price of
competing data. Upon entering into these commitments, the Company obtained
commitments for a majority of the anticipated costs of obtaining the data,
however the Company cannot be certain that it will fully recoup its costs if it
substantially underestimates the cost or market demand for such multi-client
projects.
The Company entered into an agreement with a third party whereby the Company
will lease 4 vehicles which are currently under construction. During the period
in which the said vehicles are being constructed, the third party has agreed to
loan the Company similar vehicles in exchange for a deposit of $1.1 million.
This deposit was made on December 31, 1997 and will be refunded to the Company
upon the return of the loaned vehicles.
36
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
8. PROPERTY AND EQUIPMENT, NET
Property and equipment, which includes assets held under capital leases,
consists of the following:
DECEMBER 31,
------------
1996 1997
(Successor) (Successor)
(in thousands)
------------------ ------------------
Field equipment $ 35,283 $ 71,200
Transportation equipment 3,687 6,052
Computer equipment 1,246 1,749
Office equipment, furniture and fixtures 239 536
Buildings and property 599 1,139
------------------ ------------------
41,054 80,676
Less accumulated depreciation and amortization 5,525 14,656
------------------ ------------------
Property and equipment, net $ 35,529 $ 66,020
================== ==================
In July 1997, the Company entered into an agreement with Hockley Production
Company, L.L.C. ("Hockley") whereby the Company earned approximately a 5%
interest in an oil and gas property in Harris County, Texas in exchange for the
acquisition of 2-D seismic data over the surrounding area. As of December 31,
1997, the Company has capitalized $476,000 of exploration costs in connection
with this agreement, which costs are included in buildings and property. This
property remains under development at December 31, 1997 and, as such, the
Company has not begun to amortize the property. As of December 31, 1997, the
Company has generated no revenue in connection with this property. The Company
will continue to evaluate the property over the next few years.
Assets held under capital leases total approximately $18.7 million, net of
accumulated depreciation of $1.3 million for the year ended December 31, 1997
and $2.8 million, net of accumulated depreciation of $419,000 for the year
ended December 31, 1996. For the years ended December 31, 1997 and 1996, 83.7%
and 0.0% of assets held under capital leases represented field equipment,
respectively, and 16.3% and 100.0% represented vehicles, respectively.
9. ACCRUED LIABILITIES
Accrued liabilities consists of the following:
DECEMBER 31,
------------
1996 1997
(Successor) (Successor)
(in thousands)
------------------ -----------------
Value added tax payable $ - $ 727
Accrued employee related cost 385 878
Accrued insurance 308 344
Accrued contract costs 203 -
Advance payments 243 -
Accrued taxes 255 1,377
Other accrued expenses 166 377
------------------ -----------------
$ 1,560 $ 3,703
================== =================
37
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
10. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION
Long-term debt and capital lease obligations as of December 31, 1996 and 1997
are as follows:
DECEMBER 31,
------------
1996 1997
(Successor) (Successor)
(in thousands)
--------------------------
Note payable to Sanwa Business Credit Corporation, due in monthly installments through October
1, 2002 at a variable interest rate of 9.5% at December 31, 1997 $ - $ 9,881
Revolving Credit Loan for working capital expenditures with Sanwa Business Credit Corporation
due in November 2002 at a variable interest rate of 9.0% at December 31, 1997 - 6,483
Revolving Credit Loan for capital expenditures with Sanwa Business Credit Corporation due in
November, 2002 at a variable interest rate of 9.5% at December 31, 1997 - 220
Capital lease obligation to Diamond Lease due in monthly Installments through
September 1, 1999 at a fixed annual interest rate of 7.75% - 10,492
Capital lease obligation to Mitcham Industries due in monthly installments
through April 15, 1998 at a imputed interest rate of 9.5% - 7,645
Capital lease obligation to Amplicon Financial due in monthly installments
through January 1, 2000 at a fixed interest rate of 10.0% - 2,204
Note payable to Mitcham Industries due in monthly installments through January 30, 1998 at a
fixed annual interest rate of 4.72% - 1,102
Note payable to Wells Fargo Bank of Texas, N.A. due in monthly installments
through July 31, 1999 at a variable interest rate of 9.25% at December 31, 1996 7,712 -
Revolving Credit Loan with Wells Fargo Bank of Texas, N.A., due on May 31, 1997 at a variable
interest rate of 9.25% at December 31, 1996 2,200 -
Note payable to former shareholders of the Predecessor, due in semi-annual installments through
February 8, 1998 at a fixed interest rate of 8.0% 750 250
Capital lease obligations to Southwest Leasing Company, due in monthly installments through
March, 2001 at fixed interest rates varying from 9.6% to 12.2%. 1,105 1,473
Capital lease obligations to Ford Motor Commerical, due in monthly installments through August
1, 2001 at fixed interest rates varying from 8.3% to 9.6%. - 393
Note payable to Imperial Premium Financing, due in semi-annual installments through August 6,
1999 at a fixed interest rate of 7.9% - 169
Capital lease obligation to Softech Financial at a fixed interest rate of 9.4% 129 70
Capital lease obligations to Century Geophysical, due in monthly installments through May, 1997
at a fixed interest rate of 12.0% 107 -
Note payable to Trace Exploration, due in monthly payments through March, 1997 at a fixed
interest rate of 8% 208 -
Miscellaneous notes payable and capital lease obligations, interest payable from 5.9% to 10.75%,
due in monthly installments through January, 2000 112 187
---------- -----------
$ 12,323 $ 40,569
========== ===========
Current portion $ 7,646 $ 23,937
========== ===========
Non-current portion $ 4,677 $ 16,632
========== ===========
38
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
10. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION (continued)
On November 17, 1997, the Company entered into a $30 million credit agreement
(the "Credit Agreement") with Sanwa Business Credit Corporation ("SBCC") which
replaced the Company's existing $18 million facility with Wells Fargo Bank
Texas, N.A. ("Wells Fargo"). The Credit Agreement provides for a term loan of
$10 million, a capital expenditures line of credit of up to $10 million, of
which $9.8 million was available as of December 31, 1997, and a revolving line
of credit of up to $10 million to use for working capital requirements, of
which $3.5 million was available as of December 31, 1997. The Credit
Agreement is collateralized by a lien on the Company's accounts receivable,
equipment, machinery, fixtures, inventory, goods, chattel paper, documents,
instruments, investment property, general intangibles and other personal
property, whether then owned or thereafter acquired, and all products and
proceeds thereof, and is guaranteed by certain of the Company's subsidiaries.
The term loan is repayable in 59 equal consecutive monthly installments through
October, 2002, based on an 84 month amortization, with the remaining principal
and interest due in November, 2002. The term loan bears a variable interest
rate, which was approximately 9.5% at December 31, 1997. The capital
expenditures line of credit is available to fund up to 85% of the purchase
price of equipment. Draws under the capital expenditures line are repayable
based on a 60 month amortization, with the remaining principal and interest due
in November, 2002. The capital expenditures line bears a variable interest
rate which was approximately 9.5% at December 31, 1997. The revolving line of
credit may be drawn down from time to time through November, 2002 in an amount
of up to 80% of the Company's "Eligible Accounts" (as defined in the Credit
Agreement). The revolving line of credit is payable in full in November, 2002,
and bears a variable interest rate, which was approximately 9.0% at December
31, 1997.
In addition to certain customary affirmative covenants, the Credit Agreement
contains restrictions on the Company with respect to (i) incurring "Debt" (as
defined in the Credit Agreement), (ii) incurring or permitting to exist "Liens"
(as defined in the Credit Agreement) on its property, assets or revenues, (iii)
declaring or paying any dividends or other distributions on its capital stock
(or acquiring any of its capital stock), (iv) issuing capital stock, (v)
entering into certain transactions with affiliates, (vi) disposing of assets,
and (vii) certain other matters. The Credit Agreement also contains financial
covenants with respect to net income, minimum tangible net worth, the ratio of
indebtedness to tangible net worth and the ratio of cash flow coverage.
Pursuant to the early extinguishment of the Credit Agreement with Wells Fargo in
the fourth quarter of 1997, the Company recognized an extraordinary loss of
$139,000, net of a tax benefit of $85,000, relating to the write-off of
unamortized debt financing costs.
Annual maturities on the Company's notes payable and capital lease obligations
are as follows: (in thousands)
1998 $23,937
1999 $8,719
2000 $2,128
2001 $1,618
2002 $4,167
39
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
11. INCOME TAXES (continued)
The provision (benefit) for taxes on income before extraordinary items for
1995, 1996 and 1997 is summarized below (in thousands):
1995 1996 1997
(Predecessor) (Successor) (Successor)
----------------- ---------------- -----------------
Current:
Federal $ - $ 417 $ -
State - 125 -
Foreign - (23) 1,036
Deferred:
Federal - (49) (217)
State - 60 (32)
Foreign 130 (24) (452)
----------------- ---------------- -----------------
$ 130 $ 506 $ 335
================= ================ =================
The reported amount of income tax expense on consolidated pretax income differs
from the amount of income tax expense that would result from applying domestic
federal statutory tax rates to consolidated pretax income for the following
reasons (in thousands):
1995 1996 1997
(Predecessor) (Successor) (Successor)
------------------ -------------------- ----------------------
U.S. federal statutory expense $ 591 $ 443 $ 162
State taxes, net of federal benefit - 114 24
Foreign income taxed at higher (lower)
rates (461) 66 191
Meals and entertainment - 56 239
Nondeductible goodwill amortization - - 99
Change in the valuation allowance,
U.S. - (417) -
Change in the valuation allowance,
foreign - 244 (244)
Other permanent differences,
principally Mexican inflation
adjustments - - (136)
------------------ -------------------- ----------------------
$ 130 $ 506 $ 335
================== ==================== ======================
The temporary differences which give rise to deferred tax assets and
liabilities as of December 31, 1996 and 1997 are as follows (in thousands):
December 31,
1996 1997
(Successor) (Successor)
------------------ ------------------
Domestic current deferred income taxes:
Deferred tax assets:
Vacation accrual $ 75 $ 146
Allowance for doubtful accounts 33 82
Non compete agreements - 15
------------------ ------------------
Current deferred tax asset $ 108 $ 243
================== ==================
40
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
11. INCOME TAXES (continued)
December 31,
1996 1997
(Successor) (Successor)
----------- -----------
Domestic non-current deferred income taxes:
Deferred income tax assets:
Net operating loss carryforwards $ 323 $ 2,503
Alternative minimum tax credit carryforwards 134 106
-------- --------
457 2,609
Deferred tax liabilities:
Property and equipment 624 2,907
Goodwill 276 --
-------- --------
900 2,907
-------- --------
Non-current deferred income tax liability $ 443 $ 298
======== ========
December 31,
1996 1997
(Successor) (Successor)
----------- -----------
Foreign non-current deferred income taxes:
Deferred income tax assets:
Net operating loss carryforwards $ 1,012 $ 1,368
Advance income 80 --
------- -------
Total foreign deferred income tax assets 1,092 1,368
Deferred income tax liabilities:
Property and equipment 1,342 1,441
------- -------
Net deferred income tax liability before valuation 250 73
allowance
Less valuation allowance (244) --
------- -------
Net deferred income tax liability after valuation allowance $ 494 $ 73
======= =======
The decrease of $417,000 in the valuation allowance for deferred tax assets for
domestic operations in fiscal 1996 related to benefits arising from operating
loss carryforwards attributable to an acquired entity. As of December 31, 1996
and 1997, the Company had approximately $3,805,000 and $10,560,000 of net
operating loss carryforwards, respectively, available to reduce income taxes.
The change in the valuation allowance of $244,000 for foreign operations relates
to the Company's operations in Peru. The Company believes it is more likely than
not that the benefits from its net operating loss carryforwards will be realized
through the reversal of timing differences and the anticipation of having
sufficient taxable income in future periods to utilize such benefits.
Undistributed earnings intended to be reinvested indefinitely by the foreign
subsidiaries totaled $3,927,929 at December 31, 1997. Accordingly, no U.S.
deferred income tax has been recorded.
12. COMMITMENTS AND CONTINGENCIES
On September 23, 1997, Geoevaluaciones was served with a notice of a
lawsuit filed in the 10th Federal District Court in Mexico City by Kelman
Technologies, Inc., formerly Capilano International, Inc. (Capilano) claiming
damages of approximately $8 million (plus interest, legal fees and other
expenses) pursuant to a non-binding Letter of Intent executed by and between
Capilano and Geoevaluaciones on June 3, 1991 and superseded by the parties
41
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
12. COMMITMENTS AND CONTINGENCIES (continued)
on June 1, 1992 with the execution of a Technical Assistance Agreement. The
Company filed a timely response to the complaint, denying in its entirety
Capilano's right to any of the claimed damages, interest and expenses, and
contesting Capilano's complaints as either not grounded in fact or as
misconstructions of actual events. While the Company, is not able to estimate
the effect, if any, on Geoevaluaciones's results of operations and financial
position which may result from the resolution of this matter, the Company
believes that Geoevaluaciones has meritorious defenses to each of Capilano's
allegations. The former shareholders of Geoevaluaciones have pledged 60,000
shares of common stock to provide for any costs incurred by the Company in
connection with this lawsuit.
During November and December of 1997, SUNAT (the revenue branch of the Peruvian
government) began a review of the 1996 and 1997 operations in Peru. On
December 2, 1997, as a result of this review, the Company was served with a
notice of embargo for $478,507 relating to the Company's alleged non-compliance
with certain provisions of Peruvian tax law relating to value-added taxes. On
December 12, 1997, payment was made to the SUNAT, and subsequently, the embargo
was released. Additionally, the Company made payments directly to the SUNAT of
approximately $32,000. On the December 24, 1997, the Company's attorney
presented a petition claiming a refund of the money as, pursuant to Peruvian
law, the SUNAT had failed to respond with a payment order in a timely manner.
Payment orders were subsequently issued by the SUNAT and approximately
$137,000, the excess of the embargoed amount over the payment orders, was
refunded to the Company in 1998. The Company recorded a fourth quarter charge
of $190,000 relating to this matter and was carrying approximately $321,000 as
a prepaid expense at December 31, 1997. Although there can be no assurance of a
positive outcome, the Company believes it has meritorious defenses to the
SUNAT's allegations and is actively disputing the claims against it.
The Company is a defendant in or party to a number of lawsuits arising in the
ordinary course of its business. While the outcome of these lawsuits cannot be
predicted with certainty, the Company does not believe that any of these
lawsuits will have a material adverse effect on its operations, cash flows or
financial position.
The Company leases premises, vehicles, helicopter services, equipment and
vessels under operating leases. Rent expense for each of the three years in
the period ending December 31, 1997 was $299,000, $3.5 million and $13.9
million, respectively. Rental and lease charges vary based on contract
requirements and location. The significant increase in rent expense in the
years ended December 31, 1996 and 1997 was the result of additional contracts
in Alaska and Latin America, areas that require extensive helicopter services
and vessel leases. The Company's lease commitments for vehicles, helicopter
services, equipment and vessels are limited to specific contract needs and, as
such, can increase or decrease based on contracts received from customers.
Future minimum lease payments under operating leases in effect at December 31,
1997, which consists primarily of facilities leases, are as follows:
Year ending December 31:
1998 $ 869
1999 517
2000 483
2001 380
2002 and thereafter 206
---------------
$ 2,455
===============
The Company has instituted a 401(k) retirement plan for the benefit of its
employees. All U.S. employees of the Company are eligible to participate after
having completed one year of service. Employees are permitted to make
contributions of up to 16% of their salary to a maximum of $9,500 per year.
The Company contributes an amount equal to one-half of the employee's
contribution up to 4% of the employees salary. During 1997, the Company
contributed $60,200 to the 401(k) plan.
42
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
13. COMMON STOCK
The Company's Certificate of Incorporation provides for authorized capital
stock of 25,000,000 shares of Common Stock, par value $.01 per share, of which
11,100,000 shares and 11,916,666 shares were outstanding at December 31, 1996
and December 31, 1997, respectively, and 1,000,000 shares of Preferred Stock,
$.01 par value per share, of which no shares were outstanding at December 31,
1996 and December 31, 1997. On February 6, 1996, the Company effected a
2,717.66 to one stock split of its existing Common Stock. This was done in
conjunction with the recapitalization of the Company immediately prior to the
Company's initial public offering.
In 1997, the Company implemented the 1997 Long-Term Incentive Compensation
Plan, the purpose of which is to provide directors, officers, and other key
employees and consultants of the Company and its subsidiaries with additional
incentives by providing them with the opportunity to increase their ownership
interests in the Company through the granting of options to purchase Common
Stock. This plan replaced the 1995 Long-Term Incentive Compensation Plan
which was implemented in 1996. Options are generally exercisable in three or
four equal installments after each 12 months past the grant date and expire
within ten years. The maximum number of shares of Common Stock that may be
subject to awards granted under the 1997 and 1995 Plans is 750,000 and 720,000,
respectively. In addition, other options were granted to key members of
management outside of the Plan during 1997 and 1996. Options granted outside of
the Plan generally vest in three equal installments after each 12 months past
the grant date and expire in ten years.
Weighted Average
Number Exercise Price
--------- ----------------
Outstanding at January 1, 1996 - -
Granted during 1996 893,352 $ 8.32
Exercised during 1996 - -
Forfeited during 1996 4,300 $ 7.38
Expired during 1996 - -
--------- ---------
Outstanding at December 31, 1996 889,052 $ 8.32
========= =========
Exercisable at December 31, 1996 - -
========= =========
Granted during 1997 397,800 7.06
Exercised during 1997 - -
Forfeited during 1997 22,625 6.96
Expired during 1997 - -
--------- ---------
Outstanding at December 31, 1997 1,264,227 7.95
========= =========
Exercisable at December 31, 1997 598,692 8.17
========= =========
The following information relates to options outstanding as of December 31,
1997:
Weighted
Average
Weighted Average Number Price of
Exercise Remaining Life Currently Options
Number Price (years) Exercisable Exercisable
- ---------- ---------- ---------- ----------- -----------
515,000 $ 7.50 8.11 360,000 $ 7.50
37,600 7.38 8.32 9,400 7.38
160,150 12.31 8.32 97,121 12.31
75,000 6.25 8.32 18,750 6.25
13,675 7.38 8.61 3,419 7.38
40,002 8.50 8.75 40,002 8.50
30,000 8.25 8.75 10,000 8.25
15,000 9.88 9.08 -- --
30,000 5.25 9.32 -- --
60,000 6.50 4.79 60,000 6.50
287,800 7.25 9.87 -- --
- ---------- ---------- ---------- ---------- ----------
1,264,227 $ 7.95 8.48 598,692 $ 8.17
========== ========== ========== ========== ==========
43
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
13. COMMON STOCK (continued)
The Company is using the intrinsic value method of accounting for compensation
cost in relation to the granting of stock options under the 1995 and 1997
Plans. There was no compensation cost recognized in 1996 or 1997 as the
exercise price of options granted was equal to the fair market value of the
Company's Common Stock on each grant date. The weighted-average grant-date fair
value of options granted during 1996 and 1997 is $8.66 and $7.45, respectively.
In calculating the fair value of options granted in 1997 and 1996, using the
Black-Scholes model, the Company used the following information:
1996 1997
------- -------
Risk-free interest rate 6.95 % 5.50 %
Expected option life 7 years 7 years
Expected volatility 61.04 % 56.44 %
Expected dividends - -
The Company would have recognized the following had the fair value based method
of accounting been used to record compensation cost relating to options granted
under the 1995 and 1997 Plans:
1996 1997
------------ ------------
Net income as reported $ 886,000 $ 8,000
Compensation cost, net of income tax effect
of $29,640 and $49,400, respectively 48,360 80,600
------------ ------------
Pro forma net income (loss) 837,640 (72,600)
============ ============
Pro forma earnings (loss) per share
Basic 0.12 (0.01)
============ ============
Dilutive $ 0.12 $ (0.01)
============ ============
Pro forma weighted average shares
Basic 7,097,374 11,916,666
============ ============
Dilutive 7,223,807 11,977,628
============ ============
14. EARNINGS PER SHARE
The Company has adopted the Statement of Financial Accounting Standards No.
128, "Earnings Per Share" in the year ended December 31, 1997 and all
historical income per share data presented has been restated to conform to the
provisions of this statement. This statement established new standards for
computing and presenting earnings per share ("EPS"). The weighted average
number of shares used in the earnings per share calculations is determined as
following:
For the Year For the Year
Ended Ended
December 31, 1996 December 31, 1997
----------------- -----------------
Weighted average common shares outstanding for calculation of Basic EPS 7,097,374 11,916,666
========= ==========
Effect of Dilutive Securities, principally common stock options 126,433 60,962
--------- ----------
Weighted average common shares outstanding for calculation of Dilutive EPS 7,223,807 11,977,628
========= ==========
Options to purchase 546,627 and 235,150 shares of common stock at a weighted
average per share price of $9.01 and $12.31 were outstanding during 1997 and
1996, respectively, but were not included in the computation of diluted EPS
because the options' exercise price was greater than the average market price
of the common shares.
44
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
15. RELATED PARTY TRANSACTIONS
In October 1997, the Company borrowed $850,000 (the "Loans") from five persons
(collectively, the "Lenders"), including Joel Friedman, Chairman of the Board
($125,000), Ralph M. Bahna, a Director ($125,000), Wayne P. Widynowski,
Executive Vice President and a Director ($100,000), and Ronald Koons, Vice
President and Chief Financial Officer ($250,000). The Loans were repaid in
November 1997 with interest accrued at an annual rate of 12%, upon the closing
of the Credit Agreement with Sanwa Business Credit Corporation. To induce the
Lenders to make the Loans, the Company issued five year options to purchase, at
$6.50 per share, 12,500 shares of the Company's common stock for each $250,000
principal amount of the Loans. Also, in October 1997, the Company issued a
five year option to purchase, at $6.50 per share, 17,500 shares of the
Company's common stock to Luis Ferran, Executive Vice President and a Director,
in consideration of Mr. Ferran's personal guarantee of a loan by the Laredo
National Bank to Geoevaluaciones in the principal amount of $350,000.
Mr. Robert Andrews, a director of the Company, is the sole stockholder of The
Andrews Group International, Inc. ("Andrews Group") which, through its Mexican
affiliate, A.G.I. Mexicana, S.A. de C.V. (collectively, the "Andrews
Companies"), acts as the exclusive representative for several companies in
Mexico, including Input/Output, Inc. and Landmark Graphics Corporation. During
the year ended December 31, 1996 and 1997 Geoevaluaciones purchased goods and
services from the Andrews Companies which totaled approximately $635,000 and
$620,000, respectively. The Company anticipates that it will continue to
purchase goods and services from the Andrews Companies. The Company also
purchased approximately 1,000 channels of 3-D seismic data acquisition
equipment and geophones from Andrews Group during 1996 for $2,942,000.
During 1997, the Company made payments to the former shareholders to
Geoevaluaciones pursuant to the Geoevaluaciones Stock Purchase Agreement of
$550,000.
The Company has retained Kramer, Levin, Naftalis & Frankel as their primary
outside legal counsel. Mr. Arthur Emil, a director of the Company, is of counsel
to this firm. Kramer, Levin, Naftalis & Frankel incurred legal fees of
approximately $310,000 in 1997, of which $210,000 was paid in 1997.
In connection with a termination and severance agreement between Mr. Richard D.
Davis, a director and former President and Chief Executive Officer, and the
Company in July 1997, the Company agreed to pay Mr. Davis a consulting fee of
$155,000 for the period July 1997 through June 1998.
The Company agreed to pay to a consulting company owned by Mr. John D. White,
Jr. (the former Chief Financial Officer and a former director of the Company)
$250,000 for financial advisory and other consulting services in connection
with the structuring, negotiation and consummation of the acquisitions of the
Operating Subsidiaries and PIASA, of which $125,000 was paid upon consummation
of the initial public offering and $125,000 was paid on January 3, 1997. In
connection with Mr. White's resignation as an executive officer of the Company
and the termination of his employment agreement on October 1, 1996, the Company
agreed to pay Mr. White $200,000 in January 1997 plus $5,000 per month through
December 31, 1998, the expiration date of the employment agreement, to provide
him with office space in the Company's New York City facility through December
31,1997, provided he does not serve as an officer of a competitor of the
Company during that period, and to provide him with certain insurance benefits
through December 31, 1998. In exchange therefor, Mr. White rendered financial
and advisory services to the Company in connection with the Company's second
public offering in December 1996 and the acquisition of J.R.S. Exploration in
January 1997.
The Company leases space in New York City at an annual base rental of $165,000.
Mr. Friedman utilizes a portion of said space as his office and the balance of
the space is utilized by sub-tenants. Mr. Friedman has agreed to reimburse the
Company for any amounts under the lease that are payable with respect to space
that is not utilized by the Company and which have not been paid by
sub-tenants. These reimbursements reduce the annual lease rental expense from
$165,000 to $80,000.
45
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3-D GEOPHYSICAL, INC. and SUBSIDIARIES
15. RELATED PARTY TRANSACTIONS (continued)
The Company leases two shops located in Katy, Texas and in Grand Junction,
Colorado which are owned by Mr. G.C.L. Kemp (an employee of the Company) and by
CBNC Real Estate, L.L.C. ("CBNC"), a partnership owned by certain employees of
the Company, respectively. Aggregate rents paid during 1996 and 1997 to Mr.
Kemp totaled $15,000, per annum. Aggregate rents paid during 1996 and 1997 to
CBNC totaled $33,000 and $43,200, respectively.
During 1996 and 1997, the Company incurred consulting charges in the amount of
$78,000 and $86,000, respectively, from Comercializadora Y Arrendadora Reforma,
S.A. de C.V., a consulting company owned by the wife of Luis Ferran, Executive
Vice President of Latin American Operations and a director of the Company.
16. SUBSEQUENT EVENTS
On March 8, 1998, the Company entered into a definitive Agreement and Plan of
Merger with Western Atlas Inc. ("Western") and WAI Acquisition Corp., a
wholly-owned subsidiary of Western, pursuant to which the Company will become a
wholly-owned subsidiary of Western. Pursuant to the agreement, Western Atlas,
through WAI Acquisition Corp., has commenced a tender offer for any and all
outstanding shares of 3-D common stock at a purchase price of $9.65 per share in
cash. The tender offer is subject to the satisfaction of a number of customary
conditions. The tender offer and the merger have been unanimously approved by
the Company's Board of Directors, which has received a fairness opinion from the
Company's financial advisor, Salomon Smith Barney. Western Atlas has received
early termination of the waiting period, effective March 26, 1998, under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 with respect to the tender
offer and the merger. The Company believes that the proposed merger will be
beneficial to its shareholders, however the Company offers no assurance that the
merger will occur.
Upon consummation of the proposed Plan of Merger with Western Atlas, Inc., the
Company will be recording expenses in the first quarter of 1998 related to
termination benefits related to employment contracts and the vesting of employee
options, lease terminations, potential fees related to prepayment of debt and
other potential costs.
On March 11, 1998, the Company and its directors were served with a class action
complaint by an individual shareholder, alleging, in part, a failure by the
directors to observe their fiduciary obligations in connection with the proposed
merger between the Company and Western Atlas, Inc. The complaint alleges failure
to (i) undertake an appropriate evaluation of the Company's net worth as a
merger/acquisition candidate and (ii) engage in a meaningful auction with third
parties in an attempt to obtain the best value for the Company's shareholders.
On March 17, 1998 the plaintiffs filed (i) an amended complaint, (ii) a motion
seeking a preliminary injunction to enjoin the Company from consummating the
tender offer and to require the Company to supplement their materials furnished
to the Company's stockholders in connection with the tender offer, and (iii) a
motion seeking expedited proceedings with respect to the preliminary injunction.
On March 27, 1998 the Company, Western, and WAI Acquisition entered into a
memorandum of understanding (the "Settlement") with respect to this lawsuit.
Pursuant to the Settlement, the Company and Western have agreed to amend their
previously announced merger agreement to provide, effective immediately, that
the termination fee payable under certain circumstances by 3-D Geophysical, Inc.
to Western shall be reduced from $5.5 million to $4.0 million. In addition, in
connection with the Settlement, 3-D announced that it would mail to its
stockholders of record information reflecting its results of operations for the
three and twelve months ended December 31, 1997.
46
47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
47
48
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information required by this item is incorporated by reference to the
Company's definitive proxy statement to be filed not later than April 30, 1998
pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to the
Company's definitive proxy statement to be filed not later than April 30, 1998
pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to the
Company's definitive proxy statement to be filed not later than April 30, 1998
pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to the
Company's definitive proxy statement to be filed not later than April 30, 1998
pursuant to Regulation 14A.
48
49
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The financial statements are contained in Item 8 and financial statement
schedules are appended to this Annual Report on Form 10-K
(b) During the fourth quarter of the fiscal year ended December 31, 1997 and
the first quarter ended March 31, 1998, the Registrant filed the following
Current Reports on Form 8-K:
(i) The Company filed a Current Report on Form 8-K on September 23,
1997, pursuant to Item 5 of Form 8-K, reporting the notification of
a lawsuit filed against the Company's wholly-owned Mexican
subsidiary, Geoevaluaciones, S.A. de C.V.
(ii) The Company filed a Current Report on Form 8-K on December 23,
1997, pursuant to Item 5 of Form 8-K, reporting the $30 million
Loan and Security Agreement which the Company entered into with
Sanwa Business Credit Corporation on November 17, 1997.
(iii) The Company filed a Current Report on Form 8-K on March 10,
1998, pursuant to Item 2 of Form 8-K, reporting the Agreement and
Plan of Merger which the Company entered into with Western Atlas
Inc. on March 8, 1998.
(c) Exhibits.
Exhibit
No. Description of Exhibit
------- ----------------------
2.1 -- Amendment dated as of January 23, 1996 to the Agreement and
Plan of Merger among 3-D Geophysical, Inc., 3-D Paragon
Acquisition Sub, Inc. and Paragon Geophysical, Inc. dated as
of November 29, 1995. (Incorporated by reference to Exhibit
2.10 of the Registrant's Registration Statement on Form S-1
(No. 333-13665)).
2.2 -- Amendment dated January 31, 1996 to the Asset Purchase
Agreement among 3-D Geophysical, Inc. and Northern
Geophysical of America, Inc. dated as of November 8, 1995.
(Incorporated by reference to Exhibit 2.11 of the
Registrant's Registration Statement on Form S-1 (No.
333-13665)).
2.3 -- Stock Purchase Agreement among 3-D Geophysical, Inc.,
3-D Geophysical of Canada, Inc., D.E. Janveau, Gladys
Mueller and W.G. Mueller, dated as of December 10, 1996
(Incorporated by reference to Exhibit 2.12 of the
Registrant's Registration Statement on Form S-1 (No.
333-13665)).
2.4 -- Stock Purchase Agreement among 3-D Geophysical, Inc.,
3-D Geophysical of Canada, Inc., C. David Siegfried and
Peggy J. Siegfried, dated as of December 10, 1996
(Incorporated by reference to Exhibit 2.13 of the
Registrant's Registration Statement on Form S-1 (No.
333-13665)).
2.5 -- Agreement and Plan of Merger by and among Western
Atlas Inc. ("Western"), WAI Acquisition Corp. and 3-D
Geophysical, Inc., dated as of March 8, 1998 (Incorporated
by reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K filed on March 10, 1998).
2.6 -- First Amendment, dated as of March 6, 1998, to the Rights
Agreement, dated as of July 17, 1997, between 3-D
Geophysical, Inc. and American Securities Transfer & Trust,
Inc. (Incorporated by reference to Exhibit 2.2 to the
Registrant's Current Report on Form 8-K filed on March 10,
1998).
2.7 -- Amended and Restated Employment Agreement dated January 13,
1998 between 3-D Geophysical, Inc. and Wayne P. Widynowski
(Incorporated by reference to Exhibit (c)(2) to the
Registrant's Solicitation/Recommendation Statement on
Schedule 14d-9 filed on March 13, 1998).
2.8 -- Amended and Restated Employment Agreement dated January 13,
1998 between 3-D Geophysical, Inc. and Ronald L. Koons
(Incorporated by reference to Exhibit (c)(3) to the
Registrant's Solicitation/Recommendation Statement on
Schedule 14d-9 filed on March 13, 1998).
2.9 -- Amendment to Merger Agreement by and among Western, WAI
Acquisition Corp. and 3-D Geophysical, Inc. dated as of
March 27, 1998 (Incorporated by reference to Exhibit (c) 15
to Amendment No. 13 to the Registrant's
Solicitation/Recommendation Statement on Schedule 14d-9
filed March 13, 1998).
3.1 -- Amended and Restated Certificate of Incorporation of 3-D
Geophysical, Inc. (Incorporated by reference to Exhibit 3.1
of the Registrant's Registration Statement on Form S-1 (No.
333-13665)).
3.2 -- Amended and Restated By-laws of 3-D Geophysical, Inc.
(Incorporated by reference to Exhibit 3.2 of the
Registrant's Registration Statement on Form S-1 (No.
333-13665)).
49
50
Exhibit
No. Description of Exhibit
------- ----------------------
4.1 -- Specimen 3-D Geophysical, Inc. common stock certificate
(Incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-1 (No.
33-99240)).
4.2 -- Rights Agreement, dated as of July 17, 1997, between 3-D
Geophysical, Inc. and American Securities Transfer & Trust,
Inc., as Rights Agent (Incorporated by reference to Exhibit
4 to the Registrant's Current Report on Form 8-K filed on
July 17, 1997).
10.1 -- Employment agreement dated February 8, 1996, between 3-D
Geophysical, Inc. and G.C.L. Kemp (Incorporated by reference
to Exhibit 10.1 of the Registrant's Registration Statement
on Form S-1 (No. 333-13665)).
10.2 -- Amended and Restated Termination Agreement dated as of
October 1, 1996, between 3-D Geophysical, Inc. and John D.
White, Jr. (Incorporated by reference to Exhibit 10.6 of the
Registrant's Registration Statement on Form S-1 (No.
333-13665)).
10.3 -- Employment agreement dated February 1, 1996, between 3-D
Geophysical, Inc. and Luis H. Ferran Arroyo (Incorporated by
reference to Exhibit 10.7 of the Registrant's Registration
Statement on Form S-1 (No. 333-13665)).
10.4 -- 3-D Geophysical 1995 Long-Term Incentive Compensation
Plan, as amended (Incorporated by reference to Exhibit 10.8
to the Registrant's Registration Statement on Form S-1 (No.
33-99240)).
10.5 -- Employment agreement dated February 1, 1996, between 3-D
Geophysical, Inc. and Joel Friedman (Incorporated by
reference to Exhibit 10.9 of the Registrant's Registration
Statement on Form S-1 (No. 333-13665)).
10.6 -- Employment Agreement dated January 27, 1997 between
J.R.S. Exploration Company Limited and Donald E. Janveau.
(Incorporated by reference to Exhibit 10.1 of the
Registrant's Current Report on Form 8-K field on March 27,
1997 (No. 0-27564)).
10.7 -- Employment Agreement dated January 27, 1997 between
J.R.S. Exploration Company Limited and W. G. Mueller.
(Incorporated by reference to Exhibit 10.2 of the
Registrant's Current Report on Form 8-K field on March 27,
1997 (No. 0-27564)).
10.8 -- Employment Agreement dated January 27, 1997 between
J.R.S. Exploration Company Limited and C. David Siegfried.
(Incorporated by reference to Exhibit 10.3 of the
Registrant's Current Report on Form 8-K field on March 27,
1997 (No. 0-27564)).
10.9 -- Non-Competition Agreement dated January 27, 1997 between
J.R.S. Exploration Company Limited and Donald E. Janveau.
(Incorporated by reference to Exhibit 10.4 of the
Registrant's Current Report on Form 8-K field on March 27,
1997 (No. 0-27564)).
10.10 -- Non-Competition Agreement dated January 27, 1997 between
J.R.S. Exploration Company Limited and W. G. Mueller.
(Incorporated by reference to Exhibit 10.2 of the
Registrant's Current Report on Form 8-K field on March 27,
1997 (No. 0-27564)).
10.11 -- Non-Competition Agreement dated January 27, 1997 between
J.R.S. Exploration Company Limited and C. David Siegfried.
(Incorporated by reference to Exhibit 10.3 of the
Registrant's Current Report on Form 8-K field on March 27,
1997 (No. 0-27564)).
10.12 -- Loan and Security Agreement between 3-D Geophysical, Inc.
and Sanwa Business Credit Corporation, dated as of November
17, 1997 (Incorporated by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K filed on December
23, 1997).
10.13 -- Term Note between Northern Geophysical of America, Inc.
and Sanwa Business Credit Corporation, dated as of November
17, 1997 (Incorporated by reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K filed on December
23, 1997).
10.14 -- Security Agreement of 3-D Geophysical, Inc. between 3-D
Geophysical, Inc. and Sanwa Business Credit Corporation,
dated as of November 17, 1997 (Incorporated by reference to
Exhibit 10.3 to the Registrant's Current Report on Form 8-K
filed on December 23, 1997).
10.15 -- Trademark Security Agreement between 3-D Geophysical,
Inc. and Sanwa Business Credit Corporation, dated as of
November 17, 1997 (Incorporated by reference to Exhibit 10.4
to the Registrant's Current Report on Form 8-K filed on
December 23, 1997).
50
51
Exhibit
No. Description of Exhibit
------- ----------------------
10.16 -- Pledge Agreement between 3-D Geophysical, Inc. and Sanwa
Business Credit Corporation (with respect to the capital
stock of Northern Geophysical of America, Inc.) dated as of
November 17, 1997 (Incorporated by reference to Exhibit 10.5
to the Registrant's Current Report on Form 8-K filed on
December 23, 1997).
10.17 -- Pledge Agreement between 3-D Geophysical, Inc. and Sanwa
Business Credit Corporation (with respect to the capital
stock of 3-D Geophysical of Canada, Inc.) dated as of
November 17, 1997 (Incorporated by reference to Exhibit 10.6
to the Registrant's Current Report on Form 8-K filed on
December 23, 1997).
10.18 -- Pledge Agreement between 3-D Geophysical, Inc. and Sanwa
Business Credit Corporation (with respect to the capital
stock of 3-D Geophysical of Latin America, Inc.) dated as of
November 17, 1997 (Incorporated by reference to Exhibit 10.7
to the Registrant's Current Report on Form 8-K filed on
December 23, 1997).
10.19 -- Pledge Agreement between 3-D Geophysical, Inc. and Sanwa
Business Credit Corporation (with respect to the capital
stock of Geoevaluaciones, S.A. de C.V. and Procesos
Interactivos Avanzados, S.A. de C.V.) dated as of November
17, 1997 (Incorporated by reference to Exhibit 10.8 to the
Registrant's Current Report on Form 8-K filed on December
23, 1997).
10.20 -- Form of Subordinated Promissory Note (Incorporated by
reference to Exhibit 10.1 to the Registrant's Current Report
on Form 8-K filed on September 23, 1997).
10.21 -- Form of Non-Qualified Stock Option Agreement
(Incorporated by reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K filed on September
23, 1997).
27.1 -- Financial Data Schedule.
51
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Annual
Report on Form 10-K, or amendment thereto, to be signed on its behalf by the
undersigned, thereunto duly authorized on March 27, 1998.
3-D GEOPHYSICAL, INC.
BY: /S/ JOEL FRIEDMAN
---------------------------------
Joel Friedman
Chairman of the Board
and Acting Chief Executive Officer
(principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-K, or amendment thereto, has been signed
by the following persons in the capacities indicated on the 27th day of March,
1998.
Signature Title
--------- -----
/s/ Joel Friedman Chairman of the Board and Acting
- ----------------------------------------------- Chief Executive Officer
Joel Friedman
/s/ Ronald L. Koons Vice President, Chief Financial
- ----------------------------------------------- Officer, Secretary and Treasurer
Ronald L. Koons (principal financial and accounting
officer)
/s/ Luis H. Ferran Arroyo Director
- -----------------------------------------------
Luis H. Ferran Arroyo
/s/ Robert Pace Andrews Director
- -----------------------------------------------
Robert Pace Andrews
/s/ Ralph M. Bahna Director
- -----------------------------------------------
Ralph M. Bahna
/s/ Douglas W. Brandrup Director
- -----------------------------------------------
Douglas W. Brandrup
/s/ Richard Davis Director
- -----------------------------------------------
Richard Davis
/s/ Arthur D. Emil Director
- -----------------------------------------------
Arthur D. Emil
/s/ P. Dennis O'Brien Director
- -----------------------------------------------
P. Dennis O'Brien
/s/ Emir L. Tavella Director
- -----------------------------------------------
Emir L. Tavella
/s/ Wayne P. Widynowski Director
- -----------------------------------------------
Wayne P. Widynowski
52
53
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27.1 -- Financial Data Schedule
53