UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-9268
GEOKINETICS INC.
(Name of registrant as specified in its charter)
|
DELAWARE |
|
94-1690082 |
|
(State or other jurisdiction of |
|
(I.R.S. Employer |
|
incorporation or organization) |
|
Identification No.) |
ONE
RIVERWAY, SUITE 2100
HOUSTON, TX 77056
(713) 850-7600
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):
|
Large accelerated filer o |
|
Accelerated filer o |
|
Non-accelerated filer x |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes o No x
At May 8, 2007, there were 5,830,893 shares of common stock, par value $0.01 per share, outstanding.
GEOKINETICS INC.
INDEX
2
Geokinetics Inc. and
Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
ASSETS
|
|
|
March 31, |
|
December 31, |
|
||
|
|
|
2007 |
|
2006 |
|
||
|
|
|
(Unaudited) |
|
|
|
||
|
Current assets: |
|
|
|
|
|
||
|
Cash and cash equivalents |
|
$ |
11,120 |
|
$ |
20,404 |
|
|
Restricted cash |
|
1,586 |
|
1,655 |
|
||
|
Accounts receivable: |
|
|
|
|
|
||
|
Trade, net of
allowance for doubtful accounts of $714 and $699 |
|
51,040 |
|
40,880 |
|
||
|
Unbilled |
|
17,337 |
|
16,166 |
|
||
|
Other |
|
5,280 |
|
7,769 |
|
||
|
Inventories |
|
305 |
|
519 |
|
||
|
Deferred costs |
|
6,214 |
|
4,810 |
|
||
|
Prepaid expenses and other current assets |
|
5,719 |
|
5,708 |
|
||
|
Total current assets |
|
98,601 |
|
97,911 |
|
||
|
|
|
|
|
|
|
||
|
Property and equipment |
|
166,371 |
|
148,491 |
|
||
|
Less: Accumulated depreciation and amortization |
|
(37,076 |
) |
(31,889 |
) |
||
|
Property and equipment, net |
|
129,295 |
|
116,602 |
|
||
|
|
|
|
|
|
|
||
|
Other assets: |
|
|
|
|
|
||
|
Goodwill |
|
73,414 |
|
73,414 |
|
||
|
Intangible assets, net |
|
5,091 |
|
5,422 |
|
||
|
Investments, at cost |
|
963 |
|
1,100 |
|
||
|
Deferred financing cost, net |
|
4,530 |
|
4,587 |
|
||
|
Other assets |
|
582 |
|
597 |
|
||
|
Total other assets |
|
84,580 |
|
85,120 |
|
||
|
|
|
|
|
|
|
||
|
Total assets |
|
$ |
312,476 |
|
$ |
299,633 |
|
See accompanying notes to the condensed consolidated financial statements.
3
Geokinetics Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
LIABILITIES, MEZZANINE AND STOCKHOLDERS’ EQUITY
|
|
|
March 31, |
|
December 31, |
|
||
|
|
|
2007 |
|
2006 |
|
||
|
|
|
(Unaudited) |
|
|
|
||
|
Current liabilities: |
|
|
|
|
|
||
|
Current portion of long-term debt and capital lease obligations |
|
$ |
8,016 |
|
$ |
3,552 |
|
|
Accounts payable |
|
37,098 |
|
42,924 |
|
||
|
Accrued liabilities |
|
29,550 |
|
22,331 |
|
||
|
Deferred revenue |
|
4,627 |
|
12,201 |
|
||
|
Income taxes payable |
|
4,607 |
|
2,437 |
|
||
|
Total current liabilities |
|
83,898 |
|
83,445 |
|
||
|
|
|
|
|
|
|
||
|
Long-term debt and capital lease obligations, net of current portion |
|
118,888 |
|
113,617 |
|
||
|
Deferred income taxes |
|
16,535 |
|
16,514 |
|
||
|
Other liabilities |
|
1,434 |
|
1,385 |
|
||
|
Total liabilities |
|
220,755 |
|
214,961 |
|
||
|
|
|
|
|
|
|
||
|
Commitments and contingencies |
|
— |
|
— |
|
||
|
|
|
|
|
|
|
||
|
Mezzanine equity: |
|
|
|
|
|
||
|
Preferred stock, Series B Senior Convertible, $10.00
par value; |
|
57,254 |
|
56,077 |
|
||
|
Total mezzanine equity |
|
57,254 |
|
56,077 |
|
||
|
|
|
|
|
|
|
||
|
Stockholders’ equity: |
|
|
|
|
|
||
|
Common stock, $.01 par value; 100,000,000 shares
authorized, |
|
58 |
|
57 |
|
||
|
Additional paid-in capital |
|
72,493 |
|
72,926 |
|
||
|
Accumulated deficit |
|
(38,132 |
) |
(44,436 |
) |
||
|
Accumulated other comprehensive income |
|
48 |
|
48 |
|
||
|
Total stockholders’ equity |
|
34,467 |
|
28,595 |
|
||
|
|
|
|
|
|
|
||
|
Total liabilities, mezzanine and stockholders’ equity |
|
$ |
312,476 |
|
$ |
299,633 |
|
See accompanying notes to the condensed consolidated financial statements.
4
Geokinetics
Inc. and
Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
|
|
|
Three Months Ended |
|
||||
|
|
|
March 31, |
|
||||
|
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
||
|
Revenue: |
|
|
|
|
|
||
|
Seismic acquisition |
|
$ |
108,365 |
|
$ |
47,095 |
|
|
Data processing |
|
2,599 |
|
1,377 |
|
||
|
Total revenue |
|
110,964 |
|
48,472 |
|
||
|
|
|
|
|
|
|
||
|
Expenses: |
|
|
|
|
|
||
|
Seismic acquisition |
|
80,786 |
|
37,550 |
|
||
|
Data processing |
|
2,343 |
|
1,798 |
|
||
|
Depreciation and amortization |
|
7,532 |
|
1,680 |
|
||
|
General and administrative |
|
9,220 |
|
3,345 |
|
||
|
Total expenses |
|
99,881 |
|
44,373 |
|
||
|
|
|
|
|
|
|
||
|
Gain on sale of equipment |
|
35 |
|
— |
|
||
|
Gain on insurance claim |
|
1,507 |
|
— |
|
||
|
|
|
|
|
|
|
||
|
Income from operations |
|
12,625 |
|
4,099 |
|
||
|
|
|
|
|
|
|
||
|
Other income (expenses): |
|
|
|
|
|
||
|
Interest income |
|
266 |
|
93 |
|
||
|
Interest expense |
|
(4,153 |
) |
(230 |
) |
||
|
Foreign exchange gain |
|
29 |
|
— |
|
||
|
Other |
|
224 |
|
7 |
|
||
|
Total other expense |
|
(3,634 |
) |
(130 |
) |
||
|
|
|
|
|
|
|
||
|
Income before income taxes |
|
8,991 |
|
3,969 |
|
||
|
|
|
|
|
|
|
||
|
Provision for income taxes |
|
2,687 |
|
1,680 |
|
||
|
|
|
|
|
|
|
||
|
Net income |
|
6,304 |
|
2,289 |
|
||
|
|
|
|
|
|
|
||
|
Return to preferred stockholders: |
|
|
|
|
|
||
|
Dividend and accretion costs |
|
1,178 |
|
— |
|
||
|
Income applicable to common stockholders |
|
$ |
5,126 |
|
$ |
2,289 |
|
|
|
|
|
|
|
|
||
|
Income per common share: |
|
|
|
|
|
||
|
Basic |
|
$ |
0.89 |
|
$ |
0.43 |
|
|
Diluted |
|
$ |
0.75 |
|
$ |
0.39 |
|
|
|
|
|
|
|
|
||
|
Weighted average common shares outstanding: |
|
|
|
|
|
||
|
Basic |
|
5,758 |
|
5,350 |
|
||
|
Diluted |
|
8,377 |
|
5,834 |
|
||
See accompanying notes to the condensed consolidated financial statements.
5
Geokinetics
Inc. and
Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
|
Three Months Ended March 31, |
|
||||
|
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
||
|
OPERATING ACTIVITIES |
|
|
|
|
|
||
|
Net income |
|
6,304 |
|
$ |
2,289 |
|
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities |
|
|
|
|
|
||
|
Depreciation and amortization |
|
7,532 |
|
1,680 |
|
||
|
Deferred financing cost |
|
509 |
|
— |
|
||
|
Stock-based compensation |
|
628 |
|
329 |
|
||
|
Gain on disposition of assets |
|
(1,542 |
) |
— |
|
||
|
Allowance for doubtful accounts |
|
15 |
|
— |
|
||
|
Warrant expense, increase in fair value of warrants |
|
— |
|
1,063 |
|
||
|
Changes in operating assets and liabilities: |
|
|
|
|
|
||
|
Restricted cash |
|
69 |
|
— |
|
||
|
Accounts receivable |
|
(7,350 |
) |
(2,661 |
) |
||
|
Prepaid expenses and other current assets |
|
(1,533 |
) |
1,078 |
|
||
|
Accounts payable |
|
(4,919 |
) |
3,849 |
|
||
|
Accrued liabilities, deferred revenue and other liabilities |
|
(285 |
) |
484 |
|
||
|
Net cash provided by (used in) operating activities |
|
(572 |
) |
8,111 |
|
||
|
|
|
|
|
|
|
||
|
INVESTING ACTIVITIES |
|
|
|
|
|
||
|
Proceeds from sale of property and equipment |
|
1,592 |
|
— |
|
||
|
Purchases of property and equipment |
|
(21,452 |
) |
(1,214 |
) |
||
|
Net cash used in investing activities |
|
(19,860 |
) |
(1,214 |
) |
||
|
|
|
|
|
|
|
||
|
FINANCING ACTIVITIES |
|
|
|
|
|
||
|
Proceeds from issuance of long-term debt |
|
6,186 |
|
1,185 |
|
||
|
Proceeds from issuance of short-term debt |
|
20,034 |
|
— |
|
||
|
Proceeds from issuance of restricted stock and exercised options |
|
150 |
|
— |
|
||
|
Payments on capital lease obligations |
|
— |
|
(1,204 |
) |
||
|
Payments on short-term debt |
|
(14,607 |
) |
(4,521 |
) |
||
|
Payments on long-term debt and capital lease obligations |
|
(615 |
) |
(796 |
) |
||
|
Net cash provided by (used in) financing activities |
|
11,148 |
|
(5,336 |
) |
||
|
|
|
|
|
|
|
||
|
Effect of exchange rate changes on cash and cash equivalents |
|
— |
|
(38 |
) |
||
|
Net (decrease) increase in cash |
|
(9,284 |
) |
1,523 |
|
||
|
Cash at beginning of quarter |
|
20,404 |
|
11,001 |
|
||
|
Cash at end of quarter |
|
$ |
11,120 |
|
$ |
12,524 |
|
Supplemental disclosures related to cash flows:
|
|
|
Quarter ended |
|
||
|
|
|
2007 |
|
2006 |
|
|
Purchase of property under capital lease obligations |
|
— |
|
90 |
|
|
Interest paid |
|
3,449 |
|
230 |
|
|
Taxes paid |
|
40 |
|
167 |
|
See accompanying notes to the condensed consolidated financial statements.
6
GEOKINETICS INC. and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Organization
Geokinetics Inc. (collectively with its subsidiaries, the “Company”), a Delaware corporation, founded in 1980, is based in Houston, Texas. The Company is a global provider of seismic data acquisition services in land, marsh and swamp (“Transition Zone”) and shallow water environments to the oil and natural gas industry. In addition, the Company provides seismic data processing and interpretation services. Seismic data is used by oil and natural gas exploration and production (“E&P”) companies to identify and analyze drilling prospects and maximize successful drilling. The Company provides seismic data acquisition services in the Gulf Coast, Mid-Continent, California, Appalachian and Rocky Mountain regions of the United States, Western Canada, Canadian Artic, Central and South America, Africa, the Middle East, Australia/New Zealand and the Far East. The Company primarily performs three-dimensional (“3D”) seismic data surveys for customers in the oil and natural gas industry, which include many national oil companies, major international oil companies and smaller independent E&P companies. In addition, the Company performs a significant amount of work for seismic data library companies that acquire seismic data to license to E&P companies rather than for their own use.
NOTE 2: Basis of Presentation and Significant Accounting Policies
The unaudited financial statements contained herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The accompanying financial statements include all adjustments which are, in the opinion of management, necessary to provide a fair presentation of the financial condition and results of operations for the periods presented. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the SEC. These financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s latest Annual Report on Form 10-K for the year ended December 31, 2006. The results of operations for the first quarter ended March 31, 2007, are not necessarily indicative of the results to be expected for the full year ending December 31, 2007.
Effective January 1, 2007, the functional currency of the Canadian subsidiary was changed from the Canadian dollar to the U.S. dollar, and the Company started capitalizing costs incurred in internal development of software to be used by the Company’s data processing subsidiaries which will allow the Company to provide new products and services. Before January 1, 2007, Accumulated Other Comprehensive Income consisted solely of the cumulative foreign currency translation adjustments of the Canadian subsidiary, and cost incurred on software development expenses was being recorded as research and development expenses.
On November 3, 2006, the Company completed a reverse stock split of the Company’s common stock outstanding at a ratio of one share for every ten shares. All share amounts and per share amounts for all periods presented have been adjusted to reflect the reverse split.
The Company’s March 31, 2006, consolidated statement of operations has been restated to include approximately $11.8 million of revenue and expenses related to third party costs, associated with the acquisition of Trace Energy Services, Inc. (“Trace”).
7
The Company believes this presentation better reflects the requirements for the treatment of such third party costs in accordance with Emerging Issues Task Force 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent.
Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently reviewing SFAS No. 159 to determine if its adoption will have a material impact on its results of operations or financial position.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure requirements regarding fair value measurement. Where applicable, this statement simplifies and codifies fair value related guidance previously issued within U.S. GAAP. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently reviewing SFAS No. 157 to determine if its adoption will have a material effect on its results of operations or financial position.
In September 2006, the FASB issued FASB Staff Position (FSP) AUG AIR-1 Accounting for Planned Major Maintenance Activities (FSP AUG AIR-1). FSP AUG AIR-1 amends the guidance on the accounting for planned major maintenance activities; specifically it precludes the use of the previously acceptable “accrue in advance” method. FSP AUG AIR-1 is effective for fiscal years beginning after December 15, 2006. The implementation of this standard will not have an impact on the Company’s consolidated financial position or results of operations.
In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes. FIN No. 48 is an interpretation of SFAS No. 109 and was adopted by the Company effective January 1, 2007. FIN No. 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements uncertain tax positions that the Company has taken or expects to take in the Company’s tax returns. The Company has evaluated the impact of FIN No. 48 on the Company’s financial statements for the first quarter of 2007. See Note 10, Income Tax for further discussion.
NOTE 3: Segment Information
The Company has three reportable segments, North American seismic data acquisition, International seismic data acquisition, and data processing. The North American and International seismic data acquisition segments acquire data for customers by conducting seismic shooting operations in the Gulf Coast, Mid-Continent, Appalachian and Rocky Mountain regions of the United States, Western Canada, Central and South America, Africa, the Middle East, Australia/New Zealand and the Far East. The data processing segment operates processing centers in Houston, Texas and London, United Kingdom to process seismic data for oil and gas exploration companies worldwide.
8
The Company’s reportable segments are strategic business units that offer different services to customers. Each segment is managed separately, has a different customer base, and requires unique and sophisticated technology. There are no inter-segment sales or transfers.
The following table sets forth significant information concerning the Company’s reportable segments.
|
|
|
For the Quarter Ended March 31, 2007 (in thousands) |
|
|||||||||||||
|
|
|
Data Acquisition |
|
Data |
|
|
|
|
|
|||||||
|
|
|
North America |
|
International |
|
Processing |
|
Corporate |
|
Total |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Revenue |
|
$ |
50,604 |
|
$ |
57,761 |
|
$ |
2,599 |
|
|
|
$ |
110,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Segment income (loss) |
|
$ |
8,197 |
|
$ |
11,323 |
|
$ |
(48 |
) |
$ |
(13,168 |
) |
$ |
6,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Segment assets |
|
$ |
121,530 |
|
$ |
172,477 |
|
$ |
7,198 |
|
$ |
11,271 |
|
$ |
312,476 |
|
|
|
|
For the Quarter Ended March 31, 2006 (in thousands) |
|
|||||||||||||
|
|
|
Data Acquisition |
|
Data |
|
|
|
|
|
|||||||
|
|
|
North America |
|
International |
|
Processing |
|
Corporate |
|
Total |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Revenue |
|
$ |
47,095 |
|
$ |
— |
|
$ |
1,377 |
|
|
|
$ |
48,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Segment income (loss) |
|
$ |
3,885 |
|
$ |
— |
|
$ |
(551 |
) |
$ |
(1,045 |
) |
$ |
2,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Segment assets |
|
$ |
61,636 |
|
$ |
— |
|
$ |
3,091 |
|
$ |
12,717 |
|
$ |
77,444 |
|
NOTE 4: Acquisitions — Grant Geophysical, Inc.
On September 8, 2006, the Company completed the acquisition of all of the issued and outstanding shares of common stock of Grant Geophysical, Inc. and its subsidiaries (“Grant”), headquartered in Houston, Texas, for $125 million in cash, subject to adjustment for net debt and working capital. Through the acquisition, the Company increased the number of operational seismic data acquisition service crews and expanded its geographic coverage. Grant has operations in the United States, Western Canada, Latin America, Africa, the Middle East, Australia/New Zealand and the Far East, performing two-dimensional and 3D seismic surveys in the land, Transition Zone and shallow water environments, using both analog and digital seismic equipment for a wide range of customers exploring for oil and gas reserves.
9
NOTE 5: Debt and Capital Lease Obligations
At March 31, 2007 and December 31, 2006, the Company’s long-term debt and capital lease obligations were as follows:
|
|
March 31, |
|
December 31, |
|
|||
|
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
||
|
U.S. operations: |
|
|
|
|
|
||
|
Floating rate notes - LIBOR plus 6.50% |
|
$ |
110,000 |
|
$ |
110,000 |
|
|
Capital lease obligations - 8.72% to 24.75% |
|
5,225 |
|
5,771 |
|
||
|
Revolving credit lines - LIBOR + 2.25% or prime |
|
5,462 |
|
— |
|
||
|
Notes payable - LIBOR + 2.75% or prime + .50% |
|
6,187 |
|
1,320 |
|
||
|
|
|
126,874 |
|
117,091 |
|
||
|
|
|
|
|
|
|
||
|
International operations: |
|
|
|
|
|
||
|
Bank overdraft |
|
— |
|
36 |
|
||
|
Capital lease obligations - various rates |
|
30 |
|
42 |
|
||
|
|
|
30 |
|
78 |
|
||
|
|
|
|
|
|
|
||
|
Total long-term debt and capital lease obligations |
|
126,904 |
|
117,169 |
|
||
|
Less: Current portion |
|
(8,016 |
) |
(3,552 |
) |
||
|
|
|
$ |
118,888 |
|
$ |
113,617 |
|
Floating Rate Notes
On December 15, 2006, the Company issued floating rate notes (the “Notes”) in the principal amount of $110.0 million. A significant portion of the net proceeds from such issuance was used to repay the Company’s $100.0 million senior loan and accrued interest incurred in connection with the Grant Acquisition and the remainder retained for general corporate purposes. Concurrently, the Company repaid the $55.0 million original principal amount subordinated loan, together with capitalized and accrued interest, by the issuance of 228,683 shares of the Company’s Series B Preferred Stock to the lenders.
Interest on the Notes accrues at a rate per annum, reset quarterly, equal to LIBOR plus 6.50% payable quarterly on March 15, June 15, September 15 and December 15 of each year, commencing on March 15, 2007. The Notes mature on December 15, 2012. These Notes are the Company’s senior obligations, guaranteed by all existing and future domestic restricted subsidiaries and secured by a second priority security interest over substantially all of the Company’s assets. The Notes are effectively subordinated to all of the Company’s existing and any future first priority secured indebtedness, including indebtedness under the Company’s credit facilities, to the extent of the secured assets of any such subsidiary. The Notes and the guarantees are pari passu in right of payment with any of the Company’s future second priority secured indebtedness and are effectively senior in right of payment to all of the Company’s existing and any future unsecured indebtedness.
The Company may, at its option, (i) redeem all or part of the Notes, at any time during the first six months after December 15, 2006 at 103% of the principal amount thereof, plus accrued
10
and unpaid interest or (ii) redeem up to 35% of the Notes, on or after June 15, 2007, and prior to December 15, 2008 at 100% of the principal amount thereof plus four times the applicable quarterly interest coupon of the Notes plus accrued and unpaid interest. In addition, the Company may, at its option, redeem the Notes on or after December 15, 2008 at fixed redemption prices.
The Company entered into a registration rights agreement, dated as of December 15, 2006 (the “Registration Rights Agreement”), with the initial purchaser of the Notes, pursuant to which the Company and each of the subsidiaries agreed to (i) file with the SEC a registration statement under the Securities Act, as amended, (the “Exchange Offer Registration Statement”) relating to a registered exchange offer for the Notes and (ii) to have such exchange offer registration statement declared effective by the SEC on or prior to 270 days after December 15, 2006, or if the exchange offer is not completed, to file a shelf registration statement pursuant to Rule 415 of the Securities Act. If the Company fails to comply with certain of the obligations arising under the Registration Rights Agreement, the Company will be required to pay liquidated damages to the holders of the Notes in accordance with the provisions of the Registration Rights Agreement.
On February 1, 2007, the Company filed a Form S-1, subsequently amended on April 27, 2007, contemplating an offering of up to 4,500,000 shares of its common stock. The Company plans to use the net proceeds from this offering to redeem all of its outstanding Notes, including, principal, premium and accrued interest, and use any remaining net proceeds to repay a portion or, if funds allow, all of its revolving credit facility and any remainder for general corporate purposes.
Capital Lease Obligations
On July 25, 2006, Quantum, a wholly-owned subsidiary of the Company, entered into an equipment lease agreement effective July 28, 2006 with CIT Group/Equipment Financing, Inc. (the “CIT lease”). The parties entered into the lease with respect to the purchase of seismic data acquisition equipment. The term of the lease is three years, beginning on July 28, 2006 and ending on July 28, 2009 with a purchase option at the expiration of the lease term. Payments under the lease total approximately $6.8 million and are payable in 36 equal monthly payments of approximately $190,000. The first rental payment was due August 28, 2006, and the remaining payments are due on the 28th of each month until paid in full. The Company and each of its principal subsidiaries are guarantors of Quantum’s obligations under the lease.
On April 23, 2007, the Company received an amendment and waiver on the CIT lease for exceeding the fixed charge coverage ratio as defined in the equipment lease dated July 25, 2006 and measured for the fiscal year ending December 31, 2006. The amendment re-defined the fixed charge coverage ratio calculation to be consistent with the amended PNC credit facility dated December 15, 2006, discussed below.
Revolving Credit Lines
On June 12, 2006, the Company and four of its subsidiaries (collectively, the “Borrowers”) completed the closing of a credit facility under the terms of a Revolving Credit, Term Loan and Security Agreement (collectively, the “Credit Agreement”) dated as of June 8, 2006 with PNC Bank, National Association (“PNC”), as lender. Under the Credit Agreement, the Borrowers are liable for
11
payment of the obligations under the Credit Agreement. The Credit Agreement makes the following credit facilities available to the Company, subject to the terms and conditions set forth in the Credit Agreement: (i) a $12.0 million term credit facility, the proceeds of which were used primarily to pay off all of the obligations of the Company and its subsidiaries to HSBC Bank Canada, and (ii) a $12.0 million revolving credit facility. On September 8, 2006, the $12 million term credit facility had a balance of $11.6 million outstanding and was fully paid off. No amounts were outstanding under the revolving credit facility. The Borrowers pledged as security the assets of the Company to PNC. The Credit Agreement contains certain restrictive covenants limiting the Company’s ability to incur additional debt and purchase additional assets.
On September 8, 2006, the Company and its principal subsidiaries entered into a Joinder and Amendment No. 1 to the Credit Agreement with PNC which allowed the Company to acquire Grant.
On December 15, 2006, the Company and its principal subsidiaries further amended the Credit Agreement with PNC to reflect the following credit facilities: (i) a $14.5 million revolving credit facility (“revolver”) and (ii) a $6.5 million capital expenditures facility. The financial covenants for the credit facility are as follows: the Company must maintain (i) a net worth (defined as assets less liabilities in accordance with accounting principles generally accepted in the United States of America) of not less than $75 million; (ii) a fixed charge coverage ratio of not less than 1.10 to 1.0; and leverage ratio of not more than 3.25 to 1.00. Other covenants include: no mergers or sale of assets, no conflicting liens on the collateral, no guarantees of other indebtedness, investments are permitted as to only specified forms of investments, capital expenditures are limited to $28.5 million for calendar year 2007 and $25.0 million for calendar year 2008 and beyond, no dividends can be paid other than dividends on preferred stock provided that there is no default or event of default and no event of default shall occur as a result, no additional indebtedness except as permitted by the credit facility, no changes in business activities, no changes in constituent documents, no prepayment of debt except under certain circumstances, and no change of control.
At March 31, 2007, the Company had available credit under this facility of $9.4 million reduced by standby letters of credit totaling $1.2 million issued by PNC under the revolver.
NOTE 6: Preferred Stock
On December 15, 2006, in connection with the repayment of the $55.0 million subordinated loan, the Company issued 228,683 shares of its Series B Preferred Stock, $10 par value, pursuant to the terms of the Securities Purchase Agreement dated September 8, 2006, with Avista, an affiliate of Avista and another institutional investor. The preferred stock is presented as mezzanine debt due to the characteristics described below:
Each holder of Series B Preferred Stock is entitled to receive cumulative dividends at the rate of 8.0% per annum on the liquidation preference of $250.00 per share, compounded quarterly. At the Company’s option through October 31, 2011, dividends may be paid in additional shares of Series B Preferred Stock. After such date, dividends shall be paid in cash if declared.
Each holder of Series B Preferred Stock, in the event of the Company’s liquidation, will be entitled to a preference over the
12
holders of shares of common stock, equal to $250.00 per share, subject to certain adjustments, plus any accrued dividends.
After March 31, 2014, holders of not less than a majority of outstanding shares of Series B Preferred Stock may require upon written notice to redeem all outstanding shares of Series B Preferred Stock, in cash, at a price equal to $250.00 per share, plus any accrued dividends.
The Series B Preferred Stock is initially convertible into 10 shares of the Company’s common stock at the option of the holder, subject to adjustment, from time to time, on the terms described in the Company’s certificate of incorporation.
At the Company’s option, each share of Series B Preferred Stock is convertible into shares of common stock, immediately upon the sale of common stock at a price per share yielding net proceeds to the Company of not less than $35.00 per share in an underwritten public offering pursuant to an effective registration statement under the Securities Act, to provide net proceeds to the Company and selling stockholders, if any, of not less than $75,000,000.
As long as at least 55,000 shares of Series B Preferred Stock are outstanding, the consent of the holders of a majority of the Company’s Series B Preferred Stock will be required to, among other things, make any material change to its certificate of incorporation or by-laws, declare a dividend on its common stock, enter into a business combination, increase or decrease the size of its board of directors or elect one member of the board of directors.
If the Company authorizes the issuance and sale of additional shares of its common stock other than pursuant to an underwritten public offering registered under the Securities Act, or for non-cash consideration pursuant to a merger or consolidation approved by its board of directors, the Company must first offer in writing to sell to each holder of its Series B Preferred Stock an equivalent pro rata portion of the securities being issued.
NOTE 7: Employee Benefits
Stock-Based Compensation
The adoption of SFAS No. 123(R) in the first quarter of fiscal year 2006 resulted in prospective changes in the Company’s accounting for stock-based compensation awards including recording stock-based compensation expense related to stock options that vested during the quarter on a prospective basis. The adoption of SFAS No. 123(R) resulted in the recognition of compensation expense of approximately $628,000 or $0.11 per common share for the quarter ended March 31, 2007. The total cost related to non-vested awards not yet recognized at March 31, 2007 is approximately $3.5 million which is expected to be recognized over a weighted average of 1.86 years.
Because the Company maintained a full valuation allowance on its U.S. deferred tax assets, the Company did not recognize any tax benefit related to stock-based compensation expense for the quarter ended March 31, 2007.
13
Stock Options
The price at which a share of common stock may be purchased upon exercise of an incentive stock option or a nonqualified stock option is determined by the Board, but in the case of incentive stock options, may not be less than the fair market value of common stock subject to the stock option on the date the stock option is granted. Options are generally exercisable over a three-year period from the date of grant and the options expire generally ten years from the date of grant.
The fair value of each option award is estimated on the date of grant using a Black-Scholes option pricing model. Expected volatilities are based on a number of factors, including historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination for determining the estimated forfeitures. The Company uses the “shortcut” method described in SAB Topic 14D.2 for determining the expected life used in the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. As the Company has not declared dividends since it became a public entity, no dividend yield is used in the calculation. For the options granted during the second quarter of 2006, the following criteria was utilized: (i) an average risk free interest rate of 4.5%, (ii) an average volatility of 159% and (iii) an average contractual life of 6.0 years. Option activity for the quarter ended March 31, 2007 is summarized as follows:
|
|
|
Number of Options |
|
Weighted |
|
Weighted Average |
|
Aggregate |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Balance at December 31, 2006 |
|
316,450 |
|
$ |
12.12 |
|
7.85 years |
|
$ |
6,853,144 |
|
|
Expired |
|
— |
|
|
|
|
|
|
|
||
|
Forfeited |
|
— |
|
|
|
|
|
|
|
||
|
Exercised |
|
(27,833 |
) |
$ |
5.32 |
|
|
|
|
|
|
|
Granted |
|
— |
|
|
|
|
|
|
|
||
|
Balance at March 31, 2007 |
|
288,617 |
|
$ |
9.99 |
|
7.60 years |
|
$ |
5,583,554 |
|
|
Exercisable at March 31, 2007 |
|
207,799 |
|
$ |
9.07 |
|
7.32 years |
|
$ |
4,205,641 |
|
The total intrinsic value of options exercised during the first quarter of 2007 was $667,316.
Restricted Stock
The restricted stock awards activity for the first quarter of 2007 is summarized below:
|
|
Number of Shares of |
|
|
|
|
|
|
|
|
Balance as of December 31, 2006 |
|
189,900 |
|
|
Forfeited |
|
— |
|
|
Vested |
|
— |
|
|
Granted |
|
50,000 |
|
|
Balance as of March 31, 2007 |
|
239,900 |
|
14
NOTE 8: Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, establishes standards for the reporting of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income generally represents all changes in stockholders’ equity during the period except those resulting from investments by, or distributions to, stockholders. The Company has an accumulated comprehensive loss related to changes in foreign currency to U.S. dollar exchange rates, which is recorded as follows (in thousands):
|
|
Three Months Ended |
|
|||||
|
|
|
March 31, |
|
||||
|
|
|
2007 |
|
2006 |
|
||
|
Net income |
|
$ |
6,304 |
|
$ |
2,289 |
|
|
Foreign currency translation adjustment |
|
— |
|
(38 |
) |
||
|
Comprehensive income |
|
$ |
6,304 |
|
$ |
2,251 |
|
NOTE 9: Income per Common Share
The following table sets forth the computation of basic and diluted income per common share (in thousands, except per share amounts):
|
|
Quarter Ended March 31, |
|
|||||
|
|
|
2007 |
|
2006 |
|
||
|
Numerator: |
|
|
|
|
|
||
|
Net income |
|
$ |
6,304 |
|
$ |
2,289 |
|
|
Net income applicable to common stockholders |
|
$ |
5,126 |
|
$ |
2,289 |
|
|
|
|
|
|
|
|
||
|
Denominator: |
|
|
|
|
|
||
|
Denominator for basic income per common share |
|
5,758 |
|
5,350 |
|
||
|
Effect of dilutive securities: |
|
|
|
|
|
||
|
Stock options |
|
110 |
|
367 |
|
||
|
Warrants |
|
88 |
|
117 |
|
||
|
Restricted stock |
|
88 |
|
— |
|
||
|
Convertible preferred stock |
|
2,333 |
|
— |
|
||
|
Denominator for diluted income per common share |
|
8,377 |
|
5,834 |
|
||
|
|
|
|
|
|
|
||
|
Income per common share: |
|
|
|
|
|
||
|
Basic |
|
$ |
0.89 |
|
$ |
0.43 |
|
|
Diluted |
|
0.75 |
|
$ |
0.39 |
|
|
15
NOTE 10: Income Taxes
Effective January 1, 2007, the Company adopted FIN No. 48, which is intended to clarify the accounting for income taxes by prescribing a minimum recognition threshold for a tax position before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. Accordingly, the Company will continue to recognize income tax related penalties and interest in its provision for income taxes and, to the extent applicable, in the corresponding balance sheet presentations for accrued income tax assets and liabilities, including any amounts for uncertain tax positions.
As of January 1 and March 31, 2007, the Company did not have any unrecognized net tax benefits, and was subject to tax examinations in the United States for years after 2002 and in foreign tax jurisdictions for years after 2000.
The Company’s income tax provision for the quarter ended March 31, 2007, amounted to approximately $2.7 million or approximately 30%. The difference between the Company’s statutory tax rate and the effective tax rate is due primarily to lower foreign tax rates in jurisdictions where the Company has substantial income.
NOTE 11: Subsequent Events
On April 18, 2007, as a result of an insurance claim related to the loss of seismic equipment destroyed by fire in December 2006, the Company received a payment of $1.5 million in addition to an advance payment of $2.5 million received on February 1, 2007. There is still a balance remaining on the claim and management is unsure of its final outcome.
16
Forward Looking Statements
Certain matters discussed in this quarterly report, except for historical information contained herein, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). When used in this report, words such as “anticipates”, “believes”, “expects”, “estimates”, “intends”, “plans”, “projects” and similar expressions, as they relate to Geokinetics Inc. (collectively with its subsidiaries, the “Company”) or management, identify forward-looking statements. Forward-looking statements include, among other things, business strategy and expectations concerning industry conditions, market position, future operations, profitability, liquidity and capital resources. Management’s expectations and assumptions regarding Company operations and other future results are subject to risks, uncertainties and other factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Although we believe that the expectations reflected in such statements are reasonable, we can give no assurance that such expectations will be correct.
Overview
The Company is a full-service, global provider of seismic data acquisition and seismic data processing and interpretation services. The Company believes it is the fourth-largest provider of seismic data acquisition services in land, transition zone and shallow water environments based on total worldwide crew count. The Company’s services are used by oil and natural gas E&P companies to identify and analyze drilling prospects, maximize drilling success, optimize field development and enhance production economics. The Company seeks to differentiate itself from its competitors through its focus on harsh environments, difficult to shoot locations and the innovative application of its specialized equipment and processes. The Company provides its seismic data acquisition services in the Gulf Coast, Mid-Continent, California, Appalachian and Rocky Mountain regions of the United States, Western Canada, Canadian Arctic, Central and South America, Africa, the Middle East, Australia/New Zealand and the Far East. The Company primarily performs 3D seismic data surveys for E&P customers, which include many national oil and gas companies, major international oil and gas companies and public and private independent operators. In addition, the Company performs a significant amount of work for seismic data library companies that acquire seismic data to license to E&P companies rather than for their own use.
The seismic services industry is dependent upon the spending levels of oil and natural gas companies for exploration, development, exploitation and production of oil and natural gas. These spending levels depend upon the prices of oil and natural gas. During the past three years, the oil and natural gas industry has seen significant increases in activity resulting from continuing high commodity prices for oil and natural gas. The Company’s seismic data acquisition services segment has benefited from these increased levels of activity, as well as from its reputation as a provider of high-quality seismic surveys. The Company has seen its seismic data acquisition services revenues and results of operations improve year after year for the past several years as a result of increased demand for its services, improved contract terms with its customers as well as the acquisitions of Trace Energy Services, Inc. (“Trace”) and Grant Geophysical, Inc. (“Grant”). While demand for the Company’s services continues to increase, the Company continues to experience competition in its marketplace which has prevented it from benefiting from significant increased pricing for its services. The Company will
17
continue to aggressively compete for seismic projects from both existing and prospective customers.
Results of Operations
Revenue for the first quarter of 2007 totaled $111.0 million as compared to $48.5 million for the same period of 2006, an increase of 129%. These increases in revenue are attributable primarily to the Company’s seismic data acquisition segment. For the first quarter of 2007, seismic data acquisition revenue totaled $108.4 million as compared to $47.1 million for the same period of 2006, an increase of 130%. This increase in seismic data acquisition revenue is primarily attributable to the Company’s acquisition of Grant, completed in September of 2006, improved contract terms, investment in additional crew capacity and continued strong demand for the Company’s services. Seismic data acquisition revenue for the first quarter of 2007 includes $50.6 million or 46% of total revenue from North America, and $57.8 million or 52% of total revenue from International. Seismic data processing revenue totaled $2.6 million at March 31, 2007 as compared to $1.4 million for the same period of 2006, an increase of 86% due to increased demand for processing of seismic data.
Operating expenses for the first quarter of 2007 totaled $83.1 million as compared to $39.3 million for the same period of 2006, an increase of 111%. These increases in operating expenses are primarily attributable to the Company’s seismic data acquisition segment. Seismic data acquisition operating expenses totaled $80.8 million for the first quarter of 2007 as compared to $37.6 million for the same period of 2006, an increase of 115%. Increased operating expenses at the Company’s seismic data acquisition segment are primarily the result of the Grant operations and increased seismic data acquisition activity. Seismic data acquisition operating expenses for the first quarter of 2007 includes $40.0 million, or 48% of total operating expenses from North America, and $40.8 million or 49% of total operating expenses from International. Seismic data processing operating expenses totaled $2.3 million for the quarter ended March 31, 2007, as compared to $1.8 million for the same period of 2006, an increase of 28% due to increased activity.
General and administrative expenses for the first quarter of 2007 were $9.2 million as compared to $3.3 million for the same period of 2006, an increase of 179%. These increases are primarily the result of the Company’s acquisition of Grant and the related general and administrative expenses acquired, salary expenses associated with increased personnel levels due to the Company’s overall growth, Sarbanes Oxley implementation costs, increased sales and administrative costs in the Company’s data processing segment and increased bonus accruals due to higher activity levels under the Senior Executive Incentive Plan.
Depreciation and amortization expense for the first quarter of 2007 totaled $7.5 million as compared to $1.7 million for the same period of 2006, resulting in an increase of $5.8 million or 341%. This is primarily attributable to depreciation expense resulting from the acquisition of Grant, additional capital equipment acquired in the first quarter and amortization of acquired intangibles with the Grant acquisition.
Interest expense for the first quarter of 2007 increased by $4.0 million to $4.2 million as compared to $230,000 for the same period of 2006. This increase is primarily due to interest expense of $3.3 million on the $110.0 million of Floating Rates Notes entered into in December 2006 and the amortization of deferred financing costs.
18
The Company had income applicable to common stockholders of $5.1 million, or $0.75 per common share on a fully diluted basis per share, for the quarter ended March 31, 2007 as compared to an income applicable to common stockholders of $2.3 million, or $0.39 per common share on a fully diluted basis, for the same period of 2006.
Liquidity and Capital Resources
The Company’s primary sources of cash are cash flow generated by its seismic data acquisition and seismic data processing segments, debt and private equity transactions, equipment financing and trade credit. The Company’s primary uses of cash are for operating expenses associated with its seismic data acquisition and seismic data processing segments and expenditures associated with upgrading and expanding the Company’s operating segment’s capital asset base. The Company’s ability to maintain adequate cash balances is dependent upon levels of future demand for the services it provides to its customers.
Net cash used in operating activities was $0.6 million for the first quarter of 2007 compared to net cash provided by operating activities of $8.1 million for the first quarter of 2006. These amounts result from the Company’s operating results adjusted by changes in working capital and depreciation. The decrease in net cash provided by operating activities in the first quarter of 2007 was primarily the result of working capital adjustments and increased activity levels in 2007.
Net cash used in investing activities was $19.9 million for the first quarter of 2007 and $1.2 million for the first quarter of 2006. The increase in net cash used in investing activities during the first quarter of 2007 was primarily the result of significant investments in capital expenditures. In the first quarter of 2006, the Company invested $1.2 million in capital expenditures. In the first quarter of 2007, the Company invested $21.5 million in capital expenditures.
Net cash provided by financing activities was $11.1 million for the first quarter of 2007 as compared to net cash used in financing activities of $5.3 million for the first quarter of 2006. These totals represent the net proceeds and net payments either received or paid from the Company’s debt obligations. The increase in net cash provided by financing activities increased primarily due to funds received from available credit facilities discussed below.
Floating Rate Notes
On December 15, 2006, the Company issued Floating Rate Notes (the “Notes”) in the principal amount of $110.0 million. A significant portion of the net proceeds from such issuance was used to repay the Company’s $100.0 million senior loan and accrued interest incurred in connection with the Grant Acquisition and the remainder retained for general corporate purposes. Concurrently, the Company repaid the $55.0 million original principal amount subordinated loan, together with capitalized and accrued interest, by the issuance of 228,683 shares of the Company’s Series B Preferred Stock to the lenders.
Interest on the Notes accrues at a rate per annum, reset quarterly, equal to LIBOR plus 6.50% payable quarterly on March 15, June 15, September 15 and December 15 of each year, commencing on March 15, 2007. The Notes mature on December 15, 2012. These Notes are the Company’s senior obligations, guaranteed by all existing and future domestic restricted subsidiaries, and secured by a second priority security interest over substantially all of the Company’s assets. The Notes are effectively subordinated to all of the Company’s existing and
19
any future first priority secured indebtedness, including indebtedness under the Company’s credit facilities, to the extent of the assets of such subsidiaries. The Notes and the guarantees are pari passu in right of payment with any of the Company’s future second priority secured indebtedness and are effectively senior in right of payment to all of the Company’s existing and any future unsecured indebtedness.
The Company may, at its option, (i) redeem all or part of the Notes, at any time during the first six months after December 15, 2006 at 103% of the principal amount thereof, plus accrued and unpaid interest or (ii) redeem up to 35% of the Notes, on or after June 15, 2007, and prior to December 15, 2008 at 100% of the principal amount thereof plus four times the applicable quarterly interest coupon of the Notes plus accrued and unpaid interest. In addition, the Company may, at its option, redeem the Notes on or after December 15, 2008 at fixed redemption prices.
The Company entered into a registration rights agreement, dated as of December 15, 2006 (the “Registration Rights Agreement”), with the initial purchaser of the Notes, pursuant to which the Company and each of the subsidiaries agreed to (i) file with the SEC a registration statement under the Securities Act, as amended, which the Company refers to as the exchange offer registration statement, relating to a registered exchange offer for the Notes and (ii) to have such exchange offer registration statement declared effective by the SEC on or prior to 270 days after December 15, 2006, or if the exchange offer is not completed, to file a shelf registration statement pursuant to Rule 415 of the Securities Act. If the Company fails to comply with certain of the obligations arising under the Registration Rights Agreement, the Company will be required to pay liquidated damages to the holders of the Notes in accordance with the provisions of the Registration Rights Agreement.
On February 1, 2007, the Company filed a Form S-1, subsequently amended on April 27, 2007, contemplating an offering of up to 4,500,000 shares of its common stock. The Company plans to use the net proceeds from this offering to redeem all of its outstanding Notes, including, principal, premium and accrued interest, and use any remaining net proceeds to repay a portion or, if funds allow, all of its revolving credit facility and any remainder for general corporate purposes.
Capital Lease Obligations
On July 25, 2006, Quantum, a wholly-owned subsidiary of the Company, entered into an equipment lease agreement effective July 28, 2006 with CIT Group/Equipment Financing, Inc. (the “CIT lease”). The parties entered into the lease with respect to the purchase of seismic data acquisition equipment. The term of the lease is three years, beginning on July 28, 2006 and ending on July 28, 2009 with a purchase option at the expiration of the lease term. Payments under the lease total approximately $6.8 million and are payable in 36 equal monthly payments of approximately $190,000. The first rental payment was due August 28, 2006, and the remaining payments are due on the 28th of each month until paid in full. The Company and each of its principal subsidiaries are guarantors of Quantum’s obligations under the lease.
Revolving Credit Lines
On June 12, 2006, the Company and four of its subsidiaries (collectively, the “Borrowers”) completed the closing of a credit facility under the terms of a Revolving Credit, Term Loan and Security Agreement (collectively, the “Credit Agreement”) dated as of
20
June 8, 2006 with PNC Bank, National Association (“PNC”), as lender. Under the Credit Agreement, the Borrowers are liable for payment of the obligations under the Credit Agreement. The Credit Agreement makes the following credit facilities available to the Company, subject to the terms and conditions set forth in the Credit Agreement: (i) a $12.0 million term credit facility, the proceeds of which were used primarily to pay off all of the obligations of the Company and its subsidiaries to HSBC Bank Canada, and (ii) a $12.0 million revolving credit facility. On September 8, 2006, the $12 million term credit facility had a balance of $11.6 million outstanding and was fully paid off. No amounts were outstanding under the revolving credit facility. The Borrowers pledged as security the assets of the Company to PNC. The Credit Agreement contains certain restrictive covenants limiting the Company’s ability to incur additional debt and purchase additional assets.
On September 8, 2006, the Company and its principal subsidiaries entered into a Joinder and Amendment No. 1 to the Credit Agreement with PNC which allowed the Company to acquire Grant.
On December 15, 2006, the Company and its principal subsidiaries further amended the Credit Agreement with PNC to reflect the following credit facilities: (i) a $14.5 million revolving credit facility (“revolver”) and (ii) a $6.5 million capital expenditures facility. The financial covenants for the credit facility are as follows: the Company must maintain (i) a net worth (defined as assets less liabilities in accordance with accounting principles generally accepted in the United States of America) of not less than $75 million; (ii) a fixed charge coverage ratio of not less than 1.10 to 1.0; and leverage ratio of not more than 3.25 to 1.00. Other covenants include: no mergers or sale of assets, no conflicting liens on the collateral, no guarantees of other indebtedness, investments are permitted as to only specified forms of investments, capital expenditures are limited to $28.5 million for calendar year 2007 and $25.0 million for calendar year 2008 and beyond, no dividends can be paid other than dividends on preferred stock provided that there is no default or event of default and no event of default shall occur as a result, no additional indebtedness except as permitted by the credit facility, no changes in business activities, no changes in constituent documents, no prepayment of debt except under certain circumstances, and no change of control.
At March 31, 2007, the Company had available credit under this facility of $9.4 million reduced by standby letters of credit totaling $1.2 million issued by PNC under the revolver. At March 31, 2007, the Company had a balance of approximately $5.5 million drawn under the revolver and $6.2 million drawn under the capital expenditure line.
On May 8, 2007, the Company was notified by PNC Bank of the approval to amend, among other things, an increase of its facility from $21 million to $60 million, with $25 million expected to be available as a revolving credit line and $35 million expected to be available specifically for capital expenditures. Initially, up to $30 million will be available upon closing of the amended credit facility and the remaining $30 million will be available in the event the Notes are redeemed as stated in the Form S-1/A filed on April 30, 2007. In addition, the amended credit facility will include a $10 million accordion feature under which, at the Company’s request, the $35 million available specifically for capital expenditures can be increased to an aggregate of $45 million, which will increase the total amended credit facility limit up to $70 million. The Company only expects to execute the above amendment if it completes the offering of common stock contemplated in the Form S-1/A filed on April 30, 2007.
The Company believes that its current cash balances and anticipated cash flow from its seismic data acquisition and seismic data processing operations will provide sufficient liquidity to continue operations beyond 2007. While industry conditions have improved, the Company continues to experience significant competition in its markets. Should the Company’s current sources of liquidity not meet its operating requirements, the Company would be forced to seek outside sources of capital to meet its operating and capital requirements.
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The Company had no off-balance sheet arrangements for the first quarter ended March 31, 2007 that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.
Critical Accounting Policies and Estimates
Effective January 1, 2007, the Company adopted FASB Interpretation Number 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), which is intended to clarify the accounting for income taxes by prescribing a minimum recognition threshold for a tax position before being recognized in the financial statements. See Note 10, Income Taxes, for further discussion. Refer to the Company’s Annual Report on Form 10-K, for the fiscal year ended December 31, 2006, for a description of other changes to the Company’s Critical Accounting Policies.
Effective January 1, 2007, the Company capitalized software development costs in accordance with SOP 98 -1 and FAS 86. These costs are incurred by the Company’s data processing segment to develop new software which will allow the Company to provide new products and services.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of operations, the Company is exposed to market risks arising from adverse changes in interest rates. Market risk is defined for these purposes as the potential for change in the fair value of debt instruments resulting from an adverse movement in interest rates. As of March 31, 2007, the Company’s financial instruments consist of cash, accounts receivable, accounts payable and notes payable. The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable and accounts payable approximate fair market value due to the short maturity of those instruments. The carrying amount of debt reported in the consolidated balance sheets approximate fair value because, in general, the interest on the underlying instruments approximates market rates. The Company is not a party to any hedge arrangements, commodity swap agreement or other derivative financial instruments. The Company’s seismic data acquisition and seismic data processing segments utilize foreign subsidiaries and branches to conduct operations outside of the United States. These operations expose the Company to market risks from changes in foreign exchange rates. To date, the changes in foreign exchange have not been of a material nature; however, with the acquisition of Grant, the Company has increased its exposure to these market risks with the addition of significant international operations.
Item 4. Controls and Procedures
Under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, the Company has performed an evaluation of the design, operation and effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of March 31, 2007. Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that such disclosure controls and procedures are effective in enabling the Company to record, process, summarize and report information required to be included in its reports filed or submitted under the Exchange Act within the required time period. There have not been any changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act) during the first quarter ended March 31, 2007 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
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Neither the Company nor any of its subsidiaries is a party to any pending legal proceedings other than certain routine litigation that is incidental to the Company’s business and that the Company believes is unlikely to materially impact the Company. Moreover, the Company is not aware of any such legal proceedings that are contemplated by governmental authorities with respect to the Company, any of its subsidiaries, or any of their respective properties.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
None.
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Exhibit Number |
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Description |
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31.1 |
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, filed herewith. |
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31.2 |
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, filed herewith. |
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32.1 |
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Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed herewith. |
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32.2 |
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Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed herewith. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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GEOKINETICS INC. |
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Date: May 9, 2007 |
/s/ David A. Johnson |
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David A. Johnson |
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President and Chief Executive Officer |
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Date: May 9, 2007 |
/s/ Scott A. McCurdy |
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Scott A. McCurdy |
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Vice President and Chief Financial Officer |
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