10-K 1 a11-32250_110k.htm 10-K

Table of Contents

 

 

 

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

 

For the fiscal year ended December 31, 2011

 

OR

 

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 001-33460

 

GEOKINETICS INC.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of
incorporation or organization)

 

94-1690082
(I.R.S. Employer Identification No.)

 

 

 

1500 CityWest Blvd., Suite 800
Houston, Texas

(Address of principal executive offices)

 

77042
(Zip Code)

 

(713) 850-7600

(Telephone Number)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Title of Each Class

 

Name of Each Exchange on Which Registered

 

 

Common Stock, $0.01 par value

 

NYSE AMEX

 

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o  No x

 

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

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.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

Aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2011, computed by reference to the closing sale price of the registrant’s common stock on the NYSE AMEX on such date: $87.5 million.  For purposes of this computation, all executive officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates.  Such a determination should not be deemed an admission that such executive officers, directors and 10% beneficial owners are affiliates.

 

Common Stock, par value $0.01 per share. Shares outstanding on March 16, 2012: 18,990,290 shares

 

Documents Incorporated by Reference

 

Portions of the definitive proxy statement for the Registrant’s Annual Meeting of Stockholders to be held on June 14, 2012, which the Registrant expects to file with the Securities and Exchange Commission within 120 days after December 31, 2011, are incorporated by reference into Part III of this report.

 

 

 



Table of Contents

 

GEOKINETICS INC.

 

FORM 10-K

 

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011

 

TABLE OF CONTENTS

 

Glossary of Certain Defined Terms

Cautionary Statement Regarding Forward-Looking Statements

 

PART I

Item 1.

Business

4

Item 1A.

Risk Factors

10

Item 1B.

Unresolved Staff Comments

24

Item 2.

Properties

24

Item 3.

Legal Proceedings

24

Item 4.

Mine Safety Disclosures

24

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

25

Item 6.

Selected Financial Data

26

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

43

Item 8.

Financial Statements and Supplementary Data

45

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

46

Item 9A.

Controls and Procedures

46

Item 9B.

Other Information

48

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

48

Item 11.

Executive Compensation

48

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

48

Item 13.

Certain Relationships and Related Transactions, and Director Independence

48

Item 14.

Principal Accounting Fees and Services

48

PART IV

Item 15.

Exhibits and Financial Statement Schedules

48

 

Signatures

51

 

 

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Glossary of Certain Defined Terms:

 

2002 Plan

 

2002 Stock Awards Plan

2007 Plan

 

2007 Stock Awards Plan

2010 Form 10-K

 

Annual Report on Form 10-K for the year ended December 31, 2010

2010 Plan

 

2010 Stock Awards Plan

May 242D

 

Two-dimensional

3D

 

Three-dimensional

4D

 

Four-dimensional

Amendment No. 1

 

Amendment to the RBC Revolving Credit Facility entered into on June 30, 2010

Amendment No. 2

 

Amendment to the RBC Revolving Credit Facility entered into on October 1, 2010

Amendment No. 3

 

Amendment to the RBC Revolving Credit Facility entered into on December 13, 2010

Amendment No. 4

 

Amendment to the RBC Revolving Credit Facility entered into on April 1, 2011

ASC

 

Accounting Standards Codification

ASU

 

Accounting Standard Update

Avista

 

Avista Capital Partners

CIT

 

CIT Group Equipment Financing, Inc.

Company

 

Geokinetics Inc., collectively with its subsidiaries

EBITDA

 

Earnings before interest, taxes, depreciation and amortization

Exchange Act

 

Securities Exchange Act of 1934, as amended

FASB

 

Financial Accounting Standards Board

Forbearance Agreement and Amendment No. 5

 

Agreement / Amendment entered into with the Whitebox Revolving Credit Facility lenders on May 24, 2011

GAAP

 

United States generally accepted accounting principles

Geokinetics

 

Geokinetics Inc., collectively with its subsidiaries

Grant Acquisition

 

Acquisition of Grant Geophysical, Inc. in September 2006

Holdings

 

Geokinetics Holdings USA, Inc.

IASB

 

International Accounting Standards Board

Lenders

 

Lenders party to the Whitebox Revolving Credit Facility, from time to time, and their respective successors, as permitted thereunder. References to “Lenders” include the original lenders party to the Forbearance Agreement and Amendment No. 5, as applicable

Levant

 

Levant America, S.A.

LIBOR

 

London InterBank Offered Rate

Multi-client

 

Multi-client seismic data acquisition and seismic data library business

NOCs

 

National oil companies

NYSE Amex

 

New York Stock Exchange Amex

Notes

 

9.75% Senior Secured Notes issued in December 2009, due December 2014

OBC

 

Ocean bottom cable

PGS

 

Petroleum Geo-Services ASA

PGS Onshore

 

Certain entities and assets formerly comprising PGS’s worldwide onshore seismic data acquisition and multi-client seismic data acquisition business

PNC

 

PNC Bank, National Association

PNC Credit Facility

 

Revolving Credit, Term Loan and Security Agreement with PNC

RBC

 

Royal Bank of Canada

RBC Revolving Credit Facility

 

Revolving credit and letters of credit facility entered into on February 10, 2010 with a group of lenders led by RBC

SEC

 

Securities and Exchange Commission

Securities Act

 

Securities Act of 1933, as amended

Trace Acquisition

 

Acquisition of Trace Energy Services, Ltd. in December 2005

Whitebox Advisors

 

Whitebox Advisors LLC, as administrative agent for the lenders under the Whitebox Revolving Credit Facility

Whitebox Revolving Credit Facility

 

Revolving credit facility entered into with the Lenders and Whitebox Advisors as the administrative agent initially via the assignment, on May 24, 2011, of the RBC Revolving Credit Facility rights and obligations. An amended and restated credit agreement was entered into with the Lenders on August 12, 2011

 

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Cautionary Statement Regarding Forward-Looking Statements

 

Unless the context otherwise requires, references in this annual report to “the Company,” “our company,” “the registrant,” “we,” “our,” “us,” and “Geokinetics” shall mean Geokinetics Inc. and its consolidated subsidiaries.

 

We have made in this report, and may from time to time otherwise make in other public filings, press releases and discussions with our management, forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act concerning our operations, economic performance and financial condition.  These forward-looking statements are often accompanied by words such as “believe,” “should,” “anticipate,” “plan,” “continue,” “expect,” “potential,” “scheduled,” “estimate,” “project,” “intend,” “seek,” “goal,” “may” and similar expressions.  These statements include, without limitation, statements about our ability to meet our short-term liquidity needs, our market opportunity, our growth strategy, competition, expected activities, future acquisitions and investments, and the adequacy of our available cash resources.  We urge you to read these statements carefully and caution you that matters subject to forward-looking statements involve risks and uncertainties, including economic, regulatory, competitive and other factors that may affect our business.  For such statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.  Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements.  Our actual results in future periods may differ materially from those projected or contemplated within the forward-looking statements as a result of, but not limited to, the following factors:

 

·                  our ability to raise capital, sell assets or implement operational efficiencies to meet our short-term liquidity needs;

·                  our ability to convert backlog into revenues and realize higher margins and improved cash flows;

·                  a decline in capital expenditures by oil and gas exploration and production companies;

·                  market developments affecting, and other changes in, the demand for seismic data and related services;

·                  the timing and extent of changes in the price of oil and gas;

·                  our future capital requirements and availability of financing on satisfactory terms;

·                  availability or increases in the price of seismic equipment;

·                  availability of crew personnel and technical personnel;

·                  competition;

·                  technological obsolescence of our seismic data acquisition equipment;

·                  the condition of the capital markets generally, which will be affected by interest rates, foreign currency fluctuations and general economic conditions;

·                  the effects of weather or other events that delay our operations;

·                  cost and other effects of uncertainties inherent in legal proceedings, settlements, investigations and claims, including liabilities which may not be covered by indemnity or insurance;

·                  governmental regulation; and

·                  the political and economic climate in the foreign or domestic jurisdictions in which we conduct business, including civil unrest, wars, regime changes, strikes, etc.

 

We have also discussed the risks to our business under the caption “Risk Factors” disclosed under Item 1A.  Given these risks and uncertainties, we can give no assurances that results projected in any forward-looking statements will in fact occur and therefore caution investors not to place undue reliance on them.  We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.  In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report and the documents incorporated by reference herein might not occur.

 

Available Information

 

All of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed with or furnished to the SEC are available free of charge through our Internet Website, http://www.geokinetics.com, as soon as reasonably practical after we have electronically filed such material with, or furnished it to, the SEC.  Other information contained on our Internet Website is available for informational purposes only and should not be relied upon for investment purposes nor is it incorporated by reference in this Annual Report on Form 10-K.  In addition, the SEC maintains an Internet Website containing reports, proxy and information statements, and other information filed electronically at www.sec.gov.  You may also read and copy this information, for a copying fee, at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.  Please call the SEC at 1-800-SEC-0330 to obtain information on the operation of the Public Reference Room.

 

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PART I

 

Item 1.  Business

 

Our Business

 

Our Company is a Delaware corporation incorporated on January 31, 1980.  We are a full-service, global provider of seismic data acquisition, processing and integrated reservoir geosciences services to the oil and natural gas industry.  We also provide clients access, via licenses, to our multi-client seismic data library.  As an industry leader in land, transition zone and shallow water (down to 500 feet water depths) OBC environments, we have the capacity to operate up to 25 seismic crews with approximately 200,000 channels of seismic data acquisition equipment worldwide and the ability to process seismic data collected throughout the world.  Crew count, configuration and location can change depending upon industry demand and requirements.

 

We provide a suite of geophysical services including acquisition of 2D, 3D, time-lapse 4D and multi-component seismic data surveys, data processing and integrated reservoir geosciences services for customers in the oil and natural gas industry, which include national oil companies, major international oil companies and independent oil and gas exploration and production companies worldwide.  Seismic data is used by our customers to identify and analyze drilling prospects, maximize drilling success, optimize field development and enhance production economics.  We also own a multi-client seismic data library whereby we maintain full or partial ownership of data acquired; client access is provided via licensing agreements.  Our multi-client data library consists of data covering various areas in the United States, Canada and Brazil.

 

For the years ended December 31, 2011, 2010 and 2009, we generated total revenues of $763.7 million, $558.1 million and $511.0 million, respectively.

 

Business Segments

 

We are currently organized into two reportable segments: seismic data acquisition and seismic data processing and integrated reservoir geosciences services.  We further break down our seismic data acquisition segment into three reporting units: North America proprietary seismic data acquisition, international proprietary seismic data acquisition and our multi-client seismic data acquisition business.  For the fiscal years ending December 31, 2011, 2010 and 2009, our North America proprietary seismic data acquisition services represented 22%, 23% and 14%, international proprietary seismic data acquisition services represented 60%, 62% and 81%, our multi-client seismic data acquisition business represented 16%, 13% and 2% and our seismic data processing and integrated reservoir geosciences services represented 2%, 2% and 3% of total revenues, respectively.  For 2012, while we intend to concentrate our efforts in selective international land markets, we continue to expect international proprietary seismic data acquisition revenues to provide the majority of total revenues.

 

Seismic Data Acquisition Services

 

We engage in seismic data acquisition services in land, transition zone and shallow water environments on a contract basis.  We acquire and process data under two basic business models: proprietary and multi-client.  Under the proprietary model, customers will typically bid or tender an acquisition and processing project and then award it based on factors such as price, safety record and crew availability.  When contracting proprietary services, clients are ultimately responsible to choose or approve the parameters of the project such as survey design and processing sequence and we act on behalf and at the direction of our customer.  Under the proprietary acquisition and processing services, our customers own the field and the data processing products we deliver.  Under the multi-client model, we perform the acquisition, processing and interpretation services based on our own parameters.  We own the product and we license the data to our customers under the terms and conditions of a data use agreement.  In most circumstances, prior to collecting and processing such data, we sell the rights on a non-exclusive basis to one or more customers, also known as pre-funding.  We then license the same data to other companies to generate additional revenues, referred to as “late sales”.  Multi-client projects have pre-funding levels of generally 80% to 100% of the estimated cash expenses.

 

Our equipment is capable of collecting 2D, 3D, time-lapse 4D and multi-component seismic data.  We own approximately 200,000 channels of seismic data acquisition equipment that can be configured to operate up to 25 crews worldwide.  Most of our seismic data acquisition services involve 3D surveys.  The crews are scalable and specially configured for each project; the number of individuals on each crew is dependent upon the size and nature of the seismic survey requested by the customer.

 

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On a typical land seismic survey, the seismic recording crew is supported by a surveying crew and a drilling crew. The surveying crew lays out the line locations to be recorded and identifies the sites for shot-hole placement.  The drilling crew creates the holes for the explosive charges that produce the necessary acoustical impulse.  A mechanical vibrating unit is used in areas where explosives are not utilized.  The seismic crew lays out the geophones and recording instruments, directs shooting operations and records the acoustical signal reflected from subsurface strata.  In the United States and Canada, the survey crew and drill crew are typically provided by third parties and supervised by our personnel.  Outside the United States and Canada, we perform our own surveying and drilling.  A fully staffed seismic land crew typically consists of at least one party manager, an observer, a head linesman and crew laborers.  The number of individuals on each crew is dependent upon the size and nature of the seismic survey and can be extensive in certain parts of the world.  We use helicopters to assist the crews in seismic data acquisition services in circumstances where such use will reduce overall costs and improve productivity.  A typical transition zone or OBC crew utilizes numerous support vessels and air guns as the energy source that produces the acoustical impulse needed to record seismic data.

 

Proprietary seismic data acquisition services contracts, whether bid or negotiated, provide for payment on either a turnkey or term (also referred to as “day-rate”) basis, or on a combination of both methods.  A turnkey contract provides for a fixed fee to be paid for data acquired.  Such a contract causes us to bear varying degrees of business interruption risk caused by weather delays and other hazards.  Our seismic data acquisition services are performed outdoors and are therefore subject to weather and seasonality.  Term contracts provide for payments based on agreed rates per units of time, which may be expressed in periods ranging from days to months.  This type of contract causes the customer to bear the majority of the business interruption risks.  When a combination of both turnkey and term methods is used, the risk of business interruption is shared by us and the customer.  In either case, progress payments are usually required unless it is expected the job can be accomplished in two weeks or less.  Our contracts for proprietary seismic data acquisition services are predominantly turnkey contracts.

 

For the years ended December 31, 2011, 2010 and 2009, seismic data acquisition services generated revenues of $755.1 million, $549.1 million and $500.3 million, respectively.  Of these revenues, for the year ended December 31, 2011, international proprietary seismic data acquisition operations accounted for 61% , North America proprietary seismic data acquisition operations accounted for 23% and multi-client seismic data acquisition operations accounted for 16%.  See note 13 to our consolidated financial statements for additional information on our segments.

 

Seismic Data Processing and Integrated Reservoir Geosciences Services

 

We provide a full suite of onshore and offshore proprietary seismic data processing and integrated reservoir geosciences solutions to complement our seismic data acquisition services.  Seismic data are processed to produce an accurate image of the earth’s subsurface using proprietary computer software and internally developed technologies.  Our seismic data processing and integrated reservoir geosciences activities are primarily undertaken at our centers in Houston, Texas, London, England and Calgary, Canada, with operations at satellite in-field processing locations in Mexico and Angola in support of our acquisition activities.  Advanced signal processing of 2D, 3D, time-lapse 4D and multi-component seismic data acquired by us, other industry contractors, as well as reprocessing of previously acquired legacy data, provides oil and gas industry clients with detailed subsurface information essential to reducing risk in their exploration and production activities.  We also offer our clients integrated reservoir services where our experts can combine the power of seismic, geologic, well and petrophysical information to provide detailed information of rock lithologies and fluid content at the reservoir level.  This integration of all sources of subsurface information has become particularly critical with the emergence of so-called resource, or shale, plays in North America and internationally since, in these plays, gross structural information is much less important than understanding physical rock properties such as fracture characterization and stress relationships at the reservoir formation level.

 

Projects are sourced worldwide with emphasis on 3D onshore and near-shore programs where our technology leverage is most effectively exercised.  North America resource plays and programs where multi-component data are acquired are particularly targeted so that both compressional and shear wave data components can be processed and integrated with complementary well and geologic data to extract extended subsurface information not available from compressional seismic data alone.  To provide information meaningful to engineers this information must, in the future, be delivered in depth (as opposed to travel-time domain).  We maintain an active program to provide accurate depth solutions. A strong bond exists between our multi-client and processing businesses to assure that our clients receive both quality acquisition and processing that maximizes the utility of our programs in the exploitation efforts.

 

The seismic data processing sector relies on rapid technology development and implementation to provide the increasing resolution and detail demanded by today’s complex hydrocarbon reservoirs.  We maintain a strong team of geoscientists to continually extend our technical solutions for these difficult subsurface problems and are particularly active

 

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in development of customized solutions for improved signal-noise data content, 3D subsurface velocity modeling and 3D imaging in time and depth, as well as extending our solutions for resource plays including multi-component processing, fracture characterization, fluid and rock property estimation.  As well as providing clients with effective solutions customized to their processing needs, we actively market our seismic data processing and integrated reservoir geosciences services in conjunction with our seismic data acquisition services to enhance total value provided to our customers.

 

Our Strengths

 

Leading provider with a balanced global market presence.  Our global diversity and exposure to both oil and natural gas exploration opportunities provide us with a balanced market presence, which increases new contract opportunities while reducing our sensitivity to individual markets and commodity price volatility.  We have the equipment and trained personnel to deploy up to 25 seismic crews throughout the world.  Our size and operating capability allow for improved crew and equipment utilization and the ability to service our customers across the globe.  Our long operating history and reputation for quality service encourages customers to continue to select us as their provider of seismic data acquisition services.

 

Specialized expertise in difficult environments and key high-growth markets.  We specialize in seismic data acquisition services in transition zones, shallow water (down to 500 feet water depth) OBC and complex land environments, which we believe to be underserved and one of the fastest growing segments of the overall seismic services industry.  We believe that our extensive experience operating in such complex and challenging areas, including our expertise in designing and utilizing special equipment customized for these environments, provides us a significant competitive advantage.  We also have experience operating in local markets within key high growth regions around the world, such as the United States, Latin America, and Australia.  In addition, we possess the expertise required to operate in challenging environments around the world, which positions us to potentially realize higher operating margins than we realize on more traditional land seismic projects.

 

Strong relationships with a globally diversified customer base.  We have strong, long-standing relationships with a diverse customer base and have experience working in over 30 countries.  We have been providing seismic data acquisition services to the petroleum industry for over 60 years.  Our global operating capability and sizable crew count allow us to leverage relationships with our customers and increase revenues by providing services throughout the world and tailoring crew size, count, configuration and location to meet industry demands and requirements.  Our customer base is diversified and it is not dependent on any one customer.  For the year ended December 31, 2011, one customer accounted for 15% of our total revenues. No other customers accounted for more than 10% of our total revenues.

 

Strong backlog that provides significant revenue visibility.  Our estimated backlog revenue increased 6% annually to $590.6 million at December 31, 2011 from $557.6 million at December 31, 2010.  The size of our backlog is due in part to our strong relationships with NOCs whose capital budgets are less dependent on commodity prices than many of the independent exploration and production companies. Our backlog at December 31, 2011 included $446.2 million, or approximately 76%, from international (excluding Canada) proprietary seismic data acquisition projects, $106.2 million, or approximately 18%, from North America (excluding Mexico) proprietary seismic data acquisition projects, $29.3 million, or approximately 5%, from our multi-client seismic data acquisition business in the United States, and $8.9 million, or approximately 1%, from our seismic data processing and integrated reservoir geosciences business.

 

Multi-client seismic data library.  As of December 31, 2011, the library consists of approximately 10,000 square miles of 3D data and 2,800 linear miles of 2D data.  We have commitments for approximately 1,150 square miles of 3D data and additional forecasted program which we expect to record during 2012.  We believe there continue to be significant opportunities in North America, specifically in liquids rich unconventional resource plays, for the continued expansion of our multi-client seismic data library business.  As we grow our multi-client seismic data library, we plan to continue to secure a significant portion of prefunded sales prior to commencing any multi-client project.

 

Highly experienced management team and strategic equity investors.  We draw on the global experience of our management team to maintain our market position and strong customer relationships.  Our senior executive management team has an average of over 25 years of relevant industry experience in the seismic services sector as well as in oil and gas exploration, with a demonstrated track record.  Our largest stockholder is Avista and its respective affiliates, which initially invested in us at the time of our merger with Grant Geophysical in 2006.  Avista brings significant experience as an investor in the oilfield service sector.  Our second largest stockholder is PGS, a leading geophysical services provider with deep industry knowledge.  PGS became our second largest stockholder as a result of the acquisition of PGS Onshore in 2010.

 

Our Strategy

 

Enhance asset utilization and operating efficiency.  During 2011 and the first quarter of 2012, we have more narrowly focused our land acquisition assets in countries with mature hydrocarbon basins which we believe will provide long term stable work with improved margins.  Within these concentrated land markets we can operate multiple crews with higher

 

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utilization of resources and improved overall returns.  We continue to market and operate our more mobile transition zone and shallow water OBC assets in a larger market as this sub-sector has less competition than the land market.

 

Maintain focus and specialization in profitable, high-potential markets.  To maximize profitability, we will continue to target our margin growth in areas in which we believe we have a competitive advantage, such as transition zones, shallow water (down to 500 feet water depths) OBC and complex land environments

 

Make strategic investments in our multi-client seismic data library.  We believe that opportunities exist for us to continue to build and expand our multi-client seismic data library in areas that will provide a high likelihood for future revenues.  We will continue to acquire multi-client seismic data by either using a joint venture partner when deemed prudent or on our own, with a particular near-term focus on the unconventional resource plays in the United States.

 

Provide a broad range of services.  We believe there are significant global opportunities in providing customers a broad range of seismic data services, from acquisition and processing to interpretation and management and partnering with E&P Companies for multi-client projects.  Customers are increasingly seeking integrated solutions to better evaluate known oil and gas deposits and improve the amount of recoverable hydrocarbons.  Given our size and technological capabilities, we believe we have the infrastructure to expand on these multiple service offerings that add value and efficiency for our customers.

 

Seasonal Seismic Recording Channel Demand and Overcapacity.  To complement our owned channel capacity for seasonal and project overcapacity demand we lease up to 10% to 30% of additional channels or seismic data acquisition equipment on a short term basis.

 

Industry Overview

 

Seismic surveys enable oil and gas companies to determine whether subsurface conditions are favorable for finding oil and natural gas accumulations and to determine the size and structure of previously identified oil and natural gas deposits.  Seismic surveys consist of the acquisition and processing of 2D, 3D, time-lapse 4D and multi-component seismic data, which is used to produce computer-generated, graphic cross-sections, maps and 3D images of the subsurface.  These resulting images are then analyzed and interpreted by geophysicists and used by oil and gas companies to assist in acquiring prospective oil and natural gas drilling rights, select drilling locations on exploratory prospects and to manage and develop producing reservoirs.

 

Seismic data is acquired by crews operating on land and in transition zone and marine environments.  Seismic data is generated by the propagation of sound waves near the earth’s surface by controlled energy sources, such as dynamite or vibration equipment.  The waves radiate into the earth and are reflected back to the surface and collected by data collection devices known in the industry as “geophones”.  Multiple geophones are strategically positioned, according to client requirements, and connected as a single recording channel or as multi-component recording channels to acquire data.  For OBC operations, an assembly of vertically oriented geophones and hydrophones connected by electrical wires typically is deployed on the sea floor to record and relay data to a seismic recording vessel.  Such systems were originally introduced to enable surveying in areas of obstructions (such as production platforms) or shallow water inaccessible to ships towing seismic streamers (submerged cables).  The data is subsequently processed by experienced and highly technically skilled geoscientists using advanced computing systems running proprietary software designed specifically to enhance the recorded signal by attenuating, to improve resolution and to produce an accurate image of the subsurface geological features.  3D seismic surveys collect far more information and generate significantly greater detail of the underlying reservoirs than 2D surveys.

 

The overall demand for seismic data and related seismic services is dependent upon spending by oil and gas companies for exploration, production, development and field management activities, which, in turn, is driven largely by present and expected future prices for oil and natural gas and the need to replenish drilling prospects and reserves.  This is impacted by supply and demand, global and local events, as well as political, economic and environmental considerations.  Demand for seismic data acquisition in North America is particularly driven by natural gas prices, with international demand typically driven by oil prices.  The overall demand for seismic data and related seismic services is dependent upon spending by oil and gas companies for exploration, production, development and field management activities, which, in turn, is driven largely by present and expected future prices for oil and natural gas and the need to replenish drilling prospects and reserves.  This is impacted by supply and demand, global and local events, as well as political, economic and environmental considerations.  Demand for seismic data acquisition in North America has been primarily driven by natural gas prices, with international demand typically driven by oil prices. Natural gas prices declined throughout 2010 and 2011.  The spot price for

 

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Henry Hub natural gas was $4.23 at December 31, 2010 and $2.98 at December 31, 2011. At March 9, 2012, the spot price for Henry Hub natural gas was $2.21 per MMBtu, and the twelve month strip, or the average of the next twelve months’ futures contract, was $2.86 per MMBtu at March 9, 2012.  Concerns about global economic growth have had a significant adverse impact on global financial markets and commodity prices.  Further, a relatively mild winter in the U.S. and higher inventory surplus has kept natural gas prices at lower levels.  These factors, together with weather, will likely remain key drivers in the natural gas market, with prices remaining at lower levels for the foreseeable futureOil prices have recovered from their lows in mid-2008 to early 2009.  The price of West Texas intermediate crude (“WTI”) increased from $89.84 at December 30, 2010, to $98.83 at December 30, 2011, reaching a high of $113.55 in May 2011. Prices since December 30, 2011 have since increased to $107.40 at March 9, 2012, primarily due to geo-political uncertainty in the Middle-East as well as improving U.S. economic data raising optimism that fuel demand will continue to grow.  Expectations are for oil prices to remain elevated for the foreseeable future.

 

Global energy demand growth.  We believe that long-term, overall global demand for energy will increase which will result in increased demand from oil and gas companies for seismic services.

 

Recent civil unrest in several of our markets.  During 2011, several governments in oil producing regions in North Africa and the Middle East experienced civil unrest.  Prior to the fourth quarter of 2011, we actively conducted business and had, or still have, equipment in several of these countries, including Libya, Tunisia, Algeria and Egypt.  This civil unrest, and the imposition of sanctions on some of these regimes by the United States in connection with the civil unrest, made the conduct of our business in these locations more difficult, and in some cases impossible, and led to the inability to utilize our equipment and the loss of business opportunities.

 

E&P capital spending.  The need to replace depleting reserves should encourage capital expenditures by oil and gas companies, which we expect will benefit the seismic services industry.  We believe that these companies, including many NOCs, remain under pressure to increase or replenish reserves and are looking to unconventional resource plays, transition zones, international locations and the optimization of current reserves with new technology to achieve these results.  Seismic data acquisition services are a key component of oil and gas capital expenditure programs.

 

Technological development.  The application and utilization of seismic services have considerably increased over the last several years as a result of significant technological advancements, such as the move from 2D to 3D and single-component to multi-component seismic data recording and processing.  Seismic services can now be applied to the entire sequence of exploration, development and production, as opposed to exploration only, allowing for a greater range of use for our services.  Additionally, surveys previously shot in 2D or single-component are often being reshot with newer techniques to give greater clarity to the subsurface.

 

Seasonality.  Weather patterns worldwide, such as hurricane and monsoon seasons, and certain environmental restrictions, such as those aimed at protecting endangered species, have an impact on asset utilization for seismic data acquisition services.

 

Regulatory environment.  In response to the oil spill in the Gulf of Mexico during 2010 and in connection with concerns raised related to the hydraulic fracturing (“fracking”) of unconventional resource plays, the United States Congress continues to consider a number of legislative proposals relating to the upstream oil and gas industry both onshore and offshore that could result in significant additional laws or regulations governing operations in the United States.  Additionally, governments around the world have become increasingly focused on similar regulatory matters which may result in significant changes in laws or regulations elsewhere.  While we do not provide seismic services in deepwater areas, our customers include national and international oil companies involved in deepwater drilling projects.  In the past we have conducted transition zone and OBC seismic acquisition surveys in the Gulf of Mexico, and may do so in the future.  Although it is not possible at this time to predict whether proposed legislation or regulations will be adopted, or how legislation or new regulation that may be adopted would impact our business, any such future laws and regulations could result in increased compliance costs or additional operating restrictions for our customers.  Additional costs or operating restrictions associated with legislation or regulations could have a material adverse effect on our customer’s operating results and cash flows, which could also negatively impact the demand for our services.  Conversely, capital that would have been previously dedicated to the Gulf of Mexico may be redirected onshore, which could positively impact demand for our services.

 

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Marketing

 

Our seismic data acquisition services and seismic data processing and integrated reservoir geosciences services are marketed from various offices around the world.  We currently maintain offices in North America, Latin America, Europe, and Asia Pacific, including our corporate headquarters in Houston, Texas, from which we market and/or perform services.

 

Seismic data acquisition services and seismic data processing and integrated reservoir geosciences services contracts are obtained either through competitive bidding in response to invitations to bid, or by direct negotiation with a prospective customer.  A significant portion of our contracts result from competitive bidding.  Contracts are awarded primarily on the basis of price, experience, availability, technological expertise and reputation for dependability and safety.

 

Our regional personnel communicate directly with existing and target customers during the bid preparation process.  With the involvement and review of senior management, bids are prepared by knowledgeable regional operations managers who understand their respective markets, customers and operating conditions.  Furthermore, the regional personnel are able to convey the superior technical services we provide and communicate the advantages of providing seismic data processing and interpretive services in conjunction with seismic data acquisition.  Most of our revenue is generated through repeat customer sales and new sales to customers referred by our existing and past clients.

 

Customers

 

For the year ended December 31, 2011, our top ten customers represented 54% of our consolidated revenue for the period.  Our largest customer in 2011 accounted for 15% of total revenue.  No other customers accounted for more than 10% of our total revenues. Because of the nature of our contracts and customers’ projects, our largest customers can change from year to year and the largest customers in any year may not be indicative of the largest customers in any subsequent year.

 

Backlog

 

We grew our estimated backlog revenue from $557.6 million at December 31, 2010 to $590.6 million at December 31, 2011.  Our backlog at December 31, 2011 included $446.2 million, or approximately 76%, from international (excluding Canada) proprietary seismic data acquisition projects, $106.2 million, or approximately 18%, from North America (excluding Mexico) proprietary seismic data acquisition projects, $29.3 million, or approximately 5%, from our multi-client seismic data acquisition business in the United States, and $8.9 million, or approximately 1%, from our seismic data processing and integrated reservoir geosciences business.  Of the total international proprietary seismic data acquisition backlog, $377.5 million, or approximately 85%, is with NOCs or partnerships including NOCs.  Furthermore, $132.2 million, or approximately 30%, of the international backlog is in shallow water transition zones and OBC environments.  We anticipate that approximately 81% of the backlog at December 31, 2011 will be completed during 2012 and approximately 14% will be completed in 2013, with the remainder to be completed in 2014.  This backlog consists of written orders or commitments believed to be firm.  Contracts for services are occasionally modified by mutual consent and in many instances can be cancelled by the customer on short notice without penalty.  As such, our backlog at any particular date may not be indicative of our actual operating results for any succeeding fiscal period.

 

Competition

 

The acquisition and processing of seismic data for the oil and natural gas industry are highly competitive businesses.  With low barriers to entry, we compete with various smaller local competitors in the various markets in which we operate.  Competition is based on the type and capability of equipment used to conduct seismic surveys and the availability of such equipment.  In addition to these factors, price, experience, availability, technological expertise and reputation for dependability and safety of a crew significantly affect a potential customer’s decision to award a contract to us or one of our competitors.  In addition, in the international markets in which we operate, we compete with various smaller local competitors.

 

Regulation

 

Our operations are subject to numerous international, federal, state and local laws and regulations.  These laws and regulations govern various aspects of operations, including the discharge of explosive materials into the environment, requiring the removal and clean-up of materials that may harm the environment or otherwise relating to the protection of the environment and access to private and governmental land to conduct seismic surveys.  We believe we have conducted our operations in substantial compliance with applicable laws and regulations governing our activities.

 

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Our Quality, Health, Safety and Environmental (“QHSE”) department is generally responsible for our meeting and remaining in compliance with certain regulatory requirements.  We have QHSE Advisors who maintain and administer these programs for our field personnel.  The costs of acquiring permits and remaining in compliance with environmental laws and regulations, title research, environmental studies, archeological surveys and cultured resource surveys are generally borne by our customers.

 

Although our direct costs of complying with applicable laws and regulations have historically not been material, the changing nature of such laws and regulations makes it impossible to predict the cost or impact of such laws and regulations on our future operations.  Additional United States or foreign government laws or regulations would likely increase the compliance and insurance costs associated with our customers’ operations.  Significant increases in compliance expenses for our customers could have a material adverse effect on our customers’ operating results and cash flows, which could also negatively impact the demand for our services.

 

Research and Development

 

We rely on certain proprietary information, proprietary software, trade secrets and confidentiality and licensing agreements to conduct our current operations.  We are continuously working to improve our technology and operating techniques, through internal development activities and working with our vendors to develop new technologies to maintain pace with industry innovation.  Our future success will be partly dependent on our ability to maintain and extend our technology base and preserve our intellectual property without infringing on the rights of any third parties.

 

Employees

 

At December 31, 2011, we had approximately 7,000 full time equivalent employees.  Some of our employees are a party to collective bargaining agreements in certain international locations.  We consider relations with our employees to be satisfactory.

 

Capital Expenditures

 

Our Board of Directors has approved a capital expenditure budget for 2012 of approximately $27.0 million, which is an increase of 9% from our capital expenditures in 2011. Subject to our liquidity limitations, we plan investments in 2012 to be primarily on expenditures to extend the useful life of equipment and facilities for our seismic data acquisition segment with a smaller portion targeted towards acquiring new equipment for our seismic data processing and integrated reservoir geosciences segment.

 

In addition, our Board of Directors has approved multi-client cash investments for 2012 of approximately $75.0 million subject to certain minimum pre-funding levels.  We expect our investments in 2012 to be primarily focused on the expansion of our existing multi-client data library interests in the Marcellus formation in Pennsylvania, the Woodford formation in Oklahoma, and in the Niobrara formation in Colorado and Wyoming.

 

Financial Information about Geographic Areas

 

For certain financial information about our significant geographic areas, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and notes 13 and 18 to our consolidated financial statements.

 

Item 1A.  Risk Factors

 

The following risk factors, which are not all-inclusive, should be carefully considered, together with the other information in this Form 10-K, in evaluating us.  If any of the following risks were to actually occur, our business, financial condition and results of operations could be materially affected.

 

Risks Related to our Business

 

We may be unable to maintain sufficient liquidity to meet our working capital, debt service, and other liquidity needs.

 

We are currently experiencing significant liquidity constraints, and we may not have sufficient liquidity to meet our anticipated working capital, debt service and other liquidity needs.  Although we have implemented certain strategic alternatives to address our liquidity issues, there can be no assurance that these efforts will be successful.  We are currently

 

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reviewing our alternatives and may adopt other strategies, such as refinancing or restructuring our indebtedness or capital structure.  For more information, see “Risks Related to our Indebtedness.”

 

Our business largely depends on the levels of exploration and development activity in the oil and natural gas industry.  A decrease in this activity caused by low oil and gas prices, reduced demand or other factors will have an adverse effect on our business, liquidity and results of operations.

 

Our business is substantially dependent upon the condition of the oil and natural gas industry and, in particular, the willingness of oil and gas companies to make capital expenditures for exploration, development and production operations.  The level of capital expenditures generally depends on the prevailing views of future oil and natural gas prices, which are influenced by numerous factors, including but not limited to:

 

·                  changes in United States and international economic conditions, including the length and severity of the recent recession and the effect of such recession on economic activity;

 

·                  demand for oil and natural gas;

 

·                  worldwide political conditions, particularly in significant oil-producing regions such as the Middle East, West Africa and Latin America;

 

·                  actions taken by the Organization of Petroleum Exporting Countries, or OPEC;

 

·                  the availability and discovery rate of new oil and natural gas reserves;

 

·                  the rate of decline of existing and new oil and gas reserves;

 

·                  the cost of exploration for, and production and transportation of, oil and natural gas;

 

·                  the ability of oil and gas companies to generate funds or otherwise obtain external capital for exploration, development, construction and production operations;

 

·                  the sale and expiration dates of leases in the United States and overseas;

 

·                  technological advances affecting energy exploration, production, transportation and consumption;

 

·                  weather conditions;

 

·                  environmental or other government regulations both domestic and foreign;

 

·                  domestic and foreign tax policies; and

 

·                  the pace adopted by foreign governments for the exploration, development and production of their oil and gas reserves.

 

Historically, demand for our services has been sensitive to the level of exploration spending by oil and gas companies.  A sustained period of low drilling and production activity, low commodity prices or reductions in industry budgets could reduce demand for our services and would likely have a material adverse effect on our business, financial condition or results of operations.

 

We operate under hazardous conditions that subject us and our employees to risk of damage to property or personal injury and limitations on our insurance coverage may expose us to potentially significant liability costs.

 

Our activities are often conducted in dangerous environments and include hazardous conditions, including operation of heavy equipment, the detonation of explosives, and operations in remote areas of developing countries.  Operating in such environments, and under such conditions, carries with it inherent risks, such as loss of human life or equipment, as well as the risk of downtime or reduced productivity resulting from equipment failures caused by an adverse operating environment.  These risks could cause us to experience equipment losses, injuries to our personnel and interruptions in our business.

 

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Although we maintain what we believe is prudent insurance protection, our insurance contains certain coverage exclusions and policy limits and we cannot assure that our insurance will be sufficient or adequate to cover all losses or liabilities or that insurance will continue to be available to us or available to us on acceptable terms.  Further, we may experience difficulties in collecting from insurers as such insurers may deny all or a portion of our claims for insurance coverage.  A successful claim for which we are not fully insured, or which is excluded from coverage or exceeds the policy limits of our applicable insurance could have a material adverse effect on our financial condition.  Moreover, we do not carry business interruption insurance with respect to our operations.

 

Historically, we have been dependent on a few customers operating in a single industry; the loss of one or more customers could adversely affect our financial condition and results of operations.

 

Our customers are engaged in the oil and natural gas drilling business throughout the world.  Historically, we have been dependent upon a few customers for a significant portion of our revenue.  For the years ended December 31, 2011, 2010 and 2009, our top ten customers collectively represented approximately 54%, 50%, and 70% of total revenues, respectively.  Our three largest customers in 2011, 2010 and 2009 accounted for approximately 29%, 25%, and 45% of total revenues, respectively.  This concentration of customers may increase our overall exposure to credit risk, and customers will likely be similarly affected by changes in economic and industry conditions.  If any of these significant clients were to terminate their contracts or fail to contract for our services in the future because they are acquired, alter their exploration or development strategy, or for any other reason, our results of operations could be adversely affected.

 

We have invested, and expect to continue to invest in acquiring and processing seismic data for multi-client surveys and for our seismic data library without knowing precisely how much of this seismic data we will be able to sell or when and at what price we will be able to sell such data.

 

Multi-client surveys and the resulting seismic data library are an increasingly important part of our business and our future investments.  We invest significant amounts of money in acquiring and processing seismic data that we own.  By making such investments, we are exposed to the following risks:

 

·                  We may not fully recover our costs of acquiring, processing and interpreting seismic data through future sales. The amounts of these data sales are uncertain and depend on a variety of factors, many of which are beyond our control.

 

·                  The timing of these sales is unpredictable and can vary greatly from period to period. The costs of each survey are capitalized and then amortized over the expected useful life of the data. This amortization will affect our earnings and when combined with the sporadic nature of sales, will result in increased earnings volatility.

 

·                  Regulatory changes that affect the ability of oil and gas companies to drill, either generally or in a specific location where we have acquired seismic data, could materially adversely affect the value of the seismic data contained in our library. Technology changes could also make existing data sets obsolete. Additionally, each of our individual surveys has a limited book life based on its location and interest of oil and gas companies to explore in prospecting for reserves in such location, so a particular survey may be subject to a significant decline in value beyond our initial estimates.

 

·                  The value of our multi-client seismic data library could be significantly adversely affected if any material adverse change occurs in the general prospects for oil and gas exploration, development and production activities.

 

·                  The cost estimates upon which we base our pre-commitments of funding could be wrong. The result could be losses that have a material adverse effect on our financial condition and results of operations. These pre-commitments of funding are subject to the creditworthiness of our clients. In the event that a client refuses or is unable to pay its commitment, we could lose a material amount of money.

 

Any reduction in the market value of such data will require us to write down its recorded value, which could have a material adverse effect on our results of operations.

 

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The seismic data acquisition services industry is capital intensive and sources of cash to finance our capital expenditures may not always be available. If financing is not available, our results of operations will be negatively affected.

 

Seismic data acquisition equipment is continually being improved with new technology.  In order to remain competitive, we must continue to invest additional capital to maintain, upgrade and expand our seismic data acquisition capabilities.  Seismic data acquisition equipment is expensive and our ability to operate and expand our business operations is dependent upon the availability of internally generated cash flow and financing alternatives.  Such financing may consist of bank or commercial debt, equity or debt securities or any combination thereof.  There can be no assurance that we will be successful in obtaining sufficient capital to upgrade and expand our current operations through cash from operations or additional financing or other transactions if and when required on terms acceptable to us.  Due to the uncertainties surrounding the changing market for seismic services, increases in capital and technological requirements, and other matters associated with our operations, we are unable to estimate the amount or terms of any financing that we may need to acquire, upgrade and maintain seismic equipment.  If we are unable to obtain such financing, if and when needed, we may be forced to curtail our business objectives, and to finance our business activities with only such internally generated funds as may then be available.

 

Our high level of fixed costs can leave us vulnerable to downturns in revenues, which can result in losses.

 

We are subject to high fixed costs which primarily consist of depreciation, maintenance expenses associated with our seismic data acquisition, processing and interpretation equipment and certain crew costs.  Extended periods of significant downtime or low productivity caused by reduced demand, weather interruptions, equipment failures, permit delays or other causes could negatively affect our results and have a material adverse effect on our financial condition and results of operations because we will not be able to reduce our fixed costs as fast as revenues decline.

 

We face intense competition in our business that could result in downward pricing pressure and the loss of market share.

 

Competition among seismic contractors historically has been, and likely will continue to be, intense.  Competitive factors have in recent years included price, crew experience, equipment availability, technological expertise and reputation for quality and dependability.  We also face increasing competition from nationally-owned companies in various international jurisdictions that operate under less significant financial constraints than those we experience.  Additionally, the seismic data acquisition services business is extremely price competitive and has a history of protracted periods where seismic contractors under financial duress bid jobs below cost and therefore adversely impact industry pricing.  Competition from these and other competitors could result in downward pricing pressure and the loss of market share.

 

We rely on a limited number of key suppliers for specific seismic services and equipment. Loss of any of these suppliers could have a material adverse effect on our business.

 

We depend on a limited number of third parties to supply us with specific seismic services and equipment.  From time to time, increased demand for seismic data acquisition services has decreased the available supply of new seismic equipment, resulting in extended delivery dates on orders.  Any delay in obtaining equipment could delay our implementation of additional crews and restrict the productivity of our existing crews, adversely affecting our business and results of operations.  In addition, any adverse change in the terms of our supplier arrangements could affect our results of operations.

 

Revenue derived from our projects may not be sufficient to cover our costs of completing those projects or may not result in the profit we anticipated when we entered into the contract. Therefore, our results of operations may be adversely affected.

 

Our revenue is determined, in part, by the price we receive for our services, the productivity of our crew and the accuracy of our cost estimates.  Our crew’s productivity is partly a function of external factors, such as weather and third party delays, over which we have no control.  In addition, cost estimates for our projects may be inadequate due to unknown factors associated with the work to be performed and market conditions, resulting in cost over-runs.  If our crew encounters operational difficulties or delays, or if we have not correctly priced our services, our results of operation may vary, and in some cases, may be adversely affected.

 

Many of our projects are performed on a turnkey basis where a defined amount and scope of work is provided by us for a fixed price and additional work, which is subject to client approval, is billed separately.  The revenue, cost and gross profit realized on a turnkey contract can vary from our estimated amount because of changes in job conditions, variations in labor and equipment productivity from the original estimates, and the performance of subcontractors.  Turnkey contracts may also cause us to bear substantially all of the risks of business interruption caused by weather delays and other hazards.  These

 

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variations, delays and risks inherent in billing clients at a fixed price may result in us experiencing reduced profitability or losses on projects.

 

Our clients could delay, reduce or cancel their commitments or service contracts with us on short notice, which may lead to lower than expected demand and revenues.

 

Our estimated backlog revenue consists of written orders or commitments for our services that we believe to be firm.  We estimate our total seismic data acquisition and seismic data processing and integrated reservoir geosciences services revenue backlog to be $590.6 million at December 31, 2011.  Our backlog at December 31, 2011 included $446.2 million, or approximately 76%, from international proprietary seismic data acquisition projects, $106.2 million, or approximately 18%, from North America proprietary seismic data acquisition projects, $29.3 million, or approximately 5%, from multi-client seismic data acquisition projects in the United States, and $8.9 million, or approximately 1%, from our seismic data processing and integrated reservoir geosciences business.  It is anticipated that approximately 81% of the backlog at December 31, 2011 will be completed in 2012, approximately 14% to be completed in 2013, with the remainder to be completed in 2014.  Backlog levels vary during the year depending on the timing of the completion of certain projects and when new projects are awarded and contracts are signed.  Because of potential changes in the scope or schedule of our clients’ projects, we cannot predict with certainty when or if our backlog will be realized.  In addition, the contracts in our backlog are cancelable by the client.  Material delays, payment defaults or cancellations could reduce the amount of backlog currently reported, and, consequently, could inhibit the conversion of that backlog into revenue which may materially affect our financial condition, results of operations and cash flows.

 

Our agreements with our clients may not adequately protect us from unforeseen events or address all issues that could arise with our clients.  The occurrence of unforeseen events, or disputes with clients not adequately addressed in the contracts could result in increased liability, costs and expenses associated with any given project.

 

We enter into master service agreements with many of our clients which allocate certain operational risks.  For example, we seek to minimize the risk of delays through the inclusion of “standby rate” provisions which provide for payment to us of a reduced rate for a limited amount of time if the weather conditions or certain other factors outside of our control prevent us from recording data.  Despite the inclusion of risk allocation provisions in our agreements, our operations may be affected by a number of events that are unforeseen or not within our control.  We cannot assure you that our agreements will adequately protect us from each possible event. If an event occurs which we have not contemplated or otherwise addressed in our agreement, we, and not our client, will likely bear the increased cost or liability.  To the extent our agreements do not adequately address these and other issues, or we are not able to successfully resolve resulting disputes, we may incur increased liability, costs and expenses.

 

We may be held liable for the actions of our subcontractors.

 

We often work as the general contractor on seismic data acquisition surveys and consequently engage a number of subcontractors to perform services and provide products.  While we obtain contractual indemnification and insurance covering the acts of these subcontractors, and require the subcontractors to obtain insurance for our benefit, there can be no assurance we will not be held liable for the actions of these subcontractors.  In addition, subcontractors may cause damage or injury to our personnel and property that is not fully covered by insurance.

 

Our results of operations can be significantly affected by currency fluctuations.

 

Because we derive a substantial amount of our revenue from sales internationally, we are subject to risks relating to fluctuations in currency exchange rates.  Fluctuations in the exchange rate of the U.S. dollar against such other currencies may, in future periods, have a significant effect upon our results of operations.  While we attempt to reduce the risks associated with such exchange rate fluctuations, we cannot assure you that we will be effective in doing so or that fluctuations in the value of the currencies in which we operate will not materially affect our results of operations in the future.

 

Our operations outside of the United States are subject to additional political, economic, and other uncertainties that could adversely affect our business, financial condition, or results of operations, or cash flows, and our exposure to such risks will increase as we expand our international operations.

 

Our international proprietary operations are a significant part of our total operations.  For the years ended December 31, 2011, 2010 and 2009, 60%, 62%, and 81%, respectively, of our total revenues were derived outside of the U.S. and Canada.  Our operations outside of the United States are subject to risks inherent in foreign operations, including but not limited to:

 

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·                  government instability, which can cause investment in capital projects by our potential clients to be withdrawn or delayed, reducing or eliminating the viability of some markets for our services;

 

·                  potential expropriation, seizure, nationalization or detention of assets;

 

·                  difficulty in repatriating foreign currency received in excess of local currency requirements;

 

·                  civil uprisings, riots and war, which can make it unsafe to continue operations, adversely affect both budgets and schedules and expose us to losses;

 

·                  availability of suitable personnel and equipment, which can be affected by government policy, or changes in policy, which limit the importation of qualified crewmembers or specialized equipment in areas where local resources are insufficient;

 

·                  decrees, laws, regulations, interpretation and court decisions under legal systems, which are not always fully developed and which may be retroactively applied and cause us to incur unanticipated and/or unrecoverable costs as well as delays which may result in real or opportunity costs;

 

·                  compliance with tax, employment, immigration and labor laws for employees living abroad or traveling abroad;

 

·                  foreign taxes, including withholding of payroll taxes; and

 

·                  terrorist attacks, including personal harm to our personnel.

 

As an example of the operational risks associated with our international operations, as a result of the civil unrest in Libya, we have been unable to operate our business or utilize our equipment in Libya since the first quarter of 2011.  As an example of certain international compliance risks, we have recorded a provision at December 31, 2011 for the potential liability for employee related taxes for third country nationals performing work for the Company in certain countries in which it operated.

 

As a company subject to compliance with the Foreign Corrupt Practices Act (the “FCPA”) and the UK Bribery Act of 2010 (the “UK Bribery Act”), our business may suffer because our efforts to comply with these laws could restrict our ability to do business in foreign markets relative to our competitors who are not subject to them.  Any determination that we or our foreign agents or joint venture partners have violated the FCPA or the UK Bribery Act may adversely affect our business and operations.

 

We and our local partners operate in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices.  We may be subject to competitive disadvantages to the extent that our competitors are able to secure business, licenses or other preferential treatment by making payments to government officials and others in positions of influence or using other methods that U.S. law and regulations prohibit us from using.

 

As a U.S. corporation, we are subject to the regulations imposed by the FCPA, which generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business.  In particular, we may be held liable for actions taken by our strategic or local partners even though our partners are not subject to the FCPA.  Any such violations could result in substantial civil and/or criminal penalties and might adversely affect our business, results of operations or financial condition.  In addition, our ability to continue to work in such foreign markets could be adversely affected if we were found to have violated certain U.S. laws, including the FCPA.

 

The UK Bribery Act, which became effective in 2011, is broader in scope than the FCPA and applies to public and private sector corruption and contains no facilitating payments exception.

 

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We are subject to compliance with stringent environmental laws and regulations that may expose us to significant costs and liabilities.

 

Our operations are subject to stringent federal, provincial, state and local environmental laws and regulations in the United States and foreign jurisdictions relating to environmental protection.  These laws and regulations may impose numerous obligations that are applicable to our operations including:

 

·                  the acquisition of permits before commencing regulated activities; and

 

·                  the limitation or prohibition of seismic activities in environmentally sensitive or protected areas such as wetlands or wilderness areas.

 

Numerous governmental authorities, such as the U.S. Environmental Protection Agency (“EPA”) and analogous state agencies in the United States and governmental bodies with control over environmental matters in foreign jurisdictions, have the power to enforce compliance with these laws and regulations and any permits issued under them, oftentimes requiring difficult and costly actions.  Failure to comply with these laws, regulations and permits may result in the assessment of administrative, civil and criminal penalties, the imposition of remedial obligations and the issuance of injunctions limiting or preventing some or all of our operations.

 

There is inherent risk of incurring significant environmental costs and liabilities in our operations due to our controlled storage, use and disposal of explosives.  Although we believe that our safety procedures for handling and disposing of explosives comply with the standards prescribed by applicable laws and regulations, the risk of accidental injury from these materials cannot be completely eliminated.  In the event of an accident, we could be held liable for any damages that result or we could be penalized with fines, and any liability could exceed the limits of or fall outside our insurance coverage.

 

Current or future distressed financial conditions of customers could have an adverse impact on us in the event these customers are unable to pay us for the services we provide.

 

Some of our customers are experiencing, or may experience in the future, severe financial problems that have had or may have a significant impact on their creditworthiness.  Although we perform ongoing credit evaluations of our customers’ financial conditions, we generally require no collateral from our customers.  We cannot provide assurance that one or more of our financially distressed customers will not default on their obligations to us or that such a default or defaults will not have a material adverse effect on our business, financial position, results of operations, or cash flows.  Furthermore, the bankruptcy of one or more of our customers, or some other similar proceeding or liquidity constraint, might make it unlikely that we would be able to collect all or a significant portion of amounts owed.  In addition, such events might force such customers to reduce or curtail their future use of our products and services, which could have a material adverse effect on our results of operations and financial condition.

 

Our seismic data acquisition services revenues are subject to seasonal conditions.

 

Our seismic data acquisition services are performed outdoors and are therefore subject to seasonality.  Shorter winter days and adverse weather negatively impact our ability to provide services in certain regions.  Additionally, while we plan for our international operations to take place during favorable seasons, we have limited control over the actual timing of these operations due to the extensive planning, preparation and permits required to perform a seismic survey in certain areas, which may cause our operations to be delayed and result in additional costs.

 

We may be unable to retain and attract management and skilled and technically knowledgeable employees.

 

Our continued success depends upon retaining and attracting highly skilled employees. A number of our employees possess many years of industry experience and are highly skilled and our inability to retain such individuals could adversely affect our ability to compete in the seismic service industry.  We may face significant competition for such skilled personnel, particularly during periods of increased demand for seismic services.  Although we utilize employment agreements, stock-based compensation and other incentives to retain certain of our key employees, there is no guarantee that we will be able to retain these personnel.

 

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We rely on certain proprietary information, proprietary software, trade secrets and confidentiality and licensing agreements to conduct our current operations.

 

We rely on certain proprietary information, proprietary software, trade secrets and confidentiality and licensing agreements to conduct our current operations.  We are continuously working to improve our technology and operating techniques, through internal development activities and working with our vendors to develop new technologies to maintain pace with industry innovation.  Our future success will be partly dependent on our ability to maintain and extend our technology base and preserve our intellectual property without infringing on the rights of any third parties.  There can be no assurance that we will be successful in protecting our intellectual property or that our competitors will not develop technologies that are substantially equivalent or superior to our technologies.

 

Our operating results from seismic data acquisition services can be significantly impacted from period to period due to a change in the timing of a few large jobs occurring at any one time.

 

We have the capacity to field up to 25 seismic data acquisition crews.  However, in any given period, we could have idle crews which result in a significant portion of our revenues, cash flows and earnings coming from a relatively small number of crews.  Additionally, due to location, service line or particular job, some of our individual crews may achieve results that are a significant percentage of consolidated operating results.  Should one or more of these crews experience significant changes in timing, our financial results are subject to significant variations from period to period.  Factors that may result in these changes in timing include, but are not limited to, weather, permits, customer requirements and political unrest.

 

Our operations are subject to delays related to obtaining land access rights from third parties which could affect our results of operations.

 

Our seismic data acquisition operations could be adversely affected by our inability to timely obtain access to both public and private land included within a seismic survey.  We cannot begin surveys on property without obtaining permits from certain governmental entities as well as the permission of the parties who have rights to the land being surveyed.  In recent years, it has become more difficult, costly and time-consuming to obtain access rights as drilling activities have expanded into more populated and protected areas.  Additionally, while land owners generally are cooperative in granting access rights, some have become more resistant to seismic and drilling activities occurring on their property and stall or refuse to grant these rights for various reasons.  In our multi-client services business, we acquire data sets pertaining to large areas of land.  Consequently, if we do not obtain land access rights from a specific land owner, we may not be able to provide a complete survey for that area.  The failure to redact or remove the seismic information relating to mineral interests held by non-consenting third parties could result in claims against us for seismic trespass.  In addition, governmental entities do not always grant permits within the time periods expected.  Delays associated with obtaining such permits and significant omissions from a survey as a result of the failure to obtain consents could have a material adverse effect on our financial condition and results of operations.

 

Our results of operations could be adversely affected by asset impairments.

 

We periodically review our portfolio of equipment and intangible assets, including our multi-client seismic data library, for impairment.  If the future cash flows anticipated to be generated from these assets falls below net book value we may be required to write down their value.  If we are forced to write down the value of our intangible assets or equipment, these non-cash asset impairments could negatively affect our results of operations in the period in which they are recorded.

 

The cyclical nature of, or a prolonged downturn in, our industry, can affect the carrying value of our long-lived assets and negatively impact our results of operations.

 

We are required to annually assess whether the carrying value of long-lived assets has been impaired, or more frequently if an event occurs or circumstances change which could indicate the carrying amount of an asset may not be recoverable.  Recoverability is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset.  If management determines that the carrying value of our long-lived assets may not be recoverable, our results of operations could be impacted by non-cash impairment charges.  As a result of our September 30, 2011, goodwill impairment analysis, we recorded goodwill impairment charges totaling $132.4 million for the year ended December 31, 2011, which are included in asset impairments in our consolidated statement of operations.  At December 31, 2011, we had no goodwill.

 

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There are inherent limitations in all control systems and failure of our controls and procedures to detect error or fraud could seriously harm our business and results of operations.

 

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal controls and disclosure controls will prevent all possible error and all fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of our controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected.  These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.  Further, controls can be circumvented by the individual acts of some persons or by collusion of two or more persons.  The design of any system of controls is based in part upon the likelihood of future events, and there can be no assurance that any design will succeed in achieving our intended goals under all potential future conditions.  Over time, a control may become inadequate because of changes in conditions or the degree of compliance with our policies or procedures may deteriorate.  Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur without detection.

 

We have identified material weaknesses in our internal controls.  Material weaknesses in our internal controls affect our ability to ensure timely and reliable financial reports and our ability to attest to the effectiveness of our internal controls.

 

A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.  During management’s review of our internal controls as of December 31, 2011, control deficiencies that constituted a material weakness related to the following was identified:

 

·      Financial Close Process:  Controls over our financial close process were deficient in areas related to accrued liabilities, goodwill impairment  and accounting for multi-client seismic data library.  These deficiencies resulted from difficulties in accumulating complete and accurate information to estimate certain  liabilities, inadequate review of work performed by third parties and material post-closing adjustments related to accounting for multi-client seismic data library resulting from difficulties in remediating deficiencies in time to allow us to assess the effectiveness of the controls  as of December 31, 2011 due to the timing in which we formalized our controls and procedures related to this area.

 

As of December 31, 2010, management identified material weaknesses in our entity level controls (control environment) and our corporate financial reporting process.  Throughout 2011, management was actively engaged in the implementation of aggressive remediation efforts to address the material weaknesses, as well as other areas of risk.  Key components of the comprehensive remediation program included the following:

 

·      Control Environment. We hired experienced personnel in key positions in our control environment.  These included a Chief Financial Officer (30 years of experience), a Chief Accounting Officer (26 years of experience), a Chief Information Officer (31 years of experience), a Vice President of Finance and Treasurer (16 years of experience), a Vice President of Tax (16 years of experience), a Corporate Controller (20 years of experience), a Director of Internal Audit (40 years of experience) and a Corporate Tax Manager (28 years of experience).  These personnel have extensive experience in the design, implementation and enforcement of an effective control environment.

 

·      Financial Reporting Process.  We reorganized and began to upgrade the skill sets of the global accounting team.  Additionally, we implemented uniform global accounting policies and procedures and improved the transparency of our financial reporting process through enhancements to our financial reporting system.  During the third and fourth quarters of 2011, we built on the implementation of these policies and procedures, including improved month-end close processes and improved reporting requirements from our global accounting organization.  Finally, we continued to make further improvements to our financial reporting system.

 

Management believes that the actions taken throughout 2011 and the resulting improvement in controls remedied the material weakness associated with our control environment identified as of December 31, 2010.

 

We are committed to continuing to improve our internal control processes and will continue to diligently and vigorously review our financial reporting control and procedures.  As we continue to evaluate and work to improve our internal control over financial reporting, we may decide to take additional measures to address our control environment.  However, we cannot be certain that the measures undertaken will be sufficient to address any deficiencies identified or ensure that our internal control over financial reporting is effective.  If we are unable to provide reliable and timely internal and external financial reports, our business and prospects could suffer material adverse effects.  In addition, we may in the future identify further material weaknesses or significant deficiencies in our internal control over financial reporting.

 

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Climate change legislation or regulations could result in increased operating costs and reduced demand for the oil and gas our clients intend to produce and so adversely affect the demand of our services.

 

On December 15, 2009, the EPA officially published its findings that emissions of carbon dioxide, methane and other GHGs present an endangerment to public health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth’s atmosphere and other climatic changes.  These findings open the door for the EPA to adopt and implement regulations that would restrict emissions of GHGs under existing provisions of the federal Clean Air Act.  On June 3, 2010, the EPA published its so-called GHG tailoring rule that begins the phase in of federal prevention of significant deterioration (PSD) permit requirements, for new sources and modifications, and Title V operating permits, for all sources that have the potential to emit specific quantities of GHGs.  On October 30, 2009, the EPA published a final rule requiring the reporting of GHG emissions from specified large GHG emission sources in the United States beginning in 2011 for emissions occurring in 2010.  On November 30, 2010, the EPA published its amendments to the GHG reporting rule to include onshore and offshore oil and natural gas production facilities and onshore oil and natural gas processing, transmission, storage and distribution facilities, which may include facilities our clients operate.  Reporting of GHG emissions from such facilities will be required on an annual basis beginning in 2012 for emissions occurring in 2011.

 

Although the federal government is unlikely to adopt legislation to reduce emissions of GHGs, a number of states have taken measures to reduce GHG emission levels, which may include the development of GHG emission inventories and/or cap and trade programs.  Most of these cap and trade programs require major sources of emissions or major producers of fuels to acquire and surrender emission allowances.  The number of allowances available for purchase is reduced each year in an effort to achieve the overall GHG emission reduction goal.  These allowances would be expected to escalate significantly in cost over time.

 

The adoption and implementation of legislation or regulatory programs imposing reporting obligations on, or limiting emissions of GHGs from, our customers’ equipment and operations could curtail their activities, including the services we provide.

 

Significant physical effects of climatic change have the potential to damage our facilities, disrupt our production activities and cause us to incur significant costs in preparing for or responding to those effects.

 

Climate change could have an effect on the severity of weather (including hurricanes and floods), sea levels, the arability of farmland, and water availability and quality.  If such effects were to occur, our seismic acquisition operations have the potential to be adversely affected.  Potential adverse effects could include damages to our facilities from powerful winds or rising waters in low-lying areas, disruption of our production activities either because of climate-related damages to our facilities in our costs of operation potentially arising from such climatic effects, less efficient or non-routine operating practices necessitated by climate effects or increased costs for insurance coverage in the aftermath of such effects.  Significant physical effects of climate change could also have an indirect effect on our financing and operations by disrupting the transportation or process-related services provided by midstream companies, service companies or suppliers with whom we have a business relationship.  We may not be able to recover through insurance some or any of the damages, losses or costs that may result from potential physical effects of climate change.

 

Federal legislation and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays.

 

Hydraulic fracturing is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations.  The process involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production.  The process is typically regulated by state oil and gas commissions but is not currently subject to regulation at the federal level.  The EPA has commenced a study of the potential environmental impacts of hydraulic fracturing activities, with results of the study anticipated to be available by late 2012, and a committee of the U.S. House of Representatives is also conducting an investigation of hydraulic fracturing practices.  Legislation has been introduced before Congress to provide for federal regulation of hydraulic fracturing and to require disclosure of the chemicals

 

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used in the fracturing process. In addition, some states have adopted, and other states are considering adopting, regulations that could restrict hydraulic fracturing in certain circumstances.  For example, in December 2010, New York imposed a de facto moratorium on the issuance of permits for high-volume, horizontal hydraulic fracturing until state-administered environmental studies are finalized.  The New York Department of Environmental Conservation, or NYDEC, issued a Revised Supplemental Generic Environmental Impact Statement in September 2011, as well as proposed regulations for high-volume hydraulic fracturing.  NYDEC accepted public comment on both, with the comment period ending January 11, 2012.  The final environmental study and regulations are expected in late 2012.  Further, Pennsylvania has adopted a variety of regulations limiting how and where fracturing can be performed.  Effective February 5, 2011, Pennsylvania requires operators to disclose all additives used in hydraulic fracturing fluids and the names and concentrations of chemicals subject to Occupational Safety and Health Administration, or OSHA, Hazard Communication requirements.

 

On August 23, 2011, the EPA published in the Federal Register a proposed rule to establish new air emission controls for oil and natural gas production and natural gas processing operations.  The new emission standards seek to reduce volatile organic compound, or VOC, emissions, including a 95 percent reduction in VOCs emitted during the construction or modification of hydraulically-fractured wells.  The EPA received public comment and conducted public hearings regarding the proposed rules and must take final action on them by April 3, 2012.  In addition, on October 20, 2011, the EPA announced its intention to develop federal pre-treatment standards for wastewater discharges associated with hydraulic fracturing activities.  If adopted, the new pretreatment rules will require coalbed methane and shale gas operations to pretreat wastewater before transferring it to treatment facilities.  Proposed rules are expected in 2013 for coalbed methane and 2014 for shale gas.

 

A portion of our seismic operations relate to the development of wells that will be subject to hydraulic fracturing.  If new laws or regulations that significantly restrict hydraulic fracturing are adopted, such legal requirements the demand for our services will be reduced.

 

Risks Related to our Indebtedness

 

We have substantial working capital and other liquidity needs, including for payments of interest on our Whitebox Revolving Credit Facility and the Notes, that we may be unable to satisfy.  Any strategies we may pursue to address our working capital and other liquidity needs may be unsuccessful or may not permit us to meet scheduled debt service or other obligations, which could cause us to default on our obligations and further impair our liquidity.

 

During 2011, we continued to incur operating losses in our business units primarily due to delays in project commencements, low international asset utilization and the suspension at the end of the third quarter of one of our seismic contracts in Mexico due to a lift boat incident, which has since resumed operations.  These events have caused a reduction in our available liquidity and we may not have the ability to generate sufficient cash flows from operations and, therefore, sufficient liquidity to meet our anticipated working capital, debt service and other liquidity needs.  Since the fourth quarter of 2011, we have implemented certain strategic alternatives to address our liquidity issues and high debt levels.  These efforts include, among others, a focus on cost reductions, the suspension of certain activities around the world where we had operating losses, the identification of additional assets for potential sale, centralization of certain processes to provide a higher level of control over costs and a focus on bidding for services that do not require capital expenditures for additional equipment or the posting of performance or bid bonds. Restrictions under the indenture governing the Notes and the Whitebox Revolving Credit Facility may impair or limit our ability to pursue certain strategies without the consent of our lenders. Further, our ability to raise cash through assets sales may be impacted by our ability to locate potential buyers in a timely fashion, or at all, and obtain a reasonable price, and by any competing asset sale programs initiated by our competitors.  It is also possible that any asset sales could be below our current book value for such assets, which could result in recorded losses that could be substantial. Given our significant liquidity constraints, even a small deviation from the assumptions used to prepare the forecasts for these strategic alternatives could impair our ability to meet our liquidity needs.  We cannot assure you that any of these efforts will be successful or will result in cost reductions or additional cash flows or the timing of any such cost reductions or additional cash flows.

 

We engaged a financial advisor to assist us in evaluating capital structure alternatives.  We are currently reviewing our alternatives, and we may adopt other strategies that may include actions such as a refinancing or restructuring of our indebtedness or capital structure, reducing or delaying capital investments, delaying bids on new sales or seeking to raise additional capital through debt or equity financing.  However, our current credit rating limits our ability to access the debt capital markets.  In addition, the recent low trading price of our common stock severely limits our ability to raise substantial capital in the equity capital markets.  Our ability to timely raise sufficient capital may also be limited by NYSE AMEX stockholder approval requirements for certain transactions involving the issuance of our common stock or securities convertible into our common stock.

 

We cannot assure you that any refinancing or debt or equity restructuring would be possible or that additional equity or debt financing could be obtained on acceptable terms, if at all.  Furthermore, we cannot assure you that any of our strategies will yield sufficient funds to meet our working capital or other liquidity needs, including for payments of interest

 

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and principal on our debt in the future, and any such alternative measures may be unsuccessful or may not permit us to meet scheduled debt service obligations, which could cause us to default on our obligations and could further materially and adversely affect our liquidity or financial position.

 

Our substantial debt could adversely affect our financial health and adversely affect our liquidity and results of operations.

 

We have a significant amount of debt and may incur substantial additional debt (including secured debt) in the future.  As of December 31, 2011, we had total indebtedness of $354.7 million, net of discount (excluding mandatorily redeemable preferred stock of $53.2 million, net of discount).  We cannot assure you that we will be able to generate sufficient cash to service our debt or sufficient earnings to cover fixed charges in future years.  If new debt is added to our current debt levels, the related risks for us could intensify.

 

Our substantial debt could have important consequences.  In particular, it could:

 

·                  increase our vulnerability to general adverse economic and industry conditions;

 

·                  require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund capital expenditures and other general corporate purposes;

 

·                  limit our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate;

 

·                  place us at a competitive disadvantage compared to our competitors that have less debt; and

 

·                  limit, along with the financial and other restrictive covenants of our indebtedness, among other things, our ability to borrow additional funds.

 

Our debt agreements contain restrictive covenants that may limit our ability to respond to changes in market conditions or pursue business opportunities.

 

Our debt agreements contain restrictive covenants that limit our ability to, among other things:

 

·                  incur or guarantee additional debt;

 

·                  pay dividends;

 

·                  repay subordinated debt prior to its maturity;

 

·                  grant additional liens on our assets;

 

·                  enter into transactions with our affiliates;

 

·                  repurchase stock;

 

·                  make certain investments or acquisitions of substantially all or a portion of another entity’s business assets; and

 

·                  merge with another entity or dispose of our assets.

 

In addition, one of our debt agreements requires us to maintain certain financial covenants at one of our international subsidiaries.  The requirement that we comply with these provisions may have a materially adverse effect on our ability to react to changes in market conditions, take advantage of business opportunities we believe to be desirable, obtain future financing, fund needed capital expenditures or withstand a continuing or future downturn in our business.

 

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If we are unable to comply with the restrictions and covenants in our debt agreements, there could be a default under the terms of such agreements, which could result in an acceleration of repayment.  Failure to maintain existing or to secure new financing could have a material adverse effect on our liquidity and financial position.

 

If we are unable to comply with the restrictions and covenants in our debt agreements, there could be a default under the terms of these agreements.  In the event of a default under these agreements, lenders could terminate their commitments to lend or accelerate the loans and declare all amounts borrowed due and payable.  Borrowings under other debt instruments that contain cross-acceleration or cross-default provisions may also be accelerated and become due and payable.  If any of these events occur, our assets might not be sufficient to repay in full all of our outstanding indebtedness and we may be unable to find alternative financing.  Even if we could obtain alternative financing, it might not be on terms that are favorable or acceptable to us.  Additionally, we may not be able to amend our debt agreements or obtain needed waivers on satisfactory terms or without incurring substantial costs.  Failure to maintain existing or secure new financing could have a material adverse effect on our liquidity and financial position.

 

Risks Related to our Common and Preferred Stock

 

Our stock price may be volatile and may decrease in response to various factors, which could adversely affect our business and cause our stockholders to suffer significant losses.

 

Although we are listed on a national exchange, our common stock is relatively illiquid and its price has been and may continue to be volatile in the future.  The market price of our common stock may be influenced by many factors, many of which are beyond our control, including the risks described in this “Risk Factors” section and the following:

 

·                  decreases in prices for oil and natural gas resulting in decreased demand for our services;

 

·                  variations in our operating results and failure to meet expectations of investors and analysts;

 

·                  the public’s reaction to our press releases, other public announcements and filings with the SEC;

 

·                  increases in interest rates;

 

·                  the loss of customers;

 

·                  competition;

 

·                  overcapacity within industry;

 

·                  illiquidity of the market for our common stock;

 

·                  sales of common stock by existing stockholders; and

 

·                  other developments affecting us or the financial markets.

 

We are unable to predict the extent to which investor interest in us will affect the liquidity of our shares of common stock. If liquidity remains low, stockholders may have difficulty selling our common stock.

 

The dividend and liquidation rights of the holders of our preferred stock and anti-dilution provisions of our preferred stock and warrants may adversely affect the rights of the holders of our common stock.  Because we are seeking to preserve cash to meet our liquidity needs, we anticipate that we will continue to accrue or pay in kind dividends on our preferred stock and in the event we were to issue additional equity to meet our liquidity needs such issuance may trigger the anti-dilution provisions of our preferred stock and outstanding warrants which would further dilute the interests of our common stockholders.

 

Our outstanding shares of Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock are entitled to cumulative dividends of 9.75%, 11.75% and 11.50% (10.50% if timely paid in cash), respectively, per annum, compounded quarterly, of the original issue price of $250.  We may pay quarterly dividends on the Series B Preferred Stock in cash or in kind, at our election, until December 16, 2015 (after which dividends are required to be paid in cash), and dividends on the Series C Preferred Stock and Series D Preferred Stock accumulate unless paid quarterly in cash (which cash

 

 

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payments are required after December 16, 2015 with respect to the Series C Preferred Stock).  The Series B Preferred Stock is convertible into a number of shares of common stock determined by dividing the then-current conversion price into the $250 per share liquidation preference plus any accrued and unpaid dividends, and votes on an as-converted basis with our common stockholders.  In past quarters we have either accrued dividends on our preferred stock or, in the case of the Series B Preferred Stock, elected to pay the dividend in kind.  As we either accrue dividends or pay dividends on the Series B Preferred Stock in kind, the outstanding shares of our Series B Preferred Stock will continue to dilute the ownership interest of our common stockholders as (i) the number of outstanding shares of Series B Preferred Stock increases, if the dividend is paid in kind, or (ii) the number of shares of common stock into which the Series B Preferred Stock is convertible increases, if the dividend is accrued but not paid.  Furthermore, accrual of dividends on our preferred stock or the payment of in kind dividends of our Series B Preferred Stock increases the aggregate liquidation preference of our preferred stock, which must be paid first before our common stockholders are entitled to receive any amounts in a liquidation or similar event.  As of December 31, 2011, the total amount of this liquidation preference was approximately $87.9 million.  Because we are seeking to preserve cash to meet our liquidity needs, we anticipate that we will continue to accrue or pay in kind dividends on our preferred stock, which will further dilute the interests of our common stockholders.  In addition, our Notes and the Whitebox Revolving Credit Facility generally restrict our ability to pay cash dividends on our preferred stock, subject to limited exceptions.  Our outstanding preferred stock and warrants also contain certain anti-dilution provisions which are triggered when we issue equity for consideration which is below certain specified thresholds.  As a result and given the depressed market value of our common stock, in the event we were to issue additional equity to meet our liquidity needs, it is likely that such issuance would trigger the anti-dilution provisions of our preferred stock and warrants, which would result in the preferred stock and warrants becoming convertible into more shares of common stock, thereby potentially further diluting our common stockholders.

 

Our stock price may decline when our financial results decline or when events occur that are adverse to us or our industry.

 

You can expect the market price of our common stock to decline when our financial results decline or otherwise fail to meet the expectations of the financial community or the investing public or at any other time when events actually or potentially adverse to us or the oil and natural gas industry occur.  Our common stock price may decline to a price below the price you paid to purchase your shares of common stock.

 

We do not expect to pay dividends on our common stock and investors will be able to receive cash in respect of the shares of common stock only upon the sale of the shares.

 

We have never paid cash dividends on our common stock.  We have no intention in the foreseeable future to pay any cash dividends on our common stock and our senior secured credit facility and the indenture that governs our senior secured notes restricts our ability to pay dividends on our common stock.  Therefore, an investor in our common stock will obtain an economic benefit from holding our common stock only after an increase in its trading price and only by selling the common stock.

 

Holders of our preferred stock vote as a class with our common stock and have the ability to cast approximately 35% of the votes on matters submitted to a vote of our stockholders, and so will have significant influence on matters submitted to a vote of our stockholders.  Holders of our preferred stock also have the right to consent to certain corporate actions, which will prevent us from undertaking those actions without the consent of the holders of our preferred stock.

 

Approximately 91% of our outstanding convertible preferred stock is held by Avista and its affiliates, and Avista owns an additional 2,863,954 shares of our common stock at December 31, 2011.  The preferred stock votes as a class with our common stock on an as converted basis, and represents approximately 35% of the outstanding voting power of Geokinetics.  In addition, the terms of the preferred stock provide that while the preferred stock is outstanding, the holders of preferred stock voting together as a class are entitled to elect one director of Geokinetics.  Accordingly, Avista and the holders of our preferred stock are able to substantially influence matters submitted to a vote of our stockholders, including the election of directors.  Currently, two members of our Board of Directors are affiliates of Avista.

 

In addition, the holders of a majority of the outstanding shares of preferred stock are required to approve each of the following transactions:

 

·                  any amendment to our certificate of incorporation or by-laws;

 

·                  any payment of a dividend to holders of our common stock or any repurchase of our common stock;

 

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·                  any sale of all or substantially all of our assets and the assets of our subsidiaries, or any merger or consolidation with another entity if our stockholders immediately prior to the merger own less than 50% of the entity resulting from the merger;

 

·                  any reclassification or reorganization of our common stock;

 

·                  the issuance of any securities on parity with or having preference to the preferred stock;

 

·                  certain transaction with our management, related parties or affiliates, unless unaffiliated members of our Board of Directors approve the transaction; or

 

·                  any increase or decrease in the number of directors on our Board of Directors.

 

The holders of our Series B Preferred Stock have the preemptive right to acquire shares of our common stock that we may offer for cash in the future, other than shares sold in a public offering.

 

Item 1B.  Unresolved Staff Comments

 

None.

 

Item 2.  Properties

 

We own or lease administrative offices, operations centers, data processing centers, and warehouses throughout the world.  No significant lease is scheduled to terminate in the near future, and we believe comparable space is readily obtainable should any lease expire without renewal.  We believe our properties are generally well maintained and adequate for their intended use.  As of December 31, 2011, we leased properties worldwide totaling approximately 5,522,000 square feet.  Of this total, 338,000 square feet were located in North America and 5,184,000 square feet were located internationally.

 

At December 31, 2011, our owned or leased facilities were as follows:

 

·            Located in Houston, Texas in the United States, in Old Woking, Surrey in the United Kingdom and in Calgary in Canada for seismic data processing.

 

·            Located in Houston and Stafford, Texas; in Canonsburg, Pennsylvania; in Anchorage, Alaska; and in Calgary, Canada for North America seismic data acquisition.

 

·            Our multi-client seismic data acquisition business also uses the facility in Canonsburg, Pennsylvania.

 

·            Located in Rio de Janeiro, Brazil; Santa Cruz, Bolivia; Bogota, Colombia; Poza Rica, Miguel Hidalgo, Mexico City and General Bravo, Mexico; Lima, Peru; Paramaribo, Suriname; Brisbane, Australia; Singapore; Cairo, Egypt; Alger, Algeria; Luanda, Soyo, and Viana, Angola; Tripoli, Libya; Glasgow, Scotland; Tunis, Tunisia; and Dubai, United Arab Emirates, for international seismic data acquisition.  We also own three warehouse facilities in Yopal and Bogota, Colombia totaling approximately 78,000 square feet.

 

Item 3.  Legal Proceedings

 

For a discussion of material legal proceedings affecting us, see note 16 to our consolidated financial statements.

 

Item 4.  Mine Safety Disclosures

 

Not applicable.

 

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PART II

 

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Our common stock, $0.01 par value per share, is listed on the NYSE AMEX (formerly the American Stock Exchange) under the trading symbol “GOK.” As of March 16, 2012, we had 73 stockholders of record; however, since many shares may be held by investors in nominee names such as the name of their broker or their broker’s nominee, the number of record holders often bears little relationship to the number of beneficial owners of the common stock.

 

The following table sets forth the high and low closing prices for the common stock of Geokinetics Inc. during the most recent two fiscal years, as reported by the NYSE AMEX. The following quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

 

Quarter Ended

 

High

 

Low

 

March 31, 2010

 

$

10.76

 

$

7.21

 

June 30, 2010

 

9.55

 

3.83

 

September 30, 2010

 

6.80

 

3.62

 

December 31, 2010

 

9.29

 

5.70

 

March 31, 2011

 

10.74

 

8.03

 

June 30, 2011

 

9.71

 

7.62

 

September 30, 2011

 

7.80

 

2.42

 

December 31, 2011

 

3.46

 

1.75

 

 

The closing market price of our common stock on March 16, 2012 was $1.55 per share.

 

We have never paid cash dividends on our common stock and the Board of Directors intends to retain all of our earnings, if any, to finance the development and expansion of our business.  There can be no assurance that our operations will prove profitable to the extent necessary to pay cash dividends.  Moreover, even if such profits are achieved, the future dividend policy will depend upon our earnings, capital requirements, financial condition, debt covenants and other factors considered relevant by our Board of Directors.  For example, the indenture governing the Notes and the Whitebox Revolving Credit Facility contractually limit our ability to pay dividends on our common stock.

 

Stock Performance Graph

 

The information included under the caption “Stock Performance Graph” in this Item 5 of this annual report is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filings we make under the Securities Act or the Exchange Act, except to the extent Geokinetics specifically incorporates it by reference into such a filing.

 

The following graph depicts the five-year cumulative total return of our common stock as compared with the S&P 500 Stock Index and the PHLX Oil Services Index (“OSX”). The PHLX Index consists of larger companies that perform a variety of services as compared to land based acquisition and processing of seismic data performed by us.

 

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Comparison of 5-year Cumulative Total Return*

Among Geokinetics Inc., the S&P 500 Index and the PHLX Oil Service Sector Index

 

GRAPHIC

 


*                                         $100 invested on 12/31/06 in stock or index—including reinvestment of dividends

 

 

 

12/06

 

12/07

 

12/08

 

12/09

 

12/10

 

12/11

 

Geokinetics

 

100.0

 

59.9

 

7.6

 

29.6

 

28.6

 

6.6

 

PHLX Oil Service Index

 

100.0

 

150.9

 

60.7

 

97.5

 

122.6

 

108.2

 

S&P 500

 

100.0

 

103.5

 

63.7

 

78.6

 

88.7

 

88.7

 

 

Item 6.  Selected Financial Data

 

The following selected financial data should be read in conjunction with Item 7. “—Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and with our consolidated financial statements and related notes included in Item 8. “—Financial Statements and Supplementary Data.”

 

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Selected Financial Data

 

 

 

As of and for the Year Ended December 31,

 

 

 

2011

 

2010(1)

 

2009

 

2008

 

2007

 

 

 

(In thousands, except per share data)

 

Total revenue

 

$

763,729

 

$

558,134

 

$

510,966

 

$

474,598

 

$

357,677

 

Income (loss) before income taxes

 

(220,013

)

(133,874

)

10,917

 

10,254

 

(13,684

)

Income taxes

 

2,040

 

4,810

 

23,252

 

9,268

 

2,252

 

Net income (loss)

 

(222,053

)

(138,684

)

(12,335

)

986

 

(15,936

)

Loss applicable to common stockholders

 

(231,251

)

(147,534

)

(34,125

)

(5,339

)

(20,802

)

Loss per common share, basic and diluted

 

(12.70

)

(8.46

)

(3.14

)

(0.51

)

(2.44

)

Total assets

 

514,172

 

725,164

 

771,690

 

439,716

 

354,321

 

Long-term debt and capital leases, net of current portion(2)

 

350,183

 

319,284

 

296,601

 

57,850

 

60,352

 

Current portion of long-term debt and capital lease obligations(3)

 

4,543

 

1,634

 

68,256

 

33,096

 

19,560

 

Derivative liabilities(4)

 

5,778

 

38,271

 

9,317

 

 

 

Mezzanine equity(5)

 

83,313

 

74,987

 

66,976

 

94,862

 

60,926

 

Total stockholders’ equity (deficit) (excluding preferred stock)

 

(202,819

)

21,787

 

145,330

 

129,680

 

130,965

 

 


(1)          Includes operating results of PGS Onshore since February 12, 2010.

 

(2)          Excludes mandatorily redeemable preferred stock and includes $300.0 million of Senior Secured Notes (net of debt discount) at December 31, 2011, 2010 and 2009.  Long-term debt increased in 2011 as compared to 2010 primarily due to borrowings on the Whitebox Revolving Credit Facility.  Long-term debt increased in 2010 as compared to 2009 due to borrowings on the RBC Revolving Credit Facility.

 

(3)          Current portion of long-term debt and capital leases increased in 2011 from 2010 primarily due to short-term project financing at one of our Latin American subsidiaries and decreased in 2010 from 2009 as we paid off existing amounts upon the closing of the acquisition of PGS Onshore.

 

(4)          Represents the fair value of derivative liabilities related to 2010 and 2008 Warrants and the Series B-1 Preferred Stock conversion feature.

 

(5)          Represents Series B Preferred Stock.  Decrease during 2009 was driven by the exchange of the Series B-2 Preferred Stock for Series C Preferred Stock, which is classified as mandatorily redeemable preferred stock.  Increase during 2010 and 2011 is due to stock dividends and accretion of initial discount.

 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operation

 

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes to those financial statements included elsewhere in this Form 10-K.  This discussion contains forward looking statements that involve risks and uncertainties.  Please see “Risk Factors” and “Forward Looking Statements” elsewhere in this Form 10-K.

 

Overview

 

We are a full-service, global provider of seismic data acquisition, processing and integrated reservoir geosciences services to the oil and natural gas industry.  We also provide clients access, via licenses, to our multi-client seismic data library.  As an acknowledged industry leader in land, transition zone and shallow water (down to 500 feet water depths) OBC environments, we have the capacity to operate up to 25 seismic crews with approximately 200,000 channels of seismic data acquisition equipment worldwide and the ability to process seismic data collected throughout the world.  Crew count, configuration and location can change depending upon industry demand and requirements.

 

We provide a suite of geophysical services including acquisition of 2D, 3D, time-lapse 4D and multi-component seismic data surveys, data processing and integrated reservoir geosciences services for customers in the oil and natural gas industry, which include national oil companies, major international oil companies and independent oil and gas exploration and production companies worldwide.  Seismic data is used by these companies to identify and analyze drilling prospects, maximize drilling success, optimize field development and enhance production economics.  We also own a multi-client seismic data library whereby we maintain full or partial ownership of data acquired for future licensing, consisting of data

 

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covering various areas in the United States, Canada and Brazil.

 

Recent Developments and Liquidity Concerns

 

Significant developments during 2011 and early 2012 related to our business include the following:

 

·                  In May 2011, the RBC Revolving Credit Facility was assigned to the Lenders and on August 12, 2011, we entered into a $50.0 million amended and restated credit agreement with the Lenders.  Borrowings under the Whitebox Revolving Credit Facility bear interest at a rate of 11.125% and amounts in excess of the total amount outstanding and the total amount available of $50.0 million are subject to an unused commitment fee of 11.125%.  Accordingly, we will incur interest costs of approximately $5.6 million per year in connection with the Whitebox Revolving Credit Facility regardless of our borrowing level.

·                  On September 1, 2011, we sold a subsidiary that held a royalty interest in a Colombian oil and gas property for $6.3 million plus applicable adjustments for net working capital.  We received net proceeds of $5.9 million.  The transaction resulted in a pre-tax gain of $5.6 million which is included in other income (expense) in the consolidated statement of operations.

·                  On September 8, 2011, a liftboat which we had contracted to support an OBC project in the Bay of Campeche, Mexico, was disabled due to high winds and unusually high seas generated by Tropical Storm Nate which resulted in the crew abandoning the vessel.  While we and local authorities conducted an immediate search and rescue operation, there were fatalities to two of our employees and two contractors.  As a result, operations on the project were suspended by the client during the investigation and evaluation of the incident.  The suspension of the operation resulted in lost revenues from the contract while we continued to incur costs to maintain the crew and equipment and otherwise in connection with the incident.  The suspension of the project was lifted at the end of November 2011.

·                  On September 30, 2011, we were notified by Moody’s Investor Services, Inc. (“Moody’s”) and Standard and Poor’s (“S&P”) that they had downgraded Geokinetics’ credit rating to Caa2 and CCC+, respectively, because of litigation uncertainty related to the Mexico liftboat incident, low margins in international markets, tight liquidity and weak financial metrics in an improved oil and gas operating environment.

·                  During the third quarter of 2011, we performed an interim goodwill assessment in light of events and circumstances adversely impacting the Company at that time.  While we had not fully completed step two of the impairment analysis, we recorded a preliminary goodwill impairment charge of $40.0 million.  During the fourth quarter of 2011, we finalized the goodwill impairment analysis, which resulted in an additional goodwill impairment charge of $92.4 million.  Accordingly, at December 31, 2011, we had no goodwill.  These charges are included in asset impairments in our consolidated statement of operations.  See discussion under “— Goodwill Impairment Assessment” below.

·                  On November 22, 2011, one of our subsidiaries in Latin America entered into a short-term project financing agreement secured by the cash flows generated by the underlying project contract.  The maximum credit available under this agreement is $7.6 million of which $2.1 million was outstanding at December 31, 2011.

·                  On December 16, 2011, we were notified that S&P had further downgraded Geokinetics’ credit rating to CCC-, citing its expectations of weaker operating measures compared to our peers and reduced liquidity in the near future.

·                  We engaged a financial advisor to assist us with evaluating capital structure alternatives, including recapitalization opportunities that may include a restructuring of our outstanding debt or equity securities.

·                  On March 15, 2012, we entered into a purchase and sale agreement with Seismic Exchange, Inc. (“SEI”) pursuant to which we agreed to sell to SEI certain North American seismic data in exchange for $10.0 million in cash.  Under the agreement, the Company will retain specified percentages of the net revenues generated and collected on the seismic data to be sold to SEI for a period of five years.  The closing of the transaction is subject to the satisfaction of certain conditions to closing. See “— Liquidity and Capital Resources — Liquidity and Industry Concerns.

·                  On March 16, 2012, we entered into a commitment letter with Avista and an affiliate of Avista to provide up to an additional $10.0 million in debt financing until January 1, 2013.  Avista’s obligations under the commitment letter are subject to the execution and delivery of definitive documents and other closing conditions. See “— Liquidity and Capital Resources — Liquidity and Industry Concerns.

 

During 2010 and the beginning of 2011, we kept our crews in ready mode and operating decisions and job functions were decentralized into our various operating regions.  These two factors, along with unfavorable circumstances on one particular job towards the end of 2010, caused significant losses and a cash drain which impacted us through the second quarter of 2011.  Subsequently, we revised our strategy and returned to our method of immediately shutting down our crew, eliminating any excess personnel and returning equipment to a strategic base ready for the next opportunity when they were not being utilized on projects.  We also centralized our management services which we believe provided a higher level of service at a lower cost.  However, during the third quarter of 2011, a liftboat which we had contracted to support an OBC project in the Bay of Campeche, Mexico, was disabled due to inclement weather resulting in the crew abandoning the vessel.  There were fatalities to two of our employees and two contractors and operations on the project were suspended by the client during the investigation and evaluation of the incident.  While the suspension of the OBC project in the Bay of Campeche, Mexico, was lifted at the end of November 2011, the suspension resulted in lost revenues from the contract and increased costs in connection with the incident, as well as costs to maintain the crew and equipment in place.

 

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In light of the circumstances mentioned above, our main focus during 2011 was cash management and we believed we could best achieve this goal by limiting our exposure to countries and regions that do not offer long term and/or continuous new job opportunities.  As a result, during the fourth quarter of 2011, we made the decision to close some of our regional offices and exit certain operations around the world, primarily in Africa and the Middle East, where our long-term prospects for profitability were not in line with our business goals.  If conditions change, we will reassess opportunities as they arise.  Cash management will continue to be our focus in 2012 and we are executing on actions designed to improve our liquidity position while maintaining our long-term commitment to providing high quality seismic data acquisition services.  These actions include cost reductions, potential sales of additional assets, further centralization of bidding and management services to provide a higher level of control over costs and bidding on seismic acquisition services under careful consideration of required capital expenditures for additional equipment or restrictions in cash required for bid or performance bonds.

 

While revenues, backlog and operating cash flows increased during 2011 compared to 2010, we continued to incur operating losses due to delays in project commencements, low international asset utilization and the Mexico liftboat incident, resulting in serious concerns about our liquidity at the end of 2011 and continuing into 2012.  To address these liquidity concerns, management has instituted a number of steps, discussed below under “Liquidity and Industry Concerns”, which we believe will improve the Company’s liquidity position if successfully implemented in the near term as well as long term.  If these steps are unsuccessful in the future or we experience a further deterioration of our business or another adverse event occurs with respect us or our operations, we may not have sufficient liquidity to meet our ongoing operating expenses and debt service obligations under the Whitebox Revolving Credit Facility or the Notes, all of which would have a material adverse effect.  This may force us to further curtail existing operations, reduce or delay capital expenditures or sell assets to meet our operating and debt service obligations and we could be forced to take other actions, including a restructuring of our existing indebtedness and capital structure to address our ongoing liquidity issues.  See our discussion under “ Liquidity and Capital Resources Liquidity and Industry Concerns” below.

 

Goodwill Impairment Assessment

 

Accounting guidance requires intangible assets with indefinite lives, including goodwill, be evaluated on an annual basis for impairment or more frequently if an event occurs or circumstances change which could potentially result in an impairment.  We historically performed our annual impairment assessment as of December 31.  As required by applicable accounting guidance, we performed a two-step impairment test for goodwill.

 

Given certain events taking place primarily during the third quarter of 2011, including the Mexico liftboat incident, a sustained decline in our market capitalization and the credit rating downgrades, we concluded that there were sufficient indicators to require an interim goodwill impairment analysis.  While we had not fully completed step two of the interim impairment analysis of goodwill prior to the filing of our September 30, 2011 Form 10-Q, we recorded at that time a preliminary goodwill impairment charge of $40.0 million, representing the best estimate within the range of the estimated impairment loss at that time.  We finalized step two of the goodwill impairment analysis during the fourth quarter of 2011, which resulted in the recognition of an additional impairment charge of $92.4 million.  Accordingly, at December 31, 2011 we had no goodwill.  These charges are included in asset impairments in our consolidated statement of operations.  See note 4(d) to our consolidated financial statements for our discussion of the most significant estimates and assumptions used in this analysis.

 

Acquisition of PGS Onshore

 

In February 2010, we closed the acquisition of PGS Onshore for a purchase price of $202.8 million, consisting of $183.4 million of cash and 2.15 million shares of our common stock.  See note 3 to our interim condensed consolidated financial statements.  To finance this acquisition, in December 2009, we issued 4.0 million shares of common stock for net cash proceeds of $34.0 million and $300.0 million of Notes for net cash proceeds of $294.3 million.  See note 6 to our consolidated financial statements.

 

The following table presents consolidated income statement information for the year ended December 31, 2011 and pro forma consolidated income statement information for the year ended December 31, 2010, as if the acquisition of PGS Onshore had occurred at the beginning of the period (in thousands):

 

 

 

2011

 

2010

 

 

 

Actual

 

Pro Forma

 

 

 

 

 

 

 

(Unaudited)

 

Total revenue

 

$

763,729

 

$

578,757

 

Loss from operations

 

$

(208,298

)

$

(97,292

)

Net loss

 

$

(222,053

)

$

(145,905

)

Preferred dividends and accretion of discount on preferred stock

 

$

(9,198

)

$

(8,850

)

Loss applicable to common stockholders

 

$

(231,251

)

$

(154,755

)

Basic and diluted net loss per common share

 

$

(12.70

)

$

(8.87

)

 

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Liquidity and Capital Resources

 

Liquidity and Industry Concerns

 

While revenues, backlog and operating cash flows increased during 2011 compared to 2010, we continued to incur operating losses primarily due to delays in project commencements, low international asset utilization and the temporary suspension by the client of one of our seismic acquisition contracts in Mexico due to the liftboat incident.  These events caused a reduction in our available liquidity.  In addition, the terms of our Notes and the Whitebox Revolving Credit Facility limit our ability to incur additional indebtedness, and the depressed market for our stock and the terms of our preferred stock limit our ability to access the equity capital markets.

 

In response to these events, we are evaluating our strategic alternatives and have initiated actions designed to improve our liquidity position by giving priority to generating cash flows while maintaining our long-term commitment to providing high quality seismic data acquisition services.  These actions have included:

 

·                  A focus on cost reductions,

 

·                  The rationalization of operating locations resulting in the decision to close some of our Africa and Middle East regional offices and operations,

 

·                  The identification of additional assets for potential sale,

 

·                  The centralization of our bidding and management services processes to provide a higher level of control over costs, and

 

·                  A focus on bidding for seismic acquisition services under careful consideration of required capital expenditures for additional equipment or the restrictions in cash required for bid or posting of performance or bid bonds.

 

The suspension of the OBC project in the Bay of Campeche, Mexico, was lifted at the end of November 2011, with recording recommencing thereafter. 

 

On March 15, 2012, we entered into a purchase and sale agreement pursuant to which we agreed to sell to SEI certain North American seismic data in exchange for $10.0 million in cash.  Under the agreement, we will retain specified percentages of the net revenues generated and collected on the seismic data to be sold to SEI for a period of five years.  The closing of the transaction is subject to the satisfaction of certain conditions to closing.

 

On March 16, 2012, we entered into a commitment letter (the “Commitment Letter”) with Avista and an affiliate of Avista (collectively, the “Avista Financing Parties”) to obtain debt financing from the Avista Financing Parties until January 1, 2013.  Pursuant to the terms of the Commitment Letter, at our election from time to time, the Avista Financing parties agreed to (i) purchase up to an additional $10 million in aggregate principal amount of Notes (the “U.S. Notes”) and (ii) enter into foreign loan facilities (the “Foreign Notes” and, collectively with the U.S. Notes, the “Additional Avista Notes”) to be secured by the assets of certain of our non-U.S. subsidiaries that would be drawn down from time to time concurrently with the purchase by the Avista Financing Parties of any U.S. Notes (the “Commitment”).  In the event that we elect to exercise our right to have the Avista Financing Parties purchase any Additional Avista Notes, we will be obligated to deliver U.S. Notes with a principal amount equal to the amount of the purchase price and Foreign Notes in an aggregate principal amount equal to 80% of such purchase price, allocated among the Foreign Notes as directed by the Avista Financing Parties.

 

The obligations of the Avista Financing Parties under the Commitment Letter are subject to the execution and delivery of definitive documents and other closing conditions.  In consideration for their obligations under the Commitment Letter, we paid the Avista Financing Parties a fee of $0.3 million at the time the Commitment Letter was executed and are obligated to deliver either warrants to purchase 190,000 shares of the Company’s common stock or its cash equivalent value at the earlier of a purchase of any Additional Avista Notes or June 30, 2012 (unless the Commitment is terminated earlier than June 30, 2012 and prior to any such purchase).  We will also be obligated to deliver warrants to purchase an additional 190,000 shares of the Company’s common stock or its cash equivalent value, at our election, at each of June 30, 2012, September 30, 2012 and December 31, 2012 if the Commitment or any Notes remain outstanding as of the applicable foregoing dates.  Certain of the financing transactions under the Commitment Letter are subject to a right of first refusal in favor of certain of our existing senior lenders, the exercise of which right would cause the Commitment Letter to terminate and require that we issue to Avista warrants to purchase 190,000 shares of common stock or its cash equivalent value, at our election.

 

In accordance with the terms of the Commitment Letter, the warrants issued in connection with the transactions contemplated under the Commitment will have an exercise price of $0.01 per share of common stock and otherwise will be issued with terms substantially similar to the warrants we issued to the Avista Financing Parties in 2010.

 

Management believes that liquidity will be further improved throughout 2012 by the closing of some of our offices and operations around the world where we had incurred losses, as well as the continued execution of further cost reductions resulting from the implementation of the other actions described above.  However, any other adverse development could have a material adverse effect on our liquidity and financial condition.  If we are unable to successfully continue to implement some or all of the actions described above in the foreseeable future we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness.  These alternatives may not be successful, and we could face a substantial liquidity shortfall and might be required to dispose of certain assets or operations or take other actions to meet our operating and debt service obligations.  The failure to meet our debt service obligations would constitute an event of default under the Whitebox Revolving Credit Facility and the Notes, and the Lenders or Notes holders could declare all amounts outstanding under the Whitebox Revolving Credit Facility or Notes to be immediately due and payable.  In such event, we would likely be forced to pursue a restructuring of our indebtedness and capital structure.  For additional discussion of the risks associated with our high levels of indebtedness and current liquidity issues, please see the discussion under “Risk Factors” in Item 1A of this Form 10-K.

 

Liquidity

 

Our primary sources of cash flows are those generated by our seismic data acquisition and seismic data processing and integrated reservoir geosciences segments, issuances of debt and equity securities, equipment financing and trade credit.  Our primary uses of cash are operating expenses associated with our seismic data acquisition and seismic data processing and integrated reservoir geosciences segments, capital expenditures associated with upgrading and expanding our capital asset base and debt service.

 

At December 31, 2011, we had available liquidity as follows (in thousands):

 

Available cash:

 

 

 

Cash and cash equivalents

 

$

44,647

 

Undrawn borrowing capacity under the Whitebox Revolving Credit Facility

 

 

Undrawn borrowing capacity under short-term project financing agreement

 

5,553

 

Net available liquidity at December 31, 2011 (1)

 

$

50,200

 

 

30



(1) Includes approximately $10.5 million designated for multi-client investments, which is not fully available for current obligations.

 

We have certain foreign overdraft facilities in the amount of $2.4 million of which $0 million was drawn at December 31, 2011.  Due to the limitations on our ability to remit funds to the United States, amounts under these facilities have been excluded in the available liquidity table above. 

 

The following table summarizes certain measures of liquidity at December 31, 2011 and 2010, as well as our sources/uses of capital for the years ended December 31, 2011 and 2010 (in thousands):

 

 

 

Year Ended
December 31,

 

 

 

2011

 

2010

 

Cash and cash equivalents (end of period)

 

$

44,647

 

$

42,851

 

Working capital (end of period)

 

$

23,077

 

$

44,406

 

Cash provided by (used in) operating activities

 

$

59,474

 

$

31,536

 

Cash provided by (used in) investing activities

 

$

(82,003

)

$

20,703

 

Cash provided by (used in) financing activities

 

$

24,325

 

$

(19,564

)

Capital expenditures (including capital leases, if applicable)

 

$

(25,042

)

$

(47,673

)

Investment in multi-client data library

 

$

(70,115

)

$

(51,035

)

Cash paid for interest

 

$

34,946

 

$

31,356

 

Cash paid for taxes

 

$

6,721

 

$

11,464

 

 

Cash provided by (used in) operating activities

 

Net cash provided by operating activities totaled $59.5 million for year ended December 31, 2011, compared to net cash provided by operating activities of $31.5 million for the same period during 2010.  The increase in operational cash flow was primarily the result of improved operating results in our multi-client seismic data acquisition business and changes in working capital for the 2011 period compared to the same period in 2010.

 

Cash provided by (used in) investing activities

 

Net cash used in investing activities totaled $82.0 million for the year ended December 31, 2011, compared to net cash provided by investing activities of $20.7 million for the same period during 2010.  The cash outflow during 2011 primarily resulted from our investments in our multi-client seismic data library and capital expenditures (excluding capital leases) which totaled $88.7 million, partially offset by $5.9 million in net proceeds received related to the sale of an interest in a Colombian investment.  The inflow during the 2010 period primarily resulted from changes in restricted cash of $303.8 million, offset by net cash used for the acquisition of PGS Onshore of $180.8 million and investments in our multi-client seismic data library and capital expenditures (excluding capital leases) which totaled $98.7 million.

 

Cash provided by (used in) financing activities

 

Net cash provided by financing activities totaled $24.3 million for the year ended December 31, 2011, as compared to net cash used in financing activities of $19.6 million for the same period during 2010.  The cash inflow during the 2011 period represents primarily borrowings on the RBC Revolving Credit Facility during the first quarter and borrowings on the Whitebox Revolving Credit Facility during the second quarter offset by the extinguishment of the RBC Revolving Credit Facility on May 24, 2011.  The cash outflow during the 2010 period primarily represents amounts used for repayment of substantially all of our pre-acquisition debt, except for the Notes, on the date of the acquisition of PGS Onshore.

 

Other

 

During 2011, we had an operating loss of $208.3 million, while our cash flow from operating activities was $59.5 million.  The difference of $267.8 million is primarily due to non-cash depreciation and amortization charges and asset impairment charges of $158.4 million and $134.8 million, respectively. The cash generated by our operations, the proceeds from the Whitebox Revolving Credit Facility and the proceeds from the sale of certain non-core assets provided the liquidity needed to meet our investing and financing needs during 2011.

 

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Capital Resources

 

See notes 6, 7 and 9 to our consolidated financial statements for additional discussion on our debt, our mandatorily redeemable preferred stock and our preferred stock, respectively.

 

Financing Provided by Related Parties

 

On March 16, 2012, we entered into the Commitment Letter with the Avista Financing Parties to obtain debt financing until January 1, 2013.  Pursuant to the terms of the Commitment Letter, at our election from time to time, the Avista Financing parties agreed to (i) purchase up to an additional $10 million in aggregate principal amount of U.S. Notes and (ii) enter into Foreign Notes to be secured by the assets of certain of our non-U.S. subsidiaries that would be drawn down from time to time concurrently with the purchase by the Avista Financing Parties of any U.S. Notes.  In the event that we elect to exercise our right to have the Avista Financing Parties purchase any Additional Avista Notes, we will be obligated to deliver U.S. Notes with a principal amount equal to the amount of the purchase price and Foreign Notes in an aggregate principal amount equal to 80% of such purchase price, allocated among the Foreign Notes as directed by the Avista Financing Parties.

 

The obligations of the Avista Financing Parties under the Commitment Letter are subject to the execution and delivery of definitive documents and other closing conditions.  In consideration for their obligations under the Commitment Letter, we paid the Avista Financing Parties a fee of $0.3 million at the time the Commitment Letter was executed and are obligated to deliver either warrants to purchase 190,000 shares of the Company’s common stock or its cash equivalent value, at our election, at the earlier of a purchase of any Additional Avista Notes or June 30, 2012 (unless the Commitment is terminated earlier than June 30, 2012 and prior to any such purchase).  We will also be obligated to deliver warrants to purchase an additional 190,000 shares of the Company’s common stock or its cash equivalent value, at our election, at each of June 30, 2012, September 30, 2012 and December 31, 2012 if the Commitment or any Notes remain outstanding as of the applicable foregoing dates.  Certain of the financing transactions under the Commitment Letter are subject to a right of first refusal in favor of certain of our existing senior lenders, the exercise of which right would cause the Commitment Letter to terminate and require that we issue to Avista warrants to purchase 190,000 shares of common stock or its cash equivalent value, at our election.

 

In accordance with the terms of the Commitment Letter, the warrants issued in connection with the transactions contemplated under the Commitment will have an exercise price of $0.01 per share of common stock and otherwise will be issued with terms substantially similar to the warrants we issued to the Avista Financing Parties in 2010.

 

Whitebox Revolving Credit Facility

 

On May 24, 2011, the RBC Revolving Credit Facility was assigned to the Lenders.  Upon the assignment of the RBC Revolving Credit Facility to the Lenders, we borrowed $48.3 million under the credit facility, used to repay the RBC Revolving Credit Facility and for general working capital purposes.

 

We entered into a $50.0 million amended and restated credit agreement for the Whitebox Revolving Credit Facility with the Lenders on August 12, 2011.  In connection with this agreement, we paid a closing fee of $1.7 million in cash.  In addition, we paid a $4.0 million advisory fee by issuing 1,041,668 shares of our common stock (“Advisory Shares”) valued at $3.84 per share, or 95% of the volume weighted average price of the common stock over the trailing 10-day period following the execution of the amended and restated credit agreement.  The stock was issued on August 29, 2011.  The issuance of the Advisory Shares impacted the conversion and exercise prices of the Series B Preferred Stock, the 2008 Warrants and the 2010 Warrants, which are subject to an anti-dilution adjustment in the event the Company issues shares of common stock for a consideration less than the applicable conversion or exercise price.  The conversion price of the Series B Preferred Stock and the exercise price of the 2008 Warrants were reduced to $15.95 per share and $9.05 per share, respectively, in accordance with an anti-dilution formula and the exercise price of the 2010 Warrants was reduced to $3.84 per share, or the issue price of the Advisory Shares.  The closing fee and the advisory fee were recorded as deferred financing costs and will be amortized through the maturity date of this agreement.

 

Borrowings outstanding under the facility bear interest at 11.125%; amounts in excess of the amount outstanding and the total amount available of $50.0 million are subject to an unused commitment fee of 11.125%.  Accordingly, we will incur interest costs of approximately $5.6 million per year in connection with the Whitebox Revolving Credit Facility regardless of our borrowing level.  The facility does not provide for the issuance of letters of credit and will mature on September 1, 2014.  Borrowings under the facility are secured by certain of our and our subsidiaries’ U.S. assets and the pledge of a portion of the stock of certain of our foreign subsidiaries.  There are no scheduled amortization or commitment reductions prior to maturity but we are required to prepay the facility with proceeds from certain asset sales.  We have the option to prepay the facility upon the issuance of certain equity securities or after the first year, subject to a reduction fee schedule.  The facility has no financial maintenance covenants.

 

Until August 12, 2011, when the amended and restated credit agreement was executed, we incurred interest and fees on the Whitebox Revolving Credit Facility based on the terms of the RBC Revolving Credit Facility, as amended.  Accordingly, we incurred a ticking fee of 1% per quarter based on the maximum availability under the facility, a 1.5% fee for unused commitments and borrowings bore interest at a floating rate based on a specific formula.  The interest rate based on this formula was 8.75% during the period between May 24, 2011 and August 12, 2011.

 

RBC Revolving Credit Facility

 

On February 12, 2010, we entered into a $50.0 million revolving credit and letters of credit facility, with a group of lenders led by RBC.  In the period between June 2010 and April 2011, we entered into Amendments No. 1, No. 2, No. 3 and No. 4 to the RBC Revolving Credit Facility.  Borrowings outstanding under the RBC Revolving Credit Facility bore interest at a floating rate based on a specific formula.  At December 31, 2010 and through May 24, 2011, the rate was 8.75%.

 

On May 24, 2011, RBC and the other lenders assigned their rights and obligations under the RBC Revolving Credit Facility to the Lenders and received full payment of the $29.8 million outstanding under the facility plus unpaid accrued interest and fees for a total payment of $30.5 million.  We did not incur any pre-payment fees or penalties related to the retirement of the RBC Revolving Credit Facility.  We wrote off $1.1 million of deferred financing costs associated with the early extinguishment of the RBC Revolving Credit Facility, which is included in other income (expense) in our consolidated statement of operations.

 

Short-term Project Financing — Line of Credit Agreement

 

On November 22, 2011, one of our subsidiaries in Latin America entered into a short-term project financing agreement secured by the cash flows generated by the underlying project contract.  The cash inflows and outflows associated

 

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with this agreement and the underlying project contract are managed through a trust specifically set up for this purpose and required by the agreement.  The trust’s financial statements as of December 31, 2011 have been fully consolidated with those of our subsidiary and reflected accordingly.  The trust’s cash balance at December 31, 2011 of $0.2 million is classified as restricted cash in our consolidated balance sheet.  The maximum credit available under this agreement is $7.6 million of which $2.1 million was outstanding at December 31, 2011.

 

Disbursements under the line of credit agreement are subject to a fee of 3.0% plus VAT and borrowings outstanding under this agreement bear interest at 8.0% plus one-month LIBOR rate, which was 8.45% at December 31, 2011.  The agreement matures on December 17, 2012 and certain financial covenants apply as long as amounts remain outstanding under the agreement.  The Company’s subsidiary was not in compliance with these covenants at December 31, 2011 and subsequently secured a waiver through December 31, 2012.

 

Capital Lease Obligations and Vendor Financing

 

From time to time we enter into capital leases and vendor financing arrangements to purchase certain equipment.  During the year ended December 31, 2011, we entered into various capital leases, all due in 2014, for certain transportation equipment for a total purchase amount of $6.5 million.  See note 6 to our consolidated financial statements.

 

Future Capital Expenditures

 

As discussed above, we have made, and expect to continue to make, investments in capital expenditures.  In 2011, we made $25.0 million in capital expenditures (including capital leases), primarily for expenditures to extend the useful life of equipment and facilities.  For 2012, we expect our capital expenditures to be approximately $27.0 million, plus approved multi-client investments, the majority of which are pre-funded.  Subject to our liquidity limitations, we plan these investments in 2012 to be primarily on expenditures to extend the useful life of other equipment and facilities for our seismic data acquisition segment with a smaller portion targeted towards acquiring new equipment for our seismic data processing and integrated reservoir geosciences segment.

 

Meeting Our Liquidity Needs

 

We anticipate that our current cash balances and cash flows from operations in 2012, combined with potential additional asset sales and the impact from management’s other actions discussed above under “— Liquidity and Capital Resources — Liquidity and Industry Concerns”,  improvement of international assets utilization and improvement from profit margins from operations will be adequate to meet our liquidity needs during 2012.  This expectation, however, is subject to risks that the assumptions used to prepare our forecasts will not be achieved and that we obtain any necessary consents or approvals and even a small deviation from these assumptions could impair our ability to meet our liquidity needs given our already tight liquidity conditions.  Certain of these risks are described under “Item 1A. Risk Factors”.

 

Inflation and Competitive Pricing

 

We do not believe that inflation has had a significant effect on our business, financial condition, or results of operations during the most recent three years.

 

In times of decreased demand, our business is subject to increased price competition.  Increased competition could result in downward pricing pressure and the loss of market share.

 

Foreign Currency Exchange Risk

 

We operate in certain countries where we are exposed to foreign currency exchange risk.  As the majority of our contracts are denominated in U.S. dollars, when possible, we mitigate this risk by entering into split-dollar contracts.  Under a split-dollar contract, each client invoice is split into a local currency payment and a U.S. dollar payment.  The local currency payment is collected locally and used to fund local expenditures, while the U.S. dollar payment is made directly to a U.S. dollar denominated bank account.  This reduces our exposure to foreign currency risks.

 

Results of Operations

 

We primarily segregate our business into two reportable segments: seismic data acquisition and seismic data processing and integrated reservoir geosciences.  We further break down our seismic data acquisition segment into three reporting units: North America proprietary seismic data acquisition, international proprietary seismic data acquisition and multi-client

 

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data acquisition business.  The North America and international proprietary seismic data acquisition reporting units acquire data for customers by conducting specific seismic shooting operations for customers worldwide.  The multi-client seismic data acquisition business licenses fully or jointly owned seismic data, covering areas in the United States, Canada and Brazil.  The seismic data processing and integrated reservoir geosciences segment operates processing centers in Houston, Texas and London, United Kingdom to process seismic data for oil and gas exploration companies worldwide.

 

Summary of Overall Performance for 2011

 

Our revenues for 2011 increased significantly from 2010, reflecting an increase in seismic data acquisition work.  We believe this increase in seismic acquisition activity reflects higher demand for oil and gas as well as improved market conditions, primarily in the United States and Canada.  While our operating expenses grew to reflect the increased level of activity during 2011, we also experienced higher operating costs due to a variety of reasons as explained below, causing our operating results to be well below expectations and increasing our net loss.

 

Results of Operations for Year Ended December 31, 2011 compared to 2010

 

Operating Revenues.  Consolidated revenues for the year ended December 31, 2011 totaled $763.7 million compared to $558.1 million for the same period in 2010, an increase of 37%.  The increase was attributable to increased activity due to improved market fundamentals in North America, increased contribution from the multi-client data acquisition business in the United States, higher asset utilization in certain international regions and the addition of PGS Onshore assets.

 

For the year ended December 31, 2011, seismic data acquisition revenue totaled $755.1 million compared to $549.1 million for the same period in 2010, an increase of 38%.  This increase in seismic data acquisition revenue was a result of an increase of $113.7 million in our international proprietary seismic data acquisition operations, an increase of $43.9 million in our North America proprietary seismic data acquisition operations and an increase of $48.4 million in our multi-client seismic data acquisition business.

 

North America proprietary seismic data acquisition revenues for the year ended December 31, 2011 totaled $172.7 million, or 23% of consolidated seismic data acquisition revenue, compared to $128.8 million, or 23% of consolidated seismic data acquisition revenue, for the same period in 2010.  The dollar increase was primarily the result of improved market conditions in the United States, increased activity in our Canadian operations and an overall increase in third-party reimbursable charges primarily resulting from variations in the usage mix of specialized survey technologies versus dynamite energy sources as compared to 2010.

 

International proprietary seismic data acquisition revenues for the year ended December 31, 2011 totaled $462.9 million, or 61% of consolidated seismic data acquisition revenue, compared to $349.2 million, or 64% of consolidated seismic data acquisition revenue, for the same period in 2010.  The increase in revenues was attributed to increased activity due to improved market conditions or changes in the types of surveys performed in Brunei, Australia, Malaysia, Angola, Algeria, UAE, Brazil, Bolivia, Mexico and Peru partially offset by a decrease in activity or changes in the types of surveys performed in Bangladesh, Indonesia, Egypt, Libya, Gabon, Cameroon, Colombia and Trinidad.

 

Multi-client seismic data acquisition revenues for the year ended December 31, 2011 totaled $119.5 million, or 16% of consolidated seismic data acquisition revenue, compared to $71.1 million or 13% of consolidated seismic data acquisition revenue, for the same period in 2010.  The dollar increase was primarily the result of increased pre-funding activity in the Midwestern U.S. during 2011, partially offset by a decrease in data library late sales driven primarily by the decline in natural gas prices during 2011 which has impacted our customers’ interest in certain regions.

 

Seismic data processing and integrated reservoir geosciences revenues increased to $14.1 million for the year ended December 31, 2011, from $11.8 million for the same period in 2010.  The increase was primarily the result of increased volume, improved pricing and business mix factors.

 

The revenue information above includes inter-segment revenues between seismic data processing and integrated reservoir geosciences and other segments totaling $5.5 million and $2.8 million for the years ended December 31, 2011 and 2010, respectively.

 

Operating Expenses.  Consolidated direct operating costs totaled $603.3 million for the year ended December 31, 2011, compared to $455.9 million for the same period in 2010, an increase of 32%.  The increase was primarily a reflection of increased activity across all areas.

 

Seismic data acquisition operating expenses totaled $596.9 million for the year ended December 31, 2011, compared to $447.0 million for the same period in 2010, an increase of 34%.  Seismic data acquisition operating expenses as a

 

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percentage of seismic data acquisition revenue were 79% for the year ended December 31, 2011, as compared to 81% for the same period in 2010.

 

North America proprietary seismic data acquisition operating expenses for the year ended December 31, 2011 totaled $141.0 million, or 82% of North America proprietary seismic data acquisition revenue, compared to $118.9 million, or 92% of North America proprietary seismic data acquisition revenue, for the same period in 2010.  The decrease in expenses as a percentage of revenues is a reflection of improved pricing and improved crew utilization and productivity.  The dollar increase is primarily the result of increased sales volume and an overall increase in third-party reimbursable charges resulting from variations in the usage mix of specialized survey technologies versus dynamite energy sources as compared to 2010.

 

International proprietary seismic data acquisition operating expenses for the year ended December 31, 2011 totaled $455.4 million, or 98% of international seismic data acquisition revenue, compared to $326.4 million, or 93% of international seismic data acquisition revenue, for the same period in 2010.  The dollar increase in operating expenses was primarily the result of increased activity or changes in the types of surveys performed in Brunei, Australia, Angola, Algeria, UAE, Brazil, Bolivia, Mexico and Peru.  Operating expenses in Australia were also affected by delays caused by inclement weather, which led to postponement in obtaining necessary environmental permits and client requests.  Additionally, operating expenses were impacted by increased idle time due to civil unrest in North Africa, weather downtime in Mexico and Brazil during the first six months of 2011, weather downtime in Peru during the fourth quarter of 2011, additional operating costs in Mexico following the liftboat incident and a provision related to certain employment taxes for third country nationals performing work in certain countries.

 

We capitalize the majority of operating costs directly associated with acquiring and processing multi-client data and amortize them based on a specific formula driven by actual sales and expected late sales.  Costs that are not capitalized generally represent costs incurred to deliver the projects’ data and certain expenses reimbursed by our clients.  These costs totaled $0.5 million and $1.7 million for the years ended December 31, 2011 and 2010, respectively.  See Depreciation and Amortization below for discussion on our multi-client seismic data acquisition business amortization expense.

 

Seismic data processing and integrated reservoir geosciences operating expenses totaled $11.9 million, or 84% of seismic data processing and integrated reservoir geosciences revenue for the year ended December 31, 2011, compared to $11.7 million, or 99% of seismic data processing and integrated reservoir geosciences revenue for the same period in 2010.  With improved business mix and productivity factors during 2011, expenses were stable while revenue grew 19%.

 

The expense information above includes inter-segment expense between seismic data processing and integrated reservoir geosciences and other segments totaling $5.5 million and $2.8 million for the years ended December 31, 2011 and 2010, respectively.

 

Depreciation and Amortization Expense.  Depreciation and amortization expense for the year ended December 31, 2011 totaled $158.4 million, compared to $112.9 million for the same period in 2010, an increase of $45.5 million, or 40%.  The increase was primarily the result of the expansion and increased sales of our multi-client data library.  Amortization of multi-client data for the year ended December 31, 2011 totaled $85.0 million, or approximately 71% of multi-client revenues, compared to $38.0 million, or approximately 53% of multi-client revenues for the same period in 2010.  The increase as a percentage of multi-client revenues is primarily the result of a higher volume of pre-funded projects which had higher amortization rates and lower late sales during 2011 as compared to 2010.

 

General and Administrative Expense.  General and administrative expense for the year ended December 31, 2011 totaled $75.6 million, or 10% of revenues, compared to $81.4 million, or 15% of revenues for the same period in 2010.  The dollar decrease was primarily the result of a decrease in contract services and certain professional fees as well as the absence of integration costs incurred in 2010 related to the acquisition of PGS Onshore, which amounted to $5.2 million.  The decrease in expenses was partially offset by increased salary expense.

 

Asset Impairments.  During the year ended December 31, 2011, we recorded an impairment charge related to our multi-client seismic data library of $2.4 million and goodwill impairment charges totaling $132.4 million.  See “Goodwill Impairment Assessment” above and note 4(d) to our consolidated financial statements.

 

Interest Expense, Net.  Interest expense, net of interest income, for the year ended December 31, 2011 totaled $47.5 million, compared to $37.8 million for the same period in 2010.  The increase was primarily the result of interest expense associated with our Series D Preferred Stock issued in December 2010 and additional interest expense associated with the RBC Revolving Credit Facility and the Whitebox Revolving Credit Facility.  Interest expense includes dividends on mandatorily redeemable preferred stock.

 

Change in Fair Value of Derivative Liabilities.  The gain in the fair value of our derivative liabilities for the year ended December 31, 2011 totaled $33.3 million, compared to a loss of $6.4 million for the same period in 2010.  The fair

 

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values of our derivatives liabilities are subject to material changes primarily associated with fluctuations in the market value of our common stock which declined from $9.29 per share at December 31, 2010 to $2.15 per share at December 31, 2011.  When the value of our stock increases, so does the value of the derivative liabilities.  Additionally, the change in fair value of our derivative liabilities during the year ended December 31, 2011 reflects the adjustments to the conversion price of the Series B-1 Preferred Stock and the exercise prices of the 2008 and 2010 Warrants associated with the issuance of the Advisory Shares on August 29, 2011.

 

Foreign Exchange Gains/Losses.  Foreign exchange net loss for the year ended December 31, 2011 totaled $2.3 million, compared to a net gain of $0.4 million for the same period in 2010.  The net loss in 2011 was primarily the result of exchange rates weakening in the Latin America region, where local currency denominated monetary assets exceeded our local currency denominated monetary liabilities.

 

Other, Income Net.  Other income, net for the year ended December 31, 2011 totaled $4.9 million, compared to $2.1 million for the same period in 2010.  The increase was primarily the result of the $5.6 million gain on the sale of a Colombian subsidiary recorded in the third quarter of 2011 partially offset by a $1.1 million of deferred financing costs written off in connection with the early extinguishment of the RBC Revolving Credit Facility.  During the second quarter of 2011, we experienced a loss of certain equipment as a result of a wild fire in Colorado, in the United States.  During the year ended December 31, 2011, we recorded a net loss of $0.2 million related to this event, which includes insurance proceeds received of $1.5 million.  We received additional insurance proceeds of $2.1 million during the first quarter of 2012 related to this event.  All insurance proceeds will be used to replace the lost equipment.

 

Income Tax Expense.  Income tax expense totaled $2.0 million for the year ended December 31, 2011, compared to $4.8 million for the same period in 2010.  The change was primarily due to decreases in foreign withholding and deemed profits taxes.

 

Adjusted EBITDA and Net Loss.  Consolidated Adjusted EBITDA (as defined below) totaled $84.8 million for the year ended December 31, 2011, compared to $20.8 million for the same period in 2010.  The increase was primarily the result of higher activity in the United States, including increased contribution from our multi-client seismic data acquisition business and increased activity in Brunei, Australia, Algeria, UAE, Brazil, Mexico, Peru and Trinidad combined with increased activity and higher than expected operating expenses in Indonesia and Angola.  Additionally, general and administrative expenses decreased primarily due to the absence of integration costs incurred in 2010 related to the acquisition of PGS Onshore, which totaled $5.2 million.

 

North America proprietary seismic data acquisition Adjusted EBITDA for the year ended December 31, 2011 totaled $24.3 million compared to $4.1 million for the same period in 2010.  The increase was primarily the result of improved pricing and improved crew productivity in 2011 as compared to 2010.

 

International proprietary seismic data acquisition Adjusted EBITDA for the year ended December 31, 2011 totaled $(20.8) million compared to $(4.1) million for the same period in 2010.  The loss increase was primarily the result of changes in the types of surveys performed in 2011 which had lower margins coupled with the impact of additional costs incurred as a result of weather delays and constraints in Australia and Peru, civil unrest in North Africa, costs incurred following the liftboat incident in Mexico and a provision related to the potential liability for employment taxes for third country nationals performing work in certain countries.

 

Multi-client seismic data acquisition Adjusted EBITDA for the year ended December 31, 2011 totaled $117.0 million compared to $68.3 million for the same period in 2010.  The increase was primarily the result of increased pre-funding activity in 2011 as compared to 2010.

 

Seismic data processing and integrated reservoir geosciences Adjusted EBITDA for the year ended December 31, 2011 totaled $2.1 million compared to $0 million for the same period in 2010.  The increase was primarily the result of improved business mix, pricing and productivity factors.

 

The corporate components of our operations are not considered a separate operating segment.

 

We had a loss applicable to common stockholders of $231.3 million, or ($12.70) per common share, for the year ended December 31, 2011, compared to a loss applicable to common stockholders of $147.5 million, or ($8.46) per common share, for the same period in 2010.  The increase in our net loss applicable to common stock holders resulted primarily from the same variables impacting Adjusted EBITDA, the increase in multi-client amortization expense, the increase in interest expense and the goodwill and multi-client data library impairment charges offset by gains in the fair value of our derivative liabilities and gains on the sale of certain non-core assets, all described above.

 

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We define Adjusted EBITDA as Net Income (Loss) (the most directly generally accepted accounting principle or “GAAP” financial measure) before Interest, Taxes, Other Income (Expense) (including foreign exchange gains/losses, loss on early redemption of debt, gains/losses from changes in fair value of derivative liabilities and other income/expense), Asset Impairments and Depreciation and Amortization.  “Adjusted EBITDA”, as used and defined by us, may not be comparable to similarly titled measures employed by other companies and is not a measure of performance calculated in accordance with GAAP.  Adjusted EBITDA should not be considered in isolation or as a substitute for operating income, net income or loss, cash flows provided by or used in operating, investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP.  However, we believe Adjusted EBITDA is useful to an investor in evaluating our operating performance because this measure: (1) is widely used by investors in the energy industry to measure a company’s operating performance without regard to items excluded from the calculation of such term, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired, among other factors; (2) helps investors to more meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our capital structure and asset base from its operating structure; and (3) is used by our management for various purposes, including as a measure of operating performance, in presentations to our Board of Directors, as a basis for strategic planning and forecasting, and as a component for setting incentive compensation.  There are significant limitations to using Adjusted EBITDA as a measure of performance, including the inability to analyze the effect of certain recurring and non-recurring items that materially affect our net income or loss, and the lack of comparability of results of operations of different companies.

 

The reconciliation from net loss applicable to common stockholders to Adjusted EBITDA is as follows (in thousands):

 

 

 

Year Ended
December 31,

 

 

 

2011

 

2010

 

Loss applicable to common stockholders

 

$

(231,251

)

$

(147,534

)

Preferred stock dividends and accretion costs

 

9,198

 

8,850

 

Net loss

 

(222,053

)

(138,684

)

Provision for income taxes

 

2,040

 

4,810

 

Interest expense, net of interest income

 

47,540

 

37,827

 

Other (income) expense, net (as defined above)

 

(35,825

)

3,991

 

Asset impairments

 

134,756

 

 

Depreciation and amortization (1)

 

158,388

 

112,897

 

Adjusted EBITDA

 

$

84,846

 

$

20,841

 

 


(1) Includes $85.0 million and $38.0 million, respectively, in amortization expense related to our multi-client seismic data acquisition business.

 

Results of Operations for Year Ended December 31, 2010 compared to 2009

 

Operating Revenues.  Consolidated revenues for the year ended December 31, 2010 totaled $558.1 million as compared to $511.0 million for the same period in 2009, an increase of 9%.  The increase in revenues was primarily driven by the addition of the PGS Onshore operations and the contribution from the multi-client seismic data acquisition business in the U.S.

 

For the year ended December 31, 2010, seismic data acquisition revenue totaled $549.1 million compared to $500.3 million for the same period in 2009, an increase of 10%.  This increase in seismic data acquisition revenue was a result of an increase of $55.9 million in our North America proprietary seismic data acquisition international operations, a decrease of $67.9 million in our international proprietary seismic data acquisition operations and an increase of $60.8 million in our multi-client seismic data acquisition business.

 

North America proprietary seismic data acquisition revenues totaled $128.8 million, or 23% of consolidated seismic data acquisition revenue, compared to $72.9 million, or 15% of consolidated seismic data acquisition revenue, for the same period in 2009.  The increase was primarily a result of higher crew utilization.

 

International seismic data acquisition revenues were negatively impacted by lower utilization rates from a job mix that included less shallow water work, project commencement delays and weather downtime.  International proprietary seismic data acquisition revenues for the year ended December 31, 2010 totaled $349.2 million, or 64% of total seismic data

 

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acquisition revenue, compared to $417.1 million, or 83% of total seismic data acquisition related revenue, for the same period in 2009.

 

Multi-client seismic data acquisition revenues for the year ended December 31, 2010 totaled $71.1 million, or 13% of consolidated seismic data acquisition revenue, compared to $10.3 million, or 2% of consolidated seismic data acquisition revenue, for the same period in 2009.  The increase was primarily the result of increased pre-funding activity as well as increased late sales.

 

Seismic data processing and integrated reservoir geosciences revenues for the year ended December 31, 2010 totaled $11.8 million compared to $13.2 million for the same period in 2009, a decrease of 11%.  The decline in revenue was the result of depressed pricing in North America and internationally.  Additionally, the revenue generated from proprietary seismic data processing work declined slightly due to our increased focus on multi-client work in the United States.

 

The revenue information above includes inter-segment revenues between seismic data processing and integrated reservoir geosciences and other segments totaling $2.8 million and $2.5 million for the years ended December 31, 2010 and 2009, respectively.

 

Operating Expenses.  Consolidated direct operating costs totaled $455.9 million for the year ended December 31, 2010 compared to $372.8 million for the same period in 2009, an increase of 22%.  The increase in operating expense was related to overall increased costs related to operating additional PGS Onshore crews in North America and internationally.

 

Seismic data acquisition operating expenses totaled $447.0 million for the year ended December 31, 2010 compared to $364.2 million for the same period in 2009, an increase of 23%.  Seismic data acquisition operating expenses as a percentage of revenue were 81% for the year ended December 31, 2010 as compared to 73% for the same period in 2009.  This increase in operating expenses as a percentage of revenue was the result of higher idle costs in international operations coupled with a change in our job mix globally.

 

North America proprietary seismic data acquisition operating expenses for the year ended December 31, 2010 totaled $118.9 million, or 92% of total North America seismic data acquisition revenue, compared to $66.2 million, or 91% of total North America seismic data acquisition revenue, for the same period in 2009.  The costs as a percentage of revenue increased due to increased operating costs as a result of the PGS Onshore acquisition.

 

International proprietary seismic data acquisition operating expenses for the year ended December 31, 2010 totaled $326.4 million, or 93% of total international seismic data acquisition revenue, compared to $298.0 million, or 71% of total international seismic data acquisition revenue, for the same period in 2009.  International operating expenses were higher as a result of decreased activity levels due to delays in project awards and project commencements and higher as a percentage of revenue due to certain fixed costs for idle crews and vessels.

 

We capitalize the majority of operating costs directly associated with acquiring and processing multi-client data and amortize them based on a specific formula driven by actual sales and expected late sales.  Costs that are not capitalized generally represent costs incurred to deliver the projects’ data and certain expenses reimbursed by our clients. These costs totaled $1.7 million and $0.0 million for the years ended December 31, 2010 and 2009, respectively.  See Depreciation and Amortization Expense below for discussion on our multi-client seismic data acquisition business amortization expense.

 

Seismic data processing and integrated reservoir geosciences operating expenses were slightly higher at $11.7 million for the year ended December 31, 2010 compared to $11.1 million for the same period in 2009.  To remain competitive, we accepted lower margin jobs while processing a higher volume of data during 2010.

 

The expense information above includes inter-segment expense between seismic data processing and integrated reservoir geosciences and other segments totaling $2.8 million and $2.5 million for the years ended December 31, 2010 and 2009, respectively.

 

Depreciation and Amortization Expense.  Depreciation and amortization expense for the year ended December 31, 2010 totaled $112.9 million as compared to $56.9 million for the same period in 2009, an increase of $56.0 million or 98%.  This increase was primarily attributable to continued capital expenditures to support international crews along with the amortization of the multi-client data library and the purchase of $104.1 million of PGS Onshore’s fixed assets.  Amortization of multi-client data library for the year ended December 31, 2010 totaled $38.0 million, or approximately 53% of multi-client revenues, compared to $6.6 million, or approximately 64% of multi-client revenues, for the same period in 2009.  The decrease as a percentage of multi-client revenues is primarily the result of a lower rate of amortization on the pre-funded work and higher late sales during 2010 as compared to 2009.

 

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General and Administrative Expenses.  General and administrative expenses for the year ended December 31, 2010 were $81.4 million as compared to $54.9 million for the same period in 2009, an increase of $26.5 million, or 48%.  This increase was primarily due to the costs associated with the integration of the PGS Onshore acquisition including severance costs and higher salary expense associated with increased personnel levels.

 

Interest Expense.  Interest expense (net of interest income) for the year ended December 31, 2010 increased by $31.9 million, or 541%, to $37.8 million as compared to approximately $5.9 million for the same period in 2009.  This increase was primarily due to interest expense of $32.0 million related to the Notes and respective deferred issue costs and discount accretion.  Interest expense also included a $4.9 million charge related to the mandatorily redeemable preferred stock.

 

Change in Derivative Liabilities.  The loss in the fair value of our derivative liabilities for the year ended December 31, 2010 was $6.4 million compared to a loss of $7.3 million for the same period in 2009.  The fair values of our derivative liabilities are subject to material changes primarily associated with fluctuations in the market value of our common stock.  When the value of our stock increases, so does the value of the derivative liabilities.

 

Income Tax Expense.  Provision for income taxes for the year ended December 31, 2010 was $4.8 million, as compared to $23.3 million for the same period in 2009, a decrease of $18.5 million, or 79%.  The decrease was mainly due to losses in foreign jurisdictions.  In addition, we recorded a $0.8 million interest charge during 2010 on the amounts accrued for uncertain tax positions.

 

Adjusted EBITDA and Net Loss.  Adjusted EBITDA (as defined above) decreased 75% to $20.8 million for 2010 compared to $83.3 million for 2009.  This decrease was due primarily to decreased international revenues combined with decreased activity levels due to delays in project awards and project commencements.  In addition, we had increased expenses from the PGS Onshore acquisition.

 

North America seismic data acquisition Adjusted EBITDA for the year ended December 31, 2010 totaled $4.1million compared to $(0.2) million for the same period in 2009.  The increase was primarily the result of higher crew utilization.

 

International seismic data acquisition Adjusted EBITDA for the year ended December 31, 2010 totaled $(4.1) million compared to $98.4 million for the same period in 2009.  The decrease was primarily due to higher operating expenses resulting from delays in project awards and project commencements and higher costs as a percentage of revenue due to certain fixed costs for idle crews and vessels.

 

Multi-client Adjusted EBITDA for the year ended December 31, 2010 totaled $68.3 million compared to $10.3 million for the same period in 2009.  The increase was primarily the result of increased pre-funding activity as well as increased late sales during 2010.

 

Seismic data processing and integrated reservoir geosciences Adjusted EBITDA for the year ended December 31, 2010 totaled $0 million compared to $1.9 million for the same period in 2009.  The decrease was primarily the result of depressed pricing in North America and internationally.

 

The corporate components of our operations are not considered a separate operating segment.

 

We had a loss applicable to common stockholders of $147.5 million, or ($8.46) per common share, for the year ended December 31, 2010, as compared to a loss applicable to common stockholders of $34.1 million, or ($3.14) per common share, for the same period in 2009.  The increase in our net loss applicable to stockholders resulted primarily from the same variables impacting Adjusted EBITDA as well as the increase in interest expense related to the Notes and the mandatorily redeemable preferred stock (described above).

 

The reconciliation from net loss applicable to common stockholders to Adjusted EBITDA is as follows (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2010

 

2009

 

Loss applicable to common stockholders

 

$

(147,534

)

$

(34,125

)

Inducements paid to preferred stockholders

 

 

9,059

 

Preferred stock dividends and accretion costs

 

8,850

 

12,731

 

Net loss

 

(138,684

)

(12,335

)

Provision for income taxes

 

4,810

 

23,252

 

Interest expense, net of interest income

 

37,827

 

5,971

 

Other (income) expense, net (as defined above)

 

3,991

 

9,441

 

Depreciation and amortization (1)

 

112,897

 

56,921

 

Adjusted EBITDA

 

$

20,841

 

$

83,250

 

 

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(1) Includes $38.0 million and $6.6 million, respectively, in amortization expense related to our multi-client seismic data acquisition business.

 

Off-Balance Sheet Arrangements

 

We had no off-balance sheet arrangements for the year ended December 31, 2011 that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.

 

Contractual Obligations

 

The following table summarizes our obligations and commitments to make future payments of principal and interest under its long-term debt, capital leases, notes payable, mandatorily redeemable preferred stock and operating leases for the periods specified as of December 31, 2011 (in thousands):

 

Contractual Obligations Table

 

 

 

Total

 

Less than
1 year

 

1-3
years

 

4-5
years

 

Over
5 years

 

Long-Term Debt and Capital Lease Obligations

 

$

358,111

 

$

4,543

 

$

353,568

 

$

 

$

 

Interest on Long-Term Debt

 

104,438

 

34,813

 

69,625

 

 

 

Mandatorily Redeemable Preferred Stock(1)

 

76,186

 

 

 

76,186

 

 

Operational Leases(2)

 

43,790

 

32,790

 

8,323

 

2,242

 

435

 

Total

 

$

582,525

 

$

72,146

 

$

431,516

 

$

78,428

 

$

435

 

Discount on Long-Term Debt and Mandatory Redeemable Preferred Stock

 

(26,361

)

 

 

 

 

 

 

 

 

Total, Net of Discount

 

$

556,164

 

 

 

 

 

 

 

 

 

 


(1)                                  Includes accrued interest.

(2)                                  Includes minimum obligation for marine vessels on renewable 12 month time-charter.  Also includes impact of escalation clauses, as applicable.

 

Amount of Commitment Expiration Per Period

 

 

 

Total
Amounts
Committed

 

Less than
1 year

 

1-3
years

 

4-5
years

 

Over
5 years

 

Foreign Overdraft Facilities

 

$

2,361

 

$

2,361

 

$

 

$

 

$

 

 

During 2011, we entered into various financing activities as further described in “— Liquidity and Capital Resources.”

 

Critical Accounting Policies

 

A critical accounting policy is one that is both important to the presentation of our financial condition and results of operations and requires management to make difficult, subjective or complex accounting estimates.  An accounting estimate is an approximation made by management of a financial statement element, item or account in the financial statements.  Accounting estimates in our historical consolidated financial statements measure the effects of past business transactions or events, or the present status of an asset or liability.  The accounting estimates described below require us to make assumptions about matters that are highly uncertain at the time the estimate is made.  Additionally, different estimates that we could have used or changes in an accounting estimate that are reasonably likely to occur could have a material impact on the presentation of our financial condition or results of operations.  The circumstances that make these judgments difficult,

 

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subjective and/or complex have to do with the need to make estimates about the effect of matters that are inherently uncertain.  Estimates and assumptions about future events and their effects cannot be predicted with certainty.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments.  These estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes.  Our significant accounting policies are discussed in Note 2 to our consolidated financial statements.  We believe the following accounting policies involve the application of critical accounting estimates.

 

Revenue Recognition

 

Our services are provided under cancelable service contracts.  Customer contracts for services vary in terms and conditions. Contracts are either “turnkey” or “term” agreements or a combination of the two.  Under turnkey agreements or the turnkey portions thereof, we recognize revenue based upon output measures as work is performed.  This method requires that we recognize revenue based upon quantifiable measures of progress, such as square miles or linear kilometers acquired.  With respect to those contracts where the customer pays separately for the mobilization of equipment, we recognize such mobilization fees as revenue during the performance of the seismic data acquisition, using the same performance method as for the acquisition work.  We also receive revenue for certain third party charges under the terms of the service contracts.  We record amounts billed to customers in revenue as the gross amount including third party charges, if applicable, that are paid by the customer.  Our turnkey or term contracts generally do not contain cancellation provisions that would prevent us from being compensated for work performed prior to cancellation due to work not being met or work not being performed within a particular timeframe.  In some instances, customers are billed in advance of work performed and we recognize the advance billing as deferred revenue.  Taxes collected from customers and remitted to governmental authorities are excluded from our revenues.

 

We account for multi-client sales as follows:

 

(a)           Pre-funding arrangements—We obtain funding from customers before a seismic project is completed. In return for the pre-funding, the customer typically gains the ability to direct or influence the project specifications, to access data as it is being acquired and to pay discounted prices.  We recognize pre-funding revenue as the services are performed on a proportional performance basis usually determined by comparing the completed square miles of a seismic survey to the survey size unless specific facts and circumstances warrant another measure.  Progress is measured in a manner generally consistent with the physical progress on the project, and revenue is recognized based on the ratio of the project’s progress to date, provided that all other revenue recognition criteria are satisfied.

 

(b)           Late sales—When we grant a license to a customer, the customer is entitled to have access to a specifically defined portion of the multi-client seismic data library.  Our customer’s license payment is fixed and determinable and typically is required at the time that the license is granted.  We recognize revenue for late sales when our customer executes a valid license agreement, has received the underlying data or has the right to access the licensed portion of the data and collection is reasonably assured.

 

(c)           Sales of data jointly owned by us and partner—We have jointly acquired surveys with a partner whereby we share the costs of acquisition and earn license revenues.  These revenues are recognized as the services are performed on a proportional performance basis provided that all other revenue recognition criteria are satisfied.

 

Deferred revenue consists primarily of customer payments made in advance of work done, progress billings and mobilization revenue, amortized over the term of the related contract.

 

Multi-Client Seismic Data Library

 

We capitalize all costs directly associated with acquiring and processing the seismic data, including the depreciation of the assets used during production of the surveys.  We refer to these costs as our gross multi-client investment.  The capitalized cost of the multi-client data is charged to depreciation and amortization expense in the period the sales occur based on the greater of the percentage of total estimated costs to the total estimated sales in the first five years multiplied by

 

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actual sales, known as the sales forecast method, or the straight-line amortization method over five years.  This minimum straight-line amortization is recorded only if minimum amortization exceeds the amortization expense calculated using the sales forecast method.

 

We periodically review the carrying value of the multi-client seismic data library.  If during any such review, we determine that the future revenue for a multi-client survey is expected to be more or less than the original estimate of total revenue, we decrease or increase (as the case may be) the amortization rate attributable to the future revenue from the multi-client survey.  Furthermore, in connection with the review, we evaluate the recoverability of the multi-client seismic data library, and if required under applicable accounting guidance, we record an impairment charge with respect to the multi-client survey.  During the fourth quarter of 2011, we performed our impairment review of the carrying value of the multi-client seismic data library and determined that a specific multi-client survey was fully impairedAccordingly, we recorded an impairment charge of $2.4 million as of December 31, 2011, which is included in asset impairments in our consolidated statement of operations.  There were no impairment charges determined for 2010 or 2009.

 

Fair Value of Derivative Liabilities and Other Financial Instruments

 

Accounting guidance defines fair value, establishes a framework for measuring fair value under GAAP and requires certain disclosures about fair value measurements.

 

We have convertible preferred stock issued and outstanding and common stock warrants issued in connection with a preferred stock issuance in July 2008 and December 2010.  Both the convertible preferred stock conversion feature and the warrants contain a price protection provision (or down-round provision) which reduces their price in the event we issue additional shares at a more favorable price than the strike price.  The fair value of the conversion feature is bifurcated from the host instrument and recognized as a derivative liability on our consolidated balance sheet.  The warrants are also recognized at fair value as a derivative liability on our consolidated balance sheet.  The fair value of the conversion feature, the warrants and other issuance costs of the preferred stock financing transaction, are recognized as a discount to the preferred stock host.  The discount embedded in Series B Preferred Stock is accreted to the preferred stock host from our paid in capital, treated as a deemed dividend, over the period from the issuance date through the earliest redemption date of the preferred stock.  The discount embedded in Series C Preferred Stock and Series D Preferred Stock is accreted to the preferred stock from the period from issuance date through the redemption date and is recorded in interest expense.

 

We are not a party to any hedge arrangements, commodity swap agreement or other derivative financial instruments.

 

Goodwill

 

During 2011, as a result of an interim impairment test as of September 30, 2011, we recorded goodwill impairment charges totaling $132.4 million, which are included in asset impairments in our consolidated statement of operations.  Accordingly, at December 31, 2011, we have no goodwill.  See note 4(d) to our consolidated financial statements.

 

We historically performed impairment tests on the carrying value of our goodwill on an annual basis as of December 31, or more frequently if events occur or circumstances changed that would more likely than not reduce the fair value of a reporting unit below its carrying amount.  Goodwill is tested for impairment at the reporting unit level.  In accordance with the applicable accounting guidance, we performed a two-step impairment test for goodwill.  In the first step of the impairment test the fair value of a reporting unit is compared to its carrying amount, including goodwill, to determine if a potential impairment exists.  If the carrying amount of the reporting unit exceeds its fair value, the second step is performed to measure the amount of impairment by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill.  Significant judgment is involved in performing these fair value estimates since the results are based on forecasted assumptions.

 

For the goodwill impairment tests, we used a combination of the discounted cash flow method (income approach) and the subject company market approach.  The discounted cash flow method focuses on expected cash flows.  In applying this approach, the expected cash flow were projected based on assumptions regarding revenues, direct costs, general and administrative expenses, depreciation, applicable income taxes, capital expenditures and working capital requirements for a finite period of years, which was five years in our tests.  The projected cash flows and the terminal value, which was an estimate of the value at the end of the finite period and assumed a long-term growth rate, were then discounted to present value to derive an indication of the value of the reporting unit.  The discount rate used represented the estimated weighted average cost of capital consistent with the risk inherent in our future cash flows.  A higher discount rate decreases the net present value of cash flows.  We also utilized the subject company market approach which made a comparison of our

 

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projections to reasonably similar publicly traded companies.  In weighting the results of the different valuation approaches, we placed more emphasis on the income approach.

 

An estimate of the sensitivity to net income resulting from goodwill impairment calculations is not practicable, given the numerous assumptions that can materially affect the estimates within.

 

Long-Lived Assets

 

Estimated useful lives are the mechanism by which we allocate the cost of long-lived assets over the asset’s service period.  The estimated useful lives of our long-lived assets are used to compute depreciation expense and estimate expected future cash flows attributable to an asset for the purposes of impairment testing.  Estimated useful lives are based, in part, on the assumption that we provide an appropriate level of required maintenance expenditures while the assets are still in operation.  Without these continued expenditures, the useful lives of these assets could decrease significantly.

 

The Company reviews long-lived assets for impairment annually or whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.  Recoverability is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds either the fair value or the estimated discounted cash flows of the assets, whichever is more readily measurable.

 

Contingent Liabilities

 

We record loss contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated.  We consider loss contingency estimates to be critical accounting estimates because they entail significant judgment regarding probabilities and ranges of exposure, and the ultimate outcome of the proceedings is unknown and could have a material adverse effect on our results of operations, financial condition and cash flows.  We record our best estimate of a loss, or the low end of our range if no estimate is better than another estimate within a range of estimates, when the loss is considered probable.  As additional information becomes available, we reassess the potential liability related to the contingency and revise our estimates.  In our evaluation of legal matters, management holds discussions with applicable legal counsel and relies on analysis of case law and legal precedents.  We currently have loss contingencies related to litigation and tax matters.  See notes 14 and 16 to our consolidated financial statements.

 

Litigation

 

We are currently involved in various legal proceedings.  We estimate the range of liability through discussions with applicable legal counsel and analysis of case law and legal precedents.  We record our best estimate of a loss, or the low end of our range if no estimate is better than another estimate within a range of estimates, when the loss is considered probable and can be reasonably estimated.  As additional information becomes available, we reassess the potential liability related to our pending litigation and revise our estimates.  Revisions in our estimates of the potential liability could materially affect our results of operations and the ultimate resolution may be materially different from the estimates that we make.  See note 16 to our consolidated financial statements.

 

Recent Accounting Pronouncements

 

See note 2 to our consolidated financial statements.

 

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to certain market risks arising from the use of financial instruments in the ordinary course of business.  These risks arise primarily as a result of potential changes to operating concentration and credit risk and foreign currency exchange rate risks.  Additionally, we are exposed to market risk with respect to our own equity securities.  These risks are further discussed below.

 

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Concentration and Credit Risk

 

In the normal course of business, we provide credit terms to our customers.  As all of our customers are engaged in the oil and gas industry, they are similarly affected by changes in economic and industry conditions.  Fluctuations in commodity prices affect demand for and pricing of our services and impact the concentration of our customers and our exposure to credit risk.

 

We typically provide services to a relatively small group of key customers that account for a significant percentage of our accounts receivable at any given time.  If any of our key clients were to terminate their contracts or fail to contract for our services in the future because they are acquired, alter their exploration or development strategy, or for any other reason, our results of operations could be affected.  However, key customers change from year to year and the largest customers in any year may not be indicative of the largest customers in any subsequent year.  For the year ended December 31, 2011, our top 10 customers represented 54% of our consolidated revenue for the period.  Our largest customer accounted for 15% of our consolidated revenue for the year ended December 31, 2011. One customer accounted for 13% of our consolidated accounts receivable as of December 31, 2011, and 4% of consolidated revenue for the year then ended.

 

We utilize the specific identification method for establishing and maintaining allowances for possible losses.  Our allowance for doubtful accounts at December 31, 2011 was $2.8 million, primarily reflecting specific agreement disputes with a customer in the Asia-Pacific region.  Our bad debt expense for the year ended December 31, 2011 was $1.9 million.  During the first and second quarters of 2011, we recorded a reserve totaling $2.5 million related to a dispute with a customer in the Africa region.  During the third quarter of 2011, we resolved this dispute, resulting in a $1.0 million collection and $1.5 million write-off of our allowance for doubtful accounts.

 

We have cash and restricted cash balances which, at times, may exceed federally insured limits. Restricted cash includes cash held to collateralize standby letters of credit and performance guarantees.  At December 31, 2011, restricted cash also includes cash held in trust in connection with a short-term project financing agreement entered into in November 2011.  Volatility in financial markets may impact our credit risk on cash and short-term investments.  At December 31, 2011, cash and cash equivalents and restricted cash totaled $47.8 million.

 

Interest Rate Risk

 

Through August 12, 2011, we remained exposed to the impact of interest rate changes on the outstanding indebtedness under our Whitebox Revolving Credit Facility as amounts drawn under the facility continued to bear interest at a floating rate based on a specific formula as per the RBC Revolving Credit Facility, as amended.  Subsequent to entering into the amended and restated credit agreement with the Lenders on August 12, 2011, we are no longer exposed to the impact of interest rate changes on the outstanding indebtedness under the Whitebox Revolving Credit Facility, which has an 11.125% fixed interest rate.  See note 6 to our consolidated financial statements.

 

We are exposed to the impact of interest rate changes on the outstanding indebtedness under our short-term project financing agreement.  Amounts drawn under this line of credit bear interest at 8.0% plus one-month LIBOR rate.  The impact from a hypothetical 100 basis points increase in interest rates based on the average outstanding balance of this variable debt rate would be insignificant to our consolidated financial statements.

 

The fair market value of fixed-rate long-term debt increases as prevailing interest rates decrease and decreases as prevailing interest rates increase.  Increases in the fair value of our fixed-rate debt affect our results of operations and cash flows only if we elect to repurchase or otherwise retire fixed-rate debt at prices above carrying value.  The estimated fair value of our fixed-rate long-term debt was $218.5 million and $299.4 million at December 31, 2011 and 2010, respectively.

 

Foreign Currency Exchange Rate Risk

 

We operate in several countries and are involved in transactions denominated in currencies other than the U.S. dollar, which expose us to foreign currency exchange rate risk.  We utilize the payment structure of customer contracts to selectively reduce our exposure to exchange rate fluctuations in connection with monetary assets, liabilities and cash flows denominated in certain foreign currencies.  We do not hold or issue foreign currency forward contracts, option contracts or other derivative financial instruments for speculative purposes.

 

We have designated the U.S. dollar as the functional currency for our operations in international locations because the majority of our contracts with customers are denominated in U.S. dollars and we purchase equipment and finance capital primarily using the U.S. dollar.  Accordingly, certain assets and liabilities of foreign operations are translated at historical exchange rates, revenues and expenses are translated at the average rate of exchange for the period, and all translation gains or losses are reflected in the period’s results of operations.  Our net foreign exchange loss attributable to our international operations for the year ended December 31, 2011 was $2.3 million, which was primarily attributable to exchange rates weakening in the Latin America region, where local currency denominated monetary assets exceeded our local currency denominated monetary liabilities.  A 10% change in the U.S. dollar as compared to the currencies of Brazil, Mexico, Australia and Canada, would

 

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cause approximately a $2.5 million increase or decrease in our foreign exchange gains (losses) in the consolidated statement of operations.

 

Equity Risk

 

Under the terms of our Series B Preferred Stock and existing warrants and options to purchase our common stock, the holders of these instruments are given an opportunity to profit from a rise in the market price of our common stock that, upon the conversion of our Series B Preferred Stock and the exercise of the warrants and/or options, could result in dilution in the interests of our other stockholders.  See our discussion in Item 1A. “Risks Related to Our Common and Preferred Stock” and note 9 to our consolidated financial statements.  The holders of our Series B Preferred Stock have the preemptive right to acquire shares of our common stock that we may offer for cash in the future, other than shares sold in a public offering.  In addition, the conversion price of the Series B Preferred Stock, and the exercise price of the 2008 Warrants and the 2010 Warrants are subject to anti-dilution adjustments if we issue common stock at a price less than the applicable conversion or exercise price. The terms on which we may obtain additional financing may be adversely affected by the existence and potentially dilutive impact of our Series B Preferred Stock, and common stock options and warrants.

 

In connection with the execution of the amended and restated credit agreement for the Whitebox Revolving Credit Facility on August 12, 2011, the Company paid a $4.0 million advisory fee by issuing 1,041,668 shares of common stock (the Advisory Shares) on August 29, 2011.  The issuance of the Advisory Shares triggered the anti-dilution provisions of the Series B Preferred Stock, the 2008 Warrants and the 2010 Warrants.  See notes 7 and 9 to our consolidated financial statements.  Accordingly, when the common stock was issued in payment of the advisory fee, the conversion price of our Series B Preferred Stock and the exercise price of the 2008 Warrants were reduced from $16.40 to $15.95 per share and from $9.25 to $9.05 per share, respectively, in accordance with an anti-dilution formula, and the exercise price of the 2010 Warrants was reduced from $9.64 to $3.84 per share, or the issue price of the Advisory Shares.  The anti-dilution formula for the preferred stock reduced the conversion price by multiplying the conversion price by a fraction, the numerator or which is (i) the number of fully diluted shares of common stock outstanding prior to issuance plus the number of shares of common stock that $4.0 million would purchase at such conversion price and (ii) the denominator of which is the sum of the number of fully diluted shares outstanding prior to the issuance plus the number of shares issued in payment of the advisory fee.  The anti-dilution adjustment to the 2008 Warrants was similar, substituting the exercise price for the conversion price.

 

In connection with the Commitment Letter entered into on March 16. 2012 with the Avista Financing Parties, we are obligated to deliver either warrants to purchase 190,000 shares of the Company’s common stock or its cash equivalent value, at our election, at the earlier of a purchase of any Additional Avista Notes or June 30, 2012 (unless the Commitment is terminated earlier than June 30, 2012 and prior to any such purchase).  We will also be obligated to deliver warrants to purchase an additional 190,000 shares of the Company’s common stock or its cash equivalent value, at our election, at each of June 30, 2012, September 30, 2012 and December 31, 2012 if the Commitment or any Notes remain outstanding as of the applicable foregoing dates.  Certain of the financing transactions under the Commitment Letter are subject to a right of first refusal in favor of certain of our existing senior lenders, the exercise of which right would cause the Commitment Letter to terminate and require that we issue to Avista warrants to purchase 190,000 shares of common stock or its cash equivalent value, at our election.

 

In accordance with the terms of the Commitment Letter, the warrants issued in connection with the transactions contemplated under the Commitment will have an exercise price of $0.01 per share of common stock and otherwise will be issued with terms substantially similar to the warrants we issued to the Avista Financing Parties in 2010. 

 

Fair Value Measurements

 

As a result of certain anti-dilution provisions in the Series B Preferred Stock conversion feature and the 2008 Warrants and 2010 Warrants, these instruments are recorded at fair value on a recurring basis as derivative liabilities in our consolidated balance sheet.  See notes 7 and 9 to our consolidated financial statements.  Changes in the fair value of these derivative liabilities are recorded in other income (expense) as unrealized gains and losses.  The fair values of these instruments are subject to material changes primarily associated with fluctuations in the market value of our common stock.  Generally, as the market value of our stock increases/decreases, the fair values of our derivative liabilities increase/decrease and a corresponding loss/gain is recorded.  In addition, our estimate of the fair value of these instruments includes key assumptions for volatility and a risk-free discount rate.  We recorded unrealized gains of $33.3 million, and unrealized losses of $6.4 million and $7.3 million for the years ended December 31, 2011, 2010 and 2009, respectively.  These unrealized gains and losses are primarily the result of changes in the price of our common stock at the valuation dates.  When the value of our stock increases/decreases, so does the value of the derivatives.  During 2011, the gain in the fair value of our derivative liabilities also includes the impact of adjustments to the conversion price of the Series B Preferred Stock and the exercise prices of the 2008 and 2010 Warrants as a result of the issuance of the Advisory Shares on August 29, 2011, described above.

 

Due to the degree of estimation involved, our derivative liabilities are classified as Level 3 in the fair value hierarchy.  See note 8 to our consolidated financial statements.

 

Item 8.  Financial Statements and Supplementary Data

 

Our Annual Consolidated Financial Statements, Notes to Consolidated Financial Statements and the reports of UHY LLP (“UHY”), our independent registered public accounting firm, with respect thereto, referred to in the Table of Contents to Consolidated Financial Statements, appear beginning on Page F-1 of this document and are incorporated herein by reference.

 

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Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

During the years ended December 31, 2011, 2010 and 2009, there were no disagreements with UHY on any significant accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of UHY, would have caused it to make reference thereto in connection with their respective reports on our financial statements for such years.  No reportable event as described in paragraph (a)(1)(v) of item 304 of Regulation S-K occurred during the years ended December 31, 2011, 2010, and 2009.

 

Item 9A.  Controls and Procedures

 

(a)  Effectiveness of Disclosure Controls and Procedures.  We maintain disclosure controls and procedures that are designed to ensure information required to be disclosed in our reports under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.

 

Our management, including the CEO and CFO, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal year covered by this Annual Report on Form 10-K.  As described below under Management’s Annual Report on Internal Control over Financial Reporting, we have identified a material weakness as of December 31, 2011.  As a result of this material weakness, our CEO and CFO have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were not effective.

 

(b)  Management’s Annual Report on Internal Control over Financial Reporting.  Our management including our CEO and CFO are responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:

 

·      pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets;

 

·      provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and

 

·      provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our consolidated financial statements.

 

Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risks controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011, and in making this assessment, used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Based on this assessment, management identified the following material weakness as of December 31, 2011:

 

·      Financial Close Process:  Controls over our financial close process were deficient in areas related to accrued liabilities, goodwill impairment  and accounting for multi-client seismic data library.  These deficiencies resulted from difficulties in accumulating complete and accurate information to estimate certain  liabilities, inadequate review of work performed by third parties and material post-closing adjustments related to accounting for multi-client seismic data library resulting from difficulties in remediating deficiencies in time to allow us to assess the effectiveness of the controls  as of December 31, 2011 due to the timing in which we formalized our controls and procedures related to this area.

 

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Our independent registered public accounting firm, UHY LLP, has issued a report on our internal control over financial reporting. UHY LLP’s report can be found on page F-3.

 

(c)  Changes in Internal Controls Over Financial Reporting.  We significantly upgraded the accounting and finance staff by hiring professionals with experience in designing, implementing and managing global accounting and finance organizations with effective policies, procedures and processes including required global systems design and integration. We issued and implemented a complete set of accounting policies and procedures.  Additionally, we designed and implemented a global financial close process, including the enhancement of our systems and related standard reporting, including a global accounting package.  Finally, we performed a full review of key internal controls to ensure independent management and review over accounts and disclosures in our consolidated financial statements.  These improvements were implemented beginning primarily in the third quarter of 2011.

 

(d)  Remediation of the Material Weaknesses in Internal Control over Financial Reporting.  Our management, including the CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures for the fiscal year ended December 31, 2011 and concluded that our disclosure controls and procedures were not effective as material weaknesses were identified in our financial reporting process.

 

To remediate this material weakness, in 2012, management will continue executing the remediation program that began in mid-2010 and includes the following:

 

·      Financial Close Process.  We will assess the adequacy of processes and procedures underlying these specific areas, expand and strengthen our controls surrounding the multi-client process and strengthen our policies, procedures and controls surrounding accrued expenses ensuring cooperation and coordination with departments outside of the accounting department.

 

As of December 31, 2010, management identified material weaknesses in our entity level controls (control environment) and our corporate financial reporting process.  During the fourth quarter of 2010 and throughout 2011, management was actively engaged in the implementation of aggressive remediation efforts to address the material weaknesses, as well as other areas of risk.

 

Key components of the comprehensive remediation program included the following:

 

·      Control Environment. We hired experienced personnel in key positions in our control environment.  These included a Chief Financial Officer (30 years of experience), a Chief Accounting Officer (26 years of experience), a Chief Information Officer (31 years of experience), a Vice President of Finance and Treasurer (16 years of experience), a Vice President of Tax (16 years of experience), a Corporate Controller (20 years of experience), a Director of Internal Audit (40 years of experience) and a Corporate Tax Manager (28 years of experience).  These personnel have extensive experience in the design, implementation and enforcement of an effective control environment.

 

·      Financial Reporting Process. We reorganized and began to upgrade the skill sets of the global accounting team.  Additionally, we implemented uniform global accounting policies and procedures and improved the transparency of our financial reporting process through enhancements to our financial reporting system.  During the third and fourth quarters of 2011, we built on the implementation of these policies and procedures, including improved month-end close processes and improved reporting requirements from our global accounting organization.  Finally, we continued to make further improvements to our financial reporting system.

 

Management believes the actions taken throughout 2011 and the resulting improvement in controls remedied the material weaknesses associated with our control environment identified as of December 31, 2010.

 

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Item 9B.  Other Information

 

None.

 

PART III

 

Item 10.  Directors, Executive Officers and Corporate Governance

 

The information required by Item 10 is incorporated by reference to our definitive proxy statement for our Annual Meeting of Stockholders to be held on June 14, 2012, which we expect to file with the SEC within 120 days after December 31, 2011.

 

Our Code of Business Conduct and Ethics was adopted by the Board of Directors on December 28, 2006, and applies to our directors, officers and employees, including the principal executive officer and principal financial officer. Our Code of Business Conduct and Ethics is available on our website and www.geokinetics.com under “Investor Relations” and “Corporate Governance.”

 

The certifications of our chief executive officer and chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 are attached as Exhibits 31.1 and 31.2 to this report.

 

Item 11.  Executive Compensation

 

The information required by Item 11 is incorporated by reference to our definitive proxy statement for our Annual Meeting of Stockholders to be held on June 14, 2012, which we expect to file with the SEC within 120 days after December 31, 2011.

 

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

Securities Authorized for Issuance under Equity Compensation Plans

 

As of December 31, 2011, we had three active equity compensation plans approved by security holders: the 2002 Stock Awards Plan, the 2007 Stock Awards Plan and the 2010 Stock Awards Plan.  Adopted in March 2003 and amended in November 2006, the 2002 Plan has 800,000 shares of common stock authorized for issuance; the 2007 Plan, adopted on May 23, 2007, has 750,000 shares of common stock authorized for issuance; and the 2010 Plan, adopted on April 1, 2010, has 1,600,000 shares of common stock authorized for issuance.

 

Plan Category

 

Number of Securities to be
Issued upon Exercise of
Outstanding Options,
Warrants and Rights
(a)

 

Weighted-average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)

 

Number of Securities
Remaining Available for
Future Issuances Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a))
(c)

 

Equity Compensation Plans Approved by Security Holders

 

709,550

 

9.82

 

1,154,218

 

Equity Compensation Plans Not Approved by Security Holders

 

 

 

 

Total

 

709,550

 

9.82

 

1,154,218

 

 

The information required by Item 12 is incorporated by reference to our definitive proxy statement for our Annual Meeting of Stockholders to be held on June 14, 2012, which we expect to file with the SEC within 120 days after December 31, 2011.

 

Item 13.  Certain Relationships and Related Transactions, and Director Independence

 

The information required by Item 13 is incorporated by reference to our definitive proxy statement for our Annual Meeting of Stockholders to be held on June 14, 2012, which we expect to file with the SEC within 120 days after December 31, 2011.

 

Item 14.  Principal Accounting Fees and Services

 

The information required by Item 14 is incorporated by reference to our definitive proxy statement for our Annual Meeting of Stockholders to be held on June 14, 2012, which we expect to file with the SEC within 120 days after December 31, 2011.

 

PART IV

 

Item 15.  Exhibits and Financial Statement Schedules

 

(a)                                  List of documents as part of this Report:

 

(1)                                  Consolidated Financial Statements and Report of Independent Public Accounting Firm: See Index on page F-1.

 

(2)                                  Financial Statements Schedule

 

All other schedules are omitted as they are inapplicable or the required information is furnished in our Consolidated Financial Statements or the Notes thereto.

 

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(3)                                 Exhibits

 

3.1

 

Certificate of Incorporation of the Company (incorporated by reference from Exhibit 3.1 to the Company’s Registration Statement on Form S-3 filed on June 26, 2009 (file no. 333-160268)).

 

 

 

3.2

 

Amended and Restated Bylaws of the Company (incorporated by reference from Exhibit 3.2 to the Company’s Registration Statement on Form S-3 filed on June 26, 2009 (file no. 333-160268)).

 

 

 

3.3

 

Amendment to the Bylaws of the Company (incorporated by reference from Exhibit 3.1 to Form 8-K filed on May 17, 2007 (file no. 001-33460)).

 

 

 

4.1

 

First Amended Certificate of Designation of Series C Senior Preferred Stock (incorporated by reference from Exhibit 4.4 to Form 8-K filed on February 16, 2010 (file no. 001-33460)).

 

 

 

4.2

 

Fourth Amended Certificate of Designation of Series B Senior Convertible Preferred Stock (incorporated by reference from Exhibit 4.5 to Form 8-K filed on February 16, 2010 (file no. 001-33460)).

 

 

 

4.3

 

Certificate of Designation of Series D Junior Preferred Stock (incorporated by reference from Exhibit 4.2 to Form 8-K filed on December 15, 2010 (file no. 001-33460)).

 

 

 

4.4

 

Warrant, dated July 28, 2008, issued by Geokinetics Inc. to Avista Capital Partners, L.P. (incorporated by reference from Exhibit 10.4 to Form 8-K filed on July 30, 2008 (file no. 001-33460)).

 

 

 

4.5

 

Warrant, dated July 28, 2008, issued by Geokinetics Inc. to Avista Capital Partners (Offshore), L.P. (incorporated by reference from Exhibit 10.6 to Form 8-K filed on July 30, 2008 (file no. 001-33460)).

 

 

 

4.6

 

Indenture, dated as of December 23, 2009 by and among Geokinetics Holdings USA, Inc., Geokinetics Inc. and U.S. Bank National Association, as trustee (incorporated by reference from Exhibit 4.1 to Form 8-K filed December 28, 2009 (file no. 001-33460)).

 

 

 

4.7

 

Registration Rights Agreement, dated as of December 23, 2009, by and among Geokinetics Holdings USA, Inc., Geokinetics Inc., the subsidiary guarantors party thereto and RBC Capital Markets Corporation and Banc of America Securities LLC, as representatives of the several initial purchasers. (incorporated by reference from Exhibit 4.3 to Form 8-K filed December 28, 2009 (file no. 001-33460)).

 

 

 

4.8

 

Supplemental Indenture No. 1, dated as of February 12, 2010, by and among Geokinetics Holdings USA, Inc., Geokinetics Inc., the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee (incorporated by reference from Exhibit 4.2 to Form 8-K filed on February 16, 2010 (file no. 001-33460)).

 

 

 

4.9

 

Second Amended and Restated Registration Rights Agreement, dated February 12, 2010, by and among Geokinetics Inc. and the holders named therein (incorporated by reference from Exhibit 4.3 to Form 8-K filed on February 16, 2010 (file no. 001-33460)).

 

 

 

4.10

 

Form of 2010 Warrants (incorporated by reference from Exhibit 4.3 to Form 8-K filed on December 15, 2010 (file no. 001-33460)).

 

 

 

4.11

 

First Amendment, to Second Amended and Restated Registration Rights Agreement, by and among Geokinetics Inc. and the holders named therein (incorporated by reference from Exhibit 4.4 to Form 8-K filed on December 15, 2010 (file no. 001-33460)).

 

 

 

10.1†

 

2007 Geokinetics Inc. Stock Awards Plan (incorporated by reference from Exhibit 4.1 to Form S-8 filed on July 20, 2007 (file no. 333-144763))

 

 

 

10.2

 

Series B-2 and Warrant Purchase Agreement, dated July 28, 2008, by and among Geokinetics Inc. and the purchasers named therein. (incorporated by reference from Exhibit 10.3 to Form 8-K filed on July 30, 2008 (file no. 001-33460)).

 

 

 

10.3†

 

Employment Agreement by and between Geokinetics Inc. and Richard F. Miles dated October 21, 2008 (incorporated by reference from Exhibit 10.1 to Form 8-K filed on October 27, 2008 (file no. 001-33460)).

 

 

 

10.4

 

Amendment and Exchange Agreement dated December 2, 2009, by and among Geokinetics Inc., Avista Capital Partners, L.P., Avista Capital Partners (Offshore), L.P., and Levant America S.A. (incorporated by reference from Exhibit 10.2 to Form 8-K filed December 4, 2009 (file no. 001-33460)).

 

 

 

10.5

 

Purchase Agreement, dated December 3, 2009, by and among Geokinetics Inc. and certain of its direct and indirect wholly owned subsidiaries, and Petroleum Geo-Services ASA and certain of its direct and indirect wholly owned subsidiaries (incorporated by reference from Exhibit 10.1 to Form 8-K filed December 4, 2009 (file no. 001-33460)).

 

 

 

10.6

 

Underwriting Agreement, dated as of December 14, 2009, among Geokinetics Inc. and RBC Capital Markets Corporation, as representative of the several underwriters named therein (incorporated by reference from Exhibit 1.1 to Form 8-K filed December 16, 2009 (file no. 001-33460)).

 

 

 

10.7

 

Purchase Agreement, dated December 18, 2009, by and among Geokinetics Holdings USA, Inc., Geokinetics Inc. and RBC Capital Markets Corporation and Banc of America Securities LLC, as representatives of the several initial purchasers (incorporated by reference from Exhibit 10.1 to Form 8-K filed December 22, 2009 (file no. 001-33460)).

 

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10.8

 

Collateral Trust and Intercreditor Agreement, dated as of December 23, 2009, by and among Geokinetics Inc., Geokinetics Holdings USA, Inc., the guarantors party thereto, the priority debt representatives party thereto and U.S. Bank National Association, as trustee (incorporated by reference from Exhibit 4.2 to Form 8-K filed December 28, 2009 (file no. 001-33460)).

 

 

 

10.9

 

Credit Agreement, dated as of February 12, 2010 by and among Geokinetics Holdings USA, Inc. and Royal Bank of Canada as administrative and collateral agent to the certain lenders named therein (incorporated by reference from Exhibit 10.1 to Form 8-K filed on February 16, 2010 (file no. 001-33460)).

 

 

 

10.10

 

Guaranty, dated as of February 12, 2010, by and among Geokinetics Inc., the signatures party thereto and the additional guarantors party thereto (incorporated by reference from Exhibit 10.2 to Form 8-K filed on February 16, 2010 (file no. 001-33460)).

 

 

 

10.11†

 

Employment Agreement by and between Geokinetics Inc. and Lee Parker dated March 22, 2010 (incorporated by reference from Exhibit 10.5 to Form 10-Q filed on May 7, 2010 (file no. 001-33460)).

 

 

 

10.12†

 

Geokinetics Inc. 2010 Stock Awards Plan (incorporated by reference to Exhibit A of our Proxy Statement on Schedule 14A filed on March 29, 2010 (file no. 001-33460)).

 

 

 

10.13

 

Amendment No. 1 to the Credit Agreement, dated as of June 30, 2010, by and among Geokinetics Holdings USA, Inc. and Royal Bank of Canada as agent to the certain lenders named therein (incorporated by reference from Exhibit 10.1 to Form 8-K filed on July 2, 2010 (file no. 001-33460)).

 

 

 

10.14

 

Waiver and Amendment No. 2 to the Credit Agreement, dated as of October 1, 2010, by and among Geokinetics Holdings USA, Inc. and Royal Bank of Canada as agent to the certain lenders named therein (incorporated by reference from Exhibit 10.1 to Form 8-K filed on October 5, 2010 (file no. 001-33460)).

 

 

 

10.15†

 

Employment Agreement by and between Geokinetics Inc. and Gary L. Pittman dated October 13, 2010 (incorporated by reference from Exhibit 10.1 to Form 8-K filed on October 14, 2010 (file no. 001-33460)).

 

 

 

10.16

 

Waiver and Amendment No. 3 to the Credit Agreement, dated as of December 13, 2010, by and among Geokinetics Holdings USA, Inc. and Royal Bank of Canada as agent to the certain lenders named therein (incorporated by reference from Exhibit 10.1 to Form 8-K filed on December 15, 2010 (file no. 001-33460)).

 

 

 

10.17

 

Series D Preferred Stock and Warrant Purchase Agreement dated December 14, 2010, among Geokinetics Inc. and the purchasers party thereto (incorporated by reference from Exhibit 4.1 to Form 8-K filed on December 15, 2010 (file no. 001-33460)).

 

 

 

10.18

 

Form of Indemnification Agreement by and between Geokinetics Inc. and directors and executive officers (incorporated by reference from Exhibit 10.1 to Form 8-K filed on January 28, 2011 (file no. 001-33460)).

 

 

 

10.19†

 

Employment Agreement by and between Geokinetics Inc. and Diana Moore dated February 10, 2011 (incorporated by reference from Exhibit 10.1 to Form 8-K filed on February 10, 2011 (file no. 001-33460)).

 

 

 

10.20*

 

Confidential Release and Settlement Agreement by and between Geokinetics Inc. and Gerald Gilbert dated December 31, 2011.

 

 

 

12.1*

 

Statement Regarding the Computation of Ratio of Earnings to Fixed Charges.

 

 

 

21.1*

 

Subsidiaries of the Company.

 

 

 

23.1*

 

Consent of UHY LLP.

 

 

 

24.2*

 

Power of Attorney (incorporated by reference).

 

 

 

31.1*

 

Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.

 

 

 

31.2*

 

Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.

 

 

 

32.1*

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101**

 

Interactive Data Files.

 


*                 Filed herewith.

**          Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability.

†     Management contract or compensatory plan or arrangement

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

GEOKINETICS INC.

 

 

Date: March 23, 2012

By:

/s/ Richard F. Miles

 

 

Richard F. Miles

 

 

President and Chief Executive Officer

 

 

(Authorized Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant and in the capacities and on the dates indicated.

 

Date: March 23, 2012

By:

/s/ Richard F. Miles

 

 

Richard F. Miles

 

 

President and Chief Executive Officer

 

 

(Principal Executive officer)

 

 

 

Date: March 23, 2012

 

/s/ Gary L. Pittman

 

 

Gary L. Pittman

 

 

Executive Vice President and Chief Financial Officer

 

 

(Principal Financial Officer)

 

 

 

Date: March 23, 2012

 

/s/ Diana S. Moore

 

 

Diana S. Moore

 

 

Vice President and Chief Accounting Officer

 

 

(Principal Accounting Officer)

 

 

 

Date: March 23, 2012

 

/s/ William R. Ziegler

 

 

William R. Ziegler

 

 

Director (Non-executive Chairman)

 

 

 

Date: March 23, 2012

 

/s/ Steven A. Webster

 

 

Steven A. Webster

 

 

Director

 

 

 

Date: March 23, 2012

 

/s/ Christopher M. Harte

 

 

Christopher M. Harte

 

 

Director

 

 

 

Date: March 23, 2012

 

/s/ Gary M. Pittman

 

 

Gary M. Pittman

 

 

Director

 

 

 

Date: March 23, 2012

 

/s/ Robert L. Cabes, Jr.

 

 

Robert L. Cabes, Jr.

 

 

Director

 

 

 

Date: March 23, 2012

 

/s/ Christopher D. Strong

 

 

Christopher D. Strong

 

 

Director

 

 

 

Date: March 23, 2012

 

/s/ Anthony Tripodo

 

 

Anthony Tripodo

 

 

Director

 

 

 

Date: March 23, 2012

 

/s/ Gottfred Langseth

 

 

Gottfred Langseth

 

 

Director

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of Geokinetics Inc.:

 

We have audited the accompanying consolidated balance sheets of Geokinetics Inc. and Subsidiaries (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2011.  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 the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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 Geokinetics Inc. and Subsidiaries as of December 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of Public Company Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 23, 2012 expressed an adverse opinion.

 

/s/ UHY LLP

 

Houston, Texas

March 23, 2012

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of Geokinetics Inc.:

 

We have audited Geokinetics Inc. and Subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. Controls over the financial close process were deficient in areas related to accrued liabilities, goodwill impairment and accounting for multi-client seismic data library.  These deficiencies resulted from difficulties in accumulating complete and accurate information to estimate certain  liabilities, inadequate review of work performed by third parties and material post-closing adjustments related to accounting for multi-client seismic data library resulting from difficulties in remediating deficiencies in time to assess the effectiveness of the controls  as of December 31, 2011 due to the timing in which the Company formalized the controls and procedures related to this area.  This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2011 consolidated financial statements, and this report does not affect our report dated March 23, 2012 on those consolidated financial statements.

 

In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Geokinetics Inc. and Subsidiaries has not maintained effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2011, and our report dated March 23, 2012 expressed an unqualified opinion.

 

/s/ UHY LLP

 

Houston, Texas

March 23, 2012

 

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GEOKINETICS INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

(In Thousands, except share amounts)

 

 

 

December 31,

 

 

 

2011

 

2010

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

44,647

 

$

42,851

 

Restricted cash

 

3,060

 

2,455

 

Accounts receivable, net

 

160,736

 

165,323

 

Deferred costs

 

13,941

 

22,766

 

Prepaid expenses

 

12,747

 

12,722

 

Other current assets

 

3,269

 

6,568

 

Total current assets

 

238,400

 

252,685

 

Property and equipment, net

 

212,636

 

266,404

 

Goodwill

 

 

131,299

 

Multi-client seismic data library, net

 

41,512

 

53,212

 

Deferred financing costs, net

 

12,987

 

11,794

 

Other assets, net

 

8,637

 

9,770

 

Total assets

 

$

514,172

 

$

725,164

 

LIABILITIES, MEZZANINE AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term debt and current portion of long-term debt and capital lease obligations

 

$

4,543

 

$

1,634

 

Accounts payable

 

79,300

 

65,417

 

Accrued liabilities

 

79,836

 

75,694

 

Deferred revenue

 

32,675

 

49,537

 

Income taxes payable

 

18,969

 

15,997

 

Total current liabilities

 

215,323

 

208,279

 

Long-term debt and capital lease obligations, net of current portion

 

350,183

 

319,284

 

Deferred income taxes

 

8,062

 

16,169

 

Derivative liabilities

 

5,778

 

38,271

 

Mandatorily redeemable preferred stock

 

53,210

 

45,265

 

Other liabilities

 

1,122

 

1,122

 

Total liabilities

 

633,678

 

628,390

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Mezzanine equity:

 

 

 

 

 

Preferred stock, Series B Senior Convertible, $10.00 par value; 2,500,000 shares authorized, 351,444 shares issued and outstanding as of December 31, 2011 and 319,174 shares issued and outstanding as of December 31, 2010

 

83,313

 

74,987

 

Stockholders’ equity (deficit):

 

 

 

 

 

Common stock, $.01 par value; 100,000,000 shares authorized, 19,289,489 shares issued and 18,990,290 shares outstanding as of December 31, 2011 and 18,118,290 shares issued and 17,804,459 shares outstanding as of December 31, 2010

 

193

 

179

 

Additional paid-in capital

 

228,410

 

230,977

 

Accumulated deficit

 

(431,442

)

(209,389

)

Accumulated other comprehensive income

 

20

 

20

 

Total stockholders’ equity (deficit)

 

(202,819

)

21,787

 

Total liabilities, mezzanine and stockholders’ equity (deficit)

 

$

514,172

 

$

725,164

 

 

See accompanying notes to the consolidated financial statements.

 

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GEOKINETICS INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

(In Thousands, except per share amounts)

 

 

 

Year Ended December 31,

 

 

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Revenue

 

$

763,729

 

$

558,134

 

$

510,966

 

Expenses:

 

 

 

 

 

 

 

Direct operating

 

603,275

 

455,899

 

372,814

 

Depreciation and amortization

 

158,388

 

112,897

 

56,921

 

General and administrative

 

75,608

 

81,394

 

54,902

 

Asset impairments

 

134,756

 

 

 

Total expenses

 

972,027

 

650,190

 

484,637

 

Income (loss) from operations

 

(208,298

)

(92,056

)

26,329

 

Other income (expense):

 

 

 

 

 

 

 

Interest income

 

658

 

1,767

 

242

 

Interest expense

 

(48,198

)

(39,594

)

(6,213

)

Gain (loss) from change in fair value of derivative liabilities

 

33,300

 

(6,415

)

(7,324

)

Bridge loan commitment fees

 

 

 

(2,910

)

Foreign exchange gain (loss)

 

(2,333

)

365

 

680

 

Other, net

 

4,858

 

2,059

 

113

 

Total other expense, net

 

(11,715

)

(41,818

)

(15,412

)

Income (loss) before income taxes

 

(220,013

)

(133,874

)

10,917

 

Provision for income taxes:

 

 

 

 

 

 

 

Current expense

 

10,147

 

13,986

 

30,374

 

Deferred benefit

 

(8,107

)

(9,176

)

(7,122

)

Total provision for income taxes

 

2,040

 

4,810

 

23,252

 

Net loss

 

(222,053

)

(138,684

)

(12,335

)

Inducements paid to preferred stockholders

 

 

 

(9,059

)

Dividend and accretion costs

 

(9,198

)

(8,850

)

(12,731

)

Loss applicable to common stockholders

 

$

(231,251

)

$

(147,534

)

$

(34,125

)

For Basic and Diluted Shares:

 

 

 

 

 

 

 

Loss per common share

 

$

(12.70

)

$

(8.46

)

$

(3.14

)

Weighted average common shares outstanding

 

18,211

 

17,441

 

10,875

 

 

See accompanying notes to the consolidated financial statements.

 

F-5



Table of Contents

 

GEOKINETICS INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

 

AND OTHER COMPREHENSIVE INCOME

 

(In Thousands, except share amounts)

 

 

 

Common
Shares
Issued

 

Common
Stock

 

Additional
Paid-In
Capital

 

Accumulated
Deficit

 

Accumulated
Other
Comprehensive
Income

 

Total
Stockholders’
Equity (Deficit)

 

Balance at December 31, 2008

 

10,580,601

 

$

106

 

$

188,940

 

$

(59,386

)

$

20

 

$

129,680

 

Cumulative effect of change in accounting principle

 

 

 

(3,413

)

10,075

 

 

6,662

 

Stock-based compensation

 

 

 

2,174

 

 

 

2,174

 

Restricted stock issued, net

 

247,927

 

2

 

 

 

 

2

 

Issuance of common stock, net of costs

 

4,000,000

 

40

 

33,959

 

 

 

33,999

 

Issuance of common stock and cash paid as inducement for conversion of preferred stock

 

750,000

 

8

 

6,930

 

(9,059

)

 

(2,121

)

Accretion of preferred issuance costs and discounts

 

 

 

(1,674

)

 

 

(1,674

)

Accrual of preferred dividend

 

 

 

(11,057

)

 

 

(11,057

)

Net loss

 

 

 

 

(12,335

)

 

(12,335

)

Balance at December 31, 2009

 

15,578,528

 

$

156

 

$

215,859

 

$

(70,705

)

$

20

 

$

145,330

 

Stock-based compensation

 

 

 

2,888

 

 

 

2,888

 

Restricted stock issued, net

 

178,946

 

 

 

 

 

 

Accretion of preferred issuance costs and discounts

 

 

 

(1,596

)

 

 

(1,596

)

Accrual of preferred dividends

 

 

 

(7,254

)

 

 

(7,254

)

Issuance of common stock to underwriters under overallotment option

 

207,200

 

2

 

1,804

 

 

 

1,806

 

Issuance of common stock for PGS Onshore Acquisition

 

2,153,616

 

21

 

19,404

 

 

 

19,425

 

Cost of issuance of securities

 

 

 

(128

)

 

 

(128

)

Net loss

 

 

 

 

(138,684

)

 

(138,684

)

Balance at December 31, 2010

 

18,118,290

 

$

179

 

$

230,977

 

$

(209,389

)

$

20

 

$

21,787