UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
T Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Quarterly period ended June 30, 1999
or
Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period to
COMMISSION FILE NUMBER 0-23383
OMNI ENERGY SERVICES CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
LOUISIANA 72-1395273
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
4500 N.E. EVANGELINE THRUWAY
CARENCRO, LOUISIANA
(ADDRESS OF PRINCIPAL EXECUTIVE 70520
OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (318) 896-6664
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 T* No
As of August 13, 1999 there were 15,969,127 shares of the Registrant's common
stock, $0.01 par value per share, outstanding.
ITEM 1.
OMNI ENERGY SERVICES CORP.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(Thousands of dollars)
ASSETS June 30, December 31,
1999 1998
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 97 $ 3,333
Accounts receivable, net 8,608 9,691
Parts and supplies inventory 6,039 6,113
Deferred tax asset 851 851
Prepaid expenses and other 3,187 3,216
Total current assets 18,782 23,204
PROPERTY AND EQUIPMENT:
Land 1,209 1,209
Buildings and improvements 5,548 5,542
Drilling, field and support 29,078 28,383
equipment
Shop equipment 1,157 1,140
Office equipment 1,743 1,443
Aircraft 368 10,592
Vehicles 2,999 3,956
Construction in progress 215 572
42,317 52,837
Less: accumulated depreciation 7,191 6,596
Total property and equipment 35,126 46,241
OTHER ASSETS:
Goodwill, net 15,061 15,406
Other 457 495
Total other assets 15,518 15,901
Total assets $ 69,426 $ 85,346
The accompanying notes are an integral part of these condensed consolidated
financial statements.
OMNI ENERGY SERVICES CORP.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(Thousands of dollars)
LIABILITIES AND EQUITY June 30, December 31,
1999 1998
(Unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 11,458 $ 9,917
Line of credit 4,158 ---
Accounts payable 4,738 6,276
Accrued expenses
449 1,204
Total current liabilities 20,803 17,397
LONG-TERM LIABILITIES:
Long-term debt, less current maturities 2,089 14,371
Line of credit --- 4,315
Subordinated debt 2,863 ---
Due to affiliates and shareholders 1,000 1,000
Deferred taxes 2,092 2,092
Total long-term liabilities 8,044 21,778
TOTAL LIABILITIES
28,847 39,175
MINORITY INTEREST 257 600
EQUITY:
Common Stock, $.01 par value, 45,000,000
shares authorized; 15,969,127
issued and outstanding 160 160
Additional paid-in capital 47,145 46,885
Accumulated deficit (6,962) (1,414)
Cumulative translation adjustment (21) (60)
Total equity 40,322 45,571
Total liabilities and equity $ 69,426 $ 85,346
The accompanying notes are an integral part of these condensed consolidated
financial statements.
OMNI ENERGY SERVICES CORP.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
(Unaudited) (Unaudited)
Operating revenue $ 8,517 $ 24,250 $ 18,117 $ 42,579
Operating expenses 10,356 15,632 18,798 28,360
Gross profit (loss) (1,839) 8,618 (681) 14,219
General and administrative expenses 3,021 2,565 5,645 4,836
Operating income (loss) (4,860) 6,053 (6,326) 9,383
Interest expense 790 429 1,280 736
Other income 59 229 88 281
731 200 1,192 455
Income (loss) before taxes (5,591) 5,853 (7,518) 8,928
Income tax expense (benefit) (960) 2,342 (1,627) 3,572
Net income (loss), including
minority interest (4,631) 3,511 (5,891) 5,356
Loss of minority intert (308) --- (343) ---
Net income (loss) $ (4,323) $ 3,511 $ (5,548) $ 5,356
Net income (loss) per share:
Basic $ (0.27) $ 0.22 $ (0.35) $ 0.34
Diluted $ (0.27) $ 0.22 $ (0.35) $ 0.34
Weighted average shares
outstanding:
Basic 15,962 15,769 15,960 15,748
Diluted 15,962 16,163 15,960 15,991
The accompanying notes are an integral part of these condensed consolidated
financial statements.
OMNI ENERGY SERVICES CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(THOUSANDS OF DOLLARS)
SIX MONTHS ENDED JUNE 30,
1999 1998
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(5,548) $5,356
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Depreciation 2,315 2,044
Amortization 443 319
Loss on fixed asset disposition --- 42
Deferred compensation 48 72
Provision for bad debts 70 275
Interest expense on detachable warrants 51 ---
Minority interest (343) ---
Changes in operating assets and liabilities-
Decrease (increase) in assets-
Receivables-
Trade (188) (7,525)
Other 1,261 210
Inventory 78 (2,553)
Prepaid expenses 700 320
Other 182 (2,540)
Increase (decrease) in liabilities-
Accounts payable and accrued expenses (1,973) (277)
Unearned revenue --- (637)
Net cash used in operating activities (2,904) (4,894)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of fixed assets 8,917 2,984
Purchase of fixed assets (1,330) (10,472)
Acquisitions, net of cash received --- (2,856)
Net cash provided by (used in) investing activities 7,587 (10,344)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 11 6,754
Subordinated debt 3,000 ---
Principal payments on long-term debt (10,779) (7,491)
Net borrowings (payments) on line of credit (157) 8,547
Net cash provided by (used in) financing activities (7,925) 7,810
Effect of exchange rate changes in cash 6 ---
NET DECREASE IN CASH (3,236) (7,428)
CASH, at beginning of period 3,333 8,723
CASH, at end of period $97 $1,295
SUPPLEMENTAL CASH FLOW DISCLOSURES:
CASH PAID FOR INTEREST $715 $769
CASH PAID FOR TAXES $--- $1,911
The accompanying notes are an integral part of these condensed consolidated
financial statements.
OMNI ENERGY SERVICES CORP.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These financial statements have been prepared without audit as permitted by the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in the financial
statements have been condensed or omitted pursuant to such rules and
regulations. However, the management of OMNI Energy Services Corp. (the
"Company") believes that this information is fairly presented. These unaudited
condensed consolidated financial statements and notes thereto should be read in
conjunction with the financial statements contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments, consisting of only normal,
recurring adjustments, necessary to fairly present the financial results for
the interim periods presented.
Certain reclassifications have been made to the prior year's financial
statements in order to conform with the classifications adopted for reporting
in fiscal 1999.
NOTE 2. EARNINGS PER SHARE
Basic Earnings Per Share (EPS) excludes dilution and is determined by dividing
income available to common stockholders by the weighted average number of
shares of common stock outstanding during the periods presented. Diluted EPS
reflects the potential dilution that could occur if options and other contracts
to issue shares of common stock were exercised or converted into common stock.
The Company had 1,733,397 and 1,605,132 options, and 849,231 and 581,657
warrants outstanding in the three and six month periods ended June 30, 1999,
respectively that were excluded from the calculation of diluted EPS as
antidilutive considering the losses for those periods.
The Company had 6,100 and 3,017 options outstanding in the three and six month
periods ended June 30, 1998, respectively, that were excluded from the
calculation of diluted EPS because the option's exercise price was greater than
the average market price of the common shares. Dilutive common equivalent
shares for the three and six month periods ended June 30, 1998 were 393,892 and
243,456, respectively, all attributable to stock options.
NOTE 3. LONG-TERM DEBT
The Company's primary credit facility is with Hibernia National Bank (the
"Hibernia Facility"). The Hibernia Facility currently provides the Company
with a $6.1 million term loan, a $6.0 million revolving line of credit to
finance working capital requirements and a $7.9 million line of credit to
finance capital expenditures and acquisitions. The loans bear interest at
prime plus 1% and have a final maturity of January 20, 2000. As of June 30,
1999, the Company had approximately $13.2 million outstanding under the
Hibernia Facility. The terms of the bank and finance company agreements
contain, among other provisions, requirements for maintaining defined levels of
working capital, tangible net worth, debt service coverage and funded debt to
EBITDA. As of June 30, 1999, the Company was in violation of each of its
covenants under these agreements, excluding tangible net worth. These
violations were temporarily waived by the bank and finance company. The
Company intends on extending the maturities of all of this indebtedness,
partially through planned refinancing with other lenders. If the Company is
unable to extend its maturities and/or refinance the Hibernia Facility, it may
be necessary for the Company to seek additional capital and/or sell operating
assets or divisions to raise funds to satisfy its debt obligations. Management
believes that the Company will be able to obtain appropriate financing for its
operations.
In February and June 1999, the Company privately placed a total of $3.0 million
in subordinated debentures with an affiliate of the Company. The proceeds were
used for cash reserves and general corporate purposes. The notes bear interest
at 12% per annum, and mature on March 1, 2004. In connection with these
debentures, the Company issued warrants to purchase up to 960,000 shares of the
Company's common stock at an exercise price of $5.00 per share. The warrants
vest equally over the next four years until 2002, unless the debentures are
paid in full, in which case, those warrants that have not become exercisable
will become void. All warrants that become exercisable will expire on March 1,
2004. The fair value of the warrants issued is included as paid-in capital and
the effective interest rate over the term of the debt is 19.9%. At June 30,
1999, the Company has access to an additional $2.0 million in subordinated
debentures with similar terms and conditions.
At June 30,1999, the Company had $2.7 million in available credit, including the
Hibernia Facility and the subordinated debt.
In May 1999, the Company completed the sale and leaseback of 19 of its
helicopters for $8.5 million. The sale resulted in a loss of approximately
$0.6 million which has been deferred over the life of the ten year operating
lease as it is, in effect, a prepayment of rent. Lease payments total
approximately $80,000 per month. Of these proceeds, $7.9 million was paid to
Hibernia and $0.6 million was paid to another lender.
NOTE 4. COMPREHENSIVE INCOME
In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130,
"Reporting Comprehensive Income", which requires an entity to report and
display comprehensive income and its components. Comprehensive income is as
follows (thousands of dollars):
Three months ended June 30, Six months ended June 30,
1999 1998 1999 1998
Net Income (Loss) $(4,323) $3,511 $(5,548) $5,356
Other Comprehensive Income:
Foreign currency translation
adjustments 23 (20) 39 (20)
Comprehensive Income (Loss) $(4,300) $3,491 $(5,509) $5,336
NOTE 5. ACQUISITIONS
Effective July 1998, the Company entered into a joint venture with Edwin
Waldman Attie of Bolivia. The operating results of the joint venture company
have been included in the consolidated statements of income from the date of
acquisition. The pro forma effect of the joint venture as though it occurred
as of the beginning of each period presented is not material.
NOTE 6. ASSET IMPAIRMENT AND OTHER NON-RECURRING CHARGES
In the third quarter of 1998, the Company evaluated certain assets for
realizability due to the reduced market activity and the related decline in
asset utilization of certain categories of the Company's equipment. The
Company recorded an asset impairment charge of $1.8 million, primarily related
to nine drilling units and 15 trucks which had become impaired due to reduced
demand and environmental impact factors which have restricted their future use.
The Company wrote-off $1.3 million for seismic data held for sale which was
impaired due to recent price declines. The Company also recorded an additional
$0.6 million in provision for uncollectible accounts receivable.
In addition, in response to anticipated future market conditions, the Company's
senior management and its Board of Directors approved a plan to reduce future
operating costs and improve operating efficiencies. The plan involves several
factors including the restructuring of senior management and the relocation of
certain of its operational facilities. Accordingly, the Company recorded an
accrual for severance and lease exit costs of $0.3 million in September 1998.
As of June 30, 1999, the Company has paid all of these costs. Currently, the
Company has sold all of the trucks and one of the drilling units which were
considered to be impaired. Additionally, the Company has restructured its
senior management compensation plans, reduced its workforce and sold its office
located in Thibodeaux, Louisiana.
NOTE 7. SEGMENT INFORMATION
The following shows industry segment information for its three operating
segments, Drilling, Survey and Aviation, for the three and six month periods
ended June 30, 1999 and 1998 (All amounts are unaudited):
Three months ended June 30, Six months ended June 30,
1999 1998 1999 1998
Operating revenues:(1)(2)
Drilling $ 5,080 $ 16,257 $ 11,233 $ 30,250
Survey 1,979 5,142 3,274 7,336
Aviation 1,458 2,851 3,610 4,993
Total $ 8,517 $ 24,250 $ 18,117 $ 42,579
(1) Net of inter-segment revenues of $0.2 million for each of the three month
periods ended June 30, 1999 and 1998 and $0.3 and $0.7 for the six month
periods ended June 30, 1999 and 1998, respectively.
(2) Includes $1.8 million and $2.4 million of integrated services in South
America for the three and six month periods ended June 30, 1999,
respectively.
Three months ended June 30, Six months ended June 30,
1999 1998 1999 1998
Gross profit (loss):
Drilling $ (564) $ 6,136 $ 739 $ 9,658
Survey (850) 1,317 (982) 2,334
Aviation (308) 1,165 (158) 2,227
Other (117) --- (280) ---
Total $ (1,839) $ 8,618 $ (681) $ 14,219
General and administrative expenses 3,021 2,565 5,645 4,836
Other expense, net 731 200 1,192 455
Income(loss) before taxes $ (5,591) $ 5,853 $ (7,518) $ 8,928
Identifiable Assets:
Drilling $ 32,561 $ 45,956
Survey 5,495 9,729
Aviation 13,027 22,791
Other 18,343 11,127
Total $ 69,426 $ 89,603
Capital Expenditures:
Drilling $ 22 $ 3,710 $ 792 $ 5,174 $
Survey 5 215 23 632
Aviation 23 1,447 84 3,679
Other 311 391 431 987
Total $ 361 $ 5,763 $ 1,330 $ 10,472
NOTE 8. RECENT PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which established accounting and reporting
standards that every derivative instrument be recorded in the balance sheet as
either an asset or a liability measured at its fair value. In June 1999, the
FASB delayed SFAS No. 133's effective date by one year to fiscal years
beginning after June 15, 2000, with earlier application permitted. Management
believes the implementation of SFAS No. 133 will not have a material effect on
its results of operations or financial statement disclosures as the Company
historically has not used these investments.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations contains certain "forward looking statements" within the meaning
of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934 (the "Exchange Act"), which reflect
management's best judgment based on factors currently known. Actual results
could differ materially from those anticipated in these "forward looking
statements" as a result of a number of factors, including but not limited to
those discussed under the heading "Cautionary Statements." "Forward looking
statements" provided by the Company pursuant to the safe harbor established by
the federal securities laws should be evaluated in the context of these
factors.
This discussion should be read in conjunction with the financial
statements and the accompanying notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
GENERAL
DEMAND. Demand for the Company's services is principally impacted by
conditions affecting geophysical companies engaged in the acquisition of 3-D
seismic data. The level of activity among geophysical companies is primarily
influenced by the level of capital expenditures by oil and gas companies for
seismic data acquisition activities. A number of factors affect the decision
of oil and gas companies to pursue the acquisition of seismic data, including
(i) prevailing and expected oil and gas demand and prices; (ii) the cost of
exploring for, producing and developing oil and gas reserves; (iii) the
discovery rate of new oil and gas reserves; (iv) the availability and cost of
permits and consents from landowners to conduct seismic activity; (v) local and
international political and economic conditions; (vi) governmental regulations;
and (vii) the availability and cost of capital. The ability to finance the
acquisition of seismic data in the absence of oil and gas companies' interest
in obtaining the information is also a factor as some geophysical companies
will acquire seismic data on a speculative basis.
Within the last decade, improvements in drilling and production
techniques and the acceptance of 3-D imaging as an exploration tool resulted in
significantly increased seismic activity throughout the Transition Zone. Due
to this increased demand, the Company significantly increased its capacity as
measured by drilling units, support equipment and employees. The additional
capacity and related increase in work force led to significant increases in the
Company's revenue and generally commensurate increases in operating expenses
and selling, general and administrative expenses through the second quarter of
1998. Beginning in mid-1998, seismic activity in the areas in which the
Company operates decreased substantially, resulting in corresponding reductions
in demand for the Company's services and adversely affected results of
operations. As described in Note 6 to the financial statements, management has
taken a number of steps to reduce its excess capacity and related operating
expenses in response to the recent sales levels.
SEASONALITY AND WEATHER RISKS. Results of operations for interim periods
are not necessarily indicative of the operating results that may be expected
for the full fiscal year. The Company's operations are subject to seasonal
variations in weather conditions and daylight hours. Since the Company's
activities take place outdoors, on average, fewer hours are worked per day,
aviation flight hours decline and fewer holes are generally drilled or surveyed
per day in winter months than in summer months, due to an increase in rainy,
foggy, and cold conditions and a decrease in daylight hours.
RESULTS OF OPERATIONS Three months ended June 30, Six months ended June 30,
1999 1998 1999 1998
Operating revenue $ 8,517 $ 24,250 $ 18,117 $ 42,579
Operating expense 10,356 15,632 18,798 28,360
Gross profit (1,839) 8,618 (681) 14,219
General and administrative expenses 3,021 2,565 5,645 4,836
Operating income (loss) (4,860) 6,053 (6,326) 9,383
Interest expense 790 429 1,280 736
Other income 59 229 88 281
Income (loss) before income taxes (5,591) 5,853 (7,518) 8,928
Income tax expense (benefit) (960) 2,342 (1,627) 3,572
Net income (loss), including minority (4,631) 3,511 (5,891) 5,356
interest
Loss of minority interest (308) --- (343) ---
Net income (loss) $ (4,323) $ 3,511 $(5,548) $ 5,356
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Operating revenues decreased 65%, or $15.8 million, from $24.3 million
for the three months ended June 30, 1998 to $8.5 million for the three months
ended June 30, 1999. As a result of the decline in seismic activity during the
last year, drilling and survey revenues decreased $12.1 million and $4.1
million, respectively, to $4.2 million and $1.0 million, respectively, for the
three months ended June 30, 1999. Aviation revenues decreased $1.4 million
from $2.9 million for the three months ended June 30, 1998 to $1.5 million for
the three months ended June 30, 1999. These decreases were partially offset by
international revenues of $1.8 million, generated by the Company's South
American joint venture which was formed July 1, 1998.
Operating expenses decreased 33%, or $5.2 million, from $15.6 million for
the three months ended June 30, 1998 to $10.4 million for the three months
ended June 30, 1999. Declines in payroll costs and contract services accounted
for 52% of this decrease as operating payroll expense decreased from $6.7
million to $5.8 million and contract services decreased from $1.9 million to
$0.1 million for the quarters ended June 30, 1998 and 1999, respectively. The
significant decrease in seismic activity has resulted in a corresponding
decrease in the amount of personnel employed by the Company, as the average
number of field employees has declined to 427 for the three months ended June
30, 1999 compared to 625 for the three months ended June 30, 1998. Also as a
result of the lower activity levels in the second quarter of 1999 as compared
to the second quarter of 1998, explosives and fuel costs, repairs and
maintenance expenses and field supply costs decreased $2.5 million from $4.4
million to $1.9 million for the three months ended June 30, 1998 and 1999,
respectively. Depreciation expense remained constant at approximately $1.1
million for the three months ended June 30, 1998 and 1999.
Gross profit margins were 36% and (22)% for the three months ended June
30, 1998 and 1999, respectively. The variance is attributable to substantially
lower domestic revenues from the Company's Drilling, Survey and Aviation
segments, as well as losses incurred from South American operations. The
Company has completed its job in South America and expects no further operating
losses. Domestic operations resulted in a (3%) gross margin for the three
months ended June 30, 1999.
General and administrative expenses were $2.6 million for the three
months ended June 30, 1998 compared to $3.0 million for the three months ended
June 30, 1999, a 15% increase. Payroll costs increased $0.6 million from $1.0
million for the second quarter of 1998 to $1.6 million for the second quarter
of 1999. These increases are due primarily to additions in executive
management and other administrative personnel, specifically in South America.
The Company employed an average of 112 administrative personnel, 24 of which
were in South America, for the three months ended June 30, 1999, a 39% increase
over the 80 administrative personnel employed for the three months ended June
30, 1998. Currently, the Company has implemented a reduction in its workforce.
Advertising, travel and entertainment, professional services expense and other
decreased $0.2 million, from $0.8 million for the three months ended June 30,
1998 to $0.6 million for the three months ended June 30, 1999, due to the
decreased activity levels.
Interest expense increased $0.4 million from $0.4 million for the three
month period ended June 30, 1998 to $0.8 million for the three month period
ended June 30, 1999, due primarily to higher average levels of debt outstanding
during the periods.
Income tax expense for the second quarter of 1998 was $2.3 million.
There was an income tax benefit for the second quarter of 1999 of $1.0 million.
The actual rate is less than the effective tax rate due primarily to non-
deductible goodwill and to approximately $0.5 million in a valuation allowance
for foreign tax assets that was recorded in the second quarter of 1999 whose
realizability is no longer deemed more probable than not.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Operating revenues decreased $24.5 million, or 58%, from $42.6 million to
$18.1 million for the six month periods ended June 30, 1998 and 1999,
respectively. Drilling revenues decreased $20.0 million to $10.3 million for
the six months ended June 30, 1999. Survey revenues decreased $5.5 million,
from $7.3 million for the six months ended June 30, 1998 to $1.8 million for
the six months ended June 30, 1999. Aviation revenues decreased $1.4 million
to $3.6 million for the six months ended June 30, 1999 from $5.0 million for
the six months ended June 30, 1998. These decreases were related to declines
in market activity and were partially offset by international revenues of $2.4
million for the six months ended June 30, 1999. There were no international
revenues for the same period in 1998.
Operating expenses decreased $9.6 million, or 34%, from $28.4 million for
the six months ended June 30, 1998 to $18.8 million for the six months ended
June 30, 1999. Decreases in operating payroll and contract services costs
accounted for 68% of this decrease as operating payroll decreased $3.5 million
to $9.6 million for the six months ended June 30, 1999, and contract services
decreased $3.0 million to $0.1 million for the six months ended June 30, 1999.
The decreases in seismic activity has resulted in less contract services
required by the Company, as well as fewer personnel as the number of field
employees fell from 677 at June 30, 1998 to 256 at June 30, 1999. As a result
of the declines in the utilization of the Company's equipment, repairs and
maintenance expense decreased 41% from $3.7 million for the six months ended
June 30, 1998 to $2.2 million for the six months ended June 30, 1999.
Explosives costs decreased $1.9 million from $2.7 million for the six months
ended June 30, 1998 to $0.8 million for the six months ended June 30, 1999 due
to less jobs requiring explosives. These decreases were partially offset by a
$0.3 million increase in depreciation from $2.0 to $2.3 million for the six
months ended June 30, 1998 and 1999, respectively.
Gross profit margins were 33% and (3)% for the six months ended June 30,
1998 and 1999, respectively. The variance is attributable to substantially
lower domestic revenues from the Company's Drilling, Survey and Aviation
segments, as well as losses incurred from South American operations. The
Company has completed its job in South America and expects no further operating
losses. Domestic operations resulted in a 6% gross margin for the six months
ended June 30, 1999.
General and administrative expenses were $5.6 million for the six months
ended June 30, 1999, a 17% increase over the $4.8 million for the six months
ended June 30, 1998. Payroll and perdiem costs increased $0.9 million from
$2.4 million to $3.3 million for the six months ended June 30, 1998 and 1999,
respectively. This increase was due to an increased level of administrative
employees as the number of personnel increased from 83 to 108 at June 30, 1998
and 1999, respectively. Amortization expense increased $0.1 million to $0.4
million for the six months ended June 30, 1999. These increases were partially
offset by a decrease in bad debt expense of $0.2 million, from $0.3 million for
the six months ended June 30, 1998 to $0.1 million for the six months ended
June 30, 1999.
Interest expense increased $0.6 million, or 86%, from $0.7 million for
the six months ended June 30, 1998 to $1.3 million for the six months ended
June 30, 1999, due primarily to higher levels of debt outstanding for the
period ended June 30, 1999.
Income tax expense was $3.6 million for the six months ended June 30,
1998. Due to the loss for the six months ended June 30, 1999, there was an
income tax benefit of $1.6 million. The actual rate is less than the effective
tax rate due primarily to non-deductible goodwill and to approximately $0.5
million in a valuation allowance for foreign tax assets that was recorded in
the second quarter of 1999 whose realizability is no longer deemed more
probable than not.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had approximately $0.1 million in cash
compared to approximately $3.3 million at December 31, 1998. The Company
had $(2.0) million working capital at June 30, 1999, compared to $5.7
million at December 31, 1998. The decrease in working capital was due to
lower cash levels and the reclassification of a significant portion of the
Company's long-term debt to current debt, which were partially offset by
decreases in accounts payable and accrued expenses.
The Company's primary credit facility is with Hibernia National Bank (the
"Hibernia Facility"). The Hibernia Facility, which was amended in March 1999,
currently provides the Company with a $6.1 million term loan, a $6.0 million
revolving line of credit to finance working capital requirements and a $7.9
million line of credit to finance capital expenditures and acquisitions. The
loans bear interest at prime plus 1%. and have a final maturity of January 20,
2000. As of June 30, 1999, the Company had approximately $13.2 million
outstanding under the Hibernia Facility. The Company intends on extending the
maturities of all of this indebtedness, partially through planned refinancing
with other lenders. If the Company is unable to extend its maturities and/or
refinance the Hibernia Facility, it may be necessary for the Company to seek
additional capital and/or sell operating assets or divisions to raise funds to
satisfy its debt obligations. Management believes that the Company will be
able to obtain appropriate financing for its operations.
As of June 30, 1999, the Company also had approximately $7.4 million in
other loans outstanding, the majority of which (approximately $3.5 million) is
owed pursuant to agreements with The CIT Group (CIT), consisting of two asset-
based financing loans (the "CIT Loans"). Of the principal outstanding under
the CIT Loans, approximately $2.8 million bears interest at LIBOR plus 3.75%
and matures on July 19, 2001. The remaining portion of the CIT Loans bear
interest at LIBOR plus 3.0%. These loans are collateralized by various seismic
drilling, support equipment and aircraft.
In May 1999, the Company completed the sale and leaseback of 19 of its
helicopters for $8.5 million. Of these proceeds, $7.9 million was paid to
Hibernia and $0.6 million was paid to CIT.
In February and June 1999, the Company privately placed a total of $3.0
million in subordinated debentures with an affiliate of the Company. The
proceeds were used for cash reserves and general corporate purposes. The notes
bear interest at 12% per annum, and mature on March 1, 2004. In connection
with these debentures, the Company issued warrants to purchase up to 960,000
shares of the Company's common stock at an exercise price of $5.00 per share.
The warrants vest equally over the next four years until 2002, unless the
debentures are paid in full, in which case, those warrants that have not become
exercisable will become void. All warrants that become exercisable will expire
on March 1, 2004. The fair value of the warrants is included as paid-in
capital and the effective interest rate over the term of the debt is
approximately 19.9%. Currently, the Company has commitment for an additional
$2.0 million in subordinated debt, $1.0 million of which was received in July
1999. This debt will bear the same terms as the current debt outstanding with
this affiliate.
At June 30, 1999, the Company had $2.7 million in available credit,
including the Hibernia Facility and the subordinated debt.
As of June 30, 1999, remaining indebtedness includes: (i) $40,000 owed
to Delta Surveys, Inc. (8.5% interest rate; March 31, 2000 maturity date), (ii)
$63,000 incurred in connection with the formation of OMNI Geophysical (March 1,
2001 maturity date), (iii) approximately $900,000 owed to finance and insurance
companies incurred to finance certain of the Company's insurance premiums, and
(iv) $900,000 owed to an affiliate incurred to purchase two operating
facilities (non-interest bearing).
The Company currently expects to make minimal capital expenditures for
the remainder of 1999.
IMPACT OF YEAR 2000 COMPLIANCE
The Year 2000 (Y2K) issue is the result of computerized systems being
written to store and process the year portion of dates using two digits rather
than four. Date-aware systems (i.e., any system or component that performs
calculations, comparisons, sequencing, or other operations involving dates) may
fail or produce erroneous results on or before January 1, 2000 because the year
2000 will be interpreted as the year 1900.
STATE OF READINESS. The Company has been pursuing a strategy to ensure
all its significant computer systems will be able to process dates from and
after January 1, 2000, including leap years, without critical systems failure
(Y2K Compliant or Y2K Compliance). Computerized systems are integral to the
operations of the Company, particularly for accounting and operations control.
Progress of the Y2K plan is being monitored by senior management. The Company
believes all critical components of the plan are completed.
The majority of computerized date-sensitive hardware and software
components used by the Company are covered by maintenance contracts with the
vendors who originally implemented them. All of these vendors have been
contacted regarding Y2K Compliance of their products. Where necessary,
software modifications to ensure compliance will be provided by the appropriate
vendors under their maintenance contracts.
INFORMATION TECHNOLOGY AND NON-INFORMATION TECHNOLOGY SYSTEMS. The bulk
of computerized business systems processing is provided through commercial
third party software licensed by the Company. This software has been tested
for compliance and the Company believes that it is Y2K Compliant.
Additionally, the Company is currently in the process of implementing a more
sophisticated software package to meet their reporting and operational needs.
An assessment of all embedded systems contained in the Company's buildings,
equipment and other infrastructure has been completed. These assessments
revealed the need to upgrade the current phone voice mail system. This process
was completed in the second quarter of 1999.
THIRD PARTY RISKS. The Company's computer systems are not widely
integrated with the systems of its suppliers or customers. The primary
potential Y2K risk attributable to third parties would be from a temporary
disruption in certain material and services provided by third parties. The
Company has contacted all significant vendors regarding the vendor's state of
readiness and contingency plans. To date, no material adverse information has
been received. Additionally, effective November 1, 1998, Y2K Compliance
requirements have been included in all purchasing contracts.
COSTS TO ADDRESS THE Y2K ISSUES. Based on current information, the
Company believes that the cost of Y2K Compliance will not be significant and
will be provided for through its normal operating and capital budgets. These
estimates are management's best estimates, which are derived using numerous
assumptions of future events including the continued availability of certain
resources, third party modifications and other factors. There can be no
assurance that the systems of other companies will be converted on a timely
basis or that failure to convert will not have a material adverse effect on the
Company.
RISKS OF THE Y2K ISSUES. Based on preliminary risk assessment work
conducted thus far, the Company believes the most likely Y2K related failures
would probably be temporary disruptions in certain materials and services
provided by third parties, which would not be expected to have a material
adverse effect on the Company's financial condition or results of operations.
CONTINGENCY PLANS. Although the Company believes the likelihood of any
or all of the above risks occurring to be low, specific contingency plans to
address certain risk areas will be developed as needed beginning in the third
quarter of 1999. However, there can be no assurance that the Company will not
be materially adversely affected by Y2K problems or related costs.
CAUTIONARY STATEMENTS
This Annual Report contains "forward-looking statements". Such
statements include, without limitation, statements regarding the Company's
expectations regarding revenue levels, profitability and costs, the expected
results of the Company's business strategy, and other plans and objectives of
management of the Company for future operations and activities.
Important factors that could cause actual results to differ materially
from the Company's expectations include, without limitation, the Company's
dependence on activity in the oil and gas industry, risks associated with the
Company's rapid growth, the absence of a combined operating history of the
Company and the companies it has recently acquired whose operations differ in
many cases from the Company's traditional Transition Zone seismic drilling
operations, risks associated with the Company's acquisition strategy,
dependence on a relatively small number of significant customers, seasonality
and weather risks, the hazard