UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly period ended September 30, 2004
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
(State or other jurisdiction of 72-1395273
incorporation or organization) (I.R.S. Employer Identification No.)
4500 N.E. EVANGELINE THRUWAY
CARENCRO, LOUISIANA 70520
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (337) 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 [ ] No [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of November 11, 2004 there were 11,676,233 shares of the Registrant's
common stock, $0.01 par value per share, outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OMNI ENERGY SERVICES CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
2004 2003
--------------- ------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 689 $ 572
Trade receivable, net.............................................. 12,355 9,196
Other receivables.................................................. 103 78
Parts and supplies inventory....................................... 3,493 3,289
Prepaid expenses................................................... 6,420 3,058
Deferred income taxes.............................................. 2,000 2,000
--------------- ------------
Total current assets............................................ 25,060 18,193
--------------- ------------
PROPERTY AND EQUIPMENT:
Land............................................................... 648 362
Buildings and improvements......................................... 5,938 4,636
Drilling, field and support equipment.............................. 30,478 26,877
Aviation equipment................................................. 15,207 10,224
Shop equipment..................................................... 425 425
Office equipment................................................... 2,089 1,573
Vehicles........................................................... 4,175 2,476
--------------- ------------
58,960 46,573
Less: accumulated depreciation.................................... (22,378) (19,463)
--------------- ------------
Total property and equipment.................................... 36,582 27,110
--------------- ------------
OTHER ASSETS:
Goodwill........................................................... 3,366 2,129
Intangible assets, net............................................. 4,020 1,720
Other.............................................................. 2,807 1,137
--------------- ------------
Total other assets.............................................. 10,193 4,986
--------------- ------------
Total assets.................................................... $ 71,835 $ 50,289
=============== ============
The accompanying notes are an integral part of these financial statements.
2
OMNI ENERGY SERVICES CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
2004 2003
--------------- -------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt............................................... $ 3,539 $ 2,051
Accounts payable................................................................... 10,626 5,326
Accrued expenses................................................................... 2,333 1,627
Notes payable, insurance........................................................... 3,195 2,314
Line of credit..................................................................... 9,920 ---
Convertible debentures, net of discount of $1,017.................................. 11,399 ---
--------------- -------------
Total current liabilities....................................................... 41,012 11,318
--------------- -------------
LONG-TERM LIABILITIES:
Line of credit..................................................................... --- 4,633
Other long-term liabilities........................................................ 182 328
Long-term debt, less current maturities............................................ 17,059 9,624
--------------- -------------
Total long-term liabilities..................................................... 17,241 14,585
--------------- -------------
Total liabilities............................................................... 58,253 25,903
--------------- -------------
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 5,000,000 shares authorized; 29
and 12,100 shares issued and outstanding, respectively, liquidation
preference of $1,000 per share.................................................... 29 12,100
Common stock, $.01 par value, 45,000,000 shares authorized; 11,468,736
and 9,569,729 issued and 11,197,390 and 9,207,929 outstanding, respectively....... 115 96
Treasury stock, 271,346 and 361,800 shares acquired at cost........................ (529) (706)
Preferred stock dividends declared................................................. 2 484
Additional paid-in capital......................................................... 65,092 57,882
Accumulated deficit................................................................ (51,127) (45,470)
--------------- -------------
Total stockholders' equity...................................................... 13,582 24,386
--------------- -------------
Total liabilities and stockholders' equity...................................... $ 71,835 $ 50,289
=============== =============
The accompanying notes are an integral part of these financial statements.
3
OMNI ENERGY SERVICES CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(In thousands, except per share data)
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- -------------------------------
2004 2003 2004 2003
---------------- ------------- ------------- ------------
(Unaudited) (Unaudited)
Operating revenue...................................... $ 14,367 $ 10,218 $ 37,863 $ 26,834
Operating expenses..................................... 11,697 7,617 30,080 20,312
---------------- ------------- ------------- ------------
Gross profit........................................... 2,670 2,601 7,783 6,522
General and administrative expenses.................... 3,416 1,090 7,853 3,381
---------------- ------------- ------------- ------------
Operating income (loss)................................ (746) 1,511 (70) 3,141
Interest expense....................................... (1,613) (202) (3,222) (650)
Other expense, net..................................... (192) (170) (339) (250)
---------------- ------------- ------------- ------------
Income (loss) from continuing operations before
income taxes......................................... (2,551) 1,139 (3,631) 2,241
Income tax benefit..................................... --- (300) --- (625)
---------------- ------------- ------------- ------------
Net income (loss) from continuing operations........... (2,551) 1,439 (3,631) 2,866
Loss from discontinued operations, net of $0 taxes..... (1,465) --- (1,538) ---
---------------- ------------- ------------- ------------
Net income (loss)...................................... (4,016) 1,439 (5,169) 2,866
Preferred stock dividends.............................. --- (242) (490) (242)
---------------- ------------- ------------- ------------
Net income (loss) applicable to common and common
equivalent shares.................................... $ (4,016) $ 1,197 $ (5,659) $ 2,624
================ ============= ============= ============
Basic income (loss) per share:
Income (loss) from continuing operations........... $ (0.23) $ 0.14 $ (0.40) $ 0.30
Loss from discontinued operations.................. $ (0.13) $ --- $ (0.13) $ ---
Net income (loss) applicable to common and common
equivalent shares................................. $ (0.36) $ 0.14 $ (0.53) $ 0.30
Diluted income (loss) per share:
Income (loss) from continuing operations........... $ (0.23) $ 0.11 $ (0.40) $ 0.28
Loss from discontinued operations.................. $ (0.13) $ --- $ (0.13) $ ---
Net income (loss) applicable to common and common
equivalent shares................................. $ (0.36) $ 0.11 $ (0.53) $ 0.28
Weighted average common shares outstanding:
Basic.............................................. 11,160 8,742 10,723 8,741
Diluted............................................ 11,160 13,388 10,723 10,290
The accompanying notes are an integral part of these financial statements.
4
OMNI ENERGY SERVICES CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY AND COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED MARCH 31, 2004, JUNE 30, 2004, AND SEPTEMBER 30, 2004
(In thousands, except per share data)
Preferred Stock Common Stock Treasury Stock
---------------------- -------------------- ---------------
Shares Amount Shares Amount Amount
------ ------------ ------ ---------- ---------------
BALANCE, December 31, 2003................................ 12,100 $ 12,100 9,570 $ 96 $ (706)
-- stock option and warrant exercises..................... --- --- 1,340 13 ---
-- redemption of preferred stock.......................... (9,761) (9,761) --- --- ---
-- preferred stock dividends paid......................... --- --- --- --- ---
-- preferred stock dividends declared..................... --- --- --- --- ---
-- warrant discount....................................... --- --- --- --- ---
Comprehensive income:
-- net income............................................. --- --- --- --- ---
-- foreign currency translation adjustments............... --- --- --- --- ---
------ ------------ ------ ---------- ---------------
Total comprehensive income................................ --- --- --- --- ---
------ ------------ ------ ---------- ---------------
BALANCE, March 31, 2004 (unaudited)....................... 2,339 $ 2,339 10,910 $ 109 $ (706)
------ ------------ ------ ---------- ---------------
-- issuance treasury shares............................... --- --- --- --- 177
-- stock option and warrant exercises..................... --- --- 484 5 ---
-- redemption of preferred stock.......................... (2,310) (2,310) --- --- ---
-- preferred stock dividends paid......................... --- --- --- --- ---
-- preferred stock dividends declared..................... --- --- --- --- ---
-- warrant discount & beneficial conversion feature....... --- --- --- --- ---
Comprehensive loss:
-- net loss.............................................. --- --- --- --- ---
-- foreign currency translation adjustments --- --- --- --- ---
------ ------------ ------ ---------- ---------------
Total comprehensive loss.................................. --- --- --- --- ---
------ ------------ ------ ---------- ---------------
BALANCE, June 30, 2004 (unaudited)........................ 29 $ 29 11,394 $ 114 $ (529)
====== ============ ====== ========== ===============
--stock option and warrant exercises.................... --- --- 4 --- ---
--issuance of common stock for services................. --- --- 70 1 ---
--issuance of common stock warrants for services........ --- --- --- --- ---
Comprehensive loss:
--net loss.............................................. --- --- --- --- ---
--foreign currency translation adjustments.............. --- --- --- --- ---
------ ------------ ------ ---------- ---------------
Total comprehensive loss.................................. --- --- --- --- ---
------ ------------ ------ ---------- ---------------
BALANCE, September 30, 2004 (unaudited)................... 29 $ 29 11,468 $ 115 $ (529)
====== ============ ====== ========== ===============
5
Accumulated
Preferred Stock Additional Other
Dividend Paid-In Comprehensive Accumulated
Declared Capital Loss Deficit Total
--------------- ---------- ------------- ----------- ---------
BALANCE, December 31, 2003......................... $ 484 $ 57,882 $ (12) $ (45,458) $ 24,386
-- stock option and warrant exercises.............. --- 3,885 --- --- 3,898
-- redemption of preferred stock................... --- --- --- --- (9,761)
-- preferred stock dividends paid.................. (830) --- --- --- (830)
-- preferred stock dividends declared.............. 485 --- --- (485) ---
-- warrant discount................................ --- 1,000 --- --- 1,000
Comprehensive income:
-- net income...................................... --- --- --- 85 85
-- foreign currency translation adjustments........ --- --- 10 (10) ---
--------------- ---------- ------------- ----------- ---------
Total comprehensive income......................... --- --- 10 75 85
--------------- ---------- ------------- ----------- ---------
BALANCE, March 31, 2004 (unaudited)................ $ 139 $ 62,767 $ (2) $ (45,868) $ 18,778
--------------- ---------- ------------- ----------- ---------
-- issuance of treasury shares..................... --- 297 --- --- 474
-- stock option and warrant exercises.............. --- 13 --- --- 18
-- redemption of preferred stock................... --- --- --- --- (2,310)
-- preferred stock dividends paid.................. (142) --- --- --- (142)
-- preferred stock dividends declared.............. 5 --- --- (5) ---
-- warrant discount and beneficial conversion
feature --- 1,509 --- --- 1,509
Comprehensive loss:
-- net loss....................................... --- --- --- (1,238) (1,238)
-- foreign currency translation adjustments....... --- (2) 2 --- ---
--------------- ---------- ------------- ----------- ---------
Total comprehensive loss........................... --- --- 2 (1,238) (1,238)
--------------- ---------- ------------- ----------- ---------
BALANCE, June 30, 2004 (unaudited)................. $ 2 $ 64,584 $ --- $ (47,111) $ 17,089
=============== ========== ============= =========== =========
--stock option and warrant exercises.............. --- 10 --- --- 10
--issuance of common stock for services........... --- 341 --- --- 342
--issuance of common stock warrants for services.. --- 157 --- --- 157
Comprehensive loss:
--net loss........................................ --- --- --- (4,016) (4,016)
--foreign currency translation adjustments........ --- --- --- --- ---
--------------- ---------- ------------- ----------- ---------
Total comprehensive loss............................ --- --- --- (4,016) (4,016)
--------------- ---------- ------------- ------------ ----------
BALANCE, September 30, 2004 (unaudited)............. $ 2 $ 65,092 $ --- $ (51,127) $ 13,582
=============== ========== ============= =========== =========
The accompanying notes are an integral part of these financial statements.
6
OMNI ENERGY SERVICES CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(thousands of dollars)
Nine Months Ended September 30,
------------------------------
2004 2003
------------- -------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................................................... $ (5,169) $ 2,866
Adjustments to reconcile net income (loss) to net cash provided by
operating activities-
Depreciation and amortization.............................................................. 4,183 3,166
Accrued compensation on incentive awards................................................... 900 ---
Accretion of bond discount................................................................. 1,492 ---
Writedown of inventory included in loss from discontinued operations......................... 752 ---
Gain on fixed asset disposition............................................................ (109) (43)
Changes in operating assets and liabilities- Decrease (increase) in assets, net
of acquisition:
Receivables-..............................................................................
Trade................................................................................... (1,418) 236
Other................................................................................... --- (898)
Inventory................................................................................. (747) (234)
Prepaid expenses.......................................................................... 171 163
Assets held for sale...................................................................... --- 285
Other..................................................................................... (564) (742)
Increase (decrease) in liabilities, net of acquisition-
Accounts payable and accrued expenses..................................................... 3,584 296
Other long-term liabilities............................................................... (149) (888)
------------- -------------
Net cash provided by operating activities............................................... 2,926 4,207
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash received......................................................... (7,502) ---
Proceeds from disposal of fixed assets..................................................... 2,136 2,263
Purchase of fixed assets, net.............................................................. (4,469) (1,887)
------------- -------------
Net cash (used in) provided by investing activities..................................... (9,835) 376
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of convertible debentures, net of financing fees................ 14,158 ---
Payment of Debenture Put Options (Note 3).................................................. (2,634) ---
Redemption of preferred stock.............................................................. (12,071) ---
Payment of preferred stock dividends....................................................... (972) ---
Proceeds from exercises of options and warrants............................................ 3,927 9
Due to affiliates.......................................................................... --- (143)
Proceeds from the issuance of long-term debt, net of financing fees........................ 4,709 1,352
Principal payments on long-term debt....................................................... (5,378) (3,997)
Borrowings on line of credit............................................................... 71,513 36,141
Payments on line of credit................................................................. (66,226) (34,935)
------------- -------------
Net cash (used in) provided by financing activities....................................... 7,026 (1,573)
------------- -------------
NET INCREASE IN CASH......................................................................... 117 3,010
Cash and cash equivalents, at beginning of period............................................ 572 704
------------- -------------
Cash and cash equivalents, at end of period.................................................. $ 689 $ 3,714
============= =============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest....................................................................... $ 705 $ 650
============= =============
NON-CASH TRANSACTIONS:
Equipment acquired under capital lease....................................................... $ 3,765 $ 220
============= =============
Bond discount and beneficial conversion feature.............................................. $ 2,509 $ ---
============= =============
Premiums financed with Insurance Carrier..................................................... $ 3,265 $ 1,352
============= =============
Transfer of assets from receivables to equipment............................................. $ 1,661 $ ---
============= =============
Transfer of equipment to receivables pending insurance settlement............................ $ 625 $ ---
============= =============
Net increase in deferred compensation liability and related deferred compensation expense.... $ 955 $ ---
============= =============
Net increase in acquisition costs for shares and warrants issued for services (Note 7)....... $ 498 $ ---
============= =============
Transfer of deposit to acquisition costs..................................................... $ 150 $ ---
============= =============
The accompanying notes are an integral part of these financial statements.
7
OMNI ENERGY SERVICES CORP.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements included herein, which have not been audited pursuant
to the rules and regulations of the Securities and Exchange Commission, reflect
all adjustments which, in the opinion of management, are necessary for a fair
presentation of our financial position, results of operations and cash flows for
the interim periods on a basis consistent with the annual audited statements.
All such adjustments are of a normal recurring nature. The results of operations
for interim periods are not necessarily indicative of the results that may be
expected for any other interim period of a full year. Certain information,
accounting policies and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to such rules and
regulations, although we believe that the disclosures are adequate to make the
information presented not misleading. These financial statements should be read
in conjunction with our audited financial statements included in our Annual
Report on Form 10-K, as amended, for the year ended December 31, 2003 filed with
the Securities and Exchange Commission (SEC) on September 14, 2004.
Changes in Estimates
Effective January 1, 2004, we changed the estimated residual value of our fleet
of aircraft from 10% to 30% for aircraft over five years of age and from 10% to
40% for aircraft five years of age or less. We believe the revised residual
values more properly match costs over the useful lives and salvage value of
these assets.
Decreased depreciation expense was recorded for the Company's fleet of aircraft
as a result of management's first quarter 2004 change in the fleet's estimated
residual value. The effect of that change to select items in the financial
statements is shown in the table below (in thousands of dollars, except per
share amounts):
Three Months Nine Months
Ended Ended
September 30, September 30,
2004 2004
Increase Increase
------------ ------------
Effect of change in estimated residual value to decrease net loss............... $ 65 $ 195
Effect of change net loss per common Share:
Basic........................................................................ $ 0.01 $ 0.02
Diluted...................................................................... $ 0.01 $ 0.02
Costs Associated with Exit Activities and Impairment or Disposal of Long-Lived
Assets
In 2001, the FASB issued Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"). SFAS No. 144 retains the previously existing accounting requirements
related to the recognition and measurement of the impairment of long-lived
assets to be held and used, while expanding the measurement requirements of
long-lived assets to be disposed of by sale to include discontinued operations.
It also expands on the previously existing reporting requirements for
discontinued operations to include a component of an entity that either has been
disposed of or is classified as held for sale.
In 2002, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" (SFAS No. 146"). This standard requires companies
to recognize costs associated with exit or disposal activities when they are
incurred, rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring, plant
closing, or other exit or disposal activity. SFAS No. 146 is required to be
applied prospectively to exit or disposal activities initiated after December
31, 2002.
In accordance with SFAS No. 144, we are accounting for the Brazoria market as a
separate component and have report the results of operations as discontinued
operations. For the three months and the nine months ended September 30, 2004,
we recorded $1.1 million and $1.7 million, respectively, in costs associated
with exit activities in accordance with SFAS No. 146. These exit costs are
included in loss from discontinued operations (See Note 10).
8
Loss from Extinguishment of Debt
Accounting Principles Board ("APB") Opinion No. 26, Early Extinguishment of
Debt, expresses the Board's opinion on the appropriate accounting for the
difference that generally arises between the amount paid upon reacquisition of
debt securities and the net carrying amount of the debt at that time. APB
Opinion No. 26 applies to all extinguishments of debt, except extinguishments
through troubled debt restructuring and debt that is converted to equity
securities of the debtor pursuant to conversion privileges provided in the debt
agreement at issuance. Also, APB Opinion No. 26 does not apply to conversions of
convertible debt when the initial conversion terms are changed, or additional
consideration is paid, to induce conversion, as described in FASB Statement No.
84.
SFAS No. 84, Induced Conversions of Convertible Debt, an amendment to APB
Opinion No. 2, ("SFAS No. 84") specifies the accounting for conversions of
convertible debt to equity securities when the debtor induces conversion by
offering additional securities or other consideration to convertible debt
holders. SFAS No. 84 requires the recognition of an expense equal to the fair
value of the additional securities or other consideration issued to induce
conversion when the conversion (a) occurs pursuant to changed conversion
privileges that are exercisable only for a limited period of time and (b)
includes the issuance of all of the equity securities issuable pursuant to
conversion privileges included in the original terms of the debt.
Emerging Issues Task Force ("EITF") Issue No. 98-05, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, includes Exhibit 98-5A "EXAMPLES OF THE APPLICATION OF THE
EITF CONSENSUSES ON ISSUE 98-5" within which Case 6 - Extinguishment of
Convertible Debt that Includes a Beneficial Conversion Feature, outlines the
appropriate accounting treatment for the final extinguishment.
EITF Issue No. 00-27, Application of Issue No. 98-5 to Certain Convertible
Instruments, Issue 12 discusses how Issue 98-5 should be applied to the
reacquisition of the embedded conversion option if the convertible instrument is
extinguished prior to its stated maturity date. Issue 12(a) concluded that no
portion of the reacquisition price should be allocated to the conversion option
if that option had no intrinsic value required to be accounted for under Issue
98-5. Issue 12(b) tentatively concluded that Issue 98-5 does not provide for a
different measurement of the amount of the reacquisition price that is allocated
to the Beneficial Conversion Feature if the intrinsic value of the conversion
option at the extinguishment date is greater than at the commitment date. The
EITF recognized that this could result in a reduction of Paid-In-Capital that
exceeds the amount recorded at issuance.
In the third quarter of 2004, we recorded $0.3 million in ordinary loss on
extinguishment of debt in accordance with the accounting literature discussed
above (See Note 3).
NOTE 2. EARNINGS PER SHARE
Basic Earnings Per Share ("Basic EPS") excludes dilution and is determined by
dividing income applicable to common stockholders by the weighted average number
of shares of common stock outstanding during the periods presented. The
potential dilution that could occur if options, warrants and convertible
securities to issue shares of common stock were exercised or converted into
common stock is hereinafter referred to as Diluted Earnings Per Share ("Diluted
EPS").
As of September 30, 2004 and September 30, 2003, we had options and warrants
outstanding to purchase 2,486,429 and 2,408,440 shares of common stock,
respectively, that were excluded from the calculation of Diluted EPS because
they were antidilutive. For the Basic EPS and Diluted EPS calculations as of
September 30, 2004, we also had preferred stock convertible into 7,733 shares of
common stock, debentures convertible into 1,732,492 shares of common stock and
promissory notes convertible into 319,149 shares of common stock that were
excluded from the calculations because they were antidilutive.
The following table reconciles net income (loss) available to common and common
equivalent shares for the Basic EPS calculation to net income (loss) available
to common and common equivalent shares for the Diluted EPS calculation as of
September 30, 2004 and 2003, respectively:
9
Three Months Nine Months
Ended Ended
September 30, 2004 September 30, 2004
-------------------- -------------------
(in thousands)
Dollars Shares Dollars Shares
--------- ------ --------- ------
Basic EPS net loss applicable to common and common equivalent shares....... $ (4,016) 11,160 $ (5,659) 10,723
Add Options................................................................ --- --- --- ---
--------- ------ --------- ------
Diluted EPS net loss applicable to common and common equivalent shares..... $ (4,016) 11,160 $ (5,659) 10,723
========= ====== ========= ======
Three Months Nine Months
Ended Ended
September 30, 2003 September 30, 2003
------------------- -------------------
(in thousands)
Dollars Shares Dollars Shares
-------- ------ -------- ------
Basic EPS net income applicable to common and common equivalent shares..... $ 1,197 8,742 $ 2,624 8,741
Add Preferred Stock........................................................ 242 4,560 242 1,520
Add Options................................................................ --- 86 --- 29
-------- ------ -------- ------
Diluted EPS net income applicable to common and common equivalent shares... $ 1,439 13,388 $ 2,866 10,290
======== ====== ======== ======
NOTE 3. LONG-TERM DEBT
Line of Credit and Term Debt
In December 2003, we entered into a $11.0 million senior credit facility with a
bank that includes a $8.0 million working capital revolving line of credit (the
"Line") and a $3.0 million term loan. The proceeds were used to repay term debt,
refinance our then existing revolving line of credit and provide working
capital. In connection with the acquisition of Trussco, Inc. and Trussco
Properties, L.L.C. (collectively "Trussco") on June 30, 2004, the Line was
increased to $12.0 million. (See Note 7).
Availability under the Line is the lower of: (i) $12.0 million or (ii) the sum
of eligible accounts receivable, as defined under the agreement, plus the lesser
of: $2.0 million or 80% of the appraised orderly liquidation value of eligible
inventory of parts and supplies. The Line accrues interest at the prime interest
rate plus 1.5% (6.25% at September 30, 2004) and matures on December 31, 2006.
The Line is collateralized by accounts receivable and inventory. As of September
30, 2004, we had $9.9 million outstanding under the Line and $2.6 million
outstanding on the term loan. Due to the lockbox arrangement and the subjective
acceleration clause of the Line agreement, the debt under the Line has been
classified as a current liability as of September 30, 2004, as required by EITF
95-22, Balance Sheet Classification of Borrowings Outstanding under Revolving
Credit Agreements that include both a Subjective Acceleration Clause and a
Lock-box Arrangement. Our availability under the Line was $0.1 million at
September 30, 2004.
10
At September 30, 2004 and December 31, 2003, long-term debt consists of the
following (in thousands):
September 30, December 31,
2004 2003
-------------- -------------
(unaudited)
Notes payable to a finance company, variable interest rate at LIBOR plus 5.0%
(7.44% and 6.12% at September 30, 2004 and December 31, 2003 respectively)
maturing July 31, 2006, secured by various property and equipment............................ $ 912 $ 1,145
Notes payable to a bank with interest payable at Prime plus 1.5% (6.25% and 5.5% at September
30, 2004 and December 31, 2003 respectively) maturing July 31, 2023, secured by real estate.. 1,403 1,633
Notes payable to a bank with interest payable at Prime plus 1.75% (6.50% and 5.75% at
September 30, 2004 and December 31, 2003 respectively) maturing December 31,
2006, secured by various property and equipment.............................................. 2,600 3,000
Notes payable to a finance company with interest at 8% maturing January 1, 2007, secured by
various aircraft............................................................................. 1,179 1,838
Notes payable to a finance company with interest at 10.25% maturing May 15, 2008, secured by
an aircraft.................................................................................. 178 207
Notes payable to a finance company with interest at 6.26% maturing March 17, 2006, secured by
various aircraft............................................................................. 1,764 ---
Notes payable to a bank with interest at 8.13%, maturing June 20, 2009, secured by aircraft.... 246 ---
Notes payable to a finance company with interest at 8%, maturing February 10, 2013, secured by
real estate.................................................................................. 218 ---
Convertible promissory notes payable to certain former stockholders of Trussco, Inc. with
interest at 5% maturing in June 2007......................................................... 3,000 ---
Other debt..................................................................................... 127 ---
Capital lease payable to a leasing companies secured by vehicles............................... 986 491
Capital lease payable to a finance company secured by various aircraft......................... 7,985 3,361
-------------- -------------
Total........................................................................................ 20,598 11,675
Less: Current maturities....................................................................... 3,539 2,051
-------------- -------------
Long-term debt, less current maturities........................................................ $ 17,059 $ 9,624
============== =============
Our senior secured credit facility contains customary financial covenants
requiring, among other things, minimum levels of tangible net worth, debt to
EBITDA ratios, and limitations on annual capital expenditures and certain
customer concentrations. As of September 30, 2004, we were in compliance with
these covenants and we expect to maintain compliance throughout 2004.
On October 21, 2004, we executed a $6.5 million senior secured loan which was
funded on October 25, 2004. The loan will mature on January 15, 2005 with an
interest rate of 12% to be accrued and paid on the maturity date. The loan is
collateralized by specific seismic assets, Trussco assets and three helicopters.
The proceeds were used for the payment of notes on the collateralized
helicopters, the early payoff of an equipment note payable to a bank, the
payment of the October Put Option payment on the Convertible Debentures
discussed below and for working capital purposes. This loan will be paid off
with the proceeds from the Senior Credit Facility discussed below.
On October 21, 2004, we received a non-binding commitment to complete a $100
million Senior Credit Facility. The proceeds will be used to redeem our
outstanding 6.5% Subordinated Convertible Debentures (See Note 11), refinance
certain long-term debt and provide working capital. Closing is expected during
the fourth quarter of 2004, subject to the negotiation, execution and delivery
of loan documentation reasonably satisfactory to the lenders and the approval of
our Board of Directors.
Convertible Debentures
Pursuant to a Securities Purchase Agreement dated February 12, 2004, we sold (i)
$10,000,000 in principal amount of 3-year, 6.5% fixed rate, Convertible
Debentures (the "Debentures") that are convertible into shares of common stock
at an initial conversion price of $7.15 per share and (ii) 5-year Common Stock
Series B Warrants to purchase an aggregate of 390,000 shares of Common Stock at
an initial exercise price of $8.50 per share. The warrants are not exercisable
for a period of six months and one day after the issue date of such warrants and
in no event will the exercise prices of such warrants be less than $6.15 per
share. In accordance with APB Opinion No. 14, the warrants were valued at a fair
market value of $1.0 million using the Black Scholes model. The value of these
warrants were recorded as an original issue discount with a corresponding credit
to paid in capital at the date of issuance. These sales of the Debentures were
made pursuant to a private placement in reliance on Section 4(2) of the
Securities Act of 1933.
11
In addition, in exchange for issuing 1-year common stock Series A Warrants to
purchase an aggregate of 700,000 shares of Common Stock at an initial exercise
price of $7.15 per share, we obtained the right to subsequent financing of
$5,050,000.
Pursuant to that right on April 15, 2004, in accordance with the Securities
Purchase Agreement, we sold (i) $5,050,000 in principal amount of 3-year, 6.5%
fixed rate, Convertible Debentures (collectively with the aforementioned
February 12, 2004 issuance hereinafter referred to as the "Debentures") that are
convertible into shares of common stock at an initial conversion price of $7.20
per share, and (ii) 5-year Common Stock Series A Warrants to purchase an
aggregate of 151,500 shares of common stock at an initial exercise price of
$9.00 per share. The warrants are not exercisable for a period of six months and
one day after the issue date of such warrants and in no event will the exercise
prices of such warrants be less than $7.11 per share. In accordance with APB
Opinion No. 14, the warrants were valued at a fair market value of $0.8 million
using the Black Scholes model. A beneficial conversion option was also recorded
of $0.7 million. The value of the warrants and beneficial conversion option were
recorded as original issue discount with a corresponding credit to paid in
capital at the date of issuance. These sales of the Debentures were made
pursuant to a private placement in reliance on Section 4(2) of the Securities
Act of 1933.
Total proceeds of $14.2 million received from the sales, after expenses, dated
February 12, 2004 and April 15, 2004 was $9.5 million and $4.7 million,
respectively. Of the total proceeds received for these private placements, $8.2
million was used to redeem Series A Preferred Stock in March 2004 (See Note 5)
and the balance used for working capital purposes.
The original issue discount for the February 12, 2004 and April 15, 2004
debentures was $1.0 million and $0.8 million, respectively. We recorded a $0.7
million in beneficial conversion option for the April 15, 2004 Debentures. The
Debentures are being amortized using the effective interest method over the
period in which the debentures can be put to the Company. A total of $1.2
million is included in interest expense related to original issue discounts for
the nine months ended September 30, 2004.
Prior to maturity of the Debentures, the holders of the Debentures have the
right to require the repayment or conversion of up to an aggregate of $13.17
million of the Debentures (the "Put Option"). We registered 5,012,237 shares
effective June 30, 2004 covering the resales of Common Stock that maybe issuable
pursuant to the conversion of the Debentures and the exercise of the Put Option
and all associated warrants, including additional shares that may be issuable
due to adjustments for conversion price upon the Debenture conversion, payment
of interest with shares and/or the exercise of warrants due to subdivision or
combination of our common stock. Pursuant to the Debenture agreement, the
registration of the related common stock triggered the ability of the Debentures
holders to exercise the Put Option in ten, consecutive, non-cumulative and equal
monthly installments beginning August 1, 2004. Accordingly the Debentures, net
of debt discount, were classified as a current liability in the Consolidated
Balance Sheet at September 30, 2004. On July 28, 2004 and on August 23, 2004, we
received notices from the holders of the Debentures exercising their Put Option
for August and September, respectively. Upon receipt of the Debenture holders'
intent to exercise a Put Option, we have the irrevocable option to deliver cash
or, if certain conditions set forth in the Debentures are satisfied, Common
Stock with respect to such Put Option. If we elect to pay the Put Option with
Common Stock, the underlying shares will be valued at a 12.5% discount to the
average trading price of our Common Stock for the applicable pricing period, as
defined in the Debenture agreement. We elected to use cash to redeem this
portion of the Debentures for August and September.
As provided for in the terms of the applicable Securities Purchase Agreements,
the Debenture holders received Put Option payments of $1.3 million in principal,
plus accrued interest, each on August 5, 2004 and on September 9, 2004. In
accordance with APB Opinion No. 26, we recorded $0.3 million as ordinary loss on
extinguishment of debt in the third quarter of 2004 as a result of the early
extinguishment of these portions of the Debentures. (See Note 11)
In connection with the Securities Purchase Agreements, we entered into an
Amended and Restated Registration Rights Agreement (the "Registration Rights
Agreement") pursuant to which we agreed to file and maintain a registration
statement with respect to certain underlying shares of common stock (the
"Registration Statement"). The registration statement was filed and was declared
effective by the SEC on June 30, 2004. As a result of the late filing of our
Form 10-Q for the quarter ended June 30, 2004, as of August 24, 2004 our
Registration Statement was deemed to be no longer effective. Accordingly, we
were in technical default of the Registration Rights Agreement. However, with
the filing of the Form 10-Q for the six months ended June 30, 2004 on August 26,
2004, the default was cured.
NOTE 4. LITIGATION
On February 13, 2004, we commenced litigation against Steven Stull, a former
director, Advantage Capital Partners ("ACP") and their respective insurers in
the Civil District Court for the Parish of Orleans in the State of Louisiana.
The suit requests the court to determine our right under the Company's Articles
of Incorporation, as amended, to redeem the Series A 8%
12
Convertible Preferred Stock rather than to convert the shares into common stock.
Furthermore, to the extent the court determines we did not have a right to
redeem, rather than convert, the Series A Preferred Stock, the suit requests the
court to determine that the Unanimous Consent of the Board of Directors entered
into on November 7, 2000 which, among other things, reduced the conversion price
of the Series A Preferred Stock from $2.50 to $0.75 (pre-split) per share, is
null and void and without effect because it was accomplished by the defendants
in violation of fiduciary duties and/or public policy and Louisiana law. We are
seeking a declaration that we have the right to redeem, rather than convert,
Series A Preferred Stock. Alternatively, we seek (a) a declaration that the
Unanimous Consent entered into on November 7, 2000 is null and void and without
effect; or (b) damages back against Mr. Stull and the Advantage Capital Partners
as a complete set-off to any additional dollars owed by us to ACP as a result of
the November 7, 2000 actions.
On March 26, 2004, ACP and its affiliates filed a lawsuit in the United States
District Court, Eastern District of Louisiana against us and certain of our
executive officers. ACP and its affiliates are alleging that (i) we and the
officers misrepresented material facts and failed to disclose material facts
related to the intention to redeem our Series A and Series B Convertible
Preferred Stock, and (ii) the officers of the Company breached their fiduciary
duties. They are claiming damages of approximately $30 million. We have agreed
to indemnify our officers in this matter. Our costs and legal expenses related
to this lawsuit are not currently determinable. This lawsuit presents risks
inherent in litigation including continuing expenses, risks of loss, additional
claims, and attorney fee liability. We believe that the claims or litigation
arising therefrom will have no material impact on us or our business and all
disputes surrounding securities matters will likely be covered by our insurance.
However, if this lawsuit is decided against us, and if it exceeds our insurance
coverage, it could aversely affect our financial condition, results of
operations and cash flows.
NOTE 5. PREFERRED STOCK
During the years ended December 31, 1999, 2000 and 2001, we privately placed
with an affiliate, subordinated debentures totaling $7.5 million, $3.4 million
and $1.5 million, respectively. The subordinated debentures matured five years
from their date of issue and accrued interest at various rates ranging from a
fixed rate of 12% per annum to a variable rate of interest starting at 12% per
annum and escalating to 20% per annum. In October 2000, we agreed to convert
$4.6 million of the subordinated debentures into our Series A Preferred Stock.
In May 2001, we agreed to pay the affiliate $3.0 million cash plus issue to the
affiliate $4.6 million of the our Series B Preferred Stock in full satisfaction
of all of the remaining outstanding subordinated debentures including accrued
interest of $1.8 million. This transaction resulted in the affiliate agreeing to
forgive $1.0 million of indebtedness, which was reflected as a capital
contribution from the affiliate, rather than as income in our financial
statements.
In connection with the original issuance of the subordinated debentures, we
issued to the affiliate detachable warrants to purchase 1,912,833 shares of our
common stock, of which 293,055 shares were transferred in 2003 to settle certain
litigation (See Note 4) and 858,678 shares were cancelled. The balance of
761,100 shares was exercised in the first quarter of 2004 at an exercise price
of $2.25.
The Series A Preferred Stock has an 8% cumulative dividend rate, was convertible
into our common stock with a conversion rate of $2.25 per share, was redeemable
at our option at $1,000 per share plus accrued dividends, contained a
liquidation preference of $1,000 per share plus accrued dividends, had voting
rights on all matters submitted to a vote of our stockholders, had separate
voting rights with respect to matters that would affect the rights of the
holders of the Series A Preferred Stock, and had aggregate voting rights of the
affiliate limited to 49% of our total outstanding common and preferred shares
with voting rights. In respect to the Series A Preferred Stock, the affiliate
had agreed to waive its conversion rights until our EBITDA (as defined) reached
a mutually agreed upon level. The affiliate previously agreed that dividends
would not accrue after June 30, 2003, until our EBITDA reached a mutually agreed
upon level. During the third quarter of 2003, we agreed with the holders of the
preferred stock that our EBITDA had reached an acceptable level for the
resumption of conversion rights and the accrual of dividends. Pursuant to our
senior secured credit agreements, the dividends could be paid "in kind" (in
shares of like preferred stock) or in cash. In February 2004, we issued $10
million of 6.5% Subordinated Convertible Debentures (See Note 3). The proceeds
were used to redeem $8.2 million of the Series A Preferred Stock outstanding,
including accrued dividends. The remaining 25 shares of Series A Preferred Stock
were redeemed in April 2004 for $0.03 million. At September 30, 2004 there are
no Series A Preferred Stock shares outstanding.
In May 2001, we committed to issue 4,600 shares of Series B Preferred Stock to
an affiliate of ours in satisfaction of all outstanding principal and interest
owed under the subordinated debt agreements. These shares were issued in March
2002. The Series B Preferred Stock has an 8% cumulative dividend rate, is
convertible into our common stock with an initial conversion rate of $3.75 per
share, is redeemable at our option at $1,000 per share plus accrued dividends,
contains a liquidation preference of $1,000 per share plus accrued dividends and
has no voting rights until such time as it becomes convertible. The affiliate
previously agreed that dividends would not accrue after June 30, 2003 until our
EBITDA reached a mutually agreed upon level. During the third quarter of 2003 we
agreed with the holders of the preferred stock that our EBITDA had reached an
13
acceptable level for the resumption of conversion rights and the accrual of
dividends. Pursuant to our senior secured credit agreements, the dividends can
be paid "in kind" (in shares of like preferred stock) or in cash. During the
first quarter of 2004, we redeemed 2,286 shares of the Series B Preferred Stock
for $2.4 million, including accrued dividends. In April 2004, we redeemed 2,285
shares of the total of 2,314 shares of the Series B Preferred Stock outstanding
for $2.5 million, including accrued dividends. At September 30, 2004, 29 shares
of Series B Preferred Stock remain outstanding.
NOTE 6. SEGMENT INFORMATION
The following shows unaudited industry segment information for our five
operating segments, Drilling, Aviation, Survey, Permitting and Environmental for
the three months and nine months ended September 30, 2004 and 2003 (in
thousands). As described in Note 7, effective June 30, 2004 we acquired Trussco,
Inc. and Trussco Properties LLC, (collectively herein referred to as "Trussco")
whose activity is reported below in a separate operating segment
("Environmental"). The following also shows the identifiable assets of the
Environmental segment:
Three months ended September 30, Nine months ended September 30,
------------------------------------ ----------------------------------
2004 2003 2004 2003
---------------- --------------- -------------- ---------------
Operating revenues:
Drilling................................... $ 7,057 $ 8,399 $ 22,851 $ 22,568
Aviation................................... 3,008 1,254 9,722 3,032
Survey..................................... --- --- --- ---
Permitting................................. 9 565 997 1,234
Environmental (Note 7).................... 4,293 --- 4,293 ---
---------------- --------------- -------------- ---------------
Total..................................... $ 14,367 $ 10,218 $ 37,863 $ 26,834
================ =============== ============== ===============
Gross profit (loss):
Drilling................................... $ 868 $ 2,249 $ 3,326 $ 5,984
Aviation................................... 282 350 3,031 768
Survey..................................... (18) (13) (39) (50)
Permitting................................. (3) 116 131 257
Environmental (Note 7)..................... 1,638 --- 1,638 ---
Other (Corporate).......................... (97) (101) (304) (437)
---------------- --------------- -------------- ---------------
Total..................................... $ 2,670 $ 2,601 $ 7,783 $ 6,522
General and administrative expenses.......... 3,416 1,090 7,853 3,381
Interest and other expense, net.............. 1,805 372 3,561 900
---------------- --------------- -------------- ---------------
Income (loss) before taxes................... $ (2,551) $ 1,139 $ (3,631) $ 2,241
================ =============== ============== ===============
Capital Expenditures:
Drilling................................... $ 103 $ 283 $ 153 $ 317
Aviation................................... 604 174 4,223 1,504
Survey..................................... --- --- --- ---
Permitting................................. --- --- --- ---
Environmental (Note 7)..................... 16 --- 16 ---
Corporate.................................. 2 52 77 66
---------------- --------------- -------------- ---------------
Total..................................... $ 725 $ 509 $ 4,469 $ 1,887
================ =============== ============== ===============
14
September 30, September 30,
2004 2003
----------------- -----------------
Identifiable Assets:
Drilling....................................... $ 21,090 $ 20,593
Aviation....................................... 23,461 7,356
Survey......................................... 1,128 1,000
Permitting..................................... --- 90
Environmental (Note 7)......................... 13,782 ---
Corporate...................................... 12,374 13,833
----------------- -----------------
Total......................................... $ 71,835 $ 42,872
================= =================
NOTE 7. ACQUISITION
On November 20, 2003, we purchased all of the issued and outstanding stock of
American Helicopters, Inc. ("AHI") for the aggregate acquisition cost of $5.4
million, comprised of $4.6 million in cash and the assumption of current and
long-term liabilities of $0.6 million and $0.2 million, respectively. AHI
operated 17 helicopters from base locations in Louisiana and Texas and was
headquartered in Angleton, Texas. The results of AHI's operations have been
included in our consolidated financial statements since the acquisition date.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition. The allocation of the
purchase price is subject to refinement in the future as acquired asset and
liability values become finalized (in thousands):
Current assets................................... $ 2,129
Property and equipment........................... 3,322
Current Liabilities.............................. (598)
Long-term liabilities............................ (213)
-----------------
Cash purchase price........................... $ 4,640
=================
In September 2004, we made an adjustment to the purchase price for additional
liabilities assumed since the date of acquisition totaling $0.1 million, which
increased the total cash purchase price to $4.7 million. The adjustment
increased property and equipment with an offsetting amount to current
liabilities.
On June 30, 2004, we purchased all of the issued and outstanding stock of
Trussco, Inc. and all of the membership interests in Trussco Properties, L.L.C.
for the aggregate acquisition cost of $11.9 million, including $7.3 million in
cash, $3.0 million in 5% convertible promissory notes payable to certain
stockholders ("Stockholder Notes") maturing in June 2007, and the assumption of
approximately $1.6 million in debt and other liabilities. The Stockholder Notes
can be prepaid at any time and are convertible at a price of $9.40 per share.
Trussco is a leading provider of dock-side and offshore tank, vessel, boat and
barge cleaning services principally to major and independent oil and gas
companies operating in the Gulf of Mexico. The acquisition will increase our
revenue and customer base and offers cross-selling opportunities with our
aviation transportation division. Correspondingly, $2.5 million was allocated to
intangible assets attributable to customer lists and other industry-specific
intangible assets. The results of Trussco operations are included in our
consolidated financial statements from the date of the acquisition.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition. The property and equipment
and intangible assets are being amortized over five years and will not result in
any residual value. The final allocation of the purchase price to intangible
assets and goodwill has not been completed. The allocation of the purchase price
is subject to refinement as acquired asset and liability values are being
finalized (in thousands):
Current assets (including cash of $356)................. $ 3,643
Property and equipment.................................. 5,814
Other assets............................................ 19
Intangible assets....................................... 2,500
Assumption of Debt...................................... (1,637)
Stockholder Notes....................................... (3,000)
-----------
Cash purchase price.................................. $ 7,339
===========
15
In July 2004 we incurred fees for merchant banking services provided during the
Trussco acquisition. The fees were earned upon signing of final documents and
the receipt of title to assets. The total fee included $0.5 million cash,
increasing the cash purchase price to $7.8 million, 69,930 shares of
restricted stock and 5-year common stock warrants to purchase 100,000 shares of
common stock at an exercise price of $7.15. The restricted stock was valued at
the common stock price on July 1, 2004 of $4.89 per share, or $0.3 million. The
warrants are not exercisable for a period of one-year after the issue date of
such warrants. In accordance with APB Opinion No. 14, the warrants were valued
at a fair market value of $0.2 million using the Black Scholes model. The total
value of $1.0 million was capitalized as goodwill associated with the Trussco
acquisition with corresponding credits to cash, common stock and
paid-in-capital.
The unaudited pro forma results summarized below reflects our consolidated pro
forma results of operations as if AHI and Trussco were acquired on January 1,
2003. (in thousands):
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenue.................................................... $ 14,367 $ 17,580 $ 48,929 $ 47,438
Gross Profit............................................... $ 2,670 $ 4,899 $ 11,223 $ 12,780
Net income (loss) applicable to common and common
equivalent shares........................................ $ (4,016) $ 2,113 $ (5,765) $ 4,225
Net income (loss) per common share:
Basic.................................................... $ (0.36) $ 0.24 $ (0.54) $ 0.48
Diluted.................................................. $ (0.36) $ 0.16 $ (0.54) $ 0.41
NOTE 8. STOCK BASED COMPENSATION
We account for employee stock-based compensation using the intrinsic value
method prescribed in APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). Accordingly, the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," permits the continued use of the
method prescribed by APB No. 25 but requires additional disclosures, including
pro forma calculations of earnings and net earnings per share as if the fair
value method of accounting prescribed by SFAS No. 123 had been applied. No
stock-based compensation costs are reflected in net income (loss), other than
compensation expense recorded on awards to certain executive officers (see Note
9), as all options granted under the plans had an exercise price equal to the
market value of the underlying common stock on the date of grant. As required by
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," which amended SFAS No. 123, the following table illustrates the
effect on net income and earnings per share if the Company had applied the fair
value recognition provisions of SFAS No. 123 to stock-based compensation. The
pro forma data presented below is not representative of the effects on reported
amounts for future years (in thousands, except share data).
Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
--------- ------------ --------- -----------
Net income (loss) applicable to common and common equivalent
shares - as reported............................................. $ (4,016) $ 1,197 $ (5,659) $ 2,624
Add (deduct): stock-based employee compensation expense (gain)
included in reported net loss, net of related tax effects of $0.. (18) --- 900 ---
Less: total stock-based employee compensation expense determined
under fair value based method for all awards granted to
employees, net of related tax effect of $0....................... (175) (17) (1,481) (34)
--------- ------------ --------- -----------
Net income (loss) applicable to common and common equivalent
shares - pro forma............................................... $ (4,209) $ 1,180 $ (6,240) $ 2,590
========= ============ ========= ===========
Net income (loss) per common share - as reported:
Basic.............................................................. $ (0.36) $ 0.14 $ (0.53) $ 0.30
Diluted............................................................ $ (0.36) $ 0.11 $ (0.53) $ 0.28
Net income (loss) per common share - pro forma:
Basic.............................................................. $ (0.38) $ 0.13 $ (0.58) $ 0.30
Diluted............................................................ $ (0.38) $ 0.09 $ (0.58) $ 0.25
16
NOTE 9. EXECUTIVE COMPENSATION AGREEMENTS
On June 30, 2004, we amended Restricted Stock Incentive Agreements with certain
executive management into Amended and Restated Incentive Agreements
(collectively referred to hereinafter as the "Incentive Agreements") that award
stock and/or cash on various vesting dates. Under the terms and conditions of
the Incentive Agreements, two executive officers received 40,454 shares and
50,000 shares, respectively. The stock was held in escrow, registered in the
name of the executive officers, until it vested 100% on November 4, 2004. A tax
equalization payment was also paid to the two executive officers totaling $0.1
million at June 30, 2004. The awards were valued at fair market value at a price
of $5.05 per share at June 30, 2004 and recorded, in full, as compensation
expense of $0.5 million.
The Incentive Agreements also grant these executive officers the right to
receive two cash payments each equal to the fair market value of 60,673 shares
and 75,000 shares of our common stock, respectively, on the first business day
following our annual stockholders' meeting in 2005 and in 2006. The amounts of
such stock-based awards to the executive officers on each vesting date may be
paid in cash or, at the sole option of the Compensation Committee, in additional
shares, provided such shares are available for issuance pursuant to the terms of
the Fourth Amended and Restated OMNI Energy Services Corp. Stock Incentive Plan
(hereinafter the "Plan"). Such shares were not available at June 30, 2004,
therefore the awards are accounted for under FASB Interpretations (FIN) No. 28
"Accounting for Stock Appreciation Right and Other Variable Stock Option or
Award Plans" as a variable plan, which requires that compensation will be
measured at the end of each period at the quoted market price of a share of our
common stock. The change in the quoted market price will be reflected in future
periods until vested as an adjustment of accrued compensation and compensation
expense in the periods in which the changes occur. As such, the awards are
revalued at the end of each period at the quoted market price of a share of our
common stock. At September 30, 2004, a share of the our common stock was $3.52
resulting in compensation expense of $0.4 million for the nine months ended
September 30, 2004 and a deferred compensation liability of $0.9 million.
We also entered into Stock-Based Award Incentive Agreements (hereinafter "SBA")
with certain executive officers on June 30, 2004. The SBA shall become computed
and payable: (a) on the date of the Employee's termination of employment (for
any reason other than resignation or termination for cause), (b) 90 days after
the executive's death or disability or (c) upon a Change in Control. The
executive managers were awarded 45% and 55%, respectively, of: (1) 10% of the
fair market value (hereinafter "FMV"), defined as the average closing price per
share on the NASDAQ National Market over the five prior trading days times the
number of issued and outstanding shares of the Company, of a share of the
Company's common stock greater than or equal to $1.00 but less than $1.50, plus
(2) 15% of the FMV of a share of the Company's common stock greater than or
equal to $1.50 but less than $2.50, plus (3) 20% of the FMV of a share of the
Company's common stock greater than or equal to $2.50 but less than $10.00, plus
(4) 15% of the FMV of a share of the Company's common stock greater than or
equal to $10.00 but less than $20.00, plus (5) 10% of the FMV of a share of the
Company's common stock greater than or equal to $20.00. If no payments have been
made, the right terminates on December 31, 2008 or upon termination of
employment for resignation or cause, whichever occurs last. No compensation
expense was recorded at September 30, 2004 because the award is contingent on
future events none of which is considered probable at September 30, 2004.
In addition, we entered into employment contracts with certain key executive
management effective until December 31, 2008 with automatic extensions for
additional, successive one year periods commencing January 1, 2009, unless
either party gives notice of non-renewal as provided for under the terms of the
employment contracts.
In connection with the Trussco acquisition (See Note 7), we also entered into
employment contracts with certain Trussco managers effective until December 31,
2006 with automatic extensions for additional, successive one year periods
commencing January 1, 2007, unless either party gives notice of non-renewal as
provided for under the terms of the employment contracts.
NOTE 10. DISCONTINUED OPERATIONS
On November 20, 2003, we purchased American Helicopters, Inc. ("AHI"), resulting
in the acquisition of thirteen (13) helicopters at bases located in Louisiana
and Texas. AHI was strategically targeted and purchased for the infrastructure
of aircraft, fueling stations, flight (customer) following and pilot and
mechanic organizations.
We made the decision in July 2004, after owning AHI for approximately eight
months, to exit from the Texas location in Brazoria County, to begin the
withdrawal of business activity with AHI customers and to move all operations to
our main operating facility in Louisiana. This strategy also fits with the
planned completion of the Intra Coastal City (Mouton Cove) facility as a central
operation base of operations. Our planned strategy is to get all of our fleet
under the OMNI Federal Aviation Agency 135 certificate and to market our flight
services to larger independent and major independent customers. Our
17
strategy is to service operators that require aircraft geared to crew change and
larger passenger capacity such as Model 407s and S-76s, which allow for higher
rates and use. The large operators work from Master Service Agreements which
meet our needs for higher, more fixed pricing and fixed unit structures. The
plan encompasses relocation of personnel, the elimination of certain duplicate
positions, and the negotiation of early release of operating leases at the
Brazoria County facility. The costs we will incur include travel and re-location
costs for personnel who are relocated, costs associated with the transfer of
aircraft to the 135 certificate, termination costs for personnel who are
eliminated, any costs incurred to obtain an early release of operating leases at
the Brazoria County facility and other direct costs related to the exit of this
business group. As a result, in September 2004 we surrendered the AHI 135
Certificate. As of September 30, 2004 we have been able to successfully transfer
two aircraft under the OMNI 135 certificate. We expect to complete our exit of
the Brazoria market in the first quarter of 2005.
In accordance with SFAS No. 144, we are accounting for the Brazoria market as a
separate component of the aviation segment and are recognizing costs associated
with our exit activities for the Brazoria base. These items are reported as
results of discontinued operations totaling $1.5 million, net of income taxes of
$0 as a component of net income. Accordingly, the table below presents all prior
period revenues and expenses of the Brazoria location included in the loss from
discontinued operations (in thousands):
Three Months Three Months Three Months Nine Months
ended ended Ended Ended
March 31, June 30, September 30, September 30,
2004 2004 2004 2004
---------------- --------------- ---------------- ----------------
Revenue......................................... $ 643 $ 948 $ 1,188 $ 2,779
Cost of goods................................... 506 676 1,708 2,890
---------------- --------------- ---------------- ----------------
Gross profit (loss)............................. 137 272 (520) (111)
General and admin expenses................... 239 243 193 675
Other exit costs............................. --- --- 752 752
---------------- --------------- ---------------- ----------------
Income (loss) before taxes...................... (102) 29 (1,465) (1,538)
Tax (benefit) expense........................... --- --- --- ---
---------------- --------------- ---------------- ----------------
Net income (loss) from discontinued operations.. (102) 29 (1,465) (1,538)
We have included in the loss from discontinued operations an allowance for
doubtful accounts of $0.2 million recorded as a result of contract termination
negotiations associated with our exit of the Brazoria market. The allowance is
shown net against accounts receivable in the Consolidated Balance Sheet at
September 30, 2004. As required by SFAS No. 146, the following table reflects
the total amount expected to be incurred in connection with the exit activity
and the amounts incurred in the three months and the nine months ended September
30, 2004 (in thousands).
Three Months Nine Months
Ended Ended Total Exit Costs
September 30, September 30, Expected to be
2004 2004 Incurred
------------- ------------- ----------------
Writedown of inventory .......... $ 652 $ 652 $ 652
Lodging & Travel ................ 13 13 103
Severance and outplacement ...... 188 188 433
Contract Terminations ........... --- --- 17
Field Office Expenses ........... 258 795 885
Other ........................... 15 15 30
------------- ------------- ----------------
Total exit costs ................ $ 1,126 $ 1,663 $ 2,120
============= ============= ================
18
NOTE 11. SUBSEQUENT EVENTS
On October 8, 2004, we entered into an Amendment and Conditional Waiver
Agreement (the "Amendment"), with the holders of the Debentures. The Amendment
permits us to extinguish the Debentures on or prior to November 15, 2004. The
Amendment also permits us to obtain financing and incur indebtedness senior to
the debentures to fulfill our obligations under the Amendment if, simultaneously
with the closing of such financing, the Debentures are paid in full.
Under the terms of the Amendment, the Debenture holders granted the Company the
right to pre-pay in cash all, but not less than all, of the outstanding
Debentures held by each holder on or prior to 5 p.m., Eastern Standard Time, on
November 15, 2004. The Debenture holders have informally agreed to extend the
redemption date and to defer the October interest payment and the November Put
Option payment to coincide with the closing of the Senior Credit Facility
discussed below. The agreed upon redemption price is equal to the then
outstanding principal of, and accrued and unpaid interest and penalties, if any,
on the Debentures held by such holder. In exchange for such right, we agreed to
allow the holders of the Debentures to convert $2,000 of the principal amount of
the April 15, 2004 Debentures into 200,000 shares of common stock at a revised
conversion price of $0.01 per share. As a result of the conversion and in
accordance with the requirements of SFAS No 84, Induced Conversions of
Convertible Debt, an amendment to APB Opinion No. 2, we recorded $0.9 million in
debt conversion expense in October 2004.
Part of the Amendment affected the timing of the payments to the holders of the
Debentures exercising their Put Option for October. Upon receipt of the
Debenture holders' intent to exercise a Put Option, we have the irrevocable
option to deliver cash or, if certain conditions set forth in the Debentures are
satisfied, common stock with respect to such Put Option. If we elect to pay the
Put Option with common stock, the underlying shares will be valued at a 12.5%
discount to the average trading price of our Common Stock for the applicable
pricing period, as defined in the Debenture agreement. To date, we have elected
to use cash to redeem the Put Options. As provided for in the terms of the
applicable Securities Purchase Agreements and the Amendment, the Debenture
holders received a Put Option payment of $1.3 million in principal, plus accrued
interest, on October 25, 2004. In accordance with APB Opinion No. 26, we
recorded $0.1 million as ordinary loss on extinguishment of debt in the fourth
quarter of 2004 as a result of the early extinguishment of this portion of the
Debentures.
On October 21, 2004, we received a non-binding commitment to complete a $100
million Senior Credit Facility. The proceeds will be used to redeem the
outstanding Debentures in accordance with the Amendment discussed above, to
refinance certain long-term debt and to provide working capital. Closing is
expected during the fourth quarter of 2004 and is subject to the negotiation,
execution and delivery of loan documentation reasonably satisfactory to the
lenders and the approval of our Board of Directors.
We expect to record an ordinary loss on extinguishment of debt of $0.5 million
in the fourth quarter 2004 related to the refinancing.
On October 21, 2004, we executed a $6.5 million senior secured loan, which was
funded on October 25, 2004. The loan will mature on January 15, 2005 with an
interest rate of 12% to be accrued and paid on the maturity date. The loan is
collateralized by specific seismic assets, Trussco assets and three helicopters.
The proceeds were used for the payment of notes on the collateralized
helicopters, the early payoff of an equipment note payable to a bank, the
October Put Option payment on the Debentures and for working capital purposes
(See Note 3). This loan will be paid off with the proceeds from the Senior
Credit Facility discussed above.
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 "Forward-Looking Statements." "Forward looking
statements" provided by us 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, as amended, for the year ended December 31, 2003 filed with the
Securities and Exchange Commission.
19
RECENT DEVELOPMENTS
On August 25, 2004, we received a letter from the NASDAQ staff indicating that
the Company had failed to timely file its Form 10-Q for the second quarter of
2004 and therefore we were is not in compliance with the NASDAQ listing
requirements. With the filing of our Form 10-Q for the six months ended June 30,
2004 on August 26, 2004, we cured compliance with NASDAQ. No de-listing of our
stock occurred and no further action was taken.
On October 8, 2004, we entered into an Amendment and Conditional Waiver
Agreement ("the Amendment"), with the holders of the Debentures. The Amendment
permits us to extinguish the Debentures on or prior to November 15, 2004. The
Amendment also permits us to obtain financing and incur indebtedness senior to
the Debentures to fulfill our obligations under the Amendment if, simultaneously
with the closing of such financing, the Debentures are paid in full.
Under the terms of the Amendment, the Debenture holders granted us the right to
pre-pay in cash all, but not less than all, of the outstanding Debentures held
by each holder on or prior to 5 p.m., Eastern Standard Time, on November 15,
2004. The Debenture holders have informally agreed to extend the redemption date
and to defer the October interest payment and the November Put Option payment to
coincide with the closing of the Senior Credit Facility discussed below. The
agreed upon redemption price is equal to the then outstanding principal of, and
accrued and unpaid interest and penalties, if any, on the Debentures held by
such holder. In exchange for such right, we have agreed to allow the holders of
the Debentures to convert $2,000 of the principal amount of the April 15, 2004
Debentures into 200,000 shares of common stock at a revised conversion price of
$0.01 per share. As a result of the conversion and in accordance with the
requirements of SFAS No. 84, "Induced Conversions of Convertible Debt, an
amendment to APB Opinion No. 2", we recorded $0.9 million in debt conversion
expense in October 2004.
Part of the Amendment affected the timing of the payments to the holders of the
Debentures exercising their Put Option for October. Upon receipt of the
Debenture holders' intent to exercise a Put Option, we have the irrevocable
option to deliver cash or, if certain conditions set forth in the Debentures are
satisfied, common stock with respect to such Put Option. If we elect to pay the
Put Option with common stock, the underlying shares will be valued at a 12.5%
discount to the average trading price of our Common Stock for the applicable
pricing period, as defined in the Debenture agreement. To date, we have elected
to use cash to redeem the Put Options. As provided for in the terms of the
applicable Securities Purchase Agreements and the Amendment, the Debenture
holders received a Put Option payment of $1.3 million in principal, plus accrued
interest, on October 25, 2004. In accordance with APB Opinion No. 26, we
recorded $0.1 million as ordinary loss on extinguishment of debt in the fourth
quarter of 2004 as a result of the early extinguishment of this portion of the
Debentures.
On October 21, 2004, we received a non-binding commitment to complete a $100
million Senior Credit Facility. The proceeds will be used to redeem the
outstanding Debentures in accordance with the Amendment discussed above, to
refinance certain long-term debt and to provide working capital. Closing is
expected during the fourth quarter of 2004 and is subject to the negotiation,
execution and delivery of loan documentation reasonably satisfactory to the
lenders and the approval of our Board of Directors.
We expect to record an ordinary loss on extinguishment of debt of $0.5 million
in the fourth quarter 2004 related to the refinancing.
On October 21, 2004, we executed a $6.5 million senior secured loan which was
funded on October 25, 2004. The loan will mature on January 15, 2005 with an
interest rate of 12% to be accrued and paid on the maturity date. The loan is
collateralized by specific seismic assets, Trussco assets and three helicopters.
The proceeds were used for the payment of notes on the collateralized
helicopters, the early payoff of an equipment note payable to a bank, the
payment of the October Put Option payment on Convertible Debentures and for
working capital purposes (See Note 3). This loan will be paid off with the
proceeds from the Senior Credit Facility discussed above.
GENERAL
We are a leading oilfield service company specializing in providing an
integrated range of (i) onshore seismic drilling, permitting, survey and
helicopter support services to geophysical companies operating in logistically
difficult and environmentally sensitive terrain, (ii) helicopter transportation
services to oil and gas companies operating primarily in the shallow waters of
the Gulf of Mexico and (iii) dockside and offshore tank, rig, structure and
vessel cleaning for oil and gas companies operating primarily in the Gulf of
Mexico. We operate in 5 business segments: Seismic Drilling, Permitting, Survey,
Aviation Services and Environmental Services.
We were founded in 1987, as OMNI Drilling Corporation, to provide drilling
services to the geophysical industry. In July 1996, OMNI Geophysical, L.L.C.
acquired substantially all of the assets of OMNI Geophysical Corporation, the
successor to the business of OMNI Drilling Corporation. OMNI Energy Services
Corp. ("OMNI") was formed as a Louisiana corporation on September 11, 1997.
20
The principal region in which our Seismic Drilling division operates is the
marsh, swamp, shallow water and contiguous dry land areas along the U.S. Gulf
Coast (the "Transition Zone"), primarily in Louisiana and Texas, where we are
the leading provider of seismic drilling support services. In 2003, we initiated
seismic drilling activities in various Transition Zone regions of Mexico. The
work was completed in early 2004.
We own and operate a fleet of specialized seismic drilling and transportation
equipment for use in the Transition Zone. We believe we are the only domestic
company that currently can both provide an integrated range of seismic drilling,
permitting, survey and helicopter support services in all of the varied terrain
of the Transition Zone and simultaneously support operations for multiple,
large-scale seismic projects. In February 2002, we acquired all of the assets of
AirJac Drilling, a division of Veritas Land DGC. This acquisition created the
largest domestic provider of seismic drilling services to geophysical companies.
In November 2003, we acquired American Helicopters, Inc. ("AHI") establishing us
as a leading provider of helicopter transportation services in the Gulf of
Mexico. We operate a fleet of 26 company-owned, leased and customer-owned
helicopters, and one fixed-wing aircraft, from bases or heliports located in the
Gulf Coast regions of Louisiana and Texas. Our land-based aviation customers are
primarily geophysical companies operating in various regions of the United
States. Our offshore aviation customers include oil and gas companies operating
primarily in the shallow waters of the Gulf of Mexico. In the third quarter of
2004, we began to discontinue the operations of AHI at our Brazoria base,
including certain customer-owned aircraft providing air medical transportation
services for hospitals and medical programs in approximately 15 counties in
Texas. This was done in conjunction with our strategy of consolidating all
aviation operations to Louisiana, including moving all AHI aircraft under the
OMNI Federal Aviation Agency 135 Certificate, and a shift in market geared to
crew change and larger passenger capacity for customers in the Gulf of Mexico.
We also maintain an inventory of aviation maintenance parts, turbine engines and
other miscellaneous flight equipment used in connection with providing aviation
services to our customers.
On June 30, 2004, we acquired Trussco, Inc. and Trussco Properties, L.L.C.
(collectively, "Trussco"), a leading provider of dockside and offshore tank,
rig, structure and vessel cleaning for oil and gas companies operating primarily
in the Gulf of Mexico, expanding our core business segments and providing us
with integration opportunities with aviation transportation services. Trussco
operates full service NORM (Natural Occurring Radioactive Material) facility and
glycol dehydration services including system cleaning, system survey and
inspection, repairs, glycol sampling and analysis and technical support.
Trussco's personnel are highly trained in Confined Space Entry and Rescue,
HAZWOPER (Hazardous Waste Operations and Recovery), NORM, H2S (Hydrogen Sulfide)
and Behavioral Base Safety.
All of our operations are subject to seasonal variations in weather conditions
and available daylight hours. Since our drilling, environmental and aviation
activities take place outdoors, on average we experience lower flight hours &
lower production in winter months than in summer months, due to an increase in
rain, fog, and cold conditions and a decrease in daylight hours. These winter
conditions also generally result in fewer hours worked per day and fewer holes
drilled or surveyed per day during that season.
21
RESULTS OF OPERATIONS
(in thousands)
Three months ended September 30, Nine months ended September 30,
RESULTS OF OPERATIONS (unaudited) 2004 2003 2004 2003
---------------- -------------- -------------- ---------------
Operating revenue................................. $ 14,367 $ 10,218 $ 37,863 $ 26,834
Operating expenses................................ 11,697 7,617 30,080 20,312
---------------- -------------- -------------- ---------------
Gross profit...................................... 2,670 2,601 7,783 6,522
General and administrative expenses............... 3,416 1,090 7,853 3,381
---------------- -------------- -------------- ---------------
Operating income (loss)........................... (746) 1,511 (70) 3,141
Interest expense.................................. (1,613) (202) (3,222) (650)
Other expense, net................................ (192) (170) (339) (250)
---------------- -------------- -------------- ---------------
Income (loss) from continuing operations before
income taxes.................................... (2,551) 1,139 (3,631) 2,241
Income tax benefit................................ --- (300) --- (625)
---------------- -------------- -------------- ---------------
Net Income (loss) from continuing operations...... (2,551) 1,439 (3,631) 2,866
Loss from discontinued operations, net of $0 tax.. (1,465) --- (1,538) ---
----------------- -------------- --------------- ---------------
Net income (loss)................................. (4,016) 1,439 (5,169) 2,866
Preferred stock Dividends......................... --- (242) (490) (242)
---------------- -------------- -------------- ---------------
Net income (loss) applicable to common and common
equivalent shares............................... $ (4,016) $ 1,197 $ (5,659) $ 2,624
================ ============== ============== ===============
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003
Operating revenues increased 41% or $4.2 million, from $10.2 million for the
three months ended September 30, 2003 to $14.4 million for the three months
ended September 30, 2004. This increase was due primarily to our acquisition of
Trussco as of June 30, 2004 which contributed $4.3 million in revenue for the
third quarter 2004. This additional revenue was partially offset by a decline in
revenues related to our drilling, survey and permitting divisions of $1.9
million to $7.1 million for the three months ended September 30, 2004 from $9.0
million for the three months ended September 30, 2003. Third party permitting
and weather delays, including six named tropical storms, hampered operations and
lowered revenue of our seismic drilling and environmental business units.
Aviation revenues increased $1.7 million from $1.3 million to $3.0 million for
the three months ended September 30, 2004 compared to the same period in 2003 as
a result of an increase of 2,080 flight hours from 1,469 to 3,549 flight hours.
The increase in flight hours was due primarily to our acquisition of AHI in
November 2003, the addition of new aircraft in 2004 and the W&T Offshore, Inc.
contract that we began in April 2004, providing transportation services to
offshore platforms operated by W&T in the shallow offshore waters of the Gulf of
Mexico. As discussed below, $1.2 million in aviation revenue attributable to 976
flight hours is included in the loss from discontinued operations for the third
quarter of 2004.
Operating expenses increased 54%, or $4.1 million, from $7.6 million for the
three months ended September 30, 2003 to $11.7 million for the three months
ended September 30, 2004. Increases in payroll costs in all divisions accounted
for approximately 46% of this increase as operating payroll expense increased
from $2.9 million to $4.8 million for the three months ended September 30, 2003
and 2004, respectively. Payroll cost for the Trussco acquisitions accounted for
$1.6 million of the $1.9 million increase. The average number of field personnel
we employed increased from 235 for the three months ended September 30, 2003 to
407 for the three months ended September 30, 2004, as a result of our
acquisitions of AHI and Trussco. Also, explosives expense increased $0.3 million
due to an increase in the cost of explosives on jobs performed in 2004. With the
acquisition of Trussco and our increased aviation activity, expenses for
rentals, leases & charters also increased $0.2 million from $0.1 million for
quarter ended September 30, 2003 to $0.3 for the same period in 2004. Fuel
expense increased 100% or $0.4 million from $0.4 million for the three months
ended September 30, 2003 to $0.8 million for the three months ended September
30, 2004, which is consistent with the aviation revenue increase. Additional
aircraft acquired also contributed to an increase of $0.3 million in insurance
costs from $0.3 million for the three months ended September 30, 2003 to $0.6
million for the three months ended September 30, 2004. Finally, an increase in
other general operating expense of $1.0 million from the third quarter of 2003
to the third quarter of 2004 was primarily due to increased personnel and base
operations resulting from the Trussco acquisitions. Base operations costs of
$0.3 million and aircraft operating expenses of $1.4 million are included in the
loss from discontinued operations for the third quarter of 2004.
Gross profit increased $0.1 million to $2.7 million for the third quarter of
2004 from $2.6 million for the third quarter of 2003, although we experienced
declining gross profit margins, which fell from 25.5% in 2003 to 19% in 2004.
Increased revenue in our aviation division and the addition of our environmental
division was offset by lower margins in our seismic drilling division resulting
primarily from third party permitting delays, inclement weather and a certain
heliportable job in the Rocky Mountains which generated lower than expected
profit margins. The net result of revenues and operating expenses included in
the loss from discontinued operations is a loss of $0.5 million in the third
quarter of 2004.
22
General and administrative costs increased $2.3 million, from $1.1 million
during the three month period ended September 30, 2003 to $3.4 million during
the same three month period of 2004. Of this increase $1.3 million is
attributable to the June 2004 acquisition of Trussco, Inc., $0.2 million results
from increased amortization of loan costs related to the Subordinated
Convertible Debentures and $0.5 million is principally attributable to increased
legal and accounting fees.
Interest expense increased approximately $1.4 million from $0.2 million for the
three month period ended September 30, 2003 to $1.6 million for the three month
period ended September 30, 2004. Approximately 71% of this increase is accretion
of original issue discount of $0.4 million, a beneficial conversion option of
$0.2 million, interest expense of $0.2 million and loss on extinguishment of
debt of $0.3 million related to the issuance of the 6.5% Subordinated from
higher levels of debt incurred with the organic expansion of our aviation fleet
combined with higher interest rates in 2004 versus 2003.
Due to our recent history of operating losses, we recorded a valuation allowance
during the periods against our net deferred tax assets generated from our net
operating loss carry forwards, which resulted in our not reporting any income
tax expense or benefit during those periods. For the quarter ended September 30,
2003, we reversed $0.3 million of this related reserve due to our expectation of
generating income in fiscal 2004. For the period ended September 30, 2004, we
did not record any income tax expense or benefit.
As discussed in Note 10, we made the decision in July 2004, after owning AHI for
approximately eight months, to exit from the Texas location in Brazoria County,
to begin the withdrawal of business activity with AHI customers and to move all
operations to our main operating facility in Louisiana. The costs we will incur
include travel and re-location costs for personnel who are relocated,
termination costs for personnel who are eliminated, any costs incurred to obtain
an early release of operating leases at the Brazoria County facility and other
direct costs related to the exit of this business group. Accordingly, we have
recorded a loss from discontinued operations totaling $1.5 million, net of
income taxes of $0 as a component of the net loss for the quarter ended
September 30, 2004.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003
Operating revenues increased 41%, or $11.1 million, from $26.8 million for the
nine months ended September 30, 2003 to $37.9 million for the nine months ended
September 30, 2004. Our environmental division added revenue of $4.3 million.
Revenues from our aviation operations increased $7.0 million from $3.0 million
for the nine months ended September 30, 2003 to $10.0 million for the same
period in 2004. The increase is due to the acquisition of AHI in November 2003
and other new aircraft in 2004, as well as the W&T contract that we began in
April 2004, providing transportation services to offshore platforms operated by
W&T in the shallow waters of the Gulf of Mexico. The increase in revenue from
these business units was partially offset by a decrease of $0.2 million in our
seismic drilling and permitting operations, principally as a result of
permitting and weather related delays through the year. As discussed below, $2.8
million in aviation revenue attributable to 2,727 flight hours is included in
the loss from discontinued operations for the third quarter of 2004.
Operating expenses increased 48%, or $9.8 million, from $20.3 million for the
nine months ended September 30, 2003 to $30.1 million for the nine months ended
September 30, 2004. This increase is partially attributable to higher operating
payroll and payroll related costs, which increased $3.4 million from $8.4
million to $11.8 million for the nine month periods ended September 30, 2003 and
2004, respectively. Our average number of field personnel increased from 203
employees during the first nine months of 2003 to 322 employees during the first
nine months of 2004 as a result of our acquisition of AHI and Trussco. Payroll
costs for Trussco accounted for $1.6 million of this increase. Our environmental
division added other operating costs of $1.1 million. We currently utilize third
party contractors exclusively to perform permitting services and in some
drilling and aviation operations. Seismic drilling contract services increased
$1.3 million for the nine-month period ending September 30, 2004 compared to the
same period for 2003. Overall, repairs and maintenance expenses increased $0.4
million, which was directly attributable to increased aviation activity
resulting from our efforts to consolidate all aircraft under the Omni FAA 135
certificate. Fuel and oil expense increased $0.6 million for the nine month
period ending September 30, 2004 compared to the nine month period ending
September 30, 2003, in conjunction with the increased flight hours discussed
above. Explosives and down hole expenses increased from $2.6 million to $4.1
million for the nine months ended September 30, 2003 to the same period of 2004
due to an increase in the cost of explosives on jobs performed in 2004 versus
2003. Finally, an increase in other general operating expense of $1.5 million
from the third quarter of 2003 to the third quarter of 2004 was primarily due to
increased insurance and depreciation expense for acquired assets, as well as
increased personnel and base operations resulting from the AHI acquisition. Base
operations costs of $0.3 million and aircraft operating expenses of $2.6 million
are included in the loss from discontinued operations for the third quarter of
2004.
Gross profit margins were 21% and 24% for the nine months ended September 30,
2004 and 2003, respectively. Increased revenue and profitability in our aviation
division and the addition of our environmental division was offset by lower
margins in our seismic drilling operations from delays in third party permitting
and weather delays, including six named tropical storms in the third quarter of
2004 and over 50 inches of rain in late spring.
General and administrative expenses increased $4.5 million from $3.4 million for
the nine months ended September 30, 2003 to $7.9 million for the nine months
ended September 30, 2004. Approximately 22% or $1.0 related to executive
compensation agreements recorded in the second quarter for awards in 2004 and
those that vest through 2006. Professional services increased $1.2 million from
the nine month period ended September 30, 2003 to the same period in 2004
primarily attributable to increased board, legal and accounting fees. Payroll
related expenses increased $1.3 million for the same period comparison due in
part to additional support staff for aviation operations and with the addition
of our environmental division.
Interest expense increased $2.5 million from $0.7 million for the nine months
ended September 30, 2003 to $3.2 million for the nine months ended September 30,
2004. Accretion of original issue discount of $1.0 million, a beneficial
conversion option of $0.3 million, loss on extinguishment of debt of $0.3
million and interest expense of $0.5 million all related to the Debentures
issued on February 12 and April 15, 2004 account for 84% of the increase. The
remaining increase is attributable to increased levels of debt due to the
expansion of our aviation fleet combined with higher interest rates in 2004
versus 2003.
23
Due to our recent history of operating losses, we recorded a valuation allowance
during the periods against our net operating loss carry-forwards, which resulted
in our not reporting any income tax expense or benefit during those periods. For
the nine months ended September 30, 2003, the Company reversed $0.6 million of
this reserve due to the Company's expectation of generating income in fiscal
2004. For the nine month period ended September 30, 2004, we did not record any
income tax expense or benefit.
As discussed in Note 10, we made the decision in July 2004, after owning AHI for
approximately eight months, to exit from the Texas location in Brazoria County,
to begin the withdrawal of business activity with AHI customers and to move all
operations to our main operating facility in Louisiana. The costs we will incur
include travel and re-location costs for personnel who are relocated,
termination costs for personnel who are eliminated, any costs incurred to obtain
an early release of operating leases at the Brazoria County facility and other
direct costs related to the exit of this business group. Accordingly, we have
recorded a loss from discontinued operations totaling $1.5 million, net of
income taxes of $0 as a component of the net loss for the nine months ended
September 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
At September 30, 2004, we had approximately $0.7 million in cash compared to
$0.6 million at December 31, 2003 and negative working capital of $16.0 million
at September 30, 2004, compared to working capital of $6.9 million at December
31, 2003. Although decreased profit margins and reduced net cash provided by
operating activities contributed to our working capital decrease, the decrease
is primarily due to the classification of $11.3 million, net of discount 6.5%
Debentures as short-term debt because the Debenture holders have the ability to
require repayment of conversion in 10 monthly Put Options and the classification
of $9.9 million line as short-term debt due to the lock-box arrangement and the
subjective acceleration clause in the Line agreement, (See Note 3).
Line of Credit and Term Debt
In December 2003, we entered into a $11.0 million senior credit facility with a
bank that includes a $8.0 million working capital revolving line of credit (the
"Line") and a $3.0 million term loan. The proceeds were used to repay term debt,
refinance our then existing revolving line of credit and provide working
capital. In connection with the acquisition of Trussco on June 30, 2004, the
Line was increased to $12.0 million. (See Note 7)
Availability under the Line is the lower of: (i) $12.0 million or (ii) the sum
of eligible accounts receivable, as defined under the agreement, plus the lesser
of: $2.0 million or 80% of the appraised orderly liquidation value of eligible
inventory of parts and supplies. The Line accrues interest at the prime interest
rate plus 1.5% (6.25% at September 30, 2004) and matures on December 31, 2006.
The Line is collateralized by accounts receivable and inventory. As of September
30, 2004, we had $9.9 million outstanding under the Line and $2.6 million
outstanding on the term loan. Due to the lock-box arrangement and the subjective
acceleration clause of the Line agreement, the debt under the Line has been
classified as a current liability as of September 30, 2004, as required by EITF
95-22, Balance Sheet Classification of Borrowings Outstanding under Revolving
Credit Agreements that include both a Subjective Acceleration Clause and a
Lock-Box Arrangement. Our availability under the Line was $0.1 million at
September 30, 2004.
24
At September 30, 2004 and December 31, 2003, long-term debt consists of the
following (in thousands):
September 30, December 31,
2004 2003
-------------- -------------
(unaudited)
Notes payable to a finance company, variable interest rate at LIBOR plus 5.0%
(7.44% and 6.12% at September 30, 2004 and December 31, 2003 respectively)
maturing July 31, 2006, secured by various property and equipment........................ $ 912 $ 1,145
Notes payable to a bank with interest payable at Prime plus 1.5% (6.25% and 5.5% at
September 30, 2004 and December 31, 2003 respectively) maturing July 31, 2023,
secured by real estate................................................................... 1,403 1,633
Notes payable to a bank with interest payable at Prime plus 1.75% (6.50% and 5.75% at
September 30, 2004 and December 31, 2003 respectively) maturing December 31, 2006,
secured by various property and equipment................................................ 2,600 3,000
Notes payable to a finance company with interest at 8% maturing January 1, 2007, secured
by various aircraft...................................................................... 1,179 1,838
Notes payable to a finance company with interest at 10.25% maturing May 15, 2008, secured
by an aircraft........................................................................... 178 207
Notes payable to a finance company with interest at 6.26% maturing March 17, 2006, secured
by various aircraft...................................................................... 1,764 ---
Notes payable to a bank with interest at 8.13%, maturing June 20, 2009, secured by aircraft 246 ---
Notes payable to a finance company with interest at 8%, maturing February 10, 2013,
secured by real estate................................................................... 218 ---
Convertible promissory notes payable to certain former stockholders of Trussco, Inc. with
interest at 5% maturing in June 2007..................................................... 3,000 ---
Other Debt................................................................................. 127 ---
Capital lease payable to a leasing companies secured by vehicles........................... 986 491
Capital lease payable to a finance company secured by various aircraft..................... 7,985 3,361
-------------- -------------
Total.................................................................................... 20,598 11,675
Less: Current maturities................................................................... 3,539 2,051
-------------- -------------
Long-term debt, less current maturities.................................................... $ 17,059 $ 9,624
============== =============
Our senior secured credit facility contains customary financial covenants
requiring, among other things, minimum levels of tangible net worth, debt to
EBITDA ratios, and limitations on annual capital expenditures and certain
customer concentrations. As of September 30, 2004, we were in compliance with
these covenants and we expect to maintain compliance throughout 2004.
On October 21, 2004, we executed a $6.5 million senior secured loan which was
funded on October 25, 2004. The loan will mature on January 15, 2005 with an
interest rate of 12% to be accrued and paid on the maturity date. The loan is
collateralized by specific seismic assets, Trussco assets and three helicopters.
The proceeds were used for the payment of notes on the collateralized
helicopters, the early payoff of an equipment note payable to a bank, the
payment of the October Put Option payment on the Convertible Debentures
discussed below and for working capital purposes. This loan will be paid off
with the proceeds from the Senior Credit Facility discussed below.
On October 21, 2004, we received a non-binding commitment to complete a $100
million Senior Credit Facility. The proceeds will be used to redeem our
outstanding 6.5% Subordinated Convertible Debentures (See Note 11), refinance
certain long-term debt and provide working capital. Closing is expected during
the fourth quarter of 2004, subject to the negotiation, execution and delivery
of loan documentation reasonably satisfactory to the lenders and the approval of
our Board of Directors.
Convertible Debentures
Pursuant to a Securities Purchase Agreement dated February 12, 2004, we sold (i)
$10,000,000 in principal amount of 3-year, 6.5% fixed rate, Convertible
Debentures (the "Debentures") that are convertible into shares of common stock
at an initial conversion price of $7.15 per share and (ii) 5-year Common Stock
Series B Warrants to purchase an aggregate of 390,000 shares of Common Stock at
an initial exercise price of $8.50 per share. The warrants are not exercisable
for a period of six months and one day after the issue date of such warrants and
in no event will the exercise prices of such warrants be less than $6.15 per
share. In accordance with APB Opinion No. 14, the warrants were valued at a fair
market value of $1.0 million using the Black Scholes model. The value of these
warrants were recorded as an original issue discount with a corresponding credit
to paid in capital at the date of issuance. In addition, in exchange for issuing
1-year common stock Series A Warrants to purchase an aggregate of 700,000 shares
of Common Stock at an initial exercise price of $7.15 per share, we obtained the
right to subsequent financing of $5,050,000.
25
Pursuant to that right on April 15, 2004, in accordance with the Securities
Purchase Agreement, we sold (i) $5,050,000 in principal amount of 3-year, 6.5%
fixed rate, Convertible Debentures (collectively with the aforementioned
February 12, 2004 issuance hereinafter referred to as the "Debentures") that are
convertible into shares of common stock at an initial conversion price of $7.20
per share, and (ii) 5-year Common Stock Series A Warrants to purchase an
aggregate of 151,500 shares of common stock at an initial exercise price of
$9.00 per share. The warrants are not exercisable for a period of six months and
one day after the issue date of such warrants and in no event will the exercise
prices of such warrants be less than $7.11 per share. In accordance with APB
Opinion No. 14, the warrants were valued at a fair market value of $0.8 million
using the Black Scholes model. A beneficial conversion option was also recorded
of $0.7 million. The value of the warrants and beneficial conversion option were
recorded as original issue discount with a corresponding credit to paid in
capital at the date of issuance.
Total proceeds of $14.2 million received from the sales, after expenses, dated
February 12, 2004 and April 15, 2004 was $9.5 million and $4.7 million,
respectively. Of the total proceeds received for these private placements, $8.2
million was used to redeem Series A Preferred Stock in March 2004 (See Note 5)
and the balance used for working capital purposes.
The original issue discount for the February 12, 2004 and April 15, 2004
debentures was $1.0 million and $0.8 million, respectively. We recorded a $0.7
million in beneficial conversion option for the April 15, 2004 Debentures. The
Debentures are being amortized using the effective interest method over the
period in which the Debentures can be put to the Company. A total of $1.0
million is included in interest expense related to original issue discounts for
the nine months ended September 30, 2004.
Prior to maturity of the Debentures, the holders of the Debentures have the
right to require the repayment or conversion of up to an aggregate of $13.17
million of the Debentures (the "Put Option"). We registered 5,012,237 shares
effective June 30, 2004 covering the resales of Common Stock that maybe issuable
pursuant to the conversion of the Debentures and the exercise of the Put Option
and all associated warrants, including additional shares that may be issuable
due to adjustments for conversion price upon the Debenture conversion, payment
of interest with shares and/or the exercise of warrants due to subdivision or
combination of our common stock. Pursuant to the Debenture agreement, the
registration of the related common stock triggered the ability of the Debentures
holders to exercise the Put Option in ten, consecutive, non-cumulative and equal
monthly installments beginning August 1, 2004. Accordingly the Debentures, net
of debt discount, were classified as a current liability in the Consolidated
Balance Sheet at September 30, 2004. On July 28, 2004 and on August 23, 2004, we
received notices from the holders of the Debentures exercising their Put Option
for August and September, respectively. Upon receipt of the Debenture holders'
intent to exercise a Put Option, we have the irrevocable option to deliver cash
or, if certain conditions set forth in the Debentures are satisfied, Common
Stock with respect to such Put Option. If we elect to pay the Put Option with
Common Stock, the underlying shares will be valued at a 12.5% discount to the
average trading price of our Common Stock for the applicable pricing period, as
defined in the Debenture agreement. We elected to use cash to redeem this
portion of the Debentures for August and September 2004.
As provided for in the terms of the applicable Securities Purchase Agreements,
the Debenture holders received Put Option payments of $1.3 million in principal,
plus accrued interest, each on August 5, 2004 and on September 9, 2004. In
accordance with APB Opinion No. 26, we recorded $0.3 million as ordinary loss on
extinguishment of debt in the third quarter of 2004 as a result of the early
extinguishment of these portions of the Debentures.
Additionally, as provided for in the terms of the applicable Securities Purchase
Agreements, the Debenture holders received a Put Option payment of $1.3 million
in principal, plus accrued interest, on October 25, 2004. In accordance with APB
opinion No. 26, we recorded $0.1 million as ordinary loss on extinguishment of
debt in the fourth quarter of 2004 as a result of the early extinguishment of
this portion of the Debentures. (See Note 11)
Capital Resources
Historically, our capital requirements have primarily related to the purchase or
fabrication of new seismic drilling equipment and related support equipment,
additions to our aviation fleet and new business acquisitions. In 2003, we
acquired American Helicopters Inc., including approximately $3.5 million of
aircraft accounted for as capital leases, and approximately $0.2 million of new
vehicles accounted for as capital leases. Thus far in 2004, we have acquired
approximately $3.0 million of aircraft accounted for as capital leases and
approximately $0.8 million of new vehicles accounted for as a capital lease. For
the remainder of 2004, we expect to continue renewing our rolling stock,
expanding our aviation fleet and pursuing various strategic acquisitions.
CRITICAL ACCOUNTING POLICIES
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, as amended, for the year ended December 31, 2003 filed with the SEC
on September 14, 2004.
We account for employee stock-based compensation using the intrinsic value
method prescribed in APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("Opinion No. 25"). Accordingly, the provisions of SFAS No. 123,
"Accounting
26
for Stock-Based Compensation," permits the continued use of the method
prescribed by Opinion No. 25, but requires additional disclosures, including pro
forma calculations of earnings and net earnings per share as if the fair value
method of accounting prescribed by SFAS No. 123 had been applied. No stock-based
compensation costs are reflected in net income (loss), other than compensation
expense recorded on awards to certain executive officers (See Note 9), as all
options granted under the plans had an exercise price equal to the market value
of the underlying common stock on the date of grant. As required by SFAS No.
148, "Accounting for Stock-Based Compensation -- Transition and Disclosure,"
which amended SFAS No. 123, a table illustrating the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based compensation is presented in Note 8 of
the accompanying financial statements.
In 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 retains the
previously existing accounting requirements related to the recognition and
measurement of the impairment of long-lived assets to be held and used, while
expanding the measurement requirements of long-lived assets to be disposed of by
sale to include discontinued operations. It also expands on the previously
existing reporting requirements for discontinued operations to include a
component of an entity that either has been disposed of or is classified as held
for sale.
In 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" SFAS No. 146. This standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred, rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring, plant
closing, or other exit or disposal activity. SFAS No. 146 is required to be
applied prospectively to exit or disposal activities initiated after December
31, 2002.
In accordance with SFAS No. 144, we are accounting for the Brazoria market as a
separate component and have report the results of operations as discontinued
operations. For the three months and the nine months ended September 30, 2004,
we recorded $1.1 million and $1.7 million, respectively, in costs associated
with exit activities in accordance with SFAS No. 146. These exit costs are
included in loss from discontinued operations.
APB Opinion No. 26, Early Extinguishment of Debt, expresses the Board's opinion
on the appropriate accounting for the difference that generally arises between
the amount paid upon reacquisition of debt securities and the net carrying
amount of the debt at that time. APB Opinion No. 26 applies to all
extinguishments of debt, except extinguishments through troubled debt
restructuring and debt that is converted to equity securities of the debtor
pursuant to conversion privileges provided in the debt agreement at issuance.
Also, APB Opinion No. 26 does not apply to conversions of convertible debt when
the when the initial conversion terms are changed, or additional consideration
is paid, to induce conversion, as described in FASB Statement No. 84.
SFAS No. 84, Induced Conversions of Convertible Debt, an amendment to APB
Opinion No. 2, specifies the accounting for conversions of convertible debt to
equity securities when the debtor induces conversion by offering additional
securities or other consideration to convertible debt holders. SFAS No. 84
requires the recognition of an expense equal to the fair value of the additional
securities or other consideration issued to induce conversion when the
conversion (a) occurs pursuant to changed conversion privileges that are
exercisable only for a limited period of time and (b) include the issuance of
all of the equity securities issuable pursuant to conversion privileges included
in the original terms of the debt.
EITF Issue No. 98-05, Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios, includes
Exhibit 98-5A "EXAMPLES OF THE APPLICATION OF THE EITF CONSENSUSES ON ISSUE
98-5" within which Case 6 - Extinguishment of Convertible Debt that Includes a
Beneficial Conversion Feature, outlines the appropriate accounting treatment for
the final extinguishment.
EITF Issue No. 00-27, Application of Issue No. 98-5 to Certain Convertible
Instruments, Issue 12 discusses how Issue 98-5 should be applied to the
reacquisition of the embedded conversion option if the convertible instrument is
extinguished prior to its stated maturity date. Issue 12(a) concluded that no
portion of the reacquisition price should be allocated to the conversion option
if that option had no intrinsic value required to be accounted for under Issue
98-5. Issue 12(b) tentatively concluded that Issue 98-5 does not provide for a
different measurement of the amount of the reacquisition price that is allocated
to the Beneficial Conversion Feature if the intrinsic value of the conversion
option at the extinguishment date is greater than at the commitment date. The
Task Force recognized that this could result in a reduction of Paid-In-Capital
that exceeds the amount recorded at issuance.
In the third quarter of 2004, we recorded $0.3 million in ordinary loss on
extinguishment of debt in accordance with the accounting literature discussed
above (See Note 3).
27
Aside from the change in estimated residual values of our aircraft and the items
discussed above, there have been no changes to the Company's accounting policies
as disclosed in our Form 10-K, as amended, for the year ended December 31, 2003.
FORWARD-LOOKING STATEMENTS
This Quarterly Report contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. All statements other than statements of historical fact included in this
report regarding our financial position and liquidity, our strategic
alternatives, future capital needs, business strategies and other plans and
objectives of our management for future operations and activities, are
forward-looking statements. These statements are based on certain assumptions
and analyses made by our management in light of our experience and our
perception of historical trends, current conditions, expected future
developments and other factors we believe are appropriate under the
circumstances. Such forward-looking statements are subject to uncertainties that
could cause our actual results to differ materially from such statements. Such
uncertainties include but are not limited to: the volatility of the oil and gas
industry, including the level of offshore exploration, production and
development activity; changes in competitive factors affecting our operations;
operating hazards, including the significant possibility of accidents resulting
in personal injury, property damage or environment damage; the effect on our
performance of regulatory programs and environmental matters; seasonality of the
offshore industry in the Gulf of Mexico; and our dependence on certain
customers. These and other uncertainties related to our business are described
in detail in our other public filings. Although we believe that the expectations
reflected in such forward-looking statements are reasonable, we can give no
assurance that such expectations will prove to be correct. You are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof. We undertake no obligation to update any of our
forward-looking statements for any reason.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in our market risks since the year ended
December 31, 2003. For more information, please read the consolidated financial
statements and notes thereto included in our Annual Report on Form 10-K, as
amended, for the year ended December 31, 2003 filed with the SEC on September
14, 2004.
ITEM 4. CONTROLS AND PROCEDURES
In accordance with Rule 13a-15(b) promulgated under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), our Chief Executive Officer and Chief
Financial Officer (the "Certifying Officers") have conducted evaluations of our
disclosure controls and procedures. As defined under Sections 13a-15(e) and
15d-15(e) of the Exchange Act, the term "disclosure controls and procedures"
means controls and other procedures of an issuer that are designed to ensure
that information required to be disclosed by the issuer in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by an
issuer in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the issuer's management, including its principal
executive officer or officers and principal financial officer or officers, or
persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.
As the result of this review the Certifying Officers have reviewed our
disclosure controls and procedures and have concluded that, except as described
below, those disclosure controls and procedures were effective as of September
30, 2004, the end of our most recent fiscal quarter.
In connection with the preparation of this Quarterly Report on Form 10-Q for the
period ended September 30, 2004, we determined that the disclosure controls and
procedures failed to insure that our Quarterly Report on Form 10-Q for the
period ended June 30, 2004 contained disclosures concerning (i) certain fees
that became payable, in cash, common stock and common stock warrants, in July,
2004 for merchant banking services rendered to us in connection with our
acquisition of Trussco (see Note 7 of Notes to Financial Statements contained
herein.), and (ii) our July, 2004 adoption of a plan to exit the Brazoria
County, Texas activities of AHI (see Note 10 of Notes to Financial Statements
contained herein). Neither of these matters caused the financial statements
contained in our Quarterly Report on Form 10-Q for the period ended June 30,
2004 to be materially misstated, and such financial statements do not require
restatement. Additionally, these events were properly accounted for and
disclosed in this Quarterly Report on Form 10-Q for the period ended September
30, 2004.
While neither of these matters caused material misstatements in our financial
statements, we nonetheless concluded that these matters indicated the existence
of deficiencies in our disclosure control and procedures existed as of June 30,
2004. Additionally, since the occurrence of these matters was not discovered
until after September 30, 2004 (in connection with the preparation of this
Quarterly Report on Form 10-Q), these deficiencies were deemed to also exist at
September 30, 2004.
In considering what steps should be taken to strengthen the our disclosure
controls and procedures in light of the matters described above, management and
our Audit Committee noted that both matters involved isolated, non-recurring
transactions. To eliminate these deficiencies, we have determined that we will
implement procedures to (i) create more formalized and timely communication of
non-recurring or significant events or transactions from operating personnel and
the Board of Directors to the personnel responsible for accounting and financial
reporting, (ii) expand the pre-filing review of our periodic reports to include
a more formal review by certain additional operating and financial personnel,
and (iii) adopt more formalized procedures for the timely communication of
non-recurring or significant events to our outside auditors. We expect that
these procedures will be implemented during the fourth quarter of fiscal 2004.
During our most recent fiscal quarter, there were no changes in our internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
28
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 13, 2004, we commenced litigation against a former director,
Advantage Capital Partners ("ACP") and their respective insurers in the Civil
District Court for the Parish of Orleans in the State of Louisiana. The suit
requests the court to determine our right under the Company's Articles of
Incorporation, as amended, to redeem the Series A 8% Convertible Preferred Stock
rather than to convert the shares into common stock. Furthermore, to the extent
the court determines we did not have a right to redeem, rather than convert, the
Series A Preferred Stock, the suit requests the court to determine that the
Unanimous Consent of the Board of Directors entered into on November 7, 2000
which, among other things, reduced the conversion price of the Series A
Preferred Stock from $2.50 to $0.75 (pre-split) per share, is null and void and
without effect because it was accomplished by the defendants in violation of
fiduciary duties and/or public policy and Louisiana law. We are seeking a
declaration that we have the right to redeem, rather than convert, Series A
Preferred Stock. Alternatively, we seek (a) a declaration that the Unanimous
Consent entered into on November 7, 2000 is null and void and without effect; or
(b) damages back against Mr. Stull and the ACP as a complete set-off to any
additional dollars owed by us to the ACP as a result of the November 7, 2000
actions.
On March 26, 2004, ACP and its affiliates filed a lawsuit in the United States
District Court, Eastern District of Louisiana against us and certain of our
executive officers. ACP and its affiliates are alleging that ACP claims that (i)
we and the officers misrepresented material facts and failed to disclose
material facts related to its intention to redeem our Series A and Series B
Convertible Preferred Stock, and (ii) the officers of the Company breached their
fiduciary duties. They are claiming damages of approximately $30 million. We
have agreed to indemnify our officers in this matter. Our costs and legal
expenses related to this lawsuit are not currently determinable. This lawsuit
presents risks inherent in litigation including continuing expenses, risks of
loss, additional claims, and attorney fee liability. We believe that the claims
or litigation arising therefrom will have no material impact on us or our
business and all disputes surrounding securities matters will likely be covered
by our insurance. However, if this lawsuit is decide against us and if it
exceeds our insurance coverage, it could adversely affect our financial
condition, results of operations and cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
29
ITEM 6. EXHIBITS
Exhibit Description of Exhibit
2.1 Stock Purchase and Sale Agreement (Employee-Shareholders) dated
May 26, 2004, by and between the Company and Trussco, Inc. and
Trussco Properties (filed as Exhibit 2.1 to our Form 8-K, as
amended on June 14, 2004, File No. 000-23383, originally filed
with the Commission on June 10, 2004).
2.2 Stock Purchase and Sale Agreement (Non-Employee-Shareholders)
dated May 26, 2004, by and between the Company and Trussco, Inc.
and Trussco Properties (filed as Exhibit 2.2 to our Form 8-K, as
amended on June 14, 2004, File No. 000-23383, originally filed
with the Commission on June 10, 2004).
4.1 Form of 6.5% Convertible Debenture, dated as of April 15, 2004,
among the Company and certain accredited investors (with attached
schedule of parties and terms thereto) (filed as Exhibit 4.1 to
our Form 8-K, File No. 000-23383, originally filed with the
Commission on April 19, 2004).
4.2 Form of Warrant to Purchase Common Stock, dated as of April 5,
2004, among the Company and certain accredited investors
exercisable at $9.00 per share (with attached schedule of parties
and terms thereto) (filed as Exhibit 4.2 to our Form 8-K, File
No. 000-23383, originally filed with the Commission on April 19,
2004).
4.3 Omnibus Amendment, dated as of April 15, 2004, by and among the
Company and certain accredited investors listed therein (filed as
Exhibit 4.3 to our Form 8-K, File No. 000-23383, originally filed
with the Commission on April 19, 2004).
10.1 Securities Purchase Agreement, dated as of April 15, 2004, by and
among the Company and certain accredited investors listed therein
(filed as Exhibit 10.1 to our Form 8-K, File No. 000-23383,
originally filed with the Commission on April 19, 2004).
10.2 Amendment No. 1 to Registration Rights Agreement, dated as of
April 12, 2004, by and among the Company and certain accredited
investors listed therein (filed as Exhibit 10.2 to our Form 8-K,
File No. 000-23383, originally filed with the Commission on April
19, 2004).
10.3 Amended and Restated Registration Rights Agreement, dated as of
April 15, 2004, by and among the Company and certain accredited
investors listed therein (filed as Exhibit 10.3 to our Form 8-K,
File No. 000-23383, originally filed with the Commission on April
19, 2004).
10.4* Employment Agreement of James C. Eckert dated July 1, 2004 (filed
as Exhibit 10.4 to our Form 10-Q, File No. 000-23383, originally
filed with the Commission on August 25, 2004).
10.5* James C. Eckert Stock Based Award Incentive Agreement dated June
30, 2004 (filed as Exhibit 10.4 to our Form 10-Q, File No.
000-23383, originally filed with the Commission on August 25,
2004).
10.6* James C. Eckert Amended & Restated Incentive Agreement dated
August 12, 2004 (filed as Exhibit 10.4 to our Form 10-Q, File No.
000-23383, originally filed with the Commission on August 25,
2004).
10.7* Employment Agreement of G. Darcy Klug dated July 1, 2004 (filed
as Exhibit 10.4 to our Form 10-Q, File No. 000-23383, originally
filed with the Commission on August 25, 2004).
10.8* G. Darcy Klug Stock Based Award Incentive Agreement dated June
30, 2004 (filed as Exhibit 10.4 to our Form 10-Q, File No.
000-23383, originally filed with the Commission on August 25,
2004).
10.9* G. Darcy Klug Amended & Restated Incentive Agreement dated August
12, 2004 (filed as Exhibit 10.4 to our Form 10-Q, File No.
000-23383, originally filed with the Commission on August 25,
2004).
10.10* James C. Eckert Incentive Agreement dated December 1, 2003 (filed
as Exhibit 10.4 to our Form 10-Q, File No. 000-23383, originally
filed with the Commission on August 25, 2004).
10.11* G. Darcy Klug Incentive Agreement dated December 1, 2003 (filed
as Exhibit 10.4 to our Form 10-Q, File No. 000-23383, originally
filed with the Commission on August 25, 2004).
10.12 Webster Bank - Credit and Security Agreement dated December 23,
2003
10.13 Webster Bank - First Amendment to Credit and Security Agreement
dated June 30, 2004
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Principal Financial Officer
32.1 Section 906 Certification of Chief Executive Officer
32.2 Section 906 Certification of Principal Financial Officer
*Management Compensatory Agreements
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on our behalf by the
undersigned thereunto duly authorized.
OMNI ENERGY SERVICES CORP.
Dated: November 15, 2004 /s/ James C. Eckert
-------------------------------------
James C. Eckert
President and Chief Executive Officer
(Principal Executive Officer)
Dated: November 15, 2004 /s/ Deborah C. DeRouen
-------------------------------------
Deborah C. DeRouen
Chief Accounting Officer
(Principal Financial Officer)
31
EXHIBIT INDEX
Exhibit Description of Exhibit
2.1 Stock Purchase and Sale Agreement (Employee-Shareholders) dated
May 26, 2004, by and between the Company and Trussco, Inc. and
Trussco Properties (filed as Exhibit 2.1 to our Form 8-K, as
amended on June 14, 2004, File No. 000-23383, originally filed
with the Commission on June 10, 2004).
2.2 Stock Purchase and Sale Agreement (Non-Employee-Shareholders)
dated May 26, 2004, by and between the Company and Trussco, Inc.
and Trussco Properties (filed as Exhibit 2.2 to our Form 8-K, as
amended on June 14, 2004, File No. 000-23383, originally filed
with the Commission on June 10, 2004).
4.1 Form of 6.5% Convertible Debenture, dated as of April 15, 2004,
among the Company and certain accredited investors (with attached
schedule of parties and terms thereto) (filed as Exhibit 4.1 to
our Form 8-K, File No. 000-23383, originally filed with the
Commission on April 19, 2004).
4.2 Form of Warrant to Purchase Common Stock, dated as of April 5,
2004, among the Company and certain accredited investors
exercisable at $9.00 per share (with attached schedule of parties
and terms thereto) (filed as Exhibit 4.2 to our Form 8-K, File
No. 000-23383, originally filed with the Commission on April 19,
2004).
4.3 Omnibus Amendment, dated as of April 15, 2004, by and among the
Company and certain accredited investors listed therein (filed as
Exhibit 4.3 to our Form 8-K, File No. 000-23383, originally filed
with the Commission on April 19, 2004).
10.1 Securities Purchase Agreement, dated as of April 15, 2004, by and
among the Company and certain accredited investors listed therein
(filed as Exhibit 10.1 to our Form 8-K, File No. 000-23383,
originally filed with the Commission on April 19, 2004).
10.2 Amendment No. 1 to Registration Rights Agreement, dated as of
April 12, 2004, by and among the Company and certain accredited
investors listed therein (filed as Exhibit 10.2 to our Form 8-K,
File No. 000-23383, originally filed with the Commission on April
19, 2004).
10.3 Amended and Restated Registration Rights Agreement, dated as of
April 15, 2004, by and among the Company and certain accredited
investors listed therein (filed as Exhibit 10.3 to our Form 8-K,
File No. 000-23383, originally filed with the Commission on April
19, 2004).
10.4* Employment Agreement of James C. Eckert dated July 1, 2004 (filed
as Exhibit 10.4 to our Form 10-Q, File No. 000-23383, originally
filed with the Commission on August 25, 2004).
10.5* James C. Eckert Stock Based Award Incentive Agreement dated June
30, 2004 (filed as Exhibit 10.4 to our Form 10-Q, File No.
000-23383, originally filed with the Commission on August 25,
2004).
10.6* James C. Eckert Amended & Restated Incentive Agreement dated
August 12, 2004 (filed as Exhibit 10.4 to our Form 10-Q, File No.
000-23383, originally filed with the Commission on August 25,
2004).
10.7* Employment Agreement of G. Darcy Klug dated July 1, 2004 (filed
as Exhibit 10.4 to our Form 10-Q, File No. 000-23383, originally
filed with the Commission on August 25, 2004).
10.8* G. Darcy Klug Stock Based Award Incentive Agreement dated June
30, 2004 (filed as Exhibit 10.4 to our Form 10-Q, File No.
000-23383, originally filed with the Commission on August 25,
2004).
10.9* G. Darcy Klug Amended & Restated Incentive Agreement dated August
12, 2004 (filed as Exhibit 10.4 to our Form 10-Q, File No.
000-23383, originally filed with the Commission on August 25,
2004).
10.10* James C. Eckert Incentive Agreement dated December 1, 2003 (filed
as Exhibit 10.4 to our Form 10-Q, File No. 000-23383, originally
filed with the Commission on August 25, 2004).
10.11* G. Darcy Klug Incentive Agreement dated December 1, 2003 (filed
as Exhibit 10.4 to our Form 10-Q, File No. 000-23383, originally
filed with the Commission on August 25, 2004).
10.12 Webster Bank - Credit and Security Agreement dated December 23,
2003
10.13 Webster Bank - First Amendment to Credit and Security Agreement
dated June 30, 2004
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Principal Financial Officer
32.1 Section 906 Certification of Chief Executive Officer
32.2 Section 906 Certification of Principal Financial Officer
*Management Compensatory Agreements
32