U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
Commission File Number 0-14908
TGC INDUSTRIES, INC.
(Name of small business issuer of its charter)
Texas 74-2095844
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1304 Summit, Suite 2, Plano, Texas 75074
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (972) 881-1099
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
Common Stock ($.30 Par Value)
Series C 8% Convertible Exchangeable Preferred Stock ($1.00 Par Value)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No __
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. (X)
State issuer's revenues (from continuing operations) for its most recent
fiscal year: $6,455,915
State the aggregate market value of the registered voting stock (Common Stock,
$.30 par value and Series C 8% Convertible Exchangeable Preferred Stock, $1.00
par value) held by non-affiliates computed by reference to the price at which
the stock was sold on March 23, 2001: $2,885,375
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding as of March 23, 2001
Common Stock ($.30 Par Value) 2,357,488
Documents Incorporated by Reference
Document Part of the Form 10-KSB Into Which
Portions of the Proxy Statement the Document is Incorporated
for Annual Meeting of shareholders Items 9 through 12 of Part III
to be held on June 14, 2001
Part I
ITEM 1. DESCRIPTION OF BUSINESS.
TGC Industries, Inc. ("TGC" or the "Company") is a Texas corporation
engaged in the geophysical service business, primarily conducting Three-D ("3-
D") surveys for clients in the oil and gas business. TGC's principal business
office is located at 1304 Summit Avenue, Suite 2, Plano, Texas 75074.
(Telephone: 972-881-1099).
History
In April 1980, Supreme Industries, Inc., formerly ESI Industries, Inc.,
("Supreme") formed a wholly owned subsidiary that acquired certain equipment,
instruments, and related supplies of Tidelands Geophysical Co., Inc.
("Tidelands"), a Houston-based corporation that had been organized in 1967 and
was engaged in the business of conducting seismic, gravity, and magnetic
surveys under contracts to companies in the exploration for oil and gas. In
July 1986, Tidelands' name was changed to TGC Industries, Inc. ("TGC"). On
June 30, 1986, the Board of Directors of Supreme and TGC approved a spin-off
whereby substantially all of the shares of TGC owned by Supreme were
distributed as a stock dividend to Supreme security holders.
On July 30, 1993, TGC acquired, through a wholly owned subsidiary, Chase
Packaging Corporation ("Chase"), a specialty packaging business, principally
supplying products to the agricultural industry, through the purchase of
certain assets of the Chase Packaging division of Union Camp Corporation.
In June 1996, the Board of Directors of TGC approved the spin-off of
Chase, effective July 31, 1996, whereby all of the shares of Chase owned by
TGC were distributed as a stock dividend to the shareholders of TGC under the
terms of the spin-off transaction. Pursuant to the terms of the spin-off, and
following clearance by the Securities and Exchange Commission on March 7,
1997, the holders of TGC's Common Stock and, on an as-if-converted basis, the
holders of TGC's Series C 8% Convertible Exchangeable Preferred Stock received
the dividend distribution of Chase Common Stock.
During July 1996, the Company issued 1,150,350 shares of Series C 8%
Convertible Exchangeable Preferred Stock ("Series C Preferred Stock") in a
private placement offering with gross proceeds of approximately $5,800,000.
The Series C Preferred Stock sold in the private placement entitles the
holder to receive cumulative cash dividends as, when and if declared by the
Board of Directors at a rate of 8% per annum prior to any dividend or
distribution in cash or other property on any class or series of stock junior
to the Series C Preferred Stock. The dividends on the Series C Preferred
Stock are payable as, when and if declared by the Board of Directors on
January 1 and July 1 of each year, commencing January 1, 1997. The dividend
on the Series C Preferred Stock is cumulative.
From the proceeds of the private placement, TGC made a capital
contribution to Chase of $2,716,403 to facilitate the spin-off; and TGC
retained $2,000,000 for the purchase of state-of-the-art geophysical recording
equipment. Under the terms of the spin-off, the effective date of which was
July, 31, 1996, TGC completed the spin-off of the business and assets relating
to the Chase operations, except TGC retained the Portland, Oregon facility and
canceled all inter-company debt owed by Chase to TGC. The distribution of
Chase Stock was March 7, 1997. On March 18, 1997, TGC sold the Portland,
Oregon facility for $2,430,000 and applied such proceeds in satisfaction of
the mortgage indebtedness with respect to such facility and in satisfaction of
a debt obligation owing by TGC to Chase to pay to Chase any such proceeds in
excess of the amount of the mortgage indebtedness.
As of July 31, 1996, the effective date of the spin-off, TGC Industries,
Inc.'s only business has been the geophysical service business, primarily
conducting Three-D ("3-D") surveys for clients in the oil and gas business.
On December 13, 1999, WEDGE Energy Services, L.L.C., ("WEDGE Energy") an
affiliate of WEDGE Group Incorporated, a diversified Houston, Texas firm with
interests in oil and gas services, purchased a $2,500,000 8.5% Convertible
Subordinated Debenture, Series B due December 1, 2009 (the "Debenture"), of
the Company. Proceeds of the financing together with other available funds
are being utilized for working capital and an expanded capital expenditure
program. The Debenture, at WEDGE's option, could be converted into either
preferred stock or common at a price of $1.15 per share.
The holders of the Company's outstanding Series C Preferred Stock, voted at
the Annual Meeting held May 11, 2000, to consent to a new series of 8.5%
Senior Convertible Preferred Stock ("Senior Preferred Stock"). The
affirmative vote of the holders of two-thirds (2/3) of the outstanding shares
of Series C Preferred Stock approved the new series of Senior Preferred Stock.
As a result of the consent to the new series of Senior Preferred Stock by the
Series C Preferred Stock shareholders and in accordance with the terms of the
Debenture Agreement, WEDGE Energy, on May 17, 2000, converted its Debenture
plus accrued interest into 2,252,445 shares of Senior Preferred Stock. In
addition, 7,445 and 96,045 shares of Senior Preferred Stock were issued to
WEDGE Energy as payment of the June 1, 2000, and December 1, 2000, dividends,
respectively. Per the Debenture Agreement, dividends on the Senior Preferred
Stock were paid by the issuance of additional shares of Senior Preferred Stock
through December 1, 2000.
General Description of the Company's Business
Geophysical Business
Since its formation, TGC has engaged in the domestic geophysical services
business principally through conducting seismic surveys and to a lesser extent
through sales of gravity information from the Company's Data Bank to companies
engaged in the exploration for oil and gas in the United States. Geophysics
is the study of the structure and composition of the earth's interior and
involves the measuring and interpretation of the earth's properties with
appropriate instruments. Such studies are generally conducted by means of
surveys performed by field crews employing seismic, gravity, or magnetic
instruments to acquire data that is then interpreted by various means to
obtain useful information for oil and gas companies. The two survey
techniques used by the Company in acquiring geophysical data are seismic and
gravity. Land seismic surveys are the Company's principal method of data
acquisition and are by far the most widely used geophysical technique. TGC's
seismic crews use dynamite as the primary energy source for such surveys.
In July 1996, the Company purchased an Opseis Eagle 24-BIT 1500 channel
recording system, cables and geophones for approximately $2,900,000, using
$2,000,000 from proceeds from the Company's preferred stock private placement,
a $750,000 equipment loan, and funds from internal cash flow. In late
November 1996, the Company purchased a second 1000 channel Eagle system using
the proceeds and trade-in from TGC's two older systems along with equipment
financing of $855,000 and internal cash flow. In 1997, TGC purchased an
additional 1500 channels utilizing equipment financing of $2,242,685. The
greater precision and improved subsurface resolution obtainable from 3-D
seismic data have enabled energy companies in the U.S. to better evaluate
important subsurface features. The processing and interpretation of seismic
data acquired by TGC are transmitted by the Company to data processing centers
(not owned or operated by the Company) designated by the clients for
processing.
The Company's Data Bank contains gravity data, and to a lesser extent
magnetic data, from many of the major oil and gas producing areas located
within the United States. TGC does not have a seismic data bank. Data Bank
information has been amassed through participatory surveys as well as
speculative surveys funded by TGC alone. All data and interpretations may be
licensed to customers at a fraction of the cost of newly acquired data.
As a service business, the Company's domestic geophysical services
business is not dependent upon the supply of raw materials or any other
products and, therefore, the Company does not have arrangements with any raw
material suppliers.
The Company has the capability of utilizing two seismic crews to perform
its geophysical services and, in any given period, these crews may generate a
significant portion of their respective revenues from one or more clients.
For the year ended December 31, 2000, four customers accounted for twenty-
three percent (23%), nineteen percent (19%), eighteen percent (18%) and
fifteen percent (15%) of the Company's revenue, respectively. The Company
enters into a general or master agreement with each of its clients for the
provision of geophysical services and a supplementary agreement (which becomes
a part of the general agreement) with respect to each particular job that the
Company performs for a client. Under the terms of such agreements, the
Company generally contracts to supply all personnel, transportation and
equipment to perform seismic surveys for a given prospect for a fixed price
plus reimbursement for certain third party charges. The Company generally
bills its clients on a progressive basis over the term of the contract. The
Company is generally obligated to maintain insurance against injury or damage
to persons or equipment arising from the performance of its services and to
indemnify its customers against all claims and liability arising therefrom.
Management believes this insurance coverage is sufficient.
Prior to the second half of 1998, activity in the U.S. Geophysical
Industry had increased with the success and acceptance of 3-D surveys. The
improved cost effectiveness gained from the data acquisition and processing of
3-D surveys had resulted in increased profits for the U.S. operations of the
major and independent oil companies. With these cost advantages and the
uncertainty of foreign operations, many of the major U.S. oil companies
increased participation in the domestic oil industry. However, beginning
approximately in mid 1998, activity declined significantly due to a decline in
the price of oil.
Due to a significant decline in spending for seismic services by a number
of oil and gas clients as a result of significantly lower oil prices, TGC has
reduced its operations to one seismic acquisition crew. This decrease in
spending was primarily a result of the significant decline in oil and natural
gas prices (principally oil prices) during 1998. An increase in oil prices
began in December 1999. However, the increase in natural gas prices did not
begin until May 2000. Due to the significant lag time in the geophysical
services industry between increases in oil and natural gas prices and an
increase in demand for services, the geophysical services industry has yet to
experience a significant increase in demand for its services. Company
management continues to monitor expenses and, where possible, implement cost
containment programs to remain highly competitive through this continued
period of reduced industry activity. However, there has been a recent
increase in seismic bidding activity and management is aggressively pursuing
contract opportunities. Management believes that the outlook for the
geophysical services industry is promising. Though there can be no assurance,
geophysical services should be in greater demand due to the recent increase in
levels of seismic bidding activity and the prospect of oil and natural gas
prices remaining at or near their current levels.
As of December 31, 2000, TGC employed 45 employees, supporting one
seismic crew with a total of 39 crew members and direct support members. The
Company believes its relationship with its employees to be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's headquarters are in leased facilities located in Plano,
Texas from which it conducts all its current operations. These facilities
include 8,000 square feet of office and warehouse space and an outdoor storage
area of approximately 10,000 square feet. The monthly rent is $5,098. This
facility is used to house corporate offices and serves as the headquarters for
the geophysical business. The Company is not responsible for insuring the
facilities. The condition of the Company's facilities is good and TGC
management believes that these properties are suitable and adequate for the
Company's foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a defendant in various legal actions that arose out of the
normal course of business. In the opinion of Management, none of the actions
will result in any significant loss to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted by the Company, during the fourth quarter of
the fiscal year ended December 31, 2000, to a vote of the Company's security
holders, through the solicitation of proxies or otherwise.
Part II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has traded on the NASDAQ SmallCap Market under
the symbol "TGCI" since September 25, 1994.
The number of shareholders of record of TGCI's Common Stock as of March
23, 2001, was 314. Due to the number of shares held in nominee or street
name, the Company believes that there are a significantly greater number of
beneficial owners of its Common Stock. As of such date, CEDE & CO. held
1,274,848 shares in street name. On March 23, 2001, TGC's Common Stock was
quoted at a closing sales price of $1.00. High and low sales prices (adjusted
for the Reverse Split effective November 6, 1998) of TGC's Common Stock for
the period of January 1, 1999, to December 31, 2000, were as follows:
Sales Price of TGC Common Stock
Date High Low
October 1 -- December 31, 2000 1 1/4 1/2
July 1 -- September 30, 2000 1 1/4 5/8
April 1 -- June 30, 2000 1 7/8 5/8
January 1 -- March 31, 2000 1 7/8 11/16
October 1 -- December 31, 1999 1 7/16
July 1 -- September 30, 1999 1 15/16 1/4
April 1 -- June 30, 1999 3 7/8
January 1 -- March 31, 1999 1 1/2 7/8
The above sale quotations were furnished to TGC by the NASD.
On November 6, 1998, the Company effected a one-for-three reverse stock
split of its Common Stock, whereby each three shares of issued and outstanding
Common Stock was converted and combined into one share of Common Stock (the
"Reverse Split"). The Common Stock commenced trading on a post-Reverse Split
basis on November 9, 1998.
As a consequence of the Reverse Split: (1) pursuant to the provisions
for adjustment of the conversion ratio of the Company's Series C Preferred
Stock, the conversion price per share of Common Stock on a post-Reverse Split
basis increased from $0.75 to $2.25 per share; and (2) pursuant to the terms
for adjustment to the exercise price of the Company's Common Share Purchase
Warrants, each Warrant purchased on a post-Reverse Split basis, 1/3 of a share
of Common Stock at a price of $1.125 per share of Common Stock. The Company's
Common Share Purchase Warrants expired under the terms of the Warrant
Agreement dated July 28, 1995 (and all amendments thereto) on December 31,
2000. As provided in the Warrant Agreement, any unexercised Warrant
Certificates outstanding on December 31, 2000, were automatically deemed
exercised on behalf of each record holder of Warrant Certificates into shares
of the Company's Common Stock at the rate of one-tenth (1/10th) of a share of
Common Stock for each three Warrants. There was no exercise price payable to
the Company in connection with this deemed exercise.
On June 3, 1999, the TGC Board of Directors voted that in lieu of
declaring the July 1999 semi-annual dividend on the Series C Preferred Stock
to reduce, on a post-Reverse Split basis, the initial conversion price of the
Series C Preferred Stock from $2.25 per share of Common Stock to $2.00 per
share of Common Stock and delay the increase in the conversion price of the
Series C Preferred Stock until the close of business on December 31, 2001.
The increase in the conversion price of the Series C Preferred Stock from
$2.00 per share of Common Stock to $3.75 per share of Common Stock, following
the reduction described above, was otherwise scheduled to increase at the
close of business on December 31, 2000. As a result of the adjustments
described above, the conversion price of the Series C Preferred Stock is $2.00
per share of Common Stock if exercised prior to the close of business on
December 31, 2001. After December 31, 2001 and prior to the close of business
on December 31, 2002, the conversion price per share of Common Stock shall be
$3.75. Thereafter, the conversion price will be $6.00 per share of Common
Stock.
Dividends are payable on the Company's Common Stock at the discretion of
the Board of Directors. In light of the working capital needs of the Company,
it is unlikely that cash dividends will be declared and paid on the Company's
Common Stock in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS.
Results of operations
Geophysical Operation (Continuing Operations)
Revenues for the year ended December 31, 2000 were $6,455,915 compared
with revenues of $4,600,708 for the year ended December 31, 1999. The Company
incurred a net loss, before dividend requirements on preferred stock, of
$(1,912,064) for the year ended December 31, 2000 compared with a net loss
before dividend requirements on preferred stock of $(2,073,071) for the year
ended December 31, 1999. The net loss of $(1,912,064), before dividend
requirements on preferred stock, for the year ended December 31, 2000 included
a charge of $202,000 for deferred income tax expense.
The Company's shareholders, at a special meeting of shareholders on
November 5, 1998, approved an Amendment to the Company's Articles of
Incorporation to effect a one-for-three reverse stock split of its Common
Stock (the "Reverse Split"). The Reverse Split was effected on November 6,
1998, and the Common Stock commenced trading on a post-Reverse Split basis on
November 9, 1998. All references to number of shares, except shares
authorized, and to per share information have been adjusted to reflect the
reverse stock split.
TGC's cost of services, as a percentage of revenue, decreased to 109.3%
in 2000 from 113.1% in 1999. This percentage decrease was principally a result
of the increased revenue level in 2000. Selling, general and administrative
expense increased to $969,875 in 2000 from $878,940 in 1999. This increase
was primarily the result of additional expenditures in selling expense as
marketing efforts were expanded in 2000. Interest expense decreased by $60,172
in 2000 when compared to 1999 primarily as a result of certain debt issues
that matured during 2000. Non-cash charges for depreciation and amortization
were $1,644,331 in 2000 compared with $1,885,313 in 1999.
Due to a significant decline in spending for seismic services by a number
of oil and gas clients as a result of significantly lower oil prices, TGC
reduced its operations to one seismic acquisition crew in 1999. TGC continued
to operate at this one crew level during 2000. This decrease in spending was
primarily a result of the significant decline in oil and gas prices
(principally oil prices) during 1998 and early 1999. For over thirty years,
TGC has successfully served the geophysical industry. However, the Company
was unable to obtain a sufficient number of contracts during 2000 to operate
at a profitable level. An increase in oil prices began in December 1999.
However, the increase in natural gas prices just began in May 2000. Due to
the significant lag time in the geophysical services industry between
increases in oil and natural gas prices and an increase in demand for
services, the geophysical services industry has yet to experience a
significant increase in demand for its services. However, there has been a
recent increase in seismic bidding activity and management is aggressively
pursing contract opportunities.
Management believes that the geophysical services industry is promising.
Geophysical services should be in greater demand due to the recent increase in
levels of seismic bidding activity and the prospect of oil and natural gas
prices remaining at or near their current levels. Though there can be no
assurance, such conditions should enable the Company to secure contracts and
improve its performance.
This report contains forward-looking statements which reflect the view of
Company's management with respect to future events. Although management
believes that the expectations reflected in such forward-looking statements
are reasonable, it can give no assurance that such expectations will prove to
have been correct. Important factors that could cause actual results to
differ materially from such expectations are disclosed in the Company's
Securities and Exchange Commission filings, and include, without limitation,
the unpredictable nature of forecasting weather, the potential for contract
delay or cancellation, and the potential for fluctuations in oil and gas
prices. The forward-looking statements contained herein reflect the current
views of the Company's management and the Company assumes no obligation to
update the forward-looking statements or to update the reasons actual results
could differ from those contemplated by such forward-looking statements.
At December 31, 2000, the Company had net operating loss carry forwards
of approximately $7,800,000 available to offset future taxable income, which
expires at various dates through 2020.
Discontinued Operations
During June 1996, the Board of Directors approved the spin-off of Chase
Packaging Corporation ("Chase"), whereby all of the shares of Chase would be
distributed as a stock dividend to the shareholders of TGC common stock and,
on an as if converted basis, TGC preferred stock, effective July 31, 1996.
The date of the distribution of Chase's stock was March 7, 1997. The spin-off
distribution of Chase to TGC stockholders reduced stockholders' equity by
$103,976, which represents the book value of the net assets of Chase as of
March 7, 1997. In addition, on March 18, 1997, TGC sold the Portland, Oregon
manufacturing facility of Chase for approximately $2,400,000, and applied such
proceeds in satisfaction of the mortgage indebtedness with respect to such
facility and in satisfaction of a debt obligation owing by TGC to Chase to pay
to Chase any such proceeds in excess of the amount of the mortgage
indebtedness.
Financial Condition
Cash of $383,582 was used in operations for the twelve months ended
December 31, 2000, compared with cash provided by operations of $404,418 for
the same period of the prior year. The primary reason for the decrease in cash
from operations was an increase in accounts receivable of $894,764 in 2000
compared with a decrease in 1999 of $1,113,185. Net cash used in investing
activities was $520,803 during 2000. This was principally the result of
capital expenditures in the amount of $543,311. Principal payments of debt
obligations in the amount of $814,462 resulted in net cash of $735,158 being
used in financing activities during 2000.
Working capital decreased $762,857 to $329,534 from the December 31,
1999, working capital of $1,092,391. The Company's current ratio decreased to
1.4 to 1.0 at December 31, 2000 from 2.3 to 1.0 at December 31, 1999.
Stockholders' equity increased to $4,171,860 at December 31, 2000, from the
December 31, 1999, balance of $3,493,612 due primarily to the conversion in
May 2000 by WEDGE Energy Services, LLC ("WEDGE Energy") of its 8.5%
Convertible Subordinated Debenture, Series B due December 1, 2009, in the
principal amount of $2,500,000 (the "Debenture") plus accrued interest of
$90,312 into 2,252,445 shares of 8.5% Senior Convertible Preferred Stock
(Senior Preferred Stock"), as further described below.
The holders of the Company's outstanding Series C 8% Convertible
Exchangeable Preferred Stock ("Series C Preferred Stock"), voted at the Annual
Meeting held May 11, 2000, to consent to a new series of Senior Preferred
Stock. The affirmative vote of the holders of two-thirds (2/3) of the
outstanding shares of Series C Preferred Stock approved the new series of
Senior Preferred Stock. As a result of the consent to the new series of
Senior Preferred Stock by the Series C Preferred Stock shareholders and in
accordance with the terms of the Debenture Agreement, WEDGE Energy, on May 17,
2000, converted its Debenture plus accrued interest into 2,252,445 shares of
Senior Preferred Stock. In addition, 7,445 and 96,045 shares of Senior
Preferred Stock were issued to WEDGE Energy as payment of the June 1 and
December 1, 2000 dividends, respectively. Per the Debenture Agreement all
dividends on the Senior Preferred Stock were to be paid by the issuance of
additional shares of Senior Preferred Stock through December 1, 2000.
The Company anticipates that available funds, together with anticipated
cash flows generated from future operations will be sufficient to meet the
Company's cash needs during 2001, so long as one of the Company's two crews is
employed, of which there is no assurance.
ITEM 7. FINANCIAL STATEMENTS.
Financial Statements
December 31, 2000 and 1999
CONTENTS
Report of Independent Certified Public Accountants p. 11
Financial Statements
Balance Sheets p. 12
Statements of Operations p. 14
Statement of Stockholders' Equity p. 15
Statements of Cash Flows p. 16
Notes to Financial Statements p. 18
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
TGC Industries, Inc.
We have audited the accompanying balance sheets of TGC Industries, Inc. as of
December 31, 2000 and 1999, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TGC Industries, Inc. as of
December 31, 2000 and 1999, and the results of its operations and its cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Dallas, Texas
February 9, 2001
TGC Industries, Inc.
BALANCE SHEETS
December 31,
ASSETS 2000 1999
___________ __________
CURRENT ASSETS
Cash and cash equivalents $ 259,131 $ 1,898,674
Trade accounts receivable 894,764 -
Costs and estimated earnings in excess of
billings on uncompleted contracts 8,550 -
Prepaid expenses and other 72,085 44,479
___________ ___________
Total current assets 1,234,530 1,943,153
PROPERTY AND EQUIPMENT - at cost
Machinery and equipment 11,187,043 10,839,242
Automobiles and trucks 757,111 600,703
Furniture and fixtures 323,323 317,167
Other 4,536 18,144
____________ ___________
12,272,013 11,775,256
Less accumulated depreciation and amortization (8,309,781) (6,712,004)
____________ ___________
3,962,232 5,063,252
DEFERRED INCOME TAXES - 202,000
OTHER ASSETS 395 495
____________ ___________
$ 5,197,157 $ 7,208,900
============ ===========
TGC Industries, Inc.
BALANCE SHEETS - CONTINUED
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
_________ _________
CURRENT LIABILITIES
Trade accounts payable $ 336,876 $ 50,932
Accrued liabilities 140,535 60,362
Billings in excess of costs and estimated
earnings on uncompleted contracts 179,050 -
Current maturities of long-term obligations 248,535 739,468
_________ __________
Total current liabilities 904,996 850,762
LONG-TERM OBLIGATIONS, less current maturities 120,301 2,864,526
Commitments and contingencies - -
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value;
4,000,000 shares authorized;
8.5% senior convertible preferred stock;
2,355,935 and 0 shares issued and
outstanding in 2000 and 1999, respectively 2,355,935 -
8% Series C convertible exchangeable
preferred stock; 1,150,350 shares issued,
1,085,550 and 1,115,750 shares outstanding
at 2000 and 1999, respectively 1,085,550 1,115,750
Common stock, $.30 par value;
25,000,000 shares authorized; 2,360,818 and
2,285,318 shares issued in 2000 and 1999,
respectively 708,245 685,595
Additional paid-in capital 5,609,285 5,367,358
Accumulated deficit (5,371,841) (3,459,777)
Treasury stock, at cost
(31,944 shares in 2000 and 1999) (215,314) (215,314)
___________ ___________
4,171,860 3,493,612
___________ ___________
$ 5,197,157 $ 7,208,900
============= ============
The accompanying notes are an integral part of these statements.
TGC Industries, Inc.
STATEMENTS OF OPERATIONS
Years ended December 31,
2000 1999
________ _________
Revenue $ 6,455,915 $ 4,600,708
Cost and expenses
Cost of services 7,053,779 5,201,342
Selling, general and administrative 969,875 878,940
Interest expense 142,325 202,497
Debt financing costs - 391,000
___________ ___________
8,165,979 6,673,779
___________ ___________
Loss from operations before income taxes (1,710,064) (2,073,071)
Income tax expense
Deferred 202,000 -
___________ ___________
Net loss (1,912,064) (2,073,071)
Less dividend requirements on preferred stock (572,426) (446,300)
___________ ___________
Loss allocable to common stockholders $(2,484,490) $(2,519,371)
============ ============
Loss per common share - basic and diluted $(1.08) $(1.13)
Weighted average number of common shares - basic
and diluted 2,296,210 2,228,989
The accompanying notes are an integral part of these statements.
TGC Industries, Inc.
STATEMENT OF STOCKHOLDERS' EQUITY
Additional
Preferred stock Common stock paid-in Accumulated Treasury
Shares Amount Shares Amount capital deficit stock Total
_________ __________ _________ ________ __________ ____________ __________ ___________
Balances at
January 1, 1999 1,129,350 $1,129,350 2,204,130 $661,239 $4,939,287 $(1,386,706) $(215,314) $ 5,127,856
Issuance of common stock - - 47,827 14,348 33,479 - - 47,827
Conversion of preferred stock (13,600) (13,600) 33,361 10,008 3,592 - - -
Stock warrants issued with debt - - - - 391,000 - - 391,000
Net loss - - - - - (2,073,071) - (2,073,071)
_________ _________ _________ _________ _________ ___________ _________ ___________
Balances at
December 31, 1999 1,115,750 1,115,750 2,285,318 685,595 5,367,358 (3,459,777) (215,314) 3,493,612
Conversion of note into
preferred stock 2,252,445 2,252,445 - - 337,867 - - 2,590,312
Conversion of
preferred stock (30,200) (30,200) 75,500 22,650 7,550 - - -
Dividend on 8-1/2% senior
convertible preferred stock 103,490 103,490 - - (103,490) - - -
Net loss - - - - - (1,912,064) - (1,912,064)
_________ __________ __________ ________ _________ ___________ _________ ___________
Balances at
December 31, 2000 3,441,485 $3,441,485 2,360,818 $708,245 $5,609,285 $(5,371,841) $(215,314) $ 4,171,860
========= ========== ========= ======== ========== =========== ========= ===========
The accompanying notes are an integral part of these statements.
TGC Industries, Inc.
STATEMENTS OF CASH FLOWS
Years ended December 31,
2000 1999
__________ _________
Cash flows from operating activities
Net loss $(1,912,064) $(2,073,071)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization 1,644,331 1,885,313
Gain on disposal of property and equipment (22,508) (9,894)
Deferred income taxes 202,000 -
Debt financing costs - 391,000
Changes in operating assets and liabilities
Trade accounts receivable (894,764) 1,113,185
Billings in excess of costs and estimated
earnings on uncompleted contracts (8,550) (387,474)
Prepaid expenses (27,606) 81,940
Other assets 100 468
Accounts payable 285,944 (525,373)
Accrued liabilities 170,485 (46,485)
Costs and estimated earnings in excess of
billings on uncompleted contracts 179,050 -
Federal income taxes payable - (25,191)
_________ __________
Net cash provided by (used in) operating activities (383,582) 404,418
Cash flows from investing activities
Capital expenditures (543,311) (9,223)
Proceeds from sale of property and equipment 22,508 46,300
_________ __________
Net cash provided by (used in) investing activities (520,803) 37,077
Cash flows from financing activities
Dividends paid - (178,043)
Net borrowings under line of credit - (290,000)
Proceeds from issuance of debt 79,304 3,112,500
Principal payments of debt obligations (814,462) (1,890,277)
_________ ___________
Net cash provided by (used in) financing activities (735,158) 754,180
_________ ___________
Net increase (decrease) in cash and cash equivalents (1,639,543) 1,195,675
Cash and cash equivalents at beginning of year 1,898,674 702,999
___________ ___________
Cash and cash equivalents at end of year $ 259,131 $ 1,898,674
=========== ============
TGC Industries, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31,
2000 1999
__________ _________
Supplemental cash flow information
Interest paid $ 153,360 $ 192,462
Income taxes paid $ - $ 22,000
Noncash investing and financing activities
During 2000, the holder of the Company's $2,500,000 debenture payable
converted the debenture and accrued interest of $90,312 into 2,252,445
shares of 8.5% Senior Preferred Stock. In addition, the Company issued
an additional 103,490 shares of 8.5% Senior Preferred Stock as a
dividend payment to the holder of the 8.5% Senior Preferred Stock.
In accordance with the terms of the Debenture Agreement, dividends
payable through December 1, 2000 were to be paid by the issuance of
additional shares of 8.5% Senior Preferred Stock.
During 1999, the Company issued 47,827 shares of common stock to holders
of the Series C 8% Convertible Exchangeable Preferred Stock electing to
receive common stock in lieu of cash dividends.
The accompanying notes are an integral part of these statements.
TGC INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2000 and 1999
NOTE A - NATURE OF OPERATIONS
TGC Industries, Inc. (TGC or the Company) is engaged in the domestic
geophysical services business and primarily conducts seismic surveys and
sells gravity data to companies engaged in exploration in the oil and gas
industry.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
The Company considers all highly liquid investments with original maturity
dates of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives
of the individual assets ranging from 1 to 7 years.
Long-Lived Assets
Long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. For the purposes of evaluating
the recoverability of long-lived assets, the recoverability test is
performed using undiscounted cash flows estimated to
be generated by those assets.
Income Taxes
Deferred income taxes reflect the impact of temporary differences between
the amounts of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees" and provides the required pro
forma disclosures prescribed by Statement of Financial Accounting Standards
No. 123.
TGC Industries, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000 and 1999
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Financial Instruments
The Company's financial instruments recorded on the balance sheet include
cash and cash equivalents, accounts receivable, accounts payable and debt.
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of the short-term nature of
these items. Fair value of long-term debt is based on rates available to
the Company for debt with similar terms and maturities.
Revenue Recognition
Revenues from conducting seismic surveys are recognized over the term of
the contract using the percentage-of-completion method. Under this method,
revenues are recognized on the units-of-production method. Revenues for
the sale of gravity data are recognized when services are rendered.
Earnings (Loss) Per Share
Basic earnings (loss) per common share is based upon the weighted average
number of shares of common stock outstanding. Diluted earnings (loss) per
share is based upon the weighted average number of common shares
outstanding and, when dilutive, common shares issuable for stock options,
warrants and convertible securities.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
TGC Industries, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000 and 1999
NOTE C - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
The components of uncompleted contracts are as follows:
December 31,
_____________________
2000 1999
________ ______
Costs incurred on uncompleted contracts and
estimated earnings $ 127,680 $ -
Less billings to date (298,180) -
________ _____
$(170,500) $ -
======== =====
NOTE D - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
December 31,
_____________________
2000 1999
_________ ______
Compensation and payroll taxes $ 25,994 $13,387
Insurance 48,000 -
Other 66,541 46,975
______ ______
$140,535 $60,362
======= ======
TGC Industries, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000 and 1999
NOTE E - DEBT
Long-term Obligations
Long-term obligations consist of the following:
December 31,
_____________________
2000 1999
________ ______
Debenture payable to a corporation, maturing
in December 2009, interest at 8.5%, payable
semi-annually $ - $2,500,000
Note payable, interest at 4%, due in monthly
installments of $552 including interest;
collateralized by equipment and accounts
receivable 106,142 108,342
Note payable, interest at 4%, due in monthly
installments of $1,130 including interest;
collateralized by equipment and accounts
receivable 28,962 40,923
Notes payable to a finance company, interest
at 11%, due in monthly installments of
$50,267 including interest; collateralized
by equipment - 432,458
Note payable to a finance company, interest
at 9.5%, due in monthly installments of
$5,143 including interest; collateralized
by equipment 34,928 90,666
Note payable to a finance company, interest
at 8.7%, due in monthly installments of
$5,038 including interest; collateralized
by equipment 43,796 98,079
Note payable to a finance company, interest
at 8.8%, due in monthly installments of
$4,974 including interest; collateralized
by equipment 57,061 109,539
Note payable to a finance company, interest
at 9.4%, due in monthly installments of
$12,104 including interest, collateralized
by equipment 93,637 223,987
Other 4,310 -
______ _______
$368,836 $3,603,994
======== ==========
TGC Industries, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000 and 1999
NOTE E - DEBT - Continued
Aggregate maturities of long-term obligations at December 31, 2000 are as
follows:
Year ending
December 31,
2001 $248,535
2002 15,475
2003 5,854
2004 2,594
2005 2,702
Thereafter 93,676
_______
368,836
Less current maturities 248,535
_______
$120,301
=======
Subordinated Debt
During 1999, the Company issued subordinated notes payable of $312,500 to
officers and directors. The notes payable bore interest at 8% and were
paid in full during December 1999.
On December 14, 1999, the Company issued a $2,500,000 convertible
subordinated debenture to a corporation. The debenture bears interest at
8.5%, payable semi-annually, and matures in December 2009. The debenture
was converted into 8.5% Senior Preferred Stock at a conversion price of
$1.15 per share on May 17, 2000.
Fair Value of Debt Obligations
The fair value of debt obligations is estimated using discounted cash flows
based on the Company's incremental borrowing rate for similar types of
borrowings. A comparison of the carrying value and fair value of these
instruments is as follows:
December 31,
_____________________
2000 1999
________ ______
Carrying value $368,836 $3,603,994
Fair value $315,343 $3,264,899
TGC Industries, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000 and 1999
NOTE F - STOCKHOLDERS' EQUITY
Earnings Per Share
The effect of preferred stock dividends on the amount of loss available to
common stockholders was $.25 and $.20 for the years ended December 31, 2000
and 1999, respectively.
Outstanding warrants that were not included in the diluted calculation
because their effect would be anti-dilutive total 1,136,575 for each of the
years ended December 31, 2000 and 1999. Outstanding options that were not
included in the diluted calculation because their effect would be anti-
dilutive total 345,497 and 176,497 for the years ended December 31, 2000
and 1999, respectively.
Stock-Based Compensation Plans
The Company's 1986 Incentive Stock Option Plan (the "1986 Plan") expired
during July 1997. At December 31, 2000, options covering 6,335 shares of
the Company's common stock were outstanding under the 1986 Plan. Options
granted under the 1986 Plan must be exercised within five years from the
date of grant. All options were exercisable at December 31, 2000, and will
remain outstanding until they are exercised or canceled.
The Company currently has in effect a 1993 Stock Option Plan (the "1993
Plan") covering a total of 283,334 shares of the Company's common stock.
Options under the 1993 Plan must be granted at prices not less than the
market price at the date of grant and must be exercised within five years
from the date of grant. Options covering 45,004 shares are exercisable as
follows: (i) one-third of the shares after the first 12 month period
following the date of grant, (ii) up to two-thirds of the shares after the
first 24 month period following the date of grant, and (iii) all of the
shares of stock subject to the option at any time after the first 36 month
period following the date of grant. Options covering 35,000 shares are
exercisable as follows: (i) one-third of the shares on January 1, 2000,
and (ii) all of the shares after January 1, 2001. Options covering 37,100
shares are exercisable as follows: (i) one-third on October 21, 2000, and
(ii) all of the shares after October 21, 2001. At December 31, 2000,
outstanding options for 92,369 shares were exercisable.
In conjunction with the spin-off of the Company's wholly-owned subsidiary,
Chase Packaging Corporation (Chase), in 1996, options held by employees of
Chase under the 1993 Plan were converted into a nonqualified plan. Options
covering 53,058 shares were outstanding and exercisable at December 31,
2000.
TGC Industries, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000 and 1999
NOTE F - STOCKHOLDERS' EQUITY - Continued
The Company currently has in effect a 1999 stock option plan (the "1999
Plan") covering up to 300,000 shares of the Company's common stock.
Options under the 1999 Plan must be granted at prices not less than the
lesser of the par value per share of the stock or the fair market value per
share of the Company's stock on the date of the grant, and their term
cannot exceed ten years from the date of the grant. Options outstanding at
December 31, 2000, covering 169,000 shares, expire five years from the date
of the grant and are exercisable as follows: (i) one-third of the shares
after the 12 month period following the date of the grant, (ii) two-thirds
of the shares after the 24 month period following the date of the grant,
and (iii) all of the shares of stock after the 36 month period following
the date of the grant. At December 31, 2000, no outstanding options are
exercisable.
The Company has adopted only the disclosure provisions of SFAS 123. The
Company will continue to apply APB 25 and related interpretations in
accounting for its stock-based compensation plans. Had compensation cost
for the Company's stock grants been determined consistent with SFAS 123,
the Company's net loss and net loss per common share for 2000 and 1999
would approximate the pro forma amounts indicated below:
2000 1999
________________________ _________________________
As reported Pro forma As reported Pro forma
___________ _________ ___________ __________
Net loss $(1,912,064) $(1,926,337) $(2,073,071) $(2,093,544)
========== ========= ========= =========
Net loss allocable
to common
stockholders $(2,484,490) $(2,498,763) $(2,519,371) $(2,539,844)
========== ========= ========= =========
Loss per common
share basic
and diluted $(1.08) $(1.09) $(1.13) $(1.14)
TGC Industries, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000 and 1999
NOTE F - STOCKHOLDERS' EQUITY - Continued
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future disclosures because they do not take into effect pro
forma compensation expense related to grants made before December 31, 1994.
The fair value of these options was estimated at the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants: expected volatility of 192% and 143% in 2000
and 1999, respectively; risk-free interest rate of 5.5% and 6.4% in 2000
and 1999, respectively; and expected life of 5 years for 2000 and 1999.
The weighted average fair value of options granted during 2000 and 1999 was
$.97 and $.68, respectively.
The following table summarizes activity under the Plans:
Weighted
Shares under average
option exercise price
____________ ______________
Balance at January 1, 1999 154,398 2.39
Granted 37,100 .75
Canceled (15,001) 3.87
_______ ____
Balance at December 31, 1999 176,497 $1.92
Granted 169,000 1.00
_______ ____
Balance at December 31, 2000 345,497 $1.47
======= =====
Exercisable at December 31:
1999 127,730 $2.34
2000 151,762 $2.11
TGC Industries, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000 and 1999
NOTE F - STOCKHOLDERS' EQUITY - Continued
The following information applies to options outstanding at December 31,
2000:
Weighted
average
remaining Weighted
Range of Number contractual average
exercise prices outstanding life exercise price
(in years)
_______________ ___________ ___________ ______________
$ .75 $1.13 247,435 7.76 $ .95
$ 2.40 $3.00 98,062 .89 2.84
_______
345,497 $1.47
======= =====
The following information applies to options exercisable at December 31,
2000:
Range of Number Weighted average
exercise prices exercisable exercise price
_______________ ___________ ________________
$ .75 - $1.13 53,700 $ .96
$ 2.40 - $3.00 98,062 2.74
______
151,762 $2.11
=======
TGC Industries, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000 and 1999
NOTE F - STOCKHOLDERS' EQUITY - Continued
Stock Warrants
At December 31, 2000, warrants covering 1,136,574 shares were outstanding.
In connection with the issuance of subordinated notes payable during 1999,
certain officers and directors received warrants covering 850,000 shares
with a value of $391,000. These warrants have a strike price of $.30 and
expire on July 31, 2009. Warrants covering 233,240 shares have a strike
price of $1.13 per share and expire on December 31, 2000. Warrants
covering 50,000 shares have a strike price of $2.40 and expire on December
27, 2000. Warrants to purchase 3,334 common shares have a strike price of
$3.19 and expire on January 25, 2001.
Preferred Stock
During 1996, the Company issued 1,150,350 shares of Series C 8% convertible
exchangeable preferred stock ("Series C Preferred Stock") at $5.00 per
share in a private placement offering with gross proceeds of approximately
$5,800,000. The Series C Preferred Stock is, at the option of the Company,
exchangeable into 8% subordinated convertible debentures. The preferred
stock and debentures are convertible into shares of the Company's common
stock at the conversion price of (i) $2.00 per share if exercised by
December 31, 2001, (ii) $3.75 per share if exercised from January 1, 2002
through December 31, 2002, and (iii) $6.00 per share thereafter.
During 2000, the holders of the Series C 8% convertible exchangeable
preferred stock voted to consent to a new series of 8.5% Senior Convertible
Preferred Stock ("Senior Preferred Stock"). As a result, in accordance
with the terms of a debenture agreement, the $2,500,000 debenture on the
books of the Company plus accrued interest, were converted into 2,252,445
shares of the Senior Preferred Stock. In addition, in accordance with the
terms of the agreement, the Company issued 7,445 and 96,045 additional
shares of Senior Preferred Stock to the Senior Preferred shareholders as
payment for the June 1, 2000 and December 1, 2000 dividends, respectively,
resulting in 2,355,935 shares outstanding at December 31, 2000.
Dividends
Holders of the Company's Series C 8% Preferred Stock will receive, when, as
and if declared by the Board of Directors of the Company, dividends at a
rate of 8% per annum. The dividends are payable semi-annually during
January and July of each year. At December 31, 2000, cumulative dividends
of approximately $651,000 were in arrears.
TGC Industries, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000 and 1999
NOTE F - STOCKHOLDERS' EQUITY - Continued
Holders of the Company's Senior Preferred Stock will receive, when, as and
if declared by the Board of Directors of the Company, dividends at a rate
of 8.5% per annum. The dividends are payable semi-annually during June and
December of each year. Dividends payable in 2000 were paid in additional
shares of Senior Preferred Stock, in accordance with the terms of the
agreement.
NOTE G - INCOME TAXES
The income tax provision (benefit) reconciled to the tax computed at the
statutory Federal rate is as follows:
Years ended
December 31,
__________________
2000 1999
_______ ________
Federal tax expense (benefit) at statutory rate $(581,422) $(704,844)
Meals and entertainment 22,269 5,512
Other 647 (41,298)
Change in prior year estimates (212,210) -
Change in valuation allowance 972,716 740,630
_______ _______
$ 202,000 $ -
======= ========
Deferred tax assets and liability consist of the following:
December 31,
__________________
2000 1999
_______ ________
Deferred tax assets
Net operating loss carryforwards $ 2,636,873 $1,904,159
Other 20,661 33,046
Deferred tax liability
Property and equipment (679,594) (729,981)
________ _________
1,977,940 1,207,224
Less valuation allowance (1,977,940) (1,005,224)
________ _________
Net deferred tax asset $ - $ 202,000
======== =========
TGC Industries, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000 and 1999
NOTE G - INCOME TAXES - Continued
At December 31, 2000, the Company had net operating loss carryforwards of
approximately $7,800,000 available to offset future taxable income, which
expire at various dates through 2020. Future tax benefits, such as net
operating loss carryforwards, are recognized to the extent that realization
of such benefits are more likely than not.
NOTE H - 401(k) PLAN
The Company has a 401(k) salary deferral plan which covers all employees
who have reached the age of 20.5 years and have been employed by the
Company for at least one year. The covered employees may elect to have an
amount deducted from their wages for investment in a retirement plan. The
Company makes contributions to the plan equal to 100% of each participant's
salary reduction contributions to the plan up to 2% of the participant's
compensation. The Company's matching contribution to the plan was
approximately $14,000 and $13,000 for the years ended December 31, 2000 and
1999, respectively.
NOTE I - CONCENTRATION OF CREDIT RISK
The Company sells its geophysical services primarily to large independent
oil and gas companies operating in the United States. The Company performs
ongoing credit evaluations of its customer's financial condition and,
generally, requires no collateral from its customers.
During 2000, four customers accounted for 23%, 19%, 18% and 15% of the
revenues of the Company, respectively. During 1999, three customers
accounted for 38%, 20% and 16% of the revenues of the Company,
respectively.
NOTE J - CONTINGENCIES
In conducting its activities, the Company from time to time is the subject
of various claims arising from the ordinary course of business. In the
opinion of management, the ultimate resolution of such claims is not
expected to have a material adverse effect upon the financial position of
the Company.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTER AND CONTROL
PERSONS, COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT.
Certain information required by Item 9 of the Form 10-KSB is hereby
incorporated by reference from the Company's definitive proxy statement, which
will be filed pursuant to Regulation 14A within 120 days after the Company's
year end for the year covered by this report, under the caption "Nominees for
Directors" in the proxy statement.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by Item 10 of Form 10-KSB is hereby incorporated
by reference from the Company's definitive proxy statement, which will be
filed pursuant to Regulation 14A within 120 days after the Company's year end
for the year covered by this report, under the caption "Executive
Compensation" in the proxy statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by Item 11 of Form 10-KSB is hereby incorporated
by reference from the Company's definitive proxy statement, which will be
filed pursuant to Regulation 14A within 120 days after the Company's year end
for the year covered by this report, under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the proxy statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information provided by Item 12 of Form 10-KSB is hereby incorporated
by reference from the Company's definitive proxy statement, which will be
filed pursuant to Regulation 14A within 120 days after the Company's year end
for the year covered by this report, under the caption "Transactions with
Management" in the proxy statement.
ITEM 13. EXHIBITS.
Item 13 (a). The following is a list of exhibits to this Form 10-KSB:
3.1 Restated Articles of Incorporation as of July 31,
1986, filed as Exhibit 3(a) to the Company's
Registration Statement on Form 10 (Registration
No. 0-14908), filed with the Commission and
incorporated herein by reference.
3.2 Certificate of Amendment to the Company's Restated
Articles of Incorporation, as of July 5, 1988, filed
as Exhibit 3.2 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1988, and
incorporated herein by reference.
3.3 Restated Articles of Incorporation (with amendment) as
of November 6, 1998, filed as Exhibit 3.3 to the
Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1998, and incorporated herein by
reference.
3.4 First Amended Bylaws of the Company as amended, filed
as Exhibit 3.2 to the Company's annual report on Form
10-K for the fiscal year ended December 31, 1987, and
incorporated herein by reference.
3.5 Amendment to the Company's First Amended Bylaws as
adopted by the Board of Directors on March 7, 1988,
filed as Exhibit 3.3 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31,
1987, and incorporated herein by reference.
4.1 Statement of Resolution Establishing Series of
Preferred Stock of TGC Industries, Inc. filed with
the Secretary of State of Texas on July 16, 1993,
filed as Exhibit 2 to the Company's Current Report on
Form 8-K dated August 11, 1993, and incorporated
herein by reference.
4.2 Statement of Resolution Establishing Series C 8%
Convertible Exchangeable Preferred Stock of TGC
Industries, Inc. as filed with the Secretary of State
of Texas on July 9, 1996, filed as Exhibit B to the
Company's current report on Form 8-K dated July 11,
1996, filed with the Commission and incorporated
herein by reference.
4.3 Statement of Resolution Regarding Series C 8%
Convertible Exchangeable Preferred Stock of TGC
Industries, Inc. as filed with the Secretary of State
of Texas on December 30, 1998, filed as Exhibit 4.3 to
the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 30, 1998, and incorporated
herein by reference.
4.4 Statement of Resolution Regarding Series C 8%
Convertible Exchangeable Preferred Stock of TGC
Industries, Inc. as filed with the Secretary of State
of Texas on July 9, 1999.
4.5 Form of Debenture Agreement and Debenture for 8%
Subordinated Convertible Debentures, Series A, filed
as Exhibit 4.2 to the Company's Registration
Statement on Form SB-2 (Registration No. 333-12269),
as amended, filed with the Commission and incorporated
herein by reference.
4.6 Form of Warrant Agreement dated July 28, 1995, as
amended, and Warrant, filed as Exhibit 4.3 to the
Company's Registration Statement on Form SB-2
(Registration No. 333-12269), as amended, filed with
the Commission and incorporated herein by reference.
4.7 Debenture Agreement dated December 10, 1999, with
respect to the Company's $2,500,000 8 1/2% Convertible
Subordinated Debenture, Series B payable to Wedge Energy
Services, L.L.C., filed as Exhibit 4.6 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1999, and incorporated herein by reference.
4.8 Statement of Resolution Establishing 8-1/2% Senior
Convertible Preferred Stock of TGC Industries, Inc. as
filed with the Secretary of State of Texas on May 17,
2000.
10.1 Service Mark License Agreement dated as of July 31,
1986, between the Company and Supreme Industries,
Inc. (formerly ESI Industries, Inc.), relating to
the use of the Company's logo, filed as Exhibit 10(b)
to the Company's Registration Statement on Form 10
(Registration No. 0-14908), filed with the Commission
and incorporated herein by reference.
10.2 The Company's 1986 Incentive and Nonqualified Stock
Option Plan, filed as Exhibit 10(c) to the Company's
Registration Statement on Form 10 (Registration No.
0-14908), filed with the Commission and incorporated
herein by reference.
10.3 Amendment Number One to the Company's 1986 Incentive
and Nonqualified Stock Option Plan as adopted by the
Board of Directors on May 1, 1987, filed as Exhibit
10.4 to the Company's annual report on Form 10-K for
the fiscal year ended December 31, 1987, and
incorporated herein by reference.
10.4 The Company's 1993 Stock Option Plan as adopted by
the Board of Directors on June 3, 1993, filed as
Exhibit 10.4 to the Company's Registration Statement
on Form S-2 (Registration No. 33-73216), filed
with the Commission and incorporated by reference.
10.5 Master Contract for Geophysical Services-Onshore
dated April 18, 1990 between Marathon Oil Co. and the
Company together with a form of Supplementary
Agreement thereto, filed as Exhibit 10.8 to the
Company's Registration Statement on Form S-2
(Registration No. 33-73216), filed with the
Commission and incorporated herein by reference.
10.6 Agreement for Spin-off of Subsidiary Stock filed as
Exhibit 1 to the Company's Form 8-K filed with the
Commission on August 9, 1996 and incorporated herein
by reference.
10.7 Bill of Sale dated July 31, 1996 between TGC
Industries, Inc. and Chase Packaging Corporation,
filed as Exhibit 10.8 to the Company's annual report
on Form 10-KSB for the fiscal year ended December 31,
1996, and incorporated herein by reference.
10.8 Amendment No. 1 to the 1993 Stock Option Plan as adopted
by the Board of Directors on July 24, 1996, filed as
Exhibit 10.9 to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1998, and
incorporated herein by reference.
10.9 Amendment No. 2 to the 1993 Stock Option Plan as adopted
by the Board of Directors and approved by Company's
Shareholders on June 4, 1998, filed as Exhibit 10.10 to
the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1998, and incorporated
herein by reference.
10.10 Warrant Agreements and Warrant Certificates dated July
30, 1999 issued by the Company to JMS Inc. Cust FBO
William J. Barrett Keogh, JMS Inc. Cust FBO Herbert M.
Gardner Keogh, Edward L. Flynn, Allen T. McInnes, and
Wayne A. Whitener in connection with the issuance by
the Company of notes payable to such persons, filed as
Exhibit 10.10 to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1999, and
incorporated herein by reference.
10.11 Debenture Purchase Agreement dated December 10, 1999,
between WEDGE Energy Services, L.L.C. and the Company
with respect to the purchase by WEDGE of the Company's
8 1/2% Convertible Subordinated Debenture, Series B, for
the cash consideration of $2,500,000 paid by WEDGE to
the Company, filed as Exhibit 10.11 to the Company's
Annual Report filed on Form 10-KSB for the fiscal year
ended December 31, 1999, and incorporated herein by
reference.
10.12 Voting Agreement dated December 10, 1999, between the
Company, WEDGE Energy Services, L.L.C., and the
following shareholders of the Company: Allen McInnes,
Wayne Whitener, Herbert Gardner, William J. Barrett and
Edward L. Flynn, filed as Exhibit 10.12 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1999, and incorporated herein by reference.
10.13 The Company's 1999 Stock Option Plan as adopted by the
Board of Directors on December 14, 1999, filed as
Exhibit 10.13 to the Company's Annual Report on Form 10-
KSB for the fiscal year ended December 31, 1999, and
incorporated herein by reference.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TGC INDUSTRIES, INC.
Date: March 26, 2001 By: /s/ Wayne A. Whitener
Wayne A. Whitener
President (Principal Executive
Officer)
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Date: March 26, 2001 By: /s/ Allen T. McInnes
Allen T. McInnes
Chairman of the Board
and Secretary
Date: March 26, 2001 By: /s/ Edward L. Flynn
Edward L. Flynn
Director
Date: March 26, 2001 By: /s/ Wayne A. Whitener
Wayne A. Whitener
President, Chief Executive
Officer and Director
Date: March 26, 2001 By: /s/ Kenneth Uselton
Kenneth Uselton, Treasurer
(Principal Financial and
Accounting Officer)
Date: March 26, 2001 By: /s/ William J. Barrett
William J. Barrett
Director
Date: March 26, 2001 By: /s/ Herbert M. Gardner
Herbert M. Gardner
Director
Date: March 26, 2001 By: /s/ William H. White
William H. White
Director
Date: March 26, 2001 By: /s/ Pasquale V. Scaturro
Pasquale V. Scaturro
Director
EXHIBIT 4.4
Statement of Resolution Regarding
Series of Preferred Stock
of
TGC Industries, Inc.
Pursuant to the provisions of Article 2.13 of the Texas Business
Corporation Act, and the Articles of Incorporation, as amended, of the
undersigned Corporation, the Corporation submits the following with respect to
its Statement of Resolution Establishing its Series C 8% Convertible
Exchangeable Preferred Stock for the purpose of modifying certain terms of the
Series C Preferred Stock, which Statement of Resolution was originally filed
with the Secretary of State of Texas on July 9, 1996, and was modified by
Statements of Resolution filed with the Secretary of State of Texas on July
22, 1998, December 9, 1998, and December 30, 1998.
1. The name of the Corporation is TGC Industries, Inc.; and
2. A resolution adopting the Statement of Resolution Regarding Series
C 8% Convertible Exchangeable Preferred Stock is attached as Exhibit "A"
hereto and incorporated herein by reference. Such resolution was duly adopted
by all necessary action on the part of the Corporation at a regular meeting of
the Board of Directors of the Corporation held on June 3, 1999.
Dated June 30, 1999.
TGC INDUSTRIES, INC.
By: /S/ Rice M. Tilley, Jr.
Rice M. Tilley, Jr., Assistant Secretary
EXHIBIT "A"
STATEMENT OF RESOLUTION REGARDING
SERIES C 8% CONVERTIBLE EXCHANGEABLE PREFERRED STOCK OF
TGC INDUSTRIES, INC.
Pursuant to the provisions of Article 2.13 of the Texas Business
Corporation Act and the Articles of Incorporation, as amended, of TGC
Industries, Inc., a Texas corporation (the "Corporation" or the "Company"),
the Corporation has adopted the following resolution by all necessary action
on the part of the Corporation, at a regular meeting of the Board of Directors
on June 3, 1999, for the purpose of modifying certain terms of its Series C 8%
Convertible Exchangeable Preferred Stock as provided therein:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Corporation by Article 4.b of the Corporation's Articles of
Incorporation, as amended, the Corporation hereby approves a modification with
respect to its Statement of Resolution Establishing Series C 8% Convertible
Exchangeable Preferred Stock (the "Preferred Stock"), which Statement of
Resolution was originally filed with the Secretary of State of Texas on July
9, 1996, and was modified by Statements of Resolution filed with the Secretary
of State of Texas on July 22, 1998, December 9, 1998, and December 30, 1998,
by adopting the following modification to subparagraph 3(d) thereof to (i)
reduce the conversion price per share of Common Stock and (ii) delay the date
of the increase of the conversion price of the Preferred Stock from December
31, 2000 until December 31, 2001 and the subsequent date of the increase of
the conversion price of the Preferred Stock from December 31, 2001 to December
31, 2002, so that subparagraph 3(d) of such Statement of Resolution shall read
in its entirety as set forth below. Except as modified as set forth below,
the Statement of Resolution Establishing Series C 8% Convertible Exchangeable
Preferred Stock as filed with the Secretary of State on July 9, 1996, shall
remain in full force and effect.
"(d) Conversion Ratio. Each share of Preferred
Stock may, at the discretion of the holder thereof, be
converted into shares of Common Stock of the
Corporation at the conversion price per share of (i)
prior to the close of business on December 31, 2001,
the conversion price per share of Common Stock of Two
Dollars and 00/100 ($2.00), (ii) after December 31,
2001 and prior to the close of business on December
31, 2002, the conversion price per share of Common
Stock of Three Dollars and Seventy-Five Cents ($3.75),
and (iii) thereafter, the conversion price per share
of Common Stock of Six Dollars ($6.00), as such
conversion price may be adjusted and readjusted from
time to time in accordance with subparagraph 3(g)
hereof (such conversion price, as adjusted and
readjusted and in effect at any time, being herein
called the "Conversion Price" or the "Conversion
Ratio"), into the number of fully paid and non-
assessable shares of Common Stock determined by
dividing (x) the $5.00 per share price of the
Preferred Stock to be so converted by (y) the Conversion Price in
effect at the time of such conversion. The Conversion Ratios
referred to above will be subject to adjustment as set forth in
subparagraph 3(g)."
[END]
EXHIBIT 4.8
Statement of Resolution Establishing
Series of Preferred Stock
of
TGC Industries, Inc.
Pursuant to the provisions of Article 2.13 of the Texas Business
Corporation Act, and the Articles of Incorporation, as amended, of the
undersigned Corporation, the Corporation submits the following with respect to
establishing and designating its 8-1/2% Senior Convertible Preferred Stock:
1. The name of the Corporation is TGC Industries, Inc.; and
2. A resolution adopting the Statement of Resolution Establishing the
8-1/2% Senior Convertible Preferred Stock is attached as Exhibit "A" hereto
and incorporated herein by reference. Such resolution was duly adopted by all
necessary action on the part of the Corporation at a Special Meeting of the
Board of Directors of the Corporation held on November 30, 1999, and consented
to by the holders of over two-thirds (2/3) of the issued and outstanding
shares of Series C 8% Convertible Exchangeable Preferred Stock entitled to
vote thereon at the Annual Meeting of Shareholders held on May 11, 2000.
Dated May 11, 2000.
TGC INDUSTRIES, INC.
By: /s/ Rice M. Tilley, Jr.
Rice M. Tilley, Jr., Assistant Secretary
EXHIBIT "A"
8-1/2% SENIOR CONVERTIBLE PREFERRED STOCK
OF
TGC INDUSTRIES, INC.
RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Corporation by Article 4.b of the Corporation's Certificate
of Restated Articles of Incorporation, as amended, a series of preferred stock
of the Corporation be, and it is hereby, created out of the authorized but
unissued shares of the capital stock of the Corporation, such series to be
designated 8-1/2% Senior Convertible Preferred Stock (the "Preferred Stock"), to
consist of 2,750,000 shares, of which the preferences and relative and other
rights, and the qualifications, limitations or restrictions thereof, shall be
(in addition to those set forth in the Corporation's Certificate of
Incorporation, as amended) as follows:
1. Certain Definitions. Unless the context otherwise requires, the
terms defined in this paragraph 1 shall have, for all purposes of this
resolution, the meanings herein specified.
Common Stock. The term "Common Stock" shall mean all shares now or
hereafter authorized of any class of Common Stock of the Corporation and any
other stock of the Corporation, howsoever designated, authorized after the
Issue Date, which has the right (subject always to prior rights of any class
or series of preferred stock) to participate in the distribution of the assets
and earnings of the Corporation without limit as to per share amount.
Conversion Date. The term "Conversion Date" shall have the meaning set
forth in subparagraph 3(e) below.
Conversion Ratio. The term "Conversion Ratio" shall mean the ratio used
to determine the number of shares of Common Stock deliverable upon conversion
of the Preferred Stock, subject to adjustment in accordance with the
provisions of paragraph 3 below.
Issue Date. The term "Issue Date" shall mean the date that shares of
Preferred Stock are first issued by the Corporation.
Series C Preferred Stock. The term "Series C Preferred Stock" shall
mean the Corporation's Series C 8% Convertible Exchangeable Preferred Stock.
Subsidiary. The term "Subsidiary" shall mean any corporation of which
shares of stock possessing at least a majority of the general voting power in
electing the board of directors are, at the times as of which any
determination is being made, owned by the Corporation, whether directly or
indirectly through one or more Subsidiaries.
2. Dividends. The Preferred Stock shall be senior in rights to
dividends to all classes and series of stock of the Corporation, including
without limitation the Corporation's Series C Preferred Stock. In addition,
the Preferred Stock shall have the following dividend rights:
(a) Declaration of Dividends. The holders of shares of
Preferred Stock shall be entitled to receive cumulative cash dividends, when
and as declared by the Board of Directors out of funds legally available
therefor, at a rate of eight and one-half percent (8-1/2%) per annum and no more
($0.09775 per share per annum based on the per share liquidation value of
$1.15), before any dividend or distribution in cash or other property (other
than dividends payable in stock ranking junior to the Preferred Stock as to
dividends and upon liquidation, dissolution or winding-up) on any class or
series of stock of the Corporation ranking junior to the Preferred Stock as to
dividends or on liquidation, dissolution or winding-up shall be declared or
paid or set apart for payment.
(b) Payment of Dividends. Dividends on the Preferred Stock
shall be payable, when and as declared by the Board of Directors on December 1
and June 1 of each year, commencing June 1, 2000 (each such date being
hereinafter individually a "Dividend Payment Date" and collectively the
"Dividend Payment Dates"), except that if such date is a Saturday, Sunday or
legal holiday then such dividend shall be payable on the first immediately
preceding calendar day which is not a Saturday, Sunday or legal holiday, to
holders of record as they appear on the books of the Corporation on such
respective dates, not exceeding sixty days preceding such Dividend Payment
Date, as may be determined by the Board of Directors in advance of the payment
of each particular dividend. Dividends in arrears may be declared and paid at
any time, without reference to any regular Dividend Payment Date, to holders
of record on such date as may be fixed by the Board of Directors of the
Corporation. Dividends declared and paid in arrears shall be applied first to
the earliest dividend period or periods for which any dividends remain
outstanding. The amount of dividends payable per share of this Series for
each dividend period shall be computed by dividing the annual rate of eight
and one-half percent (8-1/2%) by two (2). Dividends payable on this Series for
the initial period and for any period less than a full semi-annual period
shall be computed on the basis of a 360-day year of twelve 30-day months.
Dividends shall be payable in cash, provided that for each dividend declared
and payable through December 1, 2000, the dividend payment shall be by payment
in kind securities by issuance of additional shares of Preferred Stock with a
liquidation value equal to the amount of the cash dividend payment which would
have been paid ("PIK Dividend"). For each dividend payment due and payable
after December 1, 2000, payment shall be by cash or by PIK Dividend at the
election of the holders by written notice to the Corporation, provided that
the Corporation shall only pay a PIK Dividend and not a cash dividend in the
event the Corporation's earnings before deduction of interest, taxes,
depreciation and amortization (EBITDA) for the six (6) months ended with the
previous quarter (for the December 1 payment: the six (6) months ended
September 30; and for the June 1 payment: the six (6) months ended March 31)
are less than one hundred twenty-five percent (125%) of the Corporation's
obligation for such dividend payment and for all other dividends and interest
due and payable on all other outstanding securities of the Corporation as of
such time.
(c) Dividends Cumulative. Preferred Stock shall be cumulative
and accrue from and after the date of original issuance thereof, whether or
not declared by the Board of Directors. Accrued dividends shall not bear
interest.
(d) Dividend Restriction. No cash dividend may be declared on
any other class or series of stock ranking on a parity with the Preferred
Stock as to dividends in respect of any dividend period unless there shall
also be or have been declared on the Preferred Stock like dividends for all
periods coinciding with or ending before such semi-annual period, ratably in
proportion to the respective annual dividend rates fixed therefor and the
total dividend obligation with respect thereto.
3. Conversion Rights. The Preferred Stock shall be convertible into
Shares of Common Stock as follows:
(a) Conversion Right. The holder of any shares of Preferred
Stock shall have the right, at such holder's option, at any time to convert
any of such shares of Preferred Stock into fully paid and nonassessable shares
of Common Stock at the Conversion Ratio provided for in subparagraph 3(d)
below by surrendering shares of Preferred Stock for conversion in accordance
with subparagraph 3(e) below.
(b) Continuance of Conversion Right. The Conversion Right set
forth above will continue so long as such Preferred Stock is outstanding with
respect to any stock not redeemed in accordance with the terms of paragraph 7.
(c) Surrender of Shares on Exercise of Conversion Right. In the
event that any holder of shares of Preferred Stock surrenders such shares for
conversion, such holder will be issued the number of shares of Common Stock to
which such holder is entitled pursuant to the provisions of subparagraph 3(d)
in the manner provided for in subparagraph 3(e). The shares of Preferred
Stock deemed to have been surrendered will have the status described in
paragraph 11 below.
(d) Conversion Ratio. Each share of Preferred Stock may, at the
discretion of the holder thereof, be converted into shares of Common Stock of
the Corporation at the conversion ratio of one (1) share of Common Stock for
each share of Preferred Stock, as such conversion ratio may be adjusted and
readjusted from time to time in accordance with subparagraph 3(g) hereof (such
conversion ratio, as adjusted and readjusted and in effect at any time, being
herein called the "Conversion Ratio"). The Conversion Ratio referred to above
will be subject to adjustment as set forth in subparagraph 3(g).
(e) Mechanics of Conversion. The holder of any shares of
Preferred Stock may exercise the conversion right specified in subparagraph
3(a) by surrendering to the Corporation or any transfer agent of the
Corporation the certificate or certificates for the shares to be converted,
accompanied by written notice specifying the number of shares to be converted.
Conversion shall be deemed to have been effected upon receipt of the
certificate or certificates for the shares to be converted accompanied by
written notice of election to convert specifying the number of shares to be
converted. The date of such receipt is referred to herein as the "Conversion
Date." As promptly as practicable thereafter (and after surrender of the
certificate or certificates representing shares of Preferred Stock to the
Corporation or any transfer agent of the Corporation) the Corporation shall
issue and deliver to or upon the written order of such holder a certificate or
certificates for the number of full shares of Common Stock to which such
holder is entitled and a check or cash with respect to any fractional interest
in a share of Common Stock as provided in subparagraph 3(f). The person in
whose name the certificate or certificates for Common Stock are to be issued
shall be deemed to have become a holder of record of such Common Stock on the
applicable Conversion Date. Upon conversion of only a portion of the number of
shares covered by a certificate representing shares of Preferred Stock
surrendered for conversion, the Corporation shall issue and deliver to or upon
the written order of the holder of the certificate so surrendered for
conversion, at the expense of the Corporation, a new certificate covering the
number of shares of Preferred Stock representing the unconverted portion of
the certificate so surrendered.
(f) Fractional Shares. No fractional Shares or scrip shall be
issued upon conversion of shares of Preferred Stock. If more than one share of
Preferred Stock shall be surrendered for conversion at any one time by the
same holder, the number of shares of Common Stock issuable upon conversion
thereof shall be computed on the basis of the aggregate number of shares of
Preferred Stock so surrendered. Instead of any fractional shares which would
otherwise be issuable upon conversion of any shares of Preferred Stock, the
Corporation shall pay a cash adjustment in respect of such fractional interest
in an amount equal to that fractional interest of the then current market
price.
(g) Conversion Ratio Adjustments. The Conversion Ratio shall be
subject to adjustment from time to time as follows:
(i) Stock Dividends, Subdivisions, Reclassifications or
Combinations. If the Corporation shall (x) declare a dividend or make a
distribution on its Common Stock in shares of its Common Stock, (y) subdivide
or reclassify the outstanding shares of Common Stock into a greater number of
shares, or (z) combine or reclassify the outstanding Common Stock into a
smaller number of shares, the Conversion Ratio in effect at the time of the
record date for such dividend or distribution or the effective date of such
subdivision, combination or reclassification shall be proportionately adjusted
so that the holder of any shares of Preferred Stock surrendered for conversion
after such date shall be entitled to receive the number of shares of Common
Stock which he would have owned or been entitled to receive had such Preferred
Stock been converted immediately prior to such date. Successive adjustments in
the Conversion Ratio shall be made whenever any event specified above shall
occur.
(ii) Other Distributions. In case the Corporation shall
fix a record date for the making of a distribution to all holders of shares of
its Common Stock (w) of shares of any class other than its Common Stock or (x)
of evidence of indebtedness of the Corporation or any Subsidiary or (y) of
assets (excluding cash dividends or distributions, and dividends or
distributions referred to in subparagraph 3(g)(i) above), or (z) of rights or
warrants, in each such case the Conversion Ratio in effect immediately prior
thereto shall be immediately thereafter proportionately adjusted for such
distribution so that the holder of Preferred Stock would be entitled to
receive the fair market value (as determined by the Board of Directors, whose
determination in good faith shall be conclusive) of what he would have been
entitled to receive had such Preferred Stock been converted prior to such
distribution. Such adjustment shall be made successively whenever such a
record date is fixed. In the event that such distribution is not so made, the
Conversion Ratio then in effect shall be readjusted, effective as of the date
when the Board of Directors determines not to distribute such shares,
evidences of indebtedness, assets, rights or warrants, as the case may be, to
the Conversion Ratio which would then be in effect if such record date had not
been fixed.
(iii) Consolidation, Merger, Sale, Lease or Conveyance. In
case of any consolidation with or merger of the Corporation with or into
another corporation or entity, or in case of any sale, lease or conveyance to
another corporation or entity of the assets of the Corporation as an entirety
or substantially as an entirety, each share of Preferred Stock shall after the
date of such consolidation, merger, sale, lease or conveyance be convertible
into the number of shares of stock or other securities or property (including
cash) to which the shares of Common Stock issuable (at the time of such
consolidation, merger, sale, lease or conveyance) upon conversion of such
share of Preferred Stock would have been entitled upon such consolidation,
merger, sale, lease or conveyance; and in any such case, if necessary, the
provisions set forth herein with respect to the rights and interests
thereafter of the holders of the shares of Preferred Stock shall be
appropriately adjusted so as to be applicable, as nearly as may reasonably be,
to any shares of stock or other securities or property thereafter deliverable
on the conversion of the shares of Preferred Stock.
(h) Statement Regarding Adjustments. Whenever the Conversion
Ratio shall be adjusted as provided in subparagraph 3(g), the Corporation
shall forthwith file, at the office of any transfer agent for the Preferred
Stock and at the principal office of the Corporation, a statement showing in
detail the facts requiring such adjustment and the Conversion Ratio that shall
be in effect after such adjustment, and the Corporation shall also cause a
copy of such statement to be sent by mail, first class postage prepaid, to
each holder of shares of Preferred Stock at its address appearing on the
Corporation's records. Where appropriate, such copy may be given in advance
and may be included as part of a notice required to be mailed under the
provisions of subparagraph 3(i).
(i) Notice to Holders. In the event the Corporation shall
propose to take any action of the type described in clause (i), (ii) or (iii)
of subparagraph 3(g), the Corporation shall give notice to each holder of
shares of Preferred Stock, in the manner set forth in subparagraph 3(h), which
notice shall specify the record date, if any, with respect to any such action
and the approximate date on which such action is to take place. Such notice
shall also set forth such facts with respect thereto as shall be reasonably
necessary to indicate the effect of such action (to the extent such effect may
be known at the date of such notice) on the Conversion Ratio and the number,
kind or class of shares which shall be deliverable upon conversion of shares
of Preferred Stock. In the case of any action which would require the fixing
of a record date, such notice shall be given at least 10 days prior to the
date so fixed, and in case of all other action, such notice shall be given at
least 15 days prior to the taking of such proposed action. Failure to give
such notice, or any defect therein, shall not affect the legality or validity
of any such action.
(j) Treasury Stock. For the purposes of this paragraph 3, the
sale or other disposition of any Common Stock theretofore held in the
Corporation's treasury shall be deemed to be an issuance thereof.
(k) Costs. The Corporation shall pay all documentary, stamp,
transfer or other transactional taxes attributable to the issuance or delivery
of shares of Common Stock upon conversion of any shares of Preferred Stock;
provided that the Corporation shall not be required to pay any taxes which may
be payable in respect of any transfer involved in the issuance or delivery of
any certificate for such shares in a name other than that of the holder of the
shares of Preferred Stock in respect of which such shares are being issued.
(l) Reservation of Shares. The Corporation shall reserve at all
times so long as any shares of Preferred Stock remain outstanding, free from
preemptive rights, out of its treasury stock (if applicable) or its authorized
but unissued shares of Common Stock, or both, solely for the purpose of
effecting the conversion of the shares of Preferred Stock, sufficient shares
of Common Stock to provide for the conversion of all outstanding shares of
Preferred Stock.
(m) Approvals. If any shares of Common Stock to be reserved for
the purpose of conversion of shares of Preferred Stock require registration
with or approval of any governmental authority under any Federal or state law
before such shares may be validly issued or delivered, then the Corporation
will in good faith and as expeditiously as possible endeavor to secure such
registration or approval, as the case may be. If, and so long as, any shares
of Common Stock into which the shares of Preferred Stock are then convertible
are listed on any national securities exchange, the Corporation will, if
permitted by the rules of such exchange, list and keep listed on such
exchange, upon official notice of issuance, all such shares issuable upon
conversion.
(n) Valid Issuance. All shares of Common Stock which may be
issued upon conversion of the shares of Preferred Stock will upon issuance by
the Corporation be duly and validly issued, fully paid and nonassessable and
free from all taxes, liens and charges with respect to the issuance thereof,
and the Corporation shall take no action which will cause a contrary result.
4. Voting Rights. The holders of the shares of the Preferred Stock
will be entitled to one vote per share of Preferred Stock held by them to vote
upon all matters which the holders of shares of the Company's Common Stock
shall have the right to vote. In all cases, as a matter of law, where the
holders of shares of Preferred Stock shall have the right to vote separately
as a class, such holders will also be entitled to one vote per share of
Preferred Stock held by them.
The affirmative vote or consent of the holders of at least two-thirds of
the outstanding shares of the Preferred Stock, voting as a class, will be
required to (i) authorize, create or issue, or increase the authorized or
issued amount of, shares of any class or series of stock ranking senior to the
Preferred Stock, either as to dividends or upon liquidation, or (ii) amend,
alter or repeal (whether by merger, consolidation or otherwise) any provisions
of the Company's Articles of Incorporation or of the Statement of Resolution
establishing this series of Preferred Stock so as to materially and adversely
affect the preferences, special rights or powers of the Preferred Stock;
provided, however, that any increase in the authorized preferred stock or the
creation and issuance of any other series of preferred stock ranking on a
parity with or junior to the Preferred Stock shall not be deemed to materially
and adversely affect such preferences, special rights or powers.
5. Liquidation Rights. Upon the dissolution, liquidation or winding
up of the Corporation, whether voluntary or involuntary, the holders of the
shares of this series of Preferred Stock shall be entitled to receive, before
any payment or distribution of the assets of the Corporation or proceeds
thereof (whether capital or surplus) shall be made to or set apart for the
holders of the Common Stock or any other class or series of stock ranking
junior to the shares of this series of Preferred Stock upon liquidation,
including without limitation the Series C Preferred Stock, the amount of One
Dollar and Fifteen Cents ($1.15) per share, plus a sum equal to all dividends
on such shares (whether or not earned or declared) accrued and unpaid thereon
to the date of final distribution, but such holders shall not be entitled to
any further payment. If, upon any liquidation, dissolution or winding-up of
the Corporation, the assets of the Corporation, or proceeds thereof,
distributable among the holders of shares of the Preferred Stock and any other
class or series of preferred stock ranking on a parity with the Preferred
Stock as to payments upon liquidation, dissolution or winding-up shall be
insufficient to pay in full the preferential amount foresaid, then such assets
or the proceeds thereof shall be distributed among such holders ratably in
accordance with the respective amounts which would be payable on such shares
if all amounts payable thereon were paid in full. For the purposes of this
paragraph 5, the voluntary sale, conveyance, lease, exchange or transfer (for
cash, shares of stock, securities or other consideration) of all or
substantially all the property or assets of the Corporation to, or a
consolidation or merger of the Corporation with, one or more corporations
(whether or not the Corporation is the corporation surviving such
consolidation or merger) shall not be deemed to be a liquidation, dissolution
or winding-up, voluntary or involuntary.
6. Registration Rights.
(a) Registration on Request. Upon the written request of any
holder or holders of at least fifty-one percent (51%) in the aggregate number
of shares of the Preferred Stock and/or shares of Common Stock ("Shares")
issued upon conversion of such Preferred Stock (provided that in computing
such 51% amount the number of shares of Preferred Stock and Common Stock shall
be weighted proportionately taking into account the Conversion Ratio with
respect to which such shares of Common Stock were issued upon conversion),
which request shall state the intended method of disposition by such holder or
holders and shall request that the Company effect the registration of all or
part of such Shares, or the Shares issuable upon the conversion of such
Preferred Stock, or both, under the Securities Act of 1933, as amended (the
"Act"), the Company will promptly give written notice of such requested
registration to all holders of outstanding Preferred Stock and Shares, and
thereupon will use its best efforts to effect the registration under the Act
of:
(i) the Shares which the Company has been so requested to
register, for disposition in accordance with the intended method of
disposition stated in such request, and
(ii) all other outstanding Shares, or Shares issuable upon
the conversion of Preferred Stock, the holders of which shall have made
written request (stating the intended method of disposition of such securities
by such holders) to the Company for registration thereof within thirty (30)
days after the receipt of such written notice from the Company,all to the
extent requisite to permit the disposition (in accordance with the intended
methods thereof as aforesaid) by the holders of the Shares so registered and
to maintain such registration in effect for a period of twenty-four (24)
months from the effective date of such registration statement; provided, that
the Company shall not be required to register or use its best efforts to
effect any registration of Shares under the Act pursuant to this paragraph
6(a) more than once. In the event that, as a result of such registration,
another person with incidental registration rights granted by the company
requests that the Company include securities of such person in such
registration, such request will not result in a reduction in the number of
securities of the holder or holders of the Preferred Stock and/or Shares to be
included in such registration.
The Company shall have no obligation to register or use its best efforts
to effect any registration of Shares under the Act pursuant to this paragraph
6 which would be in conflict with the obligations of any holder or holders of
Preferred Stock and/or Shares under any confidentiality agreement between such
holder or holders and the Company entered into in connection with the offering
of the Preferred Stock to such holder or holders.
(b) Incidental Registration. If the Company at any time
proposes to register any of its securities under the Act (otherwise than
pursuant to paragraph 6(a) and other than a registration on Form S-8, or the
form, if any, which supplants such Form), it will at such time give written
notice to all holders of outstanding Preferred Stock and Shares of its
intention to do so and, upon the written request of any such holder made
within thirty (30) days after the receipt of any such notice (which request
shall specify the Shares intended to be disposed of by such holder and state
the intended method of disposition thereof), the Company will use its best
efforts to cause all such outstanding Shares, or Shares issuable upon the
conversion of Preferred Stock, the holders of which shall have so requested
the registration thereof, to be registered under the Act to the extent
requisite to permit the disposition (in accordance with the intended methods
thereof as aforesaid) of the Shares so registered; provided that, if in the
good faith judgment of the managing underwriter or underwriters of a then
proposed public offering of the Company's securities, such registration of
such Shares would materially and adversely affect such public offering, then
in such event the number of Shares and other securities to be registered by
the Company shall each be proportionally reduced to such number as shall be
acceptable to the managing underwriter, subject to Section 6(a) above.
(c) Registration Procedures. If and whenever the Company is
required to use its best efforts to effect or cause the registration of any
Shares under the Act as provided in this paragraph 6, the Company will, as
expeditiously as possible:
(i) prepare and file with the Securities and Exchange
Commission (the "Commission") a registration statement with respect to such
Shares and use its best efforts to cause such registration statement to become
effective;
(ii) prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective for such period not exceeding twenty-four (24) months from the
effective date of such registration statement as may be necessary to comply
with the provisions of the Act with respect to the disposition of all Shares
covered by such registration statement during such period in accordance with
the intended methods of disposition by the seller or sellers thereof set forth
in such registration statement;
(iii) furnish to each seller of such Shares such number of
copies of such registration statement and of each such amendment and
supplement thereto (in each case including all exhibits), such number of
copies of the prospectus included in such registration statement (including
each preliminary prospectus and, if any seller shall so request, a summary
prospectus), in conformity with the requirements of the Act, and such other
documents, as such seller may reasonably request in order to facilitate the
disposition of the Shares owned by such seller;
(iv) use its best efforts to register or qualify such
Shares covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as each seller shall reasonably request
and as agreed to by the Corporation, and do any and all other acts and things
which may be reasonably necessary or advisable to enable such seller to
consummate the disposition in such jurisdictions of the Shares owned by such
seller; and
(v) notify each seller of any such Shares covered by such
registration statement, at any time when a prospectus relating thereto is
required to be delivered under the Act within the period mentioned in
subdivision (b) of this paragraph 6(c), of the happening of any event as a
result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing, and at the request of any such seller prepare and furnish to such
seller a reasonable number of copies of a supplement to or an amendment of
such prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Shares, such prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in
the light of the circumstances then existing.
(d) Registration Expenses. All expenses incident to the
Company's performance of or compliance with this paragraph 6, including,
without limitation, all registration and filing fees, fees and expenses of
complying with securities or blue sky laws, printing expenses and fees and
disbursements of counsel for the Company and of independent public
accountants, but excluding underwriting commissions and discounts, the fees of
any counsel engaged by the holder or holders, and any filing fees associated
with shares of Preferred Stock, but not Common Stock, being listed with a
national securities exchange or quoted on the NASDAQ National Market System or
Small Cap Market, shall be borne by the Company.
(e) Indemnification.
(i) In the event of any registration of any Shares under
the Act pursuant to this paragraph 6, the Company will, to the extent
permitted by law, indemnify and hold harmless the seller of such Shares and
each underwriter of such securities and each other person, if any, who
controls such seller or underwriter within the meaning of the Act, against any
losses, claims, damages, or liabilities, joint or several, to which such
seller or underwriter or controlling person may become subject, under the Act
or otherwise, insofar as such losses, claims, damages, or liabilities (or
actions in respect thereof) arise out of or are based upon (x) any untrue
statement or alleged untrue statement of any material fact contained, on the
effective date thereof, in any registration statement under which such
securities were registered under the Act, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereto, or (y)
any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading;
and the Company will reimburse such seller and each such underwriter and each
such controlling person for any legal or any other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability, or action, provided that the Company shall not be
liable in any such case to the extent that any such loss, claim, damage, or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement,
any such preliminary prospectus, final prospectus, amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company through an instrument duly executed by such seller or underwriter
specifically for use in the preparation thereof.
(ii) The Company may require, as a condition to including
any Shares in any registration statement filed pursuant to paragraph 6(c),
that the Company shall have received an undertaking satisfactory to it from
the prospective seller of such Shares and from each underwriter of such
Shares, to indemnify and hold harmless (in the same manner and to the same
extent as set forth in paragraph 6(e)(i)) the Company, each director of the
Company, each officer of the Company who shall sign such registration
statement and any person who controls the Company within the meaning of the
Act, with respect to any statement or omission from such registration
statement, any preliminary prospectus or final prospectus contained therein,
or any amendment or supplement thereto, if such statement or omission was made
in reliance upon and in conformity with written information furnished to the
Company through an instrument duly executed by such seller or underwriter
specifically for use in the preparation of such registration statement,
preliminary prospectus, final prospectus, amendment, or supplement.
(iii) Promptly after receipt by an indemnified party of
notice of the commencement of any action involving a claim referred to in the
preceding subparagraphs of this paragraph 6(e), such indemnified party will,
if a claim in respect thereof is to be made against an indemnifying party,
give written notice to the latter of the commencement of such action, provided
that the failure of any indemnified party to give notice as provided therein
shall not relieve the indemnifying party of its obligations under the
preceding subdivisions of this paragraph 6(e). In case any such action is
brought against an indemnified party, the indemnifying party will be entitled
to participate in and to assume the defense thereof, jointly with any other
indemnifying party similarly notified to the extent that it may wish, with
counsel reasonably satisfactory to such indemnified party, and after notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof the indemnifying party will not be liable to such
indemnified party for any legal or other expenses subsequently incurred by the
latter in connection with the defense thereof. No indemnifying party, in the
defense of any such claim or litigation, shall, except with the consent of
each indemnified party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving
by the claimant or plaintiff to such indemnified party of a release from all
liability in respect to such claim or litigation.
7. Redemption Rights.
(a) Company's Redemption Option. Except for any redemption
which the Company would be prohibited from effecting under applicable law, and
provided the shares of Preferred Stock of a holder have not earlier been
converted in accordance with the provisions hereof, the shares of Preferred
Stock may be redeemed by the Company, in whole or in part, at the option of
the Company upon written notice by the Company to the holders of Preferred
Stock at any time after December 1, 2001, in the event that the Preferred
Stock of one or more holders has not been converted pursuant to the terms
hereof on or before such date. The Company shall redeem each share of
Preferred Stock of such holders within thirty (30) days of the Company's
delivery of the above notice to such holders and such holders shall surrender
the certificate(s) representing such shares of Preferred Stock. For any
partial redemptions the Company shall redeem shares in proportion to the
number of shares held by each holder. The redemption amount shall be One
Dollar and Seventy-five Cents ($1.75) per share, plus in each case accrued and
unpaid dividends thereon to the date of payment of such amount (the total sum
so payable on any such redemption being herein referred to as the "redemption
price").
(b) Redemption Notice. Notice of any redemption pursuant to
this paragraph 7 shall be mailed to the party or parties required to receive
such notice at the principal office or residence address for such party or
parties. Each such notice shall state: (1) the election of the redemption
option and the facts which give rise to such option; and (2) the number of
shares of Preferred Stock which are being elected to be redeemed. From and
after the date of the Company's payment of the redemption price to such holder
or holders in accordance with such redemption notice (the "redemption date"),
notwithstanding that any certificates for such shares shall not have been
surrendered for cancellation, the shares represented thereby shall no longer
be deemed outstanding, the rights to receive dividends and distributions shall
cease to accrue from and after the redemption date, and all rights of such
holder or holders of the shares of Preferred Stock as a stockholder of the
Corporation with respect to such shares, shall cease and terminate.
8. Special rights. So long as, but only so long as, the shares of
Preferred Stock are held by WEDGE Energy Services, L.L.C., a Delaware limited
liability company ("WEDGE"), or by an affiliate of WEDGE (collectively
"Holder"), the shares of Preferred Stock shall have the following special
rights:
(a) Right of Participation.
(i) Grant of Right of Participation. The Company hereby
grants the Holder a right of participation to participate in any additional
equity offerings which the Company may offer, up to the Holder Percentage (as
defined below), on the following terms and conditions. In the event that the
Company has received a bona fide offer (which the Company desires to accept)
with respect to the issuance of any equity securities (including, without
limitation, any common or preferred stock, any options (excluding the
Company's 1993 Stock Option Plan or any future employee stock option plan
approved by the Company's shareholders), warrants, rights, unsecured
convertible notes, convertible debentures, or other convertible securities),
the Company shall immediately give written notice thereof (the "Notice") to
the Holder of the Preferred Stock. The Notice shall state the name of the
party proposing to provide the offering and all the pertinent terms and
conditions of such offering. This right shall expire upon the later to occur
of the following: (a) the conversion by the Holder of the Preferred Stock into
Common Stock, or (b) the tenth anniversary of the date of the filing of this
Statement.
(ii) Procedure. The Holder shall have fourteen (14) days
from the date the Notice was given to indicate to the Company, in writing,
that the Holder undertakes to participate in the offering under the terms and
conditions set forth in the Notice. If the Holder undertakes to participate
in such offering, then the Company shall be obligated to accept such
participation up to the Holder Percentage upon the terms and conditions set
forth in the Notice and the parties shall use their best efforts to enter into
a definitive agreement relating to such offering. In the event that the
Holder declines to participate in such offering, the Company shall have the
right to accept such offering from the third party without participation by
the Holder provided that it does so upon the terms and conditions set forth in
the Notice. In the event that such offering is not consummated within sixty
(60) days after the date the Notice was given, the Company shall not
consummate such offering without again complying with this subparagraph
8(a)(ii).
(iii) Holder Percentage. For purposes hereof, the term
"Holder Percentage" shall mean that percentage calculated, on a fully diluted
basis, as if the Holder had (a) converted the Preferred Stock into Common
Stock, which number shall constitute the numerator, and (b) divided by the
denominator, which shall be equal to the total number of shares of Common
Stock issued and outstanding as of such date, plus (i) that number of shares
of Common Stock issuable upon the conversion of all convertible securities of
the Company, including, without limitation, the Preferred Stock, and (ii) that
number of shares of Common Stock issuable upon the exercise of all options and
warrants utilizing the "treasury method" as of such date. Under the treasury
method, only shares issuable upon the exercise of "in the money" options and
warrants are considered in the calculation and the net dilution is that number
of shares issuable upon such exercise net of that number of shares which could
have been purchased with the proceeds from the exercise of the options and
warrants at the then market price. For example, assuming 100,000 options are
outstanding at a strike price of $1.00 per share and that the market price of
the Common Stock is $2.50 per share, under the treasury method, the proceeds
from the exercise of the options would equal $100,000 and such proceeds would
purchase 40,000 shares of Common Stock at the market price of $2.50 per share.
The net dilution is 60,000 shares, which number of shares is utilized in the
calculation of the Holder Percentage under the above formula.
(b) Restriction on Payment of Cash Dividends and Interest. The
Company agrees that so long as the Holder owns shares of Preferred Stock
representing at least ten percent (10%) of the shares of capital stock of the
Company on a fully diluted basis utilizing the "treasury method" as described
in subparagraph 8(a)(iii) above, it shall not pay any cash dividends or any
interest accruals on any equity security or any debt security (excluding any
Superior Indebtedness as defined in that certain Debenture Agreement dated
December 10, 1999, between the Company and WEDGE (the "Debenture Agreement")
on file at the Company's principal office), in existence as of the date hereof
or created hereafter unless and until the Company's earnings before deduction
of interest, taxes, depreciation and amortization ("EBITDA") for the six (6)
months ended with the quarter for the last quarterly report which the Company
is required to furnish to WEDGE under Section 4.01 of the Debenture Agreement
are more than 125% of the Company's obligations for all dividends and interest
due and payable on all outstanding securities of the Company as of such time.
(c) Prohibition Against Capital Expenditures. The Company
agrees that so long as Holder owns shares of Preferred Stock representing at
least ten percent (10%) of the shares of capital stock of the Company on a
fully diluted basis utilizing the "treasury method" as described in
subparagraph 8(a)(iii) above, the Company will not incur, or commit to incur,
any capital expenditures of any kind or nature in excess of $50,000 without
the approval by the Board of Directors of the Company, and, in addition, the
Company agrees that, until the Company has expended the $2,500,000 in proceeds
from the issuance of the Debenture, from the date hereof there shall be no
capital expenditure in excess of $50,000 without the affirmative written
consent of WEDGE or its affiliate.
9. Exclusion of Other Rights. Except as may otherwise be required by
law, the shares of Preferred Stock shall not have any preferences or relative,
participating, optional or other special rights, other than those specifically
set forth in this resolution (as such resolution may be amended from time to
time) and in the Corporation's Certificate of Incorporation. The shares of
Preferred Stock shall have no preemptive or subscription rights.
10. Severability of Provisions. If any right, preference or
limitation of the Preferred Stock set forth in this resolution (as such
resolution may be amended from time to time) is invalid, unlawful or incapable
of being enforced by reason of any rule or law or public policy, all other
rights, preferences and limitations set forth in this resolution (as so
amended) which can be given effect without the invalid, unlawful or
unenforceable right, preference or limitation herein set forth shall be deemed
enforceable and not dependent upon any other such right, preference or
limitation unless so expressed herein.
11. Status of Reacquired Shares. Shares of Preferred Stock which have
been issued and reacquired in any manner shall (upon compliance with any
applicable provisions of the laws of the State of Texas) have the status of
authorized and unissued shares of Preferred Stock issuable in series
undesignated as to series and may be redesignated and reissued.
[END]
