10-Q 1 h06132e10vq.txt GRANT GEOPHYSICAL, INC.- MARCH 31, 2003 =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ ] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended March 31, 2003 Commission file number: 333-89863* GRANT GEOPHYSICAL, INC. (Exact name of registrant as specified in its charter) Delaware 76-0548468 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 16850 Park Row, Houston, Texas 77084 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (281) 398-9503 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [ ] As of July 15, 2003, 14,547,055 shares of common stock, par value $.001 per share, were issued and outstanding. As of such date, there was no public market for the common stock. ------------------------------------------------------------------------------- * The Commission file number refers to a Form S-1 registration statement filed by the registrant under the Securities Act of 1933, which became effective January 12, 2000. =============================================================================== 1 GRANT GEOPHYSICAL, INC. INDEX TO FORM 10-Q QUARTER ENDED MARCH 31, 2003 PAGE(S) PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of December 31, 2002 and March 31, 2003 3 Consolidated Statements of Operations for the Three Months Ended March 31, 2002 and 2003 4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2003 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk 16 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds 17 Item 3. Defaults on Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 6. Exhibits and Reports on Form 8-K 18 PART III. SIGNATURES & CERTIFICATIONS 19 2 GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)

~~PAGE~~DECEMBER 31, MARCH 31, 2002 2003 ---------- ~~PART~~---------- I.(UNAUDITED) ~~FINANCIAL~~ASSETS ~~INFORMATION~~Current ~~Item~~assets: 1.Cash ~~Financial~~and ~~Statements~~cash ~~Consolidated~~equivalents ~~Balance~~$ ~~Sheets~~6,405 as$ 3,960 Restricted cash 858 -- Accounts receivable: Trade (net of allowance for doubtful accounts of $538 and $509 at December 31, ~~2001~~2002 and ~~September~~March 3031, ~~2002~~2003, 3respectively) ~~Consolidated~~11,358 ~~Statements~~17,653 ofOther ~~Operations~~4,560 ~~for~~5,238 ~~the~~Inventories ~~Three~~511 336 Prepayments and ~~Nine~~other ~~Months~~2,186 ~~Ended~~1,971 ~~September~~Work 30in process 1,107 ~~2001~~2,818 ---------- ---------- Total current assets 26,985 31,976 Property, plant and ~~2002~~equipment, 4at ~~Consolidated~~cost ~~Statements~~104,241 of93,905 ~~Cash~~Less: ~~Flows~~accumulated ~~for~~amortization ~~the~~79,399 ~~Nine~~69,796 ~~Months~~---------- ~~Ended~~---------- ~~September~~Net 30property, ~~2001~~plant and ~~2002~~equipment 524,842 ~~Notes~~24,109 toMulti-client ~~Consolidated~~data ~~Financial~~library ~~Statements~~- 6non ~~Item~~current 2.404 ~~Management~~384 Other assets 1,707 1,489 ---------- ---------- Total assets $ 53,938 $ 57,958 ========== ========== LIABILITIES AND STOCKHOLDERS's ~~Discussion~~EQUITY ~~and~~Current ~~Analysis~~liabilities: Notes payable, current portion of ~~Financial~~long-term ~~Condition~~debt and ~~Results~~capital oflease ~~Operations~~obligations 12$ ~~Item~~80,745 $ 79,676 Term loan - affiliate 7,500 7,500 Accounts payable 6,301 10,401 Accrued expenses 8,414 7,666 Accrued interest 2,929 4,486 Unearned revenue-current 3.,727 ~~Quantitative~~1,051 Foreign income taxes payable 2,516 2,617 ---------- ---------- Total current liabilities 112,132 113,397 Long-term debt and ~~Qualitative~~capital ~~Disclosures~~lease ~~about~~obligations ~~Market~~3,890 ~~Risk~~5,508 17Unearned ~~Item~~revenue 4.- ~~Controls~~non current 391 391 Other liabilities and ~~Procedures~~deferred 17credits ~~PART~~468 II468 Stockholders' equity: Preferred stock, $.001 ~~OTHER~~par ~~INFORMATION~~value. ~~Item~~Authorized 1.,000,000 ~~Legal~~shares ~~Proceedings~~8% 18convertible ~~Item~~preferred 2.series, ~~Changes~~liquidation invalue ~~Securities~~$100 per share issued and ~~Use~~outstanding of671,550 ~~Proceeds~~shares 18at ~~Item~~December 3.31, ~~Defaults~~2002 onand ~~Senior~~685,090 ~~Securities~~shares 18at ~~Item~~March 431, 2003, respectively 67,155 68,509 Common stock, $.001 ~~Submission~~par ofvalue. ~~Matters~~Authorized to50,000,000; ashares ~~Vote~~issued ofand ~~Security~~outstanding ~~Holders~~14,547,055 18shares ~~Item~~at 6.December ~~Exhibits~~31, 2002 and ~~Reports~~March on31, ~~Form~~2003 815 15 Additional paid-Kin 18capital ~~SIGNATURES~~58,867 ~~AND~~58,867 ~~CERTIFICATIONS~~Accumulated 20deficit (186,886) (187,267) Accumulated other comprehensive income (2,094) (1,930) ---------- ---------- Total stockholders' equity (62,943) (61,806) ---------- ---------- Total liabilities and stockholders' equity $ 53,938 $ 57,958 ========== ==========

See accompanying Notes to Consolidated Financial Statements. 3 GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) THREE MONTHS ENDED MARCH 31, ----------------------- 2002 2003 -------- -------- (UNAUDITED) Revenues $ 29,313 $ 28,805 Expenses: Direct operating expenses 23,347 20,588 Selling, general and administrative expenses 2,158 3,000 Depreciation and amortization 2,327 2,669 -------- -------- Total costs and expenses 27,832 26,257 -------- -------- Operating income 1,481 2,548 Other income (expense): Interest, net (1,742) (2,011) Other 3 951 -------- -------- Total other expense (1,739) (1,060) -------- -------- Income (loss) before taxes (258) 1,488 Income tax expense 782 516 -------- -------- Net income (loss) (1,040) 972 Preferred dividend requirements 1,248 1,353 -------- -------- Net loss applicable to common stock $ (2,288) $ (381) ======== ======== LOSS PER COMMON SHARE - BASIC AND DILUTED: Net income (loss) $ (0.07) $ 0.07 Dividend requirements on pay-in-kind Preferred stock (0.09) (0.09) -------- -------- Net income(loss) per common share $ (0.16) $ (0.02) ======== ======== See accompanying Notes to Consolidated Financial Statements. 4 GRANT GEOPHYSICAL, INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)

~~DECEMBER~~THREE ~~31,~~MONTHS ~~SEPTEMBER~~ENDED 30MARCH 31, ~~2001 2002~~ -------------------------- 2002 2003 -------- -------- (UNAUDITED) ~~ASSETS~~CASH ~~Current~~FLOWS ~~assets:~~FROM ~~Cash~~OPERATING ~~and~~ACTIVITIES: ~~cash~~NET ~~equivalents~~INCOME (LOSS) $ 2(1,~~471~~040) $ ~~3,436~~972 ~~Restricted~~ADJUSTMENTS ~~cash~~TO 17RECONCILE 17NET ~~Accounts~~LOSS ~~receivable:~~TO ~~Trade~~NET ~~(net~~CASH ofPROVIDED ~~allowance~~BY ~~for~~(USED ~~doubtful~~IN) ~~accounts~~OPERATING ofACTIVITIES: ~~$790~~Depreciation and ~~$538~~amortization atexpense ~~December~~2,283 312,623 ~~2001~~Multi-client ~~and~~data ~~September~~library ~~30,~~amortization ~~2002,~~expense ~~respectively~~44 46 (Gain) ~~14,142~~loss ~~12,989~~on ~~Other~~sale ~~3,696~~of ~~2,770~~fixed ~~Inventories~~assets ~~447~~(20) ~~500~~(998) ~~Prepaids~~Provision ~~and~~for ~~other~~doubtful ~~2,146~~accounts ~~3,000~~9 ~~Work~~9 inExchange ~~process~~loss ~~1,511~~144 ~~1,754~~(49) ~~----------~~Other non-~~--------~~cash ~~Total~~items ~~current~~10 ~~assets~~9 ~~24,430~~CHANGES ~~24,466~~IN ~~Property,~~ASSETS ~~plant~~AND ~~and~~LIABILITIES: ~~equipment~~(INCREASE) ~~95,423~~DECREASE ~~96,606 Less~~IN: ~~accumulated~~Restricted ~~depreciation~~cash ~~and amortization 76,370 80,047~~ --~~--------~~ ~~---------~~858 ~~Net~~Accounts ~~property,~~receivable ~~plant and equipment 19~~(3,~~053~~629) 16(6,~~559~~982) ~~Multi-client~~Inventories ~~data~~208 ~~library~~175 --Prepaids ~~non~~(20) ~~current,~~215 ~~net~~Work ~~599~~in ~~457~~process ~~Other assets~~ 1,~~843~~003 (1,~~852~~711) ~~----------~~Other ~~--------- Total~~ assets $80 ~~45,925~~218 $INCREASE ~~43,334~~(DECREASE) ~~========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities~~IN: ~~Notes~~Accounts payable (1,624) ~~current~~4,101 ~~portion~~Accrued ofinterest ~~long-term debt~~ and ~~capital~~other ~~lease~~expenses ~~obligations $ 63~~(4,~~776~~630) ~~$ 74~~(1,~~546~~868) ~~Term~~Foreign ~~loan~~income -tax ~~Elliott 7,500 7,500 Accounts~~ payable ~~12,471~~774 ~~8,532~~101 ~~Accrued~~Other ~~expenses~~liabilities ~~9,402~~and ~~8,348~~deferred ~~Accrued~~credit ~~interest~~(24) ~~1,854 1,561 Unearned revenue~~-~~current~~ ~~4,349 3,938 Foreign income taxes payable 1,272 853~~ ---------- --------- ~~Total~~NET ~~current~~CASH ~~liabilities~~USED ~~100,624~~IN ~~105,278~~OPERATING ~~Long-term~~ACTIVITIES ~~debt~~(6,432) ~~and~~(2,281) ~~capital~~CASH ~~lease~~FLOWS ~~obligations~~FROM ~~719~~INVESTING ~~387~~ACTIVITIES: ~~Unearned~~Capital ~~revenue -- non current 782 782 Other liabilities and deferred credits 1~~expenditures,~~399~~ ~~1,048~~net ~~Stockholders' equity~~ (~~deficit~~1,145): ~~Preferred~~103 ~~stock,~~Multi-client ~~$.001~~data ~~par~~library ~~value.~~-- ~~Authorized~~-- ~~5,000,000~~Proceeds ~~shares~~from 8%sale ~~convertible~~of ~~preferred~~assets ~~series~~34 1,959 ~~liquidation~~-------- ~~value~~-------- ~~$100~~NET ~~per~~CASH ~~share~~PROVIDED ~~issued~~BY ~~and~~(USED ~~outstanding~~IN) ~~620,408~~INVESTING ~~shares~~ACTIVITIES ~~at December 31~~(1,111) ~~2001 and 658~~2,~~276~~062 ~~shares~~CASH atFLOWS ~~September~~FROM ~~30,~~FINANCING ~~2002,~~ACTIVITIES: ~~respectively~~Borrowings ~~62,041~~made 6514,~~828~~645 ~~Common stock~~1,613 ~~$.001~~Repayment ~~par~~on ~~value.~~borrowings ~~Authorized 50~~(8,~~000,000~~469) ~~shares; 14~~(3,~~547,055~~824) ~~shares~~-------- ~~issued~~-------- ~~and~~NET ~~outstanding~~CASH atPROVIDED ~~December~~BY ~~31,~~(USED ~~2001~~IN) ~~and~~FINANCING ~~September~~ACTIVITIES 306,176 ~~2002~~(2,211) 15-------- ~~15 Additional paid~~-in------- ~~capital~~EFFECT ~~58,867~~OF ~~58,867~~EXCHANGE ~~Accumulated~~RATE ~~deficit~~USED ~~(176,194)~~IN ~~(186,670)~~CHANGES ~~Accumulated~~ON ~~other~~CASH ~~comprehensive income~~ (~~2,328~~114) (~~2,201~~15) ---------- ---------- ~~Total~~NET ~~stockholders'~~DECREASE ~~equity~~IN ~~(deficit)~~CASH AND CASH EQUIVALENTS (571,~~599~~481) (642,~~161~~445) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,471 6,405 ---------- ---------- ~~Total~~CASH ~~liabilities~~AND ~~and~~CASH ~~stockholders'~~EQUIVALENTS ~~equity~~AT ~~(deficit)~~END OF PERIOD $ ~~45,925~~990 $ 433,~~334~~960 ========== =========

See accompanying Notes to Consolidated Financial Statements. 5 GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) INDUSTRY CONDITIONS/LIQUIDITY/GOING CONCERN The liquidity of the Company should be considered in light of the cyclical nature of demand for land and transition zone seismic services. These fluctuations have rapidly impacted the Company's liquidity as supply and demand factors directly affect pricing. The Company's ability to meet its debt service and other obligations depends on its future performance, which in turn is subject to general economic conditions, activity levels in the oil and gas exploration sector, and other factors beyond the Company's control. The market for seismic services domestically and in Canada remain depressed, but management believes there has been recent improvement in market conditions in Latin America and the Far East, however funds to finance operations are expected to remain limited through 2003 and may not permit the Company to continue its operations in the ordinary course of business. The Company is currently in default under its credit facility (the "Credit Facility"), with Elliott Associates, L.P. ("Elliott") as well as under the indenture under which the Company's 9 3/4% Senior Notes due 2008 (the "Senior Notes") were issued. The Company has not made any payment of principal or interest to Elliott in 2003, and the Company did not make the February 18, 2003 scheduled interest payment on the Senior Notes. As a result of the event of default under the indenture, the trustee, or the holders of a specified percentage in aggregate principal amount of the Senior Notes, could take the steps necessary to cause the Senior Notes to become immediately due and payable. As of the date of this report, neither the trustee nor such holders has exercised this right. Additionally, the event of default under the Senior Notes constitutes an event of default under the Credit Facility, which entitles Elliott to accelerate the maturity of all amounts owing under the Credit Facility and to exercise remedies to collect such amounts as provided under the Credit Facility and the related security agreements. As of the date of this report, Elliott has not exercised this right. Accordingly, the Company has classified $43.5 million of otherwise long-term debt related to the Senior Notes and $24.2 million of otherwise long-term debt related to the Credit Facility as current and expects to continue to do so for the foreseeable future. If the maturity of any of the Company's debt was accelerated, it would be unlikely that the Company would be able to continue its operations without seeking protection from its creditors under the federal bankruptcy code. Additionally, as a result of the defaults, the Company does not expect that any additional amounts will be made available to the Company under the Credit Facility. There are currently no additional committed sources of financing available to the Company and no availability under its existing facilities. The Company has in the past relied on its majority stockholder, Elliott, to provide credit support and interim funding. Elliott has indicated to the Company that it will not commit to provide additional financial and credit support to the Company during 2003. Even if the Company's operating results continue to improve and cost control initiatives are successful during 2003, the Company will require additional financing, or waivers on current debt obligations, to sustain its operations and meet its debt service requirements as those amounts become due. There can be no assurance that amounts that become due in 2003 can be paid or refinanced or that any additional financing can be obtained to meet the Company's needs. The Company has incurred significant net losses during each of the past three years and has operated with working capital deficits during this period. As a result, the Company's capital requirements during 2002 were funded primarily through $7.7 million in funds provided by Elliott pursuant to a factoring arrangement and $8.2 million of funds provided by Foothill, and cash collateralized by Elliott, under the supplemental term loan of the Credit Facility, as well as close management of the Company's accounts receivable and payables. The Company will need to attain profitable operating levels in order to provide sufficient cash flow to service its debt, maintain its operations, fund capital expenditures and service existing equipment financing obligations. While the Company was able to generate operating income in 2002, the overcapacity in the seismic service industry and the Company's increased reliance on international operations will require that the Company continue to closely manage its available cash resources. Because of the high costs associated with equipping and operating crews outside of North America and the time generally required to process billings and receive payments, the Company expects to require significant amounts of liquidity to support its international projects. The Company has approximately $161.2 million of debt and preferred stock outstanding at March 31, 2003. Currently, the Company's highly leveraged capital structure negatively impacts and will continue to negatively impact its profitability and cash flow. If the Company is not able to significantly improve its operations or obtain additional financing, either from Elliott or other sources, a financial restructuring will be required to allow the Company to be a viable entity on a long-term basis. 6 The Company's management is currently in discussions with the ad hoc steering committee of the holders of the Senior Notes and Elliott concerning a debt-for-equity exchange or other comprehensive restructuring of the Company's indebtedness that, among other things, would resolve the interest payment default under the Senior Notes, and because other defaults have been waived through June 30, 2003, would eliminate Elliott's right to accelerate amounts outstanding under the Credit Facility through the date of the existing waiver. Additionally, the Company has taken measures to reduce costs through consolidation of certain locations, resizing its Canadian operation in reaction to reduced current demand levels, and to reduce overhead personnel. Should such measures be unsuccessful, or should any of the Company's creditors exercise their right to accelerate their amounts outstanding, there would be substantial doubt about the Company's ability to continue as a going concern. If the maturity of any of the Company's debt was accelerated, it would be unlikely that the Company would be able to continue its operations without seeking protection from its creditors under the federal bankruptcy code. The accompanying financial statements do not include any adjustments that might result from the outcome of those uncertainties. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND INDUSTRY CONDITIONS The consolidated balance sheets of the Company as of March 31, 2003 and the related consolidated statements of operations and cash flows for the three months ended March 31, 2002 and 2003 are unaudited. In the opinion of management, the accompanying unaudited condensed financial statements of the Company and its consolidated subsidiaries contain all adjustments (consisting only of normal, recurring adjustments) necessary to present fairly the Company's financial position as of March 31, 2003 and the results of its operations and cash flows for the three months ended March 31, 2002 and 2003, respectively. Results of operations for the interim periods included herein are not necessarily indicative of results of operations for the full year periods. The consolidated financial statements should be read in conjunction with the audited financial statements and footnotes for the year ended December 31, 2002, included in the Company's Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (the "Commission"). Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Revenues Revenue from cancelable exclusive seismic surveys is recognized as the services are performed or, when applicable, in accordance with contractual milestones then chargeable to the customer in accordance with contract terms. Anticipated losses on survey contracts are recognized when such losses are determinable. Revenue from non-cancelable exclusive and non-exclusive seismic surveys is recognized in accordance with the percentage of completion method of accounting based upon costs incurred as a percentage of total estimated costs. The Company does not currently have any non-cancelable contracts and they are not common for the Company. Revenue from the licensing of multi-client data surveys is recognized upon issuance of license when the Company obtains a non-cancelable commitment from the customer. Cash and Cash Equivalents For purposes of the consolidated statement of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. Restricted Cash At December 31, 2002 and March 31, 2003, restricted cash balances were $858,000 and $0, respectively, which included contractually restricted customer advances. Inventories Inventories, which consist primarily of miscellaneous supplies, are stated at the lower of cost or market. Cost is determined using the specific identification method. 7 Prepaids Prepaid expenses are recognized over the period in which benefits are obtained from the expenditure. Work in Process Expenses related to the work in progress of seismic crews are deferred and recognized over the performance of the contract. Mobilization Cost Transportation and other direct expenses incurred prior to and at the commencement of geophysical operations in an area or on a specific contract, that would not have been incurred otherwise, are deferred and recognized over either the lesser of the term of the related contract (in the case of costs related to a specific contract this method is always used) or backlog of contracts in that area, or one year. Property, Plant and Equipment Property, plant and equipment are stated at cost. Plant and equipment under capital leases are stated at the present value of future minimum lease payments at the inception of the lease. Depreciation is provided principally by the straight-line method over the estimated useful lives of the various classes of assets as follows: YEARS ----- Buildings and improvements................................... 5-20 Data processing equipment.................................... 3-5 Plant facilities and office fixtures......................... 5-10 Seismic exploration and transportation equipment............. 3-10 Plant and equipment held under capital leases are amortized by the straight-line method over the shorter of the lease term or estimated useful life of the asset. Expenditures for maintenance and repairs are charged to operations. Betterments and major renewals are capitalized. Amortization of assets recorded under capital leases is included with depreciation and amortization expense. Multi-client Data Library The costs incurred in acquiring and processing multi-client seismic data owned by the Company are capitalized. During the twelve-month period beginning at the completion of the acquisition and processing of each multi-client survey, costs are amortized based on revenues from such survey as a percentage of total estimated revenues to be realized from such survey. Thereafter, amortization of remaining capitalized costs is provided at the greater of the percentage of realized revenues to total estimated revenues or straight line over four years. Amortization expense associated with the Company's multi-client data library was $44,000 and $46,000 for the three months ended March 31, 2002 and 2003, respectively. As of December 31, 2002 and March 31, 2003, accumulated amortization related to the Company's multi-client data library was approximately $29.2 million and 29.3 million, respectively. On a quarterly basis, management estimates the residual value of each survey, and additional amortization is provided if the remaining revenues reasonably expected to be obtained from any survey are less than the carrying value of such survey or group of surveys. Asset Impairment In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" the Company evaluates the recoverability of property and equipment, and other long-lived assets if facts and circumstances indicate that any of those assets might be impaired. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset's carrying amount to determine if an impairment of such property is 8 necessary. The effect of any impairment would be to expense the difference between the fair value of such property and its carrying value. 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. The more significant areas requiring the use of management estimates relate to expected future sales associated with the Company's multi-client data library, estimated future cash flows related to long-lived assets and valuation allowances for deferred tax assets. Actual results could differ materially from these estimates making it reasonably possible that a change in these estimates could occur in the near term. Foreign Exchange Gains and Losses The United States ("U.S.") dollar is the Company's primary functional currency in all foreign locations with the exception of its Canadian subsidiaries. Accordingly, those foreign entities (other than Canada) translate property and equipment (and related depreciation) and inventories into U.S. dollars at the exchange rate in effect at the time of their acquisition while other assets and liabilities are translated at year-end rates. Operating results (other than depreciation) are translated at the average rates of exchange prevailing during the year. Re-measurement gains and losses are included in the determination of net income and are reflected in other income (expense). The Canadian subsidiaries use the Canadian dollar as their functional currency and translate all monetary assets and liabilities at year-end exchange rates and operating results at average exchange rates prevailing during the year in accordance with SFAS No. 52, "Foreign Currency Translation". Adjustments resulting from the translation of Canadian assets and liabilities are recorded in the accumulated other comprehensive loss account in stockholders' equity (deficit). Income Taxes Under the asset and liability method required by SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company considers the undistributed earnings of its foreign subsidiaries to be permanently reinvested. The Company has not provided deferred U.S. income tax on those earnings to the extent such earnings are either remitted or deemed remitted as dividends or if the Company should sell its stock in these foreign subsidiaries. Income (Loss) Per Common Share In accordance with SFAS No. 128, "Earnings per Share," basic income (loss) per common share is computed based upon the weighted average number of common shares outstanding during each period without any dilutive effects considered. Diluted income (loss) per common share reflects dilution for all potentially dilutive securities, including warrants and convertible securities. The income (loss) is adjusted for cumulative preferred stock dividends in calculating net income (loss) attributable to common shareholders. Segment Information The Company follows the provisions of SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." The management approach required by SFAS No. 131 designates the internal organization used by management for making operating decisions and assessing performance as the basis for determining the Company's reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers. (see Note 5). Recent Accounting Pronouncements 9 In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" which covers all legally enforceable obligations associated with the retirement of tangible long-lived assets and provides the accounting and reporting requirements for such obligations. SFAS No. 143 is effective for the Company beginning January 1, 2003. Management does not believe the adoption of SFAS No. 143 will have a material impact on Company's consolidated financial position or results of operations. In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based Compensation" amending SFAS No. 123, to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation. The three methods provided in SFAS No. 148 include (1) the prospective method, which is the method currently provided for in SFAS No. 123, (2) the retroactive restatement method, which would allow companies to restate all periods presented and (3) the modified prospective method which would allow companies to present the recognition provisions of all outstanding stock-based employee compensation instruments as of the beginning of the fiscal year of adoption. In addition, SFAS No. 148 amends the disclosure provisions of SFAS No. 123 to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. SFAS No. 148 does not amend SFAS No. 123 to require companies to account for their employee stock-based awards using the fair value method. However, the disclosure provisions are required for all companies with stock-based employee compensation, regardless of whether they utilize the fair method of accounting described in SFAS No. 123 or the intrinsic value method described in APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company does not intend on adopting the fair value method of accounting for stock-based compensation of SFAS No. 123, and accordingly SFAS No. 148 is not expected to have a material impact on the Company's reported results of operations or financial position in 2003. In January 2003, the FASB issued Interpretation (FIN) No. 46, "Consolidation of Variable Interest Entities", which addresses consolidation by business enterprises of variable interest entities. FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company does not expect to identify any variable interest entities that must be consolidated and thus the Company does not expect the requirements of FIN No. 46 to have a material impact on its financial condition or result of operations. In April 2003, the FASB issued Statement of Financial Accounting Standard No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FAS 133. FAS 149 is effective for contracts entered into or modified after June 30, 2003 except for the provisions that were cleared by the FASB in prior pronouncements. The Company does not expect the provision of this statement to have a significant impact on the Company's results of operations or financial position. In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. This Statement shall be effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not expect the provision of this statement to have a significant impact on the Company's results of operations or financial position. (3) SEGMENT INFORMATION The Company has determined that its reportable segments are those based on the Company's method of internal reporting, which disaggregates its one product/service line (geophysical services) into four geographic regions: the United States, Canada, Latin America and the Far East. The Company evaluates the performance of its segments and allocates resources to them based on operating income (loss). There are no intersegment revenues. 10 The tables below present information about the Company's reported segments for the periods indicated (dollars in thousands):

~~THREE~~UNITED ~~MONTHS~~LATIN ~~ENDED~~STATES ~~NINE~~CANADA ~~MONTHS~~AMERICA ~~ENDED~~FAR ~~SEPTEMBER~~EAST ~~30,~~TOTAL ~~SEPTEMBER 30,~~ ---------~~-----------------------~~ ------~~---------------------~~ ~~2001 2002 2001 2002~~ -------~~------~~ --------~~-----~~ ---------~~----~~ ~~----------~~FOR ~~(UNAUDITED)~~THE ~~(UNAUDITED)~~THREE ~~Revenues~~MONTHS ~~$23,990~~ENDED ~~$18,238~~MARCH ~~$ 72~~31,~~017~~ ~~$ 63,183 Expenses~~2003: ~~Direct~~Revenues ~~operating~~$ ~~expenses 22~~1,~~057~~896 ~~14,142~~$ 463,~~440~~274 ~~49,196~~$ ~~Selling~~21,981 ~~general~~$ ~~and administrative expenses 2~~1,~~302~~654 ~~2,358~~$ ~~6,550 6,760 Depreciation and amortization 4,639 2,291 31,869 7,104 ------- -------- --------- --------- Total costs and expenses~~ 28,~~998~~805 ~~18,791 84,859 63,060 ------- -------- --------- ---------~~ Operating ~~income~~Income (~~loss~~Loss) (~~5,008) (553) (12,842) 123 Other income (expense): Interest, net (~~1,~~617~~769) (~~1,806~~686) ~~(4,954) (~~5,~~441)~~182 ~~Other~~ (~~660~~179) ~~(772) (1,571) (107) ------- --------- ---------- ---------- Total other income (expense) (~~2,~~277) (2,578) (6,525) (5,~~548) ~~-------~~Depreciation ~~---------~~and ~~----------~~Amortization ~~----------~~368 ~~Loss~~578 ~~before taxes (7,285) (3,131) (19,367) (5,425) Income tax expense 107 183 499~~ 1,~~264~~573 ~~-------~~150 ~~-------- --------- --------- Net loss (7~~2,~~392)~~669 ~~(3,314)~~FOR ~~(19,866)~~THE ~~(6,689)~~THREE ~~Preferred~~MONTHS ~~dividend~~ENDED ~~requirements~~MARCH 131,~~226~~ ~~1,327~~2002: ~~3,569~~Revenues ~~3,863 ------- -------- --------- --------- Net loss applicable to common stock~~ $~~(8,618)~~ ~~$ (4~~1,~~641)~~023 $ ~~(23~~7,~~435)~~302 $ ~~(10~~20,~~552)~~988 ~~======= ======== ========== ========== LOSS PER COMMON SHARE - BASIC AND DILUTED: Net loss~~ $ (0~~.51)~~ $ ~~(0.23)~~29,313 $Operating ~~(1.37)~~Income $ (~~0.46~~Loss) ~~Dividend requirements on pay-in-kind preferred stock~~ (~~0.08~~2,211) ~~(0.09)~~851 ~~(0.24)~~2,874 (~~0.27~~33) ~~-------~~1,481 ~~---------~~Depreciation ~~---------~~and ~~---------~~Amortization ~~Net~~591 ~~loss~~643 ~~per common share $ (0.59) $ (0.32) $ (~~1~~.61)~~,093 ~~$ (~~0~~.73)~~ ~~======= ======== ========= =========~~2,327

(4) DEBT AND OTHER FINANCINGS On May 11, 1999, the Company entered into a Loan and Security Agreement (the "Credit Facility") with Foothill Capital Corporation and Elliott (collectively the "Lenders"), pursuant to which the Company could borrow up to $6.0 million through a revolving facility and up to $19.0 million through two term loans. Proceeds were used to repay all of the Company's outstanding indebtedness to Elliott ($14.8 million) and to provide additional liquidity and working capital to support the Company's operations. The Foothill/Elliott Credit Facility imposes certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, incur liens, pay dividends or make other distributions in cash or certain property, consummate certain asset sales, enter into certain transactions with affiliates, merge or consolidate with any other persons or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company or its subsidiaries, make investments (as defined in the Foothill/Elliott Credit Facility) and requires the Company to maintain a minimum EBITDA (earnings before interest, tax, depreciation and amortization) level. The interest rate on the loans is 1.5% over prime with a minimum interest rate of 7%. On February 14, 2000, the Company completed significant modifications to the Loan and Security Agreement with Foothill and Elliott whereby the credit facility was increased from $25 million to $29 million by means of increasing commitments under the revolving credit facility from $6 million to $10 million, subject to borrowing base limitations. The term loan, which had been reduced through periodic payments to $10.1 million, was increased to the original outstanding balance of $11.5 million. On March 22, 2001, the Company completed modifications of the Loan and Security Agreement with Foothill/Elliott whereby the credit facility was modified and extended through May 11, 2005. On June 28, 2001, the Company completed further modifications to the Credit Facility whereby the credit facility was decreased from $29.0 million to $28.0 million by means of decreasing the original commitment under the term loan. The original term loan of $11.5 million, which had been reduced through periodic payments to $6.1 million, was increased to an outstanding balance of $10.5 million. Additional modifications were made to the agreement to revise the repayment period on the Foothill term loan. Under the amended agreement, the final principal payment on the term loan is scheduled to be made January 2005. On May 24, 2002, the Company completed further modifications to the Credit Facility whereby, among other things, the maximum amount of the revolving facility was reduced from $10.5 million to $8.0 million (subject to additional borrowing base limitations) and Foothill agreed, subject to conditions, to fund a $16.5 million supplemental term loan. Additionally, on July 8, 2002, the Company completed additional modifications to the Foothill/Elliott Credit Facility whereby, among other things, the maximum amount of the Foothill supplemental term loan was increased from $16.5 million to $19.5 million. Advances under the supplemental term loan are conditioned, among other things, on Elliott having elected, at its sole and absolute discretion, to deposit cash collateral with Foothill in the amount of such advances to secure Elliott's guarantee of the supplemental term loan. The supplemental term loan will bear interest at the 90-day CD rate announced by Wells Fargo. The Foothill supplemental term loan and all other obligations under the Foothill/Elliott Credit Facility are secured by substantially all assets of the Company and its subsidiaries, are guaranteed by Elliott and, except as to the existing Elliott term loan, may be purchased from Foothill by Elliott at any time on 5 business days' notice. The modifications to the Foothill/Elliott Credit Facility made on July 8, 2002 also include a new mandatory prepayment provision with respect to the $6.9 million Foothill term loan. In brief, the new provision generally requires the Company, upon any net movement of equipment outside the United States and Canada, to prepay the Foothill term loan so that the remaining outstanding 11 balance thereof is no greater than two-thirds of the appraised value of the equipment remaining in the United States and Canada in which Foothill has a perfected security interest. At March 31, 2003, $7.5 million and $6.0 million were outstanding under the Elliott term loan and the Foothill term loan, respectively, $5.4 million was outstanding under the Foothill revolving credit line, and $8.2 million was outstanding under the Foothill supplemental term loan. Based on the Company's borrowing base and current Elliott cash collateral levels at December 31, 2002, these amounts represent the maximum amount then allowable at such date under the respective facilities. On January 2, 2003, Elliott exercised its right to buyout Foothill and become the sole agent and lender under the Credit Facility. The Company is in default of certain payment provisions under the Credit Facility. Elliott has granted the Company numerous waivers of the payment defaults subsequent to year-end and certain payment defaults are currently waived through July 15, 2003. However, the Company's event of default on its 9 3/4% Senior Notes (described below) has created an event of default under the Credit Facility that has not been waived (see below discussion for further discussion of default and Elliott's rights). The Company's equipment notes payable and capital lease obligations represent installment loans or capital lease obligations primarily related to the acquisition of seismic recording equipment. On February 18, 1998, Grant completed an offering of $100 million face value 9 3/4% Senior Notes due and payable in a lump sum on February 15, 2008. The Senior Notes bear interest from February 18, at a rate per annum set forth above payable semi-annually on February 15 and August 15 of each year, commencing August 15, 1998. The net proceeds to Grant from the sale of the Senior Notes was approximately $95.2 million after deducting the Initial Purchaser's discount and certain other estimated fees and expenses. Grant used the proceeds to repay approximately $74.5 million of the outstanding balance of debt ($73.0 million) and interest ($1.5 million) existing at December 31, 1997. Total debt issue costs of $4.3 million were incurred in connection with the offering and are being amortized over the term of the notes. The unamortized portion of the debt issue costs, included in the Company's other assets, is $1.0 million at March 31, 2003. The Senior Notes were issued under an indenture (the "Indenture") entered into among the Company, as issuer, the Subsidiary Guarantors, and LaSalle Bank National Association, as trustee, dated as of February 18, 1998. The Indenture imposes certain limitations on the ability of the Company and its Restricted Subsidiaries (as defined in the Indenture) to, among other things, incur additional indebtedness (including capital leases), incur liens, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, issue preferred stock, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company or any of its Restricted Subsidiaries. Additionally, the indenture provides for an event of default, if a default resulting in the acceleration of indebtedness of the Company greater than $5.0 million occurs. In order to improve its liquidity and supplement its operating activities, pursuant to a registration statement originally filed on October 28, 1999 and declared effective on January 12, 2000, the Company offered to exchange (the "Exchange Offer") $100,000,000 aggregate principal amount of its outstanding Senior Notes for shares of its Convertible Preferred Stock with an aggregate liquidation value equal to 65% of the aggregate principal amount of the Senior Notes tendered, plus 100% of the accrued and unpaid interest thereon through the date of the exchange. On January 19, 2000, a total of $56,320,000 of the Senior Notes, together with $2,364,000 of accrued and unpaid interest, were exchanged for 389,722 shares of Convertible Preferred Stock. The Senior Notes exchanged represent all of the Senior Notes previously held by Elliott. No other Senior Notes were tendered and the Exchange Offer expired on February 7, 2000. The consummation of the Exchange Offer has increased the Company's liquidity by reducing its interest payment obligations with respect to the Senior Notes and reducing the negative cash flow impact of its interest payment obligations on the Senior Notes. The Company intends to pay dividends on the Convertible Preferred Stock in additional shares of Convertible Preferred Stock until further notice. In connection with the Exchange Offer, the Company solicited and obtained requisite consents from the holders of its Senior Notes in order to amend definitions and to modify certain restrictive covenants in the indenture governing the Senior Notes. As evidenced by market transactions, the estimated fair value of the $43.5 million aggregate principal amount of Senior Notes outstanding at December 31, 2002 was $10.8 million. The Company is currently in default under the Senior Notes and a resulting default has occurred under the Credit Facility. As a result of the event of default under the indenture, the trustee, or the holders of a specified percentage in aggregate principal amount of the Senior Notes, could take the steps necessary to cause the Senior Notes to become immediately due and payable. As of the date of this report, neither the trustee nor such holders has exercised this right. Additionally, the event of default under the Senior Notes constitutes an event of default under the Credit Facility, which entitles Elliott to accelerate the maturity of all amounts owing under the Credit Facility and to exercise remedies to collect such amounts as provided under the Credit Facility and the related security agreements. As of the date of this report, Elliott has not exercised this right. Accordingly, the Company has classified $43.5 million 12 of otherwise long-term debt related to the Senior Notes and $24.2 million of otherwise long-term debt related to the Credit Facility as current and expects to continue to do so for the foreseeable future. If the maturity of any of the Company's debt was accelerated, it would be unlikely that the Company would be able to continue its operations without seeking protection from its creditors under the federal bankruptcy code. Additionally, as a result of the defaults, the Company does not expect that any additional amounts will be made available to the Company under the Credit Facility. On August 3, 2001, the Company completed an agreement with Elliott for the sale, with recourse retained, of certain of its foreign accounts receivable. The agreement allows the Company to sell, at its election, both billed and unbilled receivables arising out of data acquisition and processing services rendered by the Company's branch operations in Ecuador and Colombia. The maximum amount available for Elliott to purchase is $4.0 million and the agreement extends through February 2002, with all repayments to Elliott required by that time. As of December 31, 2001, the Company's obligation under the agreement was $4.0 million. On January 7, 2002, the agreement for purchase and assignment of foreign accounts receivable with Elliott was modified to extend the term of the agreement to September 30, 2002 and to increase the maximum amount allowable to be purchased by Elliott from the Company to $5,250,000. On February 5, 2002, March 5, 2002 and March 21, 2002 additional modifications were made to the Elliott agreement to increase the maximum amount allowable to be purchased by Elliott from the Company to $7,500,000, $10,900,000 and $11,700,000, respectively. Additionally, the March 21, 2002 amendment expanded the scope of the agreement to include receivables for all of the Company's South American locations. On September 30, 2002, the agreement was further modified to extend the term of the arrangement to October 31, 2003. As of June 27, 2003, $11,700,000 was outstanding under the agreement all of which is due and payable on October 31, 2003. The Company does not expect to be able to retire these amounts through its operating cash flows by October 31, 2003. Therefore, the Company will need to obtain additional financing or reach accommodations with Elliott to avoid a default under this agreement. There can be no assurance that additional financing or such accommodations will be able to be obtained. If the maturity of any of the Company's debt was accelerated, it would be unlikely that the Company would be able to continue its operations without seeking protection from its creditors under the federal bankruptcy code. There are no commitments to provide additional financing in place at this time. Should business conditions not improve or cost control initiatives not be successful during 2003, the Company would require additional sources of financing to sustain operational activities. There can be no assurance that Elliott will continue to provide credit support and working capital funding, or that alternative financing will be available on commercially acceptable terms or that such financing will be available at all. (5) SUPPLEMENTAL SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, --------------------- 2002 2003 (DOLLARS IN THOUSANDS) CASH PAID FOR INTEREST AND TAXES WAS AS FOLLOWS: Taxes, net of refunds $ 1,537 $ 1,011 Interest 2,197 296(1) (1) The Company did not make its February, 2003 semi-annual interest payment on the Senior Notes. See Note 4 for discussion of default. (6) COMMITMENTS AND CONTINGENCIES The Company is a party, defendant to a lawsuit filed in August 2000, which alleges, among other things, that the defendants wrongfully acquired geophysical data from plaintiff's mineral estates after January 1, 1998. The plaintiffs seek unspecified damages and injunctive relief. The matter is in the early stages of discovery and no dates have been set for a class certification hearing or trial on the merits. The Company believes that the allegations of the lawsuit are without merit and intends to vigorously defend the lawsuit. Management does not believe this lawsuit will have a material adverse effect on the Company's financial position, results of operations or cash flows. Additionally, the Company is involved in various claims and legal actions arising in the ordinary course of business. Management is of the opinion that none of the claims and actions will have a material adverse effect on the Company's financial position, results of operations or cash flows. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW Grant is a provider of seismic data acquisition services in land and transition zone environments in selected markets, including the United States, Canada, Latin America and the Far East. The Company also markets seismic data acquisition services in the Middle East. The Company's seismic data acquisition services typically are provided on an exclusive contract basis to domestic and international oil and gas exploration and production companies and seismic data marketing companies. Grant also provides seismic data processing services through its international support facilities. The market for seismic land acquisition, both domestically and in Canada, remained significantly depressed throughout the first three months of 2003. Additionally, demand for land and transition zone seismic data acquisition services are primarily determined by oil and gas industry capital expenditures, budgets and spending patterns. These spending patterns are affected by individual oil and gas company budgets as well as industry-wide conditions. Overcapacity in the seismic service industry continues to suppress pricing and activity levels and has materially adversely affected the Company's results of operations. Management has implemented a business plan in 2003 with the specific objectives of improving profitability and generating positive operating cash flow through intensified sales and marketing, tighter cost controls and reduced overhead expenses. Additionally, due to the competitive markets and decreased demand in the United States and Canada, the Company has increased its reliance on its Latin American and Far East land and transition zone operations, areas where higher demand levels exist. As of June 19, 2003, the Company was operating one crew in the United States, operating two crews in Latin America, and mobilizing one crew in the Far East. For the three months ended March 31, 2003, the Company's total revenues were $28.8 million, with approximately 6.6% from the United States, 76.3% from Latin America, 11.4% from Canada and 5.7% from the Far East. RESULTS OF OPERATIONS THE THREE-MONTH PERIOD ENDED MARCH 31, 2003 COMPARED WITH THE THREE-MONTH PERIOD ENDED MARCH 31, 2002 Revenues. Revenues for the three months ended March 31, 2003 were $28.8 million, compared with $29.3 million for the three months ended March 31, 2002. The net decrease during the first quarter of 2003 of $0.5 million, or 1.7 %, was primarily due to the significant reduction in Canadian seismic data acquisition revenue; partially offset by increased Latin America data acquisition revenues and a new crew operating in the Far East. Revenues from United States data acquisition operations increased $0.2 million, or 22.2%, from $0.9 million for the three months ended March 31, 2002 to $1.1 million for the three months ended March 31, 2003. The increase in data acquisition revenues is due to the relative size and number of programs awarded to the Company. Revenues from seismic data processing operations were $0.0 million for the first three months of 2003 compared to $0.1 million for the first three months of 2002. The reduction is due to the closing of the Company's Houston processing center in June 2002. Revenues from Canadian data acquisition operations decreased $4.0 million, or 54.8% from $7.3 million in the first three months of 2002 to $3.3 million in the first three months of 2003. During the first quarter of 2003, two land seismic crews were operating in Canada. During the first quarter of 2002, three land seismic crews were operating in Canada. Revenues from sales of the data library for the first three months of 2003 were $756,000, compared to $47,000 for the first three months of 2002. At March 31, 2003, the remaining book value of the Company's multi-client data library is $ 384,000. Revenues for data acquisition operations in Latin America increased $1.0 million, or 4.8%, from $21.0 million in the first three months of 2002 to $22.0 million in the first three months of 2003. This revenue increase is attributable to an additional seismic crew working in Ecuador; partially offset by a decrease in operating crews in Colombia. Revenues for data acquisition operations in the Far East increased $1.7 million from $0.0 million in the three months ended March 31, 2002 to $1.7 million in the three months ended March 31, 2003. During the first three months of 2003, the Company mobilized 14 and operated one crew in India. No crews were in operation in the Far East during the first three months of 2002. Expenses. Direct operating expenses for the three months ended March 31, 2003 decreased $2.7 million, or 11.6%, to $20.6 million, compared to $23.3 million for the three months ended March 31, 2002. This decrease is primarily a result of decreased data acquisition activities in Canada in the first quarter of 2003. Selling, general and administrative expenses increased $0.8 million, or 36.4%, to $3.0 million for the three months ended March 31, 2003 from $2.2 million for the three months ended March 31, 2002. This increase is the result of the Company incurring higher professional costs primarily associated with the Company's efforts towards a debt restructure. Depreciation and amortization increased $0.3 million, or 13.0%, to $2.6 million in the first three months of 2003 from $2.3 million for the first three months of 2002. Capital expenditures were $2.6 million and $2.0 million for the first three months of 2003 and 2002, respectively. Other Income (Expenses). Interest expense, net, was $2.0 million in the first three months of 2003 and $1.7 million for the first three months of 2002. Other income (expense) in the 2003 quarter includes gains on the sale of fixed assets, which included the sale of the Company's office building in Canada, of $1.0 million compared to $0.02 million for the 2002 quarter. Tax Provision. The income tax provisions for the 2002 and 2003 quarters consisted of foreign income taxes. No benefit for United States federal income tax loss carryforwards was recorded in either period, given the uncertainty of realization of such tax benefits. LIQUIDITY AND CAPITAL RESOURCES The Company currently has substantial indebtedness. The level of the Company's indebtedness and the Company's current level of cash flow generated from its operations (i) has not allowed for the Company to meet its debt service requirements and the Company does not expect to be able to meet such obligations without refinancing its current debt or reaching an accommodation with the holders of that debt; (ii) makes it extremely difficult for the Company to obtain any additional debt or equity financing for any purpose; (iii) requires that a substantial portion of the Company's available cash be dedicated to debt service and, accordingly, is not available for use in its business; (iv) limits the Company's flexibility in planning for, or reacting to, changes in its business; (v) results in the Company being more highly leveraged than most of its competitors, which places it at a competitive disadvantage in pursuing contract opportunities; and (vi) makes it more vulnerable to current business conditions in the seismic services industry. The Company is currently in default under its credit facility (the "Credit Facility"), with Elliott Associates, L.P. ("Elliott") as well as under the indenture under which the 9 3/4% Senior Notes due 2008 (the "Senior Notes") were issued. As a result of the event of default under the indenture, the trustee, or the holders of a specified percentage in aggregate principal amount of the Senior Notes, could take the steps necessary to cause the Senior Notes to become immediately due and payable. As of the date of this report, neither the trustee nor such holders has exercised this right. Additionally, the event of default under the Senior Notes constitutes an event of default under the Credit Facility, which entitles Elliott to accelerate the maturity of all amounts owing under the Credit Facility and to exercise remedies to collect such amounts as provided under the Credit Facility and the related security agreements. As of the date of this report, Elliott has not exercised this right. Accordingly, the Company has classified both the $43.5 million of otherwise long-term debt related to the Senior Notes and the $24.2 million of otherwise long-term debt related to the Credit Facility as current and expects to continue to do so for the foreseeable future. If the maturity of any of the Company's debt was accelerated, it would be unlikely that the Company would be able to continue its operations without seeking protection from its creditors under the federal bankruptcy code. Additionally, as a result of the defaults, the Company does not expect that any additional amounts will be made available to the Company under the Credit Facility. The Company's ability to maintain its operations and fund capital expenditures depends on its future performance, which in turn is subject to general economic conditions, activity levels in the oil and gas exploration sector, and other factors beyond the Company's control and upon completing a comprehensive restructuring of its outstanding debt. The Company has incurred net losses for the past three years and, given the continuing low activity level in the United States and Canada for land data seismic acquisition services and cash constraints on the Company, the Company expects to continue to incur net losses through 2003. While management believes there has been a recent improvement in market conditions for seismic services, especially in Latin America and the Far East, our ability to finance operations will remain limited through 2003 and may not be available at all to allow the Company to continue its operations in the ordinary course of business if the Company cannot refinance its debt, reach an accommodation with its lenders or obtain additional financing or credit support. 15 During the first quarter the Company raised a total of $1.6 million of working capital through the refinancing and subsequent sale of the Company's office building in Canada and refinancing the Company's office building in Houston, Texas. The Company's management is currently in discussions with the ad hoc steering committee of the holders of the Senior Notes and Elliott concerning a debt-for-equity exchange or other comprehensive restructuring of the Company's indebtedness that, among other things, would resolve the interest payment default under the Senior Notes, and because other defaults have been waived through June 30, 2003, would eliminate Elliott's right to accelerate amounts outstanding under the Credit Facility through the date of the existing waiver. Additionally, the Company has taken measures to reduce costs through consolidation of certain locations, resizing its Canadian operation in reaction to reduced current demand levels, and to reduce overhead personnel. Should such measures be unsuccessful, or should any of the Company's creditors exercise their right to accelerate their amounts outstanding, there would be substantial doubt about the Company's ability to continue as a going concern. If the maturity of any of the Company's debt was accelerated, it would be unlikely that the Company would be able to continue its operations without seeking protection from its creditors under the federal bankruptcy code. The accompanying financial statements do not include any adjustments that might result from the outcome of those uncertainties. There are currently no committed additional sources of financing available to the Company and no availability under its existing facilities. The Company has in the past relied on its majority stockholder, Elliott, to provide credit support and interim funding. Elliott has indicated to the Company that it will not commit to provide additional financial and credit support to the Company during 2003. Even if the Company's operating results continue to improve and cost control initiatives are successful during 2003, the Company will require additional financing, or waivers on current debt obligations, to sustain its operations and meet its debt service requirements as those amounts become due. There can be no assurance that amounts that become due in 2003 can be paid or refinanced or that any additional financing can be obtained to meet the Company's needs. FOREIGN CURRENCY RISK The Company conducts a substantial portion of its business in currencies other than the U.S. or Canadian dollars, particularly various Latin American currencies, and its international operations are subject to fluctuations in foreign currency exchange rates. Accordingly, the Company's international contracts could be significantly affected by fluctuations in exchange rates. International contracts requiring payment in currency other than U.S. or Canadian dollars typically are indexed to inflationary tables and generally are used for local expenses. The Company attempts to structure the majority of its international contracts to be billed and paid at a favorable U.S. dollar conversion rate. The Company's operating results were positively impacted by foreign exchange gain of approximately $49,000 for the three months ended March 31, 2003 and negatively impacted by foreign exchange loss of approximately $144,000 for the three months ended March 31, 2002. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS From time to time, information provided by the Company, statements by its employees or information included in written material, such as press releases and filings (including this Form 10-Q Quarterly Report) with the Commission (including portions of the "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and certain other sections contained in such filings) may contain "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable it can give no assurance that such expectations will prove to be correct. Such forward-looking statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should any of the underlying assumptions prove incorrect, actual results of current and future operations may vary materially from those anticipated, estimated or projected. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. Among the factors that will have a direct bearing on the Company's results of operations and the oil and gas services industry in which it operates are the effects of rapidly changing technology; the presence of competitors with greater financial resources; operating risks inherent in the oil and gas services industry; regulatory uncertainties; worldwide political stability and economic conditions and other risks associated with international operations, including foreign currency exchange risk; and the Company's successful execution of its strategy and internal operating plans. 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's debt consists of both fixed-interest and variable-interest rate debt; consequently, the Company's results of operations and cash flows, as well as the fair values of its fixed-rate debt instruments, are subject to interest-rate risk. The Company has performed sensitivity analyses to assess the impact of this risk based on a hypothetical ten-percent increase in market interest rates. Market rate volatility is dependent on many factors that are impossible to forecast, and actual interest rate increases could be more severe than the hypothetical ten-percent increase. The Company estimates that if prevailing market interest rates had been ten percent higher throughout the first three months of 2003 and all other factors affecting the Company's debt remained the same, the Company's pretax loss would have been increased by approximately $0.2 million for the first three months of 2003. With respect to the fair value of the Company's fixed-interest rate debt, if prevailing market interest rates had been ten percent higher during the first three months of 2003, and all other factors affecting the Company's debt remained the same, fair value of the Company's fixed-rate debt, as determined on a present-value basis, would have been lower by approximately $3.6 million at March 31, 2003. Given the composition of the Company's debt structure, the Company does not hedge its interest rate risk. ITEM 4. CONTROLS AND PROCEDURES Within the 90 days prior to the date of this Report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a party defendant to a class action lawsuit filed in August 2000, which alleges, among other things, that the defendants wrongfully acquired geophysical data from plaintiff's mineral estates after January 1, 1998. The plaintiffs seek unspecified damages and injunctive relief. The Company filed a motion for summary judgment and an amended motion for summary judgment which was heard and taken under advisement by the Court. On August 23, 2002, after due consideration, the 229th judicial District Court, Starr County, Texas ruled in favor of Grant Geophysical, Inc. and Grant Geophysical Corp.'s amended motion for summary judgment on this matter. The Court, after considering the amended motion for summary judgment, the responses and the argument of counsel, ruled in favor of the Company. The plaintiffs have appealed the judge's decision and the decision is currently in the appellate level process. The Company believes that the allegations of the lawsuit are without merit and intends to defend the lawsuit vigorously. Management does not believe this lawsuit will have a material adverse effect on the Company's financial position, results of operations or cash flow. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS In January 2003, the Company issued 13,510 shares and in February, 2003 issued 3 shares of its 8% convertible preferred stock to satisfy payment in-kind dividend requirements on such stock issue. These securities were issued without registration under the Securities Act of 1933, as amended, in reliance on Section 4(2) of the Securities Act. ITEM 3. DEFAULTS UPON SENIOR SECURITIES The Company is currently in default under its credit facility (the "Credit Facility"), with Elliott Associates, L.P. ("Elliott") as well as under the indenture under which the Company's 9 3/4% Senior Notes due 2008 (the "Senior Notes") were issued. As a result of the event of default under the indenture, the trustee, or the holders of a specified percentage in aggregate principal amount of the Senior 17 Notes, could take the steps necessary to cause the Senior Notes to become immediately due and payable. As of the date of this report, neither the trustee nor such holders has exercised this right. Additionally, the event of default under the Senior Notes constitutes an event of default under the Credit Facility, which entitles Elliott to accelerate the maturity of all amounts owing under the Credit Facility and to exercise remedies to collect such amounts as provided under the Credit Facility and the related security agreements. As of the date of this report, Elliott has not exercised this right. Accordingly, the Company has classified both the $43.5 million of otherwise long-term debt related to the Senior Notes and the $24.2 million of otherwise long-term debt related to the Credit Facility as current and expects to continue to do so for the foreseeable future. If the maturity of any of the Company's debt was accelerated, it would be unlikely that the Company would be able to continue its operations without seeking protection from its creditors under the federal bankruptcy code. Additionally, as a result of the defaults, the Company does not expect that any additional amounts will be made available to the Company under the Credit Facility. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) List of Exhibits EXHIBIT NO. 10.1* -- Eighth supplement to the Ninth Amendment to the Elliott credit facility. 10.2* -- Ninth supplement to the Ninth Amendment to the Elliott credit facility. 99.1* -- Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 99.2* -- Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 * Filed herein (b) Reports on Form 8-K On January 22, 2003 , the Company filed a current report on Form 8-K related to the disclosure of Amendment Nine to the Elliott credit facility. On February 10, 2003, the Company filed a current report on Form 8-K related to the first and second supplement to the Ninth Amendment to the Elliott credit facility. On February 27, 2003, the Company filed a current report on Form 8-K related to the third supplement to the Ninth Amendment to the Elliott credit facility. On March 18, 2003, the Company filed a current report on Form 8-K related to the fourth and fifth supplement to the Ninth Amendment to the Elliott credit facility. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GRANT GEOPHYSICAL, INC. Date: July 15, 2003 By: /s/ RICHARD F. MILES ------------------------------------- Richard F. Miles President and Chief Executive Officer By: /s/ JAMES BLACK ------------------------------------- James Black Chief Financial Officer (Principal Financial Officer) By: /s/ SCOTT A. MCCURDY ------------------------------------- Scott A. McCurdy Controller (Principal Accounting Officer) 19 I, Richard F. Miles, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Grant Geophysical, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weakness. Date: July 15, 2003 /s/ RICHARD F. MILES Richard F. Miles President and Chief Executive Officer 20 I, James Black, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Grant Geophysical, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weakness. Date: July 15, 2003 /s/ JAMES BLACK James Black Chief Financial Officer 21 INDEX TO EXHIBIT EXHIBIT NO. 10.1* -- Eighth supplement to the Ninth Amendment to the Elliott credit facility. 10.2* -- Ninth supplement to the Ninth Amendment to the Elliott credit facility. 99.1* -- Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 99.2* -- Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 * Filed herein 22

NINE MONTHS ENDED SEPTEMBER 30, -------------------------- 2001 2002 ---------- ---------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: NET LOSS $ (19,866) $ (6,689) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation and amortization expense 13,524 6,957 Multi-client data library amortization expense 18,345 145 (Gain) loss on sale of fixed assets 367 (357) Provision for doubtful accounts 90 9 Exchange (gain) loss 1,394 709 Other non-cash items 26 26 CHANGES IN ASSETS AND LIABILITIES: (INCREASE) DECREASE IN: Accounts receivable (7,390) 2,070 Inventories (38) (53) Prepaids (1,375) (855) Work in process (1,212) (243) Other assets 220 (62) INCREASE (DECREASE) IN: Accounts payable 4,941 (3,924) Accrued interest and other expenses (9,797) (1,754) Foreign income tax payable 289 (419) Other liabilities and deferred credit (67) (351) ---------- ---------- NET CASH USED IN OPERATING ACTIVITIES (549) (4,791) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, net (2,011) (2,342) Multi-client data library (233) -- Proceeds from sale of assets 222 464 --------- --------- NET CASH USED IN INVESTING ACTIVITIES (2,022) (1,878) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings made 34,236 30,157 Repayment on borrowings (33,254) (21,908) --------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES 982 8,249 EFFECT OF EXCHANGE RATE CHANGES ON CASH (505) (615) --------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,094) 965 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,654 2,471 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,560 $ 3,436 ========== =========

NINE MONTHS ENDED SEPTEMBER 30, ------------------ 2001 2002 ------ ------- (DOLLARS IN THOUSANDS) CASH PAID FOR INTEREST AND TAXES WAS AS FOLLOWS: Taxes, net of refunds $1,619 $3,803 Interest 4,444 4,601

UNITED LATIN STATES CANADA AMERICA FAR EAST TOTAL ------ ------ ------- -------- ----- FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002: Revenues $ 3,672 $ 8,840 $50,620 $ 51 $ 63,183 Operating Income (Loss) (6,608) (698) 7,542 (113) 123 Depreciation and Amortization 1,639 1,775 3,689 1 7,104 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001: Revenues $ 29,399(1) $ 9,696 $30,948 $ 1,974 $ 72,017 Operating Income (Loss) (13,011) (1,678) 1,610 237 (12,842) Depreciation and Amortization 25,063(1) 3,508 2,975 323 31,869

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