#  

# **U.S. SECURITIES AND EXCHANGE COMMISSION**

# **Washington, D.C. 20549**

#  

# **FORM 10-KSB**

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**(MarkOne)**

**ý****                                ****ANNUALREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the Fiscal Year Ended December 31, 2005**

 

**o****                                ****TRANSITIONREPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE****ACT OF 1934**

 

**For the period from         to        **

 

**Commission File Number 0-14908**

 

**TGC INDUSTRIES, INC.**

(Name of small business issuer in its charter)

 

| **Texas**                                                      | ** ** | **74-2095844**                       |
|----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization) |       | (I.R.S. Employer Identification No.) |

 

| **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 ExchangeAct:  **NONE**

 

Securities registered under Section 12(g) of the ExchangeAct:

 

**Common Stock ($.01 Par Value)**

 

Checkwhether the issuer is not required to file reports pursuant to Section 13or 15(d) of the Exchange Act. Yes  o   No  ý

 

Checkwhether the issuer (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes  ý   No  o

 

Checkif there is no disclosure of delinquent filers in response to Item 405 ofRegulation S-B contained in this form, and no disclosure will be contained, tothe best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-KSBor any amendment to this Form 10-KSB. ý

 

Indicateby check mark whether the registrant is a shell company as defined by Rule 12b-2of the Exchange Act. Yes  o   No  ý

 

Stateissuer’s revenues (from continuing operations) for its most recent fiscal year:  **$30,851,963**

 

Statethe aggregate market value of the voting and non-voting common equity held bynon-affiliates computed by reference to the price at which the common equitywas sold, or the average bid and asked price of such common equity, as of March 20,2006 (for the purpose of this calculation only directors, executive officers,and 10% or greater stockholders are deemed to be affiliates):  **$92,672,939**

 

Statethe number of shares outstanding of each of the issuer’s classes of commonequity, as of the latest practicable date.

 

| **Class**                                  | ** ** | **Outstanding as of March 20, 2006**    |
|--------------------------------------------|------------|----------------------------------------------|
| **Common Stock ($.01 Par Value)**          | ** ** | **14,867,609**                               |
|                                       |       |                                         |
| **Document**                               | ** ** | **Documents  Incorporated by Reference**     |
| **Portions of the Proxy Statement**        | ** ** | **Parts of the Form 10-KSB Into Which** |
| **For the Annual Meeting of Shareholders** | ** ** | **the Document is Incorporated:**            |
| **To be held on June 6, 2006**        | ** ** | **Part III**                            |

 

Transitional Small Business Disclosure Format (check one). Yes  o   No  ý

 

 

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# **Part I**

#  

**ITEM 1. DESCRIPTION OF BUSINESS.**

 

TGCIndustries, Inc. (“TGC” or the “Company”) is a Texas corporation engagedin the geophysical service business, primarily conducting Three-D (“3-D”)surveys for clients in the oil and gas business. TGC’s principal business officeis located at 1304 Summit Avenue, Suite 2, Plano, Texas 75074. (Telephone:972-881-1099).

 

# **BUSINESS**

 

**History**

 

InApril of 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 was engaged in the business of conductingseismic, gravity, and magnetic surveys under contracts for oil and natural gascompanies. In July of 1986, our name was changed from “Tideland’sGeophysical Co. Inc.” to “TGC Industries, Inc.” On June 30, 1986, theBoards of Directors of Supreme and TGC Industries, Inc. approved aspin-off of substantially all of the shares of TGC Industries, Inc., ownedby Supreme which were distributed as a stock dividend to Supreme’s securityholders.

 

Weare a leading provider of seismic data acquisition services throughout thecontinental U.S. As of December 31, 2005, we operated five seismic crews,and we deployed our sixth seismic crew in January of 2006. These seismiccrews supply seismic data to companies engaged in the domestic exploration anddevelopment of oil and natural gas on land and in land-to-water transitionareas. Our customers rely on seismic data to identify areas where subsurfaceconditions are favorable for the accumulation of existing hydrocarbons, tooptimize the development and production of hydrocarbon reservoirs, to betterdelineate existing oil and natural gas fields, and to augment reservoirmanagement techniques.

 

Weacquire geophysical data using the latest in 3-D survey techniques. Weintroduce acoustic energy into the ground by using vibration equipment ordynamite detonation, depending on the surface terrain and subsurface requirements.The reflected energy, or echoes, is received through geophones, converted intoa digital signal at a multi-channel recording unit, and then transmitted to acentral recording vehicle. Subsurface requirements dictate the number ofchannels necessary to perform our services. With our state-of-the-artseismic equipment, including computer technology and multiple channels, weacquire, on a cost effective basis, immense volumes of seismic data that whenprocessed and interpreted produce more precise images of the earth’ssubsurface. Our customers then use our seismic data to generate 3-D geologicmodels that help reduce finding costs and improve recovery rates from existingwells.

 

**The Industry**

 

Technologicaladvances in seismic equipment and computing allow the seismic industry toeconomically acquire and process immense volumes of seismic data which producemore precise images of the earth’s subsurface. The latest accepted method ofseismic data acquisition, processing, and the subsequent interpretation of theprocessed data is the 3-D seismic method. Geophysicists use computerworkstations to interpret 3-D data volumes, identify subsurface anomalies, andgenerate a geologic model of subsurface features.

 

3-Dseismic data are used in the exploration and development for new reserves andenable oil and natural gas companies to better delineate existing fields and toaugment their reservoir management techniques. Benefits of incorporating highresolution 3-D seismic surveys into exploration and development programsinclude reducing drilling risk, decreasing oil and natural gas finding costs,and increasing the efficiencies of reservoir location, delineation, andmanagement. In order to meet the requirements necessary to fully realize thebenefits of 3-D seismic data, there is an increasing demand for improved dataquality with greater subsurface resolution.

 

Currently,the seismic data acquisition industry is made up of a number of companiesdivided into two groups. The first group is made up of five publicly-tradedcompanies with long operating histories who field numerous crews and work in anumber of different regions and terrain. This group includes us, DawsonGeophysical Company, Geo Kinetics, Inc., Veritas DGC, Inc., andPetroleum Geo Services. These companies field approximately 50% of theestimated 55****seismic crewscurrently operating in the continental U.S. The second group is made up ofsmaller companies who generally run one or two seismic crews and oftenspecialize in specific regions or type of operation.

 

Weprovide our seismic data acquisition services primarily to domestic onshore oiland natural gas exploration and development companies for use in the onshoredrilling and production of oil and natural gas in the continental U.S. The mainfactors influencing demand for seismic data acquisition services in ourindustry are the level of drilling activity by oil and natural gas companiesand the sizes of such companies’ exploration and development budgets, which, inturn, depend largely on current and anticipated future crude oil and naturalgas prices and depletion rates. Current market indicators suggest an increasingdemand for oil and natural gas coupled with a flat or declining productioncurve, which we believe may result in the continuation of historicallyhigh oil and natural gas commodity prices. From 2003 through 2025, consumptionof oil and natural gas in the U.S. are each projected to grow at an annual rateof 1.5%. However, U.S. domestic production of oil is projected to decrease(0.8)% annually, and natural gas is projected to grow at an annual rate of 0.6%over the same period. Additionally, the Energy Information Administration (“EIA”)recently estimated that by 2010 U.S. domestic consumption of oil and naturalgas will outpace domestic production by 139.1% and 24.2%, respectively. By

 

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2025,EIA forecasts that these supply and demand gaps for oil and natural gas may expandto 216.3% and 40.0%, respectively. The majority of the wells drilled by ourcustomers have been wells drilled in search of natural gas reserves.

 

Increaseddecline rates in natural gas basins in the U.S. have also led to an increase inthe price of oil and natural gas. Over the past 10 years, the number of U.S.natural gas wells drilled has increased significantly; however, a correspondingincrease in production has not been realized. We believe that a significantreason for the limited supply response, even as drilling activities haveincreased, is an acceleration in the decline rates of production from newnatural gas wells drilled. A study published by the National Petroleum Councilin September 2003 concluded, from analysis of production data over thepreceding 10 years, that as a result of domestic natural gas decline rates of25% to 30% per year, 80% of natural gas production in 10 years will be fromwells that have not yet been developed. We believe that this tends to support asustained higher natural gas price environment, which should create incentivesfor exploration and development companies to increase seismic activities in theU.S. As a result of improvements in extraction technologies coupled withgeneral increases in prices, oil and natural gas companies increasingly areexploring for and developing “unconventional” resources, including hydrocarbonsfrom tight sands and shales in new areas.

 

Weanticipate that oil and natural gas exploration and development companies willcontinue to respond to sustained increases in demand and corresponding higherfuture oil and natural gas commodity prices by expanding their exploration anddrilling activities through increased capital spending. According to RigData,weekly average onshore well permits issued in 2005 and 2004 were 1,349 and1,122, respectively, an increase of 20.2%. Based upon Baker-Hughes rig countdata, the 2005 and 2004 domestic onshore rig count averaged 1,666 and 1,392rigs, respectively, an increase of 19.7%. Based on strong oil and natural gasprices and increasing exploration and development budgets of oil and naturalgas companies, we anticipate continued growth in the industry.

 

Inaddition, since January 1, 2006, new energy legislation permits the taxdeduction of seismic data acquisition services over a 24 month period insteadof the longer write-off period previously in effect. We believe that thisaccelerated tax write-off may encourage additional exploration anddevelopment activity.

 

Weanticipate that oil and natural gas exploration and development companies willcontinue to respond to sustained increases in demand by expanding theirexploration and drilling activities and increasing capital spending. We believethat a continued increase in U.S. seismic work will be required for the oil andnatural gas industry to help meet the expected increased demand for oil andnatural gas in the U.S.

 

**Equipment and Crews**

 

In2002, we downsized from two crews to one crew because of a reduced demand forour services. As a result, we began exploring ways of increasing biddingopportunities in existing markets. In February of 2002, we entered into anagreement to trade in our shot hole drilling equipment for five buggy-mountedvibroseis units. The purchase of these units has opened up a new marketopportunity for us, thereby increasing our bidding opportunities. We have beensuccessful in the vibroseis market with a significant portion of our 2005,2004, and 2003 revenues being generated from vibroseis contracts. We announcedin January of 2004 that, in view of the fact that oil and natural gasexploration and development companies had increased the levels of activity intheir domestic oil and natural gas exploration programs, we had acquired threenew vibroseis units and deployed a second seismic data acquisition crew. In June of2004, in response to the continued increased level of activity in the domesticoil and natural gas market, we deployed our third seismic data acquisition crew.In the fourth quarter of 2004, we acquired, and placed into service, our firstnew ARAM ARIES recording system. In July of 2005, we deployed our fourthseismic data acquisition crew along with our second new ARAM ARIES recordingsystem. In November of 2005, we deployed our fifth seismic dataacquisition crew along with our third new ARAM ARIES recording system. In December of2005, we completed a loan transaction with a commercial lender for the purposeof providing funds for the purchase of our fourth new ARAM ARIES recordingsystem. In January of 2006, we deployed a sixth crew to operate thisfourth new ARAM ARIES recording system.

 

Twoof our crews utilize the Opseis Eagle data gathering system. This systememploys radio-frequency (“RF”) telemetry technology providing seismicdata-gathering services to land-to-water transition areas, rivers, lakes,inaccessible terrain, deserts, and man-made barriers such as highways andcities. RF telemetry transmits data in “real time” via remote units set up on ashot line. These lightweight units, called Seismic Acquisition Remove (“SAR”)units, can be set up and repositioned quickly and easily without cumbersomecables. Multiple SAR units represent the first surface mount technology and theability to gather data from any terrain through any obstacle. Our crews havegreat flexibility in energy sources and placement of SAR units in the field.

 

InOctober of 2004, June of 2005, November of 2005, and December of2005 we purchased new state-of-the-art ARAM ARIES recording systems. Thesesystems employ cable telemetry technology enhanced by multiple baseline andredundant cable connections that provide seismic data acquisition services withincreased reliability. This allows our crews to record data faster, therebyincreasing their productivity and freeing up equipment for use by our othercrews. Subsurface requirements dictate the number of channels necessary to perform ourservices, and the increased number of recording channels we obtained with thesenew recording systems give us greater operational flexibility. Each new ARAMARIES recording system comes with a 24 month warranty and system upgrades.

 

Wecurrently own equipment for six land-based seismic data acquisition crews and27 vibration vehicles equipped with Pelton electronics. Each crew consists ofapproximately 35 to 45 technicians with associated vehicles, geophones, aseismic recording system, energy sources, cables, and a variety of otherequipment. Each crew has one central recording vehicle which captures seismicdata. This data is recorded on a CD ROM or data tape which is delivered to adata processing center selected by the customer.

 

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Additionally,we currently plan to purchase peripheral seismic equipment, including sevenadditional vibration vehicles, with a portion of the proceeds from our publicoffering which was completed in October of 2005.

 

**Capital Expenditures**

 

Webelieve that it is essential to take advantage of advances in seismictechnology and to commit capital to purchase and update our equipment costeffectively. Purchasing and updating seismic equipment and technology involvesa continuing commitment to capital spending. For fiscal year 2005, capitalexpenditures were approximately $20,525,000 compared with approximately$5,795,000 for 2004.

 

**Customers and Consultants**

 

Ourcustomers are major and independent oil and natural gas exploration anddevelopment companies. The services we provide to our customers vary accordingto the size and needs of each customer. Our services are marketed bysupervisory and executive personnel who contact customers to determine theirneeds and respond to customer inquiries regarding the availability of crews.Contacts are based principally upon professional relationships developed over anumber of years. There are a number of consultants in the oil and natural gasindustry who process and interpret seismic data for oil and natural gascompanies. These consultants can have an influence in determining which companytheir customers use to acquire seismic data.

 

Oneof the benefits from the rapid growth we experienced in 2005 is the fact thatwe have been able to reduce our customer concentration. For the year ended December 31,2005, two customers accounted for approximately 11.6% and 10.6% of our revenues.For the year ended December 31, 2004, two customers accounted forapproximately 33.6% and 14.8% of our revenues. We expect that this reduction incustomer concentration will continue during 2006.

 

Inorder to avoid potential conflicts of interest with our customers, we do notparticipate in oil and natural gas ventures. The results of a seismic surveyconducted for a customer belong to that customer. All of our customer’sinformation is maintained in strictest confidence.

 

**Contracts**

 

Ourcontracts are obtained either through competitive bidding or as a result ofcustomer negotiations. Our services are conducted under general serviceagreements for seismic data acquisition services which define certainobligations for us and for our customers. A supplemental agreement settingforth the terms of a specific project, which may be cancelled by either partyupon 60 days advance written notice, is entered into for every project. Wecurrently operate under supplemental agreements that are either “turnkey”agreements providing for a fixed fee to be paid to us for each unit of dataacquired or “term” agreements providing for a fixed hourly, daily, or monthlyfee during the term of the project or projects. Turnkey agreements generallyprovide us with more profit potential, but involve more risks because of thepotential of crew downtime or operational delays. Under the term agreements, weforego an increased profit potential in exchange for a more consistent revenuestream with improved protection from crew downtime or operational delays. Weattempt to negotiate on a project-by-project basis some level of weatherdowntime protection within our agreements; however, we may stillexperience some risk due to inclement weather. We strive to manage our crewsand equipment as a portfolio, balancing the mix of turnkey and term contractsand the type of equipment.

 

Theenergy source for each contract is determined by the surface terrain and thesub-surface requirements. Although our contracts involving dynamite make up asmall percentage of the total number of contracts, since January of 2003they have represented approximately 28% of our total revenues. The range ofrevenues is influenced by the number of dynamite projects we conduct in a givenyear. We incur higher costs on our dynamite projects that we pass on to ourcustomers and, as a result, we recognize both higher revenues and higher costsof services, thereby reducing our margin.

 

**Sub-Contractors and EquipmentRental**

 

Weengage a number of sub-contractors to perform specialized services relatedto the use of dynamite that is required on some projects. These sub-contractorsprovide services that include supplying dynamite, drilling holes in connectionwith the use of dynamite and specialized surveying crews that can clear heavybrush and trees in order to complete the survey. Since there are a number ofcontractors that provide these types of services, we are not dependent on anysingle contractor or group of contractors for the successful completion of ourprojects.

 

Wealso rent certain specialized equipment on a project-by-project basis, such asboats and specialized geophones.

 

**Competition**

 

Theacquisition of seismic data for the oil and natural gas industry is a highlycompetitive business. There are approximately 55 seismic crews currentlyoperating in the continental United States. Contracts for such services generallyare awarded on the basis of price quotations, crew experience, and theavailability of crews to perform in a timely manner, although factorsother than price, such as crew safety performance history, technological andoperational expertise, are often determinative. Our competitors includecompanies with financial resources that are significantly greater than our ownas well as companies of comparable and smaller size. Our primary competitorsare Dawson Geophysical Company, Geo Kinetics, Inc., Petroleum GeoServices, and to a lesser extent, Veritas DGC, Inc. In addition to thepreviously named companies, we also compete for projects from time to time withsmaller seismic companies which operate in local markets with only one or twocrews. We believe that our long-term industry expertise, the

 

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customerrelationships developed over our history, and our financial stability give usan advantage over most of our competitors in the industry.

 

**Employees**

 

Asof December 31, 2005, we employed a total of 152 full-time (non-union)employees, of which 9 consisted of management, sales and administrativepersonnel with the remainder being crew personnel. We also hire contract laborfor our crews on an as-needed basis. We believe our relationship with ouremployees to be satisfactory.

 

**Data Bank**

 

Weown a data bank which contains gravity data, and to a lesser extent magneticdata, from many of the major oil and natural gas producing areas located withinthe U.S. We do not have a seismic data bank. Our data bank information has beenamassed through participatory surveys as well as speculative surveyshistorically funded by us alone. All data and interpretations may belicensed to customers at a fraction of the cost of newly acquired data.However, the licensing of this data is not a significant portion of ourrevenues.

 

**Operating Risks and Insurance**

 

Ourbusiness is subject to the hazards inherent in conducting seismic dataacquisition activities in hostile environments with dangerous machinery, and insome instances explosives. These conditions can cause personal injury or lossof life, damage to or destruction of property, equipment, the environment, andmarine life, and suspension of operations.

 

Inaddition, we could be subject to personal injury or real property damage claimsin the normal operation of our business. Such claims may not be coveredunder the indemnification provisions in our general service agreements to theextent that the damage is due to our negligence or intentional misconduct.

 

Wedo not carry insurance against certain risks that we could experience, such asbusiness interruption resulting from equipment maintenance or weather delays.We obtain insurance against certain property and personal casualty risks andother risks when such insurance is available and when our management considersit advisable to do so. Currently, our insurance coverage consists of employersliability with limits of $1,000,000 per accident and $2,000,000 in theaggregate, commercial general liability of $1,000,000 per accident and$2,000,000 in the aggregate, pollution liability of $1,000,000 per accident and$2,000,000 in the aggregate, automobile liability with a $1,000,000 combinedsingle limit, and a $10,000,000 umbrella policy. Our general service agreementsrequire us to have specific amounts of insurance. There can be no assurance,however, that any insurance obtained by us will be adequate to cover any lossesor liabilities, or that this insurance will continue to be available oravailable on terms which are acceptable to us. Liabilities for which we are notinsured, or which exceed the policy limits of our applicable insurance, couldhave a material adverse effect on us.

 

**ITEM 2. DESCRIPTION OF PROPERTY.**

 

Ourheadquarters are in leased facilities located in Plano, Texas, from which weconduct all of our current operations. These facilities include approximately10,500 square feet of office and warehouse space and an outdoor storage area ofapproximately 20,000 square feet. The monthly rent is $6,559. This facility isused to house our corporate offices and serves as the headquarters for ourseismic data acquisition services business. In September of 2005, we addedan additional 10,000 square feet of office and warehouse space and anadditional 10,000 square feet of outdoor storage to accommodate our recentgrowth. This facility is used primarily to repair geophysical equipment. Themonthly rent is $3,542. In January of 2006, we leased a 600 square footfacility in Houston, Texas, to be used as a sales office. The monthly rent is$734. The Company is not responsible for insuring these facilities. Theconditions of these facilities are good, and we believe that these propertiesare suitable and adequate for our foreseeable needs.

 

**ITEM 3. LEGAL PROCEEDINGS.**

 

OnDecember 28, 2004, one of our employees was killed in a work-relatedaccident. On July 11, 2005, the deceased employee’s widow filed suitagainst us in a state court in Harris County, Texas, seeking monetary damages. Ourinsurance company is currently providing legal counsel to represent us in thiscase, and we do not believe that the case’s disposition will have a materialadverse affect on our financial condition.

 

Weare a defendant in various other legal actions that arise out of the normalcourse of business. In our opinion, none of these actions will result in anysignificant loss to us.

 

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**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

 

Nomatters were submitted by the Company, during the fourth quarter of the fiscalyear ended December 31, 2005, to a vote of our security holders throughthe solicitation of proxies or otherwise.

 

# **Part II**

#  

**ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDERMATTERS.**

 

**Market Prices**

 

FromMay 25, 2002, through April 15, 2005, our common stock was tradedover-the-counter on the National Association of Securities Dealers, Inc.Over-The-Counter Bulletin Board System (using the trading symbol “TGCI”). Becauseof our improved financial condition which has led to a substantial increase inour stock price and the market value of our publicly-held shares, we qualifiedfor, and began trading on, the American Stock Exchange (“AMEX”) on April 18,2005, under our current trading symbol “TGE.”

 

Inthe following table, the prices shown through April 15, 2005, representprices among the dealers on the Over-The-Counter Bulletin Board System and donot include retail mark-ups, mark-downs, or commissions, and do not necessarilyrepresent actual transactions. Beginning on April 18, 2005, the followingtable shows the high and low sales prices reported for our common stock on theAMEX.

 
| ** **  | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-------------|------------|------------|------------|------------|------------|
| ** **  | ** ** | **High**   | ** ** | **Low**    | ** ** | **High** | ** ** | **Low** | ** ** |
| ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| 1st quarter |       | $          | 4.65       |       | $          | 2.72 |   | $ | 1.11 |   | $ | .70 |   |
| 2nd quarter |       | 6.10       |       | 3.31       |       | 2.45 |   | 1.20 |   |
| 3rd quarter |       | 11.70      |       | 5.59       |       | 2.50 |   | 1.50 |   |
| 4th quarter |       | 8.50       |       | 6.12       |       | 2.95 |   | 2.15 |   |
|             |            |            |            |            |            |  |  |  |  |  |  |  |  |

 

Thenumber of shareholders of record of TGE’s Common Stock as of March 20,2006, was 139. Due to the number of shares held in nominee or street name, webelieve that there are a significantly greater number of beneficial owners ofour common stock. As of such date, CEDE & CO. held 11,040,403 sharesin street name. On March 20, 2006, our common stock was quoted at aclosing sales price of $9.36.

 

Whilethere are currently no restrictions prohibiting us from paying cash dividendsto our shareholders, we have not paid any cash dividends on our common stock inthe past, and we do not anticipate paying any dividends in the foreseeablefuture. Payment of any cash dividends in the future, however, is in thediscretion of our board of directors and will depend on our financialcondition, results of operations, capital and legal requirements, and otherfactors deemed relevant by our board of directors. Earnings, if any, areexpected to be retained to fund our future operations.

 

**ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF PLAN OFOPERATIONS.**

 

*The following discussion and analysis should be readin conjunction with our financial statements and related notes thereto includedelsewhere in this Form 10-KSB. Portions of this document that are notstatements of historical or current fact are forward-looking statements thatinvolve risk and uncertainties, such as statements of our plans, objectives,expectations, and intentions. The cautionary statements made in this Form 10-KSBshould be read as applying to all related forward-looking statements whereverthey appear in this Form 10-KSB. Our actual results could differmaterially from those anticipated in the forward-looking statements. Factorsthat could cause our actual results to differ materially from those anticipatedinclude those discussed in “Risk Factors,” “Business,” and “Forward-LookingStatements.”*

 

**Overview**

 

Weare one of the leading providers of seismic data acquisition services in thecontinental U.S. As of December 31, 2005, we operated five seismic crews,and we deployed our sixth seismic crew in January of 2006. Substantiallyall of our revenues are derived from the seismic data acquisition serviceswhich we provide to our customers, primarily major and independent oil andnatural gas exploration and development companies in the continental U.S.Demand for our services depends upon the level of spending by these oil andnatural gas companies for exploration, production, and development, whichactivities depend, in part, on oil and natural gas prices. Fluctuations indomestic oil and natural gas exploration activities and commodity prices haveaffected the demand for our services and our results of operations in yearspast and continue to have a significant impact on our business and results ofoperations.

 

Ourreturn to profitability in 2003 after several years of losses is directlyrelated to an increase in the level of exploration and development for domesticoil and natural gas. The increased level of exploration and development is afunction of higher prices for oil

 

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andnatural gas. As a result of the increase in domestic exploration spending, wehave experienced an increased demand for our seismic data acquisition services.

 

Wecontinue to focus on increasing revenues and profitability. Due to the fixedcosts we incur, consisting primarily of depreciation, a non-cash item, andmaintenance expenses associated with seismic data acquisition equipment andcrew costs, we strive to maintain high utilization rates for our crews. Whileour revenues are mainly affected by the level of customer demand for ourservices, our revenues are also affected by the pricing for our services thatwe negotiate with our customers. As a result of the fixed cost structure of ourbusiness, our profitability is affected by the level of productivity of ourseismic data acquisition crews including crew downtime related to inclementweather, unplanned equipment repairs, and delays in acquiring land accesspermits. Consequently, our continued growth in revenues and improvedprofitability is due, in part, to our successful efforts to negotiate morefavorable weather protection provisions in our service agreements with ourcustomers, our ability to mitigate access permit delays and our continuedefforts to improve overall crew productivity by purchasing equipment thatoperates more efficiently in our markets. Although our customers may canceltheir supplemental service agreements with us on short notice, we believe thatwe currently have sufficient contracts to sustain operations through the firsthalf of 2006.

 

**How We Generate Our Revenues**

 

Ourcontracts are obtained either through competitive bidding or as a result ofnegotiations with customers. Contract terms offered by us are generallydependent on the complexity and risk of operations, energy source techniquebeing used (vibroseis or dynamite), type of equipment, and the anticipatedduration of the work to be performed. The majority of our contracts aretypically subject to termination by the customer upon 60 days advance writtennotice to us with little or no penalty.

 

**How We Manage Our Operations**

 

Ourmanagement team uses a variety of tools to manage our operations. These toolsinclude monitoring our: (1) seismic crew performance; (2) projectscheduling calendar; (3) schedule of pending proposals; and (4) safetyperformance.

 

*Seismic crew performance*.  Wemonitor crew performance on a daily basis by monitoring the production obtainedby each crew on the previous day in relation to the type of geography, weather,and type of acquisition technique being employed — vibroseis or dynamite. Thisreview allows us to monitor the profitability of turnkey contracts andreallocate resources if necessary to increase productivity. We expect our costof services and selling, general and administrative (“SG&A”) expenses toincrease as a percentage of sales during periods in which we deploy additionalcrews, but decrease as a percentage of sales as new crews become more efficientand higher revenues are generated.

 

*Project scheduling calendar*.  Ourmanagement team reviews our project scheduling calendar on a daily basis.Monitoring this schedule allows management to schedule or reschedule projectsto most efficiently utilize our resources. This continuous monitoring allows usto limit our crews’ downtime between jobs and helps us communicate effectivelywith customers concerning the estimated start dates and completion dates ofpending projects.

 

*Schedule of pending proposals*.  Wemonitor on a daily basis our list of outstanding proposals. By monitoring thislist, we are able to more effectively schedule our future projects anddetermine whether we need to follow up with the customer on any of the pendingproposals.

 

*Safety performance*.  Maintaining a strong safety record is acritical component of our operational success. Our field level management teamholds a safety meeting every day to discuss any safety issues that arose duringthe previous day. In an effort to maintain our historic levels of safetyperformance, we have engaged a safety specialist through our insurance agencyto conduct our safety training courses and to review our safety reports on aregular basis.

 

**Our Growth Strategies**

 

Webelieve that there are significant opportunities for us to increase ourrevenues and market position in the continental U.S. onshore seismic market by:

 

•       optimizing equipment and crew utilization;

 

•       maintaining our state-of-the-art technologyposition;

 

•       maintaining our efficient managementstructure;

 

•       managing the mix and terms of our contracts;and

 

•       maintaining a conservative balance sheet anddisciplined capital spending program.

 

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**Results of Operations**

 

***Year Ended December 31,2005, Compared to Year Ended December 31, 2004***

 

*Revenues*. Our revenues were $30,851,963 for the year ended December 31,2005, compared to $20,084,175 for the same period of 2004, an increase of 53.6%.This increase in revenues was attributable to several factors includingincreasing the number of seismic data acquisition crews operating in 2005compared with the number of crews operating in 2004, increased demand for ourservices due to increased exploration and development activity by domestic oiland natural gas companies, price improvements and more favorable contract termsin our agreements with customers, and the increased productivity derived fromour new ARAM ARIES recording systems. In January of 2004, we deployed oursecond seismic data acquisition crew. In June of 2004, we deployed ourthird seismic data acquisition crew. In the fourth quarter of 2004, we placedour first ARAM ARIES recording system into service. In July of 2005, wedeployed our fourth seismic data acquisition crew along with our second newARAM ARIES recording system, and in November of 2005, we deployed ourfifth seismic data acquisition crew along with our third ARAM ARIES recordingsystem.

 

*Cost of services*. Cost of services includes the wages and expenses directly related toour field crews and support operations, as well as third party costs associatedwith certain contracts provided by non-employee contractors, but excludesdepreciation and amortization expense. Our cost of services was $18,152,118 forthe year ended December 31, 2005, compared to $14,707,648 for the sameperiod of 2004, an increase of 23.4%. This increase was principallyattributable to our increase in revenues. However, as a percentage of revenues,cost of services was 58.8% for the year ended December 31, 2005, comparedto 73.2% for the same period of 2004, a decrease of 14.4%. This decrease wasprimarily attributable to the mix of contracts, non-recurring equipment rentalexpense that occurred in the second quarter of 2004, and the increasedproductivity attributable to the new ARAM ARIES recording systems.

 

*Selling, general, and administrative*. SG&A expenses include the wages andsalaries of administrative and sales personnel, as well as other generaloverhead costs not directly related to field operations. SG&A expenses were$2,149,350 for the year ended December 31, 2005, compared to $1,277,161for the same period of 2004, an increase of 68.3%. This increase was primarilyattributable to additional compensation expense for incentive bonuses,additional expenses associated with the Company’s common stock being listed onthe American Stock Exchange, increased insurance costs, increased legalexpense, and expenses associated with additional personnel in 2005 comparedwith 2004. SG&A expenses as a percent of revenue increased to 7.0% for theyear ended December 31, 2005, from 6.4% for the same period of 2004.

 

*Depreciation**and amortization**expense*.Depreciation and amortization expense was $3,201,236 for the year ended December 31,2005, compared to $1,106,022 for the same period of 2004, an increase of 189.4%.This increase was attributable to capital expenditures of $5,794,553 in 2004,which was incurred predominantly in the fourth quarter, and to that portion ofthe $20,525,672 in capital expenditures during 2005 that were placed intoservice during that year. As a result, depreciation and amortization expense asa percent of revenue increased to 10.4% for the year ended December 31,2005, from 5.5% for the same period of 2004.

 

*Income from operations*. Income from operations was $7,349,259 forthe year ended December 31, 2005, compared to $2,993,344 for the sameperiod of 2004, an increase of 145.5%. This increase was primarily attributableto the increase in revenues and the improvement in our cost of services,partially offset by increases in SG&A and depreciation and amortizationexpenses. EBITDA increased $6,451,129 to $10,550,495 for the year ended December 31,2005, from $4,099,366 in the same period of 2004, an increase of 157.4%. Thisincrease was a result of those factors mentioned above. For a definition ofEBITDA, a reconciliation of EBITDA to net income, and a discussion of EBITDA,see the section entitled “Non-GAAP Financial Measure” which follows.

 

*Interest expense*. Interest expense was $364,848 for the year ended December 31,2005, compared to $60,878 for the same period of 2004. This increase wasprimarily attributable to the debt incurred for the purchase of our first twoARAM ARIES seismic recording systems and the debt associated with vehiclesleased under capital leases.

 

*Income tax expense*. Income tax expense was $783,633 for the year ended December 31,2005, compared to $64,127 for the same period of 2004. As of December 31,2004, we had net operating loss carryforwards of approximately $4,980,000available to offset future taxable income. These net operating losscarryforwards were depleted during 2005. As a result, the Company had aneffective tax rate of 11.2% in 2005, but will incur federal (and various stateincome) taxes in 2006 at regular statutory rates.

 

**Non-GAAP Financial Measure**

 

Wedefine EBITDA as net income plus expenses of interest, income taxes,depreciation, and amortization. We use EBITDA as a supplemental financialmeasure to assess:

 

•       the financial performance of our assetswithout regard to financing methods, capital structures, taxes, or historicalcost basis;

 

•       our liquidity and operating performance overtime and in relation to other companies that own similar assets and that webelieve calculate EBITDA in a manner similar to us; and

 

•       the ability of our assets to generate cashsufficient for us to pay potential interest expenses.

 

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Wealso understand that such data is used by investors to assess our performance.However, EBITDA is not a measure of operating income, operating performance, orliquidity presented in accordance with General Accepted Accounting Principals(GAAP). When assessing our operating performance or our liquidity, you shouldnot consider this data in isolation or as a substitute for our net income, cashflow from operating activities, or other cash flow data calculated inaccordance with GAAP. EBITDA excludes some, but not all, items that affect netincome and operating income, and these measures may vary among othercompanies. Therefore, EBITDA as presented below may not be comparable tosimilarly titled measures of other companies. Further, the results presented byEBITDA cannot be achieved without incurring the costs that the measureexcludes: interest, taxes, depreciation, and amortization.

 

Thefollowing table reconciles our EBITDA to our net income:

 
| ** **                            | ** ** | **Year Ended  December 31,** | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|
| ** **                            | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Net income                            |       | $                                      | 6,200,778  |   | $ | 2,868,339 |   |
| Depreciation and amortization expense |       | 3,201,236                              |       | 1,106,022 |   |
| Interest expense                      |       | 364,848                                |       | 60,878 |   |
| Income tax expense                    |       | 783,633                                |       | 64,127 |   |
| EBITDA                                |       | $                                      | 10,550,495 |   | $ | 4,099,366 |   |

 

**Liquidity and Capital Resources**

 

**Liquidity**

 

*Cash flows from operatingactivities.*

 

Netcash provided by operating activities was $5,739,614 for the year ended December 31,2005, compared to $4,165,754 for the same period of 2004. The $1,573,860increase was principally due to a $3,332,439 increase in net income and a $2,095,214increase in depreciation and amortization expense offset by an increase in theaccounts receivable of $1,947,130 and an increase in costs and estimatedearnings in excess of billings on uncompleted contracts of $3,253,330. Significantcomponents of net cash provided by operations are the changes, period overperiod, in accounts receivable, costs, and estimated earnings in excess ofbillings on uncompleted contracts, accounts payable, and billings in excess ofcosts and estimated earnings on uncompleted contracts. Accounts receivableincreased $857,630 during the year ended December 31, 2004, to $1,655,084and increased $2,804,760 during the year ended December 31, 2005, to$4,459,844. These receivable fluctuations were primarily due to the timing ofbillings and collections. Costs and estimated earnings in excess of billings onuncompleted contracts increased $201,030 during the year ended December 31,2004, to $231,524 and increased $3,454,360 during the year ended December 31,2005, to $3,685,884. These costs and estimated earnings in excess of billingson uncompleted contracts fluctuations were primarily due to the increased levelof activity. Accounts payable increased $621,633 during the year ended December 31,2004, to $741,782 and increased $1,222,884 during the year ended December 31,2005, to $1,964,666. These payable fluctuations were primarily due to the mixof contracts and the timing of receipt and payment of invoices. Billings inexcess of costs and estimated earnings on uncompleted contracts increased$361,977 during the year ended December 31, 2004, to $657,956 andincreased $762,728 during the year ended December 31, 2005, to $1,420,684.These billings in excess of costs and estimated earnings on uncompletedcontracts fluctuations were primarily due to the timing of billings and revenuerecognition.

 

Workingcapital increased $ 9,099,016 to $9,952,149 as of December 31, 2005, fromthe December 31, 2004, working capital of $853,133. This increase was dueprimarily to an increase in cash and cash equivalents of $7,669,505, anincrease in trade accounts receivable of $2,804,760, and an increase in costsand estimated earnings in excess of billings on uncompleted contracts of$3,454,360 offset by increases in trade accounts payable of $1,222,884,billings in excess of costs and estimated earnings on uncompleted contracts of$762,728, and current maturities of notes payable of $2,685,290. These changeswere primarily the result of net proceeds the Company received from its publicoffering completed in October of 2005, the increased level of activity in2005, and the increased debt levels associated with the financing of twoadditional ARAM ARIES seismic recording systems and three vibration vehicles in2005.

 

*Cash flows used in investing activities*.

 

Netcash used in investing activities was $2,636,741 for the year ended December 31,2004, and $11,358,108 for the year ended December 31, 2005. The $8,721,367increase was due to an increase in capital expenditures of $8,853,795 offset byan increase in proceeds from sale of property and equipment of $132,428.

 

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*Cash flows provided by (used in) financing activities.*

 

Netcash used in financing activities was $724,330 for the year ended December 31,2004. Net cash provided by financing activities was $13,287,999 for the yearended December 31, 2005. The change was due primarily to net proceeds fromthe issuance of common stock of $40,002,839, proceeds from issuance of debt of$430,581, and an increase in proceeds from exercise of stock options of $76,239offset by redemption of stock purchase warrants of $24,001,298, an increase inprincipal payments on notes payable of $2,094,291, and an increase in principalpayments on capital lease obligations of $421,550.

 

*Capital expenditures*.

 

Duringthe year ended December 31, 2005, capital expenditures of $11,491,786 wereused to acquire additional seismic equipment and vehicles. In June of2005, we completed a $3,366,253 loan transaction with a commercial lender forthe purpose of providing funds for the purchase of our second new ARAM ARIESrecording system. This loan is repayable over a period of thirty-six months ata fixed per annum interest rate of 7.25%. The loan is collateralized by the newrecording system equipment and the recording truck and two semi-trailers thattransport the newly purchased equipment between projects. During the thirdquarter of 2005, we completed a $ 858,705 loan transaction with a commerciallender for the purpose of providing funds for the purchase of three new buggymounted vibration vehicles. This loan is repayable over a period of thirty-sixmonths at a fixed per annum interest rate of 7.25%. This loan is collateralizedby the three new buggy mounted vibration vehicles. In September of 2005 weentered into an equipment sales contract to purchase nine new vibrationvehicles at a cost of approximately $ 2,936,000. We took delivery of thesevibration vehicles during the first quarter of 2006, and proceeds from ourpublic offering were used to purchase these vibration vehicles. In November of2005, we purchased our third new ARAM ARIES recording system using $4,088,127of the proceeds from the public offering. In addition, in December of2005, we completed a $3,791,338 loan transaction with a commercial lender forthe purpose of providing funds for the purchase of our fourth new ARAM ARIESrecording system. This loan is repayable over a period of thirty-six months ata fixed per annum interest rate of 7.78%. This loan is collateralized by thenew recording system equipment and the recording truck and two semi-trailersthat transport the newly purchased equipment between projects. In January of2006, we entered into an equipment sales contract to purchase seven new buggymounted vibration vehicles at a cost of approximately $2,325,000. We anticipatedelivery of these units during the third quarter of 2006. Proceeds from thepublic offering will be used to purchase these buggy mounted vibration vehicles.Although we do not budget for our capital expenditures, we may purchaseadditional equipment as the demand for our services increases.

 

**Capital Resources**

 

Historically,we have relied on cash generated from operations and short-term borrowings fromcommercial banks and equipment lenders and loans from directors to fund ourworking capital requirements and capital expenditures.

 

Duringa period beginning in 1999 and ending in 2003, we did not have adequatefinancial strength to enable us to obtain from independent sources financingneeded to enable us to sustain our operations. With no other financial sourcesavailable, on several different occasions during this period of time certain ofour directors both made direct loans to us and agreed to provide us with neededlines of credit. In connection with these loans and lines of credit, we issuedstock purchase warrants. When we completed in October of 2005 a publicoffering of our common stock, we used a portion of the proceeds received topurchase from these directors all of their stock purchase warrants which theyhad acquired for providing such financial accommodations. Financial advisors tothe Company had suggested that this would simplify the Company’s capitalizationthereby allowing investors to better understand the Company’s earnings pershare calculations. The purchase price of each of these warrants was equal tothe public offering price of the Company’s common stock less the total of theexercise price of each warrant and each warrant’s proportionate share of theunderwriting discounts and commissions (such proportionate share being based onthe “in the money” value of each warrant).

 

InOctober of 2004, we completed a $2,386,649 loan transaction with acommercial lender for the purpose of providing funds for the purchase of ourfirst new ARAM ARIES recording system. The loan is repayable over a period of36 months at a fixed per annum interest rate of 6.85%. The loan iscollateralized by the new recording system equipment and the recording vehicleand two semi-trailers that transport the equipment between projects.

 

InApril of 2005, we entered into a revolving line of credit loan agreementwith a commercial bank. On September 16, 2005, we amended our revolvingline of credit under which we may borrow, repay, and re-borrow, from timeto time until September 2006, up to $3,500,000. Our obligations under thisagreement are secured by a security interest in our accounts receivable.Interest on the outstanding amount under the line of credit loan agreement ispayable monthly at a rate of prime plus 1.0%. The credit loan agreementprovides for non-financial and financial covenants including a minimum debt toworth ratio of 1 to 1.50 and a minimum liquidity of $500,000. As of December 31,2005, we had no borrowings****outstandingunder the line of credit loan agreement.

 

InJune of 2005, we completed a $3,366,253 loan transaction with a commerciallender for the purpose of providing funds for the purchase of our second newARAM ARIES recording system. This loan is repayable over a period of 36 monthsat a fixed per annum interest rate of 7.25%. This loan is collateralized by thenew recording system equipment and the recording vehicles and two semi-trailersthat transport the newly purchased equipment between jobs. During the thirdquarter of 2005, we obtained financing from a commercial lender for $858,705 ofthe purchase price of three new buggy mounted vibration vehicles for a periodof 36 months at a

 

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fixedper annum simple interest rate of 7.25%. These loans are collateralized by thethree new buggy mounted vibration vehicles. In December of 2005, wecompleted a $3,791,338 loan transaction with a commercial lender for thepurpose of providing funds for the purchase of our fourth new ARAM ARIES recordingsystem. This loan is repayable over a period of 36 months at a fixed per annuminterest rate of 7.78%. This loan is collateralized by the new recording systemequipment.

 

Theboard of directors determined to eliminate unnecessary administrative expensesand dividend payments with respect to our outstanding Series C PreferredStock by redeeming all of such preferred stock. As a result, the board ofdirectors, at its regular meeting held on June 7, 2005, approved theredemption by the Company of the Series C Preferred Stock. The redemptionprivilege was contained in the resolution establishing such preferred stock.The redemption price was $5.00 per share plus a premium of 40% per share (i.e.,$2.00 per share). In addition, each share was entitled to receive the regular$.20 dividend that had accrued for the first half of the year. Thus, theredemption price was $7.20 per share. On June 30, 2005, the Companyredeemed all 5,250 shares of its Series C Preferred Stock for $36,750 plusaccrued dividends of $1,050.

 

Ourboard of directors approved a resolution providing for redemption of all of ouroutstanding 81⁄2% Senior Convertible Preferred Stock upon the consummation of ourpublic offering in October of 2005. Under the terms of the resolutioncreating such 81⁄2% Senior Convertible Preferred Stock, each share was redeemableat $1.75 per share, and each holder of our 81⁄2% Senior Convertible PreferredStock had an option to convert each share of our 81⁄2% Senior ConvertiblePreferred Stock into one share of our common stock. All of the holders of our81⁄2% Senior Convertible Preferred Stock elected to convert their shares of 81⁄2%Senior Convertible Preferred Stock into shares of our common stock. As aresult, in October of 2005 all of the outstanding shares of our 81⁄2% SeniorConvertible Preferred Stock were converted into shares of our common stock.

 

InOctober of 2005, the Company completed a public offering of 5,500,000shares of our common stock at $7.50 per share. In November of 2005, theunderwriters of the public offering exercised a portion of their over-allotmentoption and purchased an additional 285,700 shares of our common stock. Thesales resulted in aggregate net proceeds of approximately $40,572,000.

 

InOctober of 2001, the Company entered into a three-year operating lease forthe Company’s headquarters facility located in Plano, Texas. In April of2004, the Company executed an addendum to its operating lease. The addendumextended the term of the lease until March 31, 2009, and increased thesquare footage of the office and outdoor storage area. Additionally, in August of2005, the Company entered into a 38 month operating lease for additionaloffice and warehouse space in Plano, Texas. This operating lease will expire inOctober of 2008. In January of 2006, the Company entered into atwo-year operating lease for a sales office in Houston, Texas. This operatinglease will expire in January of 2008.

 

**Contractual Obligations**

 

Thefollowing table summarizes payments due in specific periods related to ourcontractual obligations as of December 31, 2005: 

 
| ** **                       | ** ** | **Payments Due by Period (1)** | ** ** |
|----------------------------------|------------|----------------------------------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**                                          | ** ** | **Within  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **After  5 Years** | ** ** |
| ** **                       | ** ** | **(In thousands)**                                 | ** ** |
| Operating lease obligations      |       | $                                                  | 384        |   | $ | 121 |   | $ | 242 |   | $ | 21 |   | $ | — |   |
| Debt obligations                 |       | $                                                  | 9,009      |   | $ | 3,559 |   | $ | 5,450 |   | $ | — |   | $ | — |   |
| Capital lease obligations        |       | $                                                  | 1,420      |   | $ | 671 |   | $ | 749 |   | $ | — |   | $ | — |   |
|                             |       |                                               |       |   |   |   |   |   |   |   |   |
| Total                            |       | $                                                  | 10,813     |   | $ | 4,351 |   | $ | 6,441 |   | $ | 21 |   | $ | — |   |

 

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(1)  See “Capital Resources” above for adiscussion of the contractual obligations we have incurred since December 31,2005.

 

Webelieve that our capital resources, including our short-term investments, fundsavailable under our line of credit loan agreement, and cash flow fromoperations, are adequate to meet our current operational needs. We believe thatwe will be able to finance our 2006 capital expenditures through cash flow fromoperations, borrowings from commercial lenders, and the proceeds from ourpublic offering completed in October of 2005. However, our ability tosatisfy working capital requirements, meet debt repayment obligations, and fundfuture capital requirements will depend principally upon our future operatingperformance, which is subject to the risks inherent in our business.

 

**Off-Balance Sheet Arrangements**

 

Asof December 31, 2005, we had no off-balance sheet arrangements.

 

**Critical Accounting Policies**

 

Thepreparation of our financial statements in conformity with GAAP requires us tomake certain assumptions and estimates that affect the reported amounts ofassets and liabilities at the date of our financial statements and the reportedamounts of revenues and

 

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expensesduring the reporting period. Because of the use of assumptions and estimatesinherent in the reporting process, actual results could differ from thoseestimates.

 

*Revenue Recognition.*

 

Ourservices are provided under cancelable service contracts. These contracts areeither “turnkey” or “term” agreements. The Company recognizes revenues whenservices are performed under both types of agreements. Services are defined asthe commencement of seismic data acquisition. Under turnkey agreements, revenueis recognized on a-per unit of data acquired rate as services are performed.Under term agreements, revenue is recognized on a-per unit of time worked rateas services are performed. In the case of a cancelled service contract, werecognize revenue and bill our customer for services performed up to the dateof cancellation.

 

Insome instances, we bill customers in advance of the services performed. Inthose cases, we recognize the liability as deferred revenue.

 

*Allowance for Doubtful Accounts.*

 

Weprepare our allowance for doubtful accounts receivable based on our pastexperience of historical write-offs, our current customer base and our reviewof past due accounts. The inherent volatility of the energy industry’s businesscycle can cause swift and unpredictable changes in the financial stability ofour customers.

 

*Impairment of Long-lived Assets.*

 

Wereview long-lived assets for impairment when triggering events occur suggestingdeterioration in the assets’ recoverability or fair value. Recognition of animpairment charge is required if future expected net cash flows areinsufficient to recover the carrying value of the asset. Our forecast of futurecash flows used to perform impairment analysis includes estimates offuture revenues and profitability based on our historical results and analysisof future oil and natural gas prices which is fundamental in assessing demandfor our services. If we are unable to achieve these cash flows, our estimateswould be revised which could result in an impairment charge for the period ofrevision.

 

*Depreciable Lives of Property,Plant, and Equipment.*

 

Ourproperty, plant, and equipment are capitalized at historical cost anddepreciated over the useful life of the asset. Our estimation of this usefullife is based on circumstances that exist in the seismic industry andinformation available at the time of the purchase of the asset. The technologyof the equipment used to gather data in the seismic industry has historicallyevolved such that obsolescence does not occur quickly. As circumstances changeand new information becomes available, these estimates could change. Weamortize these capitalized items using the straight-line method. Capital assetsare depreciated over their useful lives ranging from one to seven years,depending on the classification of the asset.

 

*Tax Accounting.*

 

Weaccount for our income taxes in accordance with Statement of FinancialAccounting Standards (SFAS) No. 109, “Accounting for Income Taxes,” whichrequires the recognition of amounts of taxes payable or refundable for thecurrent year and an asset and liability approach in recognizing the amount ofdeferred tax liabilities and assets for the future tax consequences of eventsthat have been recognized in our financial statements or tax returns. Wedetermine deferred taxes by identifying the types and amounts of existingtemporary differences, measuring the total deferred tax asset or liabilityusing the applicable tax rate, and reducing the deferred tax asset by avaluation allowance if, based on available evidence, it is more likely than notthat some portion or all of the deferred tax assets will not be realized. Ourmethodology for recording income taxes requires judgment regarding assumptionsand the use of estimates, including determining our annual effective tax rateand the valuation of deferred tax assets, which can create variance betweenactual results and estimates. This process involves making forecasts of currentand future years’ taxable income, and unforeseen events may significantlyaffect these estimates. Those factors, among others, could have a materialimpact on our provision or benefit for income taxes.

 

*Stock Based Compensation.*

 

Inaccordance with the Accounting Principles Board (APB) Opinion No. 25, “Accountingfor Stock Issued to Employees,” we do not record compensation for stock optionsor other stock-based awards that are granted to employees or non-employeedirectors with an exercise price equal to or above the common stock marketprice on the grant date.

 

**Recently Issued AccountingPronouncements**

 

InDecember of 2004, the Financial Accounting Standards Board (FASB) issuedSFAS No. 123R, “Share Based Payment” (SFAS 123R), which requires thatcompensation costs relating to share-based payments be recognized in ourfinancial statements. We currently account for those payments under therecognition and measurement principles of APB Opinion No. 25, “Accountingfor

 

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StockIssued to Employees,” and related interpretations. The Company implemented thisstandard effective January 1, 2006. Such implementation is expected to haveminimal impact on our results of operations, financial position, and liquidity.

 

InDecember of 2004, the FASB issued SFAS No. 153, “Exchange ofNonmonetary Assets,—an Amendment of APB Opinion No. 29,” (SFAS 153), whichbecame effective for our asset-exchange transactions on July 1, 2005.Under APB 29, assets received in certain types of nonmonetary exchanges werepermitted to be recorded at the carrying value of the assets that wereexchanged (i.e., recorded on a carryover basis). As amended by SFAS 153, assetsreceived in some circumstances will have to be recorded instead at their fairvalues. In the past, we have not engaged in significant amounts of nonmonetaryasset exchanges.

 

**Effect of Inflation**

 

Wedo not believe that inflation has had a material effect on our business,results of operations, or financial condition during the past two years.

 

**Qualitative and QuantitativeDisclosure about Market Risk**

 

Wehave not entered into any hedging agreements or swap agreements. Our principalmarket risk is the risk related to the concentration of our customers in theoil and natural gas industry. Since all of our customers are involved in theoil and natural gas industry, there may be a positive or a negative effecton our exposure to credit risk in that our customers may be similarlyaffected by changes in economic and industry conditions. For the years ended December 31,2005 and 2004, our top two customers in each of those years accounted forapproximately 11.6% and 10.6% and 33.6% and 14.8%, respectively, of our annualrevenues.

 

**FORWARD-LOOKING STATEMENTS**

 

ThisForm 10-KSB includes “forward-looking statements” as defined in Section 27Aof the Securities Act of 1933, as amended (the “Securities Act”), and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”), whichreflect our view with respect to future events. We base these forward-lookingstatements on our current expectations and projections about future events.These forward looking statements are subject to risks, uncertainties, andassumptions about the Company, including:

 

•       dependence upon energy industry spending forseismic data acquisition services;

 

•       the unpredictable nature of forecastingweather;

 

•       the potential for contract delay orcancellation;

 

•       the potential for fluctuations in oil andnatural gas prices; and

 

•       the availability of capital resources.

 

Weuse the words “may,” “will,” “can,” “could,” “should,” “expect,” “anticipate,” “estimate,”“believe,” “target,” “continue,” “intend,” “plan,” “budget,” and other similarwords to identify forward-looking statements. You should read statements thatcontain these words carefully because they discuss future expectations, containprojections of results of operations or of our financial condition, and/orstate other “forward-looking” information. We do not undertake any obligationto update or revise publicly any forward-looking statements, except as requiredby law. These statements also involve risks and uncertainties that could causeour actual results or financial condition to materially differ from ourexpectations in this Form 10-KSB.

 

Webelieve that it is important to communicate our expectations of futureperformance to our investors. However, events may occur in the future thatwe are unable to accurately predict or over which we have no control. Whenconsidering our forward-looking statements, you should keep in mind the riskfactors and other cautionary statements in this Form 10-KSB and otherfactors noted throughout this Form 10-KSB. There are many risks,uncertainties, and events that may cause our actual results to differmaterially from those contained in any forward-looking statement. Please readthe section entitled “Risk Factors” for a discussion of certain risks ofour business and an investment in our common stock.

 

**MARKET DATA AND FORECASTS**

 

Unlessotherwise indicated, information in this Form 10-KSB concerning economicconditions and our industry is based on information from independent industryanalysts and publications as well as our estimates. Our estimates are derivedfrom publicly available information released by third-party sources, as well asdata from our internal research, and are based on such data and our knowledgeof our industry, which we believe to be reasonable. None of the independentindustry publications used in this Form 10-KSB were prepared on our or ouraffiliates’ behalves, and none of the sources cited in this Form 10-KSBhas consented to the inclusion of any data from its reports, nor have we soughtconsent from any of them.

 

**RISK FACTORS**

 

Anyinvestment in our common stock involves a high degree of risk. You shouldcarefully consider the risks and uncertainties described below and the otherinformation included in this Form 10-KSB before purchasing our commonstock. Although the risks described below are the risks that we believe arematerial, they are not the only risks relating to our business and our commonstock. Additional risks and uncertainties, including those that are not yetidentified or that we currently believe are immaterial, may also

 

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adverselyaffect our business, financial condition, or results of operations. If any ofthe events described below occur, our business and financial results could bematerially and adversely affected. The market price of our common stock coulddecline due to any of these risks, perhaps significantly, and you could loseall or part of your investment.

 

**Company Risks**

 

**We have a history of losses, and we may incurlosses again.**

 

Althoughwe reported net income (before dividend requirements on preferred stock) ofapproximately $6,201,000 for the year ended December 31, 2005, we have ahistory of losses with only three profitable years since 1998. In 2004, we hadnet income (before dividend requirements on preferred stock) of approximately$2,868,000, and in 2003 we had net income (before dividend requirement onpreferred stock) of approximately $555,000. Our ability to be profitable in thefuture will depend on many factors beyond our control, but primarily on thelevel of demand for land-based seismic data acquisition services by oil andnatural gas exploration and development companies. Even if we do achieveprofitability, we may not be able to sustain or increase profitability ona quarterly or annual basis.

 

**Our revenues and operating results can be expected tofluctuate from period to period.**

 

Ourrevenues, operating results, and profitability may fluctuate from periodto period. These fluctuations are attributable to the level of new business ina particular period, the timing of the initiation, progress, or cancellation ofsignificant projects, higher revenues and expenses on our dynamite contracts,and costs we incur to train new crews we may add in the future to meetincreased customer demand. Fluctuations in our operating results may alsobe affected by other factors that are outside of our control such as permitdelays, weather delays, and crew productivity. Oil and natural gas prices areat record highs and have resulted in increasing demand for our services. Therecan be no assurance that such high prices will continue. The demand for ourservices will be adversely affected by a significant reduction in oil andnatural gas prices. Since our business has high fixed costs, the negativeeffect of one or more of these factors could trigger wide variations in ouroperating revenues, EBITDA margin, and profitability from quarter to quarter,which render quarter to quarter comparisons unreliable as an indicator ofperformance. Due to the factors discussed above, you should not expectsequential growth in our quarterly revenues and profitability.

 

**We are implementing a growth strategy which, ifsuccessful, will place significant demands on us and subject us to numerousrisks.**

 

Growingbusinesses often have difficulty managing their growth. If our growth strategyis successful, significant demands will be placed on our management,accounting, financial, information, and other systems and on our business. Wewill have to expand our management and continue recruiting and employingexperienced executives and key employees capable of providing the necessarysupport. In addition, to manage our anticipated growth we will need to continueto improve our financial, accounting, information, and other systems in orderto effectively manage our growth, and in doing so could incur substantialadditional expenses that could harm our financial results. We cannot assure youthat our management will be able to manage our growth effectively orsuccessfully. Our failure to meet these challenges could materially impair ourbusiness.

 

**We are dependent upon significant customers.**

 

Wederive a significant amount of our revenues from a small number of oil andnatural gas exploration and development companies. During 2005 and 2004, ourtwo largest customers accounted, respectively, for approximately 22.2% and 48.4% of revenues. While our revenues arederived from a concentrated customer base, our significant customers may varybetween years. If we lose one or more major customers in the future, or if oneor more customers encounter financial difficulties, our business, financialcondition, and results of operations could be materially and adverselyaffected.

 

**We receive revenues from customers who engageconsultants for processing and interpreting the seismic data we provide.**

 

Wereceive revenues from customers who have engaged consultants to process andinterpret their seismic data. Consultants can have an influence in determiningwhich company its customers use to acquire seismic data. A consultant couldrecommend that its customers consider using other seismic companies.

 

**We face intense competition in our business fromcompanies with greater financial resources.**

 

Theseismic data acquisition services industry is a highly competitive business inthe continental U.S. Our competitors include companies with financial resourcesthat are significantly greater than our own as well as companies of comparableand smaller size.

 

**Technological change in our business creates risks oftechnological obsolescence and requirements for future capital expenditures. Ifwe are unable to keep up with these technological advances, we may not beable to compete effectively.**

 

Seismicdata acquisition technologies historically have steadily improved andprogressed, and we expect this progression to continue. Our strategy is toupgrade our seismic data acquisition equipment on a regular basis to maintainour competitive position.

 

14

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However,since we are in a capital intensive industry and have limitations on ourability to obtain the financing necessary to enable us to purchasestate-of-the-art equipment, some of our competitors may be able topurchase newer equipment when we may not be able to do so.

 

**We are dependent on our management team and keyemployees, and the loss of any of them could harm our business.**

 

Wehave limited management depth with the result that the loss, whether by death,departure, or illness, of Wayne A. Whitener, our President and Chief ExecutiveOfficer, or other senior executives, could have a material adverse effect onthe ability of management to continue operations at the same level ofefficiency. We have key man insurance on the life of our President and ChiefExecutive Officer so that, in the event of his untimely death, we would receiveinsurance proceeds of $1,000,000 under this policy.

 

**Certain members of our management team are not subjectto employment or non-competition agreements and may leave our employment atany time.**

 

Noneof the members of our management team, other than our President and ChiefExecutive Officer, are subject to employment agreements or non-competitionagreements; therefore, any of these members of our management team could leaveupon little or no notice which could have a material adverse effect on ourmanagement’s ability to continue operations at the same level of effectiveness.Additionally, the lack of non-competition agreements would allow these membersof our management team to immediately begin working for one of our competitorsupon the termination of their relationship with us. This could have a negativeimpact on our strategic plan and our relationships with customers.

 

**We extend credit to our customers without requiringcollateral, and a default by a customer could have a material adverse effect onour operating revenues.**

 

Weperform ongoing credit evaluations of our customers’ financial conditionsand, generally, require no collateral from our customers. A default in paymentfrom one of these large customers could have a material adverse effect on ouroperating revenues for the period involved.

 

**Certain of our core assets are pledged as collateralfor short term notes that require large monthly payments.**

 

Certainassets that are critical to our operations, including three of our ARAM ARIESrecording systems, are pledged as collateral to our equipment lenders and couldbe subject to foreclosure in the event that we default on our indebtednesshaving 36 month terms. We currently have debt obligations covering the purchaseof three of our four ARAM ARIES recording systems that require monthly paymentsbetween approximately $67,000 and $82,000 for the first ARAM ARIES recordingsystem, between approximately $94,000 and $114,000 for the second ARAM ARIESrecording system, and between approximately $106,000 and $130,000 for thefourth ARAM ARIES recording system. Any decline in our operations could inhibitour ability to make these substantial monthly payments. In light of the shortterms of these notes, a failure to make the monthly payments on these notescould cause our lenders to promptly foreclose on the assets securing thesenotes. The foreclosure of certain of our core assets securing these notes couldseverely limit our ability to continue operations.

 

**We may be subject to liability claims that arenot covered by our insurance.**

 

Ourbusiness is subject to the general risks inherent in land-based seismic dataacquisition activities. Our activities are often conducted in remote areas underdangerous conditions, including the detonation of dynamite. These operationsare subject to risks of injury to personnel and equipment. Our crews aremobile, and equipment and personnel are subject to vehicular accidents. Theserisks could cause us to experience equipment losses, injuries to our personnel,and interruptions in our business.

 

Inaddition, we could be subject to personal injury or real property damage claimsin the normal operation of our business. Such claims may not be coveredunder the indemnification provisions in our general service agreements to theextent that the damage is due to our negligence or intentional misconduct.

 

15

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Wedo not carry insurance against certain risks that we could experience,including business interruption resulting from equipment maintenance or weatherdelays. We obtain insurance against certain property and personal casualtyrisks and other risks when such insurance is available and when our managementconsiders it advisable to do so. Our current insurance coverage consists ofemployers liability with limits of $1,000,000 per accident and $2,000,000 inthe aggregate, commercial general liability of $1,000,000 per accident and$2,000,000 in the aggregate, pollution liability of $1,000,000 per accident and$2,000,000 in the aggregate, automobile liability with a $1,000,000 combinedsingle limit, and a $10,000,000 umbrella policy.

 

Ourgeneral service agreements require us to have specific amounts of insurance. Therecan be no assurance, however, that any insurance obtained by us will beadequate to cover all losses or liabilities, or that this insurance willcontinue to be available or available on terms which are acceptable to us.Liabilities for which we are not insured, or which exceed the policy limits ofour applicable insurance, could have a materially adverse effect on us.

 

**We are subject to the requirements of Section 404of the Sarbanes-Oxley Act. If we are unable to timely comply with Section 404or if the costs related to compliance are significant, our profitability, stockprice, and results of operations and financial condition could be materiallyadversely affected.**

 

Wewill be required to comply with the provisions of Section 404 of theSarbanes-Oxley Act of 2002 by December 31, 2007. Section 404 requiresthat we document and test our internal control over financial reporting andissue management’s assessment of our internal control over financial reporting.This section also requires that our independent registered publicaccounting firm opine on those internal controls and management’s assessment ofthose controls. We are currently evaluating our existing controls against thestandards adopted by the Committee of Sponsoring Organizations of the TreadwayCommission, or COSO. During the course of our ongoing evaluation andintegration of the internal control over financial reporting, we may identifyareas requiring improvement, and we may have to design enhanced processesand controls to address issues identified through this review.

 

Webelieve that the out-of-pocket costs, the diversion of management’s attentionfrom running the day-to-day operations, and operational changes caused by theneed to comply with the requirements of Section 404 of the Sarbanes-OxleyAct could be significant. If the time and costs associated with such complianceexceed our current expectations, our profitability could be affected.

 

Wecannot be certain at this time that we will be able to successfully completethe procedures, certification, and attestation requirements of Section 404or that we or our auditors will not identify material weaknesses in internalcontrol over financial reporting. If we fail to comply with the requirements ofSection 404 or if we or our auditors identify and report any materialweakness, the accuracy and timeliness of the filing of our annual and quarterlyreports may be negatively affected and could cause investors to loseconfidence in our reported financial information, which could have a negativeeffect on the trading price of our common stock. In addition, a materialweakness in the effectiveness of our internal control over financial reportingcould result in an increased chance of fraud and the loss of customers, reduceour ability to obtain financing, and require additional expenditures to complywith these requirements, each of which could negatively impact our business,profitability, and financial condition.

 

**Industry Risks**

 

**We derive all of our revenues from companies in theoil and natural gas exploration and development industry, a historicallycyclical industry, with levels of activity that are significantly affected bythe levels and volatility of oil and natural gas prices.**

 

Anyprolonged reduction in the overall level of exploration and developmentactivities, whether resulting from changes in oil and natural gas prices orotherwise, can adversely impact us in many ways by negatively affecting:

 

•       our revenues, cash flows, and profitability;

 

•       our ability to maintain or increase our borrowingcapacity;

 

•       our ability to obtain additional capital tofinance our business and the cost of that capital; and

 

•       our ability to attract and retain skilledpersonnel whom we would need in the event of an upturn in the demand for ourservices.

 

Worldwidepolitical, economic, and military events have contributed to oil and naturalgas price volatility and are likely to continue to do so in the future.Depending on the market prices of oil and natural gas, oil and natural gasexploration and development companies may cancel or curtail their drillingprograms, thereby reducing demand for our services. Oil and natural gas priceshave been volatile historically and, we believe, will continue to be so in thefuture. Many factors beyond our control affect oil and natural gas prices,including:

 

•       the cost of exploring for, producing, anddelivering oil and natural gas;

 

•       the discovery rate of new oil and natural gasreserves;

 

•       the rate of decline of existing and new oiland natural gas reserves;

 

•       available pipeline and other oil and naturalgas transportation capacity;

 

•       the ability of oil and natural gas companiesto raise capital;

 

16

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•       actions by OPEC (the Organization ofPetroleum Exporting Countries);

 

•       political instability in the Middle East andother major oil and natural gas producing regions;

 

•       economic conditions in the U.S. andelsewhere;

 

•       domestic and foreign tax policy;

 

•       weather conditions in the U.S. and elsewhere;

 

•       the pace adopted by foreign governments forthe exploration, development, and production of their national reserves;

 

•       the price of foreign imports of oil andnatural gas; and

 

•       the overall supply and demand for oil andnatural gas.

 

**The high fixed costs of our operations could result inoperating losses.**

 

Companieswithin our industry are typically subject to high fixed costs which primarilyconsist of depreciation, a non-cash item, and maintenance expenses associatedwith seismic data acquisition and equipment and crew costs. In addition,ongoing maintenance capital expenditures, as well as new equipment investment,can be significant. As a result, any extended periods of significant downtimeor low productivity caused by reduced demand, weather interruptions, equipment failures,permit delays, or other causes could adversely affect our results ofoperations.

 

**Our operations are subject to delays related toobtaining land access rights of way from third parties which could affect ourresults of operations.**

 

Ourseismic data acquisition operations could be adversely affected by ourinability to obtain timely right of way usage from both public and private landand/or mineral owners. Delays associated with obtaining such rights of waycould negatively affect our results of operations.

 

**Our industry has recently experienced shortages in theavailability of equipment. Any difficulty we experience replacing or addingequipment could adversely affect our business.**

 

Wemay not be able to acquire equipment to replace our existing equipment oradd additional equipment. The high demand for the services that we provide hasdecreased the supply of geophysical equipment, resulting in extended deliverydates on orders of new equipment. Any delay in obtaining equipment could delaythe implementation of additional crews and restrict the productivity of ourexisting crews. A delay in obtaining equipment essential to our operationscould have a material adverse effect on our operations.

 

**Our business is subject to government regulation whichmay adversely affect our future operations.**

 

Ouroperations are subject to a variety of federal, state, and local laws andregulations, including laws and regulations relating to the protection of theenvironment and archeological sites. We are required to expend financial andmanagerial resources to comply with such laws and related permit requirementsin our operations, and we anticipate that we will continue to be required to doso in the future. Although such expenditures historically have not been materialto us, the fact that such laws or regulations change frequently makes itimpossible for us to predict the cost or impact of such laws and regulations onour future operations. The adoption of laws and regulations that have theeffect of reducing or curtailing exploration and development activities byenergy companies could also adversely affect our operations by reducing thedemand for our services.

 

**Risks Related To Our Common Stock**

 

**Our common stock has experienced, and may continueto experience, price volatility and low trading volume.**

 

Ourstock price is subject to significant volatility. Overall market conditionsincluding a decline in oil and natural gas prices, in addition to other risksand uncertainties described in this “Risk Factors” section and elsewherein this Form 10-KSB, may cause the market price of our common stockto fall. Our high and low closing stock prices for the 12 months ended December 31,2005, were $11.70 and $2.72, respectively.

 

Ourcommon stock is listed on the American Stock Exchange under the symbol “TGE.”However, daily trading volumes for our common stock are, and may continueto be, relatively small compared to many other publicly traded securities. Forexample, since April 18, 2005, when we began trading on the American StockExchange, our daily trading volume has been as low as 1,600 shares. It may bedifficult for you to sell your shares in the public market at any given time atprevailing prices, and the price of our common stock may, therefore, bevolatile.

 

**Our officers and directors own a large percentage ofour common stock, and they may control our business and affairs.**

 

Ourofficers and directors as a group beneficially own approximately 33.7% of ourcommon stock. As a result, they will continue to be able to exercisesignificant influence, and in most cases control, over matters requiringshareholder approval, including the

 

17

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electionof directors, changes to our charter documents, and significant corporate transactions.This concentration of ownership makes it unlikely that any other holder orgroup of holders of our common stock will be able to affect the way we aremanaged or the direction of our business. The continued concentrated ownershipof our common stock will make it difficult for another company to acquire usand for you to receive any related takeover premium for your shares (unless thecontrolling group approves the acquisition).

 

**Certain provisions of our Restated Articles ofIncorporation may make it difficult for a third party to acquire us or may adverselyimpact your rights as a common shareholder.**

 

OurRestated Articles of Incorporation contain provisions that require the approvalof holders of 80% of our issued and outstanding shares before we can enter intoa merger or other business combination or sell all or substantially all of ourassets. Additionally, if we increase the size of our board from the current sixto nine directors, we could be required to stagger our directors’ terms, andour directors could not be removed without approval of holders of 80% of ourissued and outstanding shares. These provisions could discourage or impede atender offer, proxy contest, or other similar transaction involving control ofus.

 

Inaddition, our board of directors has the right to issue preferred stock uponsuch terms and conditions as it deems to be in the best interest of theCompany. The terms of such preferred stock may adversely impact thedividend and liquidation rights of the common shareholders without the approvalof the common shareholders.

 

**We do not intend to pay cash dividends on our commonstock in the foreseeable future, and therefore only appreciation of the priceof our common stock will provide a return to our shareholders.**

 

Whilethere are currently no restrictions prohibiting us from paying dividends to ourshareholders, we have not paid any cash dividends on our common stock in thepast, and we do not anticipate paying any dividends in the foreseeable future.Payment of any cash dividends in the future, however, is in the discretion ofour board of directors and will depend on our financial condition, results ofoperations, capital and legal requirements, and other factors deemed relevantby our board of directors. Earnings, if any, are expected to be retained tofund our future operations.

 

**ITEM 7. FINANCIAL STATEMENTS**.

 

**Financial Statements**

**December 31, 2005 and 2004**

 

# **CONTENTS**

#  

| Report of Independent  Registered Public Accounting Firm |   |
|----------------------------------------------------------|--------|
|                                                     |   |
| Financial  Statements                                    |   |
|                                                     |   |
| Balance Sheets                                           |   |
|                                                     |   |
| Statements of  Income                                    |   |
|                                                     |   |
| Statements  of Stockholders’ Equity                 |   |
|                                                     |   |
| Statements  of Cash Flows                                |   |
|                                                     |   |
| Notes to Financial  Statements                           |   |

 

18

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Reportof Independent Registered Public Accounting Firm

 

Boardof Directors and

Shareholdersof TGC Industries, Inc.

 

Wehave audited the accompanying balance sheets of TGC Industries, Inc. as ofDecember 31, 2005 and 2004, and the related statements of income,stockholders’ equity, and cash flows for the years then ended. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audits to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of TGC Industries, Inc. as of December 31,2005 and 2004, and the results of its operations and its cash flows for theyears then ended, in conformity with accounting principles generally acceptedin the United States of America.

 

 
| /s/  Lane Gorman Trubitt, L.L.P. |   |
|----------------------------------|--------|
| Dallas,  Texas                   |
| February 17,  2006          |

 

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TGC Industries, Inc.

BALANCESHEETS

December 31, 

 
| ** **                                                                   | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| ASSETS                                                                       |       |        |       |        |       |
|                                                                         |       |        |       |        |       |
| CURRENT ASSETS                                                               |       |        |       |        |       |
| Cash and cash equivalents                                                    |       | $           | 9,499,409  |        | $          | 1,829,904 |   |
| Trade accounts receivable                                                    |       | 4,459,844   |       | 1,655,084   |       |
| Costs and estimated earnings in excess of  billings on uncompleted contracts |       | 3,685,884   |       | 231,524     |       |
| Prepaid expenses and other                                                   |       | 330,991     |       | 120,720     |       |
| Prepaid federal income tax                                                   |       | 318,243     |       | —      |       |
| Deferred tax asset                                                           |       | 98,925      |       | —      |       |
| Total current assets                                                         |       | 18,393,296  |       | 3,837,232   |       |
|                                                                         |       |        |       |        |       |
| PROPERTY AND EQUIPMENT - at cost                                             |       |        |       |        |       |
| Machinery and equipment                                                      |       | 34,409,975  |       | 17,028,957  |       |
| Automobiles and trucks                                                       |       | 3,578,802   |       | 1,517,639   |       |
| Furniture and fixtures                                                       |       | 296,466     |       | 335,903     |       |
| Leasehold improvements                                                       |       | 14,994      |       | 6,646       |       |
|                                                                         |       | 38,300,237  |       | 18,889,145  |       |
| Less accumulated depreciation and  amortization                              |       | (15,503,597 | )          | (13,405,979 | )          |
|                                                                         |       | 22,796,640  |       | 5,483,166   |       |
|                                                                         |       |        |       |        |       |
| Long-term deferred tax asset                                                 |       | 47,791      |       | —      |       |
| Other Assets                                                                 |       | 8,212       |       | 3,395       |       |
|                                                                         |       | 56,003      |       | 3,395       |       |
|                                                                         |       |        |       |        |       |
|                                                                         |       | $           | 41,245,939 |        | $          | 9,323,793 |   |

 

The accompanying notes are an integral part of these statements.

 

20

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| ** **                                                                                                                                                               | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                                                                                                     |       |       |       |       |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                |       |       |       |       |       |
|                                                                                                                                                                     |       |       |       |       |       |
| CURRENT LIABILITIES                                                                                                                                                      |       |       |       |       |       |
| Trade accounts payable                                                                                                                                                   |       | $          | 1,964,666  |       | $          | 741,782 |   |
| Accrued liabilities                                                                                                                                                      |       | 596,541    |       | 350,226    |       |
| Billings in excess of costs and estimated earnings  on uncompleted contracts                                                                                             |       | 1,420,684  |       | 657,956    |       |
| Federal income taxes payable                                                                                                                                             |       | —     |       | 14,351     |       |
| State income taxes payable                                                                                                                                               |       | 229,732    |       | —     |       |
| Current maturities of notes payable                                                                                                                                      |       | 3,558,521  |       | 873,231    |       |
| Current portion of capital lease obligations                                                                                                                             |       | 671,003    |       | 346,553    |       |
|                                                                                                                                                                     |       |       |       |       |       |
| Total current liabilities                                                                                                                                                |       | 8,441,147  |       | 2,984,099  |       |
|                                                                                                                                                                     |       |       |       |       |       |
| NOTES PAYABLE, less current maturities                                                                                                                                   |       | 5,450,010  |       | 1,524,803  |       |
|                                                                                                                                                                     |       |       |       |       |       |
| CAPITAL LEASE OBLIGATIONS, less current  portion                                                                                                                         |       | 749,354    |       | 244,826    |       |
|                                                                                                                                                                     |       |       |       |       |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                            |       | —     |       | —     |       |
|                                                                                                                                                                     |       |       |       |       |       |
| STOCKHOLDERS’ EQUITY                                                                                                                                                |       |       |       |       |       |
| Preferred stock, $1.00 par value; 4,000,000  shares authorized;                                                                                                          |       |       |       |       |       |
|                                                                                                                                                                     |       |       |       |       |       |
| 8.5% senior convertible preferred stock;  -0- and 2,817,564 shares issued and outstanding at December 31,2005 and 2004,  respectively                               |       | —     |       | 2,817,564  |       |
|                                                                                                                                                                     |       |       |       |       |       |
| 8% Series C convertible exchangeable  preferred stock; 1,150,350 shares issued, -0- and 18,350 shares outstanding  at December 31, 2005 and 2004, respectively |       | —     |       | 18,350     |       |
|                                                                                                                                                                     |       |       |       |       |       |
| Common stock, $.01 par value; 25,000,000  shares authorized; 14,887,412 and 6,102,067 issued at December 31, 2005  and 2004, respectively                           |       | 148,875    |       | 61,021     |       |
| Additional paid-in capital                                                                                                                                               |       | 25,321,787 |       | 6,697,133  |       |
| Retained earnings (deficit)                                                                                                                                              |       | 1,392,089  |       | (4,808,689 | )          |
| Treasury stock, at cost, 37,803 shares                                                                                                                                   |       | (257,323   | )          | (215,314   | )          |
|                                                                                                                                                                     |       | 26,605,428 |       | 4,570,065  |       |
|                                                                                                                                                                     |       |       |       |       |       |
|                                                                                                                                                                     |       | $          | 41,245,939 |       | $          | 9,323,793 |   |

 

The accompanying notes are an integral part of these statements.

 

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TGC Industries, Inc.

STATEMENTSOF INCOME

Year Ended December 31,

 
| ** **                                     | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|------------------------------------------------|------------|------------|------------|------------|------------|
|                                           |       |       |       |       |       |
| Revenue                                        |       | $          | 30,851,963 |       | $          | 20,084,175 |   |
|                                           |       |       |       |       |       |
| Cost and expenses                              |       |       |       |       |       |
| Cost of services                               |       | 18,152,118 |       | 14,707,648 |       |
| Selling, general and administrative            |       | 2,149,350  |       | 1,277,161  |       |
| Depreciation and amortization expense          |       | 3,201,236  |       | 1,106,022  |       |
|                                           |       | 23,502,704 |       | 17,090,831 |       |
|                                           |       |       |       |       |       |
| Income from operations                         |       | 7,349,259  |       | 2,993,344  |       |
|                                           |       |       |       |       |       |
| Interest expense                               |       | 364,848    |       | 60,878     |       |
|                                           |       |       |       |       |       |
| Income before income taxes                     |       | 6,984,411  |       | 2,932,466  |       |
|                                           |       |       |       |       |       |
| Income tax expense                             |       | (783,633   | )          | (64,127    | )          |
|                                           |       |       |       |       |       |
| NET INCOME                                     |       | 6,200,778  |       | 2,868,339  |       |
|                                           |       |       |       |       |       |
| Less dividend requirements on preferred  stock |       | (204,989   | )          | (300,313   | )          |
|                                           |       |       |       |       |       |
| Income allocable to common stockholders        |       | $          | 5,995,789  |       | $          | 2,568,026 |   |
|                                           |       |       |       |       |       |
| Earnings per common share                      |       |       |       |       |       |
| Basic                                          |       | $          | 0.74       |       | $          | 0.45 |   |
| Diluted                                        |       | $          | 0.48       |       | $          | 0.24 |   |
|                                           |       |       |       |       |       |
| Weighted average number of shares  outstanding |       |       |       |       |       |
| Basic                                          |       | 8,125,223  |       | 5,752,347  |       |
| Diluted                                        |       | 13,032,373 |       | 11,844,283 |       |

 

The accompanying notes are an integral part of these statements.

 

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TGC Industries, Inc.

STATEMENTS OF STOCKHOLDERS’ EQUITY

Years Ended December 31, 2005 and 2004

 
| ** **                                                   | ** ** | ** **               | ** ** | ** **            | ** ** | ** **  | ** ** | ** **   | ** ** | **Additional** | ** ** | **Retained**  | ** ** | ** ** | ** ** | ** **  | ** ** |
|--------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|-------------|------------|--------------|------------|----------------|------------|---------------|------------|------------|------------|-------------|------------|
| ** **                                                   | ** ** | **Preferred stock** | ** ** | **Common stock** | ** ** | **Paid-in** | ** ** | **earnings** | ** ** | **Treasury**   | ** ** | ** **    | ** ** |
| ** **                                                   | ** ** | **Shares**               | ** ** | **Amount**            | ** ** | **Shares**  | ** ** | **Amount**   | ** ** | **capital**    | ** ** | **(deficit)** | ** ** | **stock**  | ** ** | **Total**   | ** ** |
| Balances  at January 1, 2004                            |       | 3,082,364                |       | $                     | 3,082,364  |        | 5,727,008  |         | $          | 57,270         |       | $             | 6,696,047  |       | $          | (7,677,028  | )          | $ | (215,314 | ) | $ | 1,943,339 |   |
| Cash  dividends on 8-1/2% senior convertible preferred stock |       | —                   |       | —                |       | —      |       | —       |       | (289,830       | )          | —        |       | —     |       | (289,830    | )          |
| Conversion  of preferred stock                               |       | (246,450                 | )          | (246,450              | )          | 306,075     |       | 3,061        |       | 243,389        |       | —        |       | —     |       | —      |       |
| Exercise  of stock options                                   |       | —                   |       | —                |       | 34,100      |       | 341          |       | 26,484         |       | —        |       | —     |       | 26,825      |       |
| Issuance  of stock warrants                                  |       | —                   |       | —                |       | —      |       | —       |       | 9,880          |       | —        |       | —     |       | 9,880       |       |
| Issuance  of common stock                                    |       | —                   |       | —                |       | 34,884      |       | 349          |       | 11,163         |       | —        |       | —     |       | 11,512      |       |
| Net  income                                                  |       | —                   |       | —                |       | —      |       | —       |       | —         |       | 2,868,339     |       | —     |       | 2,868,339   |       |
| Balances  at December 31, 2004                          |       | 2,835,914                |       | 2,835,914             |       | 6,102,067   |       | 61,021       |       | 6,697,133      |       | (4,808,689    | )          | (215,314   | )          | 4,570,065   |       |
| Cash  dividends on preferred stock                           |       |                     |       |                  |       |        |       |         |       | (233,271       | )          |          |       |       |       | (233,271    | )          |
| Conversion  of preferred stock                               |       | (2,830,664               | )          | (2,830,664            | )          | 2,850,314   |       | 28,504       |       | 2,802,160      |       | —        |       | —     |       | —      |       |
| Redemption  of 8% series C convertible preferred stock  |       | (5,250                   | )          | (5,250                | )          |        |       |         |       | (31,500        | )          |          |       |       |       | (36,750     | )          |
| Exercise  of stock options                                   |       | —                   |       | —                |       | 149,331     |       | 1,493        |       | 143,580        |       | —        |       | (42,009    | )          | 103,064     |       |
| Issuance  of common stock                                    |       | —                   |       | —                |       | 5,785,700   |       | 57,857       |       | 39,944,983     |       | —        |       | —     |       | 40,002,840  |       |
| Repurchase  of stock purchase warrants                       |       | —                   |       | —                |       | —      |       | —       |       | (24,001,298    | )          | —        |       | —     |       | (24,001,298 | )          |
| Net  income                                                  |       | —                   |       | —                |       | —      |       | —       |       | —         |       | 6,200,778     |       | —     |       | 6,200,778   |       |
| Balances  at December 31, 2005                          |       | —                   |       | $                     | —     |        | 14,887,412 |         | $          | 148,875        |       | $             | 25,321,787 |       | $          | 1,392,089   |       | $ | (257,323 | ) | $ | 26,605,428 |   |

 

The accompanying notes are an integral part of these statements.

 

23

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TGC Industries, Inc.

STATEMENTSOF CASH FLOWS

Year Ended December 31, 

 
| ** **                                                                        | ** ** | **2005**    | ** ** | **2004**   | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|
|                                                                              |       |        |       |       |       |
| Cash flows from operating activities                                              |       |        |       |       |       |
| Net income                                                                        |       | $           | 6,200,778  |       | $          | 2,868,339 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities |       |        |       |       |       |
| Depreciation and amortization                                                     |       | 3,201,236   |       | 1,106,022  |       |
| Gain on disposal of property and equipment                                        |       | (122,716    | )          | (1,250     | )          |
| Director fees and other expenses                                                  |       | —      |       | 21,392     |       |
| Changes in operating assets and liabilities                                       |       |        |       |       |       |
| Trade accounts receivable                                                         |       | (2,804,760  | )          | (857,630   | )          |
| Costs and estimated earnings in excess of  billings on uncompleted contracts      |       | (3,454,360  | )          | (201,030   | )          |
| Prepaid expenses and other                                                        |       | 741,904     |       | (14,398    | )          |
|                                                                              |       |        |       |       |       |
| Prepaid federal income tax                                                        |       | (318,243    | )          | —     |       |
| Deferred tax asset                                                                |       | (98,925     | )          | —     |       |
| Long-term deferred tax asset                                                      |       | (47,791     | )          | —     |       |
| Other assets                                                                      |       | (4,817      | )          | 1,429      |       |
| Trade accounts payable                                                            |       | 1,222,884   |       | 621,633    |       |
| Accrued liabilities                                                               |       | 246,315     |       | 244,919    |       |
| Billings in excess of costs and estimated earnings  on uncompleted contracts      |       | 762,728     |       | 361,977    |       |
| Income taxes payable                                                              |       | 215,381     |       | 14,351     |       |
|                                                                              |       |        |       |       |       |
| Net cash provided by operating activities                                         |       | 5,739,614   |       | 4,165,754  |       |
|                                                                              |       |        |       |       |       |
| Cash flows from investing activities                                              |       |        |       |       |       |
| Capital expenditures                                                              |       | (11,491,786 | )          | (2,637,991 | )          |
| Proceeds from sale of property and  equipment                                     |       | 133,678     |       | 1,250      |       |
|                                                                              |       |        |       |       |       |
| Net cash used in investing activities                                             |       | (11,358,108 | )          | (2,636,741 | )          |
|                                                                              |       |        |       |       |       |
| Cash flows from financing activities                                              |       |        |       |       |       |
| Principal payments on notes payable                                               |       | (2,357,974  | )          | (263,683   | )          |
| Principal payments on capital lease  obligations                                  |       | (619,192    | )          | (197,642   | )          |
| Proceeds from issuance of debt                                                    |       | 430,581     |       | —     |       |
| Proceeds from exercise of stock options                                           |       | 103,064     |       | 26,825     |       |
| Net proceeds from issuance of common stock                                        |       | 40,002,839  |       | —     |       |
| Redemption of stock purchase warrants                                             |       | (24,001,298 | )          | —     |       |
| Redemption of 8% Series C preferred  stock                                   |       | (36,750     | )          | —     |       |
| Payment of dividends                                                              |       | (233,271    | )          | (289,830   | )          |
|                                                                              |       |        |       |       |       |
| Net cash provided by (used in) financing  activities                              |       | 13,287,999  |       | (724,330   | )          |
|                                                                              |       |        |       |       |       |
| Net increase in cash and cash equivalents                                         |       | 7,669,505   |       | 804,683    |       |
|                                                                              |       |        |       |       |       |
| Cash and cash equivalents at beginning of  year                                   |       | 1,829,904   |       | 1,025,221  |       |
|                                                                              |       |        |       |       |       |
| Cash and cash equivalents at end of year                                          |       | $           | 9,499,409  |       | $          | 1,829,904 |   |
|                                                                              |       |        |       |       |       |
| Supplemental cash flow information                                                |       |        |       |       |       |
| Interest paid                                                                     |       | $           | 333,478    |       | $          | 38,903 |   |
| Income taxes paid                                                                 |       | $           | 1,033,211  |       | $          | 49,776 |   |
|                                                                              |       |        |       |       |       |
| Noncash investing and financing activities                                        |       |        |       |       |       |
| Capital lease obligations incurred                                                |       | $           | 1,448,171  |       | $          | 593,818 |   |
| Financed equipment purchases                                                      |       | $           | 7,585,715  |       | $          | 2,562,744 |   |
| Financed insurance premiums                                                       |       | $           | 952,175    |       | $          | — |   |

 

The accompanying notes are an integral part of these statements.

 

24

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TGC Industries, Inc.

NOTES TO FINANCIAL STATEMENTS

December 31, 2005 and 2004

 

NOTEA - NATURE OF OPERATIONS

 

TGCIndustries, Inc. (TGC or the Company) is engaged in the domesticgeophysical services business and primarily conducts seismic surveys and sellsgravity data to companies engaged in exploration in the oil and gas industry.

 

NOTEB - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

CashEquivalents 

 

TheCompany considers all highly liquid investments with original maturity dates ofthree months or less to be cash equivalents. The Company maintains its accountsat financial institutions located in Texas. The bank accounts are insured bythe Federal Deposit Insurance Corporation up to $100,000.

 

TradeReceivables 

 

Tradeaccounts receivable are recorded in accordance with terms and amounts asspecified in the related contracts on an ongoing basis. The Company evaluatesthe collectibility of accounts receivable on a specific account basis using acombination of factors, including the age of the outstanding balances,evaluation of the customer’s financial condition, and discussions with relevantCompany personnel and with the customers directly. An allowance for doubtfulaccounts or direct write-off is recorded when it is determined that thereceivable may not be collected, depending on the facts known and theprobability of collection of the outstanding amount.

 

Propertyand Equipment 

 

Propertyand equipment are stated at cost. Depreciation and amortization are providedusing the straight-line method over the estimated useful lives of theindividual assets ranging from 1 to 7 years. The amortization expense on assetsacquired under capital leases is included with depreciation and amortizationexpense on owned assets. Expenditures for major renewals and betterments thatextend the useful lives of property and equipment are capitalized. Expendituresfor maintenance and repairs are charged to expenses as incurred.

 

Long-LivedAssets 

 

Long-livedassets held and used by the Company are reviewed for impairment whenever eventsor changes in circumstances indicate that the carrying amount of an asset may notbe recoverable. For the purposes of evaluating the recoverability of long-livedassets, the recoverability test is performed using undiscounted cash flowsestimated to be generated by those assets.

 

IncomeTaxes 

 

Deferredincome taxes reflect the impact of temporary differences between the amounts ofassets and liabilities recognized for financial reporting purposes and suchamounts recognized for tax purposes.

 

RevenueRecognition 

 

Revenuesfrom conducting seismic surveys are recognized over the term of the contractusing the percentage-of-completion method. Under this method, revenues arerecognized on the units-of-production method. Revenues for the sale of gravitydata are recognized when services are rendered.

 

Reclassifications

 

Certainreclassifications have been made to the 2004 financial statements to conform tothe 2005 presentation.

 

Stock-BasedCompensation 

 

TheCompany has one stock-based employee compensation plan, which is described morefully in Note H. The Company accounts for this plan under the recognition andmeasurement principles of Accounting Principles Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employees,” and related interpretations. Nostock-based employee compensation cost is reflected in net income, as alloptions granted under this plan had an exercise price equal to the market valueof the underlying common stock on the date of grant. The following tableillustrates the effect on net income and income per share allocable to commonstockholders if the Company had applied the fair value recognition provisionsof Financial Accounting Standards Board (“FASB”) Statement No. 123 (“SFAS123”), “Accounting for Stock-Based Compensation”, to stock-based employeecompensation:

 

25

----

 
| ** **                                                                                                                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Net income allocable to common  stockholders, as reported                                                                                     |       | $                                          | 5,995,789  |   | $ | 2,568,026 |   |
|                                                                                                                                          |       |                                       |       |   |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | (37,357                                    | )          | (9,710 | ) |
|                                                                                                                                          |       |                                       |       |   |   |
| Pro forma net income allocable to common  stockholders                                                                                        |       | $                                          | 5,958,432  |   | $ | 2,558,316 |   |
|                                                                                                                                          |       |                                       |       |   |   |
| Income per common share                                                                                                                       |       |                                       |       |   |   |
| Basic - as reported                                                                                                                           |       | $                                          | 0.74       |   | $ | 0.45 |   |
| Diluted - as reported                                                                                                                         |       | $                                          | 0.48       |   | $ | 0.24 |   |
| Basic - pro forma                                                                                                                             |       | $                                          | 0.73       |   | $ | 0.45 |   |
| Diluted - pro forma                                                                                                                           |       | $                                          | 0.47       |   | $ | 0.24 |   |

 

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option pricing model with the following assumptions used forgrants in 2005: risk-free interest rate of 4.20%, expected dividend yields of0.0%, expected lives of 5.0 years; and expected volatility of 92.72% in 2005and 96.5% in 2004.

 

FinancialInstruments 

 

TheCompany’s financial instruments recorded on the balance sheet include cash andcash equivalents, accounts receivable, accounts payable and debt. The carryingamounts of cash and cash equivalents, accounts receivable and accounts payableapproximate fair value because of the short-term nature of these items. Fairvalue of long-term debt is based on rates available to the Company for debtwith similar terms and maturities.

 

EarningsPer Share 

 

Basicearnings per common share is based upon the weighted average number of sharesof common stock outstanding. Diluted earnings per share is based upon theweighted average number of common shares outstanding and, when dilutive, commonshares issuable for stock options, warrants and convertible securities.

 

Useof Estimates 

 

Thepreparation of financial statements in accordance with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

 

RecentAccounting Standards 

 

InDecember 2004, the FASB issued FASB Statement No.123R, “Share-BasedPayment” (SFAS 123R), which requires that compensation costs relating toshare-based payments be recognized in the Company’s financial statements. TheCompany currently accounts for those payments under the recognition andmeasurement principles of Accounting Principles Board (APB) Opinion No. 25,“Accounting for Stock Issued to Employees,” and related interpretations. TheCompany is preparing to implement this standard effective January 1, 2006.Although the transition method to be used to adopt the standard has not beenselected, the impact of adoption is expected to have a minimal impact on theCompany’s results of operations, financial position and liquidity. Refer toNote H, for the Company’s calculation of the pro forma impact on net income ofSFAS 123, which would be similar to that under SFAS 123R.

 

InDecember 2004, the FASB issued FASB Statement No. 153, “Exchanges ofNonmonetary Assets, – an Amendment of APB Opinion No. 29,” (SFAS 153),which is effective for the Company for asset-exchange transactions beginning July 1,2005. Under APB 29, assets received in certain types of nonmonetary exchangeswere permitted to be recorded at the carrying value of the assets that wereexchanged (i.e., recorded on a carryover basis). As amended by SFAS 153, assetsreceived in some circumstances will have to be recorded instead at their fairvalues. In the past, the Company has not engaged in nonmonetary asset exchangesfor significant amounts.

 

26

----

 

NOTEC - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

 

Thecomponents of uncompleted contracts are as follows at December 31,:

 
| ** **                                                      | ** ** | **2005**   | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|----------|------------|
| Costs incurred on uncompleted contracts and  estimated earnings |       | $          | 4,737,139  |     | $          | 439,393 |   |
| Less billings to date                                           |       | (2,471,939 | )          | (865,825 | )          |
|                                                            |       | $          | 2,265,200  |     | $          | (426,432 | ) |

 

Thecomponents of uncompleted contracts are reflected in the balance sheets at December 31,2005 and 2004 as follows:

 
| ** **                                                                   | ** ** | **2005**   | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Costs and estimated earnings in excess of  billings on uncompleted contracts |       | $          | 3,685,884  |     | $          | 231,524 |   |
| Billings in excess of costs and Estimated  earnings on uncompleted contracts |       | (1,420,684 | )          | (657,956 | )          |
|                                                                         |       | $          | 2,265,200  |     | $          | (426,432 | ) |

 

NOTED - ACCRUED LIABILITIES

 

Accruedliabilities consist of the following at December 31,:

 
| ** **                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Compensation and payroll taxes |       | $        | 417,497    |     | $          | 132,040 |   |
| Accrued sales and use tax      |       | 5,678    |       | 181,211  |       |
| Insurance                      |       | 85,435   |       | —   |       |
| Accrued interest               |       | 45,571   |       | —   |       |
| Other                          |       | 42,360   |       | 36,975   |       |
|                           |       | $        | 596,541    |     | $          | 350,226 |   |

 

NOTEE - DEBT

 

Lineof Credit 

 

OnAugust 2, 2004, the Company obtained a line of credit from a bank with a$500,000 credit limit. The line of credit accrued interest at the bank’s primerate plus 1% and per the credit loan agreement matured on August 2, 2005. Collateralfor this line of credit was accounts receivable. Advances were limited toeligible receivables. There were no advances made under this line of credit andthe company terminated this line of credit in May 2005.

 

InApril 2005, the Company entered into a revolving line of creditarrangement with a bank, providing for borrowings of up to $500,000. On September 16,2005, the company amended the revolving line of credit allowing the company toborrow, repay and re-borrow, from time to time up to $3,500,000. The revolvingline of credit is secured by a security interest in the company’s accountsreceivable and matures in September 2006. Interest on the outstandingamount under the line of credit loan agreement is payable monthly at a rate ofprime plus 1%. The credit loan agreement provides for non-financial andfinancial covenants, including a minimum debt to worth ratio of 1 to 1.50 and aminimum liquidity of $500,000. At December 31, 2005, the company had noborrowings outstanding under the line of credit loan agreement.

 

27

----

 

NotesPayable****

 

Notespayable consist of the following at December 31:

 
| ** **                                                                                                                                                 | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
|                                                                                                                                                       |       |      |       |      |       |
| Note payable to a finance company, interest  at 8%, due in monthly installments of $10,004 including interest;  collateralized by equipment.               |       | $         | —     |      | $          | 77,681 |   |
|                                                                                                                                                       |       |      |       |      |       |
| Note payable to a finance company, Interest  at 6.85%, due in fixed principal monthly installments of $66,296 plus  interest; collateralized by equipment  |       | 1,524,804 |       | 2,320,353 |       |
|                                                                                                                                                       |       |      |       |      |       |
| Note payable to a finance company, Interest  at 7.25%, due in fixed principal monthly installments of $93,507 plus  interest; collateralized by equipment  |       | 2,805,211 |       | —    |       |
|                                                                                                                                                       |       |      |       |      |       |
| Note payable to a finance company, Interest  at 7.25%, due in fixed principal monthly installments of $7,951 plus  interest; collateralized by equipment   |       | 263,882   |       | —    |       |
|                                                                                                                                                       |       |      |       |      |       |
| Note payable to a finance company, Interest  at 7.25%, due in fixed principal monthly installments of $7,951 plus  interest; collateralized by equipment   |       | 262,382   |       | —    |       |
|                                                                                                                                                       |       |      |       |      |       |
| Note payable to a finance company, Interest  at 7.25%, due in fixed principal monthly installments of $7,972 plus  interest; collateralized by equipment   |       | 270,291   |       | —    |       |
|                                                                                                                                                       |       |      |       |      |       |
| Note payable to a finance company, Interest  at 7.78%, due in fixed principal monthly installments of $105,315 plus  interest; collateralized by equipment |       | 3,791,338 |       | —    |       |
|                                                                                                                                                       |       |      |       |      |       |
| Notes payable to a finance company,  interest at 6,45% to 7.70%, due in monthly installments of $90,623 including  interest                                |       | 90,623    |       | —    |       |
|                                                                                                                                                       |       |      |       |      |       |
|                                                                                                                                                       |       | $         | 9,008,531  |      | $          | 2,398,034 |   |

 

Noneof the above notes require the maintenance of financial ratios.

 

28

----

 

Aggregateannual maturities of notes payable at December 31, 2005 are as follows:

 
| **Year Ending   December 31,** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|------------|------------|
|                                          |       |       |       |
| 2006                                          |       | $          | 3,558,521  |   |
| 2007                                          |       | 3,401,602  |       |
| 2008                                          |       | 2,048,408  |       |
| Thereafter                                    |       | —     |       |
|                                          |       | 9,008,531  |       |
| Less current maturities                       |       | (3,558,521 | )          |
|                                          |       | $          | 5,450,010  |   |

 

NOTEF - LEASES

 

CapitalLeases 

 

TheCompany leases vehicles and certain specialized seismic equipment under leasesclassified as capital leases. The following is a schedule showing thefuture minimum lease payments under capital leases by years and the presentvalue of the minimum lease payments as of December 31, 2005.

 
| **Year Ending   December 31,** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|------------|------------|
|                                          |       |       |       |
| 2006                                          |       | $          | 771,060    |   |
| 2007                                          |       | 531,972    |       |
| 2008                                          |       | 279,775    |       |
|                                          |       |       |       |
| Total minimum lease payments required         |       | 1,582,807  |       |
| Less: Amount representing interest            |       | (162,450   | )          |
| Present value of minimum lease payments       |       | 1,420,357  |       |
| Less current maturities                       |       | (671,003   | )          |
|                                          |       | $          | 749,354    |   |

 

Thenet book value of the capital assets leased was approximately $2,214,000 and$810,000 as of December 31, 2005 and 2004, respectively. Total accumulatedamortization on these assets was approximately $ 947,000 and $360,000 as of December 31,2005 and 2004, respectively.

 

OperatingLeases 

 

TheCompany leases office and warehouse space under an operating lease that expiresMarch 31, 2009. The lease expense for the years ended December 31,2005 and 2004, was approximately $79,000 and $78,000, respectively. In September 2005,the company leased additional office and warehouse space under an operatinglease that expires October 31, 2008. The lease expense for the year ended December 31,2005, was approximately $7,000.

 

Thefollowing is a schedule by years of future minimum rental paymentsrequired under the operating leases as of December 31, 2005:

 

29

----

 
| **Year Ending   December 31:** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|------------|------------|
|                                          |       |       |       |
| 2006                                          |       | $          | 121,208    |   |
| 2007                                          |       | 124,079    |       |
| 2008                                          |       | 117,953    |       |
| 2009                                          |       | 20,634     |       |
| 2010 and thereafter                           |       | —     |       |
|                                          |       |       |       |
| Total minimum payments required               |       | $          | 383,874    |   |

 

NOTEG – FAIR VALUE OF DEBT OBLIGATIONS

 

Thefair value of debt obligations is estimated using discounted cash flows basedon the Company’s incremental borrowing rate for similar types of borrowings. Acomparison of the carrying value and fair value of these instruments is asfollows:

 
| ** **     | ** ** | **December 31,** | ** ** |
|----------------|------------|-----------------------|------------|
| ** **     | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Carrying value |       | $                     | 9,008,531  |   | $ | 2,398,034 |   |
| Fair value     |       | $                     | 9,008,531  |   | $ | 2,398,034 |   |

 

NOTEH - STOCKHOLDERS’ EQUITY

 

EarningsPer Share 

 

Thefollowing is a reconciliation of net income and weighted average common sharesoutstanding for purposes of calculating basic and diluted net income per share:

 
| ** **                                          | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | **2005**              | ** ** | **2004** | ** ** |
|                                                |       |                  |       |   |   |
| Numerator:                                          |       |                  |       |   |   |
| Net income                                          |       | $                     | 6,200,778  |   | $ | 2,868,339 |   |
| Less dividend requirements on preferred  stock      |       | (204,989              | )          | (300,313 | ) |
| Income allocable to common stockholders             |       | $                     | 5,995,789  |   | $ | 2,568,026 |   |
|                                                |       |                  |       |   |   |
| Denominator:                                        |       |                  |       |   |   |
| Basic - weighted average common shares  outstanding |       | 8,125,223             |       | 5,752,347 |   |
| Effect of dilutive securities:                      |       |                  |       |   |   |
| Warrants                                            |       | 2,664,352             |       | 3,117,422 |   |
| Stock options                                       |       | 152,576               |       | 119,825 |   |
| Convertible preferred stock                         |       | 2,090,222             |       | 2,854,689 |   |
|                                                |       | 13,032,373            |       | 11,844,283 |   |
|                                                |       |                  |       |   |   |
| Basic net income per share                          |       | $                     | .74        |   | $ | .45 |   |
| Diluted net income per share                        |       | $                     | .48        |   | $ | .24 |   |

 

30

----

 

Theeffect of preferred stock dividend requirements on the amount of incomeavailable to common stockholders was $.03 and $.05 for the years ended December 31,2005 and 2004.

 

Outstandingoptions that were not included in the diluted calculation because their effectwould be anti-dilutive total 5,859 for the year ended December 31, 2005.

 

Stock-BasedCompensation Plans 

 

TheCompany had a 1993 Stock Option Plan (the “1993 Plan”). Options for up to283,334 shares of the Company’s common stock could have been granted under the1993 Plan. Options under the 1993 Plan must have been granted at prices notless than the market price at the date of grant and must have been exercisedwithin five years from the date of grant. At December 31, 2003,outstanding options for 29,100 shares were exercisable, and were exercisedduring 2004. At December 31, 2004 the 1993 Plan had expired.

 

TheCompany currently has in effect a 1999 stock option plan (the “1999 Plan”). Optionsfor up to 300,000 shares of the Company’s common stock may be grantedunder the 1999 Plan. Options under the 1999 Plan must be granted at prices notless than the lesser of the par value per share of the stock or the fair marketvalue per share of the Company’s stock on the date of the grant, and their termcannot exceed five years from the date of the grant. Options outstanding at December 31,2004, covering 138,000 shares, expire five years from the date of the grant andare exercisable as follows: (i) one-third of the shares after the 12 monthperiod following the date of the grant, (ii) two-thirds of the sharesafter the 24 month period following the date of the grant, and (iii) allof the shares of stock after the 36 month period following the date of thegrant. During 2005, options covering 65,859 shares were granted, options covering10,000 shares were cancelled and options covering 149,331 shares were exercised.At December 31, 2005, options covering 144,528 shares were outstanding, ofwhich 14,790 were exercisable.

 

Thefollowing table summarizes activity under the Plans:

 
| ** **                        | ** ** | **Shares under  option** | ** ** | **Weighted  average  exercise price** | ** ** |
|-----------------------------------|------------|-------------------------------|------------|--------------------------------------------|------------|
|                              |       |                          |       |                                       |       |
| Balance at December 31, 2004 |       | 238,000                       |       | $                                          | .98        |   |
| Granted                           |       | 65,859                        |       | $                                          | 5.51       |   |
| Exercised                         |       | (149,331                      | )          | $                                          | .97        |   |
| Canceled                          |       | (10,000                       | )          | $                                          | 1.00       |   |
| Balance at December 31, 2005 |       | 144,528                       |       | $                                          | 2.95       |   |

 

Thefollowing information applies to options outstanding and exercisable at December 31,2005:

 
| **Range of  Exercise prices** | ** ** | **Number  outstanding** | ** ** | **Weighted  average  remaining  contractual  life (in years)** | ** ** | **Weighted  average  exercise price** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|--------------------------------------------------------------------------|------------|--------------------------------------------|------------|
|                                    |       |                    |       |                                                                     |       |                                       |       |
| $.80 - $7.89                            |       | 144,528                 |       | 3.29                                                                     |       | $                                          | 2.95       |   |
|                                         |            |                         |            |                                                                          |            |                                            |            |  |

 

31

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StockWarrants 

 

EffectiveJanuary 1, 2001, 181,634 warrants covering 6,054 shares of common stockexpired. Per the warrant agreement, any unexercised warrants are automaticallydeemed exercised at the rate of one share of the Company’s common stock foreach 30 warrants held.

 

Inconnection with the issuance of subordinated notes payable during 1999, certainofficers and directors received warrants covering 850,000 shares with a valueof $391,000. These warrants have a strike price of $.30 and expire on July 31,2009.

 

Inconnection with the issuance of debt during 2002, certain investors receivedwarrants covering 1,500,000 shares with a value of $45,000. These warrants havea strike price of $.20 and expire on September 12, 2012.

 

Inconnection with the commitment to provide the Company with a line of credit upto $300,000 during 2003, certain Directors received warrants covering 750,000shares with a value of $22,500. These warrants have a strike price of $.20 andexpire on June 12, 2013.

 

Theagreements covering the warrants issued in 2002 and 2003 contain provisionsthat in the event dividends are declared and paid on the Company’s SeniorPreferred Stock in additional shares of Senior Preferred Stock the number ofadditional common shares for which the warrants are exercisable and thepurchase price shall be adjusted. At December 31, 2004, the warrantsissued in 2002 and the warrants issued in 2003 were exercisable into 1,855,000shares at $.16 per share and 811,645 shares at $.18 per share, respectively.

 

During2004, the Company issued 26,000 warrants to a public relations firm as part ofits fee for services provided the Company. The warrants have a strike price of$1.00 per share and expire December 15, 2007. During January 2005,the public relations firm sold the 26,000 warrants to a group of investors thatincluded certain Directors of the Company. These warrants remain outstanding atDecember 31, 2005.

 

InOctober 2005, the company used $24,001,298 of the Company’s publicoffering proceeds to redeem all of the outstanding 1999, 2002 and 2003warrants.

 

PreferredStock 

 

During1996, the Company issued 1,150,350 shares of Series C 8% convertibleexchangeable preferred stock (“Series C Preferred Stock”) at $5.00 pershare 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. Prior to November 30,2001, the Series C Preferred Stock and debentures were convertible intoshares of the Company’s common stock at the conversion price of (i) $2.00per share if exercised by December 31, 2001, (11) $3.75 per share ifexercised from January 1, 2002 by December 31, 2001, (ii) $3.75per share if exercised from January 1, 2002 through December 31,2002, and (iii) $6.00 per share thereafter. At a November 30, 2001meeting, the Company’s Board of Directors approved amendments to the conversionterms of the Series C Preferred Stock. The amendments were as follows: theconversion price was reduced from $2.00 per share to $1.61 per share and thedate of the conversion price increase to $3.75 per share was delayed from December 31,2001, until January 31, 2002. The subsequent date of the increase in theconversion price to $6.00 per share remained December 31, 2002.

 

32

----

 

InJanuary 2002, the Series C Preferred shareholders converted 977,550shares of Series C Preferred Stock into 3,035,839 shares of common stock.As a result, 58,100 shares of Series C Preferred Stock remainedoutstanding at December 31, 2003. At a September 24, 2004 meeting,the Company’s Board of Directors approved amendments to the conversion terms ofthe Series C Preferred Stock. The amendments were as follows:  the conversion price was reduced from $6.00per share to $2.00 per share for a period beginning on September 24, 2004and ending on January 31, 2005. As a result, the Series C Preferred shareholdersconverted 39,750 shares of Series C Preferred stock into 99,375 shares ofcommon stock. At December 31, 2004, 18,350 of Series C Preferredstock remained outstanding. In January 2005, the Series C Preferredshareholders converted an additional 13,100 shares of Series C Preferredstock into 32,750 shares of common stock. In June 2005, the companyredeemed the 5,250 shares of Series C Preferred stock.

 

In2000, the Company issued 2,252,445 shares of 8.5% Senior Convertible PreferredStock (“Senior Preferred Stock”) to a debt holder in consideration for anoutstanding debenture plus accrued interest, and in accordance with the termsof the agreement, issued 103,490 additional shares of Senior Preferred Stock tothe Senior Preferred stockholder as payment for 2000 dividends. At the electionof the Senior Preferred stockholder, the Company issued 100,127, 104,383,108,819, 113,444, 118,265 and 123,291 additional shares of Senior PreferredStock to the Senior Preferred stockholder as payment for the June 1, 2001,December 1, 2001, June 1, 2002, December 1, 2002, June 1,2003 and December 1, 2003 dividends, respectively, resulting in 3,024,264shares outstanding at December 31, 2003. In February 2004, the Seniorpreferred shareholder completed a transaction, selling all its 3,024,264 sharesof Senior Preferred Stock to a small number of investors that included severalmembers of the Company’s Board of Directors who purchased 1,772,200 of suchshares. During 2004, certain members of the investor group converted 206,700shares of Senior Preferred Stock into a like number of shares of the Company’sCommon Stock. As a result, 2,817,564 shares of Senior Preferred Stock remainedoutstanding at December 31, 2004. During 2005, the Senior Preferredshareholders converted all 2,817,564 shares of Senior Preferred Stock into alike number of shares of common stock.

 

Dividends

 

Holdersof the Company’s Series C Preferred Stock received, when, as and ifdeclared by the Board of Directors of the Company, dividends at a rate of 8%per annum. The dividends were payable semi-annually during January and July ofeach year. As of December 31, 2004, following the conversion of 1,017,300shares of the Series C Preferred Stock as noted above, cumulativedividends of $44,040 were in arrears. In April 2005, the company paid thecumulative dividends in arrears on the 5,250 shares of Series C Preferredstock outstanding at that date in the amount of $12,600. In connection with theredemption of the Series C Preferred stock the shareholders received theregular $.20 per share dividend in the amount of $1,050.

 

Holdersof the Company’s Senior Preferred Stock received, when, as and if declared bythe Board of Directors of the Company, dividends at a rate of 8.5% per annum.The dividends were payable semi-annually during June and December ofeach year. Dividends payable in 2003 were paid in additional shares of SeniorPreferred Stock, at the election of the Senior Preferred Stockholder. Cashdividends of $219,621 were paid to the Senior Preferred Stockholders during2005. During 2005, the Senior Preferred shareholders converted all 2,817,564shares of Senior Preferred Stock into a like number of shares of common stock.

 

33

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NOTEI - INCOME TAXES

 

Theincome tax provision charged to continuing operations for the years ended December 31,2005, and 2004, was as follows:

 
| ** **      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
|            |       |     |       |     |       |
| Current:        |       |     |       |     |       |
| U.S. federal    |       | $        | 612,488    |     | $          | — |   |
| State and local |       | 317,861  |       | 64,127   |       |
|            |       | 930,349  |       | 64,127   |       |
| Deferred:       |       |     |       |     |       |
| U.S. federal    |       | (146,716 | )          | —   |       |
|            |       | $        | 783,633    |     | $          | 64,127 |   |

 

Theincome tax provision differs from the amount of income tax determined byapplying the U.S. federal income tax rate to pretax income from continuingoperations for the years ended December 31, 2005, and 2004, due to thefollowing:

 
| ** **                                                      | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|------------|------------|
| Computed “expected” tax expense                       |       | $          | 2,374,700  |       | $          | 997,038 |   |
| Increase (decrease) in income taxes  resulting from:            |       |       |       |       |       |
| Nondeductible expenses                                          |       | 111,110    |       | 57,405     |       |
| State & local taxes, net of  federal benefit           |       | 317,861    |       | 64,127     |       |
| Realization of additional net operating  losses and tax credits |       | (504,068   | )          | —     |       |
| Change in valuation allowance                                   |       | (1,515,970 | )          | (1,054,443 | )          |
|                                                            |       |       |       |       |       |
|                                                            |       | $          | 783,633    |       | $          | 64,127 |   |

 

Netdeferred tax liabilities consist of the following components as of December 31,2005 and 2004:

 
| ** **                      | ** ** | **2005** | ** ** | **2004**   | ** ** |
|---------------------------------|------------|----------|------------|------------|------------|
|                            |       |     |       |       |       |
| Deferred tax assets             |       |     |       |       |       |
| Loss carry forwards             |       | $        | 18,150     |       | $          | 1,762,486 |   |
| Property and equipment          |       | 38,716   |       | —     |       |
| Accrued expenses                |       | 32,465   |       | —     |       |
| Alternative minimum tax credits |       | 57,385   |       | —     |       |
| Other                           |       | —   |       | 6,959      |       |
|                            |       |     |       |       |       |
|                            |       | 146,716  |       | 1,769,445  |       |
|                            |       |     |       |       |       |
| Deferred tax liability          |       |     |       |       |       |
| Property and equipment          |       | —   |       | (253,475   | )          |
|                            |       |     |       |       |       |
| Less valuation allowance        |       | —   |       | (1,515,970 | )          |
|                            |       |     |       |       |       |
|                            |       | $        | 146,716    |       | $          | — |   |

 

Thecomponents giving rise to the net deferred tax items described above have beenincluded in the accompanying balance sheet as of December 31, 2005, and2004, as follows:

 
| ** **               | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
|                     |       |     |       |     |       |
| Current assets           |       | $        | 98,925     |     | $          | — |   |
| Noncurrent assets        |       | 47,791   |       | —   |       |
| Current (liabilities)    |       | —   |       | —   |       |
| Noncurrent (liabilities) |       | —   |       | —   |       |
|                     |       | $        | 146,716    |     | $          | — |   |

 

34

----

 

AtDecember 31, 2004 the deferred tax assets are net of a valuationallowance.

 

Thenet change in the valuation allowances for the deferred tax assets was adecrease of $1,515,970 and $1,054,443 during 2005 and 1004, respectively. Thedecreases relate to the utilization of the operating loss carry forwards during2005 and 2004. The remaining loss carry forwards that have been recognized willexpire ratably in 2006 and 2007.

 

NOTEJ - 401(k) PLAN

 

TheCompany has a 401(k) salary deferral plan which covers all employees who havereached the age of 20.5 years and have been employed by the Company for atleast one year. The covered employees may elect to have an amount deductedfrom their wages for investment in a retirement plan. The Company makescontributions to the plan equal to 50% of each participant’s salary reductioncontributions to the plan up to 6% of the participant’s compensation. TheCompany’s matching contribution to the plan was approximately $37,000 and$30,000 for the years ended December 31, 2005 and 2004, respectively.

 

NOTEK - CONCENTRATION OF CREDIT RISK

 

TheCompany sells its geophysical services primarily to large independent oil andgas companies operating in the United States. The Company performs ongoingcredit evaluations of its customer’s financial condition and, generally,requires no collateral from its customers.

 

Salesand accounts receivable from the Company’s largest customers as of and for theyears ended December 31, 2005 and 2004 consist of the following:

 
| ** **  | ** ** | **Sales** | ** ** | **Accounts  Receivable** | ** ** |
|-------------|------------|-----------|------------|--------------------------|------------|
| **Company** | ** ** | **2005**  | ** ** | **2004**                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|        |       |      |       |                     |       |   |   |   |   |
| A           |       | 12        | %          | —                   |       | — |   | — |   |
| B           |       | 11        | %          | 11                       | %          | — |   | 7 | % |
| C           |       | —    |       | 34                       | %          | — |   | — |   |
| D           |       | —    |       | 15                       | %          | — |   | 1 | % |

 

Asof December 31, 2005, 3 additional customers accounted for 22%, 19% and14% of outstanding accounts receivable, respectively.

 

NOTEL - CONTINGENCIES

 

OnDecember 28, 2004, one of the company’s employees was killed in awork-related accident. On July 11, 2005, the deceased employee’s widowfiled suit against the company. The company’s insurance company is currentlyproviding legal counsel to represent the company in this case. In the opinionof management, the disposition of this case is not expected to have a materialadverse effect upon the financial position of the Company.

 

Inconducting its activities, the Company from time to time is the subject ofvarious claims arising from the ordinary course of business. In the opinion ofmanagement, the ultimate resolution of such claims is not expected to have amaterial adverse effect upon the financial position of the Company.

 

35

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**ITEM 8. CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON****ACCOUNTING AND FINANCIAL DISCLOSURE**

 

NotApplicable.

 

**Item 8A. CONTROLS AND PROCEDURES**

 

Underthe supervision and with the participation of the Company’s management,including the Company’s Chief Executive Officer and Principal Financial andAccounting Officer, the Company performed an evaluation of the effectiveness ofthe design and operation of the Company’s disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act) as of December 31, 2005. Based upon that evaluation,the Chief Executive Officer and Principal Financial and Accounting Officerconcluded that the Company’s disclosure controls and procedures are effectivein enabling the Company to record, process, summarize, and report informationrequired to be included in reports filed or submitted under the Exchange Actwithin the required time period. There were no changes in the Company’sinternal controls over financial reporting or in other factors during thequarter ended December 31,2005, that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

TheCompany continues to take action to assure compliance with the internalcontrols, disclosure controls, and other requirements of the Sarbanes-Oxley Actof 2002. Our management, including our Chief Executive Officer and PrincipalFinancial and Accounting Officer, cannot guarantee that our internal controlsand disclosure controls will prevent all possible errors or all fraud. A controlsystem, no matter how well conceived and operated, can provide only reasonable,not absolute, assurance that the objectives of the control system are met. Inaddition, the design of a control system must reflect the fact that there areresource constraints, and the benefit of controls must be relative to theircosts. Because of the inherent limitations in all control systems, no system ofcontrols can provide absolute assurance that all control issues and instancesof fraud, if any, within the Company have been detected. These inherentlimitations include the realities that judgments in decision-making can befaulty and that breakdowns can occur because of simple error or mistake. Further,controls can be circumvented by individual acts of some persons, by collusionof two or more persons, or by management override of the controls.****

 

Thedesign of any system of controls also is based in part upon certainassumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions. Over time, a control may be inadequatebecause of changes in conditions, or the degree of compliance with the policiesor procedures may deteriorate. Because of inherent****limitations in a cost-effective controlsystem, misstatements due to error or fraud may occur and not be detected.

 

**Item 8B. OTHER INFORMATION**

 

None

 

# **PART III**

#  

**ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.**

 

Certaininformation required by Item 9 of the Form 10-KSB is hereby incorporatedby reference from the Company’s definitive proxy statement, which will be filedpursuant to Regulation 14A within 120 days after the Company’s year end for theyear covered by this report, under the caption “Nominees for Directors” in theproxy statement.

 

**ITEM 10. EXECUTIVE COMPENSATION.**

 

Theinformation required by Item 10 of Form 10-KSB is hereby incorporated byreference from the Company’s definitive proxy statement, which will be filedpursuant to Regulation 14A within 120 days after the Company’s year end for theyear covered by this report, under the caption “Executive Compensation” in theproxy statement.

 

**ITEM 11. SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND****MANAGEMENT AND RELATED STOCKHOLDER MATTERS**.

 

Theinformation required by Item 11 of Form 10-KSB is hereby incorporated byreference from the Company’s definitive proxy statement, which will be filedpursuant to Regulation 14A within 120 days after the Company’s year end for theyear covered by this report, under the caption “Security Ownership of CertainBeneficial Owners and Management” in the proxy statement.

 

36

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**ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.**

 

Theinformation required by Item 12 of Form 10-KSB is hereby incorporated byreference from the Company’s definitive proxy statement, which will be filedpursuant to Regulation 14A within 120 days after the Company’s year end for theyear covered by this report, under the caption “Transactions with Management”in the proxy statement.

 

**ITEM 13. EXHIBITS**

 

Item13   (a)  The following is a list of exhibits to this Form 10-KSB:

 
| **EXHIBIT   NO.** | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                                                                                                                    |
|------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1                    |       | Underwriting  Agreement, dated October 5, 2005, among TGC Industries, Inc. and  Oppenheimer & Co., Inc., as representative of the several  underwriters named therein, filed as Exhibit 1.1 to the Company’s  Current Report on Form 8-K dated October 6, 2005, and incorporated  herein by reference. |
|                   |       |                                                                                                                                                                                                                                                                                                                                               |
| 3.1                    |       | Restated  Articles of Incorporation (with amendment) as filed with the Secretary of  State of Texas on June 20, 2003, filed as Exhibit 3.4 to the  Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31,  2003, and incorporated herein by reference.                                             |
|                   |       |                                                                                                                                                                                                                                                                                                                                               |
| 3.2                    |       | Bylaws,  as amended and restated December 1, 2004 filed as Exhibit 3.2 to  the Company’s Registration Statement on Form SB-2/A on September 20,  2005 (Registration No. 333-128018), and incorporated herein by  reference.                                                                                          |
|                   |       |                                                                                                                                                                                                                                                                                                                                               |
| 4.1                    |       | Form of  Specimen Stock Certificate filed as Exhibit 4.1 to the Company’s  Registration Statement on Form SB-2/A on September 20, 2005  (Registration No. 333-128018), and incorporated herein by reference.                                                                                                         |
|                   |       |                                                                                                                                                                                                                                                                                                                                               |
| 4.2                    |       | Statement  of Resolution Establishing Series of Preferred Stock of TGC Industries, Inc.  filed as Exhibit 2 to the Company’s Current Report on Form 8-K  filed on August 11, 1993, and incorporated herein by reference.                                                                                             |
|                   |       |                                                                                                                                                                                                                                                                                                                                               |
| 4.3                    |       | Statement  of Resolution Establishing Series C 8% Convertible Exchangeable  Preferred Stock of TGC Industries, Inc. filed as Exhibit B to the  Company’s Current Report on Form 8-K dated July 15, 1996, filed  with the Securities and Exchange Commission and incorporated herein by  reference.                   |
|                   |       |                                                                                                                                                                                                                                                                                                                                               |
| 4.4                    |       | Statement  of Resolution Regarding Series C 8% Convertible Exchangeable Preferred  Stock of TGC Industries, Inc. filed as Exhibit 4.3 to the Company’s  Annual Report on Form 10-KSB/A for the fiscal year ended December 30,  1998, and incorporated herein by reference.                                           |
|                   |       |                                                                                                                                                                                                                                                                                                                                               |
| 4.5                    |       | Statement  of Resolution Regarding Series C 8% Convertible Exchangeable Preferred  Stock of TGC Industries, Inc. filed as Exhibit 4.4 to the Company’s  Annual Report on Form 10-KSB for fiscal year ended December 31,  2000, and incorporated herein by reference.                                                 |
|                   |       |                                                                                                                                                                                                                                                                                                                                               |
| 4.6                    |       | Statement  of Resolution regarding Series C 8% Convertible Exchangeable Preferred  Stock of TGC Industries, Inc. filed as Exhibit 4.5 to the Company’s  Annual Report on Form 10-KSB for fiscal year ended December 31,  2001, and incorporated herein by reference.                                                 |

 

37

----

 
| 4.7    |   | Statement  of Resolution regarding Series C 8% Convertible Exchangeable Preferred  Stock of TGC Industries, Inc. filed as Exhibit 4.6 to the Company’s  Annual Report on Form 10-KSB for fiscal year ended December 31,  2002, and incorporated herein by reference.                                                                                |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.8    |   | Statement  of Resolution regarding Series C 8% Convertible Exchangeable Preferred  Stock of TGC Industries, Inc. filed as Exhibit 4.7 to the Company’s  Annual Report on Form 10-KSB for the fiscal year ended December 31,  2004, and incorporated herein by reference.                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.9    |   | 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 Securities and Exchange Commission on September 19, 1996,  and incorporated herein by reference.        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.10   |   | 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 Securities and  Exchange Commission and incorporated herein by reference.                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.11   |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.12   |   | Statement  of Resolution Establishing 8-1/2% Senior Convertible Preferred Stock of TGC  Industries, Inc. filed as Exhibit 4.8 to the Company’s Annual  Report on Form 10-KSB for fiscal year ended December 31, 2000, and  incorporated herein by reference.                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.13   |   | Statement  of Resolution regarding 8-1/2% Senior Convertible Preferred Stock of TGC  Industries, Inc. filed as Exhibit 4.11 to the Company’s Annual  Report on Form 10-KSB for fiscal year ended December 31, 2002, and  incorporated herein by reference.                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.14   |   | Form of  Warrant Agreement and Warrant Certificate dated September 10, 2002,  filed as Exhibit 4.14 to the Company’s Registration Statement on Form SB-2/A  on September 20, 2005 (Registration No. 333-128018), and  incorporated herein by reference.                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.15   |   | Form of  Warrant Agreement and Warrant Certificate dated June 12, 2003, filed as Exhibit 14.15  to the Company’s Registration Statement on Form SB-2/A on September 20,  2005 (Registration No. 333-128018), and incorporated herein by  reference.                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.16   |   | Form of  Warrant Agreement and Warrant Certificate dated December 15, 2004, filed  as Exhibit 4.16 to the Company’s Registration Statement on Form SB-2/A  on September 20, 2005 (Registration No. 333-128018), and  incorporated herein by reference.                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.1   |   | Employment  Contract by and among TGC Industries, Inc. and Wayne A. Whitener, dated August 26,  2005, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K  dated August 31, 2005, and incorporated herein by reference.                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.2   |   | Form of  Indemnification Agreement, filed as Exhibit 10.2 to the Company’s  Current Report on Form 8-K dated August 31, 2005, and incorporated  herein by reference.                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.3   |   | Commercial  Lease Agreement dated August 25, 2005, by and among TGC Industries, Inc.  and JSS/Capital Avenue, L.P., filed as Exhibit 10.3 to the Company’s  Current Report on Form 8-K dated August 31, 2005, and incorporated  herein by reference.                                                                                                |

 

38

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| 10.4   |   | Promissory  Note by and among TGC Industries, Inc. and Sovereign Bank, N.A., dated September 16,  2005, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K  dated September 20, 2005, and incorporated herein by reference.                                                                                   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.5   |   | Waiver,  dated October 12, 2005 and effective September 16, 2005, to the  Promissory Note by and among TGC Industries, Inc. and Sovereign Bank,  N.A., dated September 16, 2005, filed as Exhibit 10.1 to the  Company’s Current Report on Form 8-K dated October 18, 2005, and  incorporated herein by reference. |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.6   |   | Business  Loan Agreement by and among TGC Industries, Inc. and Sovereign Bank,  N.A., dated September 16, 2005, filed as Exhibit 10.2 to the  Company’s Current Report on Form 8-K dated September 20, 2005, and  incorporated herein by reference.                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.7   |   | Promissory  Note by and among TGC Industries, Inc. and General Electric Capital  Corporation, dated September 2, 2005, filed as Exhibit 10.3 to the  Company’s Current Report on Form 8-K dated September 20, 2005, and  incorporated herein by reference.                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.8   |   | Amendment,  dated September 9, 2005, to the Promissory Note by and among TGC  Industries, Inc. and General Electric Capital Corporation, dated September 2,  2005, filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K  dated September 20, 2005, and incorporated herein by reference.                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.9   |   | Promissory  Note by and among TGC Industries, Inc. and General Electric Capital  Corporation, dated September 12, 2005, filed as Exhibit 10.5 to the  Company’s Current Report on Form 8-K dated September 20, 2005, and  incorporated herein by reference.                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.10  |   | Amendment,  dated September 9, 2005, to the Promissory Note by and among TGC  Industries, Inc. and General Electric Capital Corporation, dated September 12,  2005, filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K  dated September 20, 2005, and incorporated herein by reference.                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.11  |   | Amendment,  dated September 12, 2005, to the Promissory Note by and among TGC  Industries, Inc. and General Electric Capital Corporation, dated September 12,  2005, filed as Exhibit 10.7 to the Company’s Current Report on Form 8-K  dated September 20, 2005, and incorporated herein by reference.                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.12  |   | Promissory  Note by and among TGC Industries, Inc. and General Electric Capital  Corporation, dated September 19, 2005, Filed as Exhibit 10.1 to the  Company’s Current Report on Form 8-K filed on September 30, 2005,  and incorporated herein by reference.                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.13  |   | Form of  Warrant Purchase Agreement from Directors filed as Exhibit 10.12 to the  Company’s Registration Statement on Form SB-2/A on September 20,  2005 (Registration No. 333-128018), and incorporated herein by  reference.                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| *31.1  |   | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| *31.2  |   | Certification  of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| *32.1  |   | 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.                                                                                                                                                                                             |

 

39

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| *32.2 |   | Certification  of Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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*Filedherewith.

 

**ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

Theinformation required by item 14 of Form 10-KSB is hereby incorporated byreference from the Company’s definitive proxy statement, which will be filedpursuant to Regulation 14A within 120 days after the Company’s year end for theyear covered by this report, under the caption “Principal Accountant Fees andServices” in the proxy statement.

 

40

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**SIGNATURES**

 

Inaccordance with Section 13 or 15(d) of the Exchange Act, theregistrant caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|                       | **TGC INDUSTRIES, INC.** |
|----------------------------|-------------------------------|
|                       |                          |
| Date:  March 28, 2006 | By:                           |   /s/  Wayne A. Whitener |   |
|                       |                          | Wayne A. Whitener |
|                       |                          | President and Chief Executive Officer |
|                       |                          | (Principal Executive Officer) |

 

Inaccordance with the Exchange Act, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 

 
| Date:  March 28, 2006 | By:    |   /s/  Wayne A. Whitener          |   |
|----------------------------|--------|---------------------------------------------|--------|
|                       |   | Wayne A. Whitener                           |
|                       |   | President and Chief Executive Officer       |
|                       |   | (Principal Executive Officer)               |
|                       |   |                                        |
| Date:  March 28, 2006 | By:    |   /s/  Kenneth Uselton            |   |
|                       |   | Kenneth Uselton, Secretary and              |
|                       |   | Treasurer (Principal Financial and          |
|                       |   | Accounting Officer)                         |
|                       |   |                                        |
| Date:  March 28, 2006 | By:    |   /s/  William J. Barrett         |   |
|                       |   | William J. Barrett                          |
|                       |   | Director                                    |
|                       |   |                                        |
| Date:  March 28, 2006 | By:    |   /s/  Herbert M. Gardner         |   |
|                       |   | Herbert M. Gardner                          |
|                       |   | Director                                    |
|                       |   |                                        |
| Date:  March 28, 2006 | By:    |   /s/  Allen T. McInnes           |   |
|                       |   | Allen T. McInnes                            |
|                       |   | Director                                    |
|                       |   |                                        |
| Date:  March 28, 2006 | By:    |   /s/  Edward L. Flynn            |   |
|                       |   | Edward L. Flynn                             |
|                       |   | Director                                    |
|                       |   |                                        |
| Date:  March 28, 2006 | By:    |   /s/  William C. Hurtt, Jr. |   |
|                       |   | William C. Hurtt, Jr.                  |
|                       |   | Director                                    |

 

41

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**EXHIBITS INDEX**

 
| **EXHIBIT   NO.** | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                                                                                                                    |
|------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1                    |       | Underwriting  Agreement, dated October 5, 2005, among TGC Industries, Inc. and  Oppenheimer & Co., Inc., as representative of the several  underwriters named therein, filed as Exhibit 1.1 to the Company’s Current  Report on Form 8-K dated October 6, 2005, and incorporated herein  by reference. |
|                   |       |                                                                                                                                                                                                                                                                                                                                               |
| 3.1                    |       | Restated  Articles of Incorporation (with amendment) as filed with the Secretary of  State of Texas on June 20, 2003, filed as Exhibit 3.4 to the  Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31,  2003, and incorporated herein by reference.                                             |
|                   |       |                                                                                                                                                                                                                                                                                                                                               |
| 3.2                    |       | Bylaws,  as amended and restated December 1, 2004 filed as Exhibit 3.2 to  the Company’s Registration Statement on Form SB-2/A on September 20,  2005 (Registration No. 333-128018), and incorporated herein by  reference.                                                                                          |
|                   |       |                                                                                                                                                                                                                                                                                                                                               |
| 4.1                    |       | Form of  Specimen Stock Certificate filed as Exhibit 4.1 to the Company’s  Registration Statement on Form SB-2/A on September 20, 2005  (Registration No. 333-128018), and incorporated herein by reference.                                                                                                         |
|                   |       |                                                                                                                                                                                                                                                                                                                                               |
| 4.2                    |       | Statement  of Resolution Establishing Series of Preferred Stock of TGC Industries, Inc.  filed as Exhibit 2 to the Company’s Current Report on Form 8-K  filed on August 11, 1993, and incorporated herein by reference.                                                                                             |
|                   |       |                                                                                                                                                                                                                                                                                                                                               |
| 4.3                    |       | Statement  of Resolution Establishing Series C 8% Convertible Exchangeable  Preferred Stock of TGC Industries, Inc. filed as Exhibit B to the  Company’s Current Report on Form 8-K dated July 15, 1996, filed  with the Securities and Exchange Commission and incorporated herein by  reference.                   |
|                   |       |                                                                                                                                                                                                                                                                                                                                               |
| 4.4                    |       | Statement  of Resolution Regarding Series C 8% Convertible Exchangeable Preferred  Stock of TGC Industries, Inc. filed as Exhibit 4.3 to the Company’s  Annual Report on Form 10-KSB/A for the fiscal year ended December 30,  1998, and incorporated herein by reference.                                           |
|                   |       |                                                                                                                                                                                                                                                                                                                                               |
| 4.5                    |       | Statement  of Resolution Regarding Series C 8% Convertible Exchangeable Preferred  Stock of TGC Industries, Inc. filed as Exhibit 4.4 to the Company’s  Annual Report on Form 10-KSB for fiscal year ended December 31,  2000, and incorporated herein by reference.                                                 |
|                   |       |                                                                                                                                                                                                                                                                                                                                               |
| 4.6                    |       | Statement  of Resolution regarding Series C 8% Convertible Exchangeable Preferred  Stock of TGC Industries, Inc. filed as Exhibit 4.5 to the Company’s  Annual Report on Form 10-KSB for fiscal year ended December 31,  2001, and incorporated herein by reference.                                                 |
|                   |       |                                                                                                                                                                                                                                                                                                                                               |
| 4.7                    |       | Statement  of Resolution regarding Series C 8% Convertible Exchangeable Preferred  Stock of TGC Industries, Inc. filed as Exhibit 4.6 to the Company’s  Annual Report on Form 10-KSB for fiscal year ended December 31,  2002, and incorporated herein by reference.                                                 |
|                   |       |                                                                                                                                                                                                                                                                                                                                               |
| 4.8                    |       | Statement  of Resolution regarding Series C 8% Convertible Exchangeable Preferred  Stock of TGC Industries, Inc. filed as Exhibit 4.7 to the Company’s  Annual Report on Form 10-KSB for the fiscal year ended December 31,  2004, and incorporated herein by reference.                                             |

 

42

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| 4.9    |   | 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 Securities and Exchange Commission on September 19, 1996,  and incorporated herein by reference.        |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.10   |   | 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 Securities and  Exchange Commission and incorporated herein by reference.                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.11   |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.12   |   | Statement  of Resolution Establishing 8-1/2% Senior Convertible Preferred Stock of TGC  Industries, Inc. filed as Exhibit 4.8 to the Company’s Annual  Report on Form 10-KSB for fiscal year ended December 31, 2000, and  incorporated herein by reference.                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.13   |   | Statement  of Resolution regarding 8-1/2% Senior Convertible Preferred Stock of TGC  Industries, Inc. filed as Exhibit 4.11 to the Company’s Annual  Report on Form 10-KSB for fiscal year ended December 31, 2002, and  incorporated herein by reference.                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.14   |   | Form of  Warrant Agreement and Warrant Certificate dated September 10, 2002,  filed as Exhibit 4.14 to the Company’s Registration Statement on Form SB-2/A  on September 20, 2005 (Registration No. 333-128018), and  incorporated herein by reference.                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.15   |   | Form of  Warrant Agreement and Warrant Certificate dated June 12, 2003, filed as Exhibit 14.15  to the Company’s Registration Statement on Form SB-2/A on September 20,  2005 (Registration No. 333-128018), and incorporated herein by  reference.                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.16   |   | Form of  Warrant Agreement and Warrant Certificate dated December 15, 2004, filed  as Exhibit 4.16 to the Company’s Registration Statement on Form SB-2/A  on September 20, 2005 (Registration No. 333-128018), and  incorporated herein by reference.                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.1   |   | Employment  Contract by and among TGC Industries, Inc. and Wayne A. Whitener, dated August 26,  2005, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K  dated August 31, 2005, and incorporated herein by reference.                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.2   |   | Form of  Indemnification Agreement, filed as Exhibit 10.2 to the Company’s  Current Report on Form 8-K dated August 31, 2005, and incorporated  herein by reference.                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.3   |   | Commercial  Lease Agreement dated August 25, 2005, by and among TGC Industries, Inc.  and JSS/Capital Avenue, L.P., filed as Exhibit 10.3 to the Company’s  Current Report on Form 8-K dated August 31, 2005, and incorporated  herein by reference.                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.4   |   | Promissory  Note by and among TGC Industries, Inc. and Sovereign Bank, N.A., dated September 16,  2005, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K  dated September 20, 2005, and incorporated herein by reference.                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.5   |   | Waiver,  dated October 12, 2005 and effective September 16, 2005, to the  Promissory Note by and among TGC Industries, Inc. and Sovereign Bank,  N.A., dated September 16, 2005, filed as Exhibit 10.1 to the  Company’s Current Report on Form 8-K dated October 18, 2005, and  incorporated herein by reference.                        |

 

43

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| 10.6   |   | Business  Loan Agreement by and among TGC Industries, Inc. and Sovereign Bank,  N.A., dated September 16, 2005, filed as Exhibit 10.2 to the  Company’s Current Report on Form 8-K dated September 20, 2005, and  incorporated herein by reference.                                                          |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.7   |   | Promissory  Note by and among TGC Industries, Inc. and General Electric Capital  Corporation, dated September 2, 2005, filed as Exhibit 10.3 to the  Company’s Current Report on Form 8-K dated September 20, 2005, and  incorporated herein by reference.                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.8   |   | Amendment,  dated September 9, 2005, to the Promissory Note by and among TGC  Industries, Inc. and General Electric Capital Corporation, dated September 2,  2005, filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K  dated September 20, 2005, and incorporated herein by reference.   |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.9   |   | Promissory  Note by and among TGC Industries, Inc. and General Electric Capital  Corporation, dated September 12, 2005, filed as Exhibit 10.5 to the  Company’s Current Report on Form 8-K dated September 20, 2005, and  incorporated herein by reference.                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.10  |   | Amendment,  dated September 9, 2005, to the Promissory Note by and among TGC  Industries, Inc. and General Electric Capital Corporation, dated September 12,  2005, filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K  dated September 20, 2005, and incorporated herein by reference.  |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.11  |   | Amendment,  dated September 12, 2005, to the Promissory Note by and among TGC Industries, Inc.  and General Electric Capital Corporation, dated September 12, 2005,  filed as Exhibit 10.7 to the Company’s Current Report on Form 8-K  dated September 20, 2005, and incorporated herein by reference. |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.12  |   | Promissory  Note by and among TGC Industries, Inc. and General Electric Capital  Corporation, dated September 19, 2005, Filed as Exhibit 10.1 to the  Company’s Current Report on Form 8-K filed on September 30, 2005,  and incorporated herein by reference.                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.13  |   | Form of  Warrant Purchase Agreement from Directors filed as Exhibit 10.12 to the  Company’s Registration Statement on Form SB-2/A on September 20,  2005 (Registration No. 333-128018), and incorporated herein by  reference.                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| *31.1  |   | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| *31.2  |   | Certification  of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| *32.1  |   | 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.                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| *32.2  |   | Certification  of Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                          |

 

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*Filedherewith.

 

44

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