**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

** **

**FORM 10-K**

** **
| **x**                                                 | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|-------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| ** **                                            | ** **                                                                                              |
| **For the  fiscal year ended December 31, 2009** |
| ** **                                            | ** **                                                                                              |
| **o**                                                 | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

** **

**For the transition period from                to                  .**

** **

**Commission File Number 01-14908**

** **

**TGCINDUSTRIES, INC.**

(Exact name of registrantas specified in its charter)

 

| **Texas**                                                       | ** ** | **74-2095844**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization) |       | (I.R.S.  Employer Identification No.) |
|                                                            |       |                                  |
| **101  East Park Blvd., Suite 955, Plano, Texas**          | ** ** | **75074**                             |
| (Address of principal  executive offices)                       |       | (Zip Code)                            |

 

Registrant’s telephonenumber, including area code:  (**972) 881-1099**

 

Securities registered pursuant to Section 12(b) ofthe Act:

 

| **Common Stock, par value $.01 per share** | ** ** | **The NASDAQ Stock Market LLC** |
|--------------------------------------------------------------------------|------------|-----------------------------------------------------|
| (Title of Class)                                                         |       | (Name of exchange on  which registered)             |

 

Securities registered pursuant to Section 12(g) ofthe Act:**None**

 

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o                    Nox

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act.

Yes o                    Nox

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 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 x                   No  o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWebsite, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (Section 232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).

Yes  o                   No  o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K (229.405) is not containedherein, and will not be contained, to the best of Registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form 10-K or any amendment to this Form 10-K.   x

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company.  See thedefinitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer  o |   | Accelerated filer x          |
|----------------------------|--------|------------------------------|
| Non-accelerated filer o    |   | Smaller reporting company  o |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o                   No  x

 

The aggregate market value of the voting andnon-voting common equity held by non-affiliates computed by reference to theprice at which the common equity was last sold as of the last business day ofthe Registrant’s most recently completed second fiscal quarter was $64,577,846.

 

Number of shares of Common Stock outstanding as of February 26,2010:  18,285,288

 

**Documents incorporated byreference**

 

Listed below are documents, parts of which areincorporated herein by reference, and the part of this report into which thedocument is incorporated:

 

Proxy statement for the2010 annual meeting of shareholders — Part III

 

 

 

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**Part I**

** **

**ITEM1. BUSINESS.**

** **

**General**

** **

TGC Industries, Inc.is a Texas corporation, and with its wholly-owned subsidiary, Eagle Canada, Inc.,a Delaware corporation, (collectively “TGC” or the “Company”) are primarilyengaged in the geophysical service business of conducting Three-D (“3-D”)surveys for clients in the oil and gas business.  TGC’s principal business office is located at101 E. Park Blvd., Suite 955, Plano, Texas 75074 (Telephone:972-881-1099).  TGC’s internet address iswww.tgcseismic.com.  TGC makes availablefree of charge on its website its annual reports on Form 10-K, quarterlyreports on Form 10-Q, and current reports on Form 8-K as soon asreasonably practicable after filing or furnishing such information with theSecurities and Exchange Commission.

 

**History**

** **

In April of 1980, Supreme Industries, Inc.(“Supreme”), formerly ESI Industries, Inc., formed a wholly-ownedsubsidiary, Tidelands Geophysical Co., Inc. (“Tidelands”), that acquiredcertain equipment, instruments, and related supplies from a Houston-basedcorporation that was engaged in the business of conducting seismic, gravity,and magnetic surveys under contracts for oil and natural gas companies.  On June 30, 1986, the Boards ofDirectors of Supreme and Tidelands approved a spin-off of substantially all ofthe shares of Tidelands owned by Supreme which were distributed as a stockdividend to Supreme’s security holders. In July of 1986, our name was changed from “Tidelands GeophysicalCo., Inc.” to “TGC Industries, Inc.” (“TGC”).  On October 19,2009, we disclosed our entry into a Material Definitive Agreement regarding theacquisition of the stock of Eagle Canada, Inc. (“Eagle Canada”), aDelaware corporation.  Eagle Canada was awholly-owned subsidiary of Eagle Geophysical, Inc. and Eagle GeophysicalOnshore, Inc. (the “*Debtors*”)which were debtors in a Chapter 11 bankruptcy proceeding in Houston,Texas.  Eagle Canada is in the business of providing seismic data andsurveying services to the Canadian energy industry and has its principal placeof business located in Calgary, Alberta, Canada.  By Order dated October 14,2009, the Bankruptcy Court approved the sale of the Eagle Canada stock by theDebtors to TGC and authorized the Debtors to enter into a Stock PurchaseAgreement with TGC.  In accordance with the terms of the Stock PurchaseAgreement, the sale transaction closed on October 16, 2009, with TGCacquiring the Eagle Canada stock for a total purchase price of approximately$10.3 million paid from existing cash.

 

We are a leading providerof seismic data acquisition services throughout the continental United Statesand Canada.  As of December 31,2009, we operated six seismic crews, four in the U.S. and two in Canada.  These seismic crews supply seismic dataprimarily to companies engaged in the exploration and development of oil andnatural gas on land and in land-to-water transition areas.  Eagle Canada’s seismic acquisition servicesare also used by the potash mining industry in Canada, and Eagle has particularexpertise through their heliportable capabilities.  Our customers rely on seismic data toidentify areas where subsurface conditions are favorable for the accumulationof existing hydrocarbons, to optimize the development and production ofhydrocarbon reservoirs, to better delineate existing oil and natural gasfields, and to augment reservoir management techniques.

 

We acquiregeophysical data using the latest in 3-D survey techniques. We introduceacoustic energy into the ground by using vibration equipment or dynamite detonation,depending on the surface terrain and subsurface requirements. The reflectedenergy, or echoes, is received through geophones, converted into a digitalsignal at a multi-channel recording unit, and then transmitted to a centralrecording vehicle. Subsurface requirements dictate the number of channelsnecessary to perform our services. With our state-of-the-art seismic equipment,including computer technology and multiple channels, we acquire, on a costeffective basis, immense volumes of seismic data that when processed andinterpreted produce more precise images of the earth’s subsurface. Ourcustomers then use our seismic data to generate 3-D geologic models that helpreduce finding costs and improve recovery rates from existing wells.

 

**TheIndustry**

** **

Technologicaladvances in seismic equipment and computing allow the seismic industry toacquire and process, on a cost-effective basis, immense volumes of seismic datawhich produce precise images of the earth’s subsurface. The latest acceptedmethod of seismic data acquisition, processing, and the subsequentinterpretation of the processed data is the 3-D seismic method. Geophysicistsuse computer workstations to interpret 3-D data volumes, identify subsurfaceanomalies, and generate a geologic model of subsurface features.

 

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3-D seismic dataare used in the exploration and development of new reserves and enable oil andnatural gas companies to better delineate existing fields and to augment theirreservoir management techniques. Benefits of incorporating high resolution 3-Dseismic surveys into exploration and development programs include reducingdrilling risk, decreasing oil and natural gas finding costs, and increasing theefficiencies of reservoir location, delineation, and management. In order tomeet the requirements necessary to fully realize the benefits of 3-D seismicdata, there is an increasing demand for improved data quality with greatersubsurface resolution.

 

Currently, theseismic data acquisition industry is made up of a number of companies dividedinto two groups. The first group is made up of four publicly-traded companieswith long operating histories who field numerous crews and work in a number ofdifferent regions and terrain.  Thisgroup includes us, Dawson Geophysical Company, Geokinetics, Inc., andCGG-Veritas.  These companies fieldapproximately 50% of the estimated 65****seismic crewscurrently operating in the continental U.S. and Canada.  The second group is made up of smaller companieswho generally run one or two seismic crews and often specialize in specificregions or types of operations.

 

We provide ourseismic data acquisition services primarily to onshore oil and natural gasexploration and development companies for use in the onshore drilling andproduction of oil and natural gas in the continental U.S. and Canada. The mainfactors influencing demand for seismic data acquisition services in ourindustry are the levels of drilling activity by oil and natural gas companies andthe 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.

 

**Equipmentand Crews**

** **

In the fourthquarter of 2004, we acquired, and placed into service, our first new ARAM ARIESrecording system.  In July of 2005,we deployed our fourth seismic data acquisition crew along with our second newARAM ARIES recording system.  In November of2005, we deployed our fifth seismic data acquisition crew along with our thirdnew 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, wedeployed a sixth crew to operate this fourth new ARAM ARIES recordingsystem.  In May of 2006, we deployedour seventh seismic data acquisition crew along with our fifth new ARAM ARIESrecording system.  In October of2006, we deployed our eighth seismic data acquisition crew along with our sixthnew ARAM ARIES recording system.  In December of2007, we completed a loan transaction with a commercial lender for the purposeof providing funds for the purchase of our seventh new ARAM ARIES recordingsystem.  In January of 2008, theCompany entered into an agreement with a bank to provide financing for thepurchase of new vibration vehicles.  In February of2008, the Company exercised its purchase option for seismic recording equipmentit had been renting.  In March of2008, the Company entered into a loan agreement with a commercial lender toprovide financing for the purchase of this rented equipment and to replace anexisting loan the Company had with the lender. In July of 2008, the Company entered into a loan agreement with abank to provide financing for the purchase of additional seismic recordingequipment.  In August of 2008, theCompany entered into a loan agreement with a bank to provide financing for thepurchase of new vibration vehicles.  In September of2008, the Company entered into a loan agreement with a commercial lender toprovide financing for the purchase of a new seismic recording system andequipment.  In December of 2008, wedeployed our ninth seismic data acquisition crew along with our eighth new ARAMARIES recording system.  During thesecond quarter of 2009, demand weakened and seismic market activity declinedsignificantly in North America.  We respondedto the weakening demand for seismic services by aggressively managing ourcosts, including our crew count, dropping TGC’s from a peak of nine crews inthe first quarter of 2009 to four crews in the second half of the year in theU.S.  During October of 2009, wepurchased Eagle Canada, Inc. a provider of seismic data services to theCanadian energy industry.  Subsequent tothe acquisition in October of 2009, Eagle Canada operated two seismiccrews.  Eagle Canada utilizes the latestin ARAM ARIES recording equipment which is interchangeable with that of TGC.

 

Our crews utilizethe new state-of-the-art ARAM ARIES recording systems.  These systems employ cable telemetrytechnology enhanced by multiple baseline and redundant cable connections thatprovide seismic data acquisition services with increased reliability.  During most of the year, one crew utilizedthe Opseis Eagle data gathering system. This system employs radio-frequencytelemetry technology providing seismic data-gathering services to land-to-watertransition areas, rivers, lakes, inaccessible terrain, deserts, and man-madebarriers such as highways and cities.  The Opseis system was retired in December of 2009.

 

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We currently ownequipment for 13 land-based seismic data acquisition crews and 69 vibrationvehicles.  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.

 

**CapitalExpenditures**

** **

We believe that itis essential to take advantage of advances in seismic technology and to commitcapital to purchase and update our equipment cost-effectively. Purchasing andupdating seismic equipment and technology involves a commitment to capitalspending.  Because of the market downturnin 2009, we reduced capital expenditures to approximately $1,960,000, primarilyfor equipment and vehicle maintenance and replacement.  For fiscal year 2008, capital expenditureswere approximately $21,686,000 compared with approximately $18,238,000 for2007.

 

**Customersand Consultants**

** **

Our customers aremajor and independent oil and natural gas exploration and developmentcompanies. The services we provide to our customers vary according to the sizeand needs of each customer. Our services are marketed by supervisory andexecutive personnel who contact customers to determine their needs and respondto customer inquiries regarding the availability of crews. Contacts are basedprincipally upon professional relationships developed over a number of years.There are many consultants in the oil and natural gas industry who process andinterpret seismic data for oil and natural gas companies. These consultants canhave an influence in determining which company their customers use to acquireseismic data.

 

In order to avoidpotential conflicts of interest with our customers, we do not participate inoil and natural gas ventures. The results of a seismic survey conducted for acustomer belong to that customer. All of our customers’ information ismaintained in strictest confidence.

 

**Contracts**

** **

Our contracts areobtained either through competitive bidding or as a result of customernegotiations. Our services are conducted under general service agreements forseismic data acquisition services which define certain obligations for us andfor our customers. A supplemental agreement setting forth the terms of aspecific project, which may be cancelled by either party upon 30 days’ advancewritten notice, is entered into for every project. We currently operate undersupplemental agreements that are either “turnkey” agreements providing for afixed fee to be paid to us for each unit of data acquired or “term” agreementsproviding for a fixed hourly, daily, or monthly fee during the term of theproject or projects.

 

**Competition**

** **

The acquisition ofseismic data for the oil and natural gas industry is a highly competitivebusiness. There are approximately 65 seismic crews currently operating in thecontinental United States and Canada. Contracts for such services generally are awarded on the basis of pricequotations, crew experience, and the availability of crews to perform in atimely manner, although factors other than price, such as crew safetyperformance history and technological and operational expertise, are oftendeterminative. Our competitors include companies with financial resources thatare significantly greater than our own as well as companies of comparable andsmaller size. Our primary competitors are Dawson GeophysicalCompany, Geokinetics, Inc. and CGG-Veritas.  In addition to the previously namedcompanies, we also compete for projects from time to time with smaller seismiccompanies which operate in local markets with only one or two crews.

 

**Employees**

** **

As of December 31,2009, we employed a total of 574 full-time (non-union) employees, of which27 consisted of management, sales, and administrative personnel with theremainder being crew and crew support personnel.  We believe our relationship with ouremployees to be satisfactory.

 

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**DataBank**

** **

We own a data bankwhich contains gravity data, and to a lesser extent magnetic data, from many ofthe major oil and natural gas producing areas located within the United States.We do not have a seismic data bank. Our data bank information has been amassedthrough participatory surveys as well as speculative surveys historicallyfunded by us alone. All data and interpretations may be licensed to customersat a fraction of the cost of newly acquired data. However, the licensing ofthis data is not a significant portion of our revenues.

 

**OperatingRisks and Insurance**

** **

Our business issubject to the hazards inherent in conducting seismic data acquisitionactivities in hostile environments with dangerous machinery, and in someinstances explosives. These activities can cause personal injury or loss oflife, damage to or destruction of property, equipment, the environment, andmarine life, and suspension of operations.

 

In addition, wecould be subject to personal injury or real property damage claims in thenormal operation of our business. Such claims may not be covered by theindemnification provisions in our general service agreements to the extent thatthe damage is due to our negligence or intentional misconduct.

 

We do not carryinsurance against certain risks that we could experience such as businessinterruption resulting from equipment maintenance or weather delays. We obtaininsurance against certain property and personal casualty risks and other riskswhen such insurance is available and when our management considers it advisableto do so. Currently, our insurance coverage consists of employers liabilitywith limits of $1,000,000 per accident and $2,000,000 in the aggregate,commercial general liability of $1,000,000 per accident and $2,000,000 in theaggregate, pollution liability of $1,000,000 per accident and $2,000,000 in theaggregate, and automobile liability with a $1,000,000 combined single limit,and a $10,000,000 umbrella policy. Our general service agreements require us tohave specific amounts of insurance. There can be no assurance, however, thatany insurance obtained by us will be adequate to cover any losses orliabilities, or that this insurance will continue to be available or availableon terms which are acceptable to us. Liabilities for which we are not insured,or which exceed the policy limits of our applicable insurance, could have amaterial adverse effect on us.

 

**ITEM1A.  RISK FACTORS**

** **

Any investment inour common stock involves a high degree of risk. You should carefully considerthe risks and uncertainties described below and the other information includedin this Form 10-K before purchasing our common stock. Although the risksdescribed below are the risks that we believe are material, they are not theonly risks relating to our business and our common stock. Additional risks anduncertainties, including those that are not yet identified or that we currentlybelieve are immaterial, may also adversely affect our business, financialcondition, or results of operations. If any of the events described belowoccur, our business and financial results could be materially and adverselyaffected. The market price of our common stock could decline due to any ofthese risks, perhaps significantly, and you could lose part or all of yourinvestment.

 

**CompanyRisks**

** **

**Wehave a history of losses, and we may incur losses again.**

** **

Although wereported net income of approximately $1,880,000, $6,898,000, and $7,607,000 forthe years ended December 31, 2009, 2008, and 2007, respectively, we have ahistory of losses with only seven profitable years since 1999.  In 2006, we had net income of approximately$8,111,000; in 2005, we had net income (before dividend requirements onpreferred stock) of approximately $6,201,000; in 2004, we had net income(before dividend requirements on preferred stock) of approximately $2,868,000;and in 2003 we had net income (before dividend requirements on preferred stock)of approximately $555,000. Our ability to be profitable in the future willdepend on many factors beyond our control, but primarily on the level of demandfor land-based seismic data acquisition services by oil and natural gasexploration and development companies. Even if we do achieve profitability, we may not be able to sustain orincrease profitability on a quarterly or annual basis.

 

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**Thecurrent economic downturn could adversely affect our revenues and cash flows**.

 

The continuingcurrent economic downturn could adversely affect our revenues and cash flows ifour customers, and/or potential customers, become unable to pay or must delaypayment of, amounts owing to the Company because such customers are notsuccessful in generating revenues or are precluded from securing necessaryfinancing.

 

**Ourrevenues and operating results can be expected to fluctuate from period toperiod.**

** **

Our revenues,operating results, and profitability may fluctuate from period to period. Thesefluctuations are attributable to the level of new business in a particularperiod, the timing of the initiation, progress, or cancellation of significantprojects, higher revenues and expenses on our dynamite contracts, and costs weincur to train new crews we may add in the future to meet increased customerdemand. Fluctuations in our operating results may also be affected by otherfactors that are outside of our control such as permit delays, weather delays,and crew productivity. Oil and natural gas prices were highly volatile duringthe year ended December 31, 2009, and have resulted in demand fluctuationsfor our services. There can be no assurance of future oil and gas price levelsor stability.  The demand for ourservices will be adversely affected by a significant reduction in oil andnatural gas prices and by climate change legislation or material changes toU.S. energy policy.  Since our businesshas high fixed costs, the negative effect of one or more of these factors couldtrigger wide variations in our operating revenues, EBITDA margin, andprofitability from quarter to quarter, which factors render quarter-to-quartercomparisons unreliable as an indicator of performance.  Due to the factors discussed above, youshould not expect sequential growth in our quarterly revenues andprofitability.

 

**Weare dependent upon significant customers.**

** **

**During 2009, ourlargest customer accounted for approximately 31% of revenues.  During 2008, our two largest customeraccounted for approximately 27% of revenues. During 2007 our largest customer accounted for approximately 12% ofrevenues.  In the past we have derived asignificant amount of our revenues from a small number of oil and natural gasexploration and development companies. While our revenues are derived from a concentrated customer base, oursignificant customers vary between years. If we lose one or more majorcustomers in the future, or if one or more customers encounter financialdifficulties, our business, financial condition, and results of operationscould be materially and adversely affected.**

** **

**Weare dependent upon significant suppliers.**

** **

During 2009, ourtwo largest vendors accounted for approximately 22% and 10% of our purchases,respectively.  During 2008 and 2007, novendor accounted for more that 10% of our purchases.  If we lose one or more major vendors in thefuture, or if one or more vendors encounter financial difficulties, ourbusiness, financial condition, and results of operations could be materiallyand adversely affected.

 

**Wereceive revenues from customers who engage consultants for processing andinterpreting the seismic data we provide.**

** **

We receiverevenues from customers who have engaged consultants to process and interpretthe seismic data provided by us. Consultants can have an influence indetermining which company its customers use to acquire seismic data. Aconsultant could recommend that its customers consider using other seismiccompanies.

 

**Weface intense competition in our business from companies with greater financialresources.**

** **

The seismic dataacquisition services industry is a highly competitive business in thecontinental U.S. and Canada.  Ourcompetitors include companies with financial resources that are significantlygreater than our own as well as companies of comparable and smaller size.

 

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**We aresubject to Canadian foreign currency exchange rate risk.**

 

During the fourthquarter we began to conduct business in Canada which subjects us to foreigncurrency exchange rate risk.  Our resultsof operations and our cash flows could be impacted by changes in foreigncurrency exchange rates.

 

**Technologicalchange in our business creates risks of technological obsolescence andrequirements for future capital expenditures. If we are unable to keep up withthese technological advances, we may not be able to compete effectively.**

** **

Seismic dataacquisition technologies historically have steadily improved and progressed,and we expect this progression to continue. Our strategy is to upgrade ourseismic data acquisition equipment on a regular basis to maintain ourcompetitive position. However, since we are in a capital intensive industry andhave limitations on our ability to obtain the financing necessary to enable usto purchase state-of-the-art equipment, some of our competitors may be able topurchase newer equipment when we may not be able to do so.

 

**Weare dependent on our management team and key employees, and the loss of any ofthem could harm our business.**

** **

We have limitedmanagement depth with the result that the loss, whether by death, departure, orillness, of Wayne A. Whitener, our President and Chief Executive Officer, orother senior executives, could have a material adverse effect on the ability ofmanagement to continue operations at the same level of efficiency. We have keyman insurance on the life of our President and Chief Executive Officer so that,in the event of his untimely death, we would receive insurance proceeds of$1,000,000 under this policy.

 

**Certainmembers of our management team are not subject to employment or non-competitionagreements and may leave our employment at any time.**

** **

Our President andChief Executive Officer, and the President, the Vice President of Operations,and the Operations Manager of Eagle Canada, are subject to employmentagreements and non-competition agreements. Members of our management team that are not subject to employment ornon-competition agreements could leave upon little or no notice which couldhave a material adverse effect on our management’s ability to continueoperations at the same level of effectiveness. Additionally, the lack ofnon-competition agreements would allow these members of our management team toimmediately begin working for one of our competitors upon the termination oftheir relationship with us. This could have a negative impact on our strategicplan and our relationships with customers.

 

**Weextend credit to our customers without requiring collateral, and a default by acustomer could have a material adverse effect on our operating revenues.**

** **

We perform ongoingcredit evaluations of our customers’ financial conditions and, generally,require no collateral from our customers. A default in payment from one ofthese large customers could have a material adverse effect on our operatingrevenues for the period involved.

 

**Certainof our core assets are pledged as collateral for short term notes that requirelarge monthly payments.**

** **

Certain assetsthat are critical to our operations, including three of our ARAM ARIESrecording systems and 13 vibration vehicles are pledged as collateral to ourequipment lenders and commercial banks and could be subject to foreclosure inthe event that we default on our indebtedness having 36 to 57 month terms. Wecurrently have debt obligations covering the purchase of three of our ARAMARIES recording systems that require monthly payments between approximately$86,000 and $103,000 for one ARAM ARIES recording system, between approximately$80,000 and $97,000 for another ARAM ARIES recording system, and between$90,000 and $102,000 for a third ARAM ARIES recording system.  These debt obligations mature in December of2011, October of 2012 and January of 2011, respectively.  The Company has debt obligations covering thepurchase of five vibration vehicles requiring monthly payments betweenapproximately $56,000 and $61,000, and the purchase of eight vibration vehicles,requiring monthly payments of approximately $50,000.  These debt obligations mature in 

 

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August of2011 and February of 2013, respectively. Any decline in our operations could inhibit our ability to make thesesubstantial monthly payments. In view of the short terms of these notes, afailure to make the monthly payments on these notes could cause our lenders topromptly foreclose on the assets securing these notes. The foreclosure oncertain of our core assets securing these notes could severely limit ourability to continue operations.

 

**Wemay be subject to liability claims that are not covered by our insurance.**

** **

Our business issubject to the general risks inherent in land-based seismic data acquisitionactivities. Our activities are often conducted in remote areas under dangerousconditions including the detonation ofdynamite. These operations are subject to risks of injury to personnel andequipment. Our crews are mobile, and equipment and personnel are subject tovehicular accidents. These risks could cause us to experience equipment losses,injuries to our personnel, and interruptions in our business.

 

In addition, wecould be subject to personal injury or real property damage claims in thenormal operation of our business. Such claims may not be covered under theindemnification provisions contained in our general service agreements to theextent that the damage is due to our negligence or intentional misconduct.

 

We do not carryinsurance against certain risks that could cause losses, including businessinterruption resulting from equipment maintenance or weather delays (see “OperatingRisks and Insurance”).

 

Our generalservice agreements require us to have specific amounts of insurance. There canbe no assurance, however, that any insurance obtained by us will be adequate tocover all losses or liabilities or that this insurance will continue to beavailable or available on terms which are acceptable to us. Liabilities forwhich we are not insured, or which exceed the policy limits of our applicableinsurance, could have a materially adverse effect on us.

 

**Weare subject to the requirements of Section 404 of the Sarbanes-Oxley Act.If we are unable to maintain compliance with Section 404 or if the costs relatedto maintaining compliance are significant, our profitability, stock price, andresults of operations and financial condition could be materially adverselyaffected.**

** **

If we are unableto maintain adequate internal controls in accordance with Section 404, assuch standards are amended, supplemented, or modified from time to time, we maynot be able to insure that we have effective internal controls over financialreporting on an ongoing basis in accordance with Section 404.  Failure to achieve and maintain effectiveinternal controls could have a material adverse effect on our stock price.  In addition, a material weakness in theeffectiveness of our internal control over financial reporting could result inan increased chance of fraud and the loss of customers, reduce our ability toobtain financing, and/or require additional expenditures to comply with theserequirements, each of which could negatively impact our business,profitability, and financial condition.

 

**IndustryRisks**

** **

**We and our customers may be adversely affected by thecurrent recession.**

** **

**The current recession could have a material adverse effect on ourfinancial results and proposed plan of operations and could lead to furthersignificant fluctuations in the demand for and pricing of oil and gas.  Reduced demand and pricing pressures couldadversely affect the financial condition and results of operations of ourcustomers and their ability to purchase our services.  We are not able to predict the timing,extent, and duration of the economic cycles in the markets in which we operate.**

** **

**Wederive nearly all of our revenues from companies in the oil and natural gasexploration and development industry, a historically cyclical industry, withlevels of activity that are significantly affected by the levels and volatilityof oil and natural gas prices.**

** **

Any prolongedreduction in the overall level of exploration and development activities,whether resulting from changes in oil and natural gas prices or otherwise,could adversely impact us in many ways by negatively affecting:

 

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·                  our revenues, cash flows, and profitability;

 

·                  our ability to maintain or increase our borrowingcapacity;

 

·                  our ability to obtain additional capital to financeour business and the cost of that capital; and

 

·                  our ability to attract and retain skilled personnelwhom we would need in the event of an upturn in the demand for our services.

 

Worldwide political,economic, and military events have contributed to oil and natural gas pricevolatility and are likely to continue to do so in the future. Depending on themarket prices of oil and natural gas, oil and natural gas exploration anddevelopment companies may cancel or curtail their drilling programs, therebyreducing demand for our services. Oil and natural gas prices have been highlyvolatile historically and, we believe, will continue to be so in the future.Many factors beyond our control affect oil and natural gas prices including:

 

·                  the cost of exploring for, producing, and deliveringoil and natural gas;

 

·                  the discovery rate of new oil and natural gasreserves;

 

·                  the rate of decline of existing and new oil andnatural gas reserves;

 

·                  available pipeline and other oil and natural gastransportation capacity;

 

·                  the ability of oil and natural gas companies to raisecapital;

 

·                  actions by OPEC (the Organization of PetroleumExporting Countries);

 

·                  political instability in the Middle East and othermajor oil and natural gas producing regions;

 

·                  economic conditions in the U.S. and elsewhere;

 

·                  domestic and foreign tax policy;

 

·                  domestic and foreign energy policy including the everincreasing emphasis on alternative sources of energy;

 

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

 

·                  the pace adopted by foreign governments for theexploration, development, and production of their national reserves;

 

·                  the price of foreign imports of oil and natural gas;and

 

·                  the overall supply and demand for oil and natural gas.

 

**The high fixed costs of ouroperations could result in operating losses.**

 

Companies within ourindustry are typically subject to high fixed costs which consist primarily ofdepreciation (a non-cash item) and maintenance expenses associated with seismicdata acquisition and equipment and crew costs. In addition, ongoing maintenancecapital expenditures, as well as new equipment investment, can be significant.As a result, any extended periods of significant downtime or low productivitycaused by reduced demand, weather interruptions, equipment failures, permitdelays, or other causes could adversely affect the results of our operations.

 

9

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**Our operations are subject to delaysrelated to obtaining land access rights of way from third parties which couldaffect our results of operations.**

 

Our seismic dataacquisition operations could be adversely affected by our inability to obtaintimely right of way usage from both public and private land and/or mineralowners. Delays associated with obtaining such rights of way could negativelyaffect our results of operations.

 

**Our business is subject to governmentregulation which may adversely affect our future operations.**

 

Our operations aresubject to a variety of federal, state, and provincial and local laws andregulations, including laws and regulations relating to the protection of theenvironment and archeological sites and those that may result from climatechange legislation.  Canadian operationshave been historically cyclical due to governmental restrictions on seismicacquisition during certain periods.  As aresult, there is a risk that there will be a significant amount of unusedequipment during those periods.  We arerequired to expend financial and managerial resources to comply with such lawsand related permit requirements in our operations, and we anticipate` that wewill continue to be required to do so in the future. Although such expenditureshistorically have not been material to us, the fact that such laws orregulations change frequently makes it impossible for us to predict the cost orimpact of such laws and regulations on our future operations. The adoption oflaws and regulations that have the effect of reducing or curtailing explorationand development activities by energy companies could also adversely affect ouroperations by reducing the demand for our services.

 

**Risks Related To Our Common Stock**

 

**Our common stock has experienced, andmay continue to experience, price volatility and low trading volume.**

 

Our stock price issubject to significant volatility. Overall market conditions including adecline in oil and natural gas prices, in addition to other risks anduncertainties described in this “Risk Factors” section and elsewhere in this Form 10-K,could cause the market price of our common stock to fall. The high and lowsales prices of our common stock for the year ended December 31, 2009,were $5.47 and $1.64, respectively.

 

Our common stock islisted on the NASDAQ Stock Market LLC under the symbol “TGE.” However, dailytrading volumes for our common stock are, and may continue to be, relativelysmall compared to many other publicly traded securities. For example, during2009, our daily trading volume was as low as 5,000 shares.  Since November 6, 2007, when we begantrading on the NASDAQ Stock Market LLC, our daily trading volume has been aslow as 2,800 shares.  In addition, ourcommon stock traded on the NYSE Amex (formerly the American Stock Exchange)under the symbol “TGE” from April 18, 2005 until November 5,2007.  During this period of time ourdaily trading volume was as low as 1,600 shares.  It may be difficult for you to sell yourshares in the public market at any given time at prevailing prices, and theprice of our common stock may, therefore, be volatile.

 

**Our officers and directors own alarge percentage of our common stock, and they may exercise control over ourbusiness and affairs.**

 

Our officers anddirectors as a group beneficially own approximately 29.3% of our common stock.As a result, they will continue to be able to exercise significant influence,and in most cases control, over matters requiring shareholder approval,including the election of directors, changes to our charter documents, andsignificant corporate transactions. This concentration of ownership makes itunlikely that any other holder or group of holders of our common stock will beable to affect the way we are managed or the direction of our business. Thecontinued concentrated ownership of our common stock will make it difficult foranother company to acquire us and for you to receive any related takeoverpremium for your shares (unless the controlling group approves theacquisition).

 

**Certain provisions of our RestatedArticles of Incorporation may make it difficult for a third party to acquire usor may adversely impact your rights as a common shareholder.**

 

Our Restated Articles ofIncorporation contain provisions that require the approval of holders of 80% ofour issued and outstanding shares before we can enter into a merger or otherbusiness combination or sell all or substantially all of our assets.Additionally, if we increase the size of our board from the current six to ninedirectors, 

 

10

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we could be required to stagger our directors’ terms,and our directors could not be removed without approval of holders of 80% ofour issued and outstanding shares. These provisions could discourage or impedea tender offer, proxy contest, or other similar transaction involving controlof us.

 

In addition, our board ofdirectors has the right to issue preferred stock upon such terms and conditionsas it deems to be in the best interest of the Company. The terms of suchpreferred stock may adversely impact the dividend and liquidation rights of thecommon shareholders without the approval of the common shareholders.

 

**We do not intend to pay cash dividendson our common stock in the foreseeable future, and therefore only appreciationof the price of our common stock will provide a return to our shareholders.**

 

While there are currentlyno restrictions prohibiting us from paying dividends to our shareholders, wehave not paid any cash dividends on our common stock in the past, and we do notanticipate paying any dividends in the foreseeable future. Payment of any cashdividends in the future, however, is in the discretion of our board ofdirectors and will depend on our financial condition, results of operations,capital and legal requirements, and other factors deemed relevant by our boardof directors. Earnings, if any, are expected to be retained to fund our futureoperations.

 

**ITEM 1B. UNRESOLVED STAFF COMMENTS.**

 

None

 

**ITEM 2. DESCRIPTION OF PROPERTY.**

 

In April of 2004, weexecuted an addendum to our lease of a facility in Plano, Texas, that includedapproximately 10,500 square feet of office and warehouse space and an outdoorstorage area of approximately 20,000 square feet.  This facility was used to repair geophysicalequipment and housed our corporate offices until September of 2006.  In September of 2005, we leased anadditional facility, in Plano, Texas, with approximately 10,000 square feet ofoffice and warehouse space and an additional 10,000 square feet of outdoorstorage.  This facility was usedprimarily to repair geophysical equipment. In January of 2006, we leased a 600 square foot facility inHouston, Texas, to be used as a sales office. The monthly rent is $553.  In July of2006, we entered into a lease for 7,269 square feet of office space located inPlano, Texas.  In September of 2006,we relocated our corporate offices to this facility, and in September of2008 increased the size of this lease to 8,523 square feet of officespace.  The monthly rent is $12,482.  In October of 2006, we leased an 800 squarefoot facility in Oklahoma City, Oklahoma, to be used as a sales office.  The monthly rent is $665.  In September of 2007, we leased a 1,130square foot facility in Denver, Colorado, to be used as a sales office.  We did not renew the lease on the Denveroffice upon its expiration on August 31, 2009.  In September of 2008, we leased a 400square foot facility is Pratt, Kansas, to be used as a permit office.  The monthly rent is $500.  In November of 2008, we vacated our twoPlano repair, warehouse, and outdoor storage facilities and moved to a leasedrepair, warehouse, and outdoor storage facility in Denison, Texas.  The Denison, Texas, facility consists of one5,000 square foot building, two 10,000 square foot adjacent buildings, and anoutdoor storage area of approximately 60,500 square feet.  The monthly rent is $15,068.  Upon the acquisition of Eagle Canada, weassumed a lease entered into in August of 2008 for 3,030 square feet ofoffice space located in Calgary, Alberta. The monthly rent is $11,171.  Inaddition, Eagle Canada leases a 10,088 square foot facility, also located inCalgary, Alberta, that is used as a shop and warehouse which is currentlyleased on a month-to-month basis.  Themonthly rent is $6,103.  Effective April 1,2010, we will enter into a lease for this facility at a rate of $7,644 permonth.  The Company is not responsiblefor 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.**

 

The Company is adefendant in various legal actions that arose or may arise out of the normalcourse of business.  In our opinion, noneof these actions have or will result in any significant loss to us.

 

**ITEM 4. RESERVED.**

 

11

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**PART II**

 

**ITEM 5. MARKET FOR REGISTRANT’SCOMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES.**

 

**Market Prices**

 

On April 18, 2005,we began trading on the NYSE Amex (formerly the American Stock Exchange) (“AMEX”)under our current trading symbol “TGE.” On October 26, 2007, we announced that our board of directorsapproved the decision to switch the listing of our common stock from AMEX tothe NASDAQ Global Select Market (“NASDAQ.”) As a result, on November 6, 2007, our stock began trading on NASDAQunder the symbol “TGE.”

 

The following table showsthe high and low sales prices reported for our common stock on NASDAQ.  On May 12, 2009 and April 28, 2008, theCompany paid 5% stock dividends to shareholders of record at the close ofbusiness on April 28, 2009, and April 14, 2008, respectively.  All prior share and per share amounts havebeen restated to reflect the stock dividends.

 
| ** **       | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------|------------|----------|------------|----------|------------|
| ** **       | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
|             |       |     |       |     |       |   |   |   |   |
| 1st quarter |       | $        | 2.93       |     | $          | 1.69 |   | $ | 10.17 |   | $ | 6.71 |   |
| 2nd quarter |       | 5.75     |       | 2.13     |       | 9.25 |   | 6.60 |   |
| 3rd quarter |       | 5.17     |       | 3.30     |       | 8.93 |   | 4.70 |   |
| 4th quarter |       | 5.03     |       | 3.61     |       | 6.00 |   | 1.05 |   |
|                  |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

The number ofshareholders of record of TGE’s common stock as of February 26, 2010, was149.  Due to the number of shares held innominee or street name, we believe that there are a significantly greaternumber of beneficial owners of our common stock.  As of such date, CEDE & CO. held14,859,740 shares in street name.  On February 26,2010, our common stock was quoted at a closing sales price of $4.12.

 

The following table summarizes certain informationregarding securities authorized for issuance under our equity compensationplans as of December 31, 2009.  Seeinformation regarding material features of the plans in Note H, ‘Shareholders’Equity-Stock-Based Compensation Plans” to the Financial Statements includedherein.

 

**Equity Compensation Plan Information**

 
| ** **                                                  | ** ** | ** **                | ** ** | ** **               | ** ** | **Number  of Securities**            | ** ** |
|-------------------------------------------------------------|------------|---------------------------|------------|--------------------------|------------|--------------------------------------|------------|
| ** **                                                  | ** ** | ** **                | ** ** | ** **               | ** ** | **Remaining  Available for**         | ** ** |
| ** **                                                  | ** ** | **Number  of Securities** | ** ** | ** **               | ** ** | **Future  Issuance Under**           | ** ** |
| ** **                                                  | ** ** | **to be  Issued**         | ** ** | **Weighted-Average**     | ** ** | **Equity  Compensation Plans**       | ** ** |
| ** **                                                  | ** ** | **Upon  Exercise of**     | ** ** | **Exercise  Price of**   | ** ** | **(excluding  securities Reflected** | ** ** |
| **Plan Category**                                           | ** ** | **Outstanding  Options**  | ** ** | **Outstanding  Options** | ** ** | **in  Column (a)**                   | ** ** |
| ** **                                                  | ** ** | **(a)**                   | ** ** | **(b)**                  | ** ** | **(c)**                              | ** ** |
|                                                        |       |                      |       |                     |       |                                 |       |
| Equity  compensation plans approved by security holders     |       | 808,879                   |       | $                        | 3.99       |                                 | 173,835    | (1) |
|                                                        |       |                      |       |                     |       |                                 |       |
| Equity  compensation plans not approved by security holders |       | —                    |       | —                   |       | —                               |       |
|                                                        |       |                      |       |                     |       |                                 |       |
| Total                                                       |       | 808,879                   |       | $                        | 3.99       |                                 | 173,835    | (1) |

 

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(1)  No sharesremain available to be issued under the 1999 Stock Option Plan.  There are 173,835 shares available to beissued under the 2006 Stock Award Plan.

 

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**PerformanceGraph**

 

*The following graph is not “solicitingmaterial,” is not deemed filed with the Securities and Exchange Commission, andis not to be incorporated by reference into any of the Company’s filings underthe Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,as amended, respectively.*

 

The following graph setsforth the five-year cumulative total shareholder return, which assumesreinvestment of dividends, of a $100 investment beginning in the Company’scommon stock, a peer group made up of companies in the Philadelphia Oil ServiceSector Index, and the S&P 500 Stock Index. The Philadelphia Oil Service Sector Index consists of far largercompanies that provide a variety of services as compared to the land-basedgeophysical services provided by the Company.

 

 

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**ITEM 6. SELECTED FINANCIAL DATA.**

 

The following selectedfinancial data should be read in conjunction with Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” andthe Company’s financial statements and notes thereto included in Item 8, “FinancialStatements and Supplementary Data.”  Nocash dividends were declared in any of the five years shown below:

 
| ** **                                                      | ** ** | **Year Ended December, 31,**                  | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                      | ** ** | **2009**                                      | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                      | ** ** | **(In thousands, except per share  amounts)** | ** ** |
| Statement  of Income Data:                                      |       |                                          |       |   |   |   |   |   |   |   |   |
|                                                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Revenues                                                        |       | $                                             | 90,432     |   | $ | 86,770 |   | $ | 90,396 |   | $ | 67,760 |   | $ | 30,852 |   |
|                                                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Net  income                                                     |       | $                                             | 1,880      |   | $ | 6,898 |   | $ | 7,607 |   | $ | 8,111 |   | $ | 6,201 |   |
|                                                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Income  allocable to common shareholders                        |       | $                                             | 1,880      |   | $ | 6,898 |   | $ | 7,607 |   | $ | 8,111 |   | $ | 5,996 |   |
|                                                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Net  Income per common share - basic                            |       | $                                             | 0.10       |   | $ | 0.38 |   | $ | 0.42 |   | $ | 0.45 |   | $ | 0.61 |   |
|                                                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Net  Income per common share - diluted                          |       | $                                             | 0.10       |   | $ | 0.38 |   | $ | 0.42 |   | $ | 0.44 |   | $ | 0.39 |   |
|                                                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Weighted  average number of common Shares outstanding - basic   |       | 18,280                                        |       | 18,260 |   | 18,237 |   | 18,134 |   | 9,876 |   |
|                                                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Weighted  average number of common Shares outstanding - diluted |       | 18,344                                        |       | 18,337 |   | 18,325 |   | 18,265 |   | 15,841 |   |
|                                                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Total  assets                                                   |       | $                                             | 86,050     |   | $ | 85,091 |   | $ | 61,162 |   | $ | 56,400 |   | $ | 41,246 |   |
|                                                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Long-term  debt, less current maturities                        |       | $                                             | 6,507      |   | $ | 11,452 |   | $ | 3,769 |   | $ | 3,064 |   | $ | 6,199 |   |
|                                                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Shareholders’  equity                                      |       | $                                             | 52,695     |   | $ | 50,427 |   | $ | 42,922 |   | $ | 35,043 |   | $ | 26,605 |   |

 

In October of 2005,the Company completed a public offering of approximately 5,786,000 (notadjusted for the 5% stock dividends paid in 2009, 2008, 2007 and 2006) sharesof common stock.  The weighted averagenumber of equivalent common shares outstanding in 2005 reflects theseadditional shares for a portion of the year.

 

**ITEM 7. MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.**

 

*The following discussion andanalysis should be read in conjunction with our financial statements andrelated notes thereto included elsewhere in this Form 10-K. Portions ofthis document that are not statements of historical or current fact areforward-looking statements that involve risk and uncertainties, such asstatements of our plans, objectives, expectations, and intentions. Thecautionary statements made in this Form 10-K should be read as applying toall related forward-looking statements wherever they appear in this Form 10-K.Our actual results could differ materially from those anticipated in theforward-looking statements. Factors that could cause our actual results todiffer materially from those anticipated include those discussed in “Business,”“Information Regarding Forward-Looking Statements,” and “Risk Factors.”*

 

**Executive Overview**

 

The Company is a leadingprovider of seismic data acquisition services throughout the continental UnitedStates and Canada.  We currently operateeleven seismic crews.  These seismiccrews supply seismic data to companies engaged in the 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.

 

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We acquire geophysicaldata using the latest in 3-D survey techniques. We introduce acoustic energyinto the ground by using vibration equipment or dynamite detonation, dependingon the surface terrain and subsurface requirements. The reflected energy, orechoes, is received through geophones, converted into a digital signal at amulti-channel recording unit, and then transmitted to a central recordingvehicle. Subsurface requirements dictate the number of channels necessary toperform our services. With our state-of-the-art seismic equipment, includingcomputer technology and multiple channels, we acquire, on a cost effectivebasis, immense volumes of seismic data that when processed and interpretedproduce more precise images of the earth’s subsurface. Our customers then useour seismic data to generate 3-D geologic models that help reduce finding costsand improve recovery rates from existing wells.

 

Currently, the seismicdata acquisition industry is made up of a number of companies divided into twogroups. The first group is made up of four publicly-traded companies with longoperating histories which field numerous crews and work in a number ofdifferent regions and terrain.  Thisgroup includes us, Dawson Geophysical Company, Geokinetics, Inc. andCGG-Veritas. These companies field approximately 50% of the estimated 65seismic crews currently operating in the continental U.S. and Canada.  The second group is made up of smallercompanies who generally run one or two seismic crews and often specialize inspecific regions or types of operation.

 

We provide our seismicdata acquisition services primarily to onshore oil and natural gas explorationand development companies for use in the onshore drilling and production of oiland natural gas in the continental U.S. and Canada.  The main factors influencing demand forseismic data acquisition services in our industry are the level of drillingactivity by oil and natural gas companies and the sizes of such companies’exploration and development budgets, which, in turn, depend largely on currentand anticipated future crude oil and natural gas prices and depletion rates.

 

Our customers are majorand independent oil and natural gas exploration and development companies. Theservices we provide to our customers vary according to the size and needs ofeach customer. Our services are marketed by sales, supervisory and executivepersonnel who contact customers to determine their needs and respond tocustomer inquiries regarding the availability of crews. Contacts are basedprincipally upon professional relationships developed over a number of years.There are a number of consultants in the oil and natural gas industry whoprocess and interpret seismic data for oil and natural gas companies. Theseconsultants can have an influence in determining which company their customersuse to acquire seismic data.

 

The acquisition ofseismic data for the oil and natural gas industry is a highly competitivebusiness. There are approximately 65 seismic crews currently operating in thecontinental United States and Canada. Contracts for such services generally are awarded on the basis of pricequotations, crew experience, and the availability of crews to perform in atimely manner, although factors other than price, such as crew safetyperformance history, and technological and operational expertise, are oftendeterminative. Our competitors include companies with financial resources thatare significantly greater than our own as well as companies of comparable andsmaller size. Our primary competitors are Dawson Geophysical Company,Geokinetics, Inc. and CGG-Veritas. In addition to the previously namedcompanies, we also compete for projects from time to time with smaller seismiccompanies which operate in local markets with only one or two crews.  We believe that our long-term industryexpertise, the customer relationships developed over our history, and ourfinancial stability give us an advantage over most of our competitors in theindustry.

 

**Results of Operations**

 

***Year Ended December 31,2009 Compared to Year Ended December 31, 2008***

 

*Revenues*. Our revenues were $90,431,899 for the year ended December 31, 2009compared to $86,769,742 for the same period of 2008, an increase of 4.2%.  This increase was attributable to severalfactors including strong revenue earnings during our first quarter of 2009,revenues earned by Eagle Canada during a portion of our fourth quarter, and thefact that approximately 41% of the revenues in the year ended December 31,2009 were derived from shot-hole contracts compared with approximately 20% forthe same period of 2008.  This increasewas partially offset by revenue decreases in the second half of the year.  Shot-hole contracts typically generate higherrevenues but lower gross margins than vibroseis contracts due to higher thirdparty costs that are included in revenues and have little or no marginassociated with them.

 

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*Cost of services*. Our cost of services was $65,379,612 for the year ended December 31,2009 compared to $55,935,068 for the same period of 2008, an increase of16.9%.  This increase was primarilyattributable to the increase in revenues in the year ended December 31, 2009compared to the same period of 2008, pricing pressures as a result of theindustry wide slow-down, and higher third party costs associated with theadditional shot-hole contracts in 2009 compared to 2008.  As a percentage of revenues, cost of serviceswas 72.3% for the year ended December 31, 2009 compared to 64.5% for thesame period of 2008.

 

*Selling,general, and administrative expenses. *SG&Aexpenses were $5,522,939 for the year ended December 31, 2009 compared to$4,468,883 for the same period of 2008, an increase of 23.6%.  This increase was primarily attributable tothe recording of a reserve on an accounts receivable of a slow paying customerand the inclusion of fourth quarter general and administrative expenses ofEagle Canada.  SG&A expense as apercentage of revenues was 6.1% for the year ended December 31, 2009compared to 5.2% for the same period of 2008.

 

*Depreciationand amortization expense*. Depreciation and amortization expense was $14,621,237 for the year endedDecember 31, 2009 compared to $13,911,124 for the same period of 2008, anincrease of 5.1%.  This increase wasprimarily attributable to incremental fourth quarter depreciation andamortization expense attributable to Eagle Canada, depreciation andamortization expense associated with capital expenditures of approximately$1,960,000 since January 1, 2009, and additions of new seismic recordingequipment and vibration vehicles during the second half of 2008.  Depreciation and amortization expense as apercentage of revenues was 16.2% for the year ended December 31, 2009compared to 16.0% for the same period of 2008.

 

*Incomefrom operations*. Income from operations was $4,908,111 for the year ended December 31,2009 compared to $12,454,667 for the same period of 2008, a decrease of60.6%.  This decrease was primarilyattributable to strong market pricing pressure resulting from the currentrecession and increases in costs of services, SG&A and depreciation andamortization expenses.  EBITDA decreased$6,836,443 to $19,529,348 for the year ended December 31, 2009 from$26,365,791 for the same period of 2008, a decrease of 25.9%.  This decrease was primarily attributable tothe decrease in net income and income tax expenses, partially offset by anincrease in depreciation referred to immediately above.  For a definition of EBITDA, a reconciliationof EBITDA to net income, and discussion of EBITDA, see the section entitled “Non-GAAPFinancial Measure” which follows.

 

*Interestexpense*.  Interestexpense was $1,020,681 for the year ended December 31, 2009 compared to$929,656 for the same period of 2008, an increase of 9.8%.  This increase was primarily attributable toadditional debt incurred during the second half of 2008 for the purchase of oureighth ARAM ARIES seismic recording system, 7,000 additional channels, and 13new vibration vehicles.

 

*Incometax expense*.  Incometax expense was $2,007,811 for the year ended December 31, 2009 comparedto $4,626,569 for the same period of 2008, a decrease of 56.6%.  This decrease was primarily attributable tothe decrease in income from operations, partially offset by an increase in theeffect of permanent tax differences.  Theeffective tax rate for the year ended December 31, 2009 was 51.6% comparedto 40.1% for the same period of 2008. See Note I of Notes to Financial Statements.

 

***Year Ended December 31, 2008 Compared toYear Ended December 31, 2007***

 

*Revenues*.  Our revenues were $86,769,742 for the yearended December 31, 2008 compared to $90,395,872 for the same period of2007, a decrease of 4%.  This decrease inrevenues was attributable to the fact that approximately 20% of the revenues inthe year ended December 31, 2008 were derived from shot-hole contractscompared with approximately 34% for the same period of 2007.  Shot-hole contracts typically generate higherrevenues but lower gross margins than vibroseis contracts due to higher thirdparty costs that are included in revenues and have little or no marginassociated with them.

 

*Costof services*.  Our costof services was $55,935,068 for the year ended December 31, 2008 comparedto $60,445,783 for the same period of 2007, a decrease of 7.5%.  This decrease was primarily attributable tothe decrease in revenues in the year ended December 31, 2008 compared to thesame period of 2007 and higher third party costs associated with the additionalshot-hole contracts in 2007 compared to 2008. As a percentage of revenues, cost of services was 64.5% for the yearended December 31, 2008 compared to 66.9% for the same period of 2007.

 

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*Selling,general, and administrative expenses. *SG&Aexpenses were $4,468,883 for the year ended December 31, 2008 compared to$3,864,810 for the same period of 2007, an increase of 15.6%.  This increase was primarily attributable toadditional expenses associated with additional selling and administrativepersonnel and additional compensation expense for deferred stock-basedcompensation.  SG&A expense as a percentageof revenues was 5.2% for the year ended December 31, 2008 compared to 4.3%for the same period of 2007.

 

*Depreciationand amortization expense*. Depreciation and amortization expense was $13,911,124 for the year endedDecember 31, 2008 compared to $12,743,065 for the same period of 2007, anincrease of 9.2%.  This increase wasprimarily attributable to depreciation and amortization expense associated withcapital expenditures of approximately $21,686,000 since January 1, 2008.  This increase was partially offset by adecrease in depreciation expense in the third and fourth quarters of 2007 andthe first and second quarters of 2008 as a result of an increase in theestimated useful life of certain seismic equipment.  See “Change In Accounting Estimates” in NoteB of Notes to Financial Statements in Item 8. Depreciation and amortization expense as a percentage of revenues was16.0% for the year ended December 31, 2008 compared to 14.1% for the sameperiod of 2007.

 

*Incomefrom operations*. Income from operations was $12,454,667 for the year ended December 31,2008 compared to $13,342,214 for the same period of 2007, a decrease of6.7%.  This decrease was primarilyattributable to a decrease in revenues, an increase in SG&A, anddepreciation and amortization expenses, partially offset by a decrease in costsof services.  EBITDA increased $280,512to $26,365,791 for the year ended December 31, 2008 from $26,085,279 forthe same period of 2007, an increase of 1.1%. This increase was primarily attributable to the increase in depreciationreferred to immediately above.  For adefinition of EBITDA, a reconciliation of EBITDA to net income, and discussionof EBITDA, see the section entitled “Non-GAAP Financial Measure” which follows.

 

*Interestexpense*.  Interestexpense was $929,656 for the year ended December 31, 2008 compared to$604,616 for the same period of 2007, an increase of 53.8%.  This increase was primarily attributable tothe additional debt incurred in 2008 as a result of financing certain newseismic equipment purchased during 2008.

 

*Incometax expense*.  Incometax expense was $4,626,569 for the year ended December 31, 2008 comparedto $5,130,165 for the same period of 2007, a decrease of 9.8%.  The effective tax rate for the year ended December 31,2008 was 40.1% compared to 40.3% for the same period of 2007.

 

**Non-GAAPFinancial Measure**

** **

We define EBITDAas net income plus expenses of interest, income taxes, depreciation, andamortization. We use EBITDA as a supplemental financial measure to assess:

 

·                  the financial performance of ourassets without regard to financing methods, capital structures, taxes, orhistorical cost basis;

 

·                  our liquidity and operatingperformance over time and in relation to other companies that own similarassets and that we believe calculate EBITDA in a manner similar to us; and

 

·                  the ability of our assets to generatecash sufficient for us to pay potential interest expenses.

 

We also understandthat such data is used by investors to assess our performance. However, EBITDAis not a measure of operating income, operating performance, or liquiditypresented in accordance with General Accepted Accounting Principles (GAAP).When assessing our operating performance orour liquidity, you should not consider this data in isolation or as asubstitute for our net income, cash flow from operating activities, or othercash flow data calculated in accordance with GAAP. EBITDA excludes some, butnot all, items that affect net income and operating income, and these measuresmay vary among other companies. Therefore, EBITDA as presented below may not becomparable to similarly titled measures of other companies. Further, theresults presented by EBITDA cannot be achieved without incurring the costs thatthe measure excludes: interest, taxes, depreciation, and amortization.

 

17

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The followingtable reconciles our EBITDA to our net income:

 
| ** **                             | ** ** | **Year Ended**        | ** **       |
|----------------------------------------|------------|-----------------------|------------------|
| ** **                             | ** ** | **December 31,** | ** **       |
| ** **                             | ** ** | **2009**              | ** **       | **2008** | ** ** | **2007** | ** ** |
|                                   |       |                  |             |   |   |   |   |
| Net income                             |       | $                     |   1,879,619 |   | $ |   6,898,442 |   | $ |   7,607,433 |   |
| Depreciation and  amortization expense |       | 14,621,237            |             | 3,911,124 |   | 12,743,065 |   |
| Interest expense                       |       | 1,020,681             |             | 929,656 |   | 604,616 |   |
| Income tax  expense                    |       | 2,007,811             |             | 4,626,569 |   | 5,130,165 |   |
| EBITDA                                 |       | $                     | 19,529,348       |   | $ | 26,365,791 |   | $ | 26,085,279 |   |

 

**Liquidityand Capital Resources**

** **

***Liquidity***

 

*Cash flows fromoperating activities.*

* *

Net cash providedby operating activities was $20,698,122 for the year ended December 31,2009, compared to $33,860,082 for the same period of 2008.  The $13,161,960 decrease was principallyattributable to a decrease in net income, the timing of accounts receivablecollections, the timing of receipt and payment of invoices and taxes, thetiming of billings and revenue recognition, and the mix of contracts.

 

Working capitalincreased $326,591 to $17,295,634 as of December 31, 2009, from the December 31,2008, working capital of $16,969,043. This increase was due primarily to an increase in cash and cashequivalents of $1,389,798 and an increase in trade accounts receivable of$3,601,316, partially offset by an increase in billings in excess of costs,estimated earnings on uncompleted contracts of $1,301,497, and an increase incurrent maturities of notes payable of $1,236,020.

 

*Cash flows usedin investing activities.*

* *

Net cash used ininvesting activities was $10,942,164 for the year ended December 31, 2009,and $6,078,536 for the year ended December 31, 2008.  The $4,863,628 increase was mainly due to$10,345,000 cash paid for our purchase of the stock of Eagle Canada, partiallyoffset by a decrease in cash related capital expenditures during 2009 of$4,972,076.

 

*Cash flows usedin financing activities.*

* *

Net cash used infinancing activities was $8,367,479 for the year ended December 31, 2009and $8,171,021 for the year ended December 31, 2008.  The $196,458 increase was due primarily to anincrease in principal payments on notespayable of $502,842, partially offset by a decrease in principal payments oncapital leases of $299,542.

 

*Capitalexpenditures.*

* *

During the year ended December 31, 2009, capitalexpenditures of $1,959,706 were used to acquire seismic equipment and vehicles,primarily to replace similar equipment and vehicles.  During the first two months of 2010, therehave been no material capital expenditures. Although we do not budget for our capital expenditures, we may purchaseadditional equipment during 2010 as the demand for our services warrants.

 

***Capital Resources***

 

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

 

In April of2005, we entered into a revolving credit agreement with a commercial bank.  Effective September 16, 2006, we renewedour revolving credit agreement and increased the borrowing limit from$3,500,000 to $5,000,000. The borrowing limit under the revolving line ofcredit agreement remains at $5,000,000 and was

 

18

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renewedon September 16, 2007, September 16, 2008, and again on September 16,2009.  The revolving line of creditagreement does not expire until September 16, 2010.  Our obligations under this agreement aresecured by a security interest in our accounts receivable.  Interest on the outstanding amount under theline of credit loan agreement is payable monthly at the greater of the primerate of interest or five percent. The credit loan agreement provides fornon-financial and financial covenants including a minimum debt service coverageratio in excess of 2.0 to 1.0 and a ratio of debt to worth not in excess of1.25 to 1.0.  As of December 31,2009, we had no borrowings****outstandingunder the line of credit loan agreement.

 

In December of2007, we completed a $4,120,254 loan transaction with a commercial lender forthe purpose of providing funds for the purchase of our seventh new ARAM ARIESrecording system. This loan is repayable over a period of 48 months at a fixedper annum interest rate of 6.38%. This loan is collateralized by the newrecording system equipment and the recording vehicles and two semi-trailersthat transport the newly purchased equipment between jobs.  In January of 2008, the Company enteredinto a $2,463,101 loan agreement with a bank to provide financing for thepurchase of new vibration vehicles.  Theloan is repayable over a period of 57 months at a fixed per annum interest rateof 6.35% and is collateralized by the vibration vehicles.  In February of 2008, the Companyexercised its purchase option for seismic recording equipment it had beenrenting.  In March of 2008, theCompany entered into a $2,975,844 loan agreement with a commercial lender toprovide financing for the purchase of this rented equipment and to replace anexisting loan the Company had with the lender. This loan is repayable over a period of 48 months at a fixed per annuminterest rate of 5.75% and is collateralized by the equipment.  In July of 2008, the Company enteredinto a $3,200,000 loan agreement with a bank to provide financing for thepurchase of seismic recording equipment. This loan is repayable over 36 months at a fixed per annum interest rateof 6.00% and is collateralized by the equipment.  In August of 2008, the Company enteredinto a $2,003,700 loan agreement with a bank to provide financing for thepurchase of new vibration vehicles.  Thisloan is repayable over 36 months at a fixed per annum interest rate of 6.00%and is collateralized by the vibration vehicles.  In September of 2008, the Companyentered into a $2,690,402 loan agreement with a commercial lender to providefinancing for our eighth new ARAM ARIES recording system. This loan isrepayable over a period of 48 months at a fixed per annum interest rate of6.00% and is collateralized by the recording system.  Also in September of 2008, the Companyentered into a $1,092,053 loan agreement with the same commercial lender toprovide financing for recording equipment that goes with the eighth ARAM ARIESrecording system.  This loan isco-terminus with the loan for the recording system, carries a fixed per annuminterest rate of 6.00%, and is collateralized by the recording equipment.  In January of 2008, Eagle Canada enteredinto a $4,660,070 loan agreement with a bank to provide financing for thepurchase of a new ARAM ARIES recording system. This loan is repayable over aperiod of 36 months at a fixed per annum interest rate of 6.14% and iscollateralized by the recording system.

 

In April of2004, we executed an addendum to our lease of a facility in Plano, Texas, thatincluded approximately 10,500 square feet of office and warehouse space and anoutdoor storage area of approximately 20,000 square feet.  This facility was used to repair geophysicalequipment and housed our corporate offices until September of 2006.  In September of 2005, we leased anadditional facility, in Plano, Texas, with approximately 10,000 square feet ofoffice and warehouse space and an additional 10,000 square feet of outdoorstorage to accommodate our growth.  Thisfacility was used primarily to repair geophysical equipment.  In January of 2006, we leased a 600square foot facility in Houston, Texas, to be used as a sales office.  In July of 2006, we entered into a leasefor 7,269 square feet of office space located in Plano, Texas.  In September of 2006, we relocated ourcorporate offices to this facility, and in September of 2008 increased thesize of the lease to 8,523 square feet of office space.  In October of 2006, we leased an 800square foot facility in Oklahoma City, Oklahoma, to be used as a salesoffice.  In September of 2007, we leaseda 1,130 square foot facility in Denver, Colorado, to be used as a sales office.We did not renew the lease on the Denver office upon its expiration on August 31,2009.  In September of 2008, weleased a 400 square foot facility is Pratt, Kansas, to be used as a permitoffice.  In November of 2008, wevacated our two Plano repair, warehouse, and outdoor storage facilities, andmoved to a leased repair, warehouse, and outdoor storage facility in Denison,Texas.  The Denison, Texas, facilityconsists of one 5,000 square foot building, two 10,000 square foot adjacentbuildings, and an outdoor storage area of approximately 60,500 squarefeet.  Upon the acquisition of EagleCanada, we assumed a lease entered into in August of 2008 for 3,030 squarefeet of office space located in Calgary, Alberta.  In addition, Eagle Canada leases a 10,088square foot facility located in Calgary, Alberta, that is used as a shop andwarehouse.  This facility is currentlyleased on a month-to-month basis, but we will enter into a lease for thisfacility on April 1, 2010.

 

19

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**ContractualObligations**

** **

The followingtable summarizes payments due in specific periods related to our contractualobligations as of December 31, 2009:

 
| ** **                  | ** ** | **Payments Due by Period****(1)** | ** ** |
|-----------------------------|------------|-----------------------------------|------------|
| ** **                  | ** ** | ** **                        | ** ** | **Within** | ** ** | ** ** | ** ** | ** ** | ** ** | **After** | ** ** |
| **Contractual Obligations** | ** ** | **Total**                         | ** ** | **1 Year** | ** ** | **1-2 Years** | ** ** | **3-5 Years** | ** ** | **5 Years** | ** ** |
| ** **                  | ** ** | **(In thousands)**                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating lease obligations |       | $                                 | 2,219      |   | $ | 550 |   | $ | 1,009 |   | $ | 575 |   | $ | 85 |   |
| Debt obligations            |       | $                                 | 12,283     |   | $ | 6,408 |   | $ | 5,825 |   | $ | 50 |   | $ | — |   |
| Capital lease obligations   |       | $                                 | 1,412      |   | $ | 780 |   | $ | 632 |   | $ | — |   | $ | — |   |
| Total                       |       | $                                 | 15,914     |   | $ | 7,738 |   | $ | 7,466 |   | $ | 625 |   | $ | 85 |   |

 

----

(1)          See “Capital Resources” above for adiscussion of the contractual obligations we have incurred since December 31,2009.

 

We believe thatour capital resources, including our short-term investments, funds availableunder our line of credit loan agreement, and cash flow from operations, areadequate to meet our current operational needs. We believe that we will be ableto finance our 2010 capital expenditures through cash flow from operations,borrowings from commercial lenders, and the funds available under our line ofcredit loan agreement.  However, ourability to satisfy working capital requirements, meet debt repayment obligations,and fund future capital requirements will depend principally upon our futureoperating performance which is subject to the risks inherent in our business.

 

**Off-BalanceSheet Arrangements**

** **

As of December 31,2009, we had no off-balance sheet arrangements.

 

**CriticalAccounting****Policies**

** **

The preparation ofour financial statements in conformity with GAAP requires us to make certainassumptions and estimates that affect the reported amounts of assets andliabilities at the date of our financial statements and the reported amounts ofrevenues and expenses during the reporting period. Because of the use ofassumptions and estimates inherent in the reporting process, actual resultscould differ from those estimates.

 

*RevenueRecognition*

* *

Seismic Surveys

 

The Companyprovides seismic data acquisition survey services to its customers undergeneral service agreements which define certain obligations for the Company andfor its customers.  A supplementalagreement setting forth the terms of a specific project, which may be cancelledby either party upon 30 days advance written notice, is entered into for everyproject.  These supplemental agreementsare either “turnkey” agreements providing for a fixed fee to be paid for eachunit of seismic data acquired or “term” agreements providing for a fixedhourly, daily, or monthly fee during the term of the project.  The duration of these projects will vary froma few days to several months.  The Companyrecognizes revenue when services are performed under both types ofagreements.  Services are defined as thecommencement of data acquisition.  Underturnkey agreements, the total number of units of seismic data to be gathered isset forth in the agreement, and revenue is recognized as services are performedon a per unit of seismic data acquired rate. Under term agreements, revenue is recognized as services are performedbased on the time worked rate provided in the term agreement.  Under both turnkey and term agreements, costof earned revenue is recognized by multiplying total estimated agreement costby the percentage-of-completion of the agreement.  The excess of that amount over the cost ofearned revenue reported in prior periods is recognized as cost of earnedrevenue for the period.  Agreements arenot segmented nor combined for purposes of calculating percentage ofcompletion.  The asset “Costs andestimated earnings in excess of billings on uncompleted contracts” representscost incurred on turnkey agreements in excess of billings on thoseagreements.  The liability “Billings inexcess of costs and estimated earnings on uncompleted contracts” representsbillings on turnkey agreements in excess of cost on those agreements.  Claims have been negligible in the yearsended December 31, 2009, 2008, and 2007.

 

20

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Gravity Data

 

The Company owns adata bank which contains gravity data, and to a lesser extent magnetic data,from many of the major oil and natural gas producing areas located within theU.S.  When an order for gravity data isreceived, the portion of gravity data requested by the customer is prepared indigital format for licensing and shipment to the customer.  This process is performed by an employee inthe Company’s headquarters office and normally takes no longer than a fewdays.  The licensing of gravity data isnot a material part of the Company’s revenue. Gravity data revenue during the years ended December 31, 2009,2008, and 2007 was approximately $20,300, $46,100, and $187,300, respectively.

 

*Business Combinations*

 

We allocate the purchase price of acquiredcompanies to the tangible assets acquired, liabilities assumed, and intangibleassets acquired, based on their estimated fair values. The excess of thepurchase price over these fair values is recorded as goodwill. We engageindependent third-party appraisal firms to assist us in determining the fairvalues of assets acquired and liabilities assumed. Such valuations requiremanagement to make significant estimates and assumptions.

 

*Allowance forDoubtful Accounts*

* *

We prepare ourallowance for doubtful accounts receivable based on our past experience ofhistorical write-offs, our current customer base, and our review of past dueaccounts. The inherent volatility of the energy industry’s business cycle cancause swift and unpredictable changes in the financial stability of ourcustomers.  In the fourth quarter of2009, we recorded an allowance against the account of a slow paying customer.

 

*Impairment ofLong-lived Assets*

* *

We reviewlong-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 of futurerevenues and profitability based on our historical results and analysis offuture oil and natural gas prices which are fundamental to assessing demand forour services. If we are unable to achieve these cash flows, our estimates willbe revised which could result in an impairment charge for the period ofrevision.

 

*DepreciableLives of Property, Plant, and Equipment*

* *

Our property,plant, and equipment are capitalized at historical cost and depreciated overthe useful life of the asset. Our estimate of this useful life is based oncircumstances that exist in the seismic industry and information available atthe time of the purchase of the asset. The technology of the equipment used togather data in the seismic industry has historically evolved such thatobsolescence does not occur quickly. As circumstances change and newinformation becomes available, these estimates could change. We amortize thesecapitalized items using the straight-line method. Capital assets aredepreciated over their useful lives ranging from one to seven years, dependingon the classification of the asset.

 

*Tax Accounting*

* *

We account for ourincome taxes in accordance with the recognition of amounts of taxes payable orrefundable for the current year and an asset and liability approach inrecognizing the amount of deferred tax liabilities and assets for the futuretax consequences of events that have been recognized in our financial statementsor tax returns. We determine deferred taxes by identifying the types andamounts of existing temporary differences, measuring the total deferred taxasset or liability using the applicable tax rate, and reducing the deferred taxasset by a valuation allowance if, based on available evidence, it is morelikely than not that some portion or all of the deferred tax assets will not berealized. Our methodology for recording income taxes requires judgmentregarding assumptions and the use of estimates, including determining ourannual effective tax rate and the valuation of deferred tax assets, which cancreate a variance between actual results and estimates and could have amaterial impact on our provision or benefit for income taxes.

 

21

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* *

*Stock BasedCompensation*

* *

We recognize thefair value of the stock-based compensation awards, including stock options andrestricted stock, as wages in the consolidated statements of earnings on astraight-line basis over the vesting period of the related stock options orrestricted stock awards.  This hasresulted in the recognition of compensation expense, relative to stock-basedawards, in wages in the consolidated statements of earnings of approximately$366,000, or approximately $0.02 per share, for the year ended December 31,2009, and $455,000, or approximately $0.02 per share, for the year ended December 31,2008.

 

In August of2007, 18,900 shares of restricted stock were issued to employees of the Companyunder the 2006 Stock Award Plan.  In June of2008, 10,000 shares of restricted stock were issued to an employee of theCompany under the 2006 Stock Award Plan. In July of 2009, 5,000 shares of restricted stock were issued to anemployee of the Company under the 2006 Stock Award Plan.  In October of 2008, 335,000 stockoptions were issued to employees of the Company under the 2006 Stock AwardPlan.  In November of 2009, 135,000stock options were issued to employees of the Company under the 2006 StockAward Plan.  As of December 31,2009, there was approximately $625,000 of unrecognized compensation expenserelated to our two share-based compensation plans.

 

**RecentlyIssued Accounting Pronouncements**

** **

In September of2006, the Financial Accounting Standards Board (FASB) issued AccountingStandards Codification (ASC) 820-10, “Fair Value Measurements and Disclosures.”ASC 820-10 defines fair value as the amount that would be exchanged to sell anasset or transfer a liability in an orderly transaction between marketparticipants. The standard further establishes a framework for measuring fairvalue in generally accepted accounting principles and expands certaindisclosures about fair value measurements. ASC 820-10 became effective for allfinancial assets and financial liabilities as of October 1, 2008, and,upon adoption, ASC 820-10 did not have a material impact on our financialstatements. In February of 2008, the FASB issued ASC 820-10-15-1A, “FairValue Measurements and Disclosures — Transition and Open Effective DateInformation,” which delays the effective date of ASC 820-10 for allnon-financial assets and non-financial liabilities, except for items that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). We do not expect the adoption of ASC820-10-15-1A to have a material impact on our financial statements.

 

In February of 2007,the FASB issued ASC 825-10, “Financial Instruments.” ASC 825-10 providescompanies with an option to report selected financial assets and liabilities atfair value. As of December 31, 2009, we have not elected the fair valueoption for any additional financial assets and liabilities beyond those alreadyprescribed by accounting principles generally accepted in the United States.

 

In December of 2007, the FASB issued a newaccounting standard relating to business combinations under ASC 805-10 “BusinessCombinations.”  The new standard expandsthe definition of a business and a business combination; requires recognitionof assets acquired, liabilities assumed, and contingent consideration at theirfair value on the acquisition date with subsequent changes recognized inearnings; requires acquisition-related expenses and restructuring costs to berecognized separately from the business combination and expensed as incurred;and requires that changes in accounting for deferred tax asset valuationallowances and acquired income tax uncertainties after the measurement periodbe recognized as a component of provision for taxes. The new standard also establishesdisclosure requirements to enable the evaluation of the nature and financialeffects of the business combination.  Weadopted the provisions of ASC 805-10 for the quarter ended December 31,2009. The adoption of ASC 805-10 did not have a material impact on ourconsolidated financial statements.

 

In April of 2009,the FASB issued ASC 825-10-65-1, “Financial Instruments — Transition andOpen Effective Date Information.” ASC 825-10-65-1 requires fair valuedisclosures in both interim and annual financial statements in order to providemore timely information about the effects of current market conditions onfinancial instruments. ASC 825-10-65-1 became effective June 15, 2009. Theadoption of this standard did not have a material impact on our financialstatements.

 

In June of 2009, theFASB issued ASC 105-10, “Generally Accepted Accounting Principles.” ASC 105-10provides for the FASB Accounting Standards Codification (the “Codification”) tobecome the single official source of authoritative, nongovernmental U.S. generallyaccepted accounting principles. The Codification did not change GAAP butreorganizes the literature. ASC 105-10 became effective for us for the yearended December 31, 2009. The adoption of this standard did not have animpact on our financial statements.

 

22

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** **

**Effectof Inflation**

** **

We do not believethat inflation has had a material effect on our business, results ofoperations, or financial condition during the past three years.

 

**InformationRegarding For**w**ard-LookingStatements**

** **

This Form 10-Kincludes “forward-looking statements” as defined in Section 27A of theSecurities 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, and assumptionsabout the Company, including:

 

·                  dependence upon energy industry spendingfor seismic 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.

 

We use the words “may,”“will,” “can,” “could,” “should,” “expect,” “anticipate,” “estimate,” “believe,”“target,” “continue,” “intend,” “plan,” “budget,” and other similar words toidentify forward-looking statements. You should read statements that containthese 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 differ materially from ourexpectations in this Form 10-K.

 

We believe that itis important to communicate our expectations of future performance to ourinvestors. However, events may occur in the future that we are unable toaccurately predict or over which we have no control. When considering ourforward-looking statements, you should keep in mind the risk factors and othercautionary statements contained in this Form 10-K and other factors notedthroughout this Form 10-K. There are many risks, uncertainties, and eventsthat may cause our actual results to differ materially from those contained inany forward-looking statement. Please read the section entitled “Risk Factors”for a discussion of certain risks of our business and an investment in our commonstock.

 

**ITEM7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

** **

We have notentered into any hedging agreements or swap agreements. Our principal marketrisk is the risk related to the concentration of our customers in the oil andnatural gas industry. Since our customers are involved in the oil and naturalgas industry, there may be a positive or a negative effect on our exposure tocredit risk in that our customers may be similarly affected by changes ineconomic and industry conditions. For the year ended December 31, 2009,our top customer accounted for approximately 30.8% of our revenues. For theyear ended December 31, 2008, our top two customers accounted forapproximately 14.4% and 12.3% of our revenues. For the year ended December 31, 2007, our top customer accountedfor approximately 12.1% of our revenues. During the fourth quarter we began to conduct business in Canada whichsubjects us to a foreign currency exchange rate risk.  Our results of operations and our cash flowscould be impacted by changes in foreign currency exchange rates.

 

For furtherinformation see “Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations,” and “Item 1A. Risk Factors.”

 

23

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**ITEM 8. FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA.**

 

**Consolidated Financial Statements**

**December 31, 2009, 2008, and 2007**

 

# **CONTENTS**

#  

| Report of Independent  Registered Public Accounting Firm | 25     |
|----------------------------------------------------------|--------|
|                                                     |   |
| Consolidated Financial  Statements                       |   |
|                                                     |   |
| Consolidated  Balance Sheets                             | 26     |
|                                                     |   |
| Consolidated  Statements of Earnings                     | 28     |
|                                                     |   |
| Consolidated Statements of Shareholders’ Equity     | 29     |
|                                                     |   |
| Consolidated Statements of Cash Flows                    | 30     |
|                                                     |   |
| Notes to Consolidated Financial Statements               | 32     |

 

24

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**Report of Independent Registered Public AccountingFirm**

 

Board of Directors andShareholders

TGC Industries, Inc.and Subsidiary

 

We have audited theaccompanying consolidated balance sheets of TGC Industries, Inc. andSubsidiary (“the Company”) as of December 31,2009 and 2008, and the related consolidated statements of income,shareholders’ equity, and cash flows for each of the three years in the periodended December 31, 2009.  We also have audited the Company’s internalcontrol over financial reporting as of December 31,2009, based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). The Company’s management isresponsible for these consolidated financial statements, for maintainingeffective internal control over financial reporting, and for its assessment ofthe effectiveness of internal control over financial reporting, included in theaccompanying Management’s Report on Internal Control over Financial Reporting.Our responsibility is to express an opinion on these consolidated financialstatements and an opinion on the Company’s internal control over financialreporting based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudits to obtain reasonable assurance about whether the consolidated financialstatements are free of material misstatement and whether effective internalcontrol over financial reporting was maintained in all material respects. Ouraudits of the consolidated financial statements included examining, on a testbasis, evidence supporting the amounts and disclosures in the consolidatedfinancial statements, assessing the accounting principles used and significantestimates made by management, and evaluating the overall financial statementpresentation. Our audit of internal control over financial reporting includedobtaining an understanding of internal control over financial reporting,assessing the risk that a material weakness exists, and testing and evaluatingthe design and operating effectiveness of internal control based on theassessed risk. Our audits also included performing such other procedures as weconsidered necessary in the circumstances. We believe that our audits provide areasonable basis for our opinions.

 

A Company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof consolidated financial statements for external purposes in accordance withgenerally accepted accounting principles. A Company’s internal control overfinancial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the Company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of consolidated financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of theCompany are being made only in accordance with authorizations of management anddirectors of the Company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the Company’s assets that could have a material effect on the consolidatedfinancial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of TGC Industries, Inc. andSubsidiary as of December 31, 2009and 2008, and the results of its operations and its cash flows for eachof the years in the three year period ended December 31, 2009 in conformity with accounting principlesgenerally accepted in the United States of America. Also in our opinion, theCompany maintained, in all material respects, effective internal control overfinancial reporting as of December 31,2009, based on criteria established in *InternalControl—Integrated Framework* issued by the COSO.

 

Dallas, Texas

March 16, 2010

 

25

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**TGCIndustries, Inc.**

**CONSOLIDATED BALANCE SHEETS**

**December 31,**

 
| ** **                                                                                                    | ** ** | **2009**    | ** ** | **2008**    | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| ASSETS                                                                                                        |       |        |       |        |       |
|                                                                                                          |       |        |       |        |       |
| CURRENT  ASSETS                                                                                               |       |        |       |        |       |
|                                                                                                          |       |        |       |        |       |
| Cash  and cash equivalents                                                                                    |       | $           | 25,504,149 |        | $          | 24,114,351 |   |
| Trade  accounts receivable, net of allowance for doubtful accounts of $623,109 in  2009 and $-0- in 2008 |       | 9,455,224   |       | 5,853,908   |       |
| Cost  and estimated earnings in excess of billings on uncompleted contracts                                   |       | 474,059     |       | 2,300,985   |       |
| Prepaid  expenses and other                                                                                   |       | 648,872     |       | 718,301     |       |
| Prepaid  federal and state income tax                                                                         |       | 943,600     |       | 1,220,154   |       |
|                                                                                                          |       |        |       |        |       |
| Total  current assets                                                                                         |       | 37,025,904  |       | 34,207,699  |       |
|                                                                                                          |       |        |       |        |       |
| PROPERTY  AND EQUIPMENT - at cost                                                                             |       |        |       |        |       |
|                                                                                                          |       |        |       |        |       |
| Machinery  and equipment                                                                                      |       | 100,687,976 |       | 91,233,877  |       |
| Automobiles  and trucks                                                                                       |       | 8,914,434   |       | 8,792,645   |       |
| Furniture  and fixtures                                                                                       |       | 397,879     |       | 348,103     |       |
| Leasehold  improvements                                                                                       |       | 14,994      |       | 14,994      |       |
|                                                                                                          |       | 110,015,283 |       | 100,389,619 |       |
|                                                                                                          |       |        |       |        |       |
| Less  accumulated depreciation and amortization                                                               |       | (62,431,950 | )          | (49,757,056 | )          |
|                                                                                                          |       | 47,583,333  |       | 50,632,563  |       |
| OTHER  ASSETS                                                                                                 |       |        |       |        |       |
| Goodwill                                                                                                      |       | 1,408,089   |       | 201,530     |       |
| Other  assets                                                                                                 |       | 32,399      |       | 49,129      |       |
|                                                                                                          |       | 1,440,488   |       | 250,659     |       |
|                                                                                                          |       |        |       |        |       |
| Total  assets                                                                                                 |       | $           | 86,049,725 |        | $          | 85,090,921 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements

 

26

----

 

**TGCIndustries, Inc.**

**CONSOLIDATEDBALANCE SHEETS — Continued**

**December 31,**

 
| ** **                                                                                             | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                             |       |       |       |       |       |
|                                                                                                   |       |       |       |       |       |
| CURRENT  LIABILITIES                                                                                   |       |       |       |       |       |
|                                                                                                   |       |       |       |       |       |
| Trade  accounts payable                                                                                |       | $          | 4,126,474  |       | $          | 4,569,911 |   |
| Accrued  liabilities                                                                                   |       | 1,337,437  |       | 863,756    |       |
| Billings  in excess of costs and estimated earnings on uncompleted contracts                           |       | 7,077,941  |       | 5,776,444  |       |
| Current  maturities of notes payable                                                                   |       | 6,407,892  |       | 5,171,872  |       |
| Current  portion of capital lease obligations                                                          |       | 780,526    |       | 856,673    |       |
|                                                                                                   |       |       |       |       |       |
| Total  current liabilities                                                                             |       | 19,730,270 |       | 17,238,656 |       |
|                                                                                                   |       |       |       |       |       |
| NOTES  PAYABLE, less current maturities                                                                |       | 5,875,390  |       | 10,851,621 |       |
|                                                                                                   |       |       |       |       |       |
| CAPITAL  LEASE OBLIGATIONS, less current portion                                                       |       | 631,757    |       | 600,214    |       |
|                                                                                                   |       |       |       |       |       |
| DEFERRED  TAX LIABILITY                                                                                |       | 7,117,030  |       | 5,973,000  |       |
|                                                                                                   |       |       |       |       |       |
| COMMITMENTS  AND CONTINGENCIES                                                                         |       | —     |       | —     |       |
|                                                                                                   |       |       |       |       |       |
| SHAREHOLDERS’  EQUITY                                                                             |       |       |       |       |       |
|                                                                                                   |       |       |       |       |       |
| Preferred  stock, $1.00 par value; 4,000,000 shares authorized; issued - none                          |       | —     |       | —     |       |
|                                                                                                   |       |       |       |       |       |
| Common  stock, $.01 par value; 25,000,000 shares authorized; 18,323,091 and 17,435,319  in each period |       | 183,231    |       | 174,353    |       |
|                                                                                                   |       |       |       |       |       |
| Additional  paid-in capital                                                                            |       | 27,014,078 |       | 26,501,011 |       |
|                                                                                                   |       |       |       |       |       |
| Retained  earnings                                                                                     |       | 25,889,008 |       | 24,009,389 |       |
|                                                                                                   |       |       |       |       |       |
| Treasury  stock, at cost, 37,803 shares                                                                |       | (257,323   | )          | (257,323   | )          |
|                                                                                                   |       |       |       |       |       |
| Accumulated  other comprehensive (loss)                                                                |       | (133,716   | )          | —     |       |
|                                                                                                   |       |       |       |       |       |
|                                                                                                   |       | 52,695,278 |       | 50,427,430 |       |
|                                                                                                   |       |       |       |       |       |
| Total  liabilities and shareholders’ equity                                                       |       | $          | 86,049,725 |       | $          | 85,090,921 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements

 

27

----

 

**TGCIndustries, Inc.**

**CONSOLIDATED STATEMENTS OF EARNINGS**

**YearsEnded December 31,**

 
| ** **                                      | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                            |       |       |       |       |       |       |       |
| Revenue                                         |       | $          | 90,431,899 |       | $          | 86,769,742 |       | $ | 90,395,872 |   |
|                                            |       |       |       |       |       |       |       |
| Cost  and expenses                              |       |       |       |       |       |       |       |
| Cost  of services                               |       | 65,379,612 |       | 55,935,068 |       | 60,445,783 |       |
| Selling,  general and administrative            |       | 5,522,939  |       | 4,468,883  |       | 3,864,810  |       |
| Depreciation  and amortization expense          |       | 14,621,237 |       | 13,911,124 |       | 12,743,065 |       |
|                                            |       | 85,523,788 |       | 74,315,075 |       | 77,053,658 |       |
| ** **                                      |       |       |       |       |       |       |       |
| Income  from operations                         |       | 4,908,111  |       | 12,454,667 |       | 13,342,214 |       |
| ** **                                      |       |       |       |       | ** ** | ** ** | ** ** |
| Interest  expense                               |       | 1,020,681  |       | 929,656    |       | 604,616    |       |
|                                            |       |       |       |       |       |       |       |
| Income  before income tax expense               |       | 3,887,430  |       | 11,525,011 |       | 12,737,598 |       |
| ** **                                      |       |       |       |       |       |       |       |
| Income  tax expense:                            |       |       |       |       |       |       |       |
| Current                                         |       | 1,289,938  |       | 609,569    |       | 4,108,196  |       |
| Deferred                                        |       | 717,873    |       | 4,017,000  |       | 1,021,969  |       |
| Income  tax expense                             |       | 2,007,811  |       | 4,626,569  |       | 5,130,165  |       |
| ** **                                      |       |       |       |       |       |       |       |
| NET  INCOME                                     |       | $          | 1,879,619  |       | $          | 6,898,442  |       | $ | 7,607,433 |   |
| ** **                                      |       |       |       |       |       |       |       |
| Earnings  per common share:                     |       |       |       |       |       |       |       |
| Basic                                           |       | $          | 0.10       |       | $          | 0.38       |       | $ | 0.42 |   |
| Diluted                                         |       | $          | 0.10       |       | $          | 0.38       |       | $ | 0.42 |   |
|                                            |       |       |       |       |       |       |       |
| Weighted  average number of Shares outstanding: |       |       |       |       |       |       |       |
| Basic                                           |       | 18,280,318 |       | 18,260,110 |       | 18,236,718 |       |
| Diluted                                         |       | 18,344,041 |       | 18,337,184 |       | 18,325,421 |       |

 

The accompanyingnotes are an integral part of these consolidated financial statements

 

28

----

 

**TGC Industries, Inc.**

**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY**

 
| ** **                                                     | ** ** | ** **       | ** ** | ** **  | ** ** | ** **     | ** ** | ** **   | ** ** | ** **        | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|----------------------------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|--------------|------------|-------------------|------------|-------------------|------------|------------|------------|
| ** **                                                     | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **   | ** ** | ** **        | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **Common stock** | ** ** | **Paid-in** | ** ** | **Retained**   | ** ** | **Treasury** | ** ** | **Comprehensive** | ** ** | ** **        | ** ** |
| ** **                                                     | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Stock**         | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| Balances at January 1, 2007                               |       | 15,753,396       |       | $           | 157,535    |           | $          | 25,639,432   |       | $                 | 9,503,514  |              | $          | (257,323   | )          | $ | — |   | $ | 35,043,158 |   |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| 5% common stock dividend                                       |       | 787,387          |       | 7,873       |       | (8,799         | )          | —       |       | —            |       | —            |       | (926       | )          |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| Options issued to outside Directors                            |       | —           |       | —      |       | 75,000         |       | —       |       | —            |       | —            |       | 75,000     |       |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| Issuance of restricted common stock                            |       | 18,000           |       | 180         |       | (180           | )          | —       |       | —            |       | —            |       | —     |       |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| Repurchase of stock warrants                                   |       | —           |       | —      |       | (262,571       | )          | —       |       | —            |       | —            |       | (262,571   | )          |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| Cancellation of restricted stock                               |       | (4,221           | )          | (42         | )          | 42             |       | —       |       | —            |       | —            |       | —     |       |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| Amortization of unearned compensation restricted  stock awards |       | —           |       | —      |       | 380,261        |       | —       |       | —            |       | —            |       | 380,261    |       |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| Amortization of compensation cost of unvested stock  options   |       | —           |       | —      |       | 49,854         |       | —       |       | —            |       | —            |       | 49,854     |       |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| Exercise of stock options                                      |       | 39,015           |       | 390         |       | 28,943         |       | —       |       | —            |       | —            |       | 29,333     |       |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| Shares issued                                                  |       | 1,470            |       | 14          |       | (14            | )          | —       |       | —            |       | —            |       | —     |       |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| Net income                                                     |       | —           |       | —      |       | —         |       | 7,607,433    |       | —            |       | —            |       | 7,607,433  |       |
| Balances at December 31, 2007                             |       | 16,595,047       |       | 165,950     |       | 25,901,968     |       | 17,110,947   |       | (257,323          | )          | —            |       | 42,921,542 |       |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| 5% common stock dividend                                       |       | 827,751          |       | 8,278       |       | (9,104         | )          | —       |       | —            |       | —            |       | (826       | )          |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| Options issued to outside Directors                            |       | —           |       | —      |       | 150,000        |       | —       |       | —            |       | —            |       | 150,000    |       |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| Issuance of restricted common stock                            |       | 10,000           |       | 100         |       | (100           | )          | —       |       | —            |       | —            |       | —     |       |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| Cancellation of restricted stock                               |       | (2,110           | )          | (21         | )          | 21             |       | —       |       | —            |       | —            |       | —     |       |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| Amortization of unearned compensation restricted  stock awards |       | —           |       | —      |       | 411,113        |       | —       |       | —            |       | —            |       | 411,113    |       |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| Amortization of compensation cost of unvested stock  options   |       | —           |       | —      |       | 43,959         |       | —       |       | —            |       | —            |       | 43,959     |       |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| Exercise of stock options                                      |       | 4,631            |       | 46          |       | 3,154          |       | —       |       | —            |       | —            |       | 3,200      |       |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| Net income                                                     |       | —           |       | —      |       | —         |       | 6,898,442    |       | —            |       | —            |       | 6,898,442  |       |
| Balances at December 31, 2008                             |       | 17,435,319       |       | 174,353     |       | 26,501,011     |       | 24,009,389   |       | (257,323          | )          | —            |       | 50,427,430 |       |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| 5% common stock dividend                                       |       | 870,379          |       | 8,704       |       | (9,089         | )          | —       |       | —            |       | —            |       | (385       | )          |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| Options issued to outside Directors                            |       | —           |       | —      |       | 150,000        |       | —       |       | —            |       | —            |       | 150,000    |       |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| Issuance of restricted common stock                            |       | 5,000            |       | 50          |       | (50            | )          | —       |       | —            |       | —            |       | —     |       |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| Cancellation of restricted stock                               |       | (1,499           | )          | (15         | )          | 15             |       | —       |       | —            |       | —            |       | —     |       |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| Exercise of stock options                                      |       | 13,892           |       | 139         |       | 9,461          |       | —       |       | —            |       | —            |       | 9,600      |       |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| Amortization of unearned compensation restricted  stock awards |       | —           |       | —      |       | 182,812        |       | —       |       | —            |       | —            |       | 182,812    |       |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| Amortization of compensation cost of unvested stock  options   |       | —           |       | —      |       | 179,918        |       | —       |       | —            |       | —            |       | 179,918    |       |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| Foreign currency translation adjustments                       |       | —           |       | —      |       | —         |       | —       |       | —            |       | (133,716          | )          | (133,716   | )          |
|                                                           |       |             |       |        |       |           |       |         |       |              |       |              |       |       |       |
| Net income                                                     |       | —           |       | —      |       | —         |       | 1,879,619    |       | —            |       | —            |       | 1,879,619  |       |
|                                                           |       | 18,323,091       |       | $           | 183,231    |           | $          | 27,014,078   |       | $                 | 25,889,008 |              | $          | (257,323   | )          | $ | (133,716 | ) | $ | 52,695,278 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements

 

29

----

 

**TGC Industries, Inc.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**Years Ended December 31,**

 
| ** **                                                                         | ** ** | **2009**    | ** ** | **2008**   | ** ** | **2007**    | ** ** |
|------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|-------------|------------|
| Cash flows from operating activities                                               |       |        |       |       |       |        |       |
| Net income                                                                         |       | $           | 1,879,619  |       | $          | 6,898,442   |       | $ | 7,607,433 |   |
| Adjustments to reconcile net income to net cash provided  by operating activities: |       |        |       |       |       |        |       |
| Depreciation and amortization                                                      |       | 14,621,237  |       | 13,911,124 |       | 12,743,065  |       |
| Gain on disposal of property and equipment                                         |       | (221,156    | )          | (170,831   | )          | (132,790    | )          |
| Non-cash compensation                                                              |       | 512,730     |       | 605,072    |       | 505,115     |       |
| Deferred income taxes                                                              |       | 717,873     |       | 4,017,000  |       | 1,021,969   |       |
| Changes in operating assets and liabilities                                        |       |        |       |       |       |        |       |
| Trade accounts receivable                                                          |       | (2,352,493  | )          | 6,299,590  |       | (4,704,896  | )          |
| Cost and estimated earnings in excess of billings on  uncompleted contracts        |       | 1,875,709   |       | (1,765,842 | )          | 454,308     |       |
| Prepaid expenses and other                                                         |       | 2,187,472   |       | 1,994,248  |       | 1,908,209   |       |
| Prepaid federal and state income tax                                               |       | 1,044,631   |       | (1,118,783 | )          | 83,287      |       |
| Other assets                                                                       |       | 16,730      |       | (24,487    | )          | (3,825      | )          |
| Trade accounts payable                                                             |       | (1,115,265  | )          | 1,638,647  |       | (2,020,721  | )          |
| Accrued liabilities                                                                |       | 230,476     |       | (860,322   | )          | 613,055     |       |
| Billings in excess of cost and estimated earnings on  uncompleted contracts        |       | 1,300,559   |       | 2,436,224  |       | (2,819,294  | )          |
| Income taxes payable                                                               |       | —      |       | —     |       | (415,501    | )          |
|                                                                               |       |        |       |       |       |        |       |
| Net cash provided by operating activities                                          |       | 20,698,122  |       | 33,860,082 |       | 14,839,414  |       |
|                                                                               |       |        |       |       |       |        |       |
| Cash flows from investing activities                                               |       |        |       |       |       |        |       |
| Capital expenditures                                                               |       | (1,349,972  | )          | (6,322,048 | )          | (13,008,088 | )          |
| Purchase of stock of Eagle Canada, Inc.                                       |       | (10,345,000 | )          | —     |       | —      |       |
| Net cash inflow on acquisition of subsidiary                                       |       | 370,822     |       | —     |       | —      |       |
| Proceeds from sale of property and equipment                                       |       | 381,986     |       | 243,512    |       | 346,385     |       |
|                                                                               |       |        |       |       |       |        |       |
| Net cash used in investing activities                                              |       | (10,942,164 | )          | (6,078,536 | )          | (12,661,703 | )          |
|                                                                               |       |        |       |       |       |        |       |
| Cash flows from financing activities                                               |       |        |       |       |       |        |       |
| Principal payments on notes payable                                                |       | (7,296,477  | )          | (6,793,635 | )          | (5,516,361  | )          |
| Principal payments on capital lease obligations                                    |       | (1,080,217  | )          | (1,379,759 | )          | (1,312,129  | )          |
| Proceeds from exercise of stock options                                            |       | 9,600       |       | 3,200      |       | 29,333      |       |
| Redemption of stock purchase warrants                                              |       | —      |       | —     |       | (262,571    | )          |
| Payment of dividends                                                               |       | (385        | )          | (827       | )          | (926        | )          |
|                                                                               |       |        |       |       |       |        |       |
| Net cash used in financing activities                                              |       | (8,367,479  | )          | (8,171,021 | )          | (7,062,654  | )          |
|                                                                               |       |        |       |       |       |        |       |
| Net increase (decrease) in cash and cash  equivalents                              |       | 1,388,479   |       | 19,610,525 |       | (4,884,943  | )          |
|                                                                               |       |        |       |       |       |        |       |
| Effect of exchange rates on cash                                                   |       | 1,319       |       | —     |       | —      |       |
|                                                                               |       |        |       |       |       |        |       |
| Cash and cash equivalents at beginning of year                                     |       | 24,114,351  |       | 4,503,826  |       | 9,388,769   |       |
|                                                                               |       |        |       |       |       |        |       |
| Cash and cash equivalents at end of year                                           |       | $           | 25,504,149 |       | $          | 24,114,351  |       | $ | 4,503,826 |   |

 

30

----

 

**TGC Industries, Inc.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED**

**Years Ended December 31,**

 
| ** **                                                             | ** ** | **2009**   | ** **  | **2008** | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------------|------------|------------|-------------|----------|------------|------------|------------|
| Supplemental cash flow information                                     |       |       |        |     |       |       |       |
| Interest paid                                                          |       | $          | 1,020,681   |     | $          | 893,536    |       | $ | 603,813 |   |
| Income taxes paid                                                      |       | $          | 1,722,914   |     | $          | 1,692,057  |       | $ | 4,448,135 |   |
|                                                                   |       |       |        |     |       |       |       |
| Noncash investing and financing activities                             |       |       |        |     |       |       |       |
| Capital lease obligations incurred                                     |       | $          | 609,734     |     | $          | 938,835    |       | $ | 1,110,057 |   |
| Financed equipment purchase                                            |       | $          | —      |     | $          | 14,425,099 |       | $ | 4,120,254 |   |
| Financed insurance premiums                                            |       | $          | 2,087,288   |     | $          | 1,999,935  |       | $ | 2,111,898 |   |
| Restricted stock awards to employees net of  cancellations             |       | $          | 24,350      |     | $          | 67,258     |       | $ | 159,243 |   |
|                                                                   |       |       |        |     |       |       |       |
| Cash used in the purchase of Eagle Canada consisted  of the following: |       |       |        |     |       |       |       |
|                                                                   |       |       |        |     |       |       |       |
| Cash and cash equivalents                                              |       | $          | (370,822    | )        | $          | —     |       | $ | — |   |
| Trade accounts receivable                                              |       | (1,245,336 | )           | —   |       | —     |       |
| Other current assets                                                   |       | (861,911   | )           | —   |       | —     |       |
| Deferred tax asset                                                     |       | (1,097,088 | )           | —   |       | —     |       |
| Fixed assets                                                           |       | (9,940,118 | )           | —   |       | —     |       |
| Goodwill                                                               |       | (1,226,992 | )           | —   |       | —     |       |
| Current liabilities                                                    |       | 918,390    |        | —   |       | —     |       |
| Notes payable                                                          |       | 1,496,494  |        | —   |       | —     |       |
| Capital lease obligations                                              |       | 433,517    |        | —   |       | —     |       |
| Long-term deferred tax liability                                       |       | 1,548,866  |        | —   |       | —     |       |
|                                                                   |       |       |        |     |       |       |       |
| Purchase of stock of Eagle Canada, Inc.                           |       | $          | (10,345,000 | )        | $          | —     |       | $ | — |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements

 

31

----

 

TGC Industries, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,2009, 2008, and 2007

 

NOTE A - NATURE OF OPERATIONS

 

TGC Industries, Inc.(TGC or the Company) is engaged in the geophysical services business andprimarily conducts seismic surveys and sells gravity data to companies engagedin exploration in the oil and gas industry in the U.S. and Canada.

 

Management hasevaluated subsequent events through March 16, 2010, which is the date ofthe consolidated financial statements were available to be issued.

 

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

TheConsolidated Financial Statements include the accounts of TGC Industries, Inc. andits wholly-owned subsidiary, Eagle Canada, Inc.  We have eliminated all significantintercompany accounts and transactions.

 

Business Combinations

 

Werecord acquisitions using the purchase method of accounting and, accordingly,have included the results of operations of acquired businesses in ourconsolidated results from the date of each acquisition.  We allocate the purchase price of ouracquisitions to the tangible assets, liabilities, and intangible assetsacquired based on their estimated fair values. The excess purchase price overthose fair values is recorded as goodwill. The fair value assigned to assetsacquired is based on valuations provided by independent consultants and usingmanagement’s estimates and assumptions.

 

ForeignCurrency

 

Thefunctional currency of the Company’s international subsidiary is the localcurrency.  Local currency assets andliabilities are translated at the rates of exchange on the balance sheet date,and local currency revenues and expenses are translated at average rates ofexchange during the period.  Theresulting translation adjustments are recorded directly into a separatecomponent of stockholders’ equity and represents the only component ofaccumulated other comprehensive income.

 

Cash Equivalents

 

The Companyconsiders all highly liquid investments with original maturity dates of threemonths or less to be cash equivalents. The Company maintains its accounts atfinancial institutions located in Texas and Alberta, Canada.  The Texas bank accounts are insured by theFederal Deposit Insurance Corporation up to $250,000.  The Alberta bank accounts are insured by theCanadian Depository Insurance Corporation up to $100,000 Canadian dollars.

 

Trade Accounts Receivable

 

Trade accountsreceivable are recorded in accordance with terms and amounts as specified inthe related contracts on an ongoing basis. The Company evaluates thecollectibility 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.

 

32

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TGC Industries, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,2009, 2008, and 2007

 

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES - CONTINUED

 

Property and Equipment

 

Property andequipment are stated at cost. Depreciation and amortization are provided usingthe straight-line method over the estimated useful lives of the individualassets ranging from 1 to 7 years.  Thedepreciation expense on assets acquired under capital leases is included withdepreciation expense on owned assets. Expenditures for major renewals and betterments that extend the usefullives of property and equipment are capitalized.  Expenditures for maintenance and repairs arecharged to expense as incurred.

 

Long-Lived Assets

 

Long-lived assetsheld and used by the Company are reviewed for impairment whenever events orchanges 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. No impairment charge was necessary at December 31, 2009, 2008, and2007.

 

Income Taxes

 

The Companyutilizes the liability method of accounting for income taxes.  Under the liability method, deferred incometax assets and liabilities are provided based on the difference between thefinancial statement and tax bases of assets and liabilities measured by thecurrently enacted tax rates in effect for the years in which these differencesare expected to reverse.  Deferred taxexpense or benefit is the result of changes in deferred tax assets andliabilities.  An allowance againstdeferred tax assets is recorded in whole or in part when it is more likely thannot that such tax benefits will not be realized.

 

Effective January 1,2007, the Company adopted certain amendments of Topic No. 740 (“Topic 740”)which clarifies the accounting for income tax positions.  Topic 740prescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return.  Under Topic 740, the Company recognizes in itsfinancial statements the impact of a tax position if that position is “morelikely than not” to be sustained on audit based on the technical merits of theposition.  Topic 740 also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods, anddisclosure.  Interest and penalties related to unrecognized tax benefitsare recorded as income tax expense.  See Note I for further information.

 

Revenue Recognition

 

Seismic Surveys

 

The Company provides seismic data acquisition survey services to itscustomers under general service agreements which define certain obligations forthe Company and for its customers.  Asupplemental agreement setting forth the terms of a specific project, which maybe cancelled by either party upon 30 days advance written notice, is enteredinto for every project.  Thesesupplemental agreements are either “turnkey” agreements providing for a fixedfee to be paid for each unit of seismic data acquired or “term” agreementsproviding for a fixed hourly, daily, or monthly fee during the term of theproject.  The duration of these projectswill vary from a few days to several months. The Company recognizes revenue when services are performed under bothtypes of agreements.  Services aredefined as the commencement of data acquisition.  Under turnkey agreements, the total number ofunits of seismic data to be gathered is set forth in the agreement and revenueis recognized as services are performed on a per unit of seismic data acquiredrate.  Under term agreements, revenue isrecognized as services are performed based on the time worked rate provided inthe term agreement.  Under both turnkeyand term agreements, cost of earned revenue is recognized by multiplying totalestimated agreement cost by the percentage-of-completion of the agreement.  The excess of that amount over the cost ofearned revenue reported in prior periods is recognized as cost of earnedrevenue for the period.  Agreements arenot segmented nor combined for purposes of calculating percentage of

 

33

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TGC Industries, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,2009, 2008, and 2007

 

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — CONTINUED

 

completion.  The asset “Costs andestimated earnings in excess of billings on uncompleted contracts” representscost incurred on turnkey agreements in excess of billings on thoseagreements.  The liability “Billings inexcess of costs and estimated earnings on uncompleted contracts” representsbillings on turnkey agreements in excess of cost on those agreements.  Claims have been negligible in the yearsended December 31, 2009, 2008, and 2007.

 

Gravity Data

 

The Company owns a data bank which contains gravity data, and to alesser extent magnetic data, from many of the major oil and natural gasproducing areas located within the U.S. When an order for gravity data is received, the portion of gravity datarequested by the customer is prepared in digital format for licensing andshipment to the customer.  This processis performed by an employee in the Company’s headquarters office and normallytakes no longer than a few days.  Thelicensing of gravity data is not a material part of the Company’s revenue.  Gravity data revenue during the years ended December 31,2009, 2008, and 2007 was approximately $20,300, $46,100, and $187,300,respectively.

 

Reclassifications

 

Certain reclassifications have been made to the 2008 financialstatements to conform to the 2009 presentation.

 

Stock-Based Compensation

 

The Company hastwo stock-based compensation plans, which are described more fully in NoteH.  The Company recognizes the fair valueof the stock-based compensation awards as wages in the Statements of Earningson a straight-line basis over the vesting period.  As a result, during the years ended December 31,2009, 2008, and 2007, the Company recognized compensation expense for unvestedstock options of $179,918 $43,959, and $49,854, respectively, and restrictedstock of $182,812 $411,113, and $380,261, respectively.

 

For the year ended December 31, 2009, the fairvalue of each option grant was estimated on the date of the grant using theBinomial Lattice option pricing model with the following assumptions used forthe outstanding grants: risk-free interest rate of 2.30%; expected dividendyields of 0.0%; expected lives of 5.0 years; and expected volatility of95.0%.  For the year ended December 31,2008, the fair value of each option grant was estimated on the date of thegrant using the Binomial Lattice option pricing model with the followingassumptions used for the outstanding grants: risk-free interest rate of 2.90%;expected dividend yields of 0.0%; expected lives of 5.0 years; and expectedvolatility of 61.0%.  In years ended December 31,2007 and prior, the fair value of each option grant was estimated on the dateof grant using the Black-Scholes option pricing model with the followingassumptions used for outstanding grants: risk-free interest rate of 4.20%;expected dividend yields of 0.0%; expected lives of 5.0 years; and expectedvolatility of 92.72% to 96.54%.

 

Financial Instruments

 

The Company’sfinancial instruments recorded on the consolidated balance sheet include cashand cash equivalents, accounts receivable, accounts payable, and debt. Thecarrying amounts of cash and cash equivalents, accounts receivable, andaccounts payable approximate fair value because of the short-term nature ofthese items. Fair value of long-term debt is based on rates available to theCompany for debt with similar terms and maturities.

 

Earnings Per Share

 

Basic earnings percommon share is based upon the weighted average number of shares of commonstock outstanding.  Diluted earnings pershare is based upon the weighted average number of common shares outstandingand, when dilutive, common shares issuable for stock options, warrants, andconvertible securities.

 

34

----

 

TGC Industries, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,2009, 2008, and 2007

 

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — CONTINUED

 

All share and pershare amounts for the years ended December 31, 2009, 2008, and 2007 havebeen adjusted to reflect 5% stock dividends paid May 12, 2009, April 28,2008, and April 27, 2007 to shareholders of record as of April 28,2009, April 14, 2008, and April 13, 2007, respectively.

 

Use of Estimates

 

The preparation of consolidated financial statements in accordance withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates.

 

Change in Accounting Estimates

 

Management evaluates its estimates on a routine basis.  Effective July 1, 2007, the Companyrevised the estimated useful lives of certain seismic equipment and relatedcomponents.  The Company purchased thisnew equipment, not previously used, from November 2004 through June 2007.  Based on the information gained from operations,management believes that this equipment will benefit periods ranging from 5 to7 years beginning at the time the assets were originally placed inservice.  The original estimated usefullives ranged from 3 to 5 years.

 

The net book value of this equipment at June 30, 2007, was notmodified and is amortized over the revised estimated useful lives of theequipment.  The Company does not believethat this equipment will become obsolete at the end of the original estimateand has revised the estimated life of these assets.  The effect to depreciation expense, netincome, and earnings per share for the years ended December 31, 2009, and2008 are as follows:

 
| ** **                 | ** ** | **Year  Ended**             | ** ** | **Year  Ended**             | ** ** |
|----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** |
| ** **                 | ** ** | **As  Reported**            | ** ** | **Pro  Forma**              | ** ** | **As  Reported** | ** ** | **Pro  Forma** | ** ** |
|                       |       |                        |       |                        |       |   |   |   |   |
| Depreciation Expense       |       | $                           | 14,621,237 |                        | $          | 17,275,886 |   | $ | 13,911,124 |   | $ | 16,901,410 |   |
|                       |       |                        |       |                        |       |   |   |   |   |
| Net Income                 |       | $                           | 1,879,619  |                        | $          | 594,769 |   | $ | 6,898,442 |   | $ | 5,108,576 |   |
|                       |       |                        |       |                        |       |   |   |   |   |
| Earnings per common share: |       |                        |       |                        |       |   |   |   |   |
| Basic                      |       | $                           | 0.10       |                        | $          | 0.03 |   | $ | 0.38 |   | $ | 0.28 |   |
|                       |       |                        |       |                        |       |   |   |   |   |
| Diluted                    |       | $                           | 0.10       |                        | $          | 0.03 |   | $ | 0.38 |   | $ | 0.28 |   |

 

Recent Accounting Standards

 

In September of2006, the Financial Accounting Standards Board (FASB) issued AccountingStandards Codification (ASC) 820-10, “Fair Value Measurements and Disclosures.”ASC 820-10 defines fair value as the amount that would be exchanged to sell anasset or transfer a liability in an orderly transaction between marketparticipants. The standard further establishes a framework for measuring fairvalue in generally accepted accounting principles and expands certaindisclosures about fair value measurements. ASC 820-10 became effective for allfinancial assets and financial liabilities as of October 1, 2008, and uponadoption, ASC 820-10 did not have a material impact on our financialstatements. In February of 2008, the FASB issued ASC 820-10-15-1A, “FairValue Measurements and Disclosures — Transition and Open Effective DateInformation,” which delays the effective date of ASC 820-10 for allnon-financial assets and non-financial liabilities, except for items that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). We do not expect the adoption of ASC820-10-15-1A to have a material impact on our financial statements.

 

35

----

 

TGC Industries, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,2009, 2008, and 2007

 

NOTEB - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — CONTINUED

 

In February of2007, the FASB issued ASC 825-10, “Financial Instruments.” ASC 825-10 providescompanies with an option to report selected financial assets and liabilities atfair value. As of December 31, 2009, we have not elected the fair valueoption for any additional financial assets and liabilities beyond those alreadyprescribed by accounting principles generally accepted in the United States.

 

In December of 2007,the FASB issued a new accounting standard related to business combinationsunder ASC 805-10, “Business Combinations.” The new standard expands thedefinition of a business and a business combination; requires recognition ofassets acquired, liabilities assumed, and contingent consideration at theirfair value on the acquisition date with subsequent changes recognized inearnings; requires acquisition-related expenses and restructuring costs to berecognized separately from the business combination and expensed as incurred;and requires that changes in accounting for deferred tax asset valuationallowances and acquired income tax uncertainties after the measurement periodbe recognized as a component of provision for taxes. The new standard alsoestablishes disclosure requirements to enable the evaluation of the nature andfinancial effects of the business combination.

 

In April of2009, the FASB issued ASC 825-10-65-1, “Financial Instruments — Transitionand Open Effective Date Information.” ASC 825-10-65-1 requires fair valuedisclosures in both interim and annual financial statements in order to providemore timely information about the effects of current market conditions on financialinstruments. ASC 825-10-65-1 became effective June 15, 2009. The adoptionof this standard did not have a material impact on our financial statements.

 

In June of2009, the FASB issued ASC 105-10, “Generally Accepted Accounting Principles.”ASC 105-10 provides for the FASB Accounting Standards Codification (the “Codification”)to become the single official source of authoritative, nongovernmentalU.S. generally accepted accounting principles. The Codification did notchange GAAP but reorganizes the literature. ASC 105-10 became effective for usfor the year ended December 31, 2009. The adoption of this standard didnot have an impact on our financial statements.

 

NOTE C — COSTS, BILLINGS,AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

 

The components of uncompleted contracts are as follows at December 31,:

 
| ** **                                                      | ** ** | **2009**    | ** ** | **2008**    | ** ** |
|-----------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| Costs incurred on  uncompleted contracts and estimated earnings |       | $           | 4,831,326  |        | $          | 8,984,322 |   |
| Less billings to date                                           |       | (11,435,208 | )          | (12,459,781 | )          |
|                                                            |       | $           | (6,603,882 | )           | $          | (3,475,459 | ) |

 

The components ofuncompleted contracts are reflected in the consolidated balance sheets at December 31,2009 and 2008 as follows:

 
| ** **                                                                   | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Costs and estimated earnings in excess of billings  on uncompleted contracts |       | $          | 474,059    |       | $          | 2,300,985 |   |
| Billings in excess of costs and estimated earnings  on uncompleted contracts |       | (7,077,941 | )          | (5,776,444 | )          |
|                                                                         |       | $          | (6,603,882 | )          | $          | (3,475,459 | ) |

 

36

----

 

TGC Industries, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,2009, 2008, and 2007

 

NOTE D - ACCRUED LIABILITIES

 

Accruedliabilities consist of the following at December 31,:

 
| ** **                     | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Compensation and payroll taxes |       | $        | 811,676    |     | $          | 476,718 |   |
| Accrued sales and use tax      |       | 101,542  |       | 3,035    |       |
| Insurance                      |       | 173,483  |       | 156,717  |       |
| Accrued interest               |       | 73,105   |       | 73,105   |       |
| Other                          |       | 177,631  |       | 154,181  |       |
|                           |       | $        | 1,337,437  |     | $          | 863,756 |   |

 

NOTE E - DEBT

 

Line of Credit

 

In September of2008, and again in September of 2009, the Company renewed its revolvingline of credit allowing the Company to borrow, repay, and re-borrow, from timeto time, up to $5,000,000.  Interest onthe outstanding amount under the line of credit loan agreement is payablemonthly at the greater of the prime rate of interest or five percent.  The credit loan agreement provides fornon-financial and financial covenants including a debt to worth ratio not inexcess of 1.25 to 1.0 and a minimum debt service coverage ratio in excess of2.0 to 1.0.  At December 31, 2009and 2008, the Company had no borrowings outstanding under the line of creditloan agreement.

 

Notes Payable

 

Notes payableconsists of the following at December 31:

 
| ** **                                                                                                                                                | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
|                                                                                                                                                      |       |      |       |      |       |
| Note Payable to a finance company, Interest at  6.38%, due in fixed principal monthly installments of $85,839 plus interest;  collateralized by equipment |       | $         | 2,060,127  |      | $          | 3,090,191 |   |
|                                                                                                                                                      |       |      |       |      |       |
| Note Payable to a finance company, Interest at  5.75%, due in fixed principal monthly installments of $61,997 plus interest;  collateralized by equipment |       | 1,673,912 |       | 2,417,873 |       |
|                                                                                                                                                      |       |      |       |      |       |
| Note Payable to a finance company, Interest at  6.00%, due in fixed principal monthly installments of $56,050 plus interest;  collateralized by equipment |       | 1,849,651 |       | 2,522,252 |       |
|                                                                                                                                                           |            |           |            |           |            |  |  |

 

37

----

 

TGC Industries, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,2009, 2008, and 2007

 

NOTEE - DEBT — CONTINUED

 
| Note Payable to a finance company,Interest at 5.33%, due in  fixed principalmonthly  installments of $23,740 plusinterest; collateralized by equipment  |   | 783,429    |      | 1,068,312  |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|-----------|------------|--------|
|                                                                                                                                                    |   |       |      |       |   |
| Note Payable to a commercial bank,Interest at 6.00%, due in  fixed principalmonthly  installments of $88,889 plusinterest; collateralized by equipment  |   | 1,688,887  |      | 2,755,555  |   |
|                                                                                                                                                    |   |       |      |       |   |
| Note Payable to a commercial bank,Interest at 6.00%, due in  fixed principalmonthly  installments of $55,658 plusinterest; collateralized by equipment  |   | 1,113,172  |      | 1,781,068  |   |
|                                                                                                                                                    |   |       |      |       |   |
| Note Payable to a commercial bank,Interest at 6.35%, due in  monthlyinstallments  of $50,170 including interest;collateralized by equipment             |   | 1,682,254  |      | 2,161,061  |   |
|                                                                                                                                                    |   |       |      |       |   |
| Note payable to a finance companyinterest at 5.50% to 6.20%,  due in monthlyinstallments  of $228,464 to $227,181 includinginterest                     |   | 158,567    |      | 227,181    |   |
|                                                                                                                                                    |   |       |      |       |   |
| Note Payable to a commercial bank,Interest at 6.14%, due in  fixed principalmonthly  installments of $102,033 plusinterest; collateralized by equipment |   | 1,186,578  |      | —     |   |
|                                                                                                                                                    |   |       |      |       |   |
| Note Payable to a finance company,Interest at 6.25%, due in  fixed principalmonthly  installments of $8,921 plusinterest                                |   | 86,705     |      | —     |   |
|                                                                                                                                                    |   | 12,283,282 |      | 16,023,493 |   |
| Less Current Maturities                                                                                                                                 |   | (6,407,892 | )         | (5,171,872 | )      |
|                                                                                                                                                    |   | $          | 5,875,390 |       | $      | 10,851,621 |   |
|                                                                                                                                                         |        |            |           |            |        |  |  |

 

Aggregate annualmaturities of notes payable at December 31, 2009 are as follows:

 
| **Year Ending**       | ** ** | ** ** | ** ** |
|-----------------------|------------|------------|------------|
| **December 31,** | ** ** | ** ** | ** ** |
|                  |       |       |       |
| 2010                  |       | $          | 6,407,892  |   |
| 2011                  |       | 4,342,315  |       |
| 2012                  |       | 1,482,831  |       |
| 2013                  |       | 50,244     |       |
|                  |       | $          | 12,283,282 |   |

 

38

----

 

TGC Industries, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,2009, 2008, and 2007

 

NOTE F — LEASES

 

Capital Lease Obligations

 

The Company leasesvehicles and certain specialized seismic equipment under leases classified ascapital leases. The following is a schedule showing the future minimum leasepayments under capital leases by years and the present value of the minimumlease payments as of December 31, 2009.

 
| **Year Ending**                         | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|
| **December 31,**                   | ** ** | ** ** | ** ** |
|                                    |       |       |       |
| 2010                                    |       | $          | 872,772    |   |
| 2011                                    |       | 550,994    |       |
| 2012                                    |       | 119,412    |       |
| Total minimum lease payments required   |       | 1,543,178  |       |
| Less: Amount representing interest      |       | (130,895   | )          |
| Present value of minimum lease payments |       | 1,412,283  |       |
| Less current maturities                 |       | (780,526   | )          |
|                                    |       | $          | 631,757    |   |

 

The net book valueof the capital assets leased was approximately $1,928,000 and $2,265,000 as of December 31,2009 and 2008, respectively. Total accumulated depreciation on these assets wasapproximately $5,435,000 and $5,286,000 as of December 31, 2009, and 2008,respectively.  Interest rates on theseleases range from 8.41% to 12.82%.

 

Operating Lease Obligations

 

The Company leasessix offices and two warehouse facilities under operating leases that expire atvarious dates between January 2010 and July 2015 with three leases ona month to month basis.  One of theoffice facilities, used by the Company as its corporate headquarters, islocated in Plano, Texas.  One of theoffice facilities, used by Eagle Canada, is located in Calgary, Alberta. Thewarehouse facilities, used as warehouse and equipment repair facilities, arelocated in Denison, Texas, and Calgary, Alberta.  Two office facilities are used as salesoffices and are located in Houston, Texas, and Oklahoma City, Oklahoma.  The remaining office facilities are used as apermitting office,  located in Pratt,Kansas, and as a crew office, located in Yazoo, Mississippi.  Rent expense for these facilities for theyears ended December 31, 2009, 2008, and 2007 were approximately $450,000,$350,000, and $279,000,  respectively.

 

The following is aschedule by years of future minimum rental payments required under theoperating leases as of December 31, 2009:

 
| 2010                            |   | $       | 550,378   |   |
|---------------------------------|--------|---------|-----------|--------|
| 2011                            |   | 576,544 |      |
| 2012                            |   | 432,310 |      |
| 2013                            |   | 390,464 |      |
| 2014 and thereafter             |   | 269,726 |      |
| Total minimum payments required |   | $       | 2,219,422 |   |

 

39

----

 

TGC Industries, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,2009, 2008, and 2007

 

NOTE G — FAIR VALUE OF DEBT OBLIGATIONS

 

The fair value of debt obligations is estimated using discounted cashflows based on the Company’s incremental borrowing rate for similar types ofborrowings.  A comparison of the carryingvalue and fair value of these instruments is as follows:

 
| ** **     | ** ** | **December 31,** | ** ** |
|----------------|------------|-----------------------|------------|
| ** **     | ** ** | **2009**              | ** ** | **2008** | ** ** |
|           |       |                  |       |   |   |
| Carrying value |       | $                     | 12,283,282 |   | $ | 16,023,493 |   |
| Fair value     |       | $                     | 12,277,811 |   | $ | 16,014,545 |   |

 

NOTE H — SHAREHOLDERS’ EQUITY

 

Earnings Per Share

 

The following is areconciliation of net income and weighted average common shares outstanding forpurposes of calculating basic and diluted net income per share:

 
| ** **                                         | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2009**              | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                               |       |                  |       |   |   |   |   |
| Numerator:                                         |       |                  |       |   |   |   |   |
| Net income                                         |       | $                     | 1,879,619  |   | $ | 6,898,442 |   | $ | 7,607,433 |   |
|                                               |       |                  |       |   |   |   |   |
| Denominator:                                       |       |                  |       |   |   |   |   |
| Basic - weighted average common shares outstanding |       | 18,280,318            |       | 18,260,110 |   | 18,236,718 |   |
| Effect of Dilutive  Securities:                    |       |                  |       |   |   |   |   |
| Warrants                                           |       | —                |       | — |   | 23,765 |   |
| Stock options                                      |       | 63,723                |       | 77,074 |   | 64,938 |   |
|                                               |       | 18,344,041            |       | 18,337,184 |   | 18,325,421 |   |
|                                               |       |                  |       |   |   |   |   |
| Basic net income per share                         |       | $                     | 0.10       |   | $ | 0.38 |   | $ | 0.42 |   |
| Diluted net income per  share                      |       | $                     | 0.10       |   | $ | 0.38 |   | $ | 0.42 |   |

 

Outstandingoptions that were not included in the diluted calculation because their effectwould be anti-dilutive total 282,265 and 52,330 for the years ended December 31,2009 and 2008, respectively.

 

All share and pershare amounts have been adjusted to reflect 5% stock dividends paid May 12,2009, April 28, 2008, and April 27, 2007 to shareholders of record asof April 28, 2009, April 14, 2008, and April 13, 2007.

 

Stock-Based CompensationPlans

 

The Companycurrently has in effect a 1999 stock option plan (the “1999 Plan”).  Options for up to 300,000 shares of theCompany’s common stock may be granted. Options under the 1999 Plan must begranted at prices not less than the lesser of the par value per share of thestock or the fair market value per share of the Company’s stock on the date ofthe grant.  The term cannot exceed fiveyears from the date of the grant and are exercisable as follows: (i) one-thirdof the shares after the 12 month period following the date of the grant; (ii) two-thirdsof the shares after 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 2009, no options weregranted or cancelled, and options covering 13,892 shares were exercised underthe 1999 Plan.  At December 31,2009, options covering 80,050 shares were outstanding under the 1999 Plan, allof which are exercisable.

 

40

----

 

TGC Industries, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,2009, 2008, and 2007

 

NOTE H - SHAREHOLDERS’ EQUITY — CONTINUED

 

The Company currently has in effect a 2006 stock award plan (the “2006Plan”).  The 2006 Plan provides for thegranting of stock options, common stock, and restricted stock.  The Company can issue up to 1,000,000 sharesof the Company’s common stock pursuant to awards under the 2006 Plan. The 2006Plan will be administered by a committee of the Board of Directors (“theCommittee”).  Currently the Committee iscomprised of three directors.  Any stockoptions granted under the 2006 Plan will be exercisable as set forth in theoption agreements pursuant to which they are issued, but in no event will stockoptions be exercisable after the expiration of five (5) years from thedate of grant.  During 2009, 229,935options were granted and 20,000 options were cancelled or exercised under the2006 Plan.  During 2008, 466,560 optionswere granted and no options were cancelled or exercised under the 2006Plan.  Restricted stock consists ofshares that are transferred by the Company to a participant, but are subject tosubstantial risk of forfeiture and to restrictions on their sale or othertransfer by the participant.  In April of2006, the Committee granted 111,711 shares of restricted stock.  In August of 2007, the Committee granted19,845 shares of restricted stock.  In June of2008, the Committee granted 10,500 shares of restricted stock.  In June of 2009, the Committee granted5,000 shares of restricted stock.  Theshares of restricted stock were issued in the names of the grantees and haverestrictive legends prohibiting their sales prior to vesting.  One-third (1/3) of the granted restrictedshares vest each year on theannual anniversary of the grant.  Uponvesting, a new certificate will be issued for the vested portion without therestrictive legend.  During the yearsended December 31, 2009, 2008, and 2007, the Company recognizedcompensation expense associated with the restricted stock of $182,812,$411,113, and $380,261, respectively.  Asa result of employees who left the Company during the years ended December 31,2009, 2008, and 2007, the Company reversed approximately $4,000, $19,400, and$29,800, respectively, of deferred stock-based compensation and approximately$4,000, $19,300, and $29,700, respectively, of additional paid-in capital,which represented the unamortized balance of deferred stock-based compensationrelating to the employees who left the Company. The number of shares of restricted stock issued in April of 2006has been adjusted to reflect the 5% stock dividends paid in May of2009,  April of 2008 and April of2007.  The number of shares of restrictedstock issued in August of 2007, has been adjusted to reflect the 5% stockdividend paid in May of 2009 and April of 2008.  The number of shares of restricted stockissued in June of 2008 has been adjusted to reflect the 5% stock dividendpaid in May of 2009.

 

During the yearsended December 31, 2009, 2008, and 2007, the Company recognizedcompensation expense associated with unvested options under the 1999 and 2006Plans of $179,918, $43,959, and $49,854, respectively.

 

The followingtable summarizes activity under the Plans:

 
| ** **                        | ** ** | ** **       | ** ** | **Weighted**       | ** ** |
|-----------------------------------|------------|------------------|------------|--------------------|------------|
| ** **                        | ** ** | **Shares under** | ** ** | **Average**        | ** ** |
| ** **                        | ** ** | **Option**       | ** ** | **exercise price** | ** ** |
|                              |       |             |       |               |       |
| Balance at December 31, 2006 |       | 137,592          |       | $                  | 2.94       |   |
| Granted                           |       | 52,330           |       | $                  | 8.80       |   |
| Exercised                         |       | (39,015          | )          | $                  | .75        |   |
| Canceled                          |       | —           |       | $                  | —     |   |
| Balance at December 31, 2007 |       | 150,907          |       | $                  | 5.54       |   |
| Granted                           |       | 466,560          |       | 3.23               |       |
| Exercised                         |       | (4,631           | )          | $                  | .69        |   |
| Canceled                          |       | —           |       | —             |       |
| Balance at December 31, 2008 |       | 612,836          |       | $                  | 3.81       |   |
| Granted                           |       | 229,935          |       | $                  | 4.21       |   |
| Exercised                         |       | (13,892          | )          | $                  | .69        |   |
| Canceled                          |       | (20,000          | )          | 3.37               |       |
| Balance at December 31, 2009 |       | 808,879          |       | $                  | 3.99       |   |

 

41

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TGC Industries, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,2009, 2008, and 2007

 

NOTE H - SHAREHOLDERS’ EQUITY — CONTINUED

 

The followinginformation applies to options outstanding and exercisable at December 31,2009:

 
| ** **          | ** ** | ** **               | ** ** | ** **      | ** ** | **Weighted**                  | ** ** | ** **              | ** ** |
|---------------------|------------|--------------------------|------------|-----------------|------------|-------------------------------|------------|-------------------------|------------|
| ** **          | ** ** | ** **               | ** ** | ** **      | ** ** | **average**                   | ** ** | ** **              | ** ** |
| ** **          | ** ** | ** **               | ** ** | ** **      | ** ** | **remaining**                 | ** ** | **Weighted**            | ** ** |
| ** **          | ** ** | **Range of**        | ** ** | **Number**      | ** ** | **contractual**               | ** ** | **average**             | ** ** |
| ** **          | ** ** | **Exercise prices** | ** ** | **outstanding** | ** ** | **life (in years)** | ** ** | **exercise price** | ** ** |
| Outstanding options |       | $3.21 – $8.80       |       | 808,879         |       | 3.72                          |       | $                       | 3.99       |   |
| Exercisable options |       | $3.21 – $8.80       |       | 405,914         |       | 3.14                          |       | $                       | 4.30       |   |

 

Stock Warrants

 

During 2004, theCompany issued 28,665 warrants to a public relations firm as part of its feefor services provided the Company.  Thewarrants have a strike price of $.91 per share and expired December 15,2007.  During January of 2005, thepublic relations firm sold the 28,655 warrants to a group of investors thatincluded certain Directors of the Company. These warrants were redeemed by the Company in November of2007.  The number of warrants issued in2004 have been adjusted to reflect the 5% stock dividends paid in April 2006and 2007, respectively.

 

NOTE I - INCOME TAXES

 

Theincome tax provision charged to continuing operations for the years ended December 31,2009, 2008, and 2007, was as follows:

 
| ** **        | ** ** | **2009**  | ** ** | **2008**  | ** ** | **2007**  | ** ** |
|-------------------|------------|-----------|------------|-----------|------------|-----------|------------|
|              |       |      |       |      |       |      |       |
| Current:          |       |      |       |      |       |      |       |
| U.S.  federal     |       | $         | 774,429    |      | $          | 243,569   |       | $ | 3,565,519 |   |
| Foreign           |       | 142,358   |       | —    |       | —    |       |
| State  and local  |       | 373,151   |       | 366,000   |       | 542,677   |       |
|              |       | 1,289,938 |       | 609,569   |       | 4,108,196 |       |
|              |       |      |       |      |       |      |       |
| Deferred  expense |       | 717,873   |       | 4,017,000 |       | 1,021,969 |       |
|              |       | $         | 2,007,811  |      | $          | 4,626,569 |       | $ | 5,130,165 |   |

 

Theincome tax provision differs from the amount of income tax determined byapplying the applicable U.S. and Canadian federal income tax rates to pretaxincome from continuing operations for the year ended December 31, 2009,and applying the U.S. federal income tax rates to pretax income from continuingoperations for the years ended December 31, 2008, and 2007, due to thefollowing:

 
| ** **                                          | ** ** | **2009** | ** ** | **2008** | ** ** | **2007**  | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Computed  “expected” tax expense          |       | $        | 1,321,726  |     | $          | 3,918,504 |       | $ | 4,325,859 |   |
| Increase  in income taxes resulting from:           |       |     |       |     |       |      |       |
| Nondeductible  expenses and other                   |       | 407,168  |       | 470,165  |       | 451,566   |       |
| State and  local taxes, net of federal benefit |       | 278,917  |       | 237,900  |       | 352,740   |       |
|                                                |       | $        | 2,007,811  |     | $          | 4,626,569 |       | $ | 5,130,165 |   |

 

42

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TGC Industries, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,2009, 2008, and 2007

 

NOTE I - INCOME TAXES —CONTINUED

 

Netdeferred tax liabilities consist of the following components as of December 31,2009 and 2008:

 
| ** **                            | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|
| Deferred  tax assets                  |       |       |       |       |       |
| Foreign  tax credits                  |       | $          | 144,626    |       | $          | — |   |
| Foreign  capital losses               |       | 399,907    |       | —     |       |
| Loss  carry forwards (expire in 2028) |       | —     |       | 83,252     |       |
| Deferred  stock compensation          |       | 11,491     |       | 173,511    |       |
| Total  gross deferred tax assets      |       | 556,024    |       | 256,763    |       |
| Less  valuation allowance             |       | (399,907   | )          | —     |       |
| Total  deferred tax assets            |       | 156,117    |       | —     |       |
|                                  |       |       |       |       |       |
| Deferred  tax liability               |       |       |       |       |       |
| Property  and equipment               |       | (7,273,147 | )          | (6,229,763 | )          |
| Total  deferred tax liabilities       |       | $          | (7,117,030 | )          | $          | (5,973,000 | ) |

 

Thecomponents giving rise to the net deferred tax items described above have beenincluded in the accompanying balance sheets as of December 31, 2009 and2008, as follows:

 
| ** **                | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|---------------------------|------------|-----------|------------|-----------|------------|
|                      |       |      |       |      |       |
| Current  assets           |       | $         | —     |      | $          | — |   |
| Noncurrent  (liabilities) |       | 7,117,030 |       | 5,973,000 | )          |
|                      |       | $         | 7,117,030  |      | $          | 5,973,000 |   |

 

TheCompany adopted Topic 740 on January 1, 2007.  The implementation ofTopic 740 did not have a material impact on the Company’s consolidatedfinancial statements, results of operations, or cash flows.  At December 31,2009 and 2008, the Company had no unrecognized tax benefits, interest orpenalties within its provision for income taxes.

 

NOTE J - 401(k) PLAN

 

The Company has a401(k) salary deferral plan which covers all employees who have reachedthe age of 20.5 years and have been employed by the Company for at least oneyear. The covered employees may elect to have an amount deducted from theirwages for investment in the retirement plan. The Company makes contributions tothe plan equal to 50% of each participant’s salary reduction contributions tothe plan up to 6% of the participant’s compensation. The Company’s matchingcontribution to the plan was approximately $16,000, $78,000, and $64,000 forthe years ended December 31, 2009, 2008, and 2007, respectively.

 

NOTE K - CONCENTRATION OF CREDIT RISK

 

The Company sellsits geophysical services primarily to large independent oil and gas companiesoperating in the U.S. and Canada.  TheCompany performs ongoing credit evaluations of its customer’s financialcondition and, generally, requires no collateral from its customers.

 

During 2009 ourlargest customer accounted for approximately 30.8% of revenues.  During 2008 our two largest customersaccounted for approximately 26.7% of revenues. During 2007 our largest customer accounted for approximately 12.1% ofrevenues.  As of December 31, 2009,three customers accounted for 19%, 19%, and 12% of outstanding accountsreceivable, respectively.  As of December 31,2008, two customers accounted for 26% and 13% of outstanding accountsreceivable, respectively.  During 2009our two largest vendors accounted for approximately 22% and 10% of ourpurchases.  No vendor represented over10% of purchases in 2008 or 2007.

 

43

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TGC Industries, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,2009, 2008, and 2007

 

NOTE L - CONTINGENCIES

 

In conducting itsactivities, the Company from time to time is the subject of various claimsarising from the ordinary course of business. In the opinion of management, theultimate resolution of such claims is not expected to have a material adverseeffect upon the financial position of the Company.

 

NOTE M— QUARTERLY FINANCIAL DATA — (UNAUDITED)

 

Thefollowing is a summary of the unaudited quarterly financial information for thetwo years ended December 31, 2009 and 2008 (in thousands, except per shareamounts):

 
| ** **                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------|------------|------------------------|------------|
| **2009**                           | ** ** | **March 31**      | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|                               |       |                   |       |   |   |   |   |   |   |
| Revenues                           |       | $                      | 36,011     |   | $ | 22,591 |   | $ | 16,083 |   | $ | 15,747 |   |
| Income  (loss) from operations     |       | 8,793                  |       | 2,424 |   | (2,481 | ) | (3,828 | ) |
| Net  Income (loss)                 |       | 5,035                  |       | 1,242 |   | (1,734 | ) | (2,663 | ) |
| Net  income (loss) per share basic |       | .27                    |       | .07 |   | (.09 | ) | (.15 | ) |
| Net  income per share diluted      |       | .27                    |       | .07 |   | (.09 | ) | (.15 | ) |
|                                    |            |                        |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                    | ** ** | **Three Months Ended** | ** ** |
|-------------------------------|------------|------------------------|------------|
| **2008**                      | ** ** | **March 31**      | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|                          |       |                   |       |   |   |   |   |   |   |
| Revenues                      |       | $                      | 22,471     |   | $ | 18,620 |   | $ | 21,554 |   | $ | 24,125 |   |
| Income  from operations       |       | 3,384                  |       | 1,679 |   | 3,603 |   | 3,788 |   |
| Net  Income                   |       | 1,983                  |       | 868 |   | 1,863 |   | 2,185 |   |
| Net  income per share basic   |       | .11                    |       | .05 |   | .10 |   | .12 |   |
| Net  income per share diluted |       | .11                    |       | .05 |   | .10 |   | .12 |   |
|                               |            |                        |            |  |  |  |  |  |  |  |  |  |  |

 

NOTE N— ACQUISITION OF EAGLE CANADA SUPPLEMENTARY DATA — (UNAUDITED)

 

On October 19, 2009, we disclosed our entryinto a Material Definitive Agreement regarding the acquisition of the stock ofEagle Canada, Inc. (“Eagle Canada”), a Delaware corporation.  Eagle Canada was a wholly-owned subsidiary ofEagle Geophysical, Inc. and Eagle Geophysical Onshore, Inc. (the “*Debtors*”) which were debtors in a Chapter 11 bankruptcyproceeding in Houston, Texas.  Eagle Canada is in the business ofproviding seismic data and surveying services to the Canadian energy industryand has its principal place of business located in Calgary, Alberta,Canada.  By Order dated October 14, 2009, the Bankruptcy Court approvedthe sale of the Eagle Canada stock by the Debtors to TGC and authorized theDebtors to enter into a Stock Purchase Agreement with TGC.  In accordancewith the terms of the Stock Purchase Agreement, the sale transaction closed on October 16,2009, with TGC acquiring the Eagle Canada stock for a total purchase price ofapproximately $10.3 million paid from existing cash.  The acquisition provides the Company with anew geographic region in which to operate. The seismic recording equipment used by Eagle Canada is interchangeablewith that of TGC.  The amounts of EagleCanada’s revenue and earnings included in our consolidated statement of incomefor the year ended December 31, 2009, and the unaudited revenue andearnings of the combined entity had the acquisition date been January 1,2009, or January 1, 2008, are as follows:

 

44

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NOTE N- ACQUISITION OF EAGLE CANADA SUPPLEMENTARY DATA —(UNAUDITED) — CONTINUED

 
| ** **                                     | ** ** | **Revenue** | ** **  | **Earnings** | ** ** |
|------------------------------------------------|------------|-------------|-------------|--------------|------------|
|                                           |       |        |        |         |       |
| Actual from 10/15/09 to 12/31/09               |       | $           | 4,783,892   |         | $          | 381,366 |   |
|                                           |       |        |        |         |       |
| Supplemental pro forma from 1/1/09 to 12/31/09 |       | $           | 103,539,881 |         | $          | 1,584,565 |   |
|                                           |       |        |        |         |       |
| Supplemental pro forma from 1/1/08 to 12/31/08 |       | $           | 113,762,636 |         | $          | 8,270,624 |   |

 

NOTE O — COMMITMENTS AND CONTINGENCIES

 

Inconnection with our acquisition of Eagle Canada as discussed in Item 1 and NoteN to the consolidated financial statements, TGC is seeking damages againstEagle Geophysical, Inc. and Eagle Geophysical Onshore, Inc. (the “Debtors”)arising out of their failure to disclose material information in connectionwith the sale of Eagle Canada.  Duringthe due diligence process, and in the purchase agreement, the Debtors madecertain representations and warranties to TGC concerning Eagle Canada’sfinancial condition and debt obligations including guarantee obligations.  Soon after the sale closing, TGC discoveredthat the Debtors did not disclose a material guarantee obligation purportedlyincurred by Eagle Canada as part of a secured loan Eagle Geophysical obtainedfrom SunTrust Equipment Finance and Leasing Corp. with an outstanding balanceof approximately $731,000.  TGC notifiedthe Debtors that their failure to disclose the existence of the guaranteeconstitutes a breach of the purchase agreement and demanded, and Debtorscomplied, that the Debtors escrow $800,000 in a segregated account pendingresolution of Eagle Canada’s liability, if any, under the guarantee and thedetermination and resolution of any other guarantee to which Eagle Canada is aparty.  The Company intends to vigorouslypursue this matter.

 

**ITEM 9.****     ****CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.**

 

Not Applicable.

 

**ITEM 9A. CONTROLS AND PROCEDURES.**

 

**Disclosure Controls and Procedures**

 

The Company maintains controls and procedures toensure that it is able to collect the information it is required to disclose inthe reports it files with the Securities and Exchange Commission, and toprocess, summarize, and disclose this information within the time periods specifiedin the rules of the SEC.  Based onan evaluation of the Company’s disclosure controls and procedures (as such termis defined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended) as of the end of the period covered by thisreport conducted by the Company’s management, with the participation of theChief Executive and Chief Financial Officers, the Chief Executive and ChiefFinancial Officers believe that these controls and procedures are effective toensure that the Company is able to record, process, summarize, and reportinformation required to be included in reports filed or submitted under theExchange Act within the required time period. As discussed in Item 1 and in Note N to the consolidated financialstatements above, during October 2009 the company acquired all of thestock of Eagle Canada.  Because theacquisition occurred in 2009, management has elected to exclude Eagle Canadafrom management’s report on internal control over financial reporting.  Revenue of $4,783,892 and earnings of$381,366 attributable to Eagle Canada for the period October 15, 2009 to December 31,2009 are included in our consolidated statement of earnings for the year ended December 31,2009.  Other than the exclusion of EagleCanada, there were no changes in the Company’s internal controls over financialreporting during the year ended December 31, 2009, that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

45

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**Management’s Report on Internal Controlover Financial Reporting**

 

Management of the Companyis responsible for establishing and maintaining adequate internal control overfinancial reporting as defined in Rule 13a-15(f) under the SecuritiesExchange Act of 1934, as amended.

 

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements.  Projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions or that the degree ofcompliance with the policies or procedures may deteriorate.  All internal control systems, no matter howwell designed, have inherent limitations. Therefore, even those systems determined to be effective can provideonly reasonable assurance with respect to financial statement preparation andpresentation.

 

Management assessed the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2009.  In making this assessment, management usedthe criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission (COSO) in Internal Control — Integrated Framework.  Based on our assessment, we believe that, asof December 31, 2009, the Company’s internal control over financialreporting, excluding Eagle Canada as discussed above, is effective based onthose criteria.

 

Management’s assessment of the effectiveness ofinternal control over financial reporting as of December 31, 2009,excluding Eagle Canada as discussed above, has been audited by Lane GormanTrubitt, L.L.P., the independent registered public accounting firm which alsoaudited the Company’s financial statements. Lane Gorman Trubitt, L.L.P.’s attestation report on management’sassessment of the Company’s internal control over financial reporting,excluding Eagle Canada, appears in their Report of Independent RegisteredPublic Accounting Firm.

 

**ITEM9B.  OTHER INFORMATION.**

 

NotApplicable.

 

**PART III**

 

**ITEM 10. DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.**

** **

The information required by Item 10 of Form 10-Kis hereby incorporated by reference from the Company’s definitive proxystatement which will be filed pursuant to Regulation 14A within 120 days afterthe Company’s year end for the year covered by this report.

 

**ITEM 11. EXECUTIVE COMPENSATION.**

 

The information required by Item 11 of Form 10-Kis hereby incorporated by reference from the Company’s definitive proxystatement which will be filed pursuant to Regulation 14A within 120 days afterthe Company’s year end for the year covered by this report.

 

**ITEM12.**   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT AND RELATED STOCKHOLDER MATTERS.

** **

The information required by Item 12 of Form 10-Kis hereby incorporated by reference from the Company’s definitive proxystatement which will be filed pursuant to Regulation 14A within 120 days afterthe Company’s year end for the year covered by this report.

 

46

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**ITEM 13.**              CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

** **

The information requiredby Item 13 of Form 10-K is hereby incorporated by reference from theCompany’s definitive proxy statement which will be filed pursuant to Regulation14A within 120 days after the Company’s year end for the year covered by thisreport.

 

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

** **

The information required by Item 14 of Form 10-Kis hereby incorporated by reference from the Company’s definitive proxystatement, which will be filed pursuant to Regulation 14A within 120 days afterthe Company’s year end for the year covered by this report.

 

**PART IV**

** **

**ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.**

** **

(a)          The following documents are filed as apart of this report:

 

(1)          Financial Statements included in Item 8 above arefiled as part of this annual report.

 

(2)          Financial Statement Schedules included in Item 8herein:

 

All schedules forwhich provision is made in the applicable accounting regulations of theSecurities and Exchange Commission are not required under the relatedinstructions or are inapplicable and therefore, have been omitted.

 

(3)          Exhibits:  Theinformation required by this Item 15(a)(3) is set forth in the Index toExhibits accompanying this Annual Report on Form 10-K.

 

47

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 

 
| ** **                 | **TGC  INDUSTRIES, INC.** |
|----------------------------|---------------------------|
|                       |                      |   |   |
| Date:  March 16, 2010 |                      | By: |   /s/ Wayne A. Whitener |
|                       |                      |   |   | Wayne A. Whitener |
|                       |                      |   |   | President and Chief Executive Officer |
|                       |                      |   |   | (Principal Executive Officer) |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

 

 
| Date: March 16, 2010 | By:    |   /s/ Wayne A. Whitener  |
|---------------------------|--------|-------------------------------|
|                      |   |                          | Wayne A. Whitener |
|                      |   |                          | President, Chief Executive Officer, and Director |
|                      |   |                          | (Principal Executive Officer) |
|                      |   |                          |   |
| Date: March 16, 2010 | By:    |   /s/ James K. Brata     |
|                      |   |                          | James K. Brata |
|                      |   |                          | Vice President,  Secretary, Treasurer, and Chief |
|                      |   |                          | Financial  Officer |
|                      |   |                          | (Principal  Financial and Accounting Officer) |
|                      |   |                          |   |
| Date: March 16, 2010 | By:    |   /s/ William J. Barrett |
|                      |   |                          | William J.  Barrett |
|                      |   |                          | Director |
|                      |   |                          |   |
| Date: March 16, 2010 | By:    |   /s/ Herbert M. Gardner |
|                      |   |                          | Herbert M.  Gardner |
|                      |   |                          | Director |
|                      |   |                          |   |
| Date: March 16, 2010 | By:    |   /s/ Allen T. McInnes   |
|                      |   |                          | Allen T. McInnes |
|                      |   |                          | Director |
|                      |   |                          |   |
| Date: March 16, 2010 | By:    |   /s/ Edward L. Flynn    |
|                      |   |                          | Edward L. Flynn |
|                      |   |                          | Director |
|                      |   |                          |   |
| Date: March 16, 2010 | By:    |   /s/ Stephanie P. Hurtt |
|                      |   |                          | Stephanie P.  Hurtt |
|                      |   |                          | Director |

 

48

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**INDEX TO EXHIBITS**

 
| **EXHIBIT  NO.** | ** ** | **DESCRIPTION** |
|------------------|------------|-----------------|
| 2.1              |       |            | Stock Purchase  Agreement, dated as of October 16, 2009, by and among TGC  Industries, Inc., Eagle Geophysical, Inc. and Eagle Geophysical  Onshore, Inc., filed as Exhibit 2.1 to the Company’s Current Report  on Form 8-K dated October 17, 2009, 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              |       |            | Amended and Restated  Bylaws (as amended March 25, 2009), filed as Exhibit 3.1 to the  Company’s Current Report on Form 8-K filed on March 31, 2009, 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. |
|             |       |            |   |
| +10.1            |       |            | Employment Contract (as  Amended and Restated effective September 11, 2008) between TGC  Industries, Inc. and Wayne A. Whitener, filed as Exhibit 10.1 to  the Company’s Current Report on Form 8-K filed on September 17,  2008, and incorporated herein by reference. |
|             |       |            |   |
| 10.2             |       |            | Form of TGC  Industries, Inc. Director and Officer Indemnification Agreement, filed  as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed  on October 22, 2008, 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             |       |            | Amended and Restated Loan and Security Agreement by and between TGC  Industries, Inc. and Sovereign Bank, dated September 16, 2009, filed as Exhibit 10.1 to the  Company’s Current Report on Form 8-K filed on September 22, 2009,  and incorporated herein by reference. |
|             |       |            |   |
| 10.5             |       |            | Amended and  Restated Promissory Note by and between TGC Industries, Inc. and  Sovereign Bank, dated September 16, 2009, filed as Exhibit 10.2 to  the Company’s Current Report on Form 8-K filed on September 22,  2009, and incorporated herein by reference. |
|             |       |            |   |
| 10.6             |       |            | 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. |
|             |       |            |   |
| 10.7             |       |            | 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. |
|             |       |            |   |
| 10.8             |       |            | 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. |

 

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| 10.9              |   |   | 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.  |
|-------------------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |   |   |                                                                                                                                                                                                                                                                                                                                        |
| 10.10             |   |   | 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. |
|              |   |   |                                                                                                                                                                                                                                                                                                                                        |
| 10.11             |   |   | 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.                                                |
|              |   |   |                                                                                                                                                                                                                                                                                                                                        |
| +10.12            |   |   | 1999 Stock  Option Plan as adopted by the Board of Directors on December 14, 1999,  filed as Exhibit 10.13 to the Company’s Annual Report on  Form 10-KSB for the fiscal year ended December 31, 1999, and  incorporated herein by reference.                                                                      |
|              |   |   |                                                                                                                                                                                                                                                                                                                                        |
| +10.13            |   |   | 2006 Stock  Awards Plan, dated March 30, 2006, filed as Exhibit A to the  Company’s definitive proxy statement on Form DEFR 14A dated  April 25, 2006, 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  Chief 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  Chief Financial 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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* Filed herewith.

+ Managementcontract on compensatory plan, contract, or arrangement.

 

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