**UNITEDSTATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-KSB**

 

**(MarkOne)**
| **ý** | ** ** | **ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                             |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | **For the  Fiscal Year Ended December 31, 2004**                                                                                                                                                                                     |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                |
| **o**      | ** ** | **TRANSITION REPORT UNDER SECTION 13 or 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                         |
| ** ** | ** ** | **For the  transition period from                   to                 ** |

 

**Commission File Number 0-14908**

 

**TGC INDUSTRIES, INC.**

(Name of small business issuerin its charter)

 
| **Texas**                                                       | ** ** | **74-2095844**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or  other jurisdiction of incorporation or organization) |       | (I.R.S.  Employer Identification No.) |
|                                                            |       |                                  |
| **1304 Summit, Suite 2, Plano, Texas**                     | ** ** | **75074**                             |
| (Address of  principal executive offices)                       |       | (Zip Code)                            |

 

Issuer’s telephonenumber:  **(972) 881-1099**

 

Securities registeredunder Section 12(b) of the Exchange Act:  **NONE**

 

Securities registeredunder Section 12(g) of the Exchange Act:

 

**CommonStock ($.01 Par Value)**

**Series C8% Convertible Exchangeable Preferred Stock ($1.00 Par Value)**

**8.5%Senior Convertible Preferred Stock ($1.00 Par Value)**

 

Check whether the issuer (1) filedall reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes   ý    No o

 

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-Bcontained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB orany amendment to this Form 10-KSB. ý

 
| State issuer’s revenues (from continuing operations)  for its most recent fiscal year: |   | $20,084,175 |   |
|---------------------------------------------------------------------------------------------|--------|-------------|--------|

 

Statethe aggregate market value of the voting and non-voting common equity held bynon-affiliates computed by reference to the price at which the common equitywas sold, or the average bid and asked price of such common equity, as of March 18,2005 (for 

the purposes of this calculation only directors,executive officers, and 10% or greater stockholders are deemed to beaffiliates):
|   |   | $16,580,250 |   |
|--------|--------|-------------|--------|

 

 

State the number ofshares outstanding of each of the issuer’s classes of common equity, as of thelatest practicable date.

 
| Class                                                                                                     |       | Outstanding as  of March 18, 2005                                       |
|-----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|
| **Common Stock ($.01 Par Value)**                                                                         | ** ** | **6,102,873**                                                                |
|                                                                                                      |       |                                                                         |
| Document                                                                                                  |       | Documents  Incorporated by Reference                                         |
|                                                                                                      |       |                                                                         |
| **Portions  of the Proxy Statement  for Annual Meeting of Shareholders  to be held on June 7, 2005** | ** ** | **Parts  of the Form 10-KSB Into Which  the Document is Incorporated:** |
|                                                                                                      |       | **Part III**                                                            |

 

 

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# **Part I**

 

**ITEM 1.DESCRIPTION OF BUSINESS.**

 

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

 

**History**

 

In April 1980,Supreme Industries, Inc., formerly ESI Industries, Inc., (“Supreme”)formed a wholly owned subsidiary that acquired certain equipment, instruments,and related supplies of Tidelands Geophysical Co., Inc. (“Tidelands”), aHouston-based corporation that had been organized in 1967 and was engaged inthe business of conducting seismic, gravity, and magnetic surveys undercontracts to companies in the exploration for oil and gas. In July 1986,Tidelands’ name was changed to TGC Industries, Inc. (“TGC”). On June 30,1986, the Boards of Directors of Supreme and TGC approved a spin-off wherebysubstantially all of the shares of TGC owned by Supreme were distributed as astock dividend to Supreme security holders.

 

On July 30,1993, TGC acquired, through a wholly owned subsidiary, Chase PackagingCorporation (“Chase”), a specialty packaging business principally supplyingproducts to the agricultural industry, through the purchase of certain assetsof the Chase Packaging division of Union Camp Corporation.

 

In June 1996,the Board of Directors of TGC approved the spin-off of Chase, effective July 31,1996, whereby all of the shares of Chase owned by TGC were distributed as astock dividend to the shareholders of TGC under the terms of the spin-offtransaction. Pursuant to the terms of the spin-off, and following clearance bythe Securities and Exchange Commission on March 7, 1997, the holders ofTGC’s Common Stock and, on an as-if-converted basis, the holders of TGC’s Series C8% Convertible Exchangeable Preferred Stock (“Series C Preferred Stock”)received the dividend distribution of Chase Common Stock.

 

DuringJuly 1996, the Company issued 1,150,350 shares of Series C PreferredStock in a private placement offering with gross proceeds of approximately$5,800,000.

 

The Series CPreferred Stock sold in the private placement entitles the holder to receivecumulative cash dividends as, when and if declared by the Board of Directors ata rate of 8% per annum prior to any dividend or distribution in cash or otherproperty on any class or series of stock junior to the Series C PreferredStock. The dividends on the Series C Preferred Stock are payable as, whenand if declared by the Board of Directors on January 1 and July 1 ofeach year, commencing January 1, 1997. The dividend on the Series CPreferred Stock is cumulative.

 

Fromthe proceeds of the private placement, TGC made a capital contribution to Chaseof $2,716,403 to facilitate the spin-off; and TGC retained $2,000,000 for thepurchase of state-of-the-art geophysical recording equipment. Under the termsof the spin-off, the effective date of which was July, 31, 1996, TGC completedthe spin-off of the business and assets relating to the Chase operations,except TGC retained the Portland, Oregon facility and canceled allinter-company debt owed by Chase to TGC. The distribution of Chase Stock was March 7,1997. On March 18, 1997, TGC sold the Portland, Oregon facility for$2,430,000 and applied such proceeds in satisfaction of the mortgageindebtedness with respect to such facility and in satisfaction of a debtobligation owing by TGC to Chase to pay to Chase any such proceeds in excess ofthe amount of the mortgage indebtedness.

 

As of July 31,1996, the effective date of the spin-off, TGC Industries, Inc.’s onlybusiness has been the geophysical service business, primarily conductingThree-D (“3-D”) surveys for clients in the oil and gas business.

 

On December 13,1999, WEDGE Energy Services, L.L.C., (“WEDGE Energy”) an affiliate of WEDGEGroup Incorporated, a diversified Houston, Texas firm with interests in oil andgas services, purchased a $2,500,000 8.5% Convertible Subordinated Debenture, Series Bdue December 1, 2009 (the “Debenture”), of the Company. Proceeds of thefinancing together with other available funds were utilized for working capitaland an expanded capital expenditure program. The Debenture, at WEDGE’s option,could be converted into either preferred stock or common at a price of $1.15per share.

 

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Theholders of the Company’s outstanding Series C Preferred Stock, voted atthe Annual Meeting held May 11, 2000, to consent to a new series of 8.5%Senior Convertible Preferred Stock (“Senior Preferred Stock”). The affirmativevote of the holders of two-thirds (2/3) of the outstanding shares of Series CPreferred Stock approved the new series of Senior Preferred Stock. As a resultof the consent to the new series of Senior Preferred Stock by the Series CPreferred Stock shareholders and in accordance with the terms of the DebentureAgreement, WEDGE Energy, on May 17, 2000, converted its Debenture plusaccrued interest into 2,252,445 shares of Senior Preferred Stock. Per theDebenture Agreement, dividends on the Senior Preferred Stock have been paid bythe issuance of additional shares of Senior Preferred Stock through December 1,2003. As a result, 771,819 shares of Senior Preferred Stock have been issued toWEDGE Energy as dividend payments from June 1, 2000, through December 1,2003.

 

In February 2004,WEDGE Energy completed a transaction, selling all of its 3,024,264 shares ofSenior Preferred Stock to a small number of investors that included severalmembers of the Company’s Board of Directors who purchased 1,772,200 of suchshares. In addition, WEDGE Energy’s two designated Board members have resigned.

 

**General Description of the Company’s Business**

 

**Geophysical Business**

 

Sinceits formation, TGC has engaged in the domestic geophysical services businessprincipally through conducting seismic surveys and to a lesser extent throughsales of gravity information from the Company’s Data Bank to companies engagedin the exploration for oil and gas in the United States. Geophysics is thestudy of the structure and composition of the earth’s interior and involves themeasuring and interpretation of the earth’s properties with appropriateinstruments. Such studies are generally conducted by means of surveys performedby field crews employing seismic, gravity, or magnetic instruments to acquiredata that is then interpreted by various means to obtain useful information foroil and gas companies. The two survey techniques used by the Company inacquiring geophysical data are seismic and gravity. Land seismic surveys arethe Company’s principal method of data acquisition and are by far the mostwidely used geophysical technique. TGC’s seismic crews use dynamite andvibroseis as energy sources for such surveys. The seismic data acquired by TGCare transmitted by the Company to data processing centers (not owned oroperated by the Company) designated by the clients for processing andinterpretation.

 

TheCompany’s Data Bank contains gravity data, and to a lesser extent magneticdata, from many of the major oil and gas producing areas located within theUnited States. TGC does not have a seismic data bank. Data Bank information hasbeen amassed through participatory surveys as well as speculative surveysfunded by TGC alone. All data and interpretations may be licensed to customersat a fraction of the cost of newly acquired data.

 

In January 2002,the Company entered into a two year Joint Venture Agreement (the “Joint Venture”)with a gravity data processing center, (the “Processing Center”). Per the JointVenture the Company will furnish the Processing Center with approximately100,000 stations of the Company’s digitized gravity data, and the ProcessingCenter, using industry standards along with the latest technological gravitydata processing software and techniques, will process the digitized dataproducing a data set (the “Data Set”). During the term of this Agreement, theCompany and the Processing Center will endeavor to market and license the DataSet. In consideration for the Processing Center’s unique state-of-the-artgravity processing software and techniques, upon licensing by the Company orthe Processing Center of any or all of the Data Set, the Company agrees to paythe Processing Center a twenty percent (20%) commission. Upon expiration of theJoint Venture, the Data Set and all related information provided the ProcessingCenter will be returned to the Company. In February 2004, the Company andthe Processing Center entered into an agreement to extend the Joint Venture fora period of three years. Revenue from the licensing of gravity data representsa small portion of the Company’s total revenue. However, because the Data Bankhas been fully amortized and only minimal expenses are incurred with eachlicense agreement, revenues from the licensing of gravity data are veryprofitable.

 

As aservice business, the Company’s domestic geophysical services business is notdependent upon the supply of raw materials or any other products and,therefore, the Company does not have arrangements with any raw materialsuppliers.

 

TheCompany has the capability of utilizing three seismic crews to perform its geophysicalservices and, in any given period, these crews may generate a significantportion of their respective revenues from one or more clients. For the yearended December 31, 2004, two customers accounted for thirty four percent(34%) and fifteen percent (15%) of the Company’s revenue, respectively. TheCompany enters into a general or master agreement with each of its clients forthe

 

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provision of geophysicalservices and a supplementary agreement (which becomes a part of the generalagreement) with respect to each particular job that the Company performs for aclient. Under the terms of such agreements, the Company generally contracts tosupply all personnel, transportation and equipment to perform seismic surveysfor a given prospect for a fixed price plus reimbursement for certain thirdparty charges. The Company generally bills its clients on a progressive basisover the term of the contract. The Company is generally obligated to maintaininsurance against injury or damage to persons or equipment arising from theperformance of its services and to indemnify its customers against all claimsand liability arising therefrom. Management believes this insurance coverage issufficient.

 

Beginningapproximately in mid 1998, activity in the U.S. Geophysical Industry declinedsignificantly due to a decline in the price of oil. As a result, TGC reducedits operations to one crew in 1999 and continued to operate one crew during2000. TGC experienced an increase in demand for its services in 2001, securinga sufficient number of contracts to operate at a two-crew level during thesecond half of 2001. However, this increased level of activity was short-lived,and TGC reduced its operations to one crew in 2002. As a result, managementbegan exploring ways of increasing bidding opportunities in existing markets.In February 2002, the Company entered into an agreement with a corporationto trade in the Company’s shot hole drilling equipment for five buggy-mountedvibroseis units. In addition, the Company purchased certain equipment needed tomake the vibroseis equipment compatible with the Company’s recording equipment.A one-year $30,000 note financed this additional equipment. The purchase ofthis equipment opened up an opportunity in an existing market, in which theCompany had not participated, thereby increasing its bidding opportunities. TheCompany has been successful in the vibroseis market with a significant portionof the Company’s 2004 and 2003 revenue being generated from vibroseiscontracts. The Company announced in mid January 2004 that, given that oiland gas exploration companies had increased the level of activity in theirdomestic oil and gas exploration programs, it had acquired three additionalvibroseis units and deployed a second seismic crew. In June 2004, inresponse to the increased level of activity in the domestic oil and gas market,the Company deployed its third seismic crew. In October 2004, the Companyacquired a new ARAM ARIES recording system. This new state-of-the-art systemwill enable the crew to record data faster thereby increasing its productivityas well as freeing up currently owned equipment for our other two crews. Althoughthere can be no assurance, should this increased level of activity in theindustry continue during 2005, management believes the Company will be able tooperate at the three-crew level for the remainder of 2005. Company managementcontinues to monitor expenses and, where possible, implement cost containmentprograms to remain highly competitive.

 

As of December 31,2004, TGC employed 162 employees, supporting three seismic crews with a totalof 155 crew members and direct support members. The Company believes itsrelationship with its employees to be satisfactory.

 

**ITEM 2.DESCRIPTION OF PROPERTY.**

 

TheCompany’s headquarters are in leased facilities located in Plano, Texas fromwhich it conducts all its current operations. These facilities includeapproximately 10,500 square feet of office and warehouse space and an outdoorstorage area of approximately 20,000 square feet. The monthly rent is $6,559. Thisfacility is used to house corporate offices and serves as the headquarters forthe geophysical business. The Company is not responsible for insuring thefacilities. The condition of the Company’s facilities is good and TGCmanagement believes that these properties are suitable and adequate for theCompany’s foreseeable needs.

 

**ITEM 3.LEGAL PROCEEDINGS.**

 

TheCompany is a defendant in various legal actions that arose out of the normalcourse of business. In the opinion of Management, none of the actions willresult in any significant loss to the Company.

 

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

 

Nomatters were submitted by the Company, during the fourth quarter of the fiscalyear ended December 31, 2004, to a vote of the Company’s security holders,through the solicitation of proxies or otherwise.

 

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# **Part II**

 

**ITEM 5.MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.**

 

TheCompany’s Common Stock traded on the NASDAQ SmallCap Market under the symbol “TGCI”from September 25, 1994, until May 24, 2002. As previously reported,the Company was notified by NASDAQ of potential delisting of the Company’s CommonStock for: (1) having failed to maintain a minimum market value ofpublicly held shares of $1,000,000 and (2) having failed to equal orexceed the minimum bid price requirement of $1 per share, in each case forthirty (30) consecutive trading days. The Company, as a condition to continuedlisting of its securities on the SmallCap Market, was required to satisfy theserequirements for a minimum of ten (10) consecutive trading days by May 15,2002 and August 13, 2002, respectively. The Company’s Common Stock did nottrade at sufficient levels, for ten (10) consecutive trading days, tocomply with the May 15, 2002 deadline. As a result, the Company’ssecurities were delisted from NASDAQ SmallCap Market at the opening of businesson May 24, 2002 and now trade over-the-counter on the National Associationof Securities Dealers, Inc. Over-The-Counter Bulletin Board System. TheCompany maintains its trading symbol “TGCI”.

 

Thenumber of shareholders of record of TGCI’s Common Stock as of March 18,2005, was 122. Due to the number of shares held in nominee or street name, theCompany believes that there are a significantly greater number of beneficialowners of its Common Stock. As of such date, CEDE & CO. held 4,698,372shares in street name. On March 18, 2005, TGC’s Common Stock was quoted ata closing bid price of $4.15. The high and low bid prices shown below representprices among the dealers and do not include retail mark-ups, mark-downs, orcommissions, and do not necessarily represent actual transactions.

 

BidPrice of TGC Common Stock

 
| **Date**                                      | ** ** | **High  Bid Price** | ** ** | **Low  Bid Price** | ** ** |
|-----------------------------------------------|------------|---------------------|------------|--------------------|------------|
|                                          |       |                |       |               |       |
| October 1 — December 31, 2004. |       | 2.950               |       | 2.150              |       |
| July 1 — September 30, 2004    |       | 2.500               |       | 1.500              |       |
| April 1 — June 30, 2004        |       | 2.450               |       | 1.200              |       |
| January 1 — March 31, 2004     |       | 1.110               |       | .700               |       |
|                                          |       |                |       |               |       |
| October 1 — December 31, 2003  |       | .700                |       | .380               |       |
| July 1 — September 30, 2003    |       | .380                |       | .150               |       |
| April 1 — June 30, 2003        |       | .150                |       | .075               |       |
| January 1 — March 31, 2003     |       | .100                |       | .063               |       |

 

Dividendsare payable on the Company’s Common Stock at the discretion of the Board ofDirectors. In view of the working capital needs of the Company, it is unlikelythat cash dividends will be declared and paid on the Company’s Common Stock forthe foreseeable future.

 

**ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL****CONDITIONS AND RESULTS OFOPERATIONS.**

 

**Results of operations**

 

Revenuesfor the year ended December 31, 2004 were $20,084,175 compared withrevenues of $8,468,051 for the year ended December 31, 2003. The Companyreported net income, before dividend requirements on preferred stock, of$2,868,339 for the year ended December 31, 2004 compared with net income,before dividend requirements on preferred stock, of $555,165 for the year endedDecember 31, 2003.

 

In2004, the Company was able to secure a sufficient number of contracts to deployan additional two crews. As a result, TGC reported a 137% increase in revenuesin 2004 over 2003. As a result of higher revenue, TGC’s cost of services, as apercentage of revenue, decreased to 78.6% in 2004 from 82.1% in 2003. Selling,general and administrative expense increased to $1,313,627 in 2004 from$932,709 in 2003. This increase was due to several factors including anincrease in expenses associated with the higher level of revenues, an increasein legal expense associated with the filing of a Form S-B 2,

 

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an increase in publiccompany expenses associated with the hiring of a public relations firm, and anincrease in incentive compensation paid in 2004. Interest expense increased to$60,878 in 2004 from $8,792 in 2003. This increase was attributable to the debtincurred in 2004 associated with the purchase of additional equipment. In June 2003,the Company issued 750,000 detachable stock warrants, with a value of $22,500,to certain directors in exchange for their financial commitment for a line ofcredit that expired December 31, 2003, in an amount up to $300,000. During2003, the Company had no borrowings against the line of credit.

 

At December 31,2004, the Company had net operating loss carry forwards of approximately$4,980,000 available to offset future taxable income, which expire at variousdates through 2024. Future tax benefits, such as net operating losscarryforwards, are recognized to the extent that realization of such benefitsare more likely than not.

 

# **Financial Condition**

# ** **

Cashof $4,165,754 was provided by operations for the twelve months ended December 31,2004, compared with cash provided by operations of $1,066,743 for the sameperiod of the prior year. The primary reason for the increase in cash fromoperations in 2004 compared with 2003 was a significant increase in revenue andnet income in 2004 compared with 2003. Net cash of $2,636,741 was used ininvesting activities during 2004. This was primarily the result of capitalexpenditures of $2,637,991 to acquire additional seismic equipment needed tooperate three crews and replace certain vehicles and equipment that had becomeworn-out during 2004. Principal payments of debt obligations in the amount of$263,683, principal payments on capital lease obligations of $197,642, anddividends of $289,830 paid on the Company’s 8.5% Senior Convertible PreferredStock (less proceeds of $26,825 from the exercise of stock options) resulted innet cash of $724,330 being used in financing activities in 2004. The debtincurred in 2004 was primarily for the purchase of an ARAM recording system inthe amount of $2,386,649. The term of the debt for the new system is threeyears. This new state-of-the-art system will enable the crew to record datafaster thereby increasing its productivity as well as freeing up currentlyowned equipment for the other two crews. The capital leases entered into in2004 were primarily for additional vehicles and replacement of certain equipmentand vehicles needed to operate at the three-crew level. The terms of thesecapital leases range in length from six months to three years. The Companyanticipates that available funds, together with anticipated cash flowsgenerated from future operations will be sufficient to meet the Company’sminimum lease and note payment obligations.

 

Workingcapital decreased $473,461 to $853,133 at December 31, 2004 from the December 31,2003, working capital of $1,326,594. The Company’s current ratio decreased to1.3 at December 31, 2004 from 3.1 at December 31, 2003. Stockholders’equity increased to $4,570,065 at December 31, 2004, from the December 31,2003, balance of $1,943,339 due primarily to the net income reported in 2004 of$2,868,339.

 

In October 2001,the Company entered into a three-year operating lease for the Company’sheadquarters facility located in Plano, Texas. In April 2004, the Companyexecuted an addendum to its operating lease. The addendum extended the term ofthe lease until March 31, 2009 and increased the square footage of theoffice and outdoor storage area. The Company anticipates that available funds,together with anticipated cash flows generated from future operations will besufficient to meet the Company’s minimum rental payment obligations that are asfollows: $78,708 in 2005; $78,708 in 2006; $81,579 in 2007; $82,536 in 2008 and$20,634 in 2009.

 

During2001, the Company entered into an unsecured revolving line of creditarrangement with a bank, providing for borrowings of up to $125,000. Thefacility bore interest at prime plus 1% per annum and matured in October 2003.The Company had committed the availability to irrevocable letters of credittotaling $125,000 that also expired in October 2003. Therefore, theCompany had no borrowing availability under this line of credit. The letters ofcredit, with an insurance company as beneficiary, were being used to guaranteecontinuing seismic insurance bonds totaling $125,000, issued by the insurancecompany to two states in which the Company performs seismic surveys. In October 2003,the Company was able to secure replacement seismic bonds from an insurancecompany that did not require letters of credit.

 

Duringthe third quarter of 2004, to support future growth of the Company, a $500,000revolving bank line of credit was secured from a major bank. The line of creditbears interest at prime plus 1.0%, expires on August 2, 2005, and iscollateralized by accounts receivable. Advances are limited to eligiblereceivables. As of December 31, 2004, the Company had no borrowingsagainst the revolving line of credit.

 

In2000, the Company issued 2,252,445 shares of 8.5% Senior Convertible PreferredStock (“Senior Preferred Stock”) to a debt holder (WEDGE Energy) inconsideration for an outstanding debenture plus accrued interest, and inaccordance

 

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with the terms of theDebenture Agreement, issued 103,490 additional shares of Senior Preferred Stockto the Senior Preferred stockholder as payment for 2000 dividends. At theelection of the Senior Preferred stockholder, the Company issued 668,329additional shares of Senior Preferred Stock to the Senior Preferred Stockholderas dividend payments from June 1, 2001, through December 1, 2003. Cashdividends of $289,830 were paid to the Senior Preferred Stockholders during2004.

 

In February 2004,WEDGE Energy completed a transaction, selling all of its 3,024,264 shares ofSenior Preferred Stock to a small number of investors that included severalmembers of the Company’s Board of Directors who purchased 1,772,200 of suchshares. In addition, WEDGE Energy’s two designated Board members resigned.

 

At a November 30,2001 meeting, the Company’s Board of Directors, in an effort to encourage theconversion of Series C 8% Convertible Exchangeable Preferred Stock (“Series CPreferred Stock”) into shares of Common Stock, voted to reduce, on apost-Reverse Split basis, the conversion price of the Series C PreferredStock from $2.00 per share of Common Stock to $1.61 per share of Common Stock. Thisaction by the Board of Directors resulted in 977,550 shares of Series CPreferred Stock being converted into 3,035,839 shares of Common Stock during2002. As a result, 58,100 shares of Series C Preferred Stock remainedoutstanding at December 31, 2003. At a September 24, 2004 meeting,the Company’s Board of Directors, in an effort to encourage the conversion of Series CPreferred Stock into shares of Common Stock, voted to reduce the conversionprice of the Series C Preferred Stock from $6.00 per share of Common Stockto $2.00 per share of Common Stock for a period beginning on September 24,2004, and ending on January 31, 2005. This action by the Board ofDirectors resulted in 39,750 shares of Series C Preferred Stock being convertedinto 99,375 shares of Common Stock as of December 31, 2004. As a result,18,350 shares of Series C Preferred Stock remained outstanding at December 31,2004, and the cumulative dividends in arrears on the Series C PreferredStock were $44,040 at December 31, 2004.

 

In September 2002,the Company issued 1,500,000 detachable common stock purchase warrantsexercisable at the then market price of $.20 per share (“2002 Warrants”),valued at $45,000, to certain investors in exchange for their financial commitmentfor a line of credit that expired December 31, 2002, in an amount up to$300,000. During September 2002, the Company used $150,000 of availablefunds under the line of credit. At December 31, 2002, $120,000 remainedoutstanding under the line of credit and was paid by the Company in January 2003.In June 2003, the Company issued 750,000 detachable common stock purchasewarrants on the same terms (“2003 Warrants”), with a value of $22,500, tocertain directors in exchange for their financial commitment for a line ofcredit that expired December 31, 2003, in an amount up to $300,000. During2003, the Company had no borrowings against the line of credit. Both the 2002and 2003 Warrant Agreements contain provisions whereby the warrant holders areentitled to exercise their warrants for additional common shares of the Companyas a result of the Senior Preferred Stockholder electing to receive additionalshares of Senior Preferred Stock as Dividends. As a result, at December 31,2004, the 2002 Warrants and the 2003 Warrants were exercisable into 1,855,000and 811,645 shares of common stock, respectively.

 

TheCompany anticipates that available funds, together with anticipated cash flowsgenerated from future operations and amounts available under its revolving lineof credit, will be sufficient to meet the Company’s cash needs during 2005, solong as one of the Company’s three crews is employed, of which there is noassurance.

 

# **Forward-Looking Statements**

# ** **

Thisreport contains forward-looking statements which reflect the view of Company’smanagement with respect to future events. Although management believes that theexpectations reflected in such forward-looking statements are reasonable, itcan give no assurance that such expectations will prove to have been correct. Importantfactors that could cause actual results to differ materially from suchexpectations are disclosed in the Company’s Securities and Exchange Commissionfilings, and include, but are not limited to the dependence upon energyindustry spending for seismic services, the unpredictable nature of forecastingweather, the potential for contract delay or cancellation, the potential forfluctuations in oil and gas prices, and the availability of capital resources.The forward-looking statements contained herein reflect the current views ofthe Company’s management, and the Company assumes no obligation to update theforward-looking statements or to update the reasons actual results could differfrom those contemplated by such forward-looking statements.

 

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**ITEM 7.FINANCIAL STATEMENTS.**

 

**Financial Statements**

**December 31, 2004 and 2003**

 

**CONTENTS**

 
| Report  of Independent Registered Public Accounting Firm | 9      |
|----------------------------------------------------------|--------|
| Financial  Statements                                    |   |
| Balance Sheets                                           | 10     |
| Statements of Income                                     | 12     |
| Statements of  Stockholders’ Equity                 | 13     |
| Statements of Cash Flows                                 | 14     |
| Notes to Financial  Statements                           | 15     |

 

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Report ofIndependent Registered Public Accounting Firm

 

Boardof Directors andShareholders of TGC Industries, Inc.

 

Wehave audited the accompanying balance sheets of TGC Industries, Inc. as ofDecember 31, 2004 and 2003, and the related statements of income,stockholders’ equity, and cash flows for the years then ended. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conductedour audits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audits to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of TGC Industries, Inc. as of December 31,2004 and 2003, and the results of its operations and its cash flows for theyears then ended, in conformity with accounting principles generally acceptedin the United States of America.

 

 
| /s/ Lane Gorman  Trubitt, L.L.P. |   |
|----------------------------------|--------|
| Dallas, Texas                    |
| February 21,  2005          |

 

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TGC Industries, Inc.

BALANCE SHEETS

December 31, 

 
| ** **                                                                   | ** ** | **2004**    | ** ** | **2003**    | ** ** |
|------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| ASSETS                                                                       |       |        |       |        |       |
|                                                                         |       |        |       |        |       |
| CURRENT ASSETS                                                               |       |        |       |        |       |
| Cash and cash equivalents                                                    |       | $           | 1,829,904  |        | $          | 1,025,221 |   |
| Trade accounts receivable                                                    |       | 1,655,084   |       | 797,454     |       |
| Costs and estimated earnings in excess of billings  on uncompleted contracts |       | 231,524     |       | 30,494      |       |
| Prepaid expenses and other                                                   |       | 120,720     |       | 106,322     |       |
| Total current assets                                                         |       | 3,837,232   |       | 1,959,491   |       |
|                                                                         |       |        |       |        |       |
| PROPERTY AND EQUIPMENT - at cost                                             |       |        |       |        |       |
| Machinery and equipment                                                      |       | 17,028,957  |       | 11,888,410  |       |
| Automobiles and trucks                                                       |       | 1,517,639   |       | 893,297     |       |
| Furniture and fixtures                                                       |       | 335,903     |       | 326,108     |       |
| Leasehold improvements                                                       |       | 6,646       |       | —      |       |
|                                                                         |       | 18,889,145  |       | 13,107,815  |       |
| Less accumulated depreciation and amortization                               |       | (13,405,979 | )          | (12,313,180 | )          |
|                                                                         |       | 5,483,166   |       | 794,635     |       |
|                                                                         |       |        |       |        |       |
| OTHER ASSETS                                                                 |       | 3,395       |       | 4,824       |       |
|                                                                         |       |        |       |        |       |
|                                                                         |       | $           | 9,323,793  |        | $          | 2,758,950 |   |

 

The accompanying notesare an integral part of these statements.

 

10

----

 
| ** **                                                                                                                                                                  | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                                                                                                        |       |       |       |       |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                  |       |       |       |       |       |
|                                                                                                                                                                        |       |       |       |       |       |
| CURRENT LIABILITIES                                                                                                                                                         |       |       |       |       |       |
| Trade accounts payable                                                                                                                                                      |       | $          | 741,782    |       | $          | 120,149 |   |
| Accrued liabilities                                                                                                                                                         |       | 350,226    |       | 105,307    |       |
| Billings in excess of costs and estimated earnings  on uncompleted contracts                                                                                                |       | 657,956    |       | 295,979    |       |
| Income taxes payable                                                                                                                                                        |       | 14,351     |       | —     |       |
| Current maturities of notes payable                                                                                                                                         |       | 873,231    |       | 2,594      |       |
| Current portion of capital lease obligations                                                                                                                                |       | 346,553    |       | 108,868    |       |
|                                                                                                                                                                        |       |       |       |       |       |
| Total current liabilities                                                                                                                                                   |       | 2,984,099  |       | 632,897    |       |
|                                                                                                                                                                        |       |       |       |       |       |
| NOTES PAYABLE, less current maturities                                                                                                                                      |       | 1,524,803  |       | 96,379     |       |
|                                                                                                                                                                        |       |       |       |       |       |
| CAPITAL LEASE OBLIGATIONS, less current portion                                                                                                                             |       | 244,826    |       | 86,335     |       |
|                                                                                                                                                                        |       |       |       |       |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                               |       | —     |       | —     |       |
|                                                                                                                                                                        |       |       |       |       |       |
| STOCKHOLDERS’ EQUITY                                                                                                                                                   |       |       |       |       |       |
| Preferred stock, $1.00 par value; 4,000,000 shares  authorized;                                                                                                             |       |       |       |       |       |
|                                                                                                                                                                        |       |       |       |       |       |
| 8.5% senior convertible preferred stock; 2,817,564  and 3,024,264 shares issued and outstanding at December 31,2004 and 2003,  respectively                            |       | 2,817,564  |       | 3,024,264  |       |
|                                                                                                                                                                        |       |       |       |       |       |
| 8% Series C convertible exchangeable preferred  stock; 1,150,350 shares issued, 18,350 and 58,100 shares outstanding at December 31,  2004 and 2003, respectively |       | 18,350     |       | 58,100     |       |
|                                                                                                                                                                        |       |       |       |       |       |
| Common stock, $.01 par value; 25,000,000 shares  authorized; 6,102,067 and 5,727,008 issued at December 31, 2004 and  2003, respectively                               |       | 61,021     |       | 57,270     |       |
| Additional paid-in capital                                                                                                                                                  |       | 6,697,133  |       | 6,696,047  |       |
| Accumulated deficit                                                                                                                                                         |       | (4,808,689 | )          | (7,677,028 | )          |
| Treasury stock, at cost, 31,944 shares                                                                                                                                      |       | (215,314   | )          | (215,314   | )          |
|                                                                                                                                                                        |       |       |       |       |       |
|                                                                                                                                                                        |       | 4,570,065  |       | 1,943,339  |       |
|                                                                                                                                                                        |       |       |       |       |       |
|                                                                                                                                                                        |       | $          | 9,323,793  |       | $          | 2,758,950 |   |

 

The accompanying notesare an integral part of these statements.

 

11

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TGC Industries, Inc.

STATEMENTS OF INCOME

Year Ended December 31,

 
| ** **                                    | ** ** | **2004**   | ** ** | **2003**  | ** ** |
|-----------------------------------------------|------------|------------|------------|-----------|------------|
|                                          |       |       |       |      |       |
| Revenue                                       |       | $          | 20,084,175 |      | $          | 8,468,051 |   |
|                                          |       |       |       |      |       |
| Cost and expenses                             |       |       |       |      |       |
| Cost of services                              |       | 15,777,204 |       | 6,948,885 |       |
| Selling, general and administrative           |       | 1,313,627  |       | 932,709   |       |
| Interest expense                              |       | 60,878     |       | 8,792     |       |
| Debt financing costs                          |       | —     |       | 22,500    |       |
|                                          |       | 17,151,709 |       | 7,912,886 |       |
|                                          |       |       |       |      |       |
| Income from operations before income taxes    |       | 2,932,466  |       | 555,165   |       |
|                                          |       |       |       |      |       |
| Income tax expense - current                  |       | (64,127    | )          | —    |       |
|                                          |       |       |       |      |       |
| NET INCOME                                    |       | 2,868,339  |       | 555,165   |       |
|                                          |       |       |       |      |       |
| Less dividend requirements on preferred stock |       | (300,313   | )          | (302,998  | )          |
|                                          |       |       |       |      |       |
| Income allocable to common stockholders       |       | $          | 2,568,026  |      | $          | 252,167 |   |
|                                          |       |       |       |      |       |
| Earnings per common share                     |       |       |       |      |       |
| Basic                                         |       | $          | 0.45       |      | $          | 0.05 |   |
| Diluted                                       |       | $          | 0.24       |      | $          | 0.04 |   |
|                                          |       |       |       |      |       |
| Weighted average number of shares outstanding |       |       |       |      |       |
| Basic                                         |       | 5,752,347  |       | 5,546,132 |       |
| Diluted                                       |       | 11,844,283 |       | 6,279,109 |       |

 

The accompanying notes are an integral part of thesestatements.

 

12

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TGC INDUSTRIES, INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY

Years Ended December 31, 2004 and 2003

 
| ** **                                                   | ** ** | **Preferred stock** | ** ** | **Common stock** | ** ** | **Additional****Paid-in** | ** ** | **Accumulated** | ** ** | **Treasury** | ** ** | ** **  | ** ** |
|--------------------------------------------------------------|------------|---------------------|------------|------------------|------------|---------------------------|------------|-----------------|------------|--------------|------------|-------------|------------|
| ** **                                                   | ** ** | **Shares**          | ** ** | **Amount**       | ** ** | **Shares**                | ** ** | **Amount**      | ** ** | **capital**  | ** ** | **deficit** | ** ** | **stock** | ** ** | **Total** | ** ** |
|                                                         |       |                |       |             |       |                      |       |            |       |         |       |        |       |   |   |   |   |
| Balances at January 1, 2003                             |       | 2,840,808           |       | $                | 2,840,808  |                      | 5,547,008  |            | $          | 1,664,102    |       | $           | 5,302,871  |   | $ | (8,232,193 | ) | $ | (215,314 | ) | $ | 1,360,274 |   |
|                                                         |       |                |       |             |       |                      |       |            |       |         |       |        |       |   |   |   |   |
| Reduction in Par Value of Common Stock from $.30 to  $.01    |       | —              |       | —           |       | —                    |       | (1,608,632      | )          | 1,608,632    |       | —      |       | — |   | — |   |
|                                                         |       |                |       |             |       |                      |       |            |       |         |       |        |       |   |   |   |   |
| Dividend on 8-1/2% senior convertible preferred  stock       |       | 241,556             |       | 241,556          |       | —                    |       | —          |       | (241,556     | )          | —      |       | — |   | — |   |
|                                                         |       |                |       |             |       |                      |       |            |       |         |       |        |       |   |   |   |   |
| Issuance of stock warrants                                   |       | —              |       | —           |       | —                    |       | —          |       | 22,500       |       | —      |       | — |   | 22,500 |   |
|                                                         |       |                |       |             |       |                      |       |            |       |         |       |        |       |   |   |   |   |
| Issuance of common stock                                     |       | —              |       | —           |       | 180,000                   |       | 1,800           |       | 3,600        |       | —      |       | — |   | 5,400 |   |
|                                                         |       |                |       |             |       |                      |       |            |       |         |       |        |       |   |   |   |   |
| Net income                                                   |       | —              |       | —           |       | —                    |       | —          |       | —       |       | 555,165     |       | — |   | 555,165 |   |
|                                                         |       |                |       |             |       |                      |       |            |       |         |       |        |       |   |   |   |   |
| Balances at December 31, 2003                           |       | 3,082,364           |       | 3,082,364        |       | 5,727,008                 |       | 57,270          |       | 6,696,047    |       | (7,677,028  | )          | (215,314 | ) | 1,943,339 |   |
|                                                         |       |                |       |             |       |                      |       |            |       |         |       |        |       |   |   |   |   |
| Cash dividends on 8-1/2% senior convertible  preferred stock |       | —              |       | —           |       | —                    |       | —          |       | (289,830     | )          | —      |       | — |   | (289,830 | ) |
|                                                         |       |                |       |             |       |                      |       |            |       |         |       |        |       |   |   |   |   |
| Conversion of preferred stock                                |       | (246,450            | )          | (246,450         | )          | 306,075                   |       | 3,061           |       | 243,389      |       | —      |       | — |   | — |   |
|                                                         |       |                |       |             |       |                      |       |            |       |         |       |        |       |   |   |   |   |
| Exercise of stock options                                    |       | —              |       | —           |       | 34,100                    |       | 341             |       | 26,484       |       | —      |       | — |   | 26,825 |   |
|                                                         |       |                |       |             |       |                      |       |            |       |         |       |        |       |   |   |   |   |
| Issuance of stock warrants                                   |       | —              |       | —           |       | —                    |       | —          |       | 9,880        |       | —      |       | — |   | 9,880 |   |
|                                                         |       |                |       |             |       |                      |       |            |       |         |       |        |       |   |   |   |   |
| Issuance of common stock                                     |       | —              |       | —           |       | 34,884                    |       | 349             |       | 11,163       |       | —      |       | — |   | 11,512 |   |
|                                                         |       |                |       |             |       |                      |       |            |       |         |       |        |       |   |   |   |   |
| Net income                                                   |       | —              |       | —           |       | —                    |       | —          |       | —       |       | 2,868,339   |       | — |   | 2,868,339 |   |
|                                                         |       |                |       |             |       |                      |       |            |       |         |       |        |       |   |   |   |   |
| Balances at December 31, 2004                           |       | 2,835,914           |       | $                | 2,835,914  |                      | 6,102,067  |            | $          | 61,021       |       | $           | 6,697,133  |   | $ | (4,808,689 | ) | $ | (215,314 | ) | $ | 4,570,065 |   |

 

The accompanying notes are an integral part of these statements.

 

13

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TGC Industries, Inc.

STATEMENTS OF CASHFLOWS

Year Ended December 31, 

 
| ** **                                                                        | ** ** | **2004**   | ** ** | **2003**  | ** ** |
|-----------------------------------------------------------------------------------|------------|------------|------------|-----------|------------|
| Cash flows from operating activities                                              |       |       |       |      |       |
| Net income                                                                        |       | $          | 2,868,339  |      | $          | 555,165 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities |       |       |       |      |       |
| Depreciation and amortization                                                     |       | 1,106,022  |       | 1,314,042 |       |
| Gain on disposal of property and equipment                                        |       | (1,250     | )          | (19,349   | )          |
| Debt issuance costs                                                               |       | —     |       | 22,500    |       |
| Director fees and other expenses                                                  |       | 21,392     |       | 5,400     |       |
| Changes in operating assets and liabilities                                       |       |       |       |      |       |
| Trade accounts receivable                                                         |       | (857,630   | )          | (135,404  | )          |
| Costs and estimated earnings in excess of billings  on uncompleted contracts      |       | (201,030   | )          | 2,351     |       |
| Prepaid expenses and other                                                        |       | (14,398    | )          | (4,357    | )          |
| Other assets                                                                      |       | 1,429      |       | —    |       |
| Trade accounts payable                                                            |       | 621,633    |       | (79,187   | )          |
| Accrued liabilities                                                               |       | 244,919    |       | (16,210   | )          |
| Billings in excess of costs and estimated earnings  on uncompleted contracts      |       | 361,977    |       | (578,208  | )          |
| Income taxes payable                                                              |       | 14,351     |       | —    |       |
|                                                                              |       |       |       |      |       |
| Net cash provided by operating activities                                         |       | 4,165,754  |       | 1,066,743 |       |
| Cash flows from investing activities                                              |       |       |       |      |       |
| Capital expenditures                                                              |       | (2,637,991 | )          | (314,959  | )          |
| Proceeds from sale of property and equipment                                      |       | 1,250      |       | 19,349    |       |
|                                                                              |       |       |       |      |       |
| Net cash used in investing activities                                             |       | (2,636,741 | )          | (295,610  | )          |
| Cash flows from financing activities                                              |       |       |       |      |       |
| Principal payments on notes payable                                               |       | (263,683   | )          | (133,458  | )          |
| Principal payments on capital lease obligations                                   |       | (197,642   | )          | (135,574  | )          |
| Proceeds from exercise of stock options                                           |       | 26,825     |       | —    |       |
| Payment of dividends                                                              |       | (289,830   | )          | —    |       |
| Net cash used in financing activities                                             |       | (724,330   | )          | (269,032  | )          |
| Net increase in cash and cash equivalents                                         |       | 804,683    |       | 502,101   |       |
|                                                                              |       |       |       |      |       |
| Cash and cash equivalents at beginning of year                                    |       | 1,025,221  |       | 523,120   |       |
|                                                                              |       |       |       |      |       |
| Cash and cash equivalents at end of year                                          |       | $          | 1,829,904  |      | $          | 1,025,221 |   |
| Supplemental cash flow information                                                |       |       |       |      |       |
| Interest paid                                                                     |       | $          | 38,903     |      | $          | 11,267 |   |
| Income taxes paid                                                                 |       | $          | 49,776     |      | $          | — |   |
| Noncash investing and financing activities                                        |       |       |       |      |       |
| Capital lease obligations incurred                                                |       | $          | 593,818    |      | $          | 174,315 |   |
| Financed equipment purchases                                                      |       | $          | 2,562,744  |      | $          | — |   |

 

At the election of theSenior Preferred Stockholder, 118,265 and 123,291 shares of 8.5% SeniorPreferred Stock were issued to the Senior Preferred Stockholder as payment forthe June 1, 2003 and December 1, 2003 dividends, respectively.

 

The accompanying notes are an integral part of thesestatements.

 

14

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TGC Industries, Inc.

NOTES TO FINANCIALSTATEMENTS

December 31, 2004 and 2003

 

NOTEA - NATURE OF OPERATIONS

 

TGC Industries, Inc.(TGC or the Company) is engaged in the domestic geophysical services businessand primarily conducts seismic surveys and sells gravity data to companiesengaged in exploration in the oil and gas industry.

 

NOTEB - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Cash Equivalents 

 

The Company considers allhighly liquid investments with original maturity dates of three months or lessto be cash equivalents. The Company maintains its accounts at financialinstitutions located in Texas. The bank accounts are insured by the FederalDeposit Insurance Corporation up to $100,000.

 

Trade Receivables 

 

Trade accounts receivableare recorded in accordance with terms and amounts as specified in the relatedcontracts on an ongoing basis. The Company evaluates the collectibility ofaccounts receivable on a specific account basis using a combination of factors,including the age of the outstanding balances, evaluation of the customer’sfinancial condition, and discussions with relevant Company personnel and withthe customers directly. An allowance for doubtful accounts or direct write-offis recorded when it is determined that the receivable may not be collected,depending on the facts known and the probability of collection of theoutstanding amount.

 

Property and Equipment 

 

Property and equipmentare stated at cost. Depreciation and amortization are provided using thestraight-line method over the estimated useful lives of the individual assetsranging from 1 to 7 years. The depreciation expense on assets acquired undercapital leases is included with depreciation expense on owned assets. Expendituresfor major renewals and betterments that extend the useful lives of property andequipment are capitalized. Expenditures for maintenance and repairs are chargedto expenses as incurred.

 

Long-Lived Assets 

 

Long-lived assets heldand used by the Company are reviewed for impairment whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable. 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.

 

Income Taxes 

 

Deferred income taxesreflect the impact of temporary differences between the amounts of assets andliabilities recognized for financial reporting purposes and such amountsrecognized for tax purposes.

 

15

----

 

Revenue Recognition 

 

Revenues from conductingseismic surveys are recognized over the term of the contract using thepercentage-of-completion method. Under this method, revenues are recognized onthe units-of-production method. Revenues for the sale of gravity data arerecognized when services are rendered.

 

Stock-Based Compensation 

 

The Company has twostock-based employee compensation plans, which are described more fully in NoteH. The Company accounts for those plans under the recognition and measurementprinciples of Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations. No stock-basedemployee compensation cost is reflected in net income, as all options grantedunder those plans had an exercise price equal to the market value of theunderlying common stock on the date of grant. The following table illustratesthe effect on net income and income per share allocable to common stockholdersif the Company had applied the fair value recognition provisions of FinancialAccounting Standards Board (“FASB”) Statement No. 123 (“SFAS 123”), “Accountingfor Stock-Based Compensation”, to stock-based employee compensation:

 
| ** **                                                                                                                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2004**                         | ** ** | **2003** | ** ** |
| Net income allocable to common stockholders, as  reported                                                                                     |       | $                                | 2,568,026  |   | $ | 252,167 |   |
|                                                                                                                                          |       |                             |       |   |   |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |       | (3,557                           | )          | (39,123 | ) |
|                                                                                                                                          |       |                             |       |   |   |
| Pro forma net income allocable to common  stockholders                                                                                        |       | $                                | 2,564,469  |   | $ | 213,044 |   |
|                                                                                                                                          |       |                             |       |   |   |
| Income per common share                                                                                                                       |       |                             |       |   |   |
| Basic - as reported                                                                                                                           |       | $                                | 0.45       |   | $ | 0.05 |   |
| Diluted - as reported                                                                                                                         |       | $                                | 0.24       |   | $ | 0.04 |   |
| Basic - pro forma                                                                                                                             |       | $                                | 0.45       |   | $ | 0.04 |   |
| Diluted - pro forma                                                                                                                           |       | $                                | 0.24       |   | $ | 0.03 |   |

 

The fair value of eachoption grant is estimated on the date of grant using the Black-Scholes optionpricing model with the following assumptions used for grants in 2004: risk-freeinterest rate of 4.2%, expected dividend yields of 0.0%, expected lives of 5.0years; and expected volatility of 17%.

 

16

----

 

Financial Instruments 

 

The Company’s financialinstruments recorded on the balance sheet include cash and cash equivalents,accounts receivable, accounts payable and debt. The carrying amounts of cashand cash equivalents, accounts receivable and accounts payable approximate fairvalue because of the short-term nature of these items. Fair value of long-termdebt is based on rates available to the Company for debt with similar terms andmaturities.

 

Earnings Per Share 

 

Basic earnings per commonshare is based upon the weighted average number of shares of common stockoutstanding. Diluted earnings per share is based upon the weighted averagenumber of common shares outstanding and, when dilutive, common shares issuablefor stock options, warrants and convertible securities.

 

Use of Estimates 

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

 

Recent Accounting Standards 

 

In December 2004,the FASB issued FASB Statement No.123R, “Share-Based Payment” (FAS 123R), whichrequires that compensation costs relating to share-based payments be recognizedin the Company’s financial statements. The Company currently accounts for thosepayments under the recognition and measurement principles of AccountingPrinciples Board (APB) Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related interpretations. The Company is preparing to implementthis standard effective July 1, 2005. Although the transition method to beused to adopt the standard has not been selected, the impact of adoption isexpected to have a minimal impact on the Company’s results of operations,financial position and liquidity. Refer to Note H, for the Company’scalculation of the pro forma impact on net income of FAS 123, which would besimilar to that under FAS 123R.

 

In December 2004,the FASB issued FASB Statement No. 153, “Exchanges of Nonmonetary Assets, –an Amendment of APB Opinion No. 29,” (FAS 153), which is effective for theCompany for asset-exchange transactions beginning July 1, 2005. Under APB29, assets received in certain types of nonmonetary exchanges were permitted tobe recorded at the carrying value of the assets that were exchanged (i.e.,recorded on a carryover basis). As amended by FAS 153, assets received in somecircumstances will have to be recorded instead at their fair values. In thepast, the Company has not engaged in nonmonetary asset exchanges forsignificant amounts.

 

17

----

 

NOTEC - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

 

The components ofuncompleted contracts are as follows at December 31,:

 
| ** **                                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Costs incurred on uncompleted contracts and  estimated earnings |       | $        | 439,393    |     | $          | 111,567 |   |
| Less billings to date                                           |       | (865,825 | )          | (377,052 | )          |
|                                                            |       | $        | (426,432   | )        | $          | (265,485 | ) |

 

The components ofuncompleted contracts are reflected in the balance sheets at December 31,2004 and 2003 as follows:

 
| ** **                                                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Costs and estimated earnings in excess of billings  on uncompleted contracts |       | $        | 231,524    |     | $          | 30,494 |   |
| Billings in excess of costs and Estimated earnings  on uncompleted contracts |       | (657,956 | )          | (295,979 | )          |
|                                                                         |       | $        | (426,432   | )        | $          | (265,485 | ) |

 

NOTED - ACCRUED LIABILITIES

 

Accrued liabilitiesconsist of the following at December 31,:

 
| ** **                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Compensation and payroll taxes |       | $        | 132,040    |     | $          | 65,690 |   |
| Accrued sales and use tax      |       | 181,211  |       | —   |       |
| Other                          |       | 36,975   |       | 39,617   |       |
|                           |       | $        | 350,226    |     | $          | 105,307 |   |

 

NOTEE - DEBT

 

Line of Credit 

 

During 2001, the Companyentered into an unsecured revolving line of credit arrangement with a bank,providing for borrowings of up to $125,000. The facility bore interest at primeplus 1% per annum, and matured in October 2003. The Company had committedthe availability to irrevocable letters of credit totaling $125,000 which alsoexpired in October 2003. Therefore, the Company had no borrowingavailability under this line of credit. The letters of credit, with an insurancecompany as beneficiary, were being used to guarantee continuing seismicinsurance bonds totaling $125,000, issued by the insurance company to twostates in which the Company performs seismic surveys. In October 2003, theCompany was able to secure replacement seismic bonds from an insurance companythat did not require letters of credit.

 

18

----

 

On June 12, 2003,certain Directors extended a line of credit with a $300,000 credit limit. Theline of credit accrued interest at 6.75% and matured December 31, 2003. Therewere no advances made under this line of credit.

 

On August 2, 2004,the Company obtained a line of credit with a $500,000 credit limit. The line ofcredit accrues interest at a bank’s prime rate plus 1% and matures on August 2,2005. Collateral for this line of credit is accounts receivable. Advances arelimited to eligible receivables. There were no advances made under this line ofcredit as of December 31, 2004.

 

Notes Payable****

 

Notes payable consist ofthe following at December 31:

 
| ** **                                                                                                                                                       | ** ** | **2004**  | ** ** | **2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|----------|------------|
| Note payable to a finance company, interest at 4%,  due in monthly installments of $552 including interest; collateralized by  equipment and accounts receivable |       | $         | —     |     | $          | 98,973 |   |
|                                                                                                                                                             |       |      |       |     |       |
| Note payable to a finance company, interest at 8%,  due in monthly installments of $10,004 including interest; collateralized by equipment.                      |       | 77,681    |       | —   |       |
|                                                                                                                                                             |       |      |       |     |       |
| Note payable to a finance company, Interest at  6.85%, due in monthly installments of $66,296 plus interest; collateralized  by equipment                        |       | 2,320,353 |       | —   |       |
|                                                                                                                                                             |       | $         | 2,398,034  |     | $          | 98,973 |   |

 

None of the above notesrequire the maintenance of financial ratios.

 

Aggregate annualmaturities of notes payable at December 31, 2004 are as follows:

 
| **Year Ending  December 31,** | ** ** | ** ** |   |      |
|------------------------------------|------------|------------|--------|-----------|
|                               |       |       |   |      |   |
| 2005                               |       |       |   | $         | 873,231 |   |
| 2006                               |       |       |   | 795,550   |   |
| 2007                               |       |       |   | 729,253   |   |
| Thereafter                         |       |       |   | —    |   |
|                               |       |       |   | 2,398,034 |   |
| Less current maturities            |       |       |   | (873,231  | ) |
|                               |       |       |   | $         | 1,524,803 |   |
|                                    |            |            |        |           |  |  |  |

 

19

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NOTEF - LEASES

 

Capital Leases 

 

The Company leasescertain specialized seismic equipment under leases classified as capitalleases. 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, 2004.

 
| **Year Ending  December 31,**      | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|------------|
|                                    |       |       |       |
| 2005                                    |       | $          | 362,936    |       |
| 2006                                    |       | 200,835    |       |
| 2007                                    |       | 78,096     |       |
|                                    |       |       |       |
| Total minimum lease payments required   |       | 641,867    |       |
| Less: Amount representing interest      |       | (50,488    | )          |
| Present value of minimum lease payments |       | 591,379    |       |
| Less current maturities                 |       | (346,553   | )          |
|                                    |       | $          | 244,826    |       |

 

The net book value of thecapital assets leased was approximately $810,000 and $259,000 as of December 31,2004 and 2003, respectively. Total accumulated depreciation on these assets wasapproximately $360,000 and $132,000 as of December 31, 2004 and 2003,respectively.

 

Operating Leases 

 

The Company leases officespace under an operating lease that expires March 31, 2009. The leaseexpense for the years ended December 31, 2004 and 2003, was approximately$78,000 and $69,000, respectively.

 

The following is a schedule byyears of future minimum rental payments required under the operating lease asof December 31, 2004:

 
| **Year Ending  December 31,** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|------------|
| ** **                         | ** ** | ** ** | ** ** | ** ** |
| 2005                               |       | $          | 78,708     |       |
| 2006                               |       | 78,708     |       |
| 2007                               |       | 81,579     |       |
| 2008                               |       | 82,536     |       |
| 2009 and thereafter                |       | 20,634     |       |
|                               |       |       |       |       |
| Total minimum payments required    |       | $          | 342,165    |       |

 

20

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NOTEG – FAIR VALUE OF DEBT OBLIGATIONS

 

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

 
| ** **     | ** ** | **December 31,** | ** ** |
|----------------|------------|-----------------------|------------|
| ** **     | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Carrying value |       | $                     | 2,398,034  |   | $ | 98,973 |   |
| Fair value     |       | $                     | 2,398,034  |   | $ | 98,973 |   |

 

NOTEH - STOCKHOLDERS’ 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,** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                                               |       |                  |       |   |   |
| Numerator:                                         |       |                  |       |   |   |
| Net income                                         |       | $                     | 2,868,339  |   | $ | 555,165 |   |
| Less dividend requirements on preferred stock      |       | (300,313              | )          | (302,998 | ) |
| Income allocable to common stockholders            |       | $                     | 2,568,026  |   | $ | 252,167 |   |
|                                               |       |                  |       |   |   |
| Denominator:                                       |       |                  |       |   |   |
| Basic - weighted average common shares outstanding |       | 5,752,347             |       | 5,546,132 |   |
| Effect of dilutive securities:                     |       |                  |       |   |   |
| Warrants                                           |       | 3,117,422             |       | 732,977 |   |
| Stock options                                      |       | 119,825               |       | — |   |
| Convertible preferred stock                        |       | 2,854,689             |       | — |   |
|                                               |       | 11,844,283            |       | 6,279,109 |   |
|                                               |       |                  |       |   |   |   |   |
|   Basic net income per share             |       | $                     | .45        |   | $ | .05 |   |
|   Diluted net income per  share          |       | $                     | .24        |   | $ | .04 |   |

 

The effect of preferredstock dividend requirements on the amount of income available to commonstockholders was $.05 for the years ended December 31, 2004 and 2003.

 

Outstanding warrants thatwere not included in the diluted calculation because their effect would beanti-dilutive total 850,000 for the year ended December 31, 2003. Outstandingoptions that were not included in the diluted calculation because their effectwould be anti-dilutive total 238,000 for the year ended December 31, 2003.

 

21

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Stock-Based Compensation Plans 

 

The Company had a 1993Stock Option Plan (the “1993 Plan”). Options for up to 283,334 shares of theCompany’s common stock could have been granted under the 1993 Plan. Optionsunder the 1993 Plan must have been granted at prices not less than the marketprice at the date of grant and must have been exercised within five years fromthe date of grant. Options covering 34,000 shares expired or were canceledduring 2003. At December 31, 2003, outstanding options for 29,100 shareswere exercisable, and were exercised during 2004. At December 31, 2004 the1993 Plan had expired.

 

The Company currently hasin effect a 1999 stock option plan (the “1999 Plan”). Options for up to 300,000shares of the Company’s common stock may be granted under the 1999 Plan.Options under the 1999 Plan must be granted at prices not less than the lesserof the par value per share of the stock or the fair market value per share ofthe Company’s stock on the date of the grant, and their term cannot exceed fiveyears from the date of the grant. Options outstanding at December 31,2003, covering 153,000 shares, expire five years from the date of the grant andare exercisable as follows: (i) one-third of the shares after the 12 monthperiod following the date of the grant, (ii) two-thirds of the sharesafter the 24 month period following the date of the grant, and (iii) allof the shares of stock after the 36 month period following the date of thegrant. During 2004, options covering 100,000 shares were granted, optionscovering 10,000 shares were cancelled and options covering 5,000 shares wereexercised. At December 31, 2004, options covering 238,000 shares wereoutstanding, of which 138,000 were exercisable.

 

The following tablesummarizes activity under the Plans:

 
| ** **                        | ** ** | **Shares under   option** | ** ** | **Weighted   average   exercise price** | ** ** |
|-----------------------------------|------------|---------------------------|------------|-----------------------------------------|------------|
| Balance at January 1, 2003   |       | 232,100                   |       | $                                       | .96        |   |
| Canceled/expired                  |       | (50,000                   | )          | $                                       | .98        |   |
| Balance at December 31, 2003 |       | 182,100                   |       | $                                       | .96        |   |
| Granted                           |       | 100,000                   |       | $                                       | .80        |   |
| Exercised                         |       | (34,100                   | )          | $                                       | .79        |   |
| Canceled                          |       | (10,000                   | )          | $                                       | 1.00       |   |
| Balance at December 31, 2004 |       | 238,000                   |       | $                                       | .98        |   |

 

The following informationapplies to options outstanding and exercisable at December 31, 2004:

 
| **Range of  Exercise prices** | ** ** | **Number  outstanding** | ** ** | **Weighted  average  remaining  contractual  life (in years)** | ** ** | **Weighted  average  exercise price** | ** ** |
|-------------------------------|------------|-------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------|------------|
|                          |       |                    |       |                                                           |       |                                  |       |
| $ .80 - $1.00            |       | 238,000                 |       | 2.28                                                           |       | $ .98                            |       |

 

22

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Stock Warrants

 

Effective January 1,2001, 181,634 warrants covering 6,054 shares of common stock expired. Per thewarrant agreement, any unexercised warrants are automatically deemed exercisedat the rate of one share of the Company’s common stock for each 30 warrantsheld. These warrants remain unredeemed at December 31, 2004.

 

In connection with theissuance of subordinated notes payable during 1999, certain officers anddirectors received warrants covering 850,000 shares with a value of $391,000.These warrants have a strike price of $.30 and expire on July 31, 2009.

 

In connection with theissuance of debt during 2002, certain investors received warrants covering1,500,000 shares with a value of $45,000. These warrants have a strike price of$.20 and expire on September 12, 2012.

 

In connection with thecommitment to provide the Company with a line of credit up to $300,000 during2003, certain Directors received warrants covering 750,000 shares with a valueof $22,500. These warrants have a strike price of $.20 and expire on June 12,2013.

 

The agreements coveringthe warrants issued in 2002 and 2003 contain provisions that in the eventdividends are declared and paid on the Company’s Senior Preferred Stock inadditional shares of Senior Preferred Stock the number of additional commonshares for which the warrants are exercisable and the purchase price shall beadjusted. At December 31, 2003, the warrants issued in 2002 and thewarrants issued in 2003 were exercisable into 1,855,000 shares at $.16 pershare and 811,645 shares at $.18 per share, respectively.

 

During 2004, the Companyissued 26,000 warrants to a public relations firm as part of its fee forservices provided the Company. The warrants have a strike price of $1.00 pershare and expire December 15, 2007. During January 2005, the publicrelations firm sold the 26,000 warrants to a group of investors that includedcertain Directors of the Company.

 

Preferred Stock 

 

During 1996, the Companyissued 1,150,350 shares of Series C 8% convertible exchangeable preferredstock (“Series C Preferred Stock”) at $5.00 per share in a privateplacement offering with gross proceeds of approximately $5,800,000. The Series CPreferred Stock is, at the option of the Company, exchangeable into 8%subordinated convertible debentures. Prior to November 30, 2001, the Series CPreferred Stock and debentures were convertible into shares of the Company’scommon stock at the conversion price of (i) $2.00 per share if exercisedby December 31, 2001, (11) $3.75 per share if exercised from January 1,2002 by December 31, 2001, (ii) $3.75 per share if exercised from January 1,2002 through December 31, 2002, and (iii) $6.00 per share thereafter.At a November 30, 2001 meeting, the Company’s Board of Directors approvedamendments to the conversion terms of the Series C Preferred Stock. Theamendments were as follows: the conversion price was reduced from $2.00 pershare to $1.61 per share and the date of the conversion price increase to $3.75per share was delayed from December 31, 2001, until January 31, 2002.The subsequent date of the increase in the conversion price to $6.00 per shareremained December 31, 2002.

 

23

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In January 2002, theSeries C Preferred shareholders converted 977,550 shares of Series CPreferred Stock into 3,035,839 shares of common stock. As a result, 58,100shares of Series C Preferred Stock remained outstanding at December 31,2003. At a September 24, 2004 meeting, the Company’s Board of Directorsapproved amendments to the conversion terms of the Series C PreferredStock. The amendments were as follows: the conversion price was reduced from$6.00 per share to $2.00 per share for a period beginning on September 24,2004 and ending on January 31, 2005. As a result, the Series CPreferred shareholders converted 39,750 shares of Series C Preferred stockinto 99,375 shares of common stock. At December 31, 2004, 18,350 of Series CPreferred stock remained outstanding.

 

In 2000, the Companyissued 2,252,445 shares of 8.5% Senior Convertible Preferred Stock (“SeniorPreferred Stock”) to a debt holder in consideration for an outstandingdebenture plus accrued interest, and in accordance with the terms of theagreement, issued 103,490 additional shares of Senior Preferred Stock to theSenior Preferred stockholder as payment for 2000 dividends. At the election ofthe Senior Preferred stockholder, the Company issued 100,127, 104,383, 108,819,113,444, 118,265 and 123,291 additional shares of Senior Preferred Stock to theSenior Preferred stockholder as payment for the June 1, 2001, December 1,2001, June 1, 2002, December 1, 2002, June 1, 2003 and December 1,2003 dividends, respectively, resulting in 3,024,264 shares outstanding at December 31,2003. In February 2004, the Senior preferred shareholder completed atransaction, selling all its 3,024,264 shares of Senior Preferred Stock to asmall number of investors that included several members of the Company’s Boardof Directors who purchased 1,772,200 of such shares. During 2004, certainmembers of the investor group converted 206,700 shares of Senior PreferredStock into a like number of shares of the Company’s Common Stock. As a result,2,817,564 shares of Senior Preferred Stock remained outstanding at December 31,2004.

 

Dividends 

 

Holders of the Company’s Series CPreferred Stock will receive, when, as and if declared by the Board ofDirectors of the Company, dividends at a rate of 8% per annum. The dividendsare payable semi-annually during January and July of each year. As ofDecember 31, 2004, following the conversion of 1,017,300 shares of the Series CPreferred Stock as noted above, cumulative dividends of $44,040 were inarrears.

 

Holders of the Company’sSenior Preferred Stock will receive, when, as and if declared by the Board ofDirectors of the Company, dividends at a rate of 8.5% per annum. The dividendsare payable semi-annually during June and December of each year.Dividends payable in 2003 were paid in additional shares of Senior PreferredStock, at the election of the Senior Preferred Stockholder. Cash dividends of$289,830 were paid to the Senior Preferred Stockholders during 2004.

 

24

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NOTEI - INCOME TAXES

 

The income tax provisionreconciled to the tax computed at the statutory Federal rate is as follows:

 
| ** **                                                         | ** ** | **Years Ended  December 31,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                         | ** ** | **2004**                           | ** ** | **2003** | ** ** |
| Federal tax provision at statutory rate                            |       | $                                  | 975,235    |   | $ | 188,756 |   |
| Non-deductible expenses                                            |       | 57,405                             |       | 33,370 |   |
| Change in valuation allowance for net operating loss  carryforward |       | (968,513                           | )          | (222,126 | ) |
|                                                               |       |                               |       |   |   |   |   |
| Income tax expense - current                                       |       | $                                  | 64,127     |   | $ | — |   |

 

Deferred tax assets andliability consist of the following:

 
| ** **                            | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Deferred tax assets                   |       |                  |       |   |   |
|  Net operating loss carryfowards |       | $                     | 1,693,336  |   | $ | 2,783,950 |   |
| Other                                 |       | 22,411                |       | 3,280 |   |
|                                  |       | 1,715,747             |       | 2,787,230 |   |
| Deferred tax liability                |       |                  |       |   |   |
|  Property and equipment          |       | (253,475              | )          | (107,093 | ) |
|                                  |       | 1,462,272             |       | 2,680,137 |   |
|  Less valuation allowance        |       | (1,462,272            | )          | (2,680,137 | ) |
|                                  |       |                  |       |   |   |   |   |
| Net deferred tax asset                |       | $                     | —     |   | $ | — |   |

 

At December 31,2004, the Company had net operating loss carryforwards of approximately$4,980,000 available to offset future taxable income, which expire at variousdates through 2024. Future tax benefits, such as net operating losscarryforwards, are recognized to the extent that realization of such benefitsare more likely than not.

 

NOTEJ - 401(k) PLAN

 

The Company has a 401(k)salary deferral plan which covers all employees who have reached the age of20.5 years and have been employed by the Company for at least one year. Thecovered employees may elect to have an amount deducted from their wages forinvestment in a retirement plan. The Company makes contributions to the planequal to 100% of each participant’s salary reduction contributions to the planup to 2% of the participant’s compensation. The Company’s matching contributionto the plan was approximately $30,000 and $21,000 for the years ended December 31,2004 and 2003, respectively.

 

25

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NOTEK - CONCENTRATION OF CREDIT RISK

 

The Company sells itsgeophysical services primarily to large independent oil and gas companiesoperating in the United States. The Company performs ongoing credit evaluationsof its customer’s financial condition and, generally, requires no collateralfrom its customers.

 

Sales and accountsreceivable from the Company’s largest customers as of and for the years ended December 31,2004 and 2003 consist of the following:

 
| ** **  | ** ** | **Sales** | ** ** | **Accounts  Receivable** | ** ** |
|-------------|------------|-----------|------------|--------------------------|------------|
| **Company** | ** ** | **2004**  | ** ** | **2003**                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|        |       |      |       |                     |       |   |   |   |   |
| A           |       | —    |       | 15                       | %          | — |   | — |   |
| B           |       | —    |       | 12                       | %          | — |   | — |   |
| C           |       | 34        | %          | —                   |       | — |   | — |   |
| D           |       | 15        | %          | —                   |       | 1 | % | — |   |
| E           |       | 11        | %          | —                   |       | 7 | % | — |   |

 

As of December 31,2004, 2 additional customers accounted for 38% and 18% of outstanding accountsreceivable, respectively.

 

NOTEL - CONTINGENCIES

 

In conducting its activities,the Company from time to time is the subject of various claims arising from theordinary course of business. In the opinion of management, the ultimateresolution of such claims is not expected to have a material adverse effectupon the financial position of the Company.

 

26

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

 

Asreported on Form 8-K filed with the Securities and ExchangeCommission on April 9, 2003, Grant Thornton LLP (“Grant Thornton”)notified the Audit Committee (the “Audit Committee”) of TGC and the Board ofDirectors of the TGC that Grant Thornton declined to stand for re-election asthe Company’s principal accountants. In addition, the Audit Committee and theBoard of Directors approved the engagement of Lane Gorman Trubitt, L.L.P. asthe Company’s principal accountants.

 

Thereports of Grant Thornton on the Company’s consolidated financial statementsfor the years ended December 31, 2001 and 2002 contained no adverseopinion or disclaimer of opinion and were not qualified or modified as touncertainty, audit scope or accounting principle.

 

Asstated in the Form 8-K, in connection with its audits for yearsended December 31, 2001 and 2002, there were no disagreements with GrantThornton on any matter of accounting principles or practices, financialstatement disclosure, or auditing scope or procedure, which disagreements, ifnot resolved to the satisfaction of Grant Thornton, would have caused them tomake reference thereto in their reports on the Company’s consolidated financialstatements for such years.

 

**Item8A.  CONTROLS AND PROCEDURES**

 

Withinthe 90 days prior to the date of this report, the Company carried out anevaluation, under the supervision and with the participation of the Company’smanagement, including the Company’s Chief Executive Officer and PrincipalFinancial and Accounting Officer, of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures pursuant toSecurities Exchange Act Rule 13a-14. Based upon that evaluation, theChief Executive Officer and Principal Financial and Accounting Officerconcluded that the Company’s disclosure controls and procedures are effective. Therewere no significant changes in the Company’s internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof their evaluation.

 

TheCompany continues to take action to assure compliance with the internal **controls**, disclosure **controls,** and other requirementsof the Sarbanes-Oxley Act of 2002. Our management, including our ChiefExecutive Officer and Chief Financial Officer, cannot guarantee that ourinternal **controls** anddisclosure **controls** willprevent all possible errors or all fraud. A **control** system, no matter how wellconceived and operated, can provide only reasonable, not absolute, assurancethat the objectives of the **control**system are met. In addition, the design of a **control** system must reflect thefact that there are resource constraints, and the benefit of **controls** must be relative to theircosts. Because of the **inherentlimitations** in all **control**systems, no system of **controls**can provide absolute assurance that all **control**issues and instances of fraud, if any, within the Company have been detected. These**inherent limitations**include the realities that judgments in decision-making can be faulty and thatbreakdowns can occur because of simple error or mistake. Further, **controls** can be circumvented byindividual acts of some persons, by collusion of two or more persons, or bymanagement override of the **controls**.

 

27

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Thedesign of any system of **controls**also is based in part upon certain assumptions about the likelihood of futureevents, and there can be no assurance that any design will succeed in achievingits stated goals under all potential future conditions. Over time, a **control** may be inadequate becauseof changes in conditions or the degree of compliance with the policies orprocedures may deteriorate. Because of **inherent****limitations** in acost-effective **control**system, misstatements due to error or fraud may occur and not be detected.

 

# **PART III**

# ** **

**ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERAND CONTROL****PERSONS, COMPLIANCE WITH SECTION 16(a) OFTHE EXCHANGE****ACT.**

 

Certaininformation required by Item 9 of the Form 10-KSB is herebyincorporated by reference from the Company’s definitive proxy statement, whichwill be filed pursuant to Regulation 14A within 120 days after the Company’syear end for the year covered by this report, under the caption “Nominees forDirectors” in the proxy statement.

 

**ITEM 10.EXECUTIVE COMPENSATION.**

 

Theinformation required by Item 10 of Form 10-KSB is herebyincorporated by reference from the Company’s definitive proxy statement, whichwill be filed pursuant to Regulation 14A within 120 days after the Company’syear end for the year covered by this report, under the caption “ExecutiveCompensation” in the proxy statement.

 

**ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND****MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS**.

 

Theinformation required by Item 11 of Form 10-KSB is herebyincorporated by reference from the Company’s definitive proxy statement, whichwill be filed pursuant to Regulation 14A within 120 days after the Company’syear end for the year covered by this report, under the caption “SecurityOwnership of Certain Beneficial Owners and Management” in the proxy statement.

 

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

 

Theinformation required by Item 12 of Form 10-KSB is herebyincorporated by reference from the Company’s definitive proxy statement, whichwill be filed pursuant to Regulation 14A within 120 days after the Company’syear end for the year covered by this report, under the caption “Transactionswith Management” in the proxy statement.

 

**ITEM13.  EXHIBITS AND REPORTS ON FORM 8-K.**

 

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

 
| 3.1 |   | Restated  Articles of Incorporation as of July 31, 1986, filed as Exhibit 3(a) to  the Company’s Registration Statement on Form 10 (Registration No. 0-14908),  filed with the Commission and incorporated herein by reference. |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

28

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| 3.2    |   | Certificate of Amendment  to the Company’s Restated Articles of Incorporation, as of July 5, 1988,  filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K  for the fiscal year ended December 31, 1988, and incorporated herein by  reference.                                                                                          |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                             |
| 3.3    |   | Restated Articles  of Incorporation (with amendment) as of November 6, 1998, filed as Exhibit 3.3  to the Company’s Annual Report on Form 10-KSB for the fiscal year  ended December 31, 1998, and incorporated herein by reference.                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                             |
| 3.4    |   | 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.                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                             |
| 3.5    |   | First Amended Bylaws  of the Company as amended, filed as Exhibit 3.2 to the Company’s annual  report on Form 10-K for the fiscal year ended December 31,  1987, and incorporated herein by reference.                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                             |
| 3.6    |   | Amendment to the  Company’s First Amended Bylaws as adopted by the Board of Directors on March 7,  1988, filed as Exhibit 3.3 to the Company’s Annual Report on Form 10-K  for the fiscal year ended December 31, 1987, and incorporated herein by  reference.                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                             |
| 4.1    |   | Statement of  Resolution Establishing Series of Preferred Stock of TGC Industries, Inc.  filed with the Secretary of State of Texas on July 16, 1993, filed as Exhibit 2  to the Company’s Current Report on Form 8-K dated August 11,  1993, and incorporated herein by reference.                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                             |
| 4.2    |   | Statement of  Resolution Establishing Series C 8% Convertible Exchangeable Preferred  Stock of TGC Industries, Inc. as filed with the Secretary of State of  Texas on July 9, 1996, filed as Exhibit B to the Company’s current  report on Form 8-K dated July 11, 1996, filed with the  Commission and incorporated herein by reference.     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                             |
| 4.3    |   | Statement of  Resolution Regarding Series C 8% Convertible Exchangeable Preferred  Stock of TGC Industries, Inc. as filed with the Secretary of State of  Texas on December 30, 1998, filed as Exhibit 4.3 to the Company’s  Annual Report on Form 10-KSB for the fiscal year ended December 30,  1998, and incorporated herein by reference. |

 

29

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| 4.4    |   | Statement of  Resolution Regarding Series C 8% Convertible Exchangeable Preferred  Stock of TGC Industries, Inc. as filed with the Secretary of State of  Texas on July 9, 1999, filed as Exhibit 4.4 to the Company’s Annual  Report on Form 10-KSB for fiscal year ended December 31,  2000, and incorporated herein by reference.           |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.5    |   | Statement of  Resolution regarding Series C 8% Convertible Exchangeable Preferred  Stock of TGC Industries, Inc. as filed with the Secretary of State of  Texas on December 4, 2001, filed as Exhibit 4.5 to the Company’s  Annual Report on Form 10-KSB for fiscal year ended December 31,  2001, and incorporated herein by reference.       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.6    |   | Statement of  Resolution regarding Series C 8% Convertible Exchangeable Preferred  Stock of TGC Industries, Inc. as filed with the Secretary of State of  Texas on December 11, 2002, filed as Exhibit 4.6 to the Company’s  Annual Report on Form 10-KSB for fiscal year ended December 31,  2002, and incorporated herein by reference.      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.7    |   | Statement of  Resolution regarding Series C 8% Convertible Exchangeable Preferred  Stock of TGC Industries, Inc. as filed with the Secretary of State of  Texas on October 4, 2004.                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.8    |   | Form of  Debenture Agreement and Debenture for 8% Subordinated Convertible Debentures,  Series A, filed as Exhibit 4.2 to the Company’s Registration  Statement on Form SB-2 (Registration No. 333-12269), as  amended, filed with the Commission and incorporated herein by reference.                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.9    |   | Form of  Warrant Agreement dated July 28, 1995, as amended, and Warrant, filed as  Exhibit 4.3 to the Company’s Registration Statement on Form SB-2  (Registration No. 333-12269), as amended, filed with the  Commission and incorporated herein by reference.                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.10   |   | Debenture  Agreement dated December 10, 1999, with respect to the Company’s  $2,500,000 8 1/2% Convertible Subordinated Debenture, Series B payable  to Wedge Energy Services, L.L.C., filed as Exhibit 4.6 to the Company’s  Annual Report on Form 10-KSB for the fiscal year ended December 31,  1999, and incorporated herein by reference. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.11   |   | Statement of  Resolution Establishing 8-1/2% Senior Convertible Preferred Stock of  TGC Industries, Inc. as filed with the Secretary of State of Texas on May 17,  2000, filed as Exhibit 4.8 to the Company’s Annual Report on Form 10-KSB  for fiscal year ended December 31, 2000, and incorporated herein by  reference.                        |

 

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| 4.12   |   | Statement of  Resolution regarding 8-1/2% Senior Convertible Preferred Stock of TGC  Industries, Inc. as filed with the Secretary of State of Texas on November 27,  2002, filed as Exhibit 4.11 to the Company’s Annual Report on Form 10-KSB  for fiscal year ended December 31, 2002, and incorporated herein by  reference.                                                  |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.1   |   | Service Mark  License Agreement dated as of July 31, 1986, between the Company and  Supreme Industries, Inc. (formerly ESI Industries, Inc.), relating  to the use of the Company’s logo, filed as Exhibit 10(b) to the  Company’s Registration Statement on Form 10 (Registration No. 0-14908),  filed with the Commission and incorporated herein by reference. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.2   |   | The Company’s  1986 Incentive and Nonqualified Stock Option Plan, filed as Exhibit 10(c) to  the Company’s Registration Statement on Form 10 (Registration No. 0-14908),  filed with the Commission and incorporated herein by reference.                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3   |   | Amendment Number  One to the Company’s 1986 Incentive and Nonqualified Stock Option Plan as  adopted by the Board of Directors on May 1, 1987, filed as Exhibit 10.4  to the Company’s annual report on Form 10-K for the fiscal year  ended December 31, 1987, and incorporated herein by reference.                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.4   |   | The Company’s  1993 Stock Option Plan as adopted by the Board of Directors on June 3,  1993, filed as Exhibit 10.4 to the Company’s Registration Statement on Form S-2  (Registration No. 33-73216), filed with the Commission and  incorporated by reference.                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.5   |   | Master Contract  for Geophysical Services-Onshore dated April 18, 1990 between Marathon  Oil Co. and the Company together with a form of Supplementary Agreement  thereto, filed as Exhibit 10.8 to the Company’s Registration Statement  on Form S-2 (Registration No. 33-73216), filed with the  Commission and incorporated herein by reference.                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.6   |   | Agreement for  Spin-off of Subsidiary Stock filed as Exhibit 1 to the Company’s Form 8-K  filed with the Commission on August 9, 1996 and incorporated herein by  reference.                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.7   |   | Bill of Sale  dated July 31, 1996 between TGC Industries, Inc. and Chase  Packaging Corporation, filed as Exhibit 10.8 to the Company’s annual  report on Form 10-KSB for the fiscal year ended December 31,  1996, and incorporated herein by reference.                                                                                                                        |

 

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| 10.8   |   | Amendment No. 1  to the 1993 Stock Option Plan as adopted by the Board of Directors on July 24,  1996, filed as Exhibit 10.9 to the Company’s Annual Report on Form 10-KSB  for the fiscal year ended December 31, 1998, and incorporated herein by  reference.                                                                                                                                                                                                                      |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.9   |   | Amendment No. 2  to the 1993 Stock Option Plan as adopted by the Board of Directors and  approved by Company’s Shareholders on June 4, 1998, filed as Exhibit 10.10  to the Company’s Annual Report on Form 10-KSB for the fiscal year  ended December 31, 1998, and incorporated herein by reference.                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.10  |   | Warrant  Agreements and Warrant Certificates dated July 30, 1999 issued by the  Company to JMS Inc. Cust FBO William J. Barrett Keogh, JMS Inc. Cust FBO  Herbert M. Gardner Keogh, Edward L. Flynn, Allen T. McInnes, and Wayne A.  Whitener in connection with the issuance by the Company of notes payable to  such persons, filed as Exhibit 10.10 to the Company’s Annual Report on Form 10-KSB  for the fiscal year ended December 31, 1999, and incorporated herein by  reference. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.11  |   | Debenture  Purchase Agreement dated December 10, 1999, between WEDGE Energy  Services, L.L.C. and the Company with respect to the purchase by WEDGE of the  Company’s 8 1/2% Convertible Subordinated Debenture, Series B, for the  cash consideration of $2,500,000 paid by WEDGE to the Company, filed as Exhibit 10.11  to the Company’s Annual Report filed on Form 10-KSB for the fiscal  year ended December 31, 1999, and incorporated herein by reference.              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.12  |   | Voting Agreement  dated December 10, 1999, between the Company, WEDGE Energy Services,  L.L.C., and the following shareholders of the Company: Allen McInnes, Wayne  Whitener, Herbert Gardner, William J. Barrett and Edward L. Flynn, filed as Exhibit 10.12  to the Company’s Annual Report on Form 10-KSB for the fiscal year  ended December 31, 1999, and incorporated herein by reference.                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.13  |   | The Company’s  1999 Stock Option Plan as adopted by the Board of Directors on December 14,  1999, filed as Exhibit 10.13 to the Company’s Annual Report on Form 10-KSB  for the fiscal year ended December 31, 1999, and incorporated herein by  reference.                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.14  |   | Amendment No. 1  to the 1999 Stock Option Plan as adopted by the Board of Directors June 12,  2003, filed as Exhibit 4.2 to the Company’s Form S-8 dated August 20,  2004, filed with the Commission and incorporated herein by reference.                                                                                                                                                                                                                                           |

 

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| 31.1   |   | Certification of  Chief Executive Officer of TGC Industries, Inc. pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                   |
| 31.2   |   | Certification of  Treasurer (Principal Financial and Accounting Officer) of TGC Industries, Inc.  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                                                                                   |
| 32.1   |   | Certification of  Chief Executive Officer of TGC Industries, Inc. pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.                                |
|   |   |                                                                                                                                                                   |
| 32.2   |   | Certification of  Treasurer (Principal Financial and Accounting Officer) of TGC Industries, Inc.  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

Item13                                                          (b)                                 Reportson Form 8-K.

 

Ten (10) CurrentReports on Form 8-K were filed during the reporting period, asfollows:

 

(1)                                  TheCurrent Report of TGC Industries, Inc. on Form 8-K, dated January 14,2004, and filed with the SEC on January 16, 2004. The Form 8-Kreported that the Company issued a press release announcing that the Companyhad experienced an increase in demand for its services, securing a sufficientnumber of contracts to deploy a second seismic crew.

 

(2)                                  TheCurrent Report of TGC Industries, Inc. on Form 8-K, dated February 23,2004, and filed with the SEC on February 27, 2004. The Form 8-Kreported that the Company announced that WEDGE Energy Services, L.L.C. hadcompleted a transaction, selling all 3,024,264 outstanding shares of theCompany’s 8.5% Senior Convertible Preferred Stock to a group of purchasers inprivate transactions.

 

(3)                                  TheCurrent Report of TGC Industries, Inc. on Form 8-K, dated March 1,2004, and filed with the SEC on March 2, 2004. The Form 8-Kreported that the Company had issued a press release providing a commentary onits results for fiscal year ended December 31, 2003.

 

(4)                                  TheCurrent Report of TGC Industries, Inc. on Form 8-K, dated April 19,2004, and filed with the SEC on April 22, 2004. The Form 8-Kreported that the Company had issued a press release providing a commentary onits first quarter 2004 financial results.

 

(5)                                  TheCurrent Report of TGC Industries, Inc. on Form 8-K, dated June 14,2004, and filed with the SEC on June 17, 2004. The Form 8-Kreported that the Company had issued a press release announcing that theCompany has continued to experience an increase in demand for its oil and gasexploration 3-D seismic services.

 

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(6)                                  TheCurrent Report of TGC Industries, Inc. on Form 8-K, dated July 26,2004, and filed with the SEC on July 28, 2004. The Form 8-Kreported that the Company had issued a press release providing a commentary onits second quarter 2004 financial results.

 

(7)                                  TheCurrent Report of TGC Industries, Inc. on Form 8-K, dated September 29,2004, and filed with the SEC on October 1, 2004. The Form 8-Kreported that the Board of Directors of TGC announced that the conversion priceper share of its Series C 8% Convertible Exchangeable Preferred Stock (the“Preferred Stock”) will be reduced from $6.00 per share to $2.00 per share[resulting in each share of preferred stock being convertible into 2.5 sharesof common stock] for a period beginning on September 24, 2004, and ending January 31,2005, in an effort to encourage the conversion of its outstanding Series C8% Convertible Exchangeable Preferred Stock.

 

(8)                                  TheCurrent Report of TGC Industries, Inc. on Form 8-K, dated October 22,2004, and filed with the SEC on October 27, 2004. The Form 8-Kreported that the Company completed a loan transaction with a lender for thepurpose of providing funds for the purchase of a new ARAM ARIES recordingsystem from an equipment manufacturer whose principal offices are located onCanada, and a description of the terms of the loan transaction.

 

(9)                                  TheCurrent Report of TGC Industries, Inc. on Form 8-K, dated October 25,2004, and filed with the SEC on October 27, 2004. The Form 8-Kreported that the Company had issued a press release providing a commentary onits third quarter 2004 financial results.

 

(10)                            TheCurrent Report of TGC Industries, Inc. on Form 8-K, dated November 12,2004, and filed with the SEC on November 18, 2004. The Form 8-Kreported that the Company had been informed by one of its customers that it didnot agree with the Company’s billing on a recently completed seismic drillingand data acquisition contract that was entered into in the ordinary course ofthe Company’s business. The Company reported that it agreed with the customer’sinterpretation of the contract and agreed to make a net reduction to thecontract of approximately $224,000.

 

**ITEM14.  PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

 

Theinformation required by item 14 of Form 10-KSB is herebyincorporated by reference from the Company’s definitive proxy statement, whichwill be filed pursuant to Regulation 14A within 120 days after the Company’syear end for the year covered by this report, under the caption “PrincipalAccountant Fees and Services” in the proxy statement.

 

34

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**SIGNATURES**

 

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

 
|                                                                                                                                                                            | TGC INDUSTRIES,  INC. |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------|
|                                                                                                                                                                            |                  |
| Date:                                                                                                                                                                           | March 23,  2005  | By: |  /s/ | Wayne A.  Whitener |   |
|                                                                                                                                                                            |                  | Wayne A.  Whitener |
|                                                                                                                                                                            |                  | President  (Principal |
|                                                                                                                                                                            |                  | Executive  Officer) |
|                                                                                                                                                                            |                  |   |
| In accordance with the  Exchange Act, this report has been signed below by the following persons on  behalf of the registrant and in the capacities and on the dates indicated. |
|                                                                                                                                                                            |                  |   |
| Date:                                                                                                                                                                           | March 23,  2005  | By: |  /s/ | Wayne A.  Whitener |   |
|                                                                                                                                                                            |                  | Wayne A.  Whitener |
|                                                                                                                                                                            |                  | President, Chief |
|                                                                                                                                                                            |                  | Executive  Officer and |
|                                                                                                                                                                            |                  | Director |
|                                                                                                                                                                            |                  |   |
|                                                                                                                                                                            |                  |   |
| Date:                                                                                                                                                                           | March 23,  2005  | By: |  /s/ | Kenneth Uselton |   |
|                                                                                                                                                                            |                  | Kenneth Uselton, |
|                                                                                                                                                                            |                  | Secretary and  Treasurer |
|                                                                                                                                                                            |                  | (Principal  Financial |
|                                                                                                                                                                            |                  | and Accounting  Officer) |
|                                                                                                                                                                            |                  |   |
|                                                                                                                                                                            |                  |   |
| Date:                                                                                                                                                                           | March 23,  2005  | By: |  /s/ | William J.  Barrett |   |
|                                                                                                                                                                            |                  | William J.  Barrett |
|                                                                                                                                                                            |                  | Director |
|                                                                                                                                                                            |                  |   |
|                                                                                                                                                                            |                  |   |
| Date:                                                                                                                                                                           | March 23,  2005  | By: |  /s/ | Herbert M.  Gardner |   |
|                                                                                                                                                                            |                  | Herbert M.  Gardner |
|                                                                                                                                                                            |                  | Director |
|                                                                                                                                                                            |                  |   |
|                                                                                                                                                                            |                  |   |
| Date:                                                                                                                                                                           | March 23,  2005  | By: |  /s/ | Allen T. McInnes |   |
|                                                                                                                                                                            |                  | Allen T. McInnes |
|                                                                                                                                                                            |                  | Director |
|                                                                                                                                                                            |                  |   |
|                                                                                                                                                                            |                  |   |
| Date:                                                                                                                                                                           | March 23,  2005  | By: |  /s/ | Edward L. Flynn |   |
|                                                                                                                                                                            |                  | Edward L. Flynn |
|                                                                                                                                                                            |                  | Director |
|                                                                                                                                                                            |                  |   |
|                                                                                                                                                                            |                  |   |
| Date:                                                                                                                                                                           | March 23,  2005  | By: |  /s/ | William C. Hurtt, Jr. |   |
|                                                                                                                                                                            |                  | William C. Hurtt, Jr. |
|                                                                                                                                                                            |                  | Director |
|                                                                                                                                                                                 |                       |  |  |  |  |  |  |

 

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