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**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-K**

** **
| ** **                                           | **x**      | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT  OF 1934**     |
|------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
|                                                 |       |                                                                                                     |   |   |
| **For the fiscal year ended December 31, 2008** |
| ** **                                           | ** ** | ** **                                                                                               | ** ** | ** ** |
| ** **                                           | **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For the transition period from                to                  .**

** **

**Commission File Number 01-14908**

 

**TGCINDUSTRIES, INC.**

(Exact name of registrant as specified in its charter)

 

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

 

| **101 East Park Blvd., Suite 955, Plano,  Texas** | ** ** | **75074**  |
|--------------------------------------------------------|------------|------------|
| (Address of principal executive offices)               |       | (Zip Code) |

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

** **

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

 

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

 
| Indicate by check mark if the registrant is a  well-known seasoned issuer, as defined in Rule 405 of the Securities  Act.                |
|-----------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                          |   | Yes o |   | No x |
|                                                                                                                                          |   |   |   |   |
| Indicate by check mark if the registrant is not  required to file reports pursuant to Section 13 or  Section 15(d) of the Act. |
|                                                                                                                                          |   | Yes o |   | No x |

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15 (d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.        Yes  x        No  o

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K(229.405) is not contained herein, and will not be contained, to the best ofRegistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.   x

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

Large acceleratedfiler o  Accelerated filer x  Non-accelerated filer oSmaller reporting company o

 
| Indicate by check mark whether the registrant is a  shell company (as defined in Rule 12b-2 of the Exchange Act). |
|------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                   |   | Yes  o |   | No  x |

 

The aggregatemarket value of the voting and non-voting common equity held by non-affiliatescomputed by reference to the price at which the common equity was last sold asof the last business day of the Registrant’s most recently completedsecond  fiscal quarter was $112,220,919.

 

Number of sharesof Common Stock outstanding as of February 27, 2009:  17,396,017

 

**Documents incorporated by reference**

** **

Listed below aredocuments, parts of which are incorporated herein by reference, and the part ofthis report into which the document is incorporated:

 

Proxy statement for the 2009 annual meeting of shareholders – Part III

 

 

 

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**Part I**

** **

**ITEM 1. BUSINESS.**

** **

**General**

** **

TGC Industries, Inc. (“TGC” or the “Company”) isa Texas corporation primarily engaged in the geophysical service business ofconducting Three-D (“3-D”) surveys for clients in the oil and gasbusiness.  TGC’s principal businessoffice is located at 101 E. Park Blvd., Suite 955, Plano, Texas 75074(Telephone: 972-881-1099).  TGC’sinternet address is www.tgcseismic.com. TGC makes available free of charge on its website its annual reports on Form 10-K,quarterly reports on Form 10-Q and current reports on Form 8-K assoon as reasonably practicable after filing or furnishing such information withthe Securities and Exchange Commission.

 

**History**

** **

In April of 1980, Supreme Industries, Inc. (“Supreme”),formerly ESI Industries, Inc., formed a wholly-owned subsidiary, TidelandsGeophysical Co., Inc. (“Tidelands”), that acquired certain equipment,instruments, and related supplies from a Houston-based corporation that wasengaged in the business of conducting seismic, gravity, and magnetic surveysunder contracts for oil and natural gas companies.  On June 30, 1986, the Boards ofDirectors of Supreme and Tidelands approved a spin-off of substantially all ofthe shares of Tidelands owned by Supreme which were distributed as a stockdividend to Supreme’s security holders. In July of 1986, our name was changed from “Tidelands GeophysicalCo., Inc.” to “TGC Industries, Inc.”

 

We are a leading provider of seismic data acquisitionservices throughout the continental United States. As of December 31,2008, we operated nine seismic crews. These seismic crews supply seismic data to companies engaged in thedomestic exploration and development of oil and natural gas on land and inland-to-water transition areas. Our customers rely on seismic data to identifyareas where subsurface conditions are favorable for the accumulation ofexisting hydrocarbons, to optimize the development and production ofhydrocarbon reservoirs, to better delineate existing oil and natural gasfields, and to augment reservoir management techniques.

 

We acquire geophysical data using the latest in 3-Dsurvey techniques. We introduce acoustic energy into the ground by usingvibration equipment or dynamite detonation, depending on the surface terrainand subsurface requirements. The reflected energy, or echoes, is receivedthrough geophones, converted into a digital signal at a multi-channel recordingunit, and then transmitted to a central recording vehicle. Subsurfacerequirements dictate the number of channels necessary to perform our services.With our state-of-the-art seismic equipment, including computer technology andmultiple channels, we acquire, on a cost effective basis, immense volumes ofseismic data that when processed and interpreted produce more precise images ofthe earth’s subsurface. Our customers then use our seismic data to generate 3-Dgeologic models that help reduce finding costs and improve recovery rates fromexisting wells.

 

**The Industry**

** **

Technological advances in seismic equipment andcomputing allow the seismic industry to acquire and process, on acost-effective basis, immense volumes of seismic data which produce preciseimages of the earth’s subsurface. The latest accepted method of seismic dataacquisition, processing, and the subsequent interpretation of the processeddata is the 3-D seismic method. Geophysicists use computer workstations tointerpret 3-D data volumes, identify subsurface anomalies, and generate a geologicmodel of subsurface features.

 

3-D seismic data are used in the exploration anddevelopment for new reserves and enable oil and natural gas companies to betterdelineate existing fields and to augment their reservoir management techniques.Benefits of incorporating high resolution 3-D seismic surveys into explorationand development programs include reducing drilling risk, decreasing oil andnatural gas finding costs, and increasing the efficiencies of reservoirlocation, delineation, and management. In order to meet the requirementsnecessary to fully realize the benefits of 3-D seismic data, there is anincreasing demand for improved data quality with greater subsurface resolution.

 

Currently, the seismic data acquisition industry ismade up of a number of companies divided into two groups. The first group ismade up of five publicly-traded companies with long operating histories whofield numerous crews and work in a number of different regions andterrain.  This group includes us, DawsonGeophysical Company, Geo Kinetics, Inc., Petroleum Geo Services, and, to alesser extent, CGG-Veritas.  These 

 

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companies fieldapproximately 50% of the estimated 65****seismic crewscurrently operating in the continental U.S. The second group is made up of smaller companies who generally run oneor two seismic crews and often specialize in specific regions or types of operations.

 

We provide our seismic data acquisition servicesprimarily to domestic onshore oil and natural gas exploration and developmentcompanies for use in the onshore drilling and production of oil and natural gasin the continental U.S. The main factors influencing demand for seismic dataacquisition services in our industry are the levels of drilling activity by oiland natural gas companies and the sizes of such companies’ exploration anddevelopment budgets, which, in turn, depend largely on current and anticipatedfuture crude oil and natural gas prices and depletion rates.

 

**Equipment andCrews**

** **

In the fourth quarter of 2004, we acquired, and placedinto service, our first new ARAM ARIES recording system.  In July of 2005, we deployed our fourthseismic data acquisition crew along with our second new ARAM ARIES recordingsystem.  In November of 2005, wedeployed our fifth seismic data acquisition crew along with our third new ARAMARIES recording system.  In December of2005, we completed a loan transaction with a commercial lender for the purposeof providing funds for the purchase of our fourth new ARAM ARIES recordingsystem.  In January of 2006, wedeployed a sixth crew to operate this fourth new ARAM ARIES recordingsystem.    In May of 2006, we deployedour seventh seismic data acquisition crew along with our fifth new ARAM ARIESrecording system.  In October of2006, we deployed our eighth seismic data acquisition crew along with our sixthnew ARAM ARIES recording system.  In December of2007, we completed a loan transaction with a commercial lender for the purposeof providing funds for the purchase of our seventh new ARAM ARIES recordingsystem.  In January 2008, theCompany entered into an agreement with a bank to provide financing for thepurchase of new vibration vehicles.  In February 2008,the Company exercised its purchase option for seismic recording equipment ithad been renting.  In March 2008,the Company entered into a loan agreement with a commercial lender to providefinancing for purchase of this rented equipment and to replace an existing loanthe Company had with the lender.  In July 2008,the Company entered into a loan agreement with a bank to provide financing forthe purchase of additional seismic recording equipment.  In August 2008, the Company entered intoa loan agreement with a bank to provide financing for the purchase of newvibration vehicles.  In September 2008,the Company entered into a loan agreement with a commercial lender to providefinancing for the purchase of a new seismic recording system andequipment.  In December 2008, wedeployed our ninth seismic data acquisition crew along with our eighth new ARAMARIES recording system.

 

Eight of our crews utilize the new state-of-the-artARAM ARIES recording systems.  Thesesystems employ cable telemetry technology enhanced by multiple baseline andredundant cable connections that provide seismic data acquisition services withincreased reliability.  The other crewutilizes the Opseis Eagle data gathering system. This system employsradio-frequency telemetry technology providing seismic data-gathering servicesto land-to-water transition areas, rivers, lakes, inaccessible terrain,deserts, and man-made barriers such as highways and cities.

 

We currently own equipment for nine land-based seismicdata acquisition crews and 60 vibration vehicles equipped with Peltonelectronics. Each crew consists of approximately 35 to 45 technicians withassociated vehicles, geophones, a seismic recording system, energy sources,cables, and a variety of other equipment. Each crew has one central recordingvehicle which captures seismic data. This data is recorded on a CD ROM or datatape which is delivered to a data processing center selected by the customer.

 

**CapitalExpenditures**

** **

We believe that it is essential to take advantage ofadvances in seismic technology and to commit capital to purchase and update ourequipment cost-effectively. Purchasing and updating seismic equipment andtechnology involves a continuing commitment to capital spending. For fiscalyear 2008, capital expenditures were approximately $21,686,000 compared withapproximately $18,238,000 for 2007.  Thecapital expenditures in 2008 were primarily for equipment and equipmentmaintenance to meet the increased demand from our customers.

 

**Customers andConsultants**

** **

Our customers are major and independent oil andnatural gas exploration and development companies. The services we provide toour customers vary according to the size and needs of each customer. Ourservices are 

 

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marketed by supervisoryand executive personnel who contact customers to determine their needs andrespond to customer inquiries regarding the availability of crews. Contacts arebased principally upon professional relationships developed over a number ofyears. There are many consultants in the oil and natural gas industry whoprocess and interpret seismic data for oil and natural gas companies. Theseconsultants can have an influence in determining which company their customersuse to acquire seismic data.

 

In order to avoid potential conflicts of interest withour customers, we do not participate in oil and natural gas ventures. Theresults of a seismic survey conducted for a customer belong to that customer.All of our customers’ information is maintained in strictest confidence.

 

**Contracts**

** **

Our contracts are obtained either through competitivebidding or as a result of customer negotiations. Our services are conductedunder general service agreements for seismic data acquisition services whichdefine certain obligations for us and for our customers. A supplementalagreement setting forth the terms of a specific project, which may be cancelledby either party upon 30 days’ advance written notice, is entered into for everyproject. We currently operate under supplemental agreements that are either “turnkey”agreements providing for a fixed fee to be paid to us for each unit of dataacquired or “term” agreements providing for a fixed hourly, daily, or monthlyfee during the term of the project or projects.

 

**Competition**

** **

The acquisition of seismic data for the oil andnatural gas industry is a highly competitive business. There are approximately65 seismic crews currently operating in the continental United States.Contracts for such services generally are awarded on the basis of pricequotations, crew experience, and the availability of crews to perform in atimely manner, although factors other than price, such as crew safetyperformance history and technological and operational expertise, are oftendeterminative. Our competitors include companies with financial resources thatare significantly greater than our own as well as companies of comparable andsmaller size. Our primary competitors are Dawson Geophysical Company, GeoKinetics, Inc., Petroleum Geo Services, and to a lesser extent,CGG-Veritas.  In addition to thepreviously named companies, we also compete for projects from time to time withsmaller seismic companies which operate in local markets with only one or twocrews.

 

**Employees**

** **

As of December 31, 2008, we employed a total of651 full-time (non-union) employees, of which 17 consisted of management,sales, and administrative personnel with the remainder being crew and crewsupport personnel. We also hire contract labor for our crews on an as-neededbasis. We believe our relationship with our employees to be satisfactory.

 

**Data Bank**

** **

We own a data bank which contains gravity data, and toa lesser extent magnetic data, from many of the major oil and natural gasproducing areas located within the United States. We do not have a seismic databank. Our data bank information has been amassed through participatory surveysas well as speculative surveys historically funded by us alone. All data andinterpretations may be licensed to customers at a fraction of the cost of newlyacquired data. However, the licensing of this data is not a significant portionof our revenues.

 

**Operating Risksand Insurance**

** **

Our business is subject to the hazards inherent inconducting seismic data acquisition activities in hostile environments withdangerous machinery, and in some instances explosives. These activities cancause personal injury or loss of life, damage to or destruction of property,equipment, the environment, and marine life, and suspension of operations.

 

In addition, we could be subject to personal injury orreal property damage claims in the normal operation of our business. Suchclaims may not be covered by the indemnification provisions in our generalservice agreements to the extent that the damage is due to our negligence orintentional misconduct.

 

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We do not carry insurance against certain risks thatwe could experience such as business interruption resulting from equipmentmaintenance or weather delays. We obtain insurance against certain property andpersonal casualty risks and other risks when such insurance is available andwhen our management considers it advisable to do so. Currently, our insurancecoverage consists of employers liability with limits of $1,000,000 per accidentand $2,000,000 in the aggregate, commercial general liability of $1,000,000 peraccident and $2,000,000 in the aggregate, pollution liability of $1,000,000 peraccident and $2,000,000 in the aggregate, and automobile liability with a$1,000,000 combined single limit, and a $10,000,000 umbrella policy. Ourgeneral service agreements require us to have specific amounts of insurance.There can be no assurance, however, that any insurance obtained by us will beadequate to cover any losses or liabilities, or that this insurance willcontinue to be available or available on terms which are acceptable to us.Liabilities for which we are not insured, or which exceed the policy limits ofour applicable insurance, could have a material adverse effect on us.

 

**ITEM 1A.  RISK FACTORS**

** **

Any investment in our common stock involves a highdegree of risk. You should carefully consider the risks and uncertaintiesdescribed below and the other information included in this Form 10-Kbefore purchasing our common stock. Although the risks described below are therisks that we believe are material, they are not the only risks relating to ourbusiness and our common stock. Additional risks and uncertainties, includingthose that are not yet identified or that we currently believe are immaterial,may also adversely affect our business, financial condition, or results ofoperations. If any of the events described below occur, our business andfinancial results could be materially and adversely affected. The market priceof our common stock could decline due to any of these risks, perhapssignificantly, and you could lose all or part of your investment.

 

**Company Risks**

** **

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

** **

Although we reported net income of approximately$6,898,000, $7,607,000 and $8,111,000 for the years ended December 31,2008, 2007 and 2006, respectively, we have a history of losses with only sixprofitable years since 1998.  In 2005, wehad net income (before dividend requirements on preferred stock) of approximately$6,201,000, in 2004, we had net income (before dividend requirements onpreferred stock) of approximately $2,868,000, and in 2003 we had net income(before dividend requirements on preferred stock) of approximately $555,000.Our ability to be profitable in the future will depend on many factors beyondour control, but primarily on the level of demand for land-based seismic dataacquisition services by oil and natural gas exploration and developmentcompanies.  Even if we do achieveprofitability, we may not be able to sustain or increase profitability on aquarterly or annual basis.

 

**The current economic downturn could adverselyaffect our revenues and cash flows**.

 

The current economic downturn could adversely affectour revenues and cash flows if our customers, and/or potential customers,become unable to pay or must delay payment of, amounts owing to the Companybecause such customers are not successful in generating revenues or areprecluded from securing necessary financing.

 

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

** **

Our revenues, operating results, and profitability mayfluctuate from period to period. These fluctuations are attributable to thelevel of new business in a particular period, the timing of the initiation,progress, or cancellation of significant projects, higher revenues and expenseson our dynamite contracts, and costs we incur to train new crews we may add inthe future to meet increased customer demand. Fluctuations in our operating resultsmay also be affected by other factors that are outside of our control such aspermit delays, weather delays, and crew productivity. Oil and natural gasprices were highly volatile during the year ended December 31, 2008, andhave resulted in demand fluctuations for our services. There can be noassurance of future oil and gas price levels or stability.  The demand for our services will be adverselyaffected by a significant reduction in oil and natural gas prices. Since ourbusiness has high fixed costs, the negative effect of one or more of thesefactors could trigger wide variations in our operating revenues, EBITDA margin,and profitability from quarter to quarter, which factors renderquarter-to-quarter comparisons unreliable as an indicator of performance.  Due to the factors discussed above, youshould not expect sequential growth in our quarterly revenues andprofitability.

 

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**We are dependent upon significant customers.**

** **

During 2008, our two largest customers accounted forapproximately 27% of revenues.  During2007 our two largest customers accounted for approximately 22% ofrevenues.  During 2006 no customeraccounted for 10% of our revenues.  Inthe past we have derived a significant amount of our revenues from a smallnumber of oil and natural gas exploration and development companies.  While our revenues are derived from aconcentrated customer base, our significant customers vary between years. If welose one or more major customers in the future, or if one or more customersencounter financial difficulties, our business, financial condition, andresults of operations could be materially and adversely affected.

 

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

** **

We receive revenues from customers who have engagedconsultants to process and interpret the seismic data provided by us. Consultantscan have an influence in determining which company its customers use to acquireseismic data. A consultant could recommend that its customers consider usingother seismic companies.

 

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

** **

The seismic data acquisition services industry is ahighly competitive business in the continental U.S. Our competitors includecompanies with financial resources that are significantly greater than our ownas well as companies of comparable and smaller size.

 

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

** **

Seismic data acquisition technologies historicallyhave steadily improved and progressed, and we expect this progression tocontinue. Our strategy is to upgrade our seismic data acquisition equipment ona regular basis to maintain our competitive position. However, since we are ina capital intensive industry and have limitations on our ability to obtain thefinancing necessary to enable us to purchase state-of-the-art equipment, someof our competitors may be able to purchase newer equipment when we may not beable to do so.

 

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

** **

We have limited management depth with the result thatthe loss, whether by death, departure, or illness, of Wayne A. Whitener, ourPresident and Chief Executive Officer, or other senior executives, could have amaterial adverse effect on the ability of management to continue operations atthe same level of efficiency. We have key man insurance on the life of ourPresident and Chief Executive Officer so that, in the event of his untimelydeath, we would receive insurance proceeds of $1,000,000 under this policy.

 

**Certain members of our management team are not subject toemployment or non-competition agreements and may leave our employment at anytime.**

** **

None of the members of our management team, other thanour President and Chief Executive Officer, are subject to employment agreementsor non-competition agreements; therefore, any of these members of ourmanagement team could leave upon little or no notice which could have amaterial adverse effect on our management’s ability to continue operations atthe same level of effectiveness. Additionally, the lack of non-competitionagreements would allow these members of our management team to immediatelybegin working for one of our competitors upon the termination of theirrelationship with us. This could have a negative impact on our strategic planand our relationships with customers.

 

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

** **

We perform ongoing credit evaluations of our customers’financial conditions and, generally, require no collateral from our customers.A default in payment from one of these large customers could have a materialadverse effect on our operating revenues for the period involved.

 

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

** **

Certain assets that are critical to our operations,including two of our ARAM ARIES recording systems and 13 vibration vehicles arepledged as collateral to our equipment lenders and commercial banks and couldbe subject to foreclosure in the event that we default on our indebtednesshaving 36 to 57 month terms. We currently have debt obligations covering the purchaseof two of our eight ARAM ARIES recording systems that require monthly paymentsbetween approximately $86,000 and $108,000 for the seventh ARAM ARIES recordingsystem, and between approximately $80,000 and $98,000 for the eighth ARAM ARIESrecording system.  These debt obligationsmature in December 2011 and October 2012, respectively.  The Company also has debt obligationscovering the purchase of five vibration vehicles requiring monthly paymentsbetween approximately $56,000 and $65,000, and the purchase of eight vibrationvehicles, requiring monthly payments of approximately $50,000.  These debt obligations mature in August 2011and February 2013, respectively. Any decline in our operations could inhibit our ability to make thesesubstantial monthly payments. In light of the short terms of these notes, afailure to make the monthly payments on these notes could cause our lenders topromptly foreclose on the assets securing these notes. The foreclosure oncertain of our core assets securing these notes could severely limit ourability to continue operations.

 

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

** **

Our business is subject to the general risks inherentin land-based seismic data acquisition activities. Our activities are oftenconducted in remote areas under dangerous conditions, including the detonation of dynamite. These operations are subjectto risks of injury to personnel and equipment. Our crews are mobile, andequipment and personnel are subject to vehicular accidents. These risks couldcause us to experience equipment losses, injuries to our personnel, andinterruptions in our business.

 

In addition, we could be subject to personal injury orreal property damage claims in the normal operation of our business. Suchclaims may not be covered under the indemnification provisions contained in ourgeneral service agreements to the extent that the damage is due to ournegligence or intentional misconduct.

 

We do not carry insurance against certain risks thatcould cause losses, including business interruption resulting from equipmentmaintenance or weather delays. We obtain insurance against certain property andpersonal casualty risks and other risks when such insurance is available andwhen our management considers it advisable to do so. Our current insurancecoverage consists of employers liability with limits of $1,000,000 per accidentand $2,000,000 in the aggregate, commercial general liability of $1,000,000 peraccident and $2,000,000 in the aggregate, pollution liability of $1,000,000 peraccident and $2,000,000 in the aggregate, and automobile liability with a$1,000,000 combined single limit, and a $10,000,000 umbrella policy.

 

Our general service agreements require us to havespecific amounts of insurance. There can be no assurance, however, that anyinsurance obtained by us will be adequate to cover all losses or liabilities orthat this insurance will continue to be available or available on terms whichare acceptable to us. Liabilities for which we are not insured, or which exceedthe policy limits of our applicable insurance, could have a materially adverseeffect on us.

 

**We are subjectto the requirements of Section 404 of the Sarbanes-Oxley Act. If we areunable to maintain compliance with Section 404 or if the costs related tomaintaining compliance are significant, our profitability, stock price, andresults of operations and financial condition could be materially adverselyaffected.**

** **

If we are unable to maintain adequate internalcontrols, in accordance with Section 404, as such standards are amended,supplemented, or modified from time to time, we may not be able to ensure thatwe have effective 

 

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internal controls overfinancial reporting in accordance with Section 404 on an ongoingbasis.  Failure to achieve and maintaineffective internal controls could have a material adverse effect on our stockprice.  In addition, a material weaknessin the effectiveness of our internal control over financial reporting couldresult in an increased chance of fraud and the loss of customers, reduce ourability to obtain financing, and/or require additional expenditures to complywith these requirements, each of which could negatively impact our business,profitability, and financial condition.

 

**Industry Risks**

** **

**We and our customers may be adverselyaffected by the current economic downturn.**

** **

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

** **

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

** **

Any prolonged reduction in the overall level ofexploration and development activities, whether resulting from changes in oiland natural gas prices or otherwise, could adversely impact us in many ways bynegatively affecting:

 

·                  ourrevenues, cash flows, and profitability;

 

·                  ourability to maintain or increase our borrowing capacity;

 

·                  ourability to obtain additional capital to finance our business and the cost ofthat capital; and

 

·                  ourability to attract and retain skilled personnel whom we would need in the eventof an upturn in the demand for our services.

 

Worldwide political, economic, and military eventshave contributed to oil and natural gas price volatility and are likely tocontinue to do so in the future. Depending on the market prices of oil andnatural gas, oil and natural gas exploration and development companies maycancel or curtail their drilling programs, thereby reducing demand for ourservices. Oil and natural gas prices have been highly volatile historicallyand, we believe, will continue to be so in the future. Many factors beyond ourcontrol affect oil and natural gas prices, including:

 

·                  thecost of exploring for, producing, and delivering oil and natural gas;

 

·                  thediscovery rate of new oil and natural gas reserves;

 

·                  therate of decline of existing and new oil and natural gas reserves;

 

·                  availablepipeline and other oil and natural gas transportation capacity;

 

·                  theability of oil and natural gas companies to raise capital;

 

·                  actionsby OPEC (the Organization of Petroleum Exporting Countries);

 

·                  politicalinstability in the Middle East and other major oil and natural gas producingregions;

 

·                  economicconditions in the U.S. and elsewhere;

 

·                  domesticand foreign tax policy;

 

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·                  weatherconditions in the U.S. and elsewhere;

 

·                  thepace adopted by foreign governments for the exploration, development, andproduction of their national reserves;

 

·                  theprice of foreign imports of oil and natural gas; and

 

·                  theoverall supply and demand for oil and natural gas.

 

**Thehigh fixed costs of our operations could result in operating losses.**

** **

Companies within our industry are typically subject tohigh fixed costs which consist primarily of depreciation (a non-cash item) andmaintenance expenses associated with seismic data acquisition and equipment andcrew costs. In addition, ongoing maintenance capital expenditures, as well asnew equipment investment, can be significant. As a result, any extended periodsof significant downtime or low productivity caused by reduced demand, weatherinterruptions, equipment failures, permit delays, or other causes couldadversely affect the results of our operations.

 

**Ouroperations are subject to delays related to obtaining land access rights of wayfrom third parties which could affect our results of operations.**

** **

Our seismic data acquisition operations could beadversely affected by our inability to obtain timely right of way usage fromboth public and private land and/or mineral owners. Delays associated withobtaining such rights of way could negatively affect our results of operations.

 

**Ourbusiness is subject to government regulation which may adversely affect ourfuture operations.**

** **

Our operations are subject to a variety of federal,state, and local laws and regulations, including laws and regulations relatingto the protection of the environment and archeological sites. We are requiredto expend financial and managerial resources to comply with such laws andrelated permit requirements in our operations, and we anticipate that we willcontinue to be required to do so in the future. Although such expenditureshistorically have not been material to us, the fact that such laws orregulations change frequently makes it impossible for us to predict the cost orimpact of such laws and regulations on our future operations. The adoption oflaws and regulations that have the effect of reducing or curtailing explorationand development activities by energy companies could also adversely affect ouroperations by reducing the demand for our services.

 

**Risks RelatedTo Our Common Stock**

** **

**Our common stock has experienced, and may continue toexperience, price volatility and low trading volume.**

** **

Our stock price is subject to significant volatility.Overall market conditions including a decline in oil and natural gas prices, inaddition to other risks and uncertainties described in this “Risk Factors”section and elsewhere in this Form 10-K, could cause the market price ofour common stock to fall. The high and low sales prices of our common stock forthe year ended December 31, 2008, were $10.17 and $1.05, respectively.

 

Our common stock is listed on the NASDAQ Stock MarketLLC under the symbol “TGE.” However, daily trading volumes for our common stockare, and may continue to be, relatively small compared to many other publiclytraded securities. For example, during 2008, our daily trading volume was aslow as 4,800 shares.  Since November 6,2007, when we began trading on the NASDAQ Stock Market LLC, our daily tradingvolume has been as low as 2,800 shares. In addition, our common stock traded on the NYSE Alternext US (formerlythe American Stock Exchange) under the symbol “TGE” from April 18, 2005until November 5, 2007.  During thisperiod of time our daily trading volume was as low as 1,600 shares.  It may be difficult for you to sell yourshares in the public market at any given time at prevailing prices, and theprice of our common stock may, therefore, be volatile.

 

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**Our officers and directors own a large percentage of ourcommon stock, and they may exercise control over our business and affairs.**

** **

Our officers and directors as a group beneficially ownapproximately 28.7% of our common stock. As a result, they will continue to beable to exercise significant influence, and in most cases control, over mattersrequiring shareholder approval, including the election of directors, changes toour charter documents, and significant corporate transactions. Thisconcentration of ownership makes it unlikely that any other holder or group ofholders of our common stock will be able to affect the way we are managed orthe direction of our business. The continued concentrated ownership of ourcommon stock will make it difficult for another company to acquire us and foryou to receive any related takeover premium for your shares (unless thecontrolling group approves the acquisition).

 

**Certainprovisions of our Restated Articles of Incorporation may make it difficult fora third party to acquire us or may adversely impact your rights as a commonshareholder.**

** **

Our Restated Articles of Incorporation containprovisions that require the approval of holders of 80% of our issued andoutstanding shares before we can enter into a merger or other businesscombination or sell all or substantially all of our assets. Additionally, if weincrease the size of our board from the current six to nine directors, we couldbe required to stagger our directors’ terms, and our directors could not beremoved without approval of holders of 80% of our issued and outstanding shares.These provisions could discourage or impede a tender offer, proxy contest, orother similar transaction involving control of us.

 

In addition, our board of directors has the right toissue preferred stock upon such terms and conditions as it deems to be in thebest interest of the Company. The terms of such preferred stock may adverselyimpact the dividend and liquidation rights of the common shareholders withoutthe approval of the common shareholders.

 

**Wedo not intend to pay cash dividends on our common stock in the foreseeablefuture, and therefore only appreciation of the price of our common stock willprovide a return to our shareholders.**

** **

While there are currently no restrictions prohibitingus from paying dividends to our shareholders, we have not paid any cashdividends on our common stock in the past, and we do not anticipate paying anydividends in the foreseeable future. Payment of any cash dividends in thefuture, however, is in the discretion of our board of directors and will dependon our financial condition, results of operations, capital and legalrequirements, and other factors deemed relevant by our board of directors.Earnings, if any, are expected to be retained to fund our future operations.

 

**ITEM 1B. UNRESOLVEDSTAFF COMMENTS**

** **

None

 

**ITEM 2. DESCRIPTION OFPROPERTY.**

** **

In April of 2004, we executed an addendum to ourlease of a facility in Plano, Texas, that included approximately 10,500 squarefeet of office and warehouse space and an outdoor storage area of approximately20,000 square feet.  This facility wasused to repair geophysical equipment and housed our corporate offices until September of2006.  In September of 2005, weleased an additional facility, in Plano, Texas, with approximately 10,000square feet of office and warehouse space and an additional 10,000 square feetof outdoor storage to accommodate our growth. This facility was used primarily to repair geophysical equipment.  In January of 2006, we leased a 600square foot facility in Houston, Texas, to be used as a sales office.  The monthly rent is $553.    In July of 2006, we entered into alease for 7,269 square feet of office space located in Plano, Texas.  In September of 2006, we relocated ourcorporate offices to this facility, and in September 2008 increased the sizeof this lease to 8,523 square feet of office space.  The monthly rent is $12,127.  In October of 2006, we leased an 800square foot facility in Oklahoma City, Oklahoma, to be used as a salesoffice.  The monthly rent is $665.  In September of 2007, we leased a 1,130square foot facility in Denver, Colorado, to be used as a sales office.  The monthly rent is $2,284.  In September 2008, we leased a 400square foot facility is Pratt, Kansas, to be used as a permit office.  The monthly rent is $500.  In November 2008, we vacated our twoPlano repair, warehouse and outdoor storage facilities, and moved to a leasedrepair, warehouse and outdoor storage facility in Denison, Texas.  The Denison, Texas, facility consists of one5,000 square foot building, two 10,000 square foot adjacent buildings and anoutdoor storage area of approximately 60,500 square feet.  The monthly rent is $15,607.  The Company is not responsible for insuringthese 

 

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facilities.  The conditions of these facilities are good,and we believe that these properties are suitable and adequate for ourforeseeable needs.

 

**ITEM 3. LEGALPROCEEDINGS.**

** **

The Company is a defendant in various legal actionsthat arose or may arise out of the normal course of business.  In our opinion, none of these actions have orwill result in any significant loss to us.

 

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

** **

No matters were submitted by the Company, during thefourth quarter of the fiscal year ended December 31, 2008, to a vote ofour security holders through the solicitation of proxies or otherwise.

 

**PART II**

** **

**ITEM 5. MARKET FORREGISTRANT’S EQUITY, AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES.**

** **

**Market Prices**

** **

From May 25, 2002, through April 15, 2005,our common stock was traded over-the-counter on the National Association ofSecurities Dealers, Inc. Over-The-Counter Bulletin Board System (using thetrading symbol “TGCI”).  Because of ourimproved financial condition which has led to a substantial increase in ourstock price and the market value of our publicly-held shares, we qualified for,and began trading on, the NYSE Alternext US (formerly the American StockExchange) (“AMEX”) on April 18, 2005, under our current trading symbol “TGE.”  On October 26, 2007, we announced thatour board of directors approved the decision to switch the listing of ourcommon stock from AMEX to the NASDAQ Global Select Market (“NASDAQ.”)  As a result, on November 6, 2007, ourstock began trading on NASDAQ under the symbol “TGE.”

 

In the following table, the prices shown through November 5,2007, represent the high and low sales prices reported for our common stock onAMEX.  Beginning on November 6,2007, the following table shows the high and low sales prices reported for ourcommon stock on NASDAQ.  On April 28,2008 and April 27, 2007, the Company paid 5% stock dividends toshareholders of record at the close of business on April 14, 2008 and April 13,2007, respectively.  All prior share andper share amounts have been restated to reflect the stock dividends.

 
| ** **       | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------|------------|----------|------------|----------|------------|
| ** **       | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
|             |       |     |       |     |       |   |   |   |   |
| 1st quarter |       | $        | 10.17      |     | $          | 6.71 |   | $ | 9.35 |   | $ | 7.55 |   |
| 2nd quarter |       | 9.25     |       | 6.60     |       | 12.55 |   | 8.50 |   |
| 3rd quarter |       | 8.93     |       | 4.70     |       | 11.49 |   | 8.55 |   |
| 4th quarter |       | 6.00     |       | 1.05     |       | 11.86 |   | 8.23 |   |
|                  |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

The number of shareholders of record of TGE’s commonstock as of February 27, 2009, was 155. Due to the number of shares held in nominee or street name, we believethat there are a significantly greater number of beneficial owners of ourcommon stock.  As of such date, CEDE &CO. held 14,107,855 shares in street name. On February 27, 2009, our common stock was quoted at a closingsales price of $1.95.

 

While there are currently no restrictions prohibitingus from paying cash dividends to our shareholders, we have not paid any cashdividends on our common stock in the past, and we do not anticipate paying anydividends in the foreseeable future. Payment of any cash dividends in the future, however, is in thediscretion of our board of directors and will depend on our financialcondition, results of operations, capital and legal requirements, and otherfactors deemed relevant by our board of directors.  Earnings, if any, are expected to be retainedto fund our future operations.

 

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Thefollowing table summarizes certain information regarding securities authorizedfor issuance under our equity compensation plans as of December 31,2008.  See information regarding materialfeatures of the plans in Note H, ‘Shareholders’ Equity-Stock-Based CompensationPlans” to the Financial Statements included herein.

 

**Equity Compensation Plan Information**

 
| ** **                                                               | ** ** | ** **               | ** ** | ** **              | ** ** | **Number of Securities**            | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|-------------------------------------|------------|
| ** **                                                               | ** ** | ** **               | ** ** | ** **              | ** ** | **Remaining Available for**         | ** ** |
| ** **                                                               | ** ** | **Number of Securities** | ** ** | ** **              | ** ** | **Future Issuance Under**           | ** ** |
| ** **                                                               | ** ** | **to be Issued**         | ** ** | **Weighted-Average**    | ** ** | **Equity Compensation Plans**       | ** ** |
| ** **                                                               | ** ** | **Upon Exercise of**     | ** ** | **Exercise Price of**   | ** ** | **(excluding securities Reflected** | ** ** |
| **Plan Category**                                                        | ** ** | **Outstanding Options**  | ** ** | **Outstanding Options** | ** ** | **in Column (a))**                  | ** ** |
| ** **                                                               | ** ** | **(a)**                  | ** ** | **(b)**                 | ** ** | **(c)**                             | ** ** |
|                                                                     |       |                     |       |                    |       |                                |       |
| Equity  compensation plans approved   by  security holders     |       | 585,269                  |       | $                       |  3.99 |                                | 388,770    | (1) |
|                                                                     |       |                     |       |                    |       |                                |       |
| Equity  compensation plans not   approved by  security holders |       | —                   |       | —                  |       | —                              |       |
|                                                                     |       |                     |       |                    |       |                                |       |
| Total                                                                    |       | 585,269                  |       | $                       |  3.99 |                                | 388,770    | (1) |

 

----

(1)  No sharesremain available to be issued under the 1999 Stock Option Plan.  There are 388,770 shares available to beissued under the 2006 Stock Award Plan.

 

**PerformanceGraph**

** **

*The followinggraph is not “soliciting material,” is not deemed filed with the Securities andExchange Commission, and is not to be incorporated by reference into any of theCompany’s filings under the Securities Act of 1933, as amended, or theSecurities Exchange Act of 1934, as amended, respectively.*

 

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The followinggraph sets forth the five-year cumulative total shareholder return, whichassumes reinvestment of dividends, of a $100 investment beginning in theCompany’s common stock, a peer group made up of companies in the PhiladelphiaOil Service Sector Index, and the S&P 500 Stock Index.  The Philadelphia Oil Service Sector Indexconsists of far larger companies that provide a variety of services as comparedto the land-based geophysical services provided by the Company.

 

****

 

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**ITEM 6. SELECTEDFINANCIAL DATA.**

 

The following selected financial data should be readin conjunction with Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations,” and the Company’s financial statementsand notes thereto included in Item 8, “Financial Statements and SupplementaryData.”  No cash dividends were declaredin any of the five years shown below:

 
| ** **                                                      | ** ** | **Year Ended December, 31,**                           | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2008**                                                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                      | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Statement of  Income Data:                                      |       |                                                                  |       |   |   |   |   |   |   |   |   |
|                                                            |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Revenues                                                        |       | $                                                                     | 86,770     |   | $ | 90,396 |   | $ | 67,760 |   | $ | 30,852 |   | $ | 20,084 |   |
|                                                            |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Net income                                                      |       | $                                                                     | 6,898      |   | $ | 7,607 |   | $ | 8,111 |   | $ | 6,201 |   | $ | 2,868 |   |
|                                                            |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Income allocable  to common shareholders                        |       | $                                                                     | 6,898      |   | $ | 7,607 |   | $ | 8,111 |   | $ | 5,996 |   | $ | 2,568 |   |
|                                                            |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Net Income per  common share - basic                            |       | $                                                                     | 0.40       |   | $ | 0.44 |   | $ | 0.47 |   | $ | 0.64 |   | $ | 0.39 |   |
|                                                            |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Net Income per  common share - diluted                          |       | $                                                                     | 0.40       |   | $ | 0.44 |   | $ | 0.47 |   | $ | 0.41 |   | $ | 0.21 |   |
|                                                            |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Weighted average  number of common Shares outstanding - basic   |       | 17,391                                                                |       | 17,368 |   | 17,270 |   | 9,406 |   | 6,659 |   |
|                                                            |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Weighted average  number of common Shares outstanding - diluted |       | 17,464                                                                |       | 17,453 |   | 17,395 |   | 15,087 |   | 13,711 |   |
|                                                            |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Total assets                                                    |       | $                                                                     | 85,091     |   | $ | 61,162 |   | $ | 56,400 |   | $ | 41,246 |   | $ | 9,324 |   |
|                                                            |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Long-term debt,  less current maturities                        |       | $                                                                     | 11,452     |   | $ | 3,769 |   | $ | 3,064 |   | $ | 6,199 |   | $ | 1,770 |   |
|                                                            |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Shareholders'  equity                                           |       | $                                                                     | 50,427     |   | $ | 42,922 |   | $ | 35,043 |   | $ | 26,605 |   | $ | 4,570 |   |

 

In October of 2005, the Company completed apublic offering of approximately 5,786,000 (not adjusted for the 5% stockdividends paid in 2008, 2007 and 2006) shares of common stock.  The weighted average number of equivalentcommon shares outstanding in 2005 reflect these additional shares for a portionof the year.

 

**ITEM 7. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.**

** **

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

* *

**ExecutiveOverview**

** **

TheCompany is a leading provider of seismic data acquisition services throughoutthe continental United States.  Wecurrently operate nine seismic crews. These seismic crews supply seismic data to companies engaged in thedomestic exploration and development of oil and natural gas on land and inland-to-water transition areas. Our customers rely on seismic data to identifyareas where subsurface conditions are favorable for the accumulation ofexisting hydrocarbons, to optimize the development and production ofhydrocarbon reservoirs, to better delineate existing oil and natural gasfields, and to augment reservoir management techniques.

 

Weacquire geophysical data using the latest in 3-D survey techniques. Weintroduce acoustic energy into the ground by using vibration equipment ordynamite detonation, depending on the surface terrain and subsurfacerequirements. The reflected energy, or echoes, is received through geophones,converted into a digital signal at a multi-channel recording unit, and thentransmitted to a central recording vehicle. Subsurface requirements dictate thenumber of channels necessary to perform our services. With our state-of-the-artseismic equipment, including 

 

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computer technology and multiple channels, we acquire,on a cost effective basis, immense volumes of seismic data that when processedand interpreted produce more precise images of the earth’s subsurface. Ourcustomers then use our seismic data to generate 3-D geologic models that helpreduce finding costs and improve recovery rates from existing wells.

 

Currently,the seismic data acquisition industry is made up of a number of companiesdivided into two groups. The first group is made up of five publicly-tradedcompanies with long operating histories which field numerous crews and work ina number of different regions and terrain. This group includes us, Dawson Geophysical Company, Geo Kinetics, Inc.,Petroleum Geo Services, and to a lesser extent CGG-Veritas. These companiesfield approximately 50% of the estimated 65 seismic crews currently operatingin the continental U.S.  The second groupis made up of smaller companies who generally run one or two seismic crews andoften specialize in specific regions or types of operation.

 

Weprovide our seismic data acquisition services primarily to domestic onshore oiland natural gas exploration and development companies for use in the onshoredrilling and production of oil and natural gas in the continental U.S. The mainfactors influencing demand for seismic data acquisition services in ourindustry are the level of drilling activity by oil and natural gas companiesand the sizes of such companies’ exploration and development budgets, which, inturn, depend largely on current and anticipated future crude oil and naturalgas prices and depletion rates.

 

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

 

Theacquisition of seismic data for the oil and natural gas industry is a highlycompetitive business. There are approximately 65 seismic crews currentlyoperating in the continental United States. Contracts for such servicesgenerally are awarded on the basis of price quotations, crew experience, andthe availability of crews to perform in a timely manner, although factors otherthan price, such as crew safety performance history, and technological andoperational expertise, are often determinative. Our competitors includecompanies with financial resources that are significantly greater than our ownas well as companies of comparable and smaller size. Our primary competitorsare Dawson Geophysical Company, Geo Kinetics, Inc., Petroleum GeoServices, and to a lesser extent, CGG-Veritas. In addition to the previouslynamed companies, we also compete for projects from time to time with smallerseismic companies which operate in local markets with only one or twocrews.  We believe that our long-termindustry expertise, the customer relationships developed over our history, andour financial stability give us an advantage over most of our competitors inthe industry.

 

**Results ofOperations**

** **

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

 

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

 

*Cost of services*.  Our cost of services was $55,935,068 for theyear ended December 31, 2008 compared to $60,445,783 for the same periodof 2007, a decrease of 7.5%.  Thisdecrease was primarily attributable to the decrease in revenues in the yearended December 31, 2008 compared to the same period of 2007, and higherthird party costs associated with the additional shot-hole contracts in 2007compared to 2008.  As a percentage ofrevenues, cost of services was 64.5% for the year ended December 31, 2008compared to 66.9% for the same period of 2007.

 

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*Selling, general, and administrative expenses. *SG&A expenses were$4,468,883 for the year ended December 31, 2008 compared to $3,864,810 forthe same period of 2007, an increase of 15.6%. This increase was primarily attributable to additional expensesassociated with additional selling and administrative personnel, and additionalcompensation expense for deferred stock-based compensation.  SG&A expense as a percentage of revenueswas 5.2% for the year ended December 31, 2008 compared to 4.3% for thesame period of 2007.

 

*Depreciation and amortizationexpense*.  Depreciationand amortization expense was $13,911,124 for the year ended December 31,2008 compared to $12,743,065 for the same period of 2007, an increase of9.2%.  This increase was primarilyattributable to depreciation and amortization expense associated with capitalexpenditures of approximately $21,686,000 since January 1, 2008.  This increase was partially offset by adecrease in depreciation expense in the third and fourth quarters of 2007 andthe first and second quarters of 2008 as a result of an increase in theestimated useful life of certain seismic equipment.  See “Change In Accounting Estimate” in Note Bof Notes to Financial Statements in Item 8. Depreciation and amortization expense as a percentage of revenues was16.0% for the year ended December 31, 2008 compared to 14.1% for the sameperiod of 2007.

 

*Income from operations*.  Income from operations was $12,454,667 forthe year ended December 31, 2008 compared to $13,342,214 for the sameperiod of 2007, a decrease of 6.7%.  Thisdecrease was primarily attributable to a decrease in revenues, an increase inSG&A and depreciation and amortization expenses, partially offset by adecrease in costs of services.  EBITDAincreased $280,512 to $26,365,791 for the year ended December 31, 2008from $26,085,279 for the same period of 2007, an increase of 1.1%.  This increase was primarily attributable tothe increase in depreciation referred to immediately above.  For a definition of EBITDA, a reconciliationof EBITDA to net income, and discussion of EBITDA, see the section entitled “Non-GAAPFinancial Measure” which follows.

 

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

 

*Income tax expense*.  Income tax expense was $4,626,569 for theyear ended December 31, 2008 compared to $5,130,165 for the same period of2007, a decrease of 9.8%.  The effectivetax rate for the year ended December 31, 2008 was 40.1% compared to 40.3%for the same period of 2007.

 

***Year Ended December 31, 2007, Comparedto Year Ended December 31, 2006***

 

*Revenues*.  Our revenues were $90,395,872 for the yearended December 31, 2007 compared to $67,760,306 for the same period of2006, an increase of 33.4%.  Thisincrease in revenues was attributable to several factors, including operatingeight seismic data acquisition crews for 12 months in 2007 compared with sixcrews the first four months, seven crews for the next five months and eight crewsfor the last three months of the same period of 2006, as well as the fact thatapproximately 34% of revenues in the year ended December 31, 2007 werederived from lower margin shot-hole contracts compared with approximately 25%for the same period of 2006.  Theseshot-hole contracts typically generate higher revenues but lower gross marginsthan vibroseis contracts due to higher third party costs that are included inrevenues and have little or no margin associated with them.

 

*Cost of services*.  Our cost of services was $60,445,783 for theyear ended December 31, 2007 compared to $40,831,650 for the same periodof 2006, an increase of 48%.  Thisincrease was attributable to several factors: (1) the increase in revenues in the year ended December 31,2007 compared to the same period of 2006; (2) the adverse weatherconditions in January and February 2007 in Colorado and Kansas; (3) thesevere flooding conditions in the Mid-continent and Southwestern areas of theUnited States during the second quarter of 2007; (4) severe weatherconditions in July 2007 that negatively impacted our revenue byapproximately 18% and our pretax income by approximately 62%; and (5) thehigher third party costs associated with the additional shot-hole contracts in2007 compared to 2006.  As a percentageof revenues, cost of services was 66.9% for the year ended December 31,2007 compared to 60.3% for the same period of 2006.

 

*Selling, general, and administrative expenses. *SG&A expenses were$3,864,810 for the year ended December 31, 2007 compared to $2,988,892 forthe same period of 2006, an increase of 29.3%. This increase was primarily attributable to additional expensesassociated with additional selling and administrative personnel, additionalcompensation expense for deferred stock-based compensation, increased insurancecosts, and additional expenses associated with the operation of eight crewsduring the entire year of 2007 compared to six crews the first four months,seven crews the next five months, and eight crews for the last three months ofthe same period of 2006.

 

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SG&A expense as apercentage of revenues was 4.3% for the year ended December 31, 2007compared to 4.4% for the same period of 2006.

 

*Depreciation and amortizationexpense*.  Depreciationand amortization expense was $12,743,065 for the year ended December 31,2007 compared to $9,540,171 for the same period of 2006, an increase of33.6%.  This increase was primarilyattributable to depreciation and amortization expense associated with capitalexpenditures of approximately $18,200,000 since January 1, 2007.  This increase was partially offset by adecrease in depreciation expense in the third and fourth quarters of 2007 as aresult of an increase in the estimated useful life of certain seismicequipment.  See “Change In AccountingEstimate” in Note B of Notes to Financial Statements in Item 8.  Depreciation and amortization expense as apercentage of revenues was 14.1% for the fiscal years of 2007 and 2006.

 

*Income from operations*.  Income from operations was $13,342,214 forthe year ended December 31, 2007 compared to $14,399,593 for the sameperiod of 2006, a decrease of 7.3%.  Thisdecrease was primarily attributable to the increase in cost of services,SG&A, and depreciation and amortization expense, partially offset by anincrease in revenues.  EBITDA increased$2,145,515 to $26,085,279 for the year ended December 31, 2007 from$23,939,764 for the same period of 2006, an increase of 9%.  This increase was primarily attributable tothe increase in gross margin.  For adefinition of EBITDA, a reconciliation of EBITDA to net income, and discussionof EBITDA, see the section entitled “Non-GAAP Financial Measure” which follows.

 

*Interestexpense*.  Interestexpense was $604,616 for the year ended December 31, 2007 compared to$780,782 for the same period of 2006, a decrease of 22.6%.  This decrease was primarily attributable tothe reduction of debt.

 

*Income tax expense*.  Income tax expense was $5,130,165 for theyear ended December 31, 2007 compared to $5,507,386 for the same period of2006, a decrease of 6.8%.  The effectivetax rate for the year ended December 31, 2007 was 40.3% compared to 40.4%for the same period of 2006.

 

**Non-GAAPFinancial Measure**

** **

We define EBITDA as netincome plus expenses of interest, income taxes, depreciation, and amortization.We use EBITDA as a supplemental financial measure to assess:

 

·                  thefinancial performance of our assets without regard to financing methods,capital structures, taxes, or historical cost basis;

 

·                  ourliquidity and operating performance over time and in relation to othercompanies that own similar assets and that we believe calculate EBITDA in amanner similar to us; and

 

·                  theability of our assets to generate cash sufficient for us to pay potentialinterest expenses.

 

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

 

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The following tablereconciles our EBITDA to our net income:

 
| ** **                             | ** ** | **Year Ended**   | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **December 31,** | ** ** |
| ** **                             | ** ** | **2008**              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                   |       |                  |       |   |   |   |   |
| Net income                             |       | $                     | 6,898,442  |   | $ | 7,607,433 |   | $ | 8,111,425 |   |
| Depreciation and  amortization expense |       | 13,911,124            |       | 12,743,065 |   | 9,540,171 |   |
| Interest expense                       |       | 929,656               |       | 604,616 |   | 780,782 |   |
| Income tax  expense                    |       | 4,626,569             |       | 5,130,165 |   | 5,507,386 |   |
| EBITDA                                 |       | $                     | 26,365,791 |   | $ | 26,085,279 |   | $ | 23,939,764 |   |

 

**Liquidity andCapital Resources**

** **

***Liquidity***

 

*Cash flows fromoperating activities.*

* *

Net cash provided by operating activities was$33,860,082 for the year ended December 31, 2008, compared to $14,839,414for the same period of 2007.  The$19,020,668 increase was principally attributable to the timing of accountsreceivable collections, the timing of receipt and payment of invoices andtaxes, and the timing of billings and revenue recognition.  Changes in significant components of net cashprovided by operations were a $708,991 change in net income, a $1,168,059change in depreciation and amortization expense, a $2,995,031 change in deferredincome taxes, a $11,004,486 change in trade accounts receivable, a $2,220,150change in costs and estimated earnings in excess of billings on uncompletedcontracts, a $3,659,368 change in trade accounts payable, a $1,473,377 changein accrued liabilities, a $1,202,070 change in prepaid federal and state incometaxes, and a $5,255,518 change in billings in excess of costs and estimatedearnings on uncompleted contracts.

 

Working capital increased $11,479,746 to $16,969,043as of December 31, 2008, from the December 31, 2007, working capitalof $5,489,297.  This increase was dueprimarily to an increase in cash and cash equivalents of $19,610,525, anincrease in prepaid income taxes of $1,119,736, a decrease in accruedliabilities of $860,322, partially offset by a decrease in trade accountsreceivable of $6,299,590, an increase in trade accounts payable of $1,638,647,an increase in billings in excess of costs and estimated earnings onuncompleted contracts of $2,436,224, and an increase in current maturities ofnotes payable of $1,869,969.

 

*Cash flows usedin investing activities.*

* *

Net cash used in investing activities was $6,078,536for the year ended December 31, 2008, and $12,661,703 for the year ended December 31,2007.  The $6,583,167 decrease was mainlydue to a decrease in cash related capital expenditures during 2008 of$6,686,040.

 

*Cash flows used in financingactivities.*

* *

Net cash used in financing activities was $8,171,021for the year ended December 31, 2008, and $7,062,654 for the year ended December 31,2007.  The $1,108,367 increase was dueprimarily to an increase in principal paymentson notes payable of $1,277,274.

 

*Capital expenditures.*

* *

During the year ended December 31, 2008, capital expenditures of$21,685,982 were used to acquire additional seismic equipment and vehicles.  This additional seismic equipment primarilyincluded two new ARAM ARIES recording systems, additional recording channelsfor our ARAM ARIES recording crews, and 13 new vibration vehicles for ourrecording crews.  The additional seismicequipment and vehicles were primarily to enhance the efficiency of our existingcrews and to equip our ninth crew. During the first two months of 2009, there have been no material capitalexpenditures.  Although we do not budgetfor our capital expenditures, we may purchase additional equipment during 2009as the demand for our services warrants.

 

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***Capital Resources***

 

Historically, we have relied on cash generated fromoperations and short-term borrowings from commercial banks and equipmentlenders and loans from directors to fund our working capital requirements andcapital expenditures.

 

In April of 2005, we entered into a revolvingcredit agreement with a commercial bank. Effective September 16, 2006, we renewed our revolving creditagreement and increased the borrowing limit from $3,500,000 to $5,000,000. Theborrowing limit under the revolving line of credit agreement remains at$5,000,000 and was renewed on September 16, 2007, and again on September 16,2008.  The revolving line of creditagreement does not expire until September 16, 2009.  Our obligations under this agreement aresecured by a security interest in our accounts receivable.  Interest on the outstanding amount under theline of credit loan agreement is payable monthly at the prime rate of interest.The credit loan agreement provides for non-financial and financial covenants includinga minimum debt service coverage ratio in excess of 2.0 to 1.0, a ratio of debtto worth not in excess of 1.25 to 1.0. As of December 31, 2008, we had no borrowings****outstandingunder the line of credit loan agreement.

 

In December of 2007, we completed a $4,120,254loan transaction with a commercial lender for the purpose of providing fundsfor the purchase of our seventh new ARAM ARIES recording system. This loan isrepayable over a period of 48 months at a fixed per annum interest rate of6.38%. This loan is collateralized by the new recording system equipment andthe recording vehicles and two semi-trailers that transport the newly purchasedequipment between jobs.  In January 2008,the Company entered into a $2,463,101 loan agreement with a bank to providefinancing for the purchase of new vibration vehicles.  The loan is repayable over a period of 57months at a fixed per annum interest rate of 6.35% and is collateralized by thevibration vehicles.  In February 2008,the Company exercised its purchase option for seismic recording equipment ithad been renting.  In March 2008,the Company entered into a $2,975,844 loan agreement with a commercial lenderto provide financing for purchase of this rented equipment and to replace anexisting loan the Company had with the lender. This loan is repayable over a period of 48 months at a fixed per annuminterest rate of 5.75% and is collateralized by the equipment.  In July 2008, the Company entered into a$3,200,000 loan agreement with a bank to provide financing for the purchase ofseismic recording equipment.  This loanis repayable over 36 months at a fixed per annum interest rate of 6.00% and iscollateralized by the equipment.  In August 2008,the Company entered into a $2,003,700 loan agreement with a bank to providefinancing for the purchase of new vibration vehicles.  This loan is repayable over 36 months at afixed per annum interest rate of 6.00% and is collateralized by the vibrationvehicles.  In September 2008, theCompany entered into a $2,690,402 loan agreement with a commercial lender toprovide financing for our eighth new ARAM ARIES recording system. This loan isrepayable over a period of 48 months at a fixed per annum interest rate of6.00% and is collateralized by the recording system.  Also in September 2008, the Company enteredinto a $1,092,053 loan agreement with the same commercial lender to providefinancing for recording equipment that goes with the eighth ARAM ARIESrecording system.  This loan isco-terminus with the loan for the recording system, and carries a fixed perannum interest rate of 6.00% and is collateralized by the recording equipment.

 

In April of 2004, we executed an addendum to ourlease of a facility in Plano, Texas, that included approximately 10,500 squarefeet of office and warehouse space and an outdoor storage area of approximately20,000 square feet.  This facility wasused to repair geophysical equipment and housed our corporate offices until September of2006.  In September of 2005, weleased an additional facility, in Plano, Texas, with approximately 10,000square feet of office and warehouse space and an additional 10,000 square feetof outdoor storage to accommodate our growth. This facility was used primarily to repair geophysical equipment.  In January of 2006, we leased a 600square foot facility in Houston, Texas, to be used as a sales office.  In July of 2006, we entered into a leasefor 7,269 square feet of office space located in Plano, Texas.  In September of 2006, we relocated ourcorporate offices to this facility and in September 2008 increased thesize of the lease to 8,523 square feet of office space.  In October of 2006, we leased an 800square foot facility in Oklahoma City, Oklahoma, to be used as a salesoffice.  In September of 2007, weleased a 1,130 square foot facility in Denver, Colorado, to be used as a salesoffice. In September 2008, we leased a 400 square foot facility is Pratt,Kansas, to be used as a permit office. In November 2008, we vacated our two Plano repair, warehouse andoutdoor storage facilities, and moved to a leased repair, warehouse and outdoorstorage facility in Denison, Texas.  TheDenison, Texas, facility consists of one 5,000 square foot building, two 10,000square foot adjacent buildings and an outdoor storage area of approximately60,500 square feet.

 

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**ContractualObligations**

** **

The following tablesummarizes payments due in specific periods related to our contractualobligations as of December 31, 2008:

 
| ** **                       | ** ** | **Payments Due by Period ****(1)** | ** ** |
|----------------------------------|------------|--------------------------------------------------------|------------|
| ** **                       | ** ** | ** **                                             | ** ** | **Within** | ** ** | ** ** | ** ** | ** ** | ** ** | **After** | ** ** |
| **Contractual Obligations** | ** ** | **Total**                                              | ** ** | **1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **5 Years** | ** ** |
| ** **                       | ** ** | **(In thousands)**                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating lease  obligations     |       | $                                                      | 1,428      |   | $ | 386 |   | $ | 686 |   | $ | 356 |   | $ | — |   |
| Debt obligations                 |       | $                                                      | 16,023     |   | $ | 5,172 |   | $ | 9,318 |   | $ | 1,533 |   | $ | — |   |
| Capital lease  obligations       |       | $                                                      | 1,457      |   | $ | 857 |   | $ | 600 |   | $ | — |   | $ | — |   |
| Total                            |       | $                                                      | 18,908     |   | $ | 6,415 |   | $ | 10,604 |   | $ | 1,889 |   | $ | — |   |

 

----

(1)          See “Capital Resources”above for a discussion of the contractual obligations we have incurred since December 31,2008.

 

We believe that our capital resources, including ourshort-term investments, funds available under our line of credit loanagreement, and cash flow from operations, are adequate to meet our currentoperational needs. We believe that we will be able to finance our 2009 capitalexpenditures through cash flow from operations, borrowings from commerciallenders, and the funds available under our line of credit loan agreement.  However, our ability to satisfy workingcapital requirements, meet debt repayment obligations, and fund future capitalrequirements will depend principally upon our future operating performancewhich is subject to the risks inherent in our business.

 

**Off-BalanceSheet Arrangements**

** **

As of December 31, 2008, we had no off-balancesheet arrangements.

 

**CriticalAccounting****Policies**

** **

The preparation of our financial statements inconformity with GAAP requires us to make certain assumptions and estimates thataffect the reported amounts of assets and liabilities at the date of ourfinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Because of the use of assumptions and estimates inherentin the reporting process, actual results could differ from those estimates.

 

*RevenueRecognition*

* *

Seismic Surveys

 

The Company provides seismic data acquisition surveyservices to its customers under general service agreements which define certainobligations for the Company and for its customers.  A supplemental agreement setting forth theterms of a specific project, which may be cancelled by either party upon 30days advance written notice, is entered into for every project.  These supplemental agreements are either “turnkey”agreements providing for a fixed fee to be paid for each unit of seismic dataacquired or “term” agreements providing for a fixed hourly, daily, or monthlyfee during the term of the project.  Theduration of these projects will vary from a few days to several months.  The Company recognizes revenue when servicesare performed under both types of agreements. Services are defined as the commencement of data acquisition.  Under turnkey agreements, the total number ofunits of seismic data to be gathered is set forth in the agreement, and revenueis recognized as services are performed on a per unit of seismic data acquiredrate.  Under term agreements, revenue isrecognized as services are performed based on the time worked rate provided inthe term agreement.  Under both turnkeyand term agreements, cost of earned revenue is recognized by multiplying totalestimated agreement cost by the percentage-of-completion of the agreement.  The excess of that amount over the cost ofearned revenue reported in prior periods is recognized as cost of earnedrevenue for the period.  Agreements arenot segmented nor combined for purposes of calculating percentage ofcompletion.  The asset “Costs andestimated earnings in excess of billings on uncompleted contracts” representscost incurred on turnkey agreements in excess of billings on thoseagreements.  The liability “Billings inexcess of costs and estimated earnings on uncompleted contracts” representsbillings on turnkey agreements in excess of cost on those agreements.  Claims have been negligible in the yearsended December 31, 2008, 2007, and 2006.

 

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GravityData

 

The Company owns a data bank which contains gravitydata, and to a lesser extent magnetic data, from many of the major oil andnatural gas producing areas located within the U.S.  When an order for gravity data is received,the portion of gravity data requested by the customer is prepared in digitalformat for licensing and shipment to the customer.  This process is performed by an employee inthe Company’s headquarters office and normally takes no longer than a fewdays.  The licensing of gravity data isnot a material part of the Company’s revenue. Gravity data revenue during the years ended December 31, 2008,2007, and 2006 was approximately $46,100, $187,300, and $500, respectively.

 

*Allowance forDoubtful Accounts*

* *

We prepare our allowance for doubtful accountsreceivable based on our past experience of historical write-offs, our currentcustomer base, and our review of past due accounts. The inherent volatility ofthe energy industry’s business cycle can cause swift and unpredictable changesin the financial stability of our customers.

 

*Impairment of Long-lived Assets*

* *

We review long-lived assets for impairment whentriggering events occur suggesting deterioration in the assets’ recoverabilityor fair value. Recognition of an impairment charge is required if futureexpected net cash flows are insufficient to recover the carrying value of theasset. Our forecast of future cash flows used to perform impairment analysisincludes estimates of future revenues and profitability based on our historicalresults and analysis of future oil and natural gas prices which are fundamentalto assessing demand for our services. If we are unable to achieve these cashflows, our estimates will be revised which could result in an impairment chargefor the period of revision.

 

*DepreciableLives of Property, Plant, and Equipment*

* *

Our property, plant, and equipment are capitalized athistorical cost and depreciated over the useful life of the asset. Our estimateof this useful life is based on circumstances that exist in the seismicindustry and information available at the time of the purchase of the asset.The technology of the equipment used to gather data in the seismic industry hashistorically evolved such that obsolescence does not occur quickly. Ascircumstances change and new information becomes available, these estimatescould change. We amortize these capitalized items using the straight-linemethod. Capital assets are depreciated over their useful lives ranging from oneto seven years, depending on the classification of the asset.

 

*Tax Accounting*

* *

We account for our income taxes in accordance withStatement of Financial Accounting Standards (SFAS) No. 109, “Accountingfor Income Taxes,” which requires the recognition of amounts of taxes payableor refundable for the current year and an asset and liability approach inrecognizing the amount of deferred tax liabilities and assets for the futuretax consequences of events that have been recognized in our financialstatements or tax returns. We determine deferred taxes by identifying the typesand amounts of existing temporary differences, measuring the total deferred taxasset or liability using the applicable tax rate, and reducing the deferred taxasset by a valuation allowance if, based on available evidence, it is morelikely than not that some portion or all of the deferred tax assets will not berealized. Our methodology for recording income taxes requires judgmentregarding assumptions and the use of estimates, including determining ourannual effective tax rate and the valuation of deferred tax assets, which cancreate variance between actual results and estimates. This process involvesmaking forecasts of current and future years’ taxable income, and unforeseenevents may significantly affect these estimates. Those factors, among others,could have a material impact on our provision or benefit for income taxes. In July of2006, FIN 48, “Accounting for Uncertainty in Income Taxes — an interpretationof Financial Accounting Standards Board (FASB) Statement No. 109,” wasissued.  FIN 48 prescribes a recognitionthreshold and measurement attribute for tax positions.  The Company adopted FIN 48 at the beginningof fiscal year 2007 which did not have a material impact on the financialstatements.

 

*Stock BasedCompensation*

* *

Prior to January 1,2006, the Company accounted for its stock options under the recognition andmeasurement principles of APB Opinion No. 25, and relatedinterpretations.  Accordingly, nostock-based employee 

 

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compensation costwas reflected in our financial statements prior to January 1, 2006 sinceall options to purchase common stock of the Company had an exercise price equalto, or greater than, the market value of the underlying common stock on thedate of grant.

 

Effective January 1, 2006, the Companyimplemented Statement of Financial Accounting Standards (SFAS) No. 123R, “ShareBased Payment (SFAS 123R),” for stock-based compensation awards granted afterthat date and for unvested awards outstanding at that date using the modifiedprospective application method.  Werecognize the fair value of the stock-based compensation awards as wages in theStatements of Income on a straight-line basis over the vesting period.  Such implementation is expected to haveminimal impact on our results of operations, financial position, andliquidity.  The adoption of SFAS 123Rresulted in the recognition of compensation expense, relative to stock-basedawards, in wages in the Statements of Income of approximately $455,000, orapproximately $0.03 per share, for the year ended December 31, 2008 and$430,000, or approximately $.03 per share, for the year ended December 31,2007.  In accordance with the modifiedprospective application method permitted by SFAS 123R, prior period amountshave not been restated to reflect the recognition of stock-based compensationcosts.

 

In April of 2006, 106,391 shares of restrictedstock were issued to employees of the Company under the Company’s 2006 StockAward Plan (“2006 Stock Award Plan”).  InAugust 2007, 18,900 shares of restricted stock were issued to employees ofthe Company under the 2006 Stock Award Plan. In June 2008, 10,000 shares of restricted stock were issued to an employeeof the Company under the 2006 Stock Award Plan. In October 2008, 335,000 stock options were issued to employees ofthe Company under the 2006 Stock Award Plan. As of December 31, 2008, there was approximately $742,000 ofunrecognized compensation expense related to our two-share based compensationplans.

 

**Recently IssuedAccounting Pronouncements**

** **

In September of2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”),which defines fair value, establishes guidelines for measuring fair value, andexpands disclosures regarding fair value measurements.  This statement applies when other accountingpronouncements require or permit assets or liabilities to be measured at fairvalue, but does not expand the use of fair value to new accountingtransactions.  SFAS 157 is effective forfiscal years beginning after November 15, 2007, and for non-financialassets and liabilities, generally, in fiscal years beginning after November 15,2008.  As of December 31, 2008, theCompany has no financial assets and liabilities that are required to bemeasured at fair value.  SFAS 157excluded stock-based compensation from its scope.  The Company primarily uses fair value to measuregoodwill (non-financial asset), and its associated reporting unit, in connectionwith our annual impairment analysis. SFAS 157, as it is currently written, will apply measurement anddisclosure requirements in connection with our goodwill impairment analysiseffective in the fiscal year beginning after November 15, 2008.  We expect that SFAS 157 will not have asignificant effect on our goodwill impairment test, but it will requireenhanced disclosures.

 

In September of 2006, SFAS No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendmentof SFAS No. 87, 88, 106, and 132(R),” was issued SFAS No. 158requires the funded status of pension and postretirement plans to be recordedas assets or liabilities and unrecognized gains or losses to be recorded asaccumulated other comprehensive loss in the balance sheet.  The Company has no defined benefit pension orother postretirement plans.  As a result,SFAS No. 158 did not have an effect on the Company’s results.

 

In February of 2007, the FASB issued SFAS No. 159(“SFAS 159), “The Fair Value Option for Financial Assets and FinancialLiabilities.”  SFAS 159 providescompanies with an option to report selected financial assets and liabilities atfair value.  SFAS 159 is effective forfiscal years beginning after November 15, 2007.  The adoption of SFAS 159 has not had asignificant effect on our financial statements.

 

In December of 2007, the FASB issued Statement ofFinancial Accounting Standards No. 141R, “Business Combinations,” (SFAS141R) effective for fiscal years beginning after December 15, 2008.  Under SFAS 141R an acquiring entity in abusiness combination is required to recognize all assets acquired andliabilities assumed in the transaction. The revised standard also establishes the acquisition-date fair value asthe measurement objective for all assets acquired and liabilities assumed.  The rule requires an acquirer todisclose all of the information users may need to evaluate and understand thenature and financial effect of the business combination.  The Company is currently evaluating SFAS 141Rand does not expect these new rules to have a material impact on theCompany’s overall results of operations, financial position, or cash flows.

 

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In December of 2007, the FASB issued Statement ofFinancial Accounting Standards No. 160, “Non-controlling Interest inConsolidated Financial Statements – an amendment of ARB No. 51,” (SFAS160) effective for fiscal years beginning after December 15, 2008.  SFAS 160 requires all entities to reportnon-controlling (minority) interest in subsidiaries as equity in theconsolidated financial statements.  Itsintention is to eliminate the diversity in practice regarding the accountingfor transactions between an entity and non-controlling interest. The Company iscurrently evaluating SFAS 160 and does not expect these new rules to havea material impact on the Company’s overall results of operations, financial positionor cash flows.

 

In May 2008, the FASB issued SFAS No. 162 (“SFAS162”), “The Hierarchy of Generally Accepted Accounting Principles.”  Under SFAS 162, the GAAP hierarchy will nowreside in the accounting literature established by the FASB.  SFAS 162 identifies the sources of accountingprinciples and the framework for selecting the principles used in thepreparation of financial statements in conformity with GAAP.  SFAS 162 is effective 60 days following the SEC’sapproval of the Public Accounting Oversight Board Auditing amendments to AU Section 411,“The Meaning of Presented Fairly in Conformity with Generally AcceptedAccounting Principles.”  We do not expectthe adoption of SFAS 162 to have a material impact on our financial statements.

 

**Effect ofInflation**

** **

We do not believe that inflation has had a materialeffect on our business, results of operations, or financial condition duringthe past three years.

 

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

** **

This Form 10-K includes “forward-looking statements”as defined in Section 27A of the Securities Act of 1933, as amended (the “SecuritiesAct”), and Section 21E of the Securities Exchange Act of 1934, as amended(the “Exchange Act”), which reflect our view with respect to future events. Webase these forward-looking statements on our current expectations andprojections about future events. These forward looking statements are subjectto risks, uncertainties, and assumptions about the Company, including:

 

·                  dependence uponenergy industry spending for seismic data acquisition services;

 

·                  theunpredictable nature of forecasting weather;

 

·                  the potentialfor contract delay or cancellation;

 

·                  the potentialfor fluctuations in oil and natural gas prices; and

 

·                  the availabilityof capital resources.

 

We use the words “may,” “will,” “can,” “could,” “should,”“expect,” “anticipate,” “estimate,” “believe,” “target,” “continue,” “intend,” “plan,”“budget,” and other similar words to identify forward-looking statements. Youshould read statements that contain these words carefully because they discussfuture expectations, contain projections of results of operations or of ourfinancial condition, and/or state other “forward-looking” information. We donot undertake any obligation to update or revise publicly any forward-lookingstatements, except as required by law. These statements also involve risks anduncertainties that could cause our actual results or financial condition tomaterially differ from our expectations in this Form 10-K.

 

We believe that it is important to communicate ourexpectations of future performance to our investors. However, events may occurin the future that we are unable to accurately predict or over which we have nocontrol. When considering our forward-looking statements, you should keep inmind the risk factors and other cautionary statements in this Form 10-Kand other factors noted throughout this Form 10-K. There are many risks,uncertainties, and events that may cause our actual results to differmaterially from those contained in any forward-looking statement. Please readthe section entitled “Risk Factors” for a discussion of certain risks of ourbusiness and an investment in our common stock.

 

**ITEM 7A. QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

** **

We have not entered into any hedging agreements orswap agreements. Our principal market risk is the risk related to theconcentration of our customers in the oil and natural gas industry. Since allof our customers are 

 

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involved in the oil andnatural gas industry, there may be a positive or a negative effect on ourexposure to credit risk in that our customers may be similarly affected bychanges in economic and industry conditions. For the year ended December 31,2008, our top two customers accounted for approximately 14.4% and 12.3% of ourrevenues.  For the year ended December 31,2007, our top two customers accounted for approximately 12.1% and 9.9% of ourrevenues.  For the year ended December 31,2006, no customer accounted for 10% or more of our revenues.

 

For further information see “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” and “Item1A. Risk Factors.”

 

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

** **

**Financial Statements**

**December 31, 2008, 2007, and 2006**

 

# **CONTENTS**

 
| Report  of Independent Registered Public Accounting Firm | 26     |
|----------------------------------------------------------|--------|
|                                                     |   |
| Financial  Statements                                    |   |
|                                                     |   |
| Balance Sheets                                           | 27     |
|                                                     |   |
| Statements of Income                                     | 29     |
|                                                     |   |
| Statements  of Shareholders’ Equity                 | 30     |
|                                                     |   |
| Statements  of Cash Flows                                | 31     |
|                                                     |   |
| Notes  to Financial Statements                           | 32     |

 

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**Report of Independent Registered Public AccountingFirm**

 

Board of Directors and

Shareholders ofTGC Industries, Inc.

 

We have audited the accompanying balance sheets of TGCIndustries, Inc. as of December 31, 2008 and 2007, and the relatedstatements of income, shareholders’ equity, and cash flows for each of thethree years in the period ended December 31, 2008.  These financial statements are theresponsibility of the Company’s management. We also have audited TGC Industries, Inc.’s internal control overfinancial reporting as of December 31, 2008, based on criteria establishedin *Internal Control— Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).  TGC Industries, Inc.’smanagement is responsible for these financial statements, for maintainingeffective internal control over financial reporting, and for its assessment ofthe effectiveness of internal control over financial reporting.  Our responsibility is to express an opinionon these financial statements and an opinion on the company’s internal controlover financial reporting based on our audits.

 

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audits to obtain reasonableassurance about whether the financial statements are free of materialmisstatement and whether effective internal control over financial reportingwas maintained in all material respects. Our audits of the financial statements included examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  Our audit of internalcontrol over financial reporting included obtaining an understanding ofinternal control over financial reporting, assessing the risk that a materialweakness exists, and testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk.  Our audits also included performing suchother procedures as we considered necessary in the circumstances.  We believe that our audits provide areasonable basis for our opinions.

 

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles.  A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

In our opinion,the financial statements referred to above present fairly, in all materialrespects, the financial position of TGC Industries, Inc. as of December 31,2008 and 2007, and the results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2008, in conformity withaccounting principles generally accepted in the United States of America.  Also in our opinion, TGC Industries, Inc.maintained, in all material respects, effective internal control over financialreporting as of December 31, 2008, based on criteria established in *Internal Control—Integrated Framework* issued by the COSO.

 

 
| /s/ Lane Gorman  Trubitt, L.L.P. |   |
|----------------------------------|--------|
| Dallas, Texas                    |   |
| March 9,  2009              |   |

 

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**TGCIndustries, Inc.**

**BALANCE SHEETS**

**December 31,**

 
| ** **                                                                  | ** ** | **2008**    | ** ** | **2007**    | ** ** |
|-----------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| ASSETS                                                                      |       |        |       |        |       |
|                                                                        |       |        |       |        |       |
| CURRENT ASSETS                                                              |       |        |       |        |       |
|                                                                        |       |        |       |        |       |
| Cash and cash  equivalents                                                  |       | $           | 24,114,351 |        | $          | 4,503,826 |   |
| Trade accounts  receivable                                                  |       | 5,853,908   |       | 12,153,498  |       |
| Cost and  estimated earnings in excess of billings on uncompleted contracts |       | 2,300,985   |       | 535,143     |       |
| Prepaid expenses  and other                                                 |       | 718,301     |       | 712,614     |       |
| Prepaid federal  and state income tax                                       |       | 1,220,154   |       | 100,418     |       |
|                                                                        |       |        |       |        |       |
| Total current  assets                                                       |       | 34,207,699  |       | 18,005,499  |       |
|                                                                        |       |        |       |        |       |
| PROPERTY AND  EQUIPMENT - at cost                                           |       |        |       |        |       |
|                                                                        |       |        |       |        |       |
| Machinery and  equipment                                                    |       | 91,233,877  |       | 71,441,785  |       |
| Automobiles and  trucks                                                     |       | 8,792,645   |       | 7,770,646   |       |
| Furniture and  fixtures                                                     |       | 348,103     |       | 348,103     |       |
| Leasehold  improvements                                                     |       | 14,994      |       | 14,994      |       |
|                                                                        |       | 100,389,619 |       | 79,575,528  |       |
| Less accumulated  depreciation and amortization                             |       | (49,757,056 | )          | (36,645,143 | )          |
|                                                                        |       | 50,632,563  |       | 42,930,385  |       |
|                                                                        |       |        |       |        |       |
| Goodwill                                                                    |       | 201,530     |       | 201,530     |       |
| Other assets                                                                |       | 49,129      |       | 24,642      |       |
|                                                                        |       | 250,659     |       | 226,172     |       |
|                                                                        |       |        |       |        |       |
| Total assets                                                                |       | $           | 85,090,921 |        | $          | 61,162,056 |   |

 

The accompanying notesare an integral part of these financial statements

 

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**TGCIndustries, Inc.**

**BALANCESHEETS — Continued**

**December 31,**

 
| ** **                                                                                             | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                                   |       |       |       |       |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                             |       |       |       |       |       |
|                                                                                                   |       |       |       |       |       |
| CURRENT  LIABILITIES                                                                                   |       |       |       |       |       |
|                                                                                                   |       |       |       |       |       |
| Trade accounts  payable                                                                                |       | $          | 4,569,911  |       | $          | 2,931,264 |   |
| Accrued  liabilities                                                                                   |       | 863,756    |       | 1,724,078  |       |
| Billings in  excess of costs and estimated earnings on uncompleted contracts                           |       | 5,776,444  |       | 3,340,220  |       |
| Current  maturities of notes payable                                                                   |       | 5,171,872  |       | 3,301,903  |       |
| Current portion  of capital lease obligations                                                          |       | 856,673    |       | 1,218,737  |       |
|                                                                                                   |       |       |       |       |       |
| Total current  liabilities                                                                             |       | 17,238,656 |       | 12,516,202 |       |
|                                                                                                   |       |       |       |       |       |
| NOTES PAYABLE,  less current maturities                                                                |       | 10,851,621 |       | 3,090,191  |       |
|                                                                                                   |       |       |       |       |       |
| CAPITAL LEASE  OBLIGATIONS, less current portion                                                       |       | 600,214    |       | 679,074    |       |
|                                                                                                   |       |       |       |       |       |
| LONG-TERM  DEFERRED TAX LIABILITY                                                                      |       | 5,973,000  |       | 1,955,047  |       |
|                                                                                                   |       |       |       |       |       |
| COMMITMENTS AND  CONTINGENCIES                                                                         |       | —     |       | —     |       |
|                                                                                                   |       |       |       |       |       |
| SHAREHOLDERS’  EQUITY                                                                             |       |       |       |       |       |
|                                                                                                   |       |       |       |       |       |
| Preferred stock,  $1.00 par value; 4,000,000 shares authorized; issued – none                     |       | —     |       | —     |       |
|                                                                                                   |       |       |       |       |       |
| Common stock,  $.01 par value; 25,000,000 shares authorized; 17,435,319 and 16,595,047 in  each period |       | 174,353    |       | 165,950    |       |
|                                                                                                   |       |       |       |       |       |
| Additional  paid-in capital                                                                            |       | 26,501,011 |       | 25,901,968 |       |
|                                                                                                   |       |       |       |       |       |
| Retained  earnings                                                                                     |       | 24,009,389 |       | 17,110,947 |       |
|                                                                                                   |       |       |       |       |       |
| Treasury stock,  at cost, 37,803 shares                                                                |       | (257,323   | )          | (257,323   | )          |
|                                                                                                   |       |       |       |       |       |
|                                                                                                   |       | 50,427,430 |       | 42,921,542 |       |
|                                                                                                   |       |       |       |       |       |
| Total  liabilities and shareholders’ equity                                                       |       | $          | 85,090,921 |       | $          | 61,162,056 |   |

 

The accompanyingnotes are an integral part of these financial statements

 

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**TGCIndustries, Inc.**

**STATEMENTS OF INCOME**

**YearsEnded December 31,**

 
| ** **                                      | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                            |       |       |       |       |       |       |       |
| Revenue                                         |       | $          | 86,769,742 |       | $          | 90,395,872 |       | $ | 67,760,306 |   |
|                                            |       |       |       |       |       |       |       |
| Cost and  expenses                              |       |       |       |       |       |       |       |
| Cost of services                                |       | 55,935,068 |       | 60,445,783 |       | 40,831,650 |       |
| Selling, general  and administrative            |       | 4,468,883  |       | 3,864,810  |       | 2,988,892  |       |
| Depreciation and  amortization expense          |       | 13,911,124 |       | 12,743,065 |       | 9,540,171  |       |
|                                            |       | 74,315,075 |       | 77,053,658 |       | 53,360,713 |       |
| ** **                                      |       |       |       |       |       |       |       |
| Income from  operations                         |       | 12,454,667 |       | 13,342,214 |       | 14,399,593 |       |
| ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest expense                                |       | 929,656    |       | 604,616    |       | 780,782    |       |
|                                            |       |       |       |       |       |       |       |
| Income before  income taxes                     |       | 11,525,011 |       | 12,737,598 |       | 13,618,811 |       |
|                                            |       |       |       |       |       |       |       |
| Income tax  expense:                            |       |       |       |       |       |       |       |
| Current                                         |       | 609,569    |       | 4,108,196  |       | 4,427,592  |       |
| Deferred                                        |       | 4,017,000  |       | 1,021,969  |       | 1,079,794  |       |
| Income tax expense                              |       | 4,626,569  |       | 5,130,165  |       | 5,507,386  |       |
| ** **                                      |       |       |       |       |       |       |       |
| NET INCOME                                      |       | $          | 6,898,442  |       | $          | 7,607,433  |       | $ | 8,111,425 |   |
| ** **                                      |       |       |       |       |       |       |       |
| Earnings per  common share:                     |       |       |       |       |       |       |       |
| Basic                                           |       | $          | 0.40       |       | $          | 0.44       |       | $ | 0.47 |   |
| Diluted                                         |       | $          | 0.40       |       | $          | 0.44       |       | $ | 0.47 |   |
|                                            |       |       |       |       |       |       |       |
| Weighted average  number of shares outstanding: |       |       |       |       |       |       |       |
| Basic                                           |       | 17,390,581 |       | 17,368,303 |       | 17,270,259 |       |
| Diluted                                         |       | 17,463,985 |       | 17,452,782 |       | 17,395,201 |       |

 

The accompanyingnotes are an integral part of these financial statements

 

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**TGC Industries, Inc.**

**STATEMENTSOF SHAREHOLDERS’ EQUITY**

 
| ** **                                                     | ** ** | ** **            | ** ** | **Additional** | ** ** | ** **   | ** ** | ** **   | ** ** | ** ** | ** ** |
|----------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|--------------|------------|--------------|------------|------------|------------|
| ** **                                                     | ** ** | **Common Stock** | ** ** | **Paid-in**    | ** ** | **Retained** | ** ** | **Treasury** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **Capital**  | ** ** | **Earnings** | ** ** | **Stock**  | ** ** | **Total** | ** ** |
|                                                           |       |                  |       |           |       |         |       |         |       |       |       |   |   |
| Balances at  January 1, 2006                              |       | 14,887,412            |       | $              | 148,875    |         | $          | 25,321,787   |       | $          | 1,392,089  |   | $ | (257,323 | ) | $ | 26,605,428 |   |
|                                                           |       |                  |       |           |       |         |       |         |       |       |       |   |   |
| 5% common stock  dividend                                      |       | 743,292               |       | 7,433          |       | (8,363       | )          | —       |       | —     |       | (930 | ) |
|                                                           |       |                  |       |           |       |         |       |         |       |       |       |   |   |
| Exercise of  stock options                                     |       | 26,192                |       | 262            |       | 20,539       |       | —       |       | —     |       | 20,801 |   |
|                                                           |       |                  |       |           |       |         |       |         |       |       |       |   |   |
| Issuance of  restricted common stock                           |       | 96,500                |       | 965            |       | (965         | )          | —       |       | —     |       | — |   |
|                                                           |       |                  |       |           |       |         |       |         |       |       |       |   |   |
| Amortization of  unearned compensation restricted stock awards |       | —                |       | —         |       | 248,942      |       | —       |       | —     |       | 248,942 |   |
|                                                           |       |                  |       |           |       |         |       |         |       |       |       |   |   |
| Amortization of  compensation cost of unvested stock options   |       | —                |       | —         |       | 57,492       |       | —       |       | —     |       | 57,492 |   |
|                                                           |       |                  |       |           |       |         |       |         |       |       |       |   |   |
| Net income                                                     |       | —                |       | —         |       | —       |       | 8,111,425    |       | —     |       | 8,111,425 |   |
| Balances at  December 31, 2006                            |       | 15,753,396            |       | 157,535        |       | 25,639,432   |       | 9,503,514    |       | (257,323   | )          | 35,043,158 |   |
|                                                           |       |                  |       |           |       |         |       |         |       |       |       |   |   |
| 5% common stock  dividend                                      |       | 787,387               |       | 7,873          |       | (8,799       | )          | —       |       | —     |       | (926 | ) |
|                                                           |       |                  |       |           |       |         |       |         |       |       |       |   |   |
| Options issued  to outside Directors                           |       | —                |       | —         |       | 75,000       |       | —       |       | —     |       | 75,000 |   |
|                                                           |       |                  |       |           |       |         |       |         |       |       |       |   |   |
| Issuance of  restricted common stock                           |       | 18,000                |       | 180            |       | (180         | )          | —       |       | —     |       | — |   |
|                                                           |       |                  |       |           |       |         |       |         |       |       |       |   |   |
| Repurchase of  stock warrants                                  |       | —                |       | —         |       | (262,571     | )          | —       |       | —     |       | (262,571 | ) |
|                                                           |       |                  |       |           |       |         |       |         |       |       |       |   |   |
| Cancellation of  restricted stock                              |       | (4,221                | )          | (42            | )          | 42           |       | —       |       | —     |       | — |   |
|                                                           |       |                  |       |           |       |         |       |         |       |       |       |   |   |
| Amortization of  unearned compensation restricted stock awards |       | —                |       | —         |       | 380,261      |       | —       |       | —     |       | 380,261 |   |
|                                                           |       |                  |       |           |       |         |       |         |       |       |       |   |   |
| Amortization of  compensation cost of unvested stock options   |       | —                |       | —         |       | 49,854       |       | —       |       | —     |       | 49,854 |   |
|                                                           |       |                  |       |           |       |         |       |         |       |       |       |   |   |
| Exercise of  stock options                                     |       | 39,015                |       | 390            |       | 28,943       |       | —       |       | —     |       | 29,333 |   |
|                                                           |       |                  |       |           |       |         |       |         |       |       |       |   |   |
| Shares issued                                                  |       | 1,470                 |       | 14             |       | (14          | )          | —       |       | —     |       | — |   |
|                                                           |       |                  |       |           |       |         |       |         |       |       |       |   |   |
| Net income                                                     |       | —                |       | —         |       | —       |       | 7,607,433    |       | —     |       | 7,607,433 |   |
| Balances at  December 31, 2007                            |       | 16,595,047            |       | 165,950        |       | 25,901,968   |       | 17,110,947   |       | (257,323   | )          | 42,921,542 |   |
|                                                           |       |                  |       |           |       |         |       |         |       |       |       |   |   |
| 5% common stock  dividend                                      |       | 827,751               |       | 8,278          |       | (9,104       | )          | —       |       | —     |       | (826 | ) |
|                                                           |       |                  |       |           |       |         |       |         |       |       |       |   |   |
| Options issued  to outside Directors                           |       | —                |       | —         |       | 150,000      |       | —       |       | —     |       | 150,000 |   |
|                                                           |       |                  |       |           |       |         |       |         |       |       |       |   |   |
| Issuance of  restricted common stock                           |       | 10,000                |       | 100            |       | (100         | )          | —       |       | —     |       | — |   |
|                                                           |       |                  |       |           |       |         |       |         |       |       |       |   |   |
| Cancellation of  restricted stock                              |       | (2,110                | )          | (21            | )          | 21           |       | —       |       | —     |       | — |   |
|                                                           |       |                  |       |           |       |         |       |         |       |       |       |   |   |
| Amortization of  unearned compensation restricted stock awards |       | —                |       | —         |       | 411,113      |       | —       |       | —     |       | 411,113 |   |
|                                                           |       |                  |       |           |       |         |       |         |       |       |       |   |   |
| Amortization of  compensation cost of unvested stock options   |       | —                |       | —         |       | 43,959       |       | —       |       | —     |       | 43,959 |   |
|                                                           |       |                  |       |           |       |         |       |         |       |       |       |   |   |
| Exercise of  stock options                                     |       | 4,631                 |       | 46             |       | 3,154        |       | —       |       | —     |       | 3,200 |   |
|                                                           |       |                  |       |           |       |         |       |         |       |       |       |   |   |
| Net income                                                     |       | —                |       | —         |       | —       |       | 6,898,442    |       | —     |       | 6,898,442 |   |
| Balances at  December 31, 2008                            |       | 17,435,319            |       | $              | 174,353    |         | $          | 26,501,011   |       | $          | 24,009,389 |   | $ | (257,323 | ) | $ | 50,427,430 |   |

 

The accompanying notes are an integral part of these financialstatements

 

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**TGCIndustries, Inc.**

**STATEMENTSOF CASH FLOWS**

**Years Ended December 31,**

 
| ** **                                                                         | ** ** | **2008**   | ** ** | **2007**    | ** ** | **2006**    | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|
| Cash flows from  operating activities                                              |       |       |       |        |       |        |       |
| Net income                                                                         |       | $          | 6,898,442  |        | $          | 7,607,433   |       | $ | 8,111,425 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |       |       |        |       |        |       |
| Depreciation and  amortization                                                     |       | 13,911,124 |       | 12,743,065  |       | 9,540,171   |       |
| Gain on disposal  of property and equipment                                        |       | (170,831   | )          | (132,790    | )          | (56,240     | )          |
| Non-cash  compensation                                                             |       | 605,072    |       | 505,115     |       | 306,434     |       |
| Deferred income  taxes                                                             |       | 4,017,000  |       | 1,021,969   |       | 1,079,794   |       |
| Changes in  operating assets and liabilities                                       |       |       |       |        |       |        |       |
| Trade accounts  receivable                                                         |       | 6,299,590  |       | (4,704,896  | )          | (2,988,758  | )          |
| Cost and estimated  earnings in excess of billings on uncompleted contracts        |       | (1,765,842 | )          | 454,308     |       | 2,696,433   |       |
| Prepaid expenses  and other                                                        |       | 1,994,248  |       | 1,908,209   |       | 1,447,215   |       |
| Prepaid federal  and state income tax                                              |       | (1,118,783 | )          | 83,287      |       | 134,538     |       |
| Other assets                                                                       |       | (24,487    | )          | (3,825      | )          | (12,605     | )          |
| Trade accounts  payable                                                            |       | 1,638,647  |       | (2,020,721  | )          | 2,987,319   |       |
| Accrued  liabilities                                                               |       | (860,322   | )          | 613,055     |       | 514,482     |       |
| Billings in  excess of cost and estimated earnings on uncompleted contracts        |       | 2,436,224  |       | (2,819,294  | )          | 4,738,830   |       |
| Income taxes  payable                                                              |       | —     |       | (415,501    | )          | 185,769     |       |
|                                                                               |       |       |       |        |       |        |       |
| Net cash  provided by operating activities                                         |       | 33,860,082 |       | 14,839,414  |       | 28,684,807  |       |
|                                                                               |       |       |       |        |       |        |       |
| Cash flows from  investing activities                                              |       |       |       |        |       |        |       |
| Capital  expenditures                                                              |       | (6,322,048 | )          | (13,008,088 | )          | (21,219,238 | )          |
| Purchase of  assets of Highland Industries                                         |       | —     |       | —      |       | (1,800,000  | )          |
| Proceeds from  sale of property and equipment                                      |       | 243,512    |       | 346,385     |       | 129,689     |       |
|                                                                               |       |       |       |        |       |        |       |
| Net cash used in  investing activities                                             |       | (6,078,536 | )          | (12,661,703 | )          | (22,889,549 | )          |
|                                                                               |       |       |       |        |       |        |       |
| Cash flows from  financing activities                                              |       |       |       |        |       |        |       |
| Principal  payments on notes payable                                               |       | (6,793,635 | )          | (5,516,361  | )          | (4,957,377  | )          |
| Principal  payments on capital lease obligations                                   |       | (1,379,759 | )          | (1,312,129  | )          | (968,392    | )          |
| Proceeds from  exercise of stock options                                           |       | 3,200      |       | 29,333      |       | 20,801      |       |
| Redemption of  stock purchase warrants                                             |       | —     |       | (262,571    | )          | —      |       |
| Payment of  dividends                                                              |       | (827       | )          | (926        | )          | (930        | )          |
|                                                                               |       |       |       |        |       |        |       |
| Net cash used in  financing activities                                             |       | (8,171,021 | )          | (7,062,654  | )          | (5,905,898  | )          |
|                                                                               |       |       |       |        |       |        |       |
| Net increase  (decrease) in cash and cash equivalents                              |       | 19,610,525 |       | (4,884,943  | )          | (110,640    | )          |
|                                                                               |       |       |       |        |       |        |       |
| Cash and cash  equivalents at beginning of year                                    |       | 4,503,826  |       | 9,388,769   |       | 9,499,409   |       |
|                                                                               |       |       |       |        |       |        |       |
| Cash and cash  equivalents at end of year                                          |       | $          | 24,114,351 |        | $          | 4,503,826   |       | $ | 9,388,769 |   |
|                                                                               |       |       |       |        |       |        |       |
| Supplemental  cash flow information                                                |       |       |       |        |       |        |       |
| Interest paid                                                                      |       | $          | 893,536    |        | $          | 603,813     |       | $ | 790,171 |   |
| Income taxes  paid                                                                 |       | $          | 1,692,057  |        | $          | 4,448,135   |       | $ | 4,107,285 |   |
|                                                                               |       |       |       |        |       |        |       |
| Noncash  investing and financing activities                                        |       |       |       |        |       |        |       |
| Capital lease obligations  incurred                                                |       | $          | 938,835    |        | $          | 1,110,057   |       | $ | 1,647,918 |   |
| Financed  equipment purchases                                                      |       | $          | 14,425,099 |        | $          | 4,120,254   |       | $ | — |   |
| Financed  insurance premiums                                                       |       | $          | 1,999,935  |        | $          | 2,111,898   |       | $ | 1,625,149 |   |
| Restricted stock  awards to employees net of cancellations                         |       | $          | 67,258     |        | $          | 159,243     |       | $ | 1,071,150 |   |

 

The accompanying notes are an integral part of these financialstatements

 

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TGC Industries, Inc.

NOTES TO FINANCIAL STATEMENTS 

December 31,2008, 2007, and 2006

 

NOTE A - 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.

 

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES

 

Cash Equivalents

 

The Companyconsiders all highly liquid investments with original maturity dates of threemonths or less to be cash equivalents. The Company maintains its accounts atfinancial institutions located in Texas. The bank accounts are insured by the Federal Deposit InsuranceCorporation up to $250,000.

 

Trade Receivables

 

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

 

Property and Equipment

 

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

 

Long-Lived Assets

 

Long-lived assetsheld and used by the Company are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable. For the purposes of evaluating the recoverability of long-livedassets, the recoverability test is performed using undiscounted cash flows estimatedto be generated by those assets.  Noimpairment charge was necessary at December 31, 2008, 2007, and 2006.

 

Income Taxes

 

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

 

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TGC Industries, Inc.

NOTES TO FINANCIALSTATEMENTS - CONTINUED

December 31, 2008, 2007, and 2006

 

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

 

Income Taxes - continued

 

Effective January 1,2007, the Company adopted the provisions of FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes – as interpretation of FASBStatement 109*(“FIN 48”), which clarifies the accounting for incometax positions.  FIN 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return.  Under FIN 48, the Companyrecognizes in its financial statements the impact of a tax position if thatposition is “more likely than not” to be sustained on audit, based on thetechnical merits of the position.  FIN 48also provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods and disclosure.  Interest and penalties related tounrecognized tax benefits are recorded as income tax expense.  See Note I for further information.

 

Revenue Recognition

 

Seismic Surveys

 

The Company provides seismic data acquisition survey services to itscustomers under general service agreements which define certain obligations forthe Company and for its customers.  Asupplemental agreement setting forth the terms of a specific project, which maybe cancelled by either party upon 30 days advance written notice, is enteredinto for every project.  Thesesupplemental agreements are either “turnkey” agreements providing for a fixedfee to be paid for each unit of seismic data acquired or “term” agreementsproviding for a fixed hourly, daily, or monthly fee during the term of theproject.  The duration of these projectswill vary from a few days to several months. The Company recognizes revenue when services are performed under bothtypes of agreements.  Services aredefined as the commencement of data acquisition.  Under turnkey agreements, the total number ofunits of seismic data to be gathered is set forth in the agreement and revenueis recognized as services are performed on a per unit of seismic data acquiredrate.  Under term agreements, revenue isrecognized as services are performed based on the time worked rate provided inthe term agreement.  Under both turnkey andterm agreements, cost of earned revenue is recognized by multiplying totalestimated agreement cost by the percentage-of-completion of the agreement.  The excess of that amount over the cost ofearned revenue reported in prior periods is recognized as cost of earnedrevenue for the period.  Agreements arenot segmented nor combined for purposes of calculating percentage ofcompletion.  The asset, “Costs andestimated earnings in excess of billings on uncompleted contracts” representscost incurred on turnkey agreements in excess of billings on thoseagreements.  The liability, “Billings inexcess of costs and estimated earnings on uncompleted contracts” representsbillings on turnkey agreements in excess of cost on those agreements.  Claims have been negligible in the yearsended December 31, 2008, 2007, and 2006.

 

Gravity Data

 

The Company owns a data bank which contains gravity data, and to alesser extent magnetic data, from many of the major oil and natural gasproducing areas located within the U.S. When an order for gravity data is received, the portion of gravity datarequested by the customer is prepared in digital format for licensing andshipment to the customer.  This processis performed by an employee in the Company’s headquarters office and normallytakes no longer than a few days.  Thelicensing of gravity data is not a material part of the Company’s revenue.  Gravity data revenue during the years ended December 31,2008, 2007, and 2006 was approximately $46,100, $187,300, and $500,respectively.

 

Reclassifications

 

Certain reclassifications have been made to the 2007 financialstatements to conform to the 2008 presentation.

 

33

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TGC Industries, Inc.

NOTES TO FINANCIALSTATEMENTS - CONTINUED

December 31, 2008, 2007, and 2006

 

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

 

Stock-Based Compensation

 

Prior to March 2006,the Company had one stock-based compensation plan.  The Company now has two stock-based compensationplans, which are described more fully in Note H. Prior to January 1, 2006,the Company accounted for stock options under the recognition and measurementprinciples of Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations. Accordingly, nostock-based employee compensation cost was reflected in net income prior to January 1,2006, as all options granted under the older plan had an exercise price equalto the market value of the underlying common stock on the date of grant.Effective January 1, 2006 the Company implemented Statement of AccountingStandards (SFAS) No. 123R “Share Based Payment (SFAS 123R)” forstock-based compensation awards granted after that date and for unvested awardsoutstanding at that date using the modified prospective applicationmethod.  The Company recognizes the fairvalue of the stock-based compensation awards as wages in the Statements ofIncome on a straight-line basis over the vesting period.  As a result, during the years ended December 31,2008 and 2007, the Company recognized compensation expense for unvested stockoptions of $43,959 and $49,854, respectively, and restricted stock of $411,113and $380,261, respectively.

 

For the year ended December 31, 2008, the fairvalue of each option grant is estimated on the date of the grant using theBinomial Lattice option pricing model with the following assumptions used forthe outstanding grants: risk-free interest rate of 2.90%; expected dividendyields of 0.0%; expected lives of 5.0 years; and expected volatility of61.0%.  In years ended December 31,2007 and prior, the fair value of each option grant is estimated on the date ofgrant using the Black-Scholes option pricing model with the followingassumptions used for outstanding grants: risk-free interest rate of 4.20%;expected dividend yields of 0.0%; expected lives of 5.0 years; and expectedvolatility of 92.72% to 96.54%.

 

Financial Instruments

 

The Company’sfinancial instruments recorded on the balance sheet include cash and cashequivalents, accounts receivable, accounts payable and debt. The carryingamounts of cash and cash equivalents, accounts receivable and accounts payableapproximate fair value because of the short-term nature of these items. Fair valueof long-term debt is based on rates available to the Company for debt withsimilar terms and maturities.

 

Earnings Per Share

 

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

 

All share and pershare amounts for the years ended December 31, 2008, 2007, and 2006 havebeen adjusted to reflect 5% stock dividends paid April 28, 2008, April 27,2007 and April 25, 2006 to shareholders of record as of April 14,2008, April 13, 2007 and April 11, 2006, respectively.

 

34

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TGC Industries, Inc.

NOTES TO FINANCIALSTATEMENTS - CONTINUED

December 31, 2008, 2007, and 2006

 

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

 

Use of Estimates

 

The preparation of financial statements in accordance with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ fromthose estimates.

 

Change in Accounting Estimates

 

Management evaluates its estimates on a routine basis.  Effective July 1, 2007, the Companyrevised the estimated useful lives of certain seismic equipment and relatedcomponents.  The Company purchased thisnew equipment, not previously used, from November 2004 through June 2007.  Based on the information gained fromoperations, management believes that this equipment will benefit periodsranging from 5 to 7 years, beginning at the point the assets were originallyplaced in service.  The originalestimated useful lives ranged from 3 to 5 years.

 

The net book value of this equipment at June 30, 2007, was notmodified and is amortized over the revised estimated useful lives of theequipment.  The Company does not believethat this equipment will become obsolete at the end of the original estimateand has revised the estimated life of these assets.  The effect to depreciation expense, netincome and earnings per share for the years ended December 31, 2008 and2007 are as follows:

 
| ** **                  | ** ** | **Year Ended**             | ** ** | **Year Ended**             | ** ** |
|-----------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
| ** **                  | ** ** | **As Reported**            | ** ** | **Pro Forma**              | ** ** | **As Reported** | ** ** | **Pro Forma** | ** ** |
|                        |       |                            |       |                            |       |   |   |   |   |
| Depreciation  Expense       |       | $                               | 13,911,124 |                            | $          | 16,901,410 |   | $ | 12,743,065 |   | $ | 14,238,208 |   |
|                        |       |                            |       |                            |       |   |   |   |   |
| Net Income                  |       | $                               | 6,898,442  |                            | $          | 5,108,576 |   | $ | 7,607,433 |   | $ | 6,714,474 |   |
|                        |       |                            |       |                            |       |   |   |   |   |
| Earnings per  common share: |       |                            |       |                            |       |   |   |   |   |
| Basic                       |       | $                               | 0.40       |                            | $          | 0.29 |   | $ | 0.44 |   | $ | 0.39 |   |
|                        |       |                            |       |                            |       |   |   |   |   |
| Diluted                     |       | $                               | 0.40       |                            | $          | 0.29 |   | $ | 0.44 |   | $ | 0.38 |   |

 

Recent Accounting Standards

 

In September of2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”),which defines fair value, establishes guidelines for measuring fair value, andexpands disclosures regarding fair value measurements.  This statement applies when other accountingpronouncements require or permit assets or liabilities to be measured at fairvalue, but does not expand the use of fair value to new accountingtransactions.  SFAS 157 is effective forfiscal years beginning after November 15, 2007, and for non-financialassets and liabilities, generally, in fiscal years beginning after November 15,2008.  As of December 31, 2008, theCompany has no financial assets and liabilities that are required to bemeasured at fair value.  SFAS 157excluded stock-based compensation from its scope.  The Company primarily uses fair value tomeasure goodwill (non-financial asset), and its associated reporting unit, inconnection with our annual impairment analysis. SFAS 157, as it is currently written, will apply measurement anddisclosure requirements in connection with our goodwill impairment analysiseffective in the fiscal year beginning after November 15, 2008.  We expect that SFAS 157 will not have asignificant effect on our goodwill impairment test, but it will requireenhanced disclosures.

 

35

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Tableof Contents

 

TGC Industries, Inc.

NOTES TO FINANCIALSTATEMENTS - CONTINUED

December 31, 2008, 2007, and 2006

 

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES - CONTINUED

 

Recent Accounting Standards- continued

 

In September of2006, SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension andOther Postretirement Plans – an amendment of SFAS No. 87, 88, 106, and 132(R),”was issued, SFAS No. 158 requires the funded status of pension andpostretirement plans to be recorded as assets or liabilities and unrecognizedgains or losses to be recorded as accumulated other comprehensive loss in thebalance sheet.  The Company has nodefined benefit pension or other postretirement plans.  As a result, SFAS No. 158 did not havean effect on the Company’s results.

 

In February of2007, the FASB issued SFAS No. 159 (“SFAS 159), “The Fair Value Option forFinancial Assets and Financial Liabilities.” SFAS 159 provides companies with an option to report selected financialassets and liabilities at fair value. SFAS 159 is effective for fiscal years beginning after November 15,2007.  The adoption of SFAS 159 has nothad a significant effect on our financial statements.

 

In December of2007, the FASB issued Statement of Financial Accounting Standards No. 141R,“Business Combinations,” (SFAS 141R) effective for fiscal years beginning afterDecember 15, 2008.  Under SFAS 141Ran acquiring entity in a business combination is required to recognize allassets acquired and liabilities assumed in the transaction.  The revised standard also establishes theacquisition-date fair value as the measurement objective for all assetsacquired and liabilities assumed.  The rule requiresan acquirer to disclose all of the information users may need to evaluate andunderstand the nature and financial effect of the business combination.  The Company is currently evaluating SFAS 141Rand does not expect these new rules to have a material impact on theCompany’s overall results of operations, financial position or cash flows.

 

In December of 2007,the FASB issued Statement of Financial Accounting Standards No. 160, “Non-controllingInterest in Consolidated Financial Statements – an amendment of ARB No. 51,”(SFAS 160) effective for fiscal years beginning after December 15,2008.  SFAS 160 requires all entities toreport non-controlling (minority) interest in subsidiaries as equity in theconsolidated financial statements.  Itsintention is to eliminate the diversity in practice regarding the accountingfor transactions between an entity and non-controlling interest. The Company iscurrently evaluating SFAS 160 and does not expect these new rules to havea material impact on the Company’s overall results of operations, financialposition or cash flows.

 

In May 2008, theFASB issued SFAS No. 162 (“SFAS 162”), “The Hierarchy of GenerallyAccepted Accounting Principles.”  UnderSFAS 162, the GAAP hierarchy will now reside in the accounting literatureestablished by the FASB.  SFAS 162identifies the sources of accounting principles and the framework for selectingthe principles used in the preparation of financial statements in conformitywith GAAP, SFAS 162 is effective 60 days following the SEC’s approval of thePublic Accounting Oversight Board Auditing amendments to AU Section 411, “TheMeaning of Presented Fairly in Conformity with Generally Accepted AccountingPrinciples.”  We do not expect theadoption of SFAS 162 to have a material impact on our financial statements.

 

NOTE C - COSTS AND ESTIMATEDEARNINGS ON UNCOMPLETED CONTRACTS

 

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

 
| ** **                                                      | ** ** | **2008**    | ** ** | **2007**   | ** ** |
|-----------------------------------------------------------------|------------|-------------|------------|------------|------------|
| Costs incurred  on uncompleted contracts and estimated earnings |       | $           | 8,984,323  |       | $          | 2,617,318 |   |
| Less billings to  date                                          |       | (12,459,781 | )          | (5,422,395 | )          |
|                                                            |       | $           | (3,475,458 | )          | $          | (2,805,077 | ) |

 

36

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Tableof Contents

 

TGC Industries, Inc.

NOTES TO FINANCIALSTATEMENTS - CONTINUED

December 31, 2008, 2007, and 2006

 

NOTE C - COSTS AND ESTIMATED EARNINGS ONUNCOMPLETED CONTRACTS – CONTINUED

 

The components of uncompleted contracts are reflected in the balancesheets at December 31, 2008 and 2007 as follows:

 
| ** **                                                                   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Costs and  estimated earnings in excess of billings on uncompleted contracts |       | $          | 2,300,986  |       | $          | 535,143 |   |
| Billings in  excess of costs and estimated earnings on uncompleted contracts |       | (5,776,444 | )          | (3,340,220 | )          |
|                                                                         |       | $          | (3,475,458 | )          | $          | (2,805,077 | ) |

 

NOTE D - ACCRUED LIABILITIES

 

Accruedliabilities consist of the following at December 31,:

 
| ** **                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Compensation and  payroll taxes |       | $        | 476,718    |     | $          | 1,095,614 |   |
| Accrued sales  and use tax      |       | 3,035    |       | 357,673  |       |
| Insurance                       |       | 156,717  |       | 94,996   |       |
| Accrued interest                |       | 73,105   |       | 36,985   |       |
| Other                           |       | 154,181  |       | 138,810  |       |
|                            |       | $        | 863,756    |     | $          | 1,724,078 |   |

 

NOTE E - DEBT

 

Line of Credit

 

In September 2007, and again in September 2008, the Companyrenewed its revolving line of credit allowing the Company to borrow, repay andre-borrow, from time to time up to $5,000,000. Interest on the outstanding amount under the line of credit loanagreement is payable monthly at the prime rate of interest.  The credit loan agreement provides fornon-financial and financial covenants, including a debt to worth ratio not inexcess of 1.25 to 1.0, a minimum debt service coverage ratio in excess of 2.0to 1.0.  At December 31, 2008 and2007, the Company had no borrowings outstanding under the line of credit loanagreement.

 

Notes Payable

 

Notes payable consists of the following at December 31:

 
| ** **                                                                                                                                                | ** ** | **2008**  | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|----------|------------|
|                                                                                                                                                      |       |      |       |     |       |
| Note Payable to  a finance company, Interest at 6.38%, due in fixed principal monthly  installments of $85,839 plus interest; collateralized by equipment |       | $         | 3,090,191  |     | $          | 4,120,254 |   |
|                                                                                                                                                      |       |      |       |     |       |
| Note Payable to  a finance company, Interest at 5.75%, due in fixed principal monthly  installments of $61,997 plus interest; collateralized by equipment |       | 2,417,873 |       | —   |       |
|                                                                                                                                                      |       |      |       |     |       |
| Note Payable to  a finance company, Interest at 6.00%, due in fixed principal monthly  installments of $56,050 plus interest; collateralized by equipment |       | 2,522,252 |       | —   |       |
|                                                                                                                                                           |            |           |            |          |            |  |  |

 

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Table of Contents

 

TGC Industries, Inc.

NOTES TO FINANCIALSTATEMENTS - CONTINUED

December 31,2008, 2007, and 2006

 

NOTEE — DEBT — CONTINUED

 

Notes Payable - Continued

 
| Note Payable to  a finance company, Interest at 5.33%, due in fixed principal monthly  installments of $23,740 plus interest; collateralized by equipment  |   | 1,068,312  |       | —     |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|------------|--------|
|                                                                                                                                                       |   |       |       |       |   |
| Note Payable to  a commercial bank, Interest at 6.00%, due in fixed principal monthly  installments of $88,889 plus interest; collateralized by equipment  |   | 2,755,555  |       | —     |   |
|                                                                                                                                                       |   |       |       |       |   |
| Note Payable to  a commercial bank, Interest at 6.00%, due in fixed principal monthly  installments of $55,658 plus interest; collateralized by equipment  |   | 1,781,068  |       | —     |   |
|                                                                                                                                                       |   |       |       |       |   |
| Note Payable to  a commercial bank, Interest at 6.35%, due in monthly installments of $50,170  including interest; collateralized by equipment             |   | 2,161,061  |       | —     |   |
|                                                                                                                                                       |   |       |       |       |   |
| Note payable to  a finance company interest at 7.85% to 8.35%, due in monthly installments of  $29,905 to $227,181 including interest                      |   | 227,181    |       | 224,932    |   |
|                                                                                                                                                       |   |       |       |       |   |
| Note Payable to  a finance company, Interest at 7.25%, due in fixed principal monthly  installments of $93,507 plus interest; collateralized by equipment  |   | —     |       | 561,042    |   |
|                                                                                                                                                       |   |       |       |       |   |
| Note Payable to  a finance company, Interest at 7.25%, due in fixed principal monthly  installments of $7,951 plus interest; collateralized by equipment   |   | —     |       | 71,559     |   |
|                                                                                                                                                       |   |       |       |       |   |
| Note Payable to  a finance company, Interest at 7.25%, due in fixed principal monthly  installments of $7,951 plus interest; collateralized by equipment   |   | —     |       | 71,559     |   |
|                                                                                                                                                       |   |       |       |       |   |
| Note Payable to  a finance company, Interest at 7.25%, due in fixed principal monthly  installments of $7,972 plus interest; collateralized by equipment   |   | —     |       | 78,969     |   |
|                                                                                                                                                       |   |       |       |       |   |
| Note Payable to a  finance company, Interest at 7.78%, due in fixed principal monthly  installments of $105,315 plus interest; collateralized by equipment |   | —     |       | 1,263,779  |   |
|                                                                                                                                                       |   | 16,023,493 |       | 6,392,094  |   |
| Less Current  Maturities                                                                                                                                   |   | (5,171,872 | )          | (3,301,903 | )      |
|                                                                                                                                                       |   | $          | 10,851,621 |       | $      | 3,090,191 |   |
|                                                                                                                                                            |        |            |            |            |        |  |  |

 

38

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Tableof Contents

 

TGC Industries, Inc.

NOTES TO FINANCIALSTATEMENTS - CONTINUED

December 31, 2008, 2007,and 2006

 

NOTEE — DEBT — CONTINUED

 

Notes Payable - Continued

 

Aggregate annualmaturities of notes payable at December 31, 2008 are as follows:

 
| **Year Ending**  | ** ** | ** ** | ** ** |
|-----------------------|------------|------------|------------|
| **December 31,** | ** ** | ** ** | ** ** |
|                  |       |       |       |
| 2009                  |       | $          | 5,171,872  |   |
| 2010                  |       | 4,975,984  |       |
| 2011                  |       | 4,342,253  |       |
| 2012                  |       | 1,482,871  |       |
| 2013                  |       | 50,513     |       |
|                  |       | $          | 16,023,493 |   |

 

NOTE F — LEASES

 

Capital Leases

 

The Company leasesvehicles and certain specialized seismic equipment under leases classified ascapital leases. The following is a schedule showing the future minimum leasepayments under capital leases by years and the present value of the minimumlease payments as of December 31, 2008.

 
| **Year Ending**                     | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|
| **December 31,**                    | ** ** | ** ** | ** ** |
|                                     |       |       |       |
| 2009                                     |       | $          | 954,057    |   |
| 2010                                     |       | 450,710    |       |
| 2011                                     |       | 192,605    |       |
| Total minimum  lease payments required   |       | 1,597,372  |       |
| Less: Amount  representing interest      |       | (140,485   | )          |
| Present value of  minimum lease payments |       | 1,456,887  |       |
| Less current  maturities                 |       | (856,673   | )          |
|                                     |       | $          | 600,214    |   |

 

The net book valueof the capital assets leased was approximately $2,265,000 and $2,793,000 as of December 31,2008 and 2007, respectively. Total accumulated depreciation on these assets wasapproximately $5,286,000 and  $3,979,000as of December 31, 2008 and 2007, respectively.  Interest rates on these leases range from8.41% to 12.82%.

 

Operating Leases

 

The Company leasesfive office and one warehouse facility under operating leases that expire atvarious dates between September 2009 and October 2013 with one leaseon a month to month basis.  One of theoffice facilities, used by the Company as its corporate headquarters is locatedin Plano, Texas.  The warehouse facility,used as an equipment repair facility, is located in Denison, Texas.  Three office facilities are used as salesoffices and are located in Houston, Texas, Oklahoma City, Oklahoma and Denver,Colorado.  The remaining office facilityis used as a permitting office and is located in Pratt, Kansas.  Rent expense for these facilities for theyears ended December 31, 2008, 2007, and 2006 were approximately $350,000, $279,000, and $149,000,respectively.

 

39

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Tableof Contents

 

TGC Industries, Inc.

NOTES TO FINANCIALSTATEMENTS - CONTINUED

December 31, 2008, 2007,and 2006

 

NOTE F — LEASES -CONTINUED

 

Operating Leases - continued

 

The following is aschedule by years of future minimum rental payments required under theoperating leases as of December 31, 2008:

 
| **Year Ending**             | ** ** | ** ** | ** ** |
|----------------------------------|------------|------------|------------|
| **December 31:**            | ** ** | ** ** | ** ** |
|                             |       |       |       |
| 2009                             |       | $          | 385,695    |   |
| 2010                             |       | 340,996    |       |
| 2011                             |       | 344,678    |       |
| 2012                             |       | 200,445    |       |
| 2013 and  thereafter             |       | 156,067    |       |
| Total minimum  payments required |       | $          | 1,427,881  |   |

 

NOTE G — FAIR VALUE OF DEBT OBLIGATIONS

 

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

 
| ** **     | ** ** | **December 31,** | ** ** |
|----------------|------------|-----------------------|------------|
| ** **     | ** ** | **2008**              | ** ** | **2007** | ** ** |
|           |       |                  |       |   |   |
| Carrying value |       | $                     | 16,023,493 |   | $ | 6,392,094 |   |
| Fair value     |       | $                     | 16,011,215 |   | $ | 5,865,475 |   |

 

NOTE H — SHAREHOLDERS’ EQUITY

 

Earnings Per Share

 

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

 
| ** **                                          | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | **2008**              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                |       |                  |       |   |   |   |   |
| Numerator:                                          |       |                  |       |   |   |   |   |
| Net income                                          |       | $                     | 6,898,442  |   | $ | 7,607,433 |   | $ | 8,111,425 |   |
|                                                |       |                  |       |   |   |   |   |
| Denominator:                                        |       |                  |       |   |   |   |   |
| Basic - weighted  average common shares outstanding |       | 17,390,581            |       | 17,368,303 |   | 17,270,259 |   |
| Effect of  Dilutive Securities:                     |       |                  |       |   |   |   |   |
| Warrants                                            |       | —                |       | 22,633 |   | 27,104 |   |
| Stock options                                       |       | 73,404                |       | 61,846 |   | 97,838 |   |
|                                                |       | 17,463,985            |       | 17,452,782 |   | 17,395,201 |   |
|                                                |       |                  |       |   |   |   |   |
| Basic net income  per share                         |       | $                     | 0.40       |   | $ | 0.44 |   | $ | 0.47 |   |
| Diluted net  income per share                       |       | $                     | 0.40       |   | $ | 0.44 |   | $ | 0.47 |   |

 

40

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Tableof Contents

 

TGC Industries, Inc.

NOTES TO FINANCIALSTATEMENTS - CONTINUED

December 31, 2008, 2007,and 2006

 

NOTE H — SHAREHOLDERS’ EQUITY — CONTINUED

 

Earnings Per Share — continued

 

Outstandingoptions that were not included in the diluted calculation because their effectwould be anti-dilutive total 49,840 for the years ended December 31, 2008and 2007.

 

All share and pershare amounts have been adjusted to reflect 5% stock dividends paid April 28,2008, April 27, 2007 and April 25, 2006 to shareholders of record asof April 14, 2008, April 13, 2007 and April 11, 2006.

 

Stock-Based CompensationPlans

 

The Companycurrently has in effect a 1999 stock option plan (the “1999 Plan”).  Options for up to 300,000 shares of theCompany’s common stock may be granted. Options under the 1999 Plan must begranted at prices not less than the lesser of the par value per share of thestock or the fair market value per share of the Company’s stock on the date ofthe grant.  The term cannot exceed fiveyears from the date of the grant and are exercisable as follows: (i) one-thirdof the shares after the 12 month period following the date of the grant, (ii) two-thirdsof the shares after the 24 month period following the date of the grant, and (iii) allof the shares of stock after the 36 month period following the date of thegrant.  During 2008, no options weregranted or cancelled, and options covering 4,631 shares were exercised under the1999 Plan.  At December 31, 2008,options covering 90,134 shares were outstanding under the 1999 Plan, all ofwhich are exercisable.

 

The Companycurrently has in effect a 2006 stock award plan (the “2006 Plan”).  The 2006 Plan provides for the granting ofstock options, common stock, and restricted stock.  The Company can issue up to 1,000,000 sharesof the Company’s common stock pursuant to awards under the 2006 Plan. The 2006Plan will be administered by a committee of the Board of Directors (“the Committee”).  Currently the Committee is comprised of threedirectors.  Any stock options grantedunder the 2006 Plan will be exercisable as set forth in the option agreementspursuant to which they are issued, but in no event will stock options beexercisable after the expiration of ten (10) years from the date ofgrant.  During 2008, 445,295 options weregranted and no options were cancelled or exercised under the 2006 Plan.  Restricted stock consists of shares that aretransferred by the Company to a participant, but are subject to substantialrisk of forfeiture and to restrictions on their sale or other transfer by theparticipant.  In April 2006, theCommittee granted 106,391 shares of restricted stock.  In August 2007, the Committee granted18,900 shares of restricted stock.  In June 2008,the Committee granted 10,000 shares of restricted stock. The shares ofrestricted stock were issued in the names of the grantees and have restrictivelegends prohibiting their sales prior to vesting.  One-third (1/3) of the granted restrictedshares vest each year on the annual anniversary of the grant.   Upon vesting, a new certificate will beissued for the vested portion without the restrictive legend.  During the years ended December 31, 2008and 2007, the Company recognized compensation expense associated with therestricted stock of $411,113 and $380,261, respectively.  As a result of employees who left the Companyduring the years ended December 31, 2008 and 2007, the Company reversedapproximately $19,400 and $29,800, respectively, of deferred stock-basedcompensation and approximately $19,300 and $29,700, respectively, of additionalpaid-in capital, which represented the unamortized balance of deferredstock-based compensation relating to the employees who left the Company.  The number of shares of restricted stock,issued in April 2006, has been adjusted to reflect the 5% stock dividendspaid in April 2008 and 2007.  Thenumber of shares of restricted stock issued in August 2007, has beenadjusted to reflect the 5% stock dividend paid in April 2008.

 

During the yearsended December 31, 2008 and 2007, the Company recognized compensationexpense associated with unvested options under the 1999 and 2006 Plans of$43,959 and $49,854, respectively.

 

41

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Tableof Contents

 

TGC Industries, Inc.

NOTES TO FINANCIALSTATEMENTS - CONTINUED

December 31, 2008, 2007,and 2006

 

NOTE H — SHAREHOLDERS’ EQUITY — CONTINUED

 

Stock-Based CompensationPlans - continued

 

The followingtable summarizes activity under the Plans:

 
| ** **                         | ** ** | ** **            | ** ** | **Weighted**            | ** ** |
|------------------------------------|------------|-----------------------|------------|-------------------------|------------|
| ** **                         | ** ** | **Shares under** | ** ** | **Average**             | ** ** |
| ** **                         | ** ** | **Option**            | ** ** | **exercise price** | ** ** |
|                               |       |                  |       |                    |       |
| Balance at  December 31, 2005 |       | 159,972               |       | $                       | 2.66       |   |
| Granted                            |       | —                |       | $                       | —     |   |
| Exercised                          |       | (26,192               | )          | $                       | .79        |   |
| Canceled                           |       | —                |       | $                       | —     |   |
| Balance at  December 31, 2006 |       | 133,780               |       | $                       | 3.03       |   |
| Granted                            |       | 49,840                |       | 9.24                    |       |
| Exercised                          |       | (39,015               | )          | $                       | .75        |   |
| Canceled                           |       | —                |       | —                  |       |
| Balance at  December 31, 2007 |       | 144,605               |       | $                       | 5.78       |   |
| Granted                            |       | 445,295               |       | $                       | 3.38       |   |
| Exercised                          |       | (4,631                | )          | $                       | .69        |   |
| Canceled                           |       | —                |       | —                  |       |
| Balance at  December 31, 2008 |       | 585,269               |       | $                       | 3.99       |   |

 

The followinginformation applies to options outstanding and exercisable at December 31,2008:

 
| ** **           | ** ** | ** **               | ** ** | ** **      | ** ** | **Weighted**                  | ** ** | ** **              | ** ** |
|----------------------|------------|--------------------------|------------|-----------------|------------|-------------------------------|------------|-------------------------|------------|
| ** **           | ** ** | ** **               | ** ** | ** **      | ** ** | **average**                   | ** ** | ** **              | ** ** |
| ** **           | ** ** | ** **               | ** ** | ** **      | ** ** | **remaining**                 | ** ** | **Weighted**            | ** ** |
| ** **           | ** ** | **Range of**        | ** ** | **Number**      | ** ** | **contractual**               | ** ** | **average**             | ** ** |
| ** **           | ** ** | **Exercise prices** | ** ** | **outstanding** | ** ** | **life (in years)** | ** ** | **exercise price** | ** ** |
| Outstanding  options |       | $.69 – $9.24        |       | 585,269         |       | 4.17                          |       | $                       | 3.99       |   |
| Exercisable  options |       | $.69 – $9.24        |       | 195,124         |       | 2.89                          |       | $                       | 5.23       |   |

 

Stock Warrants

 

During 2004, theCompany issued 28,665 warrants to a public relations firm as part of its feefor services provided the Company.  Thewarrants have a strike price of $.91 per share and expired December 15,2007.  During January 2005, thepublic relations firm sold the 28,655 warrants to a group of investors thatincluded certain Directors of the Company. These warrants were redeemed by the Company in November 2007.  The number of warrants issued in 2004, havebeen adjusted to reflect the 5% stock dividends paid in April 2006 and2007, respectively.

 

Preferred Stock

 

During 1996, theCompany issued 1,150,350 shares of Series C 8% convertible exchangeablepreferred stock (“Series C Preferred Stock”) at $5.00 per share in aprivate placement offering with gross proceeds of approximately $5,800,000. TheSeries C Preferred Stock is, at the option of the Company, exchangeableinto 8% subordinated convertible debentures. Prior to November 30, 2001,the Series C Preferred Stock and debentures were convertible into sharesof the Company’s common stock at the conversion price of (i) $2.00 pershare if exercised by December 31, 2001, (ii) $3.75 per share ifexercised from January 1, 2002 through December 31, 2002, and (iii) $6.00per share thereafter. At a November 30, 2001 meeting, the Company’s Boardof Directors approved amendments to the conversion terms of the Series CPreferred Stock. The amendments were as follows: the conversion price wasreduced from $2.00 per share to $1.61 per share and the date of the conversionprice increase to $3.75 per share was delayed from December 31, 2001,until January 31, 2002. The subsequent date of the increase in theconversion price to $6.00 per share remained December 31, 2002.

 

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TGC Industries, Inc.

NOTES TO FINANCIALSTATEMENTS - CONTINUED

December 31, 2008, 2007,and 2006

 

NOTE H — SHAREHOLDERS’ EQUITY — CONTINUED

 

Preferred Stock - Continued

 

In January 2002,the Series 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, 2004meeting, the Company’s Board of Directors approved amendments to the conversionterms of the Series C Preferred Stock. The amendments were as follows: the conversion price was reduced from $6.00 per share to $2.00 per sharefor 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 C Preferred stock remained outstanding.  In January 2005, the Series CPreferred shareholders converted an additional 13,100 shares of Series CPreferred stock into 32,750 shares of common stock.  In June 2005, the Company redeemed the5,250 shares of Series C Preferred stock.

 

In 2000, theCompany issued 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 the agreement,issued 103,490 additional shares of Senior Preferred Stock to the SeniorPreferred shareholder as payment for 2000 dividends. At the election of theSenior Preferred shareholder, 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 shareholder 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 Seniorpreferred shareholder completed a transaction, selling all its 3,024,264 sharesof Senior Preferred Stock to a small number of investors that included severalmembers of the Company’s Board of Directors who purchased 1,772,200 of suchshares. During 2004, certain members of the investor group converted 206,700shares of Senior Preferred Stock into a like number of shares of the Company’sCommon Stock.  During 2005, the SeniorPreferred shareholders converted all 2,817,564 shares of Senior Preferred Stockinto a like number of shares of common stock.

 

Dividends

 

Holders of theCompany’s Series C Preferred Stock received, when, as and if declared bythe Board of Directors of the Company, dividends at a rate of 8% per annum. Thedividends were payable semi-annually during January and July of eachyear. As of December 31, 2004, following the conversion of 1,017,300shares of the Series C Preferred Stock as noted above, cumulativedividends of $44,040 were in arrears.  InApril 2005, the Company paid the cumulative dividends in arrears on the5,250 shares of Series C Preferred stock outstanding at that date in theamount of $12,600.  In connection withthe redemption of the Series C Preferred stock the shareholders receivedthe regular $.20 per share dividend in the amount of $1,050.

 

Holders of theCompany’s Senior Preferred Stock received, when, as and if declared by theBoard of Directors of the Company, dividends at a rate of 8.5% per annum. Thedividends were payable semi-annually during June and December of eachyear. Dividends payable in 2003 were paid in additional shares of SeniorPreferred Stock, at the election of the Senior Preferred Shareholder.  Cash dividends of $219,621 were paid to theSenior Preferred Shareholders during 2005. During 2005, the Senior Preferredshareholders converted all 2,817,564 shares of Senior Preferred Stock into alike number of shares of common stock.

 

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TGC Industries, Inc.

NOTES TO FINANCIALSTATEMENTS - CONTINUED

December 31, 2008, 2007,and 2006

 

NOTE I - INCOME TAXES

 

The income tax provisioncharged to continuing operations for the years ended December 31, 2008,2007, and 2006, was as follows:

 
| ** **                      | ** ** | **2008**  | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|---------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
|                            |       |      |       |      |       |      |       |
| Current:                        |       |      |       |      |       |      |       |
| U.S. federal                    |       | $         | 243,569    |      | $          | 3,565,519 |       | $ | 3,844,068 |   |
| State and local                 |       | 366,000   |       | 542,677   |       | 583,524   |       |
|                            |       | 609,569   |       | 4,108,196 |       | 4,427,592 |       |
|                            |       |      |       |      |       |      |       |
| Deferred:                       |       |      |       |      |       |      |       |
| U.S. federal  expense (benefit) |       | 4,017,000 |       | 1,021,969 |       | 1,079,794 |       |
|                            |       | $         | 4,626,569  |      | $          | 5,130,165 |       | $ | 5,507,386 |   |

 

The income tax provisiondiffers from the amount of income tax determined by applying the U.S. federalincome tax rate to pretax income from continuing operations for the years endedDecember 31, 2008, 2007, and 2006, due to the following:

 
| ** **                                          | ** ** | **2008** | ** ** | **2007** | ** ** | **2006**  | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Computed  “expected” tax expense          |       | $        | 3,918,504  |     | $          | 4,325,859 |       | $ | 4,766,584 |   |
| Increase in  income taxes resulting from:           |       |     |       |     |       |      |       |
| Nondeductible  expenses and other                   |       | 470,165  |       | 451,566  |       | 361,511   |       |
| State and  local taxes, net of federal benefit |       | 237,900  |       | 352,740  |       | 379,291   |       |
|                                                |       | $        | 4,626,569  |     | $          | 5,130,165 |       | $ | 5,507,386 |   |

 

Net deferred taxliabilities consist of the following components as of December 31, 2008and 2007:

 
| ** **                            | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|
| Deferred tax  assets                  |       |       |       |       |       |
| Loss carry  forwards (expire in 2028) |       | $          | 83,252     |       | $          | — |   |
| Deferred stock  compensation          |       | 173,511    |       | 104,775    |       |
|                                  |       | 256,763    |       | 104,775    |       |
|                                  |       |       |       |       |       |
| Deferred tax  liability               |       |       |       |       |       |
| Property and  equipment               |       | (6,229,763 | )          | (2,059,822 | )          |
|                                  |       | $          | (5,973,000 | )          | $          | (1,955,047 | ) |

 

The components givingrise to the net deferred tax items described above have been included in theaccompanying balance sheets as of December 31, 2008 and 2007, as follows:

 
| ** **                | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|---------------------------|------------|------------|------------|------------|------------|
|                      |       |       |       |       |       |
| Current assets            |       | $          | —     |       | $          | — |   |
| Noncurrent  (liabilities) |       | (5,973,000 | )          | (1,955,047 | )          |
|                      |       | $          | (5,973,000 | )          | $          | (1,955,047 | ) |

 

The Company adopted FIN 48 on January 1, 2007.  The implementation of FIN 48 did not have amaterial impact on the Company’s consolidated financial statements, results ofoperations or cash flows.  At December 31,2008 and 2007, the Company had no unrecognized tax benefits within itsprovision for income taxes.

 

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TGC Industries, Inc.

NOTES TO FINANCIALSTATEMENTS - CONTINUED

December 31, 2008, 2007,and 2006

 

NOTE J - 401(k) PLAN

 

The Company has a 401(k) salary deferral plan which covers allemployees who have reached the age of 20.5 years and have been employed by theCompany for at least one year. The covered employees may elect to have anamount deducted from their wages for investment in the retirement plan. TheCompany makes contributions to the plan equal to 50% of each participant’ssalary reduction contributions to the plan up to 6% of the participant’scompensation. The Company’s matching contribution to the plan was approximately$78,000, $64,000, and $54,000 for the years ended December 31, 2008, 2007,and 2006, respectively.

 

NOTEK - CONCENTRATION OF CREDIT RISK

 

The Company sells its geophysical services primarily to largeindependent oil and gas companies operating in the United States. The Companyperforms ongoing credit evaluations of its customer’s financial condition and,generally, requires no collateral from its customers.

 

During 2008 our two largest customers accounted for approximately 26.7%of revenues.  During 2007 our two largestcustomers accounted for approximately 22.0% of revenues.  During 2006 no customer accounted for morethan 10% of revenues.   As of December 31,2008, three customers accounted for 26%, 13% and 9% of outstanding accountsreceivable, respectively.  As of December 31,2007, three customers accounted for 31%, 27% and 16% of outstanding accountsreceivable, respectively.

 

NOTEL - CONTINGENCIES

 

In conducting its activities, the Company from time to time is thesubject of various claims arising from the ordinary course of business. In theopinion of management, the ultimate resolution of such claims is not expectedto have a material adverse effect upon the financial position of the Company.

 

NOTE M— QUARTERLY FINANCIAL DATA — (UNAUDITED)

 

Thefollowing is a summary of the unaudited quarterly financial information for thetwo years ended December 31, 2008 and 2007 (in thousands, except per shareamounts):

 
| ** **                    | ** ** | **Three Months Ended** | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| **2008**                      | ** ** | **March 31**                | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|                          |       |                             |       |   |   |   |   |   |   |
| Revenues                      |       | $                                | 22,471     |   | $ | 18,620 |   | $ | 21,554 |   | $ | 24,125 |   |
| Income from  operations       |       | 3,384                            |       | 1,679 |   | 3,603 |   | 3,788 |   |
| Net Income                    |       | 1,983                            |       | 868 |   | 1,863 |   | 2,185 |   |
| Net income per  share basic   |       | .11                              |       | .05 |   | .11 |   | .13 |   |
| Net income per  share diluted |       | .11                              |       | .05 |   | .11 |   | .13 |   |
|                               |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                    | ** ** | **Three Months Ended** | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| **2007**                      | ** ** | **March 31**                | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|                          |       |                             |       |   |   |   |   |   |   |
| Revenues                      |       | $                                | 18,608     |   | $ | 21,718 |   | $ | 24,208 |   | $ | 25,862 |   |
| Income from  operations       |       | 3,662                            |       | 2,457 |   | 3,266 |   | 3,958 |   |
| Net Income                    |       | 2,079                            |       | 1,336 |   | 1,826 |   | 2,366 |   |
| Net income per  share basic   |       | .12                              |       | .08 |   | .11 |   | .14 |   |
| Net income per  share diluted |       | .12                              |       | .08 |   | .10 |   | .14 |   |
|                               |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

 

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**ITEM9.  CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.**

 

Not Applicable.

 

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

 

**DisclosureControls and Procedures**

** **

TheCompany maintains controls and procedures to ensure that it is able to collectthe information it is required to disclose in the reports it files with theSecurities and Exchange Commission, and to process, summarize, and disclosethis information within the time periods specified in the rules of theSEC.  Based on an evaluation of theCompany’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended) as of theend of the period covered by this report conducted by the Company’s management,with the participation of the Chief Executive and Chief Financial Officers, theChief Executive and Chief Financial Officers believe that these controls andprocedures are effective to ensure that the Company is able to record, process,summarize, and report information required to be included in reports filed orsubmitted under the Exchange Act within the required time period.  There were no changes in the Company’sinternal controls over financial reporting during the quarter ended December 31,2008, that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

**Management’sReport on Internal Control over Financial Reporting**

** **

Managementof the Company is responsible for establishing and maintaining adequate internalcontrol over financial reporting as defined in Rule 13a-15(f) underthe Securities Exchange Act of 1934, as amended.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Projections of any evaluation of effectiveness to future periods aresubject to the risk that controls may become inadequate because of changes inconditions, or that the degree of compliance with the policies or proceduresmay deteriorate.  All internal control systems,no matter how well designed, have inherent limitations.  Therefore, even those systems determined tobe effective can provide only reasonable assurance with respect to financialstatement preparation and presentation.

 

Managementassessed the effectiveness of the Company’s internal control over financialreporting as of December 31, 2008. In making this assessment, management used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control — Integrated Framework. Based on our assessment, we believe that, as of December 31, 2008,the Company’s internal control over financial reporting is effective based onthose criteria.

 

Management’sassessment of the effectiveness of internal control over financial reporting asof December 31, 2008, has been audited by Lane Gorman Trubitt, L.L.P., theindependent registered public accounting firm which also audited the Company’sfinancial statements.  Lane GormanTrubitt, L.L.P.’s attestation report on management’s assessment of the Company’sinternal control over financial reporting appears in their Report ofIndependent Registered Public Accounting Firm.

 

**ITEM 9B. OTHER INFORMATION.**

 

NotApplicable.

 

**PART III**

** **

**ITEM10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.**

** **

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

 

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**ITEM 11. EXECUTIVE COMPENSATION.**

 

Theinformation required by Item 11 of Form 10-K is hereby incorporated byreference from the Company’s definitive proxy statement, which will be filedpursuant to Regulation 14A within 120 days after the Company’s year end for theyear covered by this report.

 

**ITEM12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS.**

** **

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

 

**ITEM13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.**

** **

Theinformation required by Item 13 of Form 10-K is hereby incorporated byreference from the Company’s definitive proxy statement, which will be filedpursuant to Regulation 14A within 120 days after the Company’s year end for theyear covered by this report.

 

**ITEM14.  PRINCIPAL ACCOUNTING FEES ANDSERVICES.**

** **

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

 

**PART IV**

** **

**ITEM15.  EXHIBITS AND FINANCIAL STATEMENTSCHEDULES.**

** **

(a)   Thefollowing documents are filed as a part of this report:

 

(1)           FinancialStatements included in Item 8 above are filed as part of this annual report.

 

(2)           FinancialStatement Schedules included in Item 8 herein:

 

All schedules for which provision is made in theapplicable accounting regulations of the Securities and Exchange Commission arenot required under the related instructions or are inapplicable and therefore,have been omitted.

 

(3)           Exhibits:  The information required by this Item 15(a)(3) isset forth in the Index to Exhibits accompanying this Annual Report on Form 10-K.

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 

 
| ** **                | **TGC INDUSTRIES, INC.** |
|---------------------------|--------------------------|
|                      |                     |   |
| Date: March 16, 2009 | By:                      |   /s/ Wayne A. Whitener |
|                      |                     | Wayne A. Whitener |
|                      |                     | President and Chief Executive Officer |
|                      |                     | (Principal Executive Officer) |
|                           |                          |  |  |  |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

 

 
| Date: March 16, 2009 | By:    |   /s/ Wayne A. Whitener                |
|---------------------------|--------|--------------------------------------------------|
|                      |   | Wayne A. Whitener                                |
|                      |   | President, Chief Executive Officer, and Director |
|                      |   | (Principal Executive Officer)                    |
|                      |   |                                             |
| Date: March 16, 2009 | By:    |   /s/ James K. Brata                   |
|                      |   | James K. Brata                                   |
|                      |   | Vice President, Secretary, Treasurer, and        |
|                      |   | Chief Financial Officer                          |
|                      |   | (Principal Financial and Accounting Officer)     |
|                      |   |                                             |
| Date: March 16, 2009 | By:    |   /s/ William J. Barrett               |
|                      |   | William J. Barrett                               |
|                      |   | Director                                         |
|                      |   |                                             |
| Date: March 16, 2009 | By:    |   /s/ Herbert M. Gardner               |
|                      |   | Herbert M. Gardner                               |
|                      |   | Director                                         |
|                      |   |                                             |
| Date: March 16, 2009 | By:    |   /s/ Allen T. McInnes                 |
|                      |   | Allen T. McInnes                                 |
|                      |   | Director                                         |
|                      |   |                                             |
| Date: March 16, 2009 | By:    |   /s/ Edward L. Flynn                  |
|                      |   | Edward L. Flynn                                  |
|                      |   | Director                                         |
|                      |   |                                             |
| Date: March 16, 2009 | By:    |   /s/ Stephanie P. Hurtt               |
|                      |   | Stephanie P. Hurtt                               |
|                      |   | Director                                         |
|                           |        |                                                  |  |

 

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**INDEX TO EXHIBITS**

 
| **EXHIBIT  NO.** | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                                                                                                                                            |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |       | Restated Articles of Incorporation (with amendment)  as filed with the Secretary of State of Texas on June 20, 2003, filed as  Exhibit 3.4 to the Company’s Annual Report on Form 10-KSB for the  fiscal year ended December 31, 2003, and incorporated herein by  reference.                                                                     |
|             |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 3.2              |       | Bylaws, as  amended and restated May 27, 2008, filed as Exhibit 3.1 to the  Company’s Current Report on Form 8-K filed on May 28, 2008, and  incorporated herein by reference.                                                                                                                                                                    |
|             |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 4.1              |       | Form of Specimen Stock Certificate filed as  Exhibit 4.1 to the Company’s Registration Statement on Form SB-2/A  on September 20, 2005 (Registration No. 333-128018), and  incorporated herein by reference.                                                                                                                                 |
|             |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 4.2              |       | Statement of Resolution Establishing Series of  Preferred Stock of TGC Industries, Inc. filed as Exhibit 2 to the  Company’s Current Report on Form 8-K filed on August 11, 1993, and  incorporated herein by reference.                                                                                                                     |
|             |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 4.3              |       | Statement of Resolution Establishing Series C  8% Convertible Exchangeable Preferred Stock of TGC Industries, Inc.  filed as Exhibit B to the Company’s Current Report on Form 8-K  dated July 15, 1996, filed with the Securities and Exchange Commission  and incorporated herein by reference.                                            |
|             |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 4.4              |       | Statement of Resolution Regarding Series C 8% Convertible  Exchangeable Preferred Stock of TGC Industries, Inc. filed as  Exhibit 4.3 to the Company’s Annual Report on Form 10-KSB/A for the  fiscal year ended December 30, 1998, and incorporated herein by  reference.                                                                   |
|             |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 4.5              |       | Statement of Resolution Regarding Series C 8%  Convertible Exchangeable Preferred Stock of TGC Industries, Inc. filed  as Exhibit 4.4 to the Company’s Annual Report on Form 10-KSB for  fiscal year ended December 31, 2000, and incorporated herein by  reference.                                                                         |
|             |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 4.6              |       | Statement of Resolution regarding Series C 8%  Convertible Exchangeable Preferred Stock of TGC Industries, Inc. filed  as Exhibit 4.5 to the Company’s Annual Report on Form 10-KSB for  fiscal year ended December 31, 2001, and incorporated herein by reference.                                                                          |
|             |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 4.7              |       | Statement of Resolution regarding Series C 8%  Convertible Exchangeable Preferred Stock of TGC Industries, Inc. filed  as Exhibit 4.6 to the Company’s Annual Report on Form 10-KSB for  fiscal year ended December 31, 2002, and incorporated herein by  reference.                                                                         |
|             |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 4.8              |       | Statement of Resolution regarding Series C 8%  Convertible Exchangeable Preferred Stock of TGC Industries, Inc. filed  as Exhibit 4.7 to the Company’s Annual Report on Form 10-KSB for  the fiscal year ended December 31, 2004, and incorporated herein by reference.                                                                      |
|             |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 4.9              |       | Form of Debenture Agreement and Debenture for  8% Subordinated Convertible Debentures, Series A, filed as  Exhibit 4.2 to the Company’s Registration Statement on Form SB-2  (Registration No. 333-12269), as amended, filed with the Securities and  Exchange Commission on September 19, 1996, and incorporated herein by  reference. |
|             |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 4.10             |       | Form of Warrant Agreement dated July 28,  1995, as amended, and Warrant, filed as Exhibit 4.3 to the Company’s  Registration Statement on Form SB-2 (Registration No. 333-12269),  as amended, filed with the Securities and Exchange Commission and  incorporated herein by reference.                                                      |

 

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| 4.11   |   | Debenture Agreement dated December 10, 1999,  with respect to the Company’s $2,500,000 8 1/2% Convertible Subordinated  Debenture, Series B payable to Wedge Energy Services, L.L.C., filed as  Exhibit 4.6 to the Company’s Annual Report on Form 10-KSB for the  fiscal year ended December 31, 1999, and incorporated herein by  reference. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.12   |   | Statement of Resolution Establishing 8-1/2% Senior  Convertible Preferred Stock of TGC Industries, Inc. filed as  Exhibit 4.8 to the Company’s Annual Report on Form 10-KSB for  fiscal year ended December 31, 2000, and incorporated herein by  reference.                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.13   |   | Statement of Resolution regarding 8-1/2% Senior  Convertible Preferred Stock of TGC Industries, Inc. filed as  Exhibit 4.11 to the Company’s Annual Report on Form 10-KSB for  fiscal year ended December 31, 2002, and incorporated herein by  reference.                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.14   |   | Form of Warrant Agreement and Warrant  Certificate dated September 10, 2002, filed as Exhibit 4.14 to the  Company’s Registration Statement on Form SB-2/A on September 20,  2005 (Registration No. 333-128018), and incorporated herein by  reference.                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.15   |   | Form of Warrant Agreement and Warrant  Certificate dated June 12, 2003, filed as Exhibit 14.15 to the  Company’s Registration Statement on Form SB-2/A on September 20,  2005 (Registration No. 333-128018), and incorporated herein by  reference.                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.16   |   | Form of Warrant Agreement and Warrant  Certificate dated December 15, 2004, filed as Exhibit 4.16 to the  Company’s Registration Statement on Form SB-2/A on September 20,  2005 (Registration No. 333-128018), and incorporated herein by  reference.                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| +10.1  |   | Employment  Contract (as Amended and Restated effective September 11, 2008) between  TGC Industries, Inc. and Wayne A. Whitener, filed as Exhibit 10.1  to the Company’s Current Report on Form 8-K filed on September 17,  2008, and incorporated herein by reference.                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.2   |   | Form of TGC  Industries, Inc. Director and Officer Indemnification Agreement, filed  as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed  on October 22, 2008, and incorporated herein by reference.                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.3   |   | Commercial Lease Agreement dated August 25,  2005, by and among TGC Industries, Inc. and JSS/Capital Avenue, L.P.,  filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K dated  August 31, 2005, and incorporated herein by reference.                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.4   |   | Promissory Note by and among TGC  Industries, Inc. and Sovereign Bank, dated September 16, 2008,  filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K  filed on September 19, 2008, and incorporated herein by reference.                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.5   |   | Commercial Security  Agreement by and among TGC Industries, Inc. and Sovereign Bank, dated  September 16, 2008, filed as Exhibit 10.2 to the Company’s  Current Report on Form 8-K filed on September 19, 2008, and  incorporated herein by reference.                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.6   |   | Business Loan Agreement by  and among TGC Industries, Inc. and Sovereign Bank, dated  September 16, 2008, filed as Exhibit 10.3 to the Company’s  Current Report on Form 8-K filed on September 19, 2008, and incorporated  herein by reference.                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.7   |   | Promissory Note by and among TGC  Industries, Inc. and General Electric Capital Corporation, dated  September 2, 2005, filed as Exhibit 10.3 to the Company’s Current  Report on Form 8-K dated September 20, 2005, and incorporated  herein by reference.                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.8   |   | Amendment, dated September 9, 2005, to the  Promissory Note by and among TGC Industries, Inc. and General Electric  Capital Corporation, dated September 2, 2005, filed as Exhibit 10.4  to the Company’s Current Report on Form 8-K dated September 20,  2005, and incorporated herein by reference.                                          |

 

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Tableof Contents

 
| 10.9   |   | Promissory Note by and among TGC  Industries, Inc. and General Electric Capital Corporation, dated  September 12, 2005, filed as Exhibit 10.5 to the Company’s Current  Report on Form 8-K dated September 20, 2005, and incorporated  herein by reference.                                                  |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.10  |   | Amendment, dated September 9, 2005, to the  Promissory Note by and among TGC Industries, Inc. and General Electric  Capital Corporation, dated September 12, 2005, filed as  Exhibit 10.6 to the Company’s Current Report on Form 8-K dated  September 20, 2005, and incorporated herein by reference.  |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.11  |   | Amendment, dated September 12, 2005, to the  Promissory Note by and among TGC Industries, Inc. and General Electric  Capital Corporation, dated September 12, 2005, filed as  Exhibit 10.7 to the Company’s Current Report on Form 8-K dated  September 20, 2005, and incorporated herein by reference. |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.12  |   | Promissory Note by and among TGC  Industries, Inc. and General Electric Capital Corporation, dated  September 19, 2005, Filed as Exhibit 10.1 to the Company’s Current  Report on Form 8-K filed on September 30, 2005, and incorporated  herein by reference.                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.13  |   | Form of Warrant Purchase Agreement from  Directors filed as Exhibit 10.12 to the Company’s Registration Statement  on Form SB-2/A on September 20, 2005 (Registration No. 333-128018),  and incorporated herein by reference.                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| +10.14 |   | 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.                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| +10.15 |   | 2006 Stock Awards Plan, dated March 30, 2006,  filed as Exhibit A to the Company’s definitive proxy statement on  Form DEFR 14A dated April 25, 2006, and incorporated herein by  reference.                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| *31.1  |   | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| *31.2  |   | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| *32.1  |   | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| *32.2  |   | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                             |

 

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* Filed herewith.

+ Management contract on compensatory plan, contract, or arrangement.

 

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