Kelman Announces Operating Results for Q1

Kelman Technologies Inc announced a net loss of $136 thousand for the first quarter of 2004. This number represents an improvement of $800 thousand over the comparable period last year. Interest expense, capital expenditures and depreciation were all lower. The loss for the quarter includes severance costs of $156 thousand related to cost reductions implemented during the period.

In the first quarter of 2004, as in 2003, the seismic industry experienced significantly lower activity levels than had been the case in prior years. Exploration companies have taken longer to award work for their yearly budgets.

Early in 2004, when it became apparent that the level of work was not going to arrive when expected, Kelman took steps to ensure that controllable costs were reduced to offset reduced revenues. Through this activity we were able to offset some of the reduced revenue early in the quarter while still leaving us in a position to benefit from increases in activity expected in 2004. In the latter half of the quarter activity levels improved significantly and the majority of our offices were able to report improved fundamentals. While this activity was welcome it was not enough to offset the very slow January. Current activity levels continue high and we believe the backlog and very large volume of bids outstanding should allow us to show improvement in the coming quarters.

Our Houston Processing office continues to under perform our expectations. With improved software, over 1,000 CPU capacity and a new long- term office lease, we expect this office to start flourishing. In March we responded to a large amount of bids and are awaiting decision around these.

Our data management division has reported a modest improvement particularly from our US operations. Expanded Houston facilities have allowed us to improve the physical flow of work and greatly increased our throughput capacity. Increasing volumes of work from our current clients together with expanded work from a large new client in Houston have combined to allow for significantly improved revenues.




Seismic crew counts in January and February of Q1 were extremely low as compared to previous years. Crew counts did recover somewhat in the latter part of February and throughout March; however, the activity level for new shooting in the Western Canadian Basin was generally lower than expected. This was largely responsible for slower than expected revenues early in the quarter. However, Calgary processing revenues and new sales recovered nicely toward the end of Q1 and we are entering Q2 with a relatively strong backlog.


Markets and revenues remained low in the Houston market during the first quarter. Two more major competitors disappeared from the scene in recent months - further thinning out the competition. Houston KTI office's ability to manage through this slow period will position it to be able to gain market share particularly as we go into Q2 of fiscal 2004. Oil companies of all sizes have been very slow to award any new projects during Q1. The whole process of project procurement has been delayed significantly relative to previous years.

Oklahoma City:

Our Oklahoma office is now well established with a small group of highly experienced personnel and a significant installation of computing power. We expect this office to grow in size during fiscal 2004 due to healthy activity levels of the large independents that operate out of Oklahoma City. Sales in 3D processing have been strong and the local clientele have received the new KTI offering very favorably.


We are beginning to see some commitment and interest by E&P companies increasing exploration efforts for gas in the US Rocky Mountains. The recent investment by Encana in the US Rockies is a sign that both very large independents and some majors remain very interested in exploring and developing some of the more difficult on-shore US plays. This trend will benefit KTI greatly because this type of work is one of our key specialties.

Data Management and Archives

Calgary operations experienced a slow beginning to the quarter but recovered throughout February and March. The slowness experienced early in the quarter is attributed to new budget strategies employed by our major clients.

With an influx of data at the end of fiscal 2003 our Houston operations has exceeded 2004 budgeted revenue expectations throughout the entire quarter. The market now has a greater appreciation of the KTI Data Management solution as our client base expands. The Open House at our new facility in February provided the opportunity to show our technology to key clients and make further inroads into the marketplace. The expanded facilities have enabled the operation to grow to levels of data throughput nearing that of our Calgary operation. Our first fiber network connecting us to downtown Houston and another major service provider was in place and being tested as the quarter came to a close.

Development continued at a rapid pace providing further tools to increase efficiencies, maximize data flow and implement even more rigorous quality checks of the data that KTI touches and manages for our clients.


Overall revenue of $5.4 million for the first quarter of 2004 was 4 percent lower than the same period last year but operating expenses were in turn reduced by 16 percent in the same period. Net loss of $136 thousand in the first quarter, while unacceptable, is a significant improvement over the net loss of $943 thousand achieved in the same period last year. Per share earnings in Q1 2004 were $0.02 better than Q1 2003.

Seismic Processing revenue of $3.8 million decreased 6 percent over 2003. Calgary Seismic Processing revenue of $2.7 million was up 7 percent compared to the same period last year. Houston revenues of $361 thousand decreased 70 percent. While the order backlog for seismic processing services decreased to $3.6 million down 29 percent compared to $5.1 million at March 31, 2003, we were encouraged by recent work received and the increased amount of bids outstanding. Foreign-sourced revenue of $1.5 million represents 39 percent of total revenue for the quarter, compared to $1.7 million or 43 percent for the comparable quarter last year.

Data Archives revenue of $1.6 million increased 3 percent over the same period last year. The order backlog for the Archives Division decreased to $2.2 million, down 28% compared to $3.1 million at March 31, 2003, mainly due to the completion of a very large Archive project for a Canadian client.

Earnings before interest, taxes, depreciation and amortization (EBITDA) increased by $706 thousand from the same period last year to $753 thousand while depreciation and amortization expense of $801 thousand decreased 6 percent.

Cash flow from operations of $723 thousand for the first quarter of 2004 is $800 thousand higher than the deficiency of $77 thousand for the comparable period in 2003.

Capital expenditures in the first quarter of 2004 of $457 thousand were 51 percent lower than the same period in 2003, as we control outlays during the slow period.

Surplus cash in the amount of $220 thousand was directed to pay down term debt during Q1. We are delighted to announce that we have secured banking facilities with The Toronto-Dominion Bank replacing the former facility we had with CIBC. The new facility allows us significant financial flexibility to fund expansion.

The Company had 39,538,220 Common Shares outstanding as at March 31, 2004.


While seismic activity levels were slow to pick up in early 2004 we are now seeing a very active market throughout North America. Improving backlog numbers, a high level of bids outstanding and improvement from our Houston operation are expected to carry us at a fairly high level of activity through the spring and summer; traditionally our slowest periods of the year. New software developments in our processing suite combined with the expanded hardware capacity secured in Q4 2003, should position us to compete effectively for higher margin work.

With the exception of gas we see the United States, and to a lesser degree Canada, as mature oil exploration plays. This will mean that exploration for oil will increasingly move away from these countries. However, Kelman already has experience processing seismic data from 45 different countries so this trend is seen as offering increased opportunities to your Company.

Three Months Ended
	                                                       March 31,
	                                          2004           2003          Change
	    Revenue                        $ 5,411,874    $ 5,611,930    $  (200,056)
	    Operating Expenses             $ 4,658,837    $ 5,564,820    $  (905,983)
	    Cash Flow From Operations      $   722,919    $   (77,398)   $   800,317
	    Net Loss                       $  (135,834)   $  (943,209)   $   807,375
	      Per Share                    $     (0.00)   $     (0.02)   $      0.02
	    Long-term Debt                 $   114,960    $ 2,750,940    $(2,635,980)
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