<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
<TABLE>
<S> <S>
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
</TABLE>
COMMISSION FILE NUMBER: 0-22863
EAGLE GEOPHYSICAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<C> <C>
DELAWARE 76-0522659
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 BRIAR HOLLOW LANE 77027
6TH FLOOR WEST (Zip Code)
HOUSTON, TEXAS
(Address of Principal Executive offices)
</TABLE>
Registrant's telephone number, including area code: (713) 881-2800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 14 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, as of
November 15, 1997: 8,489,000
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<PAGE> 2
EAGLE GEOPHYSICAL, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PART I -- FINANCIAL INFORMATION............................. 3
ITEM 1. FINANCIAL STATEMENTS................................ 3
EAGLE GEOPHYSICAL, INC.
Consolidated Balance Sheets -- September 30, 1997
(unaudited) and December 31, 1996...................... 3
Consolidated Statements of Operations for the three and
nine month periods ended September 30, 1997 and 1996
(unaudited)............................................ 4
Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 1997 and 1996
(unaudited)............................................ 5
Consolidated Statement of Stockholders' Equity
(unaudited)............................................ 6
Notes to Unaudited Condensed Consolidated Financial
Statements............................................. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................. 11
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........... II-1
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
EAGLE GEOPHYSICAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents, including restricted cash of
$-0-and $4,427 (unaudited) at December 31, 1996 and
September 30, 1997 respectively......................... $ -- $ 30,632
Receivables:
Trade, billed, net of allowance for doubtful accounts of
$-0- and $570 (unaudited) at December 31, 1996 and
September 30, 1997 respectively....................... 12,913 25,949
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. 441 1,577
Other................................................... 233 693
Inventory................................................. -- 1,536
Prepaid expenses and other assets......................... 860 4,106
------- --------
Total current assets............................... 14,447 64,493
PROPERTY AND EQUIPMENT, AT COST:
Geophysical equipment..................................... 20,200 51,311
Furniture, fixtures and other............................. 108 495
------- --------
20,308 51,806
Less: Accumulated depreciation............................ (8,103) (13,240)
------- --------
Net property and equipment........................... 12,205 38,566
GOODWILL, NET............................................... -- 19,565
OTHER LONG-TERM ASSETS...................................... 69 32
------- --------
TOTAL ASSETS....................................... $26,721 $122,656
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 2,556 $ 4
Current portion of capital lease obligations.............. 1,033 3,955
Accounts payable.......................................... 4,623 14,723
Accrued liabilities....................................... 652 9,725
Billings in excess of costs and estimated earnings on
uncompleted
contracts............................................... 78 443
------- --------
Total current liabilities.......................... 8,942 28,850
LONG-TERM DEBT.............................................. 6,039 --
CAPITAL LEASE OBLIGATIONS................................... 1,274 9,834
DUE TO AFFILIATE............................................ 1,965 --
DEFERRED INCOME TAXES....................................... 712 1,093
------- --------
TOTAL LIABILITIES.................................. 18,932 39,777
------- --------
CONTINGENCIES AND COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share; authorized
5,000,000 shares; none issued and outstanding........... -- --
Common stock, par value $.01 per share; authorized
25,000,000 shares; issued and outstanding 3,400,000
shares at December 31, 1996 and 8,489,000 at September
30, 1997 (unaudited).................................... 34 85
Additional paid-in capital................................ 7,755 82,702
Retained earnings......................................... -- 517
Note receivable from stockholder.......................... -- (425)
------- --------
TOTAL STOCKHOLDERS' EQUITY......................... 7,789 82,879
------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $26,721 $122,656
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
EAGLE GEOPHYSICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTH NINE MONTH
PERIODS ENDED PERIODS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
1996 1997 1996 1997
------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE(1)............................................. $12,138 $25,216 $29,889 $53,982
EXPENSES
Operating expenses (exclusive of depreciation and
amortization shown below)(1)...................... 8,790 18,709 21,557 39,488
Depreciation and amortization........................ 1,018 2,613 2,315 5,385
Selling, general and administrative expenses......... 870 1,742 2,212 3,307
Interest expense, net................................ 167 494 461 528
Other, net........................................... -- 152 -- 152
------- ------- ------- -------
10,845 23,710 26,545 48,860
------- ------- ------- -------
Income before provision for income taxes............... 1,293 1,506 3,344 5,122
Provision for income taxes............................. 474 593 1,226 1,919
------- ------- ------- -------
NET INCOME............................................. $ 819 $ 913 $ 2,118 $ 3,203
======= ======= ======= =======
Earnings per common share.............................. $ .24 $ .14 $ .62 $ .73
======= ======= ======= =======
Weighted average number of common shares............... 3,400 6,361 3,400 4,398
======= ======= ======= =======
</TABLE>
- ---------------
(1) Includes revenue from affiliates of $5,668,000, $15,279,000, $7,893,000 and
$23,105,000 for the unaudited three and nine month periods ended September
30, 1996 and 1997, respectively, and operating expenses related to such
affiliate revenue of $4,150,000, $11,130,000, $5,751,000 and $16,961,000 for
the unaudited three and nine month periods ended September 30, 1996 and
1997, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
EAGLE GEOPHYSICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTH PERIODS
ENDED SEPTEMBER 30,
--------------------
1996 1997
-------- ---------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 2,118 $ 3,203
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 2,315 5,385
Gain on sale of property and equipment.................... -- (18)
Bad debt expense.......................................... -- 570
Deferred income tax provision............................. 45 381
Increase in receivables................................... (2,127) (4,457)
Increase in other assets.................................. (46) (1,918)
(Decrease) increase in accounts payable and other
liabilities............................................ (295) 4,233
------- --------
Total adjustments................................. (108) 4,176
------- --------
Net cash provided by operating activities......... 2,010 7,379
------- --------
Cash flows from investing activities:
Purchase of property and equipment........................ (7,927) (12,259)
Cash received on disposal of property and equipment....... -- 24
Cash acquired from the purchase of Energy Research
International.......................................... -- 145
------- --------
Net cash used in investing activities............. (7,927) (12,090)
------- --------
Cash flows from financing activities:
Borrowings under term loans............................... 7,697 7,925
Principal payments on term loans.......................... (881) (34,895)
Principal payments on capital leases...................... (932) (3,893)
Payment to affiliate...................................... -- (3,003)
Issuance of Common Stock, net............................. -- 69,209
------- --------
Net cash provided by financing activities......... 5,884 35,343
------- --------
Net increase (decrease) in cash and cash equivalents........ (33) 30,632
Cash and cash equivalents at beginning of period............ 58 --
------- --------
Cash and cash equivalents at end of period.................. $ 25 $ 30,632
------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.................................................. $ 665 $ 738
======= ========
Income taxes.............................................. $ -- $ --
======= ========
Noncash investing and financing activities:
Equipment purchased through capital leases................ $ 41 $ 374
======= ========
Contribution of 19% interest in Energy Research
International by Seitel, Inc........................... $ -- $ 914
======= ========
Issuance of common stock to an officer for a note......... $ -- $ 425
======= ========
Purchase of Remaining 81% Interest in Energy Research
International for Common Stock......................... $ -- $ 8,415
======= ========
Dividend declared to Seitel, Inc.......................... $ -- $ 6,651
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
EAGLE GEOPHYSICAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTE
COMMON STOCK ADDITIONAL RECEIVABLE TOTAL
--------------- PAID-IN RETAINED FROM STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCKHOLDER EQUITY
------ ------ ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996............ 3,400 $34 $ 7,755 $ -- $ -- $ 7,789
UNAUDITED:
Contribution of 19% Interest in Energy
Research International by Seitel,
Inc. ............................... -- -- 914 -- -- 914
Net Income from January 1, 1997 to
August 11, 1997..................... -- -- -- 2,686 -- 2,686
Dividend Declared to Seitel, Inc. .... -- -- (3,965) (2,686) -- (6,651)
Issuance of Common Stock, net......... 4,464 45 69,164 -- -- 69,209
Acquisition of Remaining 81% of Energy
Research International.............. 600 6 8,409 -- -- 8,415
Issuance of Common Stock to an officer
for a note.......................... 25 -- 425 -- (425) --
Net Income from August 12, 1997 to
September 30, 1997.................. -- -- -- 517 -- 517
----- --- ------- ------- ----- -------
Balance, September 30, 1997........... 8,489 $85 $82,702 $ 517 $(425) $82,879
===== === ======= ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 7
EAGLE GEOPHYSICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. BASIS OF PRESENTATION AND SIGNIFICANT ACTIVITIES
The accompanying unaudited interim condensed consolidated financial
statements of Eagle Geophysical Inc. (Eagle or the Company) for the nine months
ended September 30, 1997 and 1996 have been prepared without an audit pursuant
to the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, all adjustments, which consist of normal recurring
adjustments, necessary to present fairly the financial position, results of
operations, and cash flows for all periods presented have been made. Operating
results for the interim period are not necessarily indicative of the results
that can be achieved for a full year. It is suggested that these interim
condensed financial statements be read in conjunction with the audited financial
statements and the notes thereto included in the Company's Registration
Statement on Form S-1.
The accompanying interim condensed consolidated financial statements
include the accounts of Eagle Geophysical, Inc. which prior to August 11, 1997
was indirectly a wholly-owned subsidiary of Seitel, Inc. (Seitel) and the
accounts of Eagle Geophysical Onshore, Inc., both of which were formed on
December 18, 1996. Effective December 31, 1996, substantially all of the assets
of its predecessor, Seitel Geophysical, Inc., a wholly-owned subsidiary of
Seitel, were contributed to Eagle Geophysical Onshore, Inc. The Company's
reported assets, liabilities, revenues and expenses include the predecessor
operations of Seitel Geophysical, Inc. for all periods presented. The financial
reporting basis of the contributed net assets was carried forward to the
Company's accounts, and the net equity of Seitel Geophysical, Inc. for periods
prior to December 31, 1996 is reflected in the Company's additional paid-in
capital account.
In May 1997, the Company amended its Certificate of Incorporation to
authorize the issuance of 25,000,000 shares of common stock and changed the par
value to $.01 per share. At the same time, the Company approved a 3,400-for-one
stock split. All share and per share information included in the accompanying
condensed consolidated financial statements has been adjusted to give
retroactive effect to the split.
In May 1997, the Company also amended its Certificate of Incorporation to
authorize the issuance of 5,000,000 shares of preferred stock, with terms and
conditions to be determined by the Board of Directors in creating any particular
series.
In May 1997, Seitel contributed to the Company all of the shares that it
owned of Energy Research International (ERI), representing a 19% ownership
interest. ERI is a holding company that wholly owns two marine seismic
companies. This contribution was recorded at Seitel's basis in such investment
and resulted in a $914,000 increase in the Company's additional paid-in capital
account.
On July 23, 1997, the Company issued 25,000 shares of common stock to the
president of the Company for a note valued at $425,000.
On August 11, 1997 and September 5, 1997, the Company completed the
offering and sale of a total of 6,524,000 shares of common stock to the public
at a price of $17 per share (including 1,880,000 shares sold by the Company's
former parent, Seitel, Inc. and 180,000 shares sold by the former owners of ERI)
resulting in net proceeds of $69.2 million to the Company after deducting
offering-related expenses (the Offering). Also on August 11, 1997, the Company
acquired the remaining 81% of Energy Research International in exchange for
600,000 shares of common stock (the ERI Acquisition). The acquisition was
accounted for by the Company as a purchase transaction in which the Company
recorded its cost in the assets acquired less liabilities assumed, with the
difference between the cost and the sum of the fair values of tangible assets
less liabilities assumed being recorded as goodwill. The Company is currently
evaluating the value of the assets acquired and liabilities assumed in order to
determine the final purchase price allocation related to ERI.
7
<PAGE> 8
EAGLE GEOPHYSICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
2. EARNINGS PER COMMON SHARE
Earnings per share of common stock has been computed on the basis of the
weighted average number of common shares outstanding during the period and,
where dilutive, the effect of common stock contingently issuable, which arises
primarily from the exercise of stock options. The weighted average shares of
common stock outstanding was 4,398,000 and 3,400,000 for the nine months ended
September 30, 1997 and 1996 respectively.
3. PRO FORMA RESULTS OF OPERATIONS
On August 11, 1997, the Company completed the acquisition of the remaining
81% interest in Energy Research International with the issuance of 600,000
shares of common stock for a purchase price valued at approximately $8.4
million. The following table presents the unaudited pro-forma effects of the
Offering, the application of the net proceeds thereof, and the purchase of ERI
as if such transactions had occurred on January 1, 1996:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Pro Forma Revenue.............................. $83,049 $63,260 $32,989 $26,326
Pro Forma Income Before Taxes.................. 7,201 1,656 3,139 3,097
Pro Forma Net Income........................... 5,596 824 2,379 2,744
Pro Forma Weighted Average Common Shares
Outstanding.................................. 8,489 8,489 8,489 8,489
Pro Forma Earnings Per Common Share............ $ .66 $ .10 $ .28 $ .32
======= ======= ======= =======
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Company is involved in or threatened with various legal proceedings
from time to time arising in the normal course of business. Management of the
Company does not believe that any liabilities resulting from such proceedings
will have a material adverse effect on its operations or financial position.
On October 21, 1997 the Company entered into an agreement with Bank One,
Texas N.A. with respect to a $20,000,000 revolving credit facility secured by
the Company's accounts receivable. The amount the Company may borrow under the
facility is limited to a borrowing base that is equal to 90% of the eligible
U.S. and U.K. investment grade accounts receivable, as defined, 100% of
receivables secured by acceptable letters of credit, 80% of eligible
non-investment grade domestic and other investment grade foreign receivables and
other eligible receivables approved by the bank. Interest only will be payable
monthly or at the end of LIBOR interest periods, and the credit facility is
payable in full in three years. Mandatory prepayments are required if borrowings
exceed the borrowing base. Interest will accrue under the credit facility at the
bank's base rate or LIBOR plus a spread of 1.375% if the Company's debt to net
worth ratio is less than 1 to 1, and 1.625% if such ratio is equal to or greater
than 1 to 1. No amounts are currently outstanding related to this facility.
5. RELATED PARTY TRANSACTIONS
The Company enters into various types of transactions with Seitel and its
subsidiaries. The Company performs seismic data acquisition services for
Seitel's seismic data library subsidiary and its exploration and production
subsidiary. For the unaudited three and nine month periods ended September 30,
1996 and 1997, the Company recognized revenue of $5,668,000, $15,279,000,
$7,893,000, and $23,105,000, respectively, for seismic data acquisition services
performed for Seitel's subsidiaries. Prior to August 11, 1997 such revenues
8
<PAGE> 9
EAGLE GEOPHYSICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
from affiliates were based on prices charged to unaffiliated third parties for
similar work. Gross margin recognized on work for affiliates was limited in each
reporting period to the total margin percentage earned on work for unaffiliated
parties. Subsequent to August 11, 1997, revenues from affiliates were based on
agreed upon contractual amounts and terms similar to contracts with other third
party customers.
Prior to the Offering the Company reimbursed Seitel for direct and indirect
costs of certain Seitel employees who provided services to the Company and for
other costs, primarily general and administrative expenses, related to the
Company's operations. Seitel allocated indirect costs to the Company using a
formula based upon the ratio of the Company's levels of revenue, number of
personnel or other factors, as applicable, to the total consolidated Seitel
levels for such factors. Management of the Company believes that the use of such
formula resulted in a reasonable allocation of indirect costs. During the
unaudited period from January 1, 1997 to August 11, 1997, the Company recorded
general and administrative costs allocated from Seitel of $1,018,000. Prior to
August 11, 1997, Seitel funded the Company's direct operating costs through
intercompany advances and was reimbursed for such advances as the Company had
available cash. Amounts payable to or receivable from Seitel and its
subsidiaries bore interest at the same rates which Seitel was charged or
received. During the unaudited period from January 1, 1997 to August 11, 1997,
the Company recorded net interest income of $404,000 related to the amounts
payable to or receivable from Seitel and its subsidiaries.
On July 22, 1997 the Company declared a dividend to its sole shareholder, a
wholly-owned, indirect subsidiary of Seitel, of the Company's receivable from
Seitel for work performed by the Company for Seitel and its subsidiaries prior
to the Offering. On August 11, 1997, the Company paid this dividend which
amounted to approximately $6,651,000.
Prior to the Offering, the Company leased certain marine seismic equipment
to Horizon Exploration Limited, a marine seismic company wholly-owned by Energy
Research International, under a five-year operating rental agreement expiring
June 30, 2001. For the unaudited three and nine month periods ended September
30, 1997, the Company recognized revenue of $182,000 and $1,088,000,
respectively, related to this lease. Subsequent to the ERI Acquisition, such
rental income and expense has been eliminated in the Company's consolidated
results of operations.
The Company and Seitel have entered into a number of agreements for the
purpose of defining their continuing relationship. Conflicts of interest may
arise in the future between Seitel and the Company in connection with these
agreements and other areas of their ongoing relationship. The following is a
summary of certain prospective arrangements between the Company and Seitel.
Master Separation Agreement. The Master Separation Agreement provided for
the Company and Seitel to enter into a Sublease, a Registration Rights
Agreement, a Tax Indemnity Agreement and an Administrative Services Agreement.
In addition, the Master Separation Agreement required the Company to repay
indebtedness owed by the Company and its subsidiaries to Seitel and indebtedness
owed by the Company and its subsidiaries to third parties guaranteed by Seitel
contemporaneously with the consummation of the Offering. Under the Master
Separation Agreement, Seitel and its subsidiaries and the Company and its
subsidiaries have indemnified each other with respect to liabilities arising in
connection with the operations of their respective businesses prior to and after
the date of consummation of the Offering including liabilities under federal
securities laws with respect to the Offering. The Master Separation Agreement
also provides for continued access by the Company to historical financial and
operational information relating to the Company and its subsidiaries maintained
by Seitel.
Sublease. The Sublease between the Company and Seitel provides for the
Company to lease its principal corporate offices, comprising approximately 7,600
square feet, from Seitel for a term of three years at an annual rent of
approximately $85,000. The Sublease also provides for the Company to utilize
certain shared office equipment, such as phone systems and central computer
systems, for an additional charge.
9
<PAGE> 10
EAGLE GEOPHYSICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
Registration Rights Agreement. Pursuant to the Registration Rights
Agreement, the Company has agreed to register the offer and sale by Seitel on a
delayed and continuous basis from time to time of the shares of Common Stock
owned by Seitel after the Offering at the expense of the Company.
Tax Indemnity Agreement. Prior to the Offering, the Company was a member of
the Seitel affiliated group and filed its tax returns on a consolidated basis
with such group. After the Offering, the Company is no longer a member of the
Seitel affiliated group. The Company and Seitel have entered into a Tax
Indemnity Agreement to define their respective rights and obligations relating
to federal, state and other taxes for periods before and after the Offering.
Pursuant to the Tax Indemnity Agreement, the Company is required to pay Seitel
(to the extent not already paid) its share of federal income taxes prior to the
date of consummation of the Offering, and is responsible for federal income
taxes from its operations on and after the date of the Offering. Any subsequent
refunds, additional taxes or penalties or other adjustments relating to the
Company's federal income taxes for periods prior to the date of consummation of
the Offering shall be for the benefit of or be borne by Seitel. Similar
provisions apply under the Tax Indemnity Agreement to other taxes, such as state
and local income taxes.
Administrative Services Agreement. Seitel and the Company have entered into
an Administrative Services Agreement pursuant to which Seitel provides the
Company with administrative services, primarily accounting services, at up to
the same levels as provided prior to the Offering. Seitel will provide these
services for a 90-day transition period after the Offering to allow the Company
adequate time to build an internal administrative staff. The Company pays Seitel
for these services at Seitel's actual cost of providing these services.
Employment Agreements. The Company entered into employment agreements with
certain of its executive officers in connection with the Offering.
Employee Benefits Allocation Agreement. The Company entered into an
employee benefits allocation agreement with Seitel to govern certain matters
relating to employees of Seitel who have become employees of the Company.
6. NEW ACCOUNTING PRONOUNCEMENTS
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings per Share"
effective for interim and annual periods after December 15, 1997. This statement
replaces primary earnings per share with a newly defined basic earnings per
share and modifies the computation of fully diluted earnings per share. The
application of this statement will not have a material impact on the Company's
calculation of earnings per share.
10
<PAGE> 11
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company's revenues are generated from the sale of onshore and offshore
seismic data acquisition services. The Company focuses its onshore operations in
logistically difficult wetland environments along the U.S. Gulf Coast, and
focuses its offshore operations through Energy Research International (ERI) in
congested areas in the North Sea and the U.S. Gulf of Mexico. The Company
generally provides its onshore seismic data acquisition services under fixed fee
contracts with its customers. The Company provides its offshore seismic data
acquisition services under either distance- or time-based contracts (or a
combination of both methods) or turnkey contracts that provide for a fixed fee.
The Company generally does not retain rights to the data acquired. Onshore
operations accounted for approximately 54% of the Company's pro forma combined
revenues for the nine months ended September 30, 1997, with offshore operations
accounting for the remaining 46% of pro forma combined revenues.
References to unaudited pro forma results of operations above and in the
following discussion assume the Offering, the application of the net proceeds
thereof, and the ERI Acquisition occurred as of January 1, 1996.
Onshore Operations
With respect to its onshore operations, the Company's prices, and therefore
its revenues, vary depending primarily on demand for the Company's services, the
number of acquisition crews of the Company, the acquisition capacity of each
crew, the utilization rates of the Company's crews and the complexity and
difficulty of the projects undertaken by each crew. The Company increased the
channel capabilities of its Opseis radio telemetry seismic data acquisition
systems for its two existing crews during 1996 and added a third Opseis crew in
January 1997. At the end of the third quarter of 1997, the Company upgraded the
channel capacity of each of its three crews to 2,350 channels. Thus, the Company
has increased the number of crews operated and the acquisition capacities of its
crews for the periods presented in the financial statements, which has
contributed substantially to the increased revenues from period to period.
Revenues for less complex, easier to perform seismic acquisition projects
tend to be lower than revenues for more complex, difficult to perform projects,
even when the projects take the same amount of time for a crew to perform. The
mix of more or less complex projects results in variations from period to period
for revenues attributable to each crew. The projects performed by the Company's
two onshore crews operating in the third quarter of 1997 were weighted more
heavily towards complex projects than in the third quarter of 1996, further
contributing to the increases in revenues in the third quarter of 1997 as
compared to the third quarter of 1996.
Offshore Operations
Similar to the Company's onshore operations, prices and revenues with
respect to the offshore operations performed by ERI vary depending primarily on
demand, the number of vessels operated by the Company, the acquisition capacity
of each vessel, utilization rates and the complexity and difficulty of the
projects undertaken by each vessel. The Company operated four vessels in the
third quarter of 1997 and 1996. The Company also increased the streamer capacity
of its vessels in mid-1996, so that the vessels operated in 1997 had greater
data acquisition capabilities than in the first half of 1996. Thus, the Company
has increased the number of vessels operated and the acquisition capacities of
its vessels for the periods presented in the financial statements, which has
contributed substantially to the increased revenues from period to period.
On July 16, 1997, an incident caused by a shrimping vessel damaged the
streamers deployed behind the Abshire Tide and the Discoverer in the Gulf of
Mexico. The Company anticipates that the cost to repair the streamers will be
less than $500,000, and that any repair costs in excess of the Company's
$250,000 deductible will be covered by the Company's insurance. This incident
did not cause any material interruption to the operations of these vessels.
11
<PAGE> 12
The Company currently intends to increase the streamer capacity of the
Simon Labrador beginning in the fourth quarter of 1997 and carrying over into
the first quarter of 1998 at an estimated capital cost of approximately $21.9
million, which will be funded from the proceeds of the Offering. This vessel
will be taken out of service for a period of approximately 90 days to accomplish
these modifications, during which period this vessel would have earned revenues
of approximately $5.1 million. The Company anticipates that revenues and income
generated by this vessel will increase as a result of these upgrades.
Because the Company derives a portion of its offshore revenues from sales
internationally, the Company is subject to risks relating to fluctuations in
currency exchange rates. The Company's costs and revenues from offshore
operations have historically been evenly divided between the U.S. dollar and the
British pound. The Company's financial statements are prepared using the U.S.
dollar as the functional currency, and, therefore, fluctuations in the exchange
rate between the U.S. dollar and the British pound affect the Company's costs
and revenues. Historically, fluctuations in exchange rates have not had a
material impact on the Company's results of operations, and the Company does not
currently engage in any currency hedging activities. As the Company expands its
operations into new geographic markets, such as Latin America, Africa and
Southeast Asia, which may involve more extensive currency risks, the Company
intends to protect itself against foreign currency fluctuations by generally
attempting to match foreign currency revenues and expenses in order to balance
its net position of receivables and payables denominated in foreign currencies,
by endeavoring to require its customers to pay for services in U.S. dollars and,
to a lesser extent, by purchasing foreign exchange contracts and other foreign
exchange instruments and implementing other procedures to counteract currency
fluctuations.
RESULTS OF OPERATIONS
The following discussion of the results of operations is divided into a
discussion of the Company's onshore operations, which were conducted by Eagle,
and the Company's offshore operations, which were conducted by ERI prior to the
consummation of the Offering. These discussions are presented based on the
unaudited proforma revenues and expenses of the separate companies including
periods prior to the ERI Acquisition, which occurred contemporaneously with the
Offering. The revenues of Eagle include intercompany profits from work performed
for Seitel, Eagle's parent corporation prior to the Offering, and its
subsidiaries.
ONSHORE OPERATIONS
Quarter Ending September 30, 1997 Compared to September 30, 1996
Revenue increased 43% from $11.9 million in the third quarter of 1996 to
$17.1 million in the third quarter of 1997, primarily due to the addition of a
third Opseis crew in January 1997. In the third quarter of 1997, Eagle operated
three crews, whereas in the third quarter of 1996, Eagle operated two crews.
Additionally, the surveys performed by the Company's crews in the 1997 period
were in more difficult logistical and environmental areas, providing higher
contract prices per crew, than the surveys performed in the 1996 period.
Operating costs (excluding depreciation) increased 46% from $8.8 million in
the third quarter of 1996 to $12.9 million in the third quarter of 1997,
primarily due to the addition of the third crew in the 1997 period. Operating
margin percentage decreased from 26.3% in the third quarter of 1996 to 24.8% in
the third quarter of 1997.
Depreciation increased 57% from $1.02 million in the third quarter of 1996
to $1.6 million in the third quarter of 1997, resulting from operating three
crews in the 1997 period versus two in the 1996 period and from depreciation of
marine seismic equipment purchased by Eagle in July 1996 and leased to a
subsidiary of ERI. Selling, general and administrative expenses increased 33%
from $1.2 million in the third quarter of 1996 to $1.6 million in the third
quarter of 1997, primarily due to the addition of administrative staff to
support the expanded operations. Net interest expense increased from $0.17
million in the 1996 period to $0.4 million in the 1997 period due to prepayment
penalties and interest related to the retirement of certain debt and capital
leases with proceeds from the Offering.
12
<PAGE> 13
Nine Months Ended September 30, 1997 Compared to September 30, 1996
Revenue increased 54% from $29.3 million for 1996 to $45.0 million for
1997. This increase in revenue was primarily due to the three crews operating in
the first nine months of 1997 as compared to two crews operating in the 1996
period.
Operating expenses (excluding depreciation) increased 56% from $21.6
million in 1996 to $33.6 million for 1997. This increase is proportional to the
increase in revenue resulting from the third seismic crew. Operating margin
percentage decreased slightly from 26.3% in 1996 to 25.2% in 1997.
Depreciation and amortization increased 87% from $2.3 million in 1996 to
$4.3 million in 1997 resulting from the operation of three crews in 1997
compared to two crews in 1996 and from depreciation of marine seismic equipment
purchased by Eagle in July 1996 and leased to a subsidiary of ERI. Selling,
general, and administrative expenses increased 19% from $3.1 million in 1996 to
$3.7 million in 1997 primarily due to the addition of administrative staff to
support the expanded operations.
OFFSHORE OPERATIONS
Quarter Ending September 30, 1997 Compared to September 30, 1996
Revenue increased 10% from $14.4 million in the third quarter of 1996 to
$15.9 million in the third quarter of 1997, primarily due to improved vessel
utilization. Two vessels experienced downtime in the third quarter of 1996 due
to upgrades and repairs. Such vessels were fully utilized in the third quarter
of 1997.
Operating expenses (excluding depreciation) increased 10% from $9.8 million
in the third quarter of 1996 to $10.8 million in the third quarter of 1997 due
to the improved vessel utilization. Operating margins were 32% for both periods
as a result of the proportionate increases in revenue and operating expenses.
Depreciation increased 27% from $1.5 million in the third quarter of 1996
to $1.9 million in the third quarter of 1997, resulting from the purchase of
additional capital equipment in mid 1996 with corresponding depreciation
beginning in 1997. Selling, general and administrative expenses increased
slightly due to higher legal and administrative costs.
Nine Months Ended September 30, 1997 Compared to September 30, 1996
Revenue increased 12% from $34.0 million for 1996 to $38.1 million for
1997. This increase in revenue was primarily due to improved vessel utilization
and increased streamer capacity in the first nine months of 1997 compared to the
1996 period. The Discoverer and Abshire Tide were in a start up mode for a
portion of the first quarter of 1996 whereas they were fully utilized in 1997.
Operating expenses (excluding depreciation) decreased 5% from $27.5 million
in 1996 to $26.1 million for 1997. The decrease is due to no significant startup
costs having been incurred during 1997 as compared to 1996. Operating margin
percentage increased from 19% in 1996 to 32% in 1997 as a result.
Depreciation increased 20% from $4.5 million in 1996 to $5.4 million in
1997 resulting from the operation of four vessels in 1997 compared to three
vessels in the first half of 1996 and four in the third quarter of 1996.
Selling, general, and administrative expenses decreased 5% from $2.0 million in
1996 to $1.9 million in 1997. Net interest expense increased 33% from $0.21
million in 1996 to $.28 million in 1997 due to increased working capital
requirements.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Offering, Eagle was a wholly-owned subsidiary of Seitel. In
the past, Seitel had guaranteed certain indebtedness of Eagle and made loans to
Eagle. All of such debt owed to Seitel was repaid with a portion of the net
proceeds of the Offering. The Company's borrowing costs may increase in the
future as a result of having to obtain financing based on its own
creditworthiness. Therefore, the historical liquidity and capital resources of
Eagle may not be indicative of the Company's future liquidity and capital
resources.
13
<PAGE> 14
Prior to August 11, 1997, the revenues of Eagle generated by work performed
for Seitel and its other subsidiaries were based on prices charged to
unaffiliated third parties for similar work and included a profit. Because Eagle
was a wholly-owned subsidiary of Seitel prior to the Offering, the profits
generated by such intercompany work were eliminated from Seitel's financial
statements upon consolidation. Upon consummation of the ERI Acquisition and the
Offering, Eagle ceased to be a wholly-owned subsidiary of Seitel. Because Seitel
did not intend to fund any payables to the Company which resulted from such
intercompany work and which were still outstanding at the time of the Offering,
the Company declared a dividend on July 22, 1997, to its sole stockholder, a
wholly-owned, indirect subsidiary of Seitel, to eliminate any remaining
intercompany receivables from Seitel. This dividend of Eagle's receivable from
Seitel for profits attributable to work performed by Eagle for Seitel and its
subsidiaries since inception to the date of consummation of the Offering, less
taxes and allocable overhead attributable to such intercompany work, was paid
immediately prior to the consummation of the Offering on August 11, 1997 and
totaled approximately $6.7 million.
The Company's working capital as of September 30, 1997 was $35.6 million.
The indebtedness of the Company as of such date consisted of capital lease
obligations, totaling approximately $13.8 million.
The Company has repaid $35.7 million of existing indebtedness with a
portion of the net proceeds of the Offering, which has significantly decreased
the Company's interest expenses and has eliminated the Company's obligation to
make payments on the principal of such debt in the future. This will allow the
Company to apply the cash generated from operations towards its capital
requirements rather than to service such debt.
The Company currently plans to expand its existing data acquisition
capabilities through the expansion of the streamer towing capacity of one of its
vessels beginning in the fourth quarter of 1997 and carrying over into the first
quarter of 1998, at a capital cost of approximately $21.9 million. This capital
expenditure will be funded from the net proceeds of the Offering. In 1998, the
Company intends to charter and equip one additional offshore seismic vessel, at
a capital cost of approximately $30 million. The Company intends to fund these
capital costs with a combination of cash from operations and additional debt or
equity financing.
The Company operates the Simon Labrador under a capital lease with
Simon-Horizon Limited (Simon), which in turn leases the vessel from the Royal
Bank of Scotland (RBS) under a capital lease. Pursuant to the arrangement
between the Company and Simon, the Company is required to use its best endeavors
to obtain the release of Simon from all obligations in connection with the lease
of this vessel. The Company has agreed in principle with RBS for RBS to enter
into a capital lease for this vessel directly with the Company, and the Company
has deposited $4,390,000 of the proceeds of the Offering with RBS as additional
security for the lease. The Company and RBS are currently negotiating the terms
of the definitive agreements relating to the release of Simon from its
obligations relating to this vessel and the new lease between the Company and
RBS.
In September 1997, the Company ordered a fourth Opseis seismic data
acquisition system at an estimated total cost of approximately $5.6 million.
This acquisition will be funded with cash flow from operations and vendor
financing. The Company anticipates that operation of this fourth system will
begin in the first quarter of 1998. Additionally in August, 1997, the Company
purchased a total of 1,500 seismic recording channels for its three crews at a
cost of approximately $3.5 million. The Company anticipates funding this
purchase with cash flows from operations and/or vendor financing.
As of September 30, 1997, the Company had capital commitments to purchase
approximately $2.3 million of additional marine seismic data acquisition
equipment as part of its scheduled routine replacement of existing equipment.
The Company intends to pay for this equipment with a combination of the net
proceeds of the Offering and vendor financing.
On October 21, 1997, the Company entered into an agreement with Bank One,
Texas, N.A. with respect to a $20,000,000 revolving credit facility secured by
the Company's accounts receivable. The amount the Company may borrow under the
revolving credit facility is limited to a borrowing base that is equal to 90% of
eligible U.S. and U.K. investment grade accounts receivable, 100% of receivables
secured by acceptable letters of credit and 80% of non-graded U.S. or investment
grade foreign receivables and other eligible receivables approved by the bank.
Interest only is payable monthly or at the end of LIBOR interest periods, and
the credit
14
<PAGE> 15
facility is payable in full in three years. Mandatory prepayments are required
if borrowings exceed the borrowing base. Interest will accrue under the credit
facility at the bank's base rate or at LIBOR plus a spread of 1.375% if the
Company's debt to net worth ratio is less than 1 to 1, and 1.625% if such ratio
is equal to or greater than 1 to 1.
The Company believes that its planned capital expenditures and operating
requirements through the end of 1997 will be funded from a portion of the net
proceeds of the Offering and the Company's cash flow from operations. The
Company anticipates that its cash flow from operations will be sufficient to
fund its operating requirements for the foreseeable future, and that any
additional capital expenditures will be funded from the Company's cash flow from
operations, borrowings from the Company's revolving credit facility, or
additional debt financing. If the Company is not able to obtain additional
financing, it will be unable to make such capital expenditures and the Company's
financial position and results of operations may be materially and adversely
affected as a result.
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
Forward-looking statements in this release are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that all forward-looking statements involved risks
associated with the uncertainty of market acceptance of the Company's products,
limited number of customers, as well as risks of downturns in economic
conditions generally, risks associated with competition and competitive pricing
pressures, and other risks detailed in the Company's filings with the Securities
and Exchange Commission.
15
<PAGE> 16
PART II -- OTHER INFORMATION
ITEMS 1, 3, 4, 5 AND 6 -- NOT APPLICABLE
ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 5, 1997, the Securities and Exchange Commission declared the
Company's registration statement on Form S-1, File No. 333-28303, effective.
Item 2 of Part II of the Company's 10-Q for the quarter ending June 30, 1997 set
forth information regarding the Company's proceeds from the offering pursuant to
such registration statement and the Company's use of such proceeds. The
following information has changed since such disclosure.
Total expenses incurred to date are approximately $9.2 million, consisting
of $7.8 million of underwriting discounts and commissions, and an estimated $1.4
million of accounting, legal and other expenses. After deducting the Company's
underwriting commissions and other expenses, the net proceeds to the Company
were approximately $69.2 million.
II-1
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EAGLE GEOPHYSICAL, INC.
<TABLE>
<CAPTION>
SIGNATURE DATE
--------- ----
<C> <C>
/s/ RICHARD W. MCNAIRY November 14, 1997
- -----------------------------------------------------
Richard W. McNairy, Vice President-Chief Financial
Officer, on behalf of the Registrant and as Chief
Financial Officer
/s/ DAVID H. SAINDON November 14, 1997
- -----------------------------------------------------
David H. Saindon, Chief Accounting Officer
</TABLE>
II-2
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ITEM 8.,
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 30,632
<SECURITIES> 0
<RECEIVABLES> 28,789
<ALLOWANCES> (570)
<INVENTORY> 1,536
<CURRENT-ASSETS> 64,493
<PP&E> 51,806
<DEPRECIATION> (13,240)
<TOTAL-ASSETS> 122,656
<CURRENT-LIABILITIES> 28,850
<BONDS> 0
0
0
<COMMON> 85
<OTHER-SE> 82,794
<TOTAL-LIABILITY-AND-EQUITY> 122,656
<SALES> 53,982
<TOTAL-REVENUES> 53,982
<CGS> 39,488
<TOTAL-COSTS> 48,180
<OTHER-EXPENSES> 152
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 528
<INCOME-PRETAX> 5,122
<INCOME-TAX> 1,919
<INCOME-CONTINUING> 3,203
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,203
<EPS-PRIMARY> .73
<EPS-DILUTED> .73
</TABLE>
