<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
<TABLE>
<CAPTION>
(MARK ONE)
<S> <C> <C>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] 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: 0-22863
</TABLE>
EAGLE GEOPHYSICAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 76-0522659
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2603 AUGUSTA
SUITE 1400
HOUSTON, TEXAS 77057
(Address of Principal Executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (713) 243-6100
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 13, 1998: 8,587,360
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
EAGLE GEOPHYSICAL, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I -- Financial Information............................. 3
Item 1. Financial Statements................................ 3
Consolidated Balance Sheets -- September 30, 1998
(unaudited) and December 31, 1997......................... 3
Consolidated Statements of Operations for the three and nine
month periods ended September 30, 1998 and 1997
(unaudited)............................................... 4
Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 1998 and 1997 (unaudited)..... 5
Consolidated Statement of Stockholders' Equity.............. 6
Notes to Unaudited Consolidated Financial Statements........ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 17
PART II -- Other Information
Item 6...................................................... 23
</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)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents, including restricted cash of
$5,000 (unaudited) and $4,502 at September 30, 1998 and
December 31, 1997, respectively......................... $ 50,841 $ 19,482
Receivables:
Trade, billed, Net of Allowance for Doubtful Accounts of
$475 (unaudited) at September 30, 1998 and $132 at
December 31, 1997...................................... 12,150 11,291
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 6,437 2,576
Other................................................... 4,679 546
Due from affiliate........................................ 15,424 12,500
Inventory................................................. 1,434 1,334
Prepaid expenses and other assets......................... 3,430 2,788
-------- --------
Total current assets............................... 94,395 50,517
PROPERTY AND EQUIPMENT, AT COST:
Geophysical equipment..................................... 174,890 69,418
Furniture, fixtures and other............................. 1,320 652
-------- --------
176,210 70,070
Less: Accumulated depreciation.............................. (27,092) (14,873)
-------- --------
Net property and equipment......................... 149,118 55,197
MULTI-CLIENT DATA LIBRARY................................... 8,958 371
GOODWILL, NET............................................... 19,527 17,990
OTHER LONG-TERM ASSETS...................................... 3,525 230
-------- --------
TOTAL ASSETS....................................... $275,523 $124,305
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 1,032 $ --
Current portion of capital lease obligations.............. 5,954 2,816
Accounts payable.......................................... 23,353 15,671
Accrued liabilities....................................... 15,594 7,849
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... 9,331 6,029
-------- --------
Total current liabilities.......................... 55,264 32,365
LONG-TERM DEBT.............................................. 104,505 --
CAPITAL LEASE OBLIGATIONS................................... 23,896 7,944
DEFERRED INCOME TAXES AND OTHER OBLIGATIONS................. 1,548 --
-------- --------
TOTAL LIABILITIES.................................. 185,213 40,309
-------- --------
CONTINGENCIES AND COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock, 5,000,000 shares authorized, none issued
and outstanding......................................... -- --
Common stock, par value $.01 per share; authorized
25,000,000 shares; issued and outstanding 8,587,360
(unaudited) shares at September 30, 1998 and 8,489,000
at December 31, 1997.................................... 86 85
Additional paid-in capital................................ 83,566 82,622
Retained earnings......................................... 7,083 1,714
Note receivable from Stockholder.......................... (425) (425)
-------- --------
TOTAL STOCKHOLDERS' EQUITY......................... 90,310 83,996
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $275,523 $124,305
======== ========
</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)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH NINE MONTH
PERIODS ENDED PERIODS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES(1)......................................... $33,930 $25,216 $92,146 $53,982
EXPENSES
Operating expenses (exclusive of depreciation and
amortization shown below)(1)................... 19,967 18,709 59,933 39,488
Depreciation and amortization..................... 5,191 2,613 12,878 5,385
Selling, general and administrative expenses...... 2,417 1,742 7,790 3,307
Interest expense.................................. 2,975 775 3,632 1,387
Interest income................................... (639) (281) (1,034) (859)
Other, net........................................ (140) 152 (51) 152
------- ------- ------- -------
29,771 23,710 83,148 48,860
------- ------- ------- -------
Income before provision for income taxes............ 4,159 1,506 8,998 5,122
Provision for income taxes.......................... 1,669 593 3,629 1,919
------- ------- ------- -------
NET INCOME.......................................... $ 2,490 $ 913 $ 5,369 $ 3,203
======= ======= ======= =======
Basic earnings per share............................ $ .29 $ .14 $ .63 $ .73
======= ======= ======= =======
Weighted average number of common shares (basic).... 8,587 6,318 8,558 4,398
======= ======= ======= =======
Diluted earnings per share.......................... $ .29 $ .14 $ .63 $ .71
======= ======= ======= =======
Weighted average number of common shares
(diluted)......................................... 8,587 6,367 8,561 4,488
======= ======= ======= =======
</TABLE>
- ---------------
(1) Includes revenue from affiliates of $20,072, $52,618, $7,893, and $23,105
for the unaudited three and nine month periods ended September 30, 1998 and
1997, respectively, and operating expenses related to such affiliate revenue
of $14,410, $39,371, $5,751 and $16,961 for the unaudited three and nine
month periods ended September 30, 1998 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, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTH PERIODS
ENDED SEPTEMBER 30,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 5,369 $ 3,203
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 12,878 5,385
Gain on sale of property and equipment.................... (18) (18)
Deferred income tax provision............................. 720 381
Bad debt expense.......................................... 475 570
Increase in receivables................................... (2,739) (4,457)
Increase in multi client data library..................... (8,587) --
Increase in other assets.................................. (8,640) (1,918)
Increase in accounts payable and other liabilities........ 16,995 4,233
-------- --------
Total adjustments.................................. 11,084 4,176
-------- --------
Net cash provided by operating activities.......... 16,453 7,379
-------- --------
Cash flows from investing activities:
Purchase of property and equipment........................ (75,097) (12,259)
Cash received on disposal of property and equipment....... 161 24
Cash paid for Seismic Drilling & Services, Inc., net of
cash acquired........................................... (3,516) --
Cash acquired from the purchase of Energy Research
International........................................... -- 145
-------- --------
Net cash used in investing activities.............. (78,452) (12,090)
-------- --------
Cash flows from financing activities:
Issuance of Senior Notes, net of offering costs........... 96,482 --
Borrowings under credit facility.......................... 35,500 --
Repayments under credit facility.......................... (35,500) --
Borrowings under term loans............................... -- 7,925
Principal payments on term loans.......................... (327) (34,895)
Principal payments on capital leases...................... (2,617) (3,893)
Payment to affiliate...................................... -- (3,003)
Issuance of Common Stock, net............................. -- 69,209
Other, net................................................ (180) --
-------- --------
Net cash provided by financing activities.......... 93,358 35,343
-------- --------
Net increase in cash and cash equivalents................... 31,359 30,632
Cash and cash equivalents at beginning of period............ 19,482 --
-------- --------
Cash and cash equivalents at end of period.................. $ 50,841 $ 30,632
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.................................................. $ 2,082 $ 738
======== ========
Income taxes.............................................. $ 2,701 $ --
======== ========
Noncash investing & financing activities:
Vessel upgrade financed through a capital lease........... $ 21,707 $ --
======== ========
Purchase of shot-hole drilling company for 98,360 shares
of common stock......................................... $ 1,125 $ --
======== ========
Equipment purchase through term loan...................... $ 5,864 $ --
======== ========
Contribution of Investment in Energy Research
International by Seitel................................. $ -- $ 914
======== ========
Purchase of Remaining 81% Interest in Energy Research
International for Common Stock.......................... $ -- $ 8,415
======== ========
Dividend Declared to Seitel, Inc. ........................ $ -- $ 6,651
======== ========
Issuance of common stock to an officer for a note......... $ -- $ 425
======== ========
Equipment purchased through capital leases................ $ -- $ 374
======== ========
</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, 1997........ 8,489 $85 $82,622 $1,714 $(425) $83,996
Unaudited:
Acquisition of Seismic Drilling
& Services, Inc. ............ 98 1 1,124 -- -- 1,125
Net Income...................... -- -- -- 5,369 -- 5,369
Other, net...................... -- -- (180) -- -- (180)
----- --- ------- ------ ----- -------
Balance, September 30, 1998....... 8,587 $86 $83,566 $7,083 $(425) $90,310
===== === ======= ====== ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 7
EAGLE GEOPHYSICAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION AND SIGNIFICANT ACTIVITIES
The accompanying unaudited interim consolidated financial statements of
Eagle Geophysical, Inc. (the "Company") for the nine months ended September 30,
1998 and 1997 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 Annual Report on Form 10-K.
In September 1998, the Company entered into a letter of intent for the
purchase of NRG Services, a Canadian land-based seismic company, for a purchase
price of approximately $5.5 million consisting of cash, shares of the Company's
common stock, and assumption of debt. The Company anticipates completing the
transaction by November 30, 1998.
In August 1998, the Company adopted a Shareholder Rights Plan pursuant to
which rights to purchase one one-thousandth of a share of the Company's Series A
Junior Participating Preferred Stock at an exercise price of $46 per share were
distributed to the shareholders. The rights will be exercisable only if a person
or group acquires beneficial ownership of 15% or more of the Company's common
stock or announces a tender or exchange offer, the consummation of which would
allow such person or group to own 15% or more of the Company's common stock.
Additionally, if a person or group becomes the beneficial owner of 15% or more
of the Company's common stock, each right not owned by that person or group will
entitle the rightholder to purchase, at the right's then current exercise price,
common stock with a market value of twice the right's exercise price. The
Company will have the option to redeem the rights at a price of $.001 per right
at any time until the 10th day following a public announcement that a 15%
position has been acquired. On August 4, 1998, the Company's Board of Directors
declared a dividend of one preferred share purchase right per each share of
common stock. Such dividend was distributed to shareholders of record on August
31, 1998.
In July 1998, the Company completed an offering (the "Offering") of $100
million of 10 3/4% Senior Notes due 2008 resulting in net proceeds to the
Company of approximately $96.4 million after deducting offering-related
expenses. The Company used approximately $27.5 million of the proceeds to repay
borrowings under a short-term loan and its revolving credit facility used for
upgrades to the Austral Horizon and the Atlantic Horizon and will use the rest
of the proceeds to fund the remaining upgrades of these two vessels.
In April 1998, the Company entered into an agreement with British Linen
Bank for the financing of the Labrador Horizon upgrades and the purchase of the
vessel for a total commitment of approximately $31.3 million. The facility bears
interest at a rate of LIBOR plus 1.375% and required the Company to enter into a
lease purchase agreement with British Linen Bank for a period of five years that
commenced upon completion of the upgrades. The facility requires a security
deposit of approximately $5 million with scheduled amounts to be refunded based
upon a predetermined formula. Additionally, the Company has the option to
acquire the vessel at the end of the lease purchase agreement for a price of .1%
of the total facility commitment.
In April 1998, the Company obtained a term loan with Fleet Capital
Corporation for the financing of an Opseis seismic data acquisition system for
approximately $5.9 million. The loan is for a period of five years and bears
interest at a fixed rate of 7.36%. Monthly payments of approximately $117,000
will be made under the loan with the Opseis system pledged as security for the
loan.
On March 24, 1998, the Company completed the acquisition of a shot-hole
drilling company for a price of approximately $6.3 million, consisting of
approximately $4.3 million in cash, 98,360 shares of the Company's common stock
and deferred compensation payable to the former owner of $500,000. This company
7
<PAGE> 8
EAGLE GEOPHYSICAL, INC.
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
was a privately held provider of seismic shot-hole drilling and related
front-end services for the seismic data acquisition industry.
In March 1998, the Company replaced one of its chartered offshore seismic
vessels working in the U.S. Gulf of Mexico, the Abshire Tide, with a newer, more
capable vessel, the Celtic Horizon.
2. EARNINGS PER COMMON SHARE
Basic 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, in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS"), No. 128 "Earnings Per
Share". The weighted average shares of common stock outstanding for the
calculation of basic earnings per share was 8,587,000, 8,558,000, 6,318,000 and
4,398,000 for the three and nine month periods ending September 30, 1998 and
1997 respectively. The weighted average shares of common stock outstanding for
the calculation of diluted earnings per share was 8,587,000, 8,561,000,
6,367,000 and 4,488,000 for the three and nine month periods ending September
30, 1998 and 1997 respectively. Options to purchase 892,550 and 800,550 shares
of common stock that were outstanding for the three and nine months ended
September 30, 1998, respectively, were not included in the computation of
diluted earnings per share because the options' exercise price was greater than
the average market price of the common shares.
3. PRO FORMA RESULTS OF OPERATIONS
On August 11, 1997, the Company completed the acquisition of the remaining
81% interest in Energy Research International ("ERI") with the issuance of
600,000 shares of common stock for a purchase price valued at approximately $8.4
million. 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 $69.1 million after deducting offering related
expenses (the "IPO"). The following table presents the unaudited pro-forma
effects of the IPO and the application of the net proceeds thereof to retire
certain debt and capital leases, and the purchase of ERI as if such transactions
had occurred on January 1, 1997 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Pro Forma Revenue............................ $33,930 $32,989 $92,146 $83,049
Pro Forma Income Before Taxes................ 4,159 3,139 8,998 7,201
Pro Forma Net Income......................... 2,490 1,867 5,369 4,285
Pro Forma Weighted Average Common Shares
Outstanding -- (Basic)..................... 8,587 8,489 8,558 8,489
Pro Forma Basic Earnings Per Common Share.... $ .29 $ .22 $ .63 $ .50
======= ======= ======= =======
</TABLE>
8
<PAGE> 9
EAGLE GEOPHYSICAL, INC.
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT
The Company had the following debt outstanding as of September 30, 1998 and
December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
Borrowings pursuant to a revolving credit facility with Bank
One Texas N.A. ........................................... $ -- $ --
Borrowings pursuant to a short term loan with Bank One Texas
N.A. ..................................................... -- --
Fleet Capital Term Loan..................................... 5,537 --
10 3/4% Senior Notes Due 2008............................... 100,000 --
-------- --------
105,537 --
Less amounts due within one year............................ (1,032) --
-------- --------
Total long-term debt........................................ $104,505 $ --
======== ========
</TABLE>
In July 1998, the Company completed the Offering of $100 million of 10 3/4%
Senior Notes due 2008 resulting in net proceeds to the Company of approximately
$96.4 million after deducting offering-related expenses. The Company used
approximately $27.5 million of the proceeds to repay borrowings under a short-
term loan and its revolving credit facility used for upgrades to the Austral
Horizon and the Atlantic Horizon and will use the rest of the proceeds to fund
the remaining upgrades of these two vessels.
The Company has an agreement with Bank One, Texas N.A. with respect to a
$20 million 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, and 80% of eligible non-investment grade domestic and other
foreign receivables. Interest only is payable monthly or at the end of LIBOR
interest periods, and the credit facility is payable in full on June 1, 1999.
Mandatory prepayments are required if borrowings exceed the borrowing base.
Interest accrues 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. As of September 30,
1998, the Company had a borrowing base of approximately $20.0 million under this
facility and no borrowings were outstanding. On July 20, 1998, $20 million of
borrowings outstanding was repaid with proceeds from the Offering.
In April 1998, the Company obtained a term loan with Fleet Capital
Corporation for the financing of an Opseis seismic data acquisition system for
approximately $5.9 million. The loan is for a period of five years and bears
interest at a fixed rate of 7.36%. Monthly payments of approximately $117,000
will be made under the loan with the Opseis system pledged as security for the
loan.
In June 1998, the Company entered into a $29.0 million short-term loan with
Bank One, Texas, N.A. to fund a portion of the cost of the upgrades to the
Austral Horizon and the Atlantic Horizon pending completion of the Offering. The
maximum amount borrowed under this loan was $7.5 million, which was repaid in
full on July 20, 1998. Interest accrued under this loan at the bank's base rate
or LIBOR plus 2% and was payable monthly or at the end of applicable LIBOR
interest periods.
5. 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.
9
<PAGE> 10
EAGLE GEOPHYSICAL, INC.
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
The Company generally provides services to a relatively small number of
customers, so that individual customers account for significant portions of the
Company's accounts receivable at any given time. Credit losses incurred on
receivables have historically been immaterial to the Company. The Company
currently has one receivable from a customer of $2,384,000 that is approximately
eighteen months old. Management currently believes that this receivable is
collectible, although in light of the age of this receivable, the Company is
maintaining a reserve for doubtful accounts of $450,000 as of September 30,
1998.
6. RELATED PARTY TRANSACTIONS
Prior to the IPO, the Company was a wholly-owned subsidiary of Seitel, Inc.
Seitel currently owns approximately 17.7% of the outstanding common stock of the
Company. 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,
1998 and 1997, the Company recognized revenue of $20,072,000, $52,618,000,
$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
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 IPO 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.
Prior to the IPO, 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. In connection with the IPO, the Company acquired all of the
outstanding stock of ERI. For the unaudited three and nine month periods ended
September 30, 1997, the Company recognized revenue of $182,000 and $1,088,000
related to this lease. Subsequent to the IPO, such rental income and expense was
eliminated in the Company's consolidated results of operations.
7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." This statement requires the reporting of
comprehensive income which includes net income plus all other non owner changes
in equity during the period. The Company adopted this statement during the
quarter ended March 31, 1998. However, the Company had no items of comprehensive
income during the three and nine months ended September 30, 1998 and 1997 and
therefore, comprehensive income is equal to net income for each period.
10
<PAGE> 11
EAGLE GEOPHYSICAL, INC.
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." This
statement requires the reporting of expanded information of a company's
operating segments. It also expands the definition of what constitutes an
entity's operating segments. This statement is required to be adopted for fiscal
years beginning after December 15, 1997. The Company intends to adopt this
statement during its fiscal year ending December 31, 1998. The Company does not
believe the adoption of this statement will have a material effect on its
consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133) "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. Statement 133 is effective for
fiscal years beginning after June 15, 1999. The Company does not believe the
adoption of this statement will have a material impact on its financial position
and results of operations, as the Company does not currently engage in any
hedging activities.
8. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
On July 20, 1998, the Company completed the offering of its $100 million
10 3/4% Senior Notes due 2008 to repay approximately $27.5 million borrowed
under the Short-Term Loan and the Revolving Credit Facility to pay for upgrades
to the Austral Horizon and Atlantic Horizon and to fund the remaining upgrades
of these two vessels. In connection with the Offering, certain of the Company's
subsidiaries (the "Guarantor Subsidiaries") agreed to guarantee the Company's
obligations under the Senior Notes. Certain other subsidiaries (the
"Non-Guarantor Subsidiaries") are not required to guarantee the Senior Notes.
The following tables present the condensed consolidating balance sheets of
Eagle Geophysical, Inc. as a parent company, its Guarantor Subsidiaries and its
Non-Guarantor Subsidiaries as of September 30, 1998 (unaudited), and December
31, 1997 and the related condensed consolidating statements of operations and
cash flows for the nine months ended September 30, 1998 and 1997 (unaudited).
11
<PAGE> 12
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
RECLASSIFICATIONS
EAGLE GEOPHYSICAL, INC. GUARANTOR NON-GUARANTOR AND EAGLE GEOPHYSICAL, INC.
PARENT COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
----------------------- ------------ ------------- ----------------- -----------------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents............. $ 28,351 $ 11,968 $ 12,237 $ (1,715) $ 50,841
Receivables, net.......... -- 29,879 8,810 -- 38,689
Inventory................. -- -- 1,434 -- 1,434
Prepaid expenses and other
assets.................. 2,607 1,348 2,083 (2,607) 3,431
--------- -------- -------- -------- --------
Total Current
Assets........... 30,958 43,195 24,564 (4,322) 94,395
Property and equipment,
net..................... -- 76,414 72,704 -- 149,118
Goodwill, net............. -- 2,402 17,125 -- 19,527
Other assets, net......... 3,526 6,985 1,972 -- 12,483
Intercompany investments
and advances............ 16,795 -- -- (16,795) --
--------- -------- -------- -------- --------
Total Assets....... $ 51,279 $128,996 $116,365 $(21,117) $275,523
========= ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of debt and
capital lease
obligations............... $ -- $ 1,032 $ 5,954 $ -- $ 6,986
Accounts payable............ -- 10,000 15,068 (1,715) 23,353
Intercompany payables,
net....................... (130,382) 87,228 57,485 (14,331) --
Accrued liabilities......... 3,125 3,338 11,741 (2,610) 15,594
Billings in excess of costs
and estimated earnings on
uncompleted contracts..... -- 9,331 -- -- 9,331
--------- -------- -------- -------- --------
Total Current
Liabilities...... (127,257) 110,929 90,248 (18,656) 55,264
Long-term debt.............. 100,000 4,505 -- -- 104,505
Capital leases
obligations............... -- -- 23,896.... -- 23,896
Deferred income taxes and
other obligations......... -- 1,548 -- -- 1,548
--------- -------- -------- -------- --------
Total
Liabilities...... (27,257) 116,982 114,144 (18,656) 185,213
--------- -------- -------- -------- --------
Stockholders' Equity........ 78,536 12,014 2,221 (2,461) 90,310
--------- -------- -------- -------- --------
Total Liabilities
and Stockholders'
Equity........... $ 51,279 $128,996 $116,365 $(21,117) $275,523
========= ======== ======== ======== ========
</TABLE>
12
<PAGE> 13
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
RECLASSIFICATIONS
EAGLE GEOPHYSICAL, INC. GUARANTOR NON-GUARANTOR AND EAGLE GEOPHYSICAL, INC.
PARENT COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
----------------------- ------------ ------------- ----------------- -----------------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents............ $ 8,450 $ 1,871 $ 9,161 $ -- $ 19,482
Receivables, net......... 89 25,339 1,485 -- 26,913
Inventory................ -- 7 1,327 -- 1,334
Prepaid expenses and
other
assets................. 2,357 515 1,866 (1,950) 2,788
--------- ------- ------- -------- --------
Total Current
Assets.......... 10,896 27,732 13,839 (1,950) 50,517
Property and equipment,
net.................... 54 22,338 32,805 -- 55,197
Goodwill, net............ -- -- 17,990 -- 17,990
Other assets, net........ 104 393 1,972 (1,868) 601
Intercompany investments
and advances........... 11,789 -- -- (11,789) --
--------- ------- ------- -------- --------
Total Assets...... $ 22,843 $50,463 $66,606 $(15,607) $124,305
========= ======= ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of debt and
capital lease
obligations.............. $ -- $ -- $ 2,816 $ -- $ 2,816
Accounts payable........... 934 8,198 6,539 -- 15,671
Intercompany payables,
net...................... (58,340) 25,681 41,987 (9,328) --
Accrued liabilities........ 278 3,095 6,426 (1,950) 7,849
Billings in excess of costs
and estimated earnings on
uncompleted contracts.... -- 5,842 187 -- 6,029
--------- ------- ------- -------- --------
Total Current
Liabilities..... (57,128) 42,816 57,955 (11,278) 32,365
Capital leases
obligations.............. -- -- 7,944 -- 7,944
Deferred income taxes and
other obligations........ -- 1,868 -- (1,868) --
--------- ------- ------- -------- --------
Total
Liabilities..... (57,128) 44,684 65,899 (13,146) 40,309
--------- ------- ------- -------- --------
Stockholders' Equity....... 79,971 5,779 707 (2,461) 83,996
--------- ------- ------- -------- --------
Total Liabilities
and
Stockholders'
Equity.......... $ 22,843 $50,463 $66,606 $(15,607) $124,305
========= ======= ======= ======== ========
</TABLE>
13
<PAGE> 14
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
RECLASSIFICATIONS
EAGLE GEOPHYSICAL, INC. GUARANTOR NON-GUARANTOR AND EAGLE GEOPHYSICAL, INC.
PARENT COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
----------------------- ------------ ------------- ----------------- -----------------------
<S> <C> <C> <C> <C> <C>
1998
REVENUES................... $ -- $68,343 $25,149 $(1,346) $92,146
EXPENSES
Operations Expenses
(exclusive of
Depreciation and
amortization shown
below)................ -- 47,769 13,510 (1,346) 59,933
Depreciation and
amortization.......... 13 6,852 6,013 -- 12,878
Selling, general and
administrative
expenses.............. 1,759 3,517 2,514 -- 7,790
Interest and other
expense, net.......... 2,036 8 503 -- 2,547
------- ------- ------- ------- -------
3,808 58,146 22,540 (1,346) 83,148
------- ------- ------- ------- -------
Income (loss) before
provision for income
taxes................. (3,808) 10,197 2,609 -- 8,998
Provision for income
taxes................. (1,428) 3,962 1,095 -- 3,629
------- ------- ------- ------- -------
NET INCOME (LOSS).......... $(2,380) $ 6,235 $ 1,514 $ -- $ 5,369
======= ======= ======= ======= =======
1997
REVENUES................... $ -- $50,331 $ 3,917 $ (266) $53,982
EXPENSES
Operations Expenses
(exclusive of
Depreciation and
amortization shown
below)................ -- 36,323 3,431 (266) 39,488
Depreciation and
amortization.......... 2 4,848 535 -- 5,385
Selling, general and
administrative
expenses.............. 718 2,458 131 -- 3,307
Interest and other
expense, net.......... (178) 671 187 -- 680
------- ------- ------- ------- -------
542 44,300 4,284 (266) 48,860
------- ------- ------- ------- -------
Income (loss) before
provision for income
taxes.................... (542) 6,031 (367) -- 5,122
Provision for income
taxes.................... (203) 2,180 (58) -- 1,919
------- ------- ------- ------- -------
NET INCOME (LOSS).......... $ (339) $ 3,851 $ (309) $ -- $ 3,203
======= ======= ======= ======= =======
</TABLE>
14
<PAGE> 15
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
RECLASSIFICATIONS
EAGLE GEOPHYSICAL, INC. GUARANTOR NON-GUARANTOR AND EAGLE GEOPHYSICAL, INC.
PARENT COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
----------------------- ------------ ------------- ----------------- -----------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss).......... $ (2,380) $ 6,235 $ 1,514 $ -- $ 5,369
Adjustments to reconcile
net income (loss) to net
cash provided by
operating activities..... (2,875) 2,716 12,958 (1,715) 11,084
--------- -------- -------- ------- --------
NET CASH PROVIDED BY (USED
IN) OPERATING
ACTIVITIES............... (5,255) 8,951 14,472 (1,715) 16,453
--------- -------- -------- ------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase and upgrades of
property and equipment... -- (50,838) (24,259) -- (75,097)
Cash received on disposal
of property and
equipment................ -- 161 -- -- 161
Cash paid for shot-hole
drilling company, net of
cash acquired............ -- (3,516) -- -- (3,516)
--------- -------- -------- ------- --------
NET CASH USED IN INVESTING
ACTIVITIES............... -- (54,193) (24,259) -- (78,452)
--------- -------- -------- ------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of Senior Notes... 96,482 -- -- -- 96,482
Borrowings under credit
facility................. 35,500 -- -- -- 35,500
Repayments under credit
facility................. (35,500) -- -- -- (35,500)
Borrowings under term
loans.................... -- -- -- -- --
Principal payments on term
loans.................... -- (327) -- -- (327)
Principal payments on
capital leases........... -- -- (2,617) -- (2,617)
Proceeds (payments) on
intercompany advances.... (71,146) 55,666 15,480 -- --
Other, net................. (180) -- -- -- (180)
--------- -------- -------- ------- --------
NET CASH PROVIDED BY (USED
IN) FINANCING
ACTIVITIES............... 25,156 55,339 12,863 -- 93,358
--------- -------- -------- ------- --------
Net decrease in cash and
cash equivalents......... 19,901 10,097 3,076 (1,715) 31,359
Cash and cash equivalents,
beginning of period...... 8,450 1,871 9,161 -- 19,482
--------- -------- -------- ------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD............ $ 28,351 $ 11,968 $ 12,237 $(1,715) $ 50,841
========= ======== ======== ======= ========
</TABLE>
15
<PAGE> 16
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
RECLASSIFICATIONS
EAGLE GEOPHYSICAL, INC. GUARANTOR NON-GUARANTOR AND EAGLE GEOPHYSICAL, INC.
PARENT COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
----------------------- ------------ ------------- ----------------- -----------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss).......... $ (339) $ 3,851 $ (309) $ -- $ 3,203
Adjustments to reconcile
net income (loss) to net
cash provided by
operating activities..... (501) 7,927 402 (3,652) 4,176
-------- -------- -------- ------- --------
NET CASH PROVIDED BY (USED
IN) OPERATING
ACTIVITIES............... (840) 11,778 93 (3,652) 7,379
-------- -------- -------- ------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase and upgrades of
property and equipment... (29) (10,527) (1,703) -- (12,259)
Cash received on disposal
of property and
equipment................ -- 24 -- -- 24
Cash acquired from the
purchase of Energy
Research International... -- -- 145 -- 145
-------- -------- -------- ------- --------
NET CASH USED IN INVESTING
ACTIVITIES............... (29) (10,503) (1,558) -- (12,090)
-------- -------- -------- ------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of Common Stock,
net...................... 69,209 -- -- -- 69,209
Borrowings under term
loans.................... -- 7,925 -- -- 7,925
Principal payments on term
loans.................... -- (23,286) (11,609) -- (34,895)
Principal payments on
capital
leases................... -- (2,920) (973) -- (3,893)
Proceeds (payments) on
intercompany advances.... (47,637) 27,169 20,468 -- --
Payment to affiliate....... -- (3,003) -- -- (3,003)
-------- -------- -------- ------- --------
NET CASH PROVIDED BY (USED
IN) FINANCING
ACTIVITIES............... 21,572 5,885 7,886 -- 35,343
-------- -------- -------- ------- --------
Net decrease in cash and
cash equivalents......... 20,703 7,160 6,421 (3,652) 30,632
Cash and cash equivalents,
beginning of period...... -- -- -- -- --
-------- -------- -------- ------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD............ $ 20,703 $ 7,160 $ 6,421 $(3,652) $ 30,632
======== ======== ======== ======= ========
</TABLE>
16
<PAGE> 17
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 and, commencing in March 1998, the sale of
seismic shot-hole drilling and front end services. The Company focuses its
onshore operations and front end services 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. Onshore operations including front end services
accounted for approximately 62% and 67% of the Company's consolidated revenues
for the three and nine months ended September 30, 1998, respectively, with
offshore operations accounting for the remaining 38% and 33% of consolidated
revenues for the three and nine months ended September 30, 1998, respectively.
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. However, the Company anticipates that an increasing percentage of its
future offshore data acquisition projects will be multi-client surveys.
In a multi-client survey, the Company retains an interest in the acquired
data. Conducting multi-client surveys normally has little effect on operating
margins in the short term because the Company capitalizes most of the costs
relating to the acquisition of the multi-client data that are not offset by
pre-funding. However, since revenues from multi-client projects only include
pre-funding amounts during the acquisition of the data, and these pre-funding
amounts are normally less than revenues for proprietary data acquisition
projects, total revenues and net income tend to be less during multi-client
acquisition projects than during proprietary acquisition projects. If the
Company is able to make sales of the multi-client data after full amortization
of the acquisition cost of the data (up to four years), the additional sales
will result in revenues with little or no cost, increasing net income.
Conversely, if the sales of the multi-client data are less than originally
projected by management, the asset value of the data will be adjusted to equal
the estimated net realizable value of the data (total estimated future sales
less selling expenses), resulting in decreased net income.
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, 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 to
counteract currency fluctuations.
The Company generally provides services to a relatively small group of key
customers that account for a significant percentage of the accounts receivable
of the Company at any given time. The Company's key customers vary over time,
but have historically included Seitel and its subsidiaries. The Company extends
credit to various companies in the oil and gas industry, including its key
customers, for the acquisition of seismic data, which results in a concentration
of credit risk. This concentration of credit risk may be affected by changes in
the economic or other conditions of the Company's key clients and may
accordingly impact the Company's overall credit risk. As of September 30, 1998,
the Company had one receivable from a customer of approximately $2.4 million
that is approximately eighteen months old. In light of the age of this
receivable, the Company is maintaining a reserve for doubtful accounts of
$450,000 as of September 30, 1998. Historical credit losses incurred on
receivables by the Company have been immaterial.
17
<PAGE> 18
RESULTS OF OPERATIONS
The following discussion of the results of operations is divided into a
discussion of the Company's onshore operations, which includes front end
services, and the Company's offshore operations. The discussions for the three
and nine months ended September 30, 1997 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 Company's IPO
in August 1997. The revenues of the Company for the three and nine months ended
September 30, 1997 include intercompany profits from work performed for Seitel,
the Company's parent corporation prior to the IPO, and its subsidiaries.
ONSHORE OPERATIONS
Quarter Ended September 30, 1998 Compared to September 30, 1997
Revenues increased 23% from $17.1 million in the third quarter of 1997 to
$21.1 million in the third quarter of 1998, primarily due to the Company's
fourth onshore crew, acquired at the end of the first quarter of 1998, higher
revenues derived from the increased channel capacity of the Company's crews from
1,850 channels to 2,450 channels per crew, and revenue from the front end
services business acquired late in the first quarter of 1998.
Operating costs (excluding depreciation) decreased 1% from $12.9 million in
the third quarter of 1997 to $12.8 million in the third quarter of 1998,
primarily due to increased crew efficiency. Operating margin percentage improved
to 39.5% for the third quarter of 1998 compared to an operating margin of 24.6%
for the 1997 third quarter.
Depreciation and amortization increased 56% from $1.6 million in the third
quarter of 1997 to $2.5 million in the third quarter of 1998. This increase
resulted from operating four crews and the front end services business in the
1998 period, including the depreciation associated with the upgrade to 2,450
channels, in the 1998 period versus three crews at 1,850 channels in the 1997
period.
Selling, general and administrative expenses decreased 6% from $1.6 million
in the third quarter of 1997 to $1.5 million in the third quarter of 1998,
primarily due to cost saving measures implemented by the Company during the 1998
period.
Net interest expense increased from $.4 million in the 1997 period to $2.3
million in the 1998 period due to increased borrowings.
Nine Months Ended September 30, 1998 Compared to September 30, 1997
Revenue increased 36% from $45.0 million in the 1997 period to $61.3
million in the 1998 period, primarily due to the Company's third onshore crew
operating for the entire year-to-date period of 1998 as compared to only part of
the 1997 period, the fourth onshore crew, acquired at the end of the first
quarter of 1998 and operating for the second and third quarters of 1998, higher
revenues derived from the increased channel capacity of the Company's crews from
1,850 channels to 2,450 channels per crew, and revenue from the front end
services business acquired late in the first quarter of 1998.
Operating costs (excluding depreciation) increased 24% from $33.6 million
in the 1997 period to $41.7 million in the 1998 period, primarily due to the
third onshore crew operating for the entire 1998 period, and the operations of
the fourth onshore crew and the front end services business, both of which were
acquired at the end of the first quarter of 1998. Operating margin percentage
improved to 30.2% for the 1998 period compared to an operating margin of 25.3%
for the 1997 period.
Depreciation and amortization increased 61% from $4.3 million in the 1997
period to $6.9 million in the 1998 period. This increase resulted from operating
four crews and the front end services business in 1998, including the
depreciation associated with the upgrade to 2,450 channels in the 1998 period,
versus three crews at 1,850 channels in the 1997 period.
18
<PAGE> 19
Selling, general and administrative expenses increased 35% from $3.7
million in the 1997 period to $5.0 million in the 1998 period, primarily due to
the addition of administrative staff to support the expanded operations and
additional corporate staff and corporate office expenses.
Net interest expense increased from $.7 million in the 1997 period to $2.6
million in the 1998 period due to increased borrowings.
OFFSHORE OPERATIONS
Quarter Ended September 30, 1998 Compared to September 30, 1997
Revenue decreased 19% from $15.9 million in the third quarter of 1997 to
$12.8 million in the third quarter of 1998, primarily due to vessel utilization.
The Company's vessel the Labrador Horizon spent a portion of the quarter in
transit to the Gulf of Mexico. The vessels Discoverer and Celtic Horizon
operated on a multi-client project for a portion of the 1998 quarter and were
also adversely affected due to mobilization to another project in the Gulf of
Mexico as well as difficult weather conditions. All four vessels were fully
utilized in the 1997 period on contract work thus contributing to higher
revenues in the 1997 period.
Operating expenses (excluding depreciation) decreased 32% from $10.8
million in the third quarter of 1997 to $7.3 million in the third quarter of
1998 due to the mix of projects performed during the 1998 quarter. The
Discoverer and Celtic Horizon were working on a multi-client project for a
portion of the quarter resulting in capitalized multi-client inventory costs.
The 1997 quarter consisted entirely of contract work. Operating margins improved
to 43.0% for the 1998 quarter as compared to 32.1% for the 1997 quarter.
Depreciation and amortization increased 45% from $1.9 million in the third
quarter of 1997 to $2.7 million in the third quarter of 1998, resulting from the
upgrade to six streamers for the Labrador Horizon and additional equipment
purchased for the Celtic Horizon in the 1998 quarter.
Selling, general and administrative expenses increased from $.7 million in
the third quarter of 1997 to $.9 million in the third quarter of 1998 due to
increases in personnel required for the expansion of the Company's vessel fleet.
Nine Months Ended September 30, 1998 Compared to September 30, 1997
Revenue decreased 19% from $38.1 million in the 1997 period to $30.8
million in the 1998 period, primarily due to the decrease in vessel availability
during the first quarter of 1998 and to the mix of multi-client versus contract
work performed in the periods.
The Company's vessel the Labrador Horizon was in drydock for the entire
first quarter of 1998 completing a $22 million upgrade, the vessel Discoverer
underwent a bi-annual maintenance inspection, and the vessel Abshire Tide was
decommissioned and replaced by the Celtic Horizon, which required shipyard work
prior to commencing service. Additionally, the Discoverer, the Abshire Tide, and
later the Celtic Horizon, were working during the 1998 period acquiring
multi-client data, which rather than generating current revenue, will generate
revenue in the future as data is licensed to customers. During the 1997 period,
the Discoverer and the Abshire Tide acquired data on a contract basis resulting
in higher revenues during the period.
Operating expenses (excluding depreciation) decreased 34% from $26.1
million in the 1997 period to $18.4 million in the 1998 period due to the
decrease in vessel utilization during the first quarter of 1998. Operating
margins improved to 40.3% for the 1998 period as compared to 31.5% for the 1997
period.
Depreciation and amortization increased 11% from $5.4 million in the 1997
period to $6.0 million in the 1998 period, resulting from the additional
depreciation commencing in the second quarter of 1998 from the upgrade to six
streamers on the Labrador Horizon and additional equipment purchased for the
Celtic Horizon.
Selling, general and administrative expenses increased 35% from $2.0
million in the 1997 period to $2.7 million in the 1998 period due to increases
in personnel required for the expansion of the Company's vessel fleet.
19
<PAGE> 20
LIQUIDITY
The Company had net working capital of $39.1 million as of September 30,
1998. The indebtedness of the Company as of such date consisted of the $100
million of 10 3/4% Senior Notes due 2008, borrowings under the Fleet Capital
Term Loan, and a capital lease obligation with British Linen Bank, totaling
approximately $135.4 million.
In September 1998, the Company entered into a letter of intent for the
purchase of NRG Services, a Canadian land-based seismic company, for a purchase
price of approximately $5.5 million consisting of cash, shares of the Company's
common stock, and assumption of debt. The Company anticipates funding the cash
portion of the purchase price, which will be approximately $1.5 million, with
cash flows from operations.
On July 20, 1998, the Company completed an offering of $100 million of
10 3/4% Senior Notes due 2008 in a private placement transaction which resulted
in net proceeds to the Company of approximately $96.4 million after deducting
offering-related expenses. The proceeds of this offering were used to repay
$27.5 million of borrowings outstanding on its revolving credit facility and a
short-term loan, with the remaining proceeds to be used to complete the upgrades
for the vessels Austral Horizon and Atlantic Horizon.
The Company has completed the upgrade of its offshore vessel Austral
Horizon and is currently upgrading and equipping its vessel the Atlantic Horizon
at an aggregate capital cost of approximately $107.2 million. The Company
completed the upgrade of the Austral Horizon early in the fourth quarter of 1998
at a cost of approximately $39.5 million (including acquisition costs) of which
approximately $30.1 million has been spent to date. The Company expects to
complete the upgrade and outfitting of the Atlantic Horizon in the first quarter
of 1999 for an estimated cost of $67.7 million (including acquisition costs). As
of November 1, 1998 the Company had expended approximately $38.0 million
(including acquisition costs) with approximately $29.7 million remaining to be
spent. The total estimated costs for the two vessels of $107.2 million has
exceeded the Company's original estimate of $98.8 million due to approximately
$5.4 million of shipyard cost overruns and approximately $3.0 million of
additional seismic equipment. The Company funded these capital costs on an
interim basis with borrowings from its revolving credit facility and a
short-term loan. These borrowings were repaid on July 20, 1998 with proceeds
from the Offering. The remaining upgrade costs, including the cost overruns and
additional seismic equipment, will be paid from the remaining proceeds of the
Senior Notes, cash flows from operations, and short-term installment debt from
its vendors.
The Company has expanded its existing data acquisition capabilities by
increasing the streamer towing capacity of its vessel the Labrador Horizon. The
upgrades to this vessel were initiated late in the fourth quarter of 1997 and
were completed at the end of the first quarter of 1998. The capital cost of
these upgrades was approximately $22.0 million.
In April 1998, the Company entered into an agreement with British Linen
Bank for the financing of the Labrador Horizon upgrade and the refinancing of
the existing capital lease of this vessel. As part of this financing, British
Linen Bank purchased the vessel from the previous owner, funded approximately
$20.0 million of the upgrades to the vessel, and entered into a capital lease of
the vessel to the Company for a five-year term commencing upon completion of the
upgrades, for a total commitment of approximately $31.3 million. The facility
bears interest at a rate of LIBOR plus 1.375% and required the Company to post a
security deposit of approximately $5 million with scheduled amounts to be
refunded based upon a predetermined formula. Additionally, the Company has the
option to acquire the vessel at the end of the term of the capital lease for a
price of 0.1% of the total facility commitment.
In April 1998, the Company entered into a term loan commitment with Fleet
Capital Corporation for the financing of an Opseis seismic data acquisition
system at a fixed rate of 7.36%. Monthly payments of approximately $117,000 are
payable under the loan, with the Opseis system pledged as security for the loan.
In March 1998, the Company acquired the common stock of a privately-held
company providing seismic shot-hole drilling and front-end services, for a price
of approximately $6.3 million consisting of approximately $4.3 million in cash
and 98,360 shares of the Company's common stock and deferred compensation
payable to
20
<PAGE> 21
the former owner of $500,000. The Company financed the cash portion of the
acquisition with a combination of cash flows from operations and borrowings from
the Company's revolving credit facility.
The Company has an agreement with Bank One, Texas, N.A. for a $20.0 million
revolving credit facility secured by the Company's accounts receivable (the
"Revolving Credit Facility"). 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 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
facility is payable in full on June 1, 1999. Mandatory prepayments are required
if borrowings exceed the borrowing base. Interest accrues 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. As of September 30, 1998, $20.0 million was
available for borrowing under the facility.
The Company will be required to fund the portion of the acquisition costs
for multi-client data that is not covered by pre-acquisition licensing
commitments. These funding requirements will vary depending on the cost of the
data acquisition project, the amount of pre-acquisition licensing commitments,
and the amount of any costs funded by any third parties who participate in the
projects. The Company will evaluate each multi-client project in light of the
capital commitments of the project and the Company's other capital commitments
as compared to the Company's liquidity and capital resources.
The Company believes that its planned capital expenditures and operating
requirements through the end of 1998 will be funded from the proceeds of its
Senior Notes, the Revolving Credit facility, 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 and additional debt or equity 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.
YEAR 2000
The Company is currently in the process of evaluating its computer hardware
and software systems to ensure such programs and systems will be able to process
transactions in the year 2000 ("Y2K"). The Company is also currently identifying
other equipment which contains embedded electronics that may render the
equipment inoperable in the year 2000 and is evaluating the plans of its
material suppliers and vendors to become Y2K compliant. The Company anticipates
it will have hardware and software critical to its operation Y2K compliant
before the end of 1999. The Company is currently evaluating the time table upon
which all other hardware, software, and equipment can be made Y2K compliant and
will target a date when the evaluation is complete.
Although it is not possible to accurately estimate the costs of this
information analysis, at this time the Company expects that such costs will not
be material to the Company's financial position or the results of operations.
There can be no assurance, however, that the Company, its suppliers and vendors,
or their respective software vendors will complete all modifications to all
material information technology systems in a timely manner, or as to the costs
associated with the Company becoming Y2K compliant, or the costs of the failure
of any of the Company's vendors failing to become Y2K compliant.
The Company's risks due to failure of computer hardware and software not
being Y2K compliant include the risk that the Company's seismic recording
systems will not operate properly or as efficiently, thus causing an unexpected
decline in revenue. The Company also risks not being able to record and process
transactions properly in its accounting system. Such risks could lead to a
material business interruption and could have a material adverse impact on the
Company's results of operations, although the amount can not be estimated. The
Company will continue to consider the likelihood of a material business
interruption due to the Year 2000 problem, and if necessary, implement an
appropriate contingency plan.
21
<PAGE> 22
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Although the Company believes that its
expectations are based on reasonable assumptions, it can give no assurance that
its goals will be achieved. Important factors that could cause actual results to
differ materially from those in the forward looking statements herein include,
but are not limited to, changes in the exploration budgets of the Company's
seismic data and related services customers, actual customer demand for the
Company's seismic acquisition services, and the timing and extent of changes in
commodity prices for natural gas, crude oil and condensate and natural gas
liquids and conditions in the capital markets and equity markets during the
periods covered by the forward looking statements.
22
<PAGE> 23
PART II
OTHER INFORMATION
ITEMS 1-5 -- NOT APPLICABLE
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
4.1 -- Indenture dated as of July 20, 1998 between Eagle
Geophysical, Inc., as Issuer, and Chase Bank of Texas,
National Association, as Trustee, with respect to Series
A and Series B of each of $100,000,000 10 3/4% Senior
Notes due 2008 (incorporated by reference to Exhibit 4.1
of the Registration Statement on Form S-4 (Reg. No.
333-63747) of Eagle Geophysical, Inc.)
4.2 -- Registration Rights Agreement dated as of July 20, 1998
among Eagle Geophysical, Inc. and Prudential Securities,
Inc. and Banc One Capital Markets, Inc. (incorporated by
reference to Exhibit 4.2 of the Registration Statement on
Form S-4 (Reg. No. 333-63747) of Eagle Geophysical, Inc.)
10.1 -- Purchase Agreement dated July 15, 1998 among Prudential
Securities Incorporated and Banc One Capital Markets,
Inc. (incorporated by reference Exhibit 10.1 of the
Registration Statement on Form S-4 (Reg. No. 333-63747)
of Eagle Geophysical, Inc.)
27 -- Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on August 25, 1998
announcing the adoption by the Company of a rights plan. The report was dated
August 24, 1998.
23
<PAGE> 24
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 TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAY N. SILVERMAN President November 13, 1998
- -----------------------------------------------------
Jay N. Silverman
/s/ RICHARD W. MCNAIRY Chief Financial Officer November 13, 1998
- -----------------------------------------------------
Richard W. McNairy
/s/ DAVID H. SAINDON Chief Accounting Officer November 13, 1998
- -----------------------------------------------------
David H. Saindon
</TABLE>
24
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
4.1 -- Indenture dated as of July 20, 1998 between Eagle
Geophysical, Inc., as Issuer, and Chase Bank of Texas,
National Association, as Trustee, with respect to Series
A and Series B of each of $100,000,000 10 3/4% Senior
Notes due 2008 (incorporated by reference to Exhibit 4.1
of the Registration Statement on Form S-4 (Reg. No.
333-63747) of Eagle Geophysical, Inc.)
4.2 -- Registration Rights Agreement dated as of July 20, 1998
among Eagle Geophysical, Inc. and Prudential Securities,
Inc. and Banc One Capital Markets, Inc. (incorporated by
reference to Exhibit 4.2 of the Registration Statement on
Form S-4 (Reg. No. 333-63747) of Eagle Geophysical, Inc.)
10.1 -- Purchase Agreement dated July 15, 1998 among Prudential
Securities Incorporated and Banc One Capital Markets,
Inc. (incorporated by reference Exhibit 10.1 of the
Registration Statement on Form S-4 (Reg. No. 333-63747)
of Eagle Geophysical, Inc.)
27 -- Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 50,841
<SECURITIES> 0
<RECEIVABLES> 39,165
<ALLOWANCES> (475)
<INVENTORY> 1,434
<CURRENT-ASSETS> 94,395
<PP&E> 176,210
<DEPRECIATION> 27,092
<TOTAL-ASSETS> 275,523
<CURRENT-LIABILITIES> 55,264
<BONDS> 104,505
0
0
<COMMON> 86
<OTHER-SE> 90,224
<TOTAL-LIABILITY-AND-EQUITY> 275,523
<SALES> 92,146
<TOTAL-REVENUES> 92,146
<CGS> 59,933
<TOTAL-COSTS> 80,601
<OTHER-EXPENSES> (1,085)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,632
<INCOME-PRETAX> 8,998
<INCOME-TAX> 3,629
<INCOME-CONTINUING> 5,369
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,369
<EPS-PRIMARY> 0.63
<EPS-DILUTED> 0.63
</TABLE>
