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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
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EAGLE GEOPHYSICAL, INC.
(Exact name of registrant as specified in its charter)
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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)
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Registrant's telephone number, including area code: (713) 243-6100
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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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant at March 15, 1999 was approximately $29,111,277. For these
purposes, the term "affiliate" is defined to mean officers and directors of the
registrant. On such date, the closing price of the Common Stock as quoted by the
Nasdaq/NM was $3 5/16 and there were a total of 8,788,310 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
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DOCUMENT PART
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Definitive Proxy Statement for 1998 Annual Stockholders
Meeting................................................... III
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EAGLE GEOPHYSICAL, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PART I
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PAGE
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Item 1. Business.................................................... 1
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......... 11
PART II
Item 5. Market for the Common Stock and Related Stockholder
Matters..................................................... 11
Item 6. Selected Financial Data..................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 21
Item 8. Financial Statements and Supplementary Data................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 21
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 21
Item 11. Executive Compensation...................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 22
Item 13. Certain Relationships and Related Transactions.............. 22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 22
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PART I
ITEM 1. BUSINESS
GENERAL
Eagle Geophysical, Inc. ("Eagle" or the "Company") is an international
oilfield service company engaged in the acquisition of seismic information, with
a specialization in the acquisition of high definition three-dimensional ("3D")
seismic data in logistically difficult wetland environments and in congested
offshore areas. Seismic data is used by oil and gas companies in the exploration
for new oil and gas reserves and the development of existing reserves.
BACKGROUND
The Company was formed in December 1996 from the onshore seismic data
acquisition business of Seitel Geophysical Inc., a wholly-owned subsidiary of
Seitel, Inc. ("Seitel"). In May 1997, the Company acquired a 19% ownership
interest in Energy Research International ("ERI") through the contribution of
stock from Seitel. ERI is a provider of offshore seismic data acquisition
services through its subsidiary Horizon Exploration Ltd. The Company remained a
wholly-owned subsidiary of Seitel until August 11, 1997 when the Company
completed an initial public offering of 6,524,000 shares of common stock at $17
per share (including 1,880,000 shares sold by Seitel and 180,000 shares sold by
the former owners of ERI) resulting in net proceeds to the Company of $69.1
million after deducting offering related expenses, (the "IPO"). Also on August
11, 1997, the Company completed the acquisition of the remaining 81% of ERI in
exchange for 600,000 shares of common stock (the "ERI Acquisition").
RECENT DEVELOPMENTS
On March 26, 1999, the Company executed an agreement with Norwest Business
Credit, Inc. for a $20.0 million revolving credit facility secured by the
Company's accounts receivable, inventory, and certain equipment ("the Norwest
Credit Facility"). The amount the Company may borrow is limited to a borrowing
base that is equal to 85% of eligible U.S. accounts receivable. Interest accrues
under the facility at the bank's base rate plus .375% or at LIBOR plus .275%.
Interest only is payable monthly or at the end of applicable LIBOR interest
periods. If all borrowings under the facility are not repaid annually, then an
additional fee of .5% of the average borrowings outstanding is payable. On March
26, 1999, the Company borrowed $14.0 million from Norwest and repaid $14.0
million of borrowings under a revolving credit facility with Bank One Texas,
N.A. and terminated the agreement related to the Bank One credit facility. The
Company had $6.0 million of borrowing availability remaining under the Norwest
Credit Facility, as of March 26, 1999. The Norwest Credit facility matures on
March 26, 2002.
In February 1999, the Company completed the upgrade of its owned seismic
vessel, the Atlantic Horizon at a total capital cost of approximately $72.9
million. The vessel is equipped to tow up to ten seismic recording streamers. It
is currently outfitted with six streamers. The vessel is currently scheduled to
begin a number of short projects in April 1999 in the North Sea. In connection
with the vessel's completion, the Company has obtained a non-binding commitment
from a financial institution for the financing of the Atlantic Horizon's seismic
recording system and streamers. The financing will be an equipment capital lease
of approximately $10.0 million payable over a term of seven years at an interest
rate of approximately 8.5%. The lease will be secured by the recording system,
streamers, and the vessel Atlantic Horizon.
In November 1998, the Company completed the acquisition of substantially
all of the assets of NRG Services, Inc., a land-based seismic company operating
in Canada, for approximately $4.5 million, (the "NRG Acquisition").
In October 1998, the Company completed the upgrade of its offshore seismic
data acquisition vessel, the Austral Horizon, at a total capital cost of
approximately $39.9 million. The vessel is currently contracted for work in the
Gulf of Mexico for approximately eight months.
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OPERATIONS
The Company derives its revenues primarily through seismic data acquisition
services to customers in one industry segment, the oil and gas industry. The
Company's seismic data acquisition services are performed through its two
operations -- the onshore operation and the offshore operation.
Onshore Seismic Operations. The Company currently operates six onshore
acquisition crews worldwide. Four crews operate in the United States and each
utilizes a 2,450 channel 24-bit Opseis 3D seismic data acquisition system. Two
crews operate in Canada, each using a 24-bit ARAM 3D cable based seismic data
acquisition system. The Opseis systems use radio signals to transmit seismic
data from the field recording boxes to the central recording system and are
therefore more efficient in swamps and marshes and in areas with numerous
man-made obstacles than systems that use cables to transmit data. The primary
components of the Company's data acquisition systems are waterproof and are
designed to be used in a wet environment. The ARAM systems utilize cable
telemetry to capture the seismic data.
Additionally, with the completion of the acquisition of a shot-hole
drilling company in March 1998, the Company has obtained an internal source of
shot-hole drilling services for its onshore seismic operations as well as for
outside customers.
Prior to acquiring onshore seismic data in the field, the specifications of
a survey must be designed to optimize the imaging of the targeted geologic
strata, permits must be obtained from the mineral owners of the survey area and
permits to enter onto the land must be obtained from surface owners and lessees
whose property will be traversed in the acquisition operations. The
specifications of the seismic surveys are generally designed by the Company's
customers with varying degrees of input from the Company. A typical 3D survey
conducted by the Company in the U.S. Gulf Coast region will require permits from
hundreds or even thousands of mineral and landowners. Although some customers
obtain these permits themselves, many contract with the Company, as part of the
acquisition project, to obtain these permits. The Company has developed
proprietary computer software to track which permits have been obtained and the
conditions imposed by the various permits. Once permitted, surveys frequently
require modification to take into account surface obstructions, such as water
wells and oil and natural gas wells, highways, towns and areas where permits
cannot be obtained. The Company combines its experience in conducting onshore
surveys in areas with many obstructions with its knowledge of the capabilities
of its radio telemetry systems to modify surveys after permitting to optimize
the quality of the data obtained within the physical limitations imposed.
Offshore Seismic Operations. The Company acquires offshore seismic data
using seismic crews employed by the Company and operating both owned and leased
vessels that have been modified and outfitted with a full complement of data
acquisition, recording, navigation and communications equipment owned or leased
by the Company. The Company currently operates six seismic vessels, two of which
operate in tandem as a single seismic crew. Company crews direct the positioning
of the vessels using sophisticated navigation equipment, deploy and retrieve
seismic streamers and energy sources and operate all of the systems relating to
seismic activities. Company crews are not responsible for the vessels or for
vessel crews, who are employees of the vessel owner or a contract operator. Each
vessel has an equipment complement consisting of recording instrumentation,
digital recording streamers, location systems, multiple navigation systems, and,
except for the recording vessel Celtic Horizon, a seismic energy source and
control system. The Company generally operates its offshore seismic data vessels
on a 24-hours-a-day, seven-days-a-week basis. Each of the Company's vessels is
taken out of service for approximately two to four weeks each year, generally at
different off-season times of the year, for routine maintenance and service.
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The following table sets forth certain information as of March 15, 1999
concerning the seismic vessels operated by the Company. As of such date, all of
these vessels were operating or mobilizing to committed projects, except for the
Atlantic Horizon, which was undergoing sea trials after its recent commissioning
and is expected to mobilize to a committed project in the second quarter.
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LAST TOTAL DATA CHARTER/
SIGNIFICANT LENGTH BEAM STREAMER ACQUISITION LEASE CURRENT
VESSEL NAME UPGRADE (FEET) (FEET) CAPABILITY SYSTEM EXPIRATION LOCATION
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Atlantic 1999 400 75 6 Input/Output Owned United Kingdom
Horizon(1)......... 3,920 Channel
24 Bit
Austral Horizon...... 1998 300 62 4 Input/Output Owned Gulf of Mexico
1,960 Channel
24 Bit
Labrador Horizon..... 1998 263 55 6 Input/Output 2003(2) Gulf of Mexico
3,920 Channel
24 Bit
Discoverer(3)........ 1996 236 52 3 Syntron 1999 Gulf of Mexico
1,920 Channel
16 Bit
Celtic Horizon(3).... 1998 214 41 3 Syntron 2001(4) Gulf of Mexico
1,920 Channel
16 Bit
Pacific Horizon...... 1996 251 41 2 Input/Output 2000(5) Argentina
1,960 Channel
24 Bit
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(1) This vessel is scheduled to enter service in the second quarter of 1999.
(2) The Labrador Horizon is currently leased under a capital lease from British
Linen Bank for a period of five years ending in 2003.
(3) The Discoverer and Celtic Horizon work in tandem as a single seismic crew.
(4) This vessel is recently chartered and replaces the Company's previous
undershoot vessel, the Abshire Tide.
(5) This charter can be terminated by the Company on one month's notice.
The Company believes that maintaining a combination of short-term vessel
charters with ownership of vessels provides flexibility to manage the risks
associated with the fixed costs of charters. This approach allows the Company to
adjust the size of its fleet according to market demand while also providing
stability in the Company's core vessel fleet. Three of the vessels in the
Company's fleet are operated under charter agreements expiring from 1999 to
2001, with provisions for extensions for varying periods and two vessels,
including the Atlantic Horizon, are owned. The Company operates one additional
vessel under a capital lease with an option to purchase expiring in 2003.
Multi-Client Surveys. Historically, the Company performed its offshore
seismic data acquisition services for its customers primarily on a contract
basis without retaining any interest in the data it acquired. However,
increasing demand for larger and higher-cost 3D surveys has resulted in
significantly increased industry acceptance of and customer demand for
multi-client surveys. As a result of this industry trend and customer demand,
the Company anticipates that an increasing portion of its future offshore data
acquisition projects will be multi-client surveys. Unlike data acquired on a
contract basis, the Company retains ownership of multi-client data and adds this
data to its seismic library for future licensing on a non-exclusive basis. For
certain of its projects, the Company may share interests in the revenues from
the sales of the multi-client data with third
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parties. For example, the Company has recently completed two multi-client
surveys in conjunction with TGS-Nopec Geophysical Company.
From the perspective of an oil and gas company, licensing multi-client data
is less expensive on a per unit basis than contracting to have data acquired on
an exclusive basis. From the Company's perspective, multi-client surveys tend to
be larger and are therefore more cost effective to acquire, and multi-client
data can be licensed a number of times to different customers over a period of
years. As a result, multi-client data may be more profitable than contract data,
but the Company assumes the risk that future license fees from multi-client data
may not cover the cost of acquiring and processing such data. The Company
intends to seek to reduce this risk by acquiring multi-client data in
partnership with third parties or by obtaining prefunding for part of such costs
and by evaluating various factors affecting the sales potential of each survey.
These factors include (i) the existence and age of any seismic data that may
already exist in the area, (ii) the amount of leased acreage in the area, (iii)
the existing infrastructure in the region for the transmission of hydrocarbons
to market, (iv) the historical turnover of the leased acreage and (v) the level
of interest from oil and gas companies in the area. Multi-client surveys are
often prevalent in areas characterized by a large number of operators, frequent
trading of tracts and few governmental restrictions on acquiring marine seismic
data, such as the Gulf of Mexico.
GEOGRAPHIC OPERATIONS
Onshore. During 1997, onshore 3D seismic data acquisition contract revenues
were $60.7 million, or 56% of the Company's pro forma combined revenues. In
1998, onshore 3D seismic data acquisition contract revenues were $79.4 million,
or 65% of the Company's combined revenues. The revenues in both 1997 and 1998
were generated primarily from surveys conducted in the U.S. Gulf Coast region.
The revenues for 1998 also include a survey currently being conducted in the San
Joaquin Valley region of California. The Company expects in the near term to
continue to focus its onshore surveys in these regions and in Canada, although
the Company intends to seek opportunities for contract revenues in other areas,
primarily Latin America, where oil and gas exploration and production activities
exist.
Offshore. During 1997, offshore seismic data acquisition contract revenues
were $47.5 million, or 44% of the Company's pro forma combined revenues. These
revenues were generated primarily from surveys conducted in the North Sea and
the U.S. Gulf of Mexico. In 1998, offshore seismic data acquisition contract
revenues were $42.1 million, or 35% of the Company's combined revenues. These
revenues were generated primarily from surveys conducted in the North Sea,
Argentina, the Falkland Islands and the U.S. Gulf of Mexico. The Company expects
in the near term to continue to focus its offshore surveys in the North Sea, the
U.S. Gulf of Mexico, and the South Atlantic, although the Company may take
advantage of opportunities for contract revenues in other areas of the world
where offshore oil and gas exploration and production activities exist.
CAPITAL EXPENDITURES
The Company has numerous competitors for both its onshore and offshore
seismic data acquisition business, and substantial financial and other resources
are required to maintain the state-of-the-art technology necessary to permit
effective competition in bidding for contracts. Seismic data acquisition
technology has progressed rapidly over recent years, and the Company expects
this trend to continue. Sophisticated seismic data acquisition equipment and
related crew training are very costly. For example, the cost of equipping a crew
with a state-of-the-art system, such as the 2,450 channel Opseis system which
the Company currently operates onshore (including ancillary equipment), ranges
from approximately $7.0 to $9.0 million. Similarly, the cost of equipping a
modern seismic data acquisition vessel with between four and eight streamers
would range from approximately $20.0 to $30.0 million excluding vessel charter
costs. The Company's strategy is to update its onshore and offshore data
acquisition systems to maintain its competitive position. This may require large
capital expenditures in addition to the Company's planned capital expenditures.
There can be no assurance that the Company will have or otherwise be able to
obtain the capital necessary to upgrade its equipment or to acquire any
additional required equipment.
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The Company upgraded the data acquisition capabilities of the seismic
acquisition vessel Labrador Horizon during the first quarter of 1998 at a
capital cost of approximately $22.0 million. This upgrade significantly expanded
the seismic data acquisition capabilities of this vessel by increasing its
streamer capacity from three to six streamers and upgrading its recording
equipment from a 16-bit system to a 24-bit system. The Company has also recently
completed the upgrade and outfitting of two vessels, the Austral Horizon and the
Atlantic Horizon, which were acquired in the fourth quarter of 1997. The Company
originally intended to sell and lease them back from charter operators, but upon
further analysis, determined to maintain ownership of these vessels. The total
capital costs for the acquisition and planned upgrades was approximately $39.9
million for the Austral Horizon utilizing four streamers and approximately $72.9
million for the Atlantic Horizon utilizing six streamers.
As the Company expands its onshore operations internationally, it is likely
that the Company will need to acquire additional onshore acquisition systems at
an estimated capital cost of approximately $7.0 to $9.0 million per crew. The
Company anticipates that the funds for such expenditures will come from
operations and additional bank financing, however, there can be no assurance
that funds from operations will be sufficient, or that additional bank financing
will be available on terms acceptable to the Company. The Company may revise its
plans in response to future changes in the oil and gas industry in general and
in the demand for its services in particular, its results of operations, its
other capital requirements and other factors.
KEY SUPPLIERS
The Company acquires its Opseis onshore seismic data acquisition systems
from Georex, Inc., a subsidiary of Compagnie Generale de Geophysique, S.A. and
Sercel, Inc. The Company acquires its offshore seismic data acquisition systems
primarily from Input/Output, Inc. and Syntron, Inc., a subsidiary of Geoscience,
Inc. Although these companies are not the only suppliers of seismic data
acquisition systems, they are the Company's primary suppliers, and the Company
is dependent on these suppliers with respect to additions and repairs to its
current systems.
SALES AND MARKETING
The Company's services traditionally have been marketed by the Company's
principal executive officers. Since the IPO, the Company has hired additional
marketing staff to preserve long-term relationships established by the Company's
executive officers. As the Company's geographical and technical capabilities
expand, the Company intends to continue to implement its marketing efforts from
its principal offices in Houston, Texas and Sevenoaks, England.
BACKLOG
The Company's backlog represents commitments for seismic data acquisition
services from both its onshore and offshore seismic data acquisition businesses.
All backlog consists of commitments believed to be firm. However, backlog
estimates are based on a number of assumptions and estimates, including
assumptions as to exchange rates between the U.S. dollar and the British pound
and other currencies and estimates of the percentage of completion of contracts
in progress. Contracts for services are occasionally varied or modified by
mutual consent and in certain instances may be canceled by the customers on
short notice without penalty. Consequently, the Company's backlog as of any
particular date may not be indicative of the Company's actual operating results
for any succeeding fiscal period.
As of March 15, 1999, the Company estimates that its total backlog was
approximately $57.7 million. Backlog for its onshore crews was $31.2 million in
future gross revenues from existing customer commitments, and backlog for its
offshore seismic acquisition crews was approximately $26.5 million in future
gross revenues from existing customer commitments. Of these backlog amounts,
approximately $23.1 million of the onshore backlog and $18.0 million of the
offshore backlog is attributable to work to be performed for Seitel and its
subsidiaries.
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COMPETITION
The acquisition of onshore and offshore seismic data for oil and gas
companies is highly competitive worldwide. Competition for available seismic
surveys is based on a number of competitive factors, including crew
availability, price, performance, dependability, and technology.
As a result of changing technology and capital requirements, the seismic
industry, both for onshore and offshore seismic data acquisition services, has
consolidated substantially since the early 1980's, thereby reducing the number
of competitors in the industry. Although dozens of companies perform onshore
seismic data acquisition services, only a few companies compete actively to
perform complex 3D surveys in the difficult wetland regions along the U.S. Gulf
Coast. The Company's primary competitors in the wetland onshore seismic data
acquisition business in the U.S. Gulf Coast region are Acadian Geophysical
Services, Inc., Boone Geophysical, Inc., (a subsidiary of Venture Seismic,
Inc.), Geco-Prakla (a subsidiary of Schlumberger Limited), Signature Geophysical
Services, Inc., Quantum Geophysical, Inc., Universal Seismic Associates Inc.,
Veritas DGC, Inc. and Western Geophysical, Inc., (a subsidiary of Baker Hughes,
Inc.). The Company's primary competitors in the offshore seismic data
acquisition business are Compagnie Generale de Geophysique, S.A., Geco-Prakla,
Petroleum Geo-Services A.S.A., Veritas DGC, Inc. and Western Geophysical, Inc.,
(a subsidiary of Baker Hughes, Inc.).
ENVIRONMENTAL MATTERS/REGULATION
The Company's operations are subject to a variety of laws and regulations,
including laws and regulations relating to the protection of the environment.
Such laws and regulations govern various aspects of operations, including the
handling of explosives and the discharge of explosives into the environment, the
entry onto and restoration of wetlands, the removal and cleanup of materials
that may harm the environment or otherwise relating to the protection of the
environment (both onshore and offshore) and the access to private and public
lands to perform seismic surveys. The Company is required to invest financial
and managerial resources to comply with such laws and related permit
requirements in its operations and anticipates that it will continue to do so in
the future. Although such expenditures historically have not been material to
the Company, the fact that such laws or regulations are changed frequently makes
it impossible for the Company to predict the cost or impact of such laws and
regulations on its future operations.
The adoption of laws and regulations that have the effect of limiting
exploration or production activities by oil and gas companies could adversely
affect the Company's operations by reducing the demand for its services. Certain
import and export regulations may also limit the Company's ability to operate in
certain areas.
In addition, the Company's offshore operations are influenced by licensing
activities and lease sales of governmental authorities. The timing and extent of
licensing and leasing of areas for exploration and production influences the
level of seismic data acquisition activity within a particular country.
CUSTOMERS
Onshore. The Company's major customers for its onshore operations include
primarily independent oil and gas companies and seismic data marketing
companies. For the year ended December 31, 1998, Seitel and its subsidiaries
accounted for approximately 86% of the Company's consolidated gross revenues
from its onshore operations. For the year ended December 31, 1997, Seitel and
its subsidiaries accounted for 57% of the Company's consolidated gross revenues
from its onshore operations. For the year ended December 31, 1996, Seitel and
its subsidiaries accounted for 57% and Fina Oil and Chemical Company accounted
for 20% of the Company's consolidated gross revenues from its onshore
operations.
Offshore. The Company's major customers for its offshore operations include
primarily multi-national oil and gas companies, foreign national oil and gas
companies, and seismic data marketing companies. For the year ended December 31,
1998, Amerada Hess and YPF Argentina each accounted for 18% while Seitel and its
subsidiaries accounted for 16% of the Company's consolidated revenues from its
offshore operations. For the year ended December 31, 1997, Seitel and its
subsidiaries accounted for 50% and Shell Exploration
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accounted for 11% of the Company's consolidated pro forma revenues from its
offshore operations. For the year ended December 31, 1996, Seitel and its
subsidiaries accounted for 46% and Clyde Petroleum Exploratie BV accounted for
26% of the Company's consolidated pro forma revenues from its offshore
operations.
SEASONALITY
The onshore and offshore seismic data acquisition operations of the Company
are subject to seasonal fluctuation, with the greatest volume of data
acquisition occurring during the summer and fall. This is due primarily to
adverse weather conditions, which are more adverse in the winter and spring.
EMPLOYEES
At December 31, 1998, the Company employed approximately 671 full-time
personnel. The Company has not experienced any material work stoppages related
to union activities and considers the relations with its employees to be good.
The Company has employment contracts with six of its senior corporate
executives.
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RISK FACTORS
DEPENDENCE UPON ENERGY INDUSTRY SPENDING
Demand for our services depends upon capital spending by oil and gas
companies for exploration, production and development activities. These
activities depend in part on oil and gas prices, expectations about future
prices, the cost of exploring for, producing and delivering oil and gas, the
sale and expiration dates of leases in the United States and abroad, the
discovery rate of new oil and gas reserves, local and international political,
regulatory and economic conditions and the ability of oil and gas companies to
obtain capital. In addition, oil and gas expenditures could decrease due to
factors such as unfavorable tax and other legislation or uncertainty concerning
national energy policies. No assurance can be given that current levels of oil
and gas activities will be maintained or that demand for the our services will
reflect the level of such activities. Decreases in oil and gas activities could
have a significant adverse effect upon the demand for our services, our cash
flow and results of operations.
INVESTMENT IN MULTI-CLIENT DATA
Historically, we have performed our offshore seismic data acquisition
services for our customers primarily on a contract basis without retaining any
interest in the data we acquired. However, increasing demand for larger and
higher cost 3D surveys has resulted in significantly increased industry
acceptance of and customer demand for multi-client surveys. As a result of this
industry trend and customer demand, we anticipate that an increasing part of our
future offshore data acquisition projects will be multi-client surveys. We
therefore anticipate that in the near term we will begin investing increasing
amounts in acquiring and processing multi-client data. By making such
investments, we will assume the risk that future sales of such data may not
fully recoup the costs of the data. The amounts of these data sales will be
uncertain and will be impacted by a number of factors, many of which are beyond
our control. In addition, revenues generated by licensing multi-client data are
typically less predictable from period to period than are revenues from surveys
performed on an exclusive contract basis for customers. In addition, the
recovery of costs of multi-client data is dependent upon the absence of
technological or regulatory changes or other developments that would render such
data obsolete or less valuable. Also, the majority of our investment in
multi-client data is likely to be in the Gulf of Mexico. If any material adverse
change in the general prospects for oil and gas exploration, development and
production activities in the Gulf of Mexico were to occur, the value of our
multi-client data in the Gulf of Mexico could be significantly adversely
impacted.
RISKS IN INTERNATIONAL OPERATIONS
A significant portion of our revenues is derived from operations outside
the U.S., and we are subject to the risks inherent in doing business
internationally. In addition, we intend to expand our international operations.
Since we have an established presence in the North Sea, we do not view our
offshore operations in the North Sea as being subject to undue risks of this
type. However, as we expand the scope and extent of our onshore and offshore
operations outside of our current primary areas of operations in the U.S. Gulf
Coast, the North Sea and the Gulf of Mexico, these risks may become more
significant. Such risks include the possibility of unfavorable changes in tax or
other laws, partial or total expropriation, currency exchange rate fluctuations
and restrictions on currency repatriation, the disruption of operations from
labor and political disturbances, insurrection or war, and the effect of
requirements of partial local ownership of operations in certain countries.
OPERATING RISKS
Seismic operations are subject to risks of injury to personnel and loss of
equipment. In addition, our crews often conduct operations in extreme weather,
in difficult terrain that is not easily accessible, and under other hazardous
conditions. Each of our vessels is taken out of service for approximately two to
four weeks each year, generally at different off-season times of the year, for
routine maintenance and service. Fixed costs, including costs associated with
operating leases, labor costs and depreciation, account for a significant amount
of our costs and expenses. As a result, low productivity resulting from weather
interruptions, equipment failures or other causes can result in significant
operating losses, particularly when we are performing our
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services under a turnkey contract. Although we provide the seismic personnel on
our offshore seismic data acquisition vessels, we contract with third parties to
provide vessel crews, so we do not control some aspects of our operations and
are subject to the safety risks inherent in relying on third parties for
critical operations. In addition, while we have insurance policies that protect
us against liabilities that may be incurred in the ordinary course of our
business, we are unable to insure fully against all possible loss or liability.
For example, no insurance is available at a cost deemed reasonable by us for
war, nationalization, expropriation or other extreme events. We do not carry
business interruption insurance with respect to our operations.
LIMITED COMBINED OPERATING HISTORY
We were formed to combine the onshore seismic data acquisition business
conducted by Seitel Geophysical, Inc. with the offshore seismic data acquisition
business conducted by Energy Research International and its operating
subsidiaries. We acquired Energy Research International in August 1997 at the
time of our IPO. Prior to our IPO, our business and Energy Research
International's business were operated separately, and neither the historical
results of our separate operations nor our pro forma financial information is
necessarily indicative of the results that would have been achieved had these
businesses been operated on an integrated basis or the results that may be
realized in the future. In addition, prior to the IPO, we were a subsidiary of
Seitel and relied on Seitel for certain financial, management, administrative
and other resources. A number of significant changes occurred in our funding and
operations in connection with the consummation of the IPO. These changes
included the establishment of our own credit facilities and our own incentive
compensation and stock option plans. These changes may have a substantial impact
on our financial position and future results of our operations. As a result, our
historical financial information does not necessarily reflect the financial
position and results of operations of our future operations or what our
financial position and results of operations would have been had our business
and Energy Research International's businesses been operated as a combined
stand-alone entity during all of the periods presented.
CONCENTRATION OF CREDIT RISK
We generally provide services to a relatively small group of key customers
that account for a significant percentage of our accounts receivable at any
given time. Our key customers vary over time, but have historically included
Seitel and its subsidiaries. We extend credit to various companies in the oil
and gas industry, including our 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
our key customers and may accordingly impact our overall credit risk. As of
December 31, 1998, we had one receivable from a customer of approximately $2.4
million that is approximately 24 months old. There can be no assurance that we
will collect this receivable, and in light of the age of this receivable, we had
provided for a valuation reserve of approximately $1.9 million as of December
31, 1998. This net receivable has been reclassified as a long-term asset as of
December 31, 1998. Historical credit losses incurred on receivables by us have
been immaterial.
CAPITAL INTENSIVE BUSINESS; OBSOLESCENCE OF TECHNOLOGY
We compete in a capital intensive industry. The development of seismic data
acquisition equipment has been characterized by rapid technological advancements
in recent years, and this trend may continue. There can be no assurance that
manufacturers of seismic equipment will not develop new systems that have
competitive advantages over systems now in use that either render our current
equipment obsolete or require us to make significant capital expenditures to
maintain our competitive position. There can be no assurance that we will have
the capital necessary to upgrade our equipment to maintain our competitive
position or that any required financing therefor will be available on favorable
terms. If we are unable to raise the capital necessary to update our data
acquisition systems to the extent necessary, we may be materially and adversely
affected.
9
<PAGE> 12
RELIANCE ON KEY SUPPLIERS
We are dependent on Georex, Inc., a subsidiary of Compagnie Generale de
Geophysique, S.A. ("CGG"), which is one of our competitors, for additions to and
replacements for our Opseis onshore seismic data acquisition systems, and Opseis
is a registered trademark of CGG. We are also dependent on Input/Output, Inc.
and Syntron, Inc., a subsidiary of GeoScience Corporation, for additions to and
replacements for our offshore seismic data acquisition systems and on Concept
Systems Ltd. for positioning software. In the event of any disruption in the
supply of repair services or replacement parts from our primary suppliers, we
may be unable to obtain such services or parts from other sources and would have
to acquire other equipment that may be less advanced technologically. If we are
unable to obtain systems from our primary suppliers in the future, our
anticipated revenues or operating margins could be reduced significantly and the
amount of cash needed for capital expenditures could be increased significantly.
ENVIRONMENTAL AND OTHER REGULATIONS
Our operations are materially affected by government regulation in the form
of international conventions, national, state and local laws and regulations in
force in the jurisdictions in which we operate, as well as in the country or
countries of registration of our vessels. We are required by various
governmental and quasi-governmental agencies to obtain certain permits, licenses
and certificates with respect to our operations. In particular, the United
States Oil Pollution Act of 1990 sets forth technical and operational
requirements for vessels operating in the U.S. Gulf of Mexico. We believe that
we possess all permits, licenses and certificates material to the operation of
our business. The modification of existing laws or regulations or the adoption
of new laws or regulations curtailing drilling for oil and gas or imposing more
stringent restrictions on seismic operations could adversely affect us.
INFLUENCE OF SEITEL ON US
Prior to our IPO, we were a subsidiary of Seitel. As of December 31, 1998,
Seitel owned approximately 17.3% of our outstanding shares of common stock.
Approximately 61% of our revenues for the year ended December 31, 1998 was
derived from seismic data acquisition services provided to Seitel and its
subsidiaries. The loss of Seitel as a customer would have a material adverse
effect on our financial condition and results of operations. There can be no
assurance that Seitel will enter into any material contracts with us for seismic
data acquisition services in the future.
RELIANCE ON KEY PERSONNEL
Our operations are dependent on the efforts of Messrs. Jay N. Silverman,
President, and Gerald M. Harrison, Executive Vice President. If either of these
key persons becomes unable to continue in his present role, or if we are unable
to attract and retain other skilled employees, our business could be adversely
affected. We have employment agreements with automatic renewal features with
Messrs. Silverman and Harrison.
ITEM 2. PROPERTIES
The Company occupies nine leased facilities and one owned facility that are
principally used for general administrative functions, maintenance, storage and
warehouse space. Three of the facilities are located in Texas, one in Louisiana,
three in England, two in Canada and one in Bolivia. These properties range in
size from approximately 1,000 to approximately 16,000 square feet, the terms of
the leases range from month-to-month to leases that expire in 2012 and the
leases provide for annual rentals ranging from approximately $12,000 to
approximately $320,000. The Company's annual lease expense under these leases
totals approximately $800,000.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in or threatened with various legal proceedings
from time to time arising in the ordinary course of business. Management of the
Company does not believe that any liabilities resulting from
10
<PAGE> 13
any such current proceedings will have a material adverse effect on its
consolidated operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON SHARES
The Company's common shares have been traded on the Nasdaq Stock Market
under the symbol "EGEO" since the Company's initial public offering in August,
1997. The following table sets forth the high and low sales prices of the
Company's common stock for the periods indicated as reported by Nasdaq/NM.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1998
First Quarter............................................. $16 3/8 $11 7/8
Second Quarter............................................ 21 9 1/2
Third Quarter............................................. 13 1/16 5 1/4
Fourth Quarter............................................ 7 7/16 2 15/16
1997
Third Quarter (from public offering date to September 30,
1997).................................................. $21 $17
Fourth Quarter............................................ 22 3/4 11 1/4
</TABLE>
On March 15, 1999, the closing price as quoted by NASDAQ/NM was $3 5/16 per
share. As of March 15, 1999, there were 8,788,310 common shares outstanding held
by approximately 102 record holders.
DIVIDEND POLICY
The Company does not currently intend to declare or pay dividends on its
Common Stock and expects to retain funds generated by operations for the
development and growth of the Company's business. The Company's future dividend
policy will be determined by the Company's Board of Directors on the basis of
various factors, including among other things, the Company's financial
condition, cash flows from operations, the level of its capital expenditures,
its future business prospects, the requirements of Delaware law and any
restrictions imposed by the Company's credit facilities. The Company's current
working capital line of credit and the 10 3/4% Senior Notes contain certain
financial covenants which limit the Company's ability to pay dividends.
11
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information has been derived from the
audited consolidated financial statements of the Company and reflects the
historical results of the Company and the historical results of ERI following
the ERI Acquisition on August 11, 1997. Such consolidated financial statements
for the years ended December 31, 1994, 1995, 1996, 1997 and 1998 have been
audited by Arthur Andersen LLP, independent public accountants. Arthur
Andersen's 1997 report indicates that ERI's 1997 financial statements were
audited by other auditors, whose opinion was furnished to Arthur Andersen.
Arthur Andersen's 1997 opinion, insofar as it relates to ERI, is based solely on
the report of the other auditors. This information should be read in conjunction
with the consolidated financial statements of the Company, the notes related
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Report.
EAGLE GEOPHYSICAL, INC.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------
1994 1995 1996 1997(1) 1998
------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues................................. $25,721 $29,275 $48,136 $ 79,061 $121,503
------- ------- ------- -------- --------
Expenses:
Operating expenses(2)................. 20,070 20,986 34,917 56,470 82,397
Depreciation and amortization......... 1,817 2,471 3,409 8,584 18,847
Selling, general and administrative... 1,673 2,874 2,680 6,408 10,050
Interest and other expense, net....... 384 408 531 205 3,153
------- ------- ------- -------- --------
Total expenses................... 23,944 26,739 41,537 71,667 114,447
------- ------- ------- -------- --------
Income before provision for income taxes... 1,777 2,536 6,599 7,394 7,056
Provision for income taxes................. 651 933 2,420 2,994 3,045
------- ------- ------- -------- --------
Net income................................. $ 1,126 $ 1,603 $ 4,179 $ 4,400 $ 4,011
======= ======= ======= ======== ========
Basic earnings per share................... $ .33 $ .47 $ 1.23 $ 0.81 $ 0.47
======= ======= ======= ======== ========
Weighted average shares outstanding
(basic).................................. 3,400 3,400 3,400 5,418 8,587
======= ======= ======= ======== ========
Diluted earnings per share................. $ .33 $ .47 $ 1.23 $ 0.81 $ 0.46
======= ======= ======= ======== ========
Weighted average shares outstanding
(diluted)................................ 3,400 3,400 3,400 5,436 8,754
======= ======= ======= ======== ========
Consolidated Balance Sheet Data:
Cash and cash equivalents................ $ 29 $ 58 $ -- $ 14,980 $ 10,331
Total assets............................. 14,413 17,960 26,721 124,305 273,195
Total debt and capital lease
obligations........................... 8,034 5,932 10,902 10,760 135,621
Stockholders' equity..................... 2,007 3,610 7,789 83,996 89,800
</TABLE>
- - ---------------
(1) Includes results of ERI from August 11, 1997, the date of the ERI
Acquisition, to December 31, 1997.
(2) As used herein, operating expenses exclude depreciation and amortization.
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<PAGE> 15
The following table sets forth selected unaudited pro forma financial data
for the Company. The unaudited pro forma results of operations for the years
ended December 31, 1996 and 1997 give effect to the IPO, the application of the
net proceeds thereof to retire certain debt and capital leases, and the ERI
Acquisition as if such transactions had occurred on January 1, 1996. Results of
operations for periods prior to August, 1997 are pro forma and may not be
indicative of the actual results that would have been achieved had the Company
been a public company during the periods presented. The following selected
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements included in Item 8 herein:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1997 1998
-------------- -------------- ----------
PRO FORMA PRO FORMA
COMBINED AS COMBINED AS
ADJUSTED(1)(2) ADJUSTED(1)(2) HISTORICAL
-------------- -------------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Statement of Operations Data:
Revenues..................................... $90,915 $108,128 $121,503
------- -------- --------
Expenses:
Operating expenses(3)..................... 71,690 76,723 82,397
Depreciation and amortization............. 9,427 12,890 18,847
Selling, general and administrative
expenses................................ 6,432 8,793 10,050
Interest and other expense, net........... 651 250 3,153
------- -------- --------
Total expenses....................... 88,200 98,656 114,447
------- -------- --------
Income before provision for income taxes....... 2,715 9,472 7,056
Provision for income taxes..................... 1,914 2,680 3,045
------- -------- --------
Net income(4).................................. $ 801 $ 6,792 $ 4,011
======= ======== ========
Basic Earnings per share(4).................... $ .09 $ 0.80 $ 0.47
======= ======== ========
Weighted average shares outstanding (Basic).... 8,489 8,489 8,587
======= ======== ========
Diluted Earnings per share(4).................. $ .09 $ 0.80 $ 0.46
======= ======== ========
Weighted average shares outstanding
(Diluted).................................... 8,489 8,489 8,754
======= ======== ========
EBITDA(5)...................................... $12,793 $ 22,612 $ 29,056
======= ======== ========
</TABLE>
- - ---------------
(1) Reflects proforma adjustments for the ERI Acquisition, adjustments to
reflect the completion of the IPO and the application of the net proceeds to
retire certain debt and capital leases, and the sale of 25,000 shares of
common stock, at the initial public offering price, to Jay N. Silverman,
President of the Company, for a note.
(2) Reflects the combination of the pro forma adjustments and the historical
financial statements.
(3) As used herein, operating expenses exclude depreciation and amortization.
(4) Excludes the effect of a $600,000 extraordinary gain for early
extinguishment of debt on ERI's historical 1996 financial statements.
(5) EBITDA represents earnings before interest expense, taxes, depreciation and
amortization. Although EBITDA is not a measure of performance calculated in
accordance with generally accepted accounting principles, management
believes that securities analysts use EBITDA as a measure to evaluate
oilfield service companies. The Company believes that EBITDA may provide
additional information about the Company's ability to meet its future
requirements for debt service, capital expenditures and working capital,
although such future cash outlays are not included in the determination of
EBITDA. The amount and trends in EBITDA should not be considered as
alternatives to net income as an indicator of the Company's operating
performance or as an alternative to cash flow as a better measure of the
Company's profitability or liquidity. Because EBITDA excludes some, but not
all, items that affect net income and its computation may vary among
companies, the EBITDA calculation presented above may not be comparable to
similarly titled measures of other companies.
13
<PAGE> 16
ITEM 7. 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.
Onshore Operations. With respect to its onshore operations, the Company's
prices, and therefore its revenues, vary depending 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 two existing Opseis crews during 1996,
added a third Opseis crew in January 1997 and added a fourth Opseis crew in
April 1998. At the end of the third quarter of 1997, the Company upgraded the
channel capacity of each of its three crews to 2,450 channels from 1,850
channels. In March 1998, the Company acquired a privately held shot-hole
drilling company. In November 1998, the Company acquired the assets of NRG
Services, Inc. a land-based seismic company operating in Canada. 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
four onshore crews operating in 1998 and three onshore crews operating in 1997
were weighted more heavily towards complex projects than in 1996, further
contributing to the increases in revenues in 1998 as compared to 1997 and in
1997 as compared to 1996.
Offshore Operations. Similar to the Company's onshore operations, prices
and revenues with respect to the offshore operations vary depending on demand
for the Company's services, 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 increased the
streamer capacity of one of its vessels in 1998 and added an additional vessel
to its operations commencing in November 1998. The Company operated four vessels
in 1997 and during the third and fourth quarter of 1996 and operated only three
vessels during the first and second quarter of 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.
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 has not retained 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 will capitalize 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, thereby 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
14
<PAGE> 17
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 Canada and 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 did not have any
open derivative contracts related to foreign currency at December 31, 1998.
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 December 31, 1998,
the Company had one receivable from a customer of approximately $2.4 million
that is approximately twenty-four months old. In light of the age of this
receivable, the Company recorded a valuation reserve of $1.9 million and has
classified the net receivable as a long-term asset as of December 31, 1998.
Historical credit losses incurred on receivables by the Company have been
immaterial.
PRO FORMA 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 the
Company, and the Company's offshore operations, which were conducted by ERI
prior to the consummation of the IPO. These discussions are presented based on
the 1998 historical results of operations and the 1996 and 1997 unaudited pro
forma revenues and expenses of the separate companies including periods prior to
the ERI Acquisition, which occurred contemporaneously with the IPO in August
1997. The 1997 and 1996 revenues of the Company include intercompany profits
from work performed for Seitel and its subsidiaries prior to the IPO.
Onshore Operations -- Year Ended December 31, 1998 Compared to December 31,
1997
Revenue increased 31% from $60.7 million in 1997 to $79.4 million in 1998,
primarily due to the third onshore crew operating for the entire 1998 period and
the operations of the fourth onshore crew which was acquired at the end of the
first quarter and operated for the remainder of the 1998 period. Higher revenues
were also derived from the increased channel capacity of the Company's crews
from 1,850 channels to 2,450 channels per crew.
Operating expenses (excluding depreciation and amortization) increased 30%
from $43.6 million in 1997 to $56.5 million in 1998 primarily due to the
operation of the third onshore crew for the entire 1998 period and the
operations of the fourth onshore crew and the front end services business, both
of which were acquired late in the first quarter of 1998. Operating margin
percentage improved slightly from 28.2% in 1997 to 28.8% in 1998.
Depreciation and amortization increased 58% from $6.0 million in 1997 to
$9.5 million in 1998. This increase resulted from operating four crews and the
front end services business in 1998, including the
15
<PAGE> 18
depreciation associated with the upgrade to 2,450 channels in 1998, versus three
crews at 1,850 channels in 1997.
Selling, general, and administrative expenses increased 8% from $6.0
million in 1997 to $6.5 million in 1998 primarily due to increased
administrative staff to support expanded operations and additional corporate
office expenses.
Net interest and other expense decreased from $.3 million in 1997 to $(.2)
million in 1998 due to interest income earned on the higher cash balances during
the first three quarters of 1998 as compared to 1997.
Onshore Operations -- Year Ended December 31, 1997 Compared to December 31,
1996
Revenue increased 28% from $47.3 million in 1996 to $60.7 million in 1997,
primarily due to the addition of a third Opseis crew in January 1997.
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 expenses (excluding depreciation and amortization) increased 25%
from $34.9 million in 1996 to $43.6 million in 1997, primarily due to the
addition of the third crew in the 1997 period. Operating margin (revenues less
operating costs as a percentage of revenues) increased from 26.2% in 1996 to
28.2% in 1997 as a result of these changes in revenues and operating costs.
Depreciation and amortization increased 77% from $3.4 million in 1996 to
$6.0 million in 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 58% from $3.8
million in 1996 to $6.0 million in 1997, primarily due to the addition of
administrative staff to support expanded operations and additional corporate
staff and related expenses incurred subsequent to the IPO.
Net interest and other expenses decreased from $0.5 million in 1996 to $0.3
million in 1997 due to interest savings related to the retirement of certain
debt and capital leases and interest income earned on proceeds from the IPO.
Offshore Operations -- Year Ended December 31, 1998 Compared to December 31,
1997
Revenue decreased 11% from $47.5 million in 1997 to $42.1 million in 1998
primarily due to vessel upgrades and replacements during the first quarter of
1998 and to the mix of multi-client versus contract work performed in 1998.
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, Abshire Tide, and
later the Celtic Horizon, were working during the majority of the 1998 period
acquiring multi-client data, which rather than generating current revenue,
should generate revenue in the future as data is licensed to customers. The
Labrador Horizon also transited to the Gulf of Mexico to acquire multi-client
data in the fourth quarter of 1998. These declines in revenue were partially
offset by the addition of the Austral Horizon which commenced working on a
contract basis in November, 1998 and $5.5 million of revenue earned in
connection with a vessel charter hire contract and related services provided to
a third party.
Operating expenses (excluding depreciation and amortization) decreased 22%
from $33.1 million in 1997 to $25.9 million in 1998, due to the mix of projects
performed during 1998. The Discoverer and Celtic Horizon were working on a
multi-client project for the majority of the year and the Labrador Horizon
worked on a multi-client project for the fourth quarter of 1998 resulting in
capitalized multi-client inventory costs. The 1997 year consisted entirely of
contract work for all vessels. Operating margins improved from 30.3% in 1997 to
38.5% in 1998 as a result of the mix of contract to multi-client work, and the
increase in the number of owned versus leased vessels.
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<PAGE> 19
Depreciation and amortization increased 36% from $6.9 million in 1997 to
$9.4 million in 1998 resulting from depreciation of the upgraded Labrador
Horizon, additional seismic equipment purchased for the Celtic Horizon, and the
acquisition and upgrade of the Austral Horizon.
Selling, general, and administrative expenses increased 29% from $2.8
million in 1997 to $3.6 million in 1998 primarily due to additional marketing
and technical staff required to support the expansion of the seismic vessel
fleet undertaken in 1998.
Net interest and other expenses increased dramatically from $-0- in 1997 to
$3.3 million in 1998 primarily due to interest expense incurred on the new
capital lease used to finance the upgrade of the Labrador Horizon completed in
March 1998, and interest expense on the $100 million of Senior Notes issued in
July 1998, the proceeds of which were used to fund the capital expenditures and
upgrades of the Austral Horizon and Atlantic Horizon.
Offshore Operations -- Year Ended December 31, 1997 Compared to December 31,
1996
Revenue increased 9% from $43.6 million in 1996 to $47.5 million in 1997,
primarily due to improved vessel utilization. Two vessels experienced downtime
in the third quarter of 1996 due to upgrades and repairs.
Operating expenses (excluding depreciation and amortization) decreased 11%
from $36.8 million in 1996 to $33.1 million in 1997 primarily due to improved
efficiency. Operating margins increased from 15.6% in 1996 to 30.3% in 1997 as a
result of these changes in revenues and operating costs.
Depreciation and amortization increased 15% from $6.0 million in 1996 to
$6.9 million in 1997, resulting from the purchase of additional capital
equipment in mid 1996 with corresponding depreciation beginning in 1997 as well
as additional vessel upgrades in 1997 subsequent to the IPO.
Selling, general and administrative expenses increased 8% from $2.6 million
in 1996 to $2.8 million due to higher legal and administrative costs.
Net interest and other expenses decreased from $0.15 million in 1996 to
$-0- in 1997 due to interest income earned on higher cash balances during 1997
and favorable foreign currency movements.
HISTORICAL RESULTS OF OPERATIONS
The following is a discussion of the historical results of operations of
the Company, including the results of ERI following the ERI Acquisition. The
revenues of the Company include intercompany profits from work performed for
Seitel prior to the IPO.
Year Ended December 31, 1998 Compared to December 31, 1997
Revenues increased 54% from $79.1 million in 1997 to $121.5 million in 1998
primarily due to a full year of offshore operations, a full year of operations
from the third onshore crew, and the operations of the fourth onshore crew and
the front end services business acquired at the end of the first quarter of
1998.
Operating expenses (excluding depreciation and amortization) increased 46%
from $56.5 million in 1997 to $82.4 million in 1998 due to a full year of
offshore operations and the expanded onshore operations. Operating margins
improved from 28.6% in 1997 to 32.2% in 1998 due to the increased onshore
capacity and a higher percentage of offshore operations (which historically have
higher operating margins).
Depreciation and amortization increased 120% from $8.5 million in 1997 to
$18.9 million in 1998 due to a full year of offshore operations and the expanded
onshore operations including the acquisition of the front end services business
in March, 1998.
Selling, general, and administrative expenses increased 56% from $6.4
million in 1997 to $10.0 million in 1998 due to a full year of offshore
operations, the expanded onshore operations including the acquisition of the
front end services business in March, 1998, and a full year of corporate office
expenses in 1998.
17
<PAGE> 20
Net interest and other expenses increased dramatically from $.2 million in
1997 to $3.2 million in 1998 primarily as a result of interest incurred on the
$100 million of Senior Notes issued in July 1998 to finance the Austral Horizon
and Atlantic Horizon upgrades, interest on the capital lease used to finance the
upgrade of the Labrador Horizon, and interest on a term loan used to finance
seismic equipment for the Company's fourth onshore crew.
Year Ended December 31, 1997 Compared to December 31, 1996
Revenues increased 64% from $48.1 million in 1996 to $79.1 million in 1997
due to the addition of a third onshore seismic crew in January 1997, and the
acquisition of ERI in August 1997.
Operating expenses (excluding depreciation and amortization) increased 62%
from $34.9 million in 1996 to $56.5 million in 1997 also due to the addition of
the third onshore seismic crew in January 1997 and the acquisition of ERI in
August 1997. Operating margins improved from 27.5% in 1996 to 28.6% in 1997.
Depreciation and amortization increased 152% from $3.4 million in 1996 to
$8.5 million in 1997 due primarily to the addition of the third onshore seismic
crew in January, 1997, and depreciation and goodwill amortization associated
with the ERI acquisition.
Selling, general and administrative expenses increased 139% from $2.7
million in 1996 to $6.4 million in 1997 due to the addition of staff to support
the Company's expanded operations, expenses related to corporate staff and
related expenses added subsequent to the IPO, and general and administrative
expenses of ERI incurred subsequent to the ERI acquisition.
Net interest and other expense decreased from $0.5 million in 1996 to $0.2
million in 1997 due to interest savings related to the retirement of the
Company's debt and capital leases and interest income earned on the net proceeds
from the IPO.
LIQUIDITY AND CAPITAL RESOURCES
The Company had net working capital of $6.1 million as of December 31,
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, a capital lease obligation with British Linen Bank and other notes
payable acquired with the NRG acquisition, totaling approximately $135.6
million.
On March 26, 1999, the Company executed an agreement with Norwest Business
Credit, Inc. for a $20.0 million revolving credit facility secured by the
Company's accounts receivable, inventory, certain equipment ("the Norwest Credit
Facility"). The amount the Company may borrow is limited to a borrowing base
that is equal to 85% of eligible U.S. accounts receivable. Interest accrues
under the facility at the bank's base rate plus .375% or at LIBOR plus .275%.
Interest only is payable monthly or at the end of applicable LIBOR interest
periods. If all borrowings under the facility are not repaid annually, then an
additional fee of .5% of the average borrowings outstanding is payable. On March
26, 1999, the Company borrowed $14.0 million under the Norwest Credit Facility
and repaid $14.0 million of borrowings under a revolving credit facility with
Bank One Texas, N.A. and terminated the agreement related to the Bank One
facility. The Company had $6.0 million of borrowing availability remaining under
the Norwest Credit Facility as of March 26, 1999. The Norwest Credit facility
matures on March 26, 2002. The Norwest Credit Facility includes financial
covenants effective beginning March 26, 1999, which will require a level of
operating performance to be achieved by the Company. Management believes the
Company can comply with the financial covenants during 1999, however, no
assurance of compliance can be provided.
In February 1999, the Company obtained a non-binding commitment from a
financial institution for a financing of $10.0 million to be secured by seismic
equipment and the vessel Atlantic Horizon. The financing will be for a term of
seven years, with an interest rate of approximately 8.5%, and monthly payments
of approximately $122,000 with the remaining principal and interest payable at
the end of the term.
In November 1998, the Company completed the purchase of NRG Services, Inc.
a land-based seismic company, for a purchase price of approximately $4.5 million
consisting of cash, shares of the Company's
18
<PAGE> 21
common stock, and assumption of approximately $2.0 million of debt. The Company
funded the cash portion of the purchase price of 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 (the "Senior
Note Offering") 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
used to complete the upgrades of the vessels Austral Horizon and Atlantic
Horizon.
The Company has completed the upgrade of its offshore vessels the Austral
Horizon and the Atlantic Horizon at an aggregate capital cost of approximately
$112.8 million. The Company completed the upgrade of the Austral Horizon early
in the fourth quarter of 1998 at a cost of approximately $39.9 million
(including acquisition costs) of which approximately $38.4 million has been
spent as of March 15, 1999. The Company completed the upgrade and outfitting of
the Atlantic Horizon in the first quarter of 1999 for a cost of approximately
$72.9 million (including acquisition costs). As of March 15, 1999 the Company
had expended approximately $49.2 million (including acquisition costs) with
approximately $23.7 million remaining to be spent. The total costs for the two
vessels of $112.8 million has exceeded the Company's original estimate of $98.8
million due to additional shipyard costs and seismic equipment specifications.
Prior to the Senior Note Offering, 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 Senior Note Offering. The remaining upgrade costs, including the cost
overruns and additional seismic equipment, will be paid from the remaining
proceeds of the Senior Note Offering, cash flows from operations, and capital
lease financing.
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 agreement with Fleet
Capital Corporation for the financing of an Opseis seismic data acquisition
system at a fixed interest 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 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 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.
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<PAGE> 22
The Company believes that its cash flow from operations, borrowings under
its Norwest Credit Facility, and borrowings under the $10 million capital lease
that it is currently negotiating will be sufficient to fund its planned capital
expenditures and operating requirements through the end of 1999. Any capital
expenditures in excess of the Company's planned capital expenditures will likely
require additional debt or equity financing. If the Company is not able to
obtain such additional financing, it may be unable to incur capital expenditures
in excess of its planned capital expenditures.
IMPACT OF INFLATION AND CHANGING PRICES
The general availability of seismic equipment and crews and the level of
exploration activity in the oil and gas industry directly affect the cost of
creating seismic data. The level of exploration activity is dependent on the
commodity price levels of oil and natural gas. The pricing of the Company's
products and services is primarily a function of these factors. For these
reasons, the Company does not believe inflationary trends have had any
significant impact on its financial operating results during the three years
ended December 31, 1998.
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 that 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 timetable 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 any such additional
costs will be immaterial 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 Y2K problem, and if necessary, implement an appropriate
contingency plan.
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K 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.
20
<PAGE> 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, including adverse changes in
interest rates and foreign currency exchange rates as discussed below.
INTEREST RATE RISK
The Company's financial instruments that are potentially sensitive to
changes in interest rates are its long-term debt and capital leases. As of
December 31, 1998 the Company had debt and capital leases outstanding of
approximately $135.6 million. Of this amount, approximately $134.2 million is
fixed rate debt that is not subject to changes in interest rates. The Company is
however, subject to cash flow risk due to changes in the market value of the
Company debt. The Company believes the fair value of its debt and capital leases
at December 31, 1998 is approximately $119.4 million. All of the Company's debt
and capital leases have book values that approximate market value except for the
$100 million of 10 3/4% Series B Senior Notes due 2008, which had a market value
of approximately $83.0 million and the capital lease obligation with British
Linen Bank which had a book value and market value of approximately $28.4
million and $29.2 million, respectively. In addition to the $135.6 million of
debt and capital leases, as of December 31, 1998 the Company had a variable
interest rate on its recently terminated Bank One Credit Facility, with
available borrowing of $20.0 million. Interest on this facility accrued at the
bank's base rate plus a margin depending on the Company's debt to net worth
ratio. Changes in interest rates would effect the Company's results of
operations and cash flow requirements for interest expense. As of December 31,
1998, no borrowings were outstanding under this facility and the facility was
terminated as of March 26, 1999.
FOREIGN CURRENCY RISK
Certain of the Company's subsidiaries have monetary assets and liabilities
that are denominated in a currency other than their functional currencies,
primarily the British pound and the Canadian dollar. An increase or decrease in
the value of 10 percent in the foreign currencies relative to the U.S. dollar
from the year-end exchange rates would result in a foreign currency exchange
loss or gain, respectively, of approximately $.6 million based on December 31,
1998 amounts. The Company considers its current risk exposure to foreign
currency exchange movements, based on net cash flows, to be immaterial. The
Company did not have any open derivative contracts relating to foreign
currencies at December 31, 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedules required by this
Item are set forth at the pages indicated in Item 14(a) (1) and (2) below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required to be set forth in this Item is incorporated by
reference to a similarly titled heading in the Company's definitive proxy
statement relating to the 1999 annual meeting of its stockholders to be filed
with the Securities and Exchange Commission not later than 120 days after the
end of the fiscal year covered by this Form 10-K (hereinafter the "Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required to be set forth in this Item is incorporated by
reference to a similarly titled heading in the Proxy Statement.
21
<PAGE> 24
ITEM 12. SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
The information required to be set forth in this Item is incorporated by
reference to a similarly titled heading in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be set forth in this Item is incorporated by
reference to a similarly titled heading in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Document filed as part of this Report
(1) Financial Statements:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... 20
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... 21
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997, and 1998......................... 22
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1997, and 1998............. 23
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997, and 1998......................... 24
Notes to Consolidated Financial Statements.................. 25
</TABLE>
(2) All Schedules are omitted because they are not applicable or the
required information is shown in the financial statements or the notes to the
financial statements.
(3) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 -- Certificate of Incorporation, as amended (incorporated by
reference to the Company's Registration Statement, as
amended, on Form S-1, No. 333-28303, as filed with the
Securities and Exchange Commission on June 2, 1997 (the
"Registration Statement"))
3.2 -- Amended and Restated Bylaws (incorporated by reference to
the Registration Statement)
3.3 -- Amendments to Bylaws of Eagle Geophysical, Inc.
(incorporated by reference to the Company's Form 10-Q for
the quarter ended March 31, 1998)
4.1 -- Specimen Certificate for Registrant's common stock, par
value $0.01 (incorporated by reference to the
Registration Statement)
4.2 -- 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 the
Registration Statement on Form S-4 (Reg. No. 333-63747)
of Eagle Geophysical, Inc.)
4.3 -- 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 the Registration Statement on Form S-4 (Reg.
No. 333-63747) of Eagle Geophysical, Inc.)
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.1.1 -- Loan and Security Agreement dated July 9, 1996, between
Seitel Geophysical, Inc., as Debtor, and Nationsbanc
Leasing Corporation of North Carolina, as Secured Party
(incorporated by reference to the Registration Statement)
10.1.2 -- Assumption and Consent dated December 31, 1996, among
Seitel Geophysical, Inc., Eagle Geophysical, Inc.,
Nationsbanc Leasing Corporation of North Carolina and
Seitel, Inc. (incorporated by reference to the
Registration Statement)
10.2 -- Loan and Security Agreement dated February 6, 1997,
between Eagle Geophysical, Inc., as Debtor, and
Nationsbanc Leasing Corporation of North Carolina, as
Secured Party (incorporated by reference to the
Registration Statement)
10.3 -- Conditional Sales Agreement dated February 19, 1997,
between Input/Output, Inc. and Horizon Exploration
Limited ("HEL") (incorporated by reference to the
Registration Statement)
10.4.1 -- Installment Note ($306,180) by HEL in favor of Teledyne
Brown Engineering Marine Products (incorporated by
reference to the Registration Statement)
10.4.2 -- Promissory Note ($330,000) by HEL in favor of Teledyne
Industries, Inc. (incorporated by reference to the
Registration Statement)
10.5.1 -- Loan and Security Agreement dated February 22, 1996,
between Seitel Geophysical, Inc. and MetLife Capital
Corporation (incorporated by reference to the
Registration Statement)
10.5.2 -- Assignment and Assumption Agreement dated December 31,
1996 between Seitel Geophysical, Inc. and Eagle
Geophysical, Inc. (incorporated by reference to the
Registration Statement)
10.6.1 -- Master Equipment Lease Agreement dated May 20, 1994,
between Seitel Geophysical, Inc. and MetLife Capital,
Limited Partnership, as amended (incorporated by
reference to the Registration Statement)
10.6.2 -- Assignment and Assumption Agreement dated December 31,
1996 between Seitel Geophysical, Inc. and Eagle
Geophysical, Inc. (incorporated by reference to the
Registration Statement)
10.7.1 -- Master Lease Agreement dated February 16, 1994 between
McCullagh Leasing (a unit of GE Capital Fleet Services)
and Seitel Geophysical, Inc., as amended (incorporated by
reference to the Registration Statement)
10.7.2 -- Partial Assignment dated April 8, 1997 among Seitel
Geophysical, Inc., Eagle Geophysical, Inc. and GE Capital
Fleet Services (incorporated by reference to the
Registration Statement)
10.8 -- Term Credit and Security Agreement dated July 15, 1993,
between Seitel Geophysical, Inc. and Compass Bank (f/k/a
Central Bank of the South), as amended (incorporated by
reference to the Registration Statement)
10.9.1 -- Bareboat Charter by Way of Subdemise dated July 15, 1994,
between Simon-Horizon Limited ("Simon") and HEL
(incorporated by reference to the Registration Statement)
10.9.2 -- Management Agreement dated December 19, 1990 between
Simon and Ervik Marine Services A/S ("Ervik")
(incorporated by reference to the Registration Statement)
10.9.3 -- Side Letter Agreement dated December 19, 1990, between
Simon and Ervik (incorporated by reference to the
Registration Statement)
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.9.4 -- Assignment Agreement Relating to a Ship Management
Agreement dated December 19, 1990 (as amended) dated July
15, 1990, between Simon and HEL (incorporated by
reference to the Registration Statement)
10.9.5 -- Deed of Assignment of Insurances dated July 15, 1994,
between HEL and Simon (incorporated by reference to the
Registration Statement)
10.9.6 -- Deed of Continuing Inter-Company Cross Guarantee and
Indemnity dated July 15, 1994, by Horizon Seismic Inc.,
Exploration Holdings Limited and HEL in favor of Simon,
Simon Petroleum Technology Limited and Simon Engineering
Plc (incorporated by reference to the Registration
Statement)
10.9.7 -- Sublease Contract Number 1 dated July 15, 1994, between
Simon and HEL (incorporated by reference to the
Registration Statement)
10.9.8 -- Sublease Contract Number 2 dated July 15, 1994, between
Simon and HEL (incorporated by reference to the
Registration Statement)
10.9.9 -- Agreement dated July 15, 1994, among Simon, Simon
Petroleum Technology Limited, Simon Engineering Plc and
HEL (incorporated by reference to the Registration
Statement)
10.9.10 -- Charterparty by Way of Sub-Demise dated December 20,
1996, between Royal Bank of Scotland and Simon
(incorporated by reference to the Registration Statement)
10.9.11 -- Addendum to Charterparty dated March 31, 1992, between
Royal Bank of Scotland and Simon (incorporated by
reference to the Registration Statement)
10.9.12 -- Quadripartite Agreement dated August 18, 1994, among
Simon, Royal Bank of Scotland (Industrial Leasing)
Limited, HEL and Simon Engineering plc (incorporated by
reference to the Registration Statement)
10.9.13 -- Master Leasing Agreement dated July 15, 1994 between
Simon and HEL (incorporated by reference to the
Registration Statement)
10.10 -- Contribution and Assumption Agreement dated December 31,
1996, between Seitel Geophysical, Inc. and Eagle
Geophysical, Inc. (incorporated by reference to the
Registration Statement)
10.11.1 -- Agreement to Extend the Charterparty of "Pacific Horizon"
dated July 11, 1994, by and between J. Marr Limited and
HEL (incorporated by reference to the Registration
Statement)
10.11.2 -- Deed of Novation m.v. "Pacific Horizon" dated July 11,
1994, by and among Simon, J. Marr Limited and HEL
(incorporated by reference to the Registration Statement)
10.11.3 -- Pacific Horizon Charter dated February 4, 1981, between
J. Marr and Son, Limited and HEL (incorporated by
reference to the Registration Statement)
10.12 -- Employment Agreement between Exploration Holdings Limited
("EHL") and Gerald Harrison, as amended (incorporated by
reference to the Registration Statement)
10.13 -- Employment Agreement between EHL and George Purdie, as
amended (incorporated by reference to the Registration
Statement)
10.14 -- Employment Agreement between EHL and Neil A.M. Campbell,
as amended (incorporated by reference to the Registration
Statement)
10.15 -- Form of Employment Agreement Amendment between EHL and
each of Messrs. Harrison, Purdie and Campbell dated
August 11, 1997 (incorporated by reference to the
Registration Statement)
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.16 -- Employment Agreement between Eagle Geophysical, Inc. and
Jay Silverman dated August 11, 1997 (incorporated by
reference to the Registration Statement)
10.17 -- Employment Agreement between Eagle Geophysical, Inc. and
Richard McNairy (incorporated by reference to the
Registration Statement)
10.18 -- Commercial Lease dated March 10, 1994, between Ron Chase
dba Chase Properties and Eagle Geophysical, Inc./Seitel
Geophysical, Inc. (incorporated by reference to the
Registration Statement)
10.19 -- Modification and Ratification of Lease dated April 24,
1996, between Ron Chase dba Chase Properties and Eagle
Geophysical, Inc./Seitel Geophysical, Inc. (incorporated
by reference to the Registration Statement)
10.20 -- Lease dated May 28, 1996, between Partnership of
Perkins-Guidry-Beazley-Ostteen and Seitel Geophysical,
Inc. (incorporated by reference to the Registration
Statement)
10.21 -- Sublease between Seitel, Inc. and its subsidiaries and
Eagle Geophysical, Inc. dated August 11, 1997
(incorporated by reference to the Registration Statement)
10.22 -- Master Separation Agreement between Seitel, Inc. and
Eagle Geophysical, Inc. dated August 11, 1997
(incorporated by reference to the Registration Statement)
10.23 -- Registration Rights Agreement between EHI Holdings, Inc.
and Eagle Geophysical, Inc. dated August 11, 1997
(incorporated by reference to the Registration Statement)
10.24 -- Tax Indemnity Agreement between Seitel, Inc. and Eagle
Geophysical, Inc. dated August 11, 1997 (incorporated by
reference to the Registration Statement)
10.25 -- Administrative Services Agreement between Seitel, Inc.
and Eagle Geophysical, Inc. dated August 11, 1997
(incorporated by reference to the Registration Statement)
10.26 -- Amended and Restated Promissory Note ($2,000,000) dated
July 3, 1996 by Energy Research International ("ERI") in
favor of Seitel, Inc. (incorporated by reference to the
Registration Statement)
10.27 -- Promissory Note ($2,679,040) dated November 15, 1996 by
ERI in favor of Seitel, Inc. (incorporated by reference
to the Registration Statement)
10.28 -- Bonus Agreement between Eagle Geophysical, Inc. and Paul
A. Frame dated August 11, 1997 (incorporated by reference
to the Registration Statement)
10.29 -- Outside Directors Deferred Compensation Plan
(incorporated by reference to the Registration Statement)
10.30 -- Independent Directors Stock Option Plan (incorporated by
reference to the Registration Statement)
10.31 -- Stock Option Plan (incorporated by reference to the
Registration Statement)
10.32.1 -- Promissory Note payable by Jay Silverman to Eagle
Geophysical, Inc. dated July 23, 1997 (incorporated by
reference to the Registration Statement)
10.32.2 -- Subscription Agreement between Eagle Geophysical, Inc.
and Jay N. Silverman dated July 23, 1997 (incorporated by
reference to the Registration Statement)
10.32.3 -- Security Agreement -- Pledge between Eagle Geophysical,
Inc. and Jay N. Silverman dated July 23, 1997
(incorporated by reference to the Registration Statement)
10.33.1 -- The Bank of N.T. Butterfield Term Loan Facility dated
February 27, 1995 (incorporated by reference to the
Registration Statement)
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.33.2 -- The Bank of N.T. Butterfield & Son Limited Facility
Letter dated August 23, 1994 (incorporated by reference
to the Registration Statement)
10.33.3 -- The Bank of N.T. Butterfield & Son Limited Amendment
Letter No. 1 dated February 3, 1995 (incorporated by
reference to the Registration Statement)
10.33.4 -- The Bank of N.T. Butterfield & Son Limited Amendment
Letter No. 2 dated February 19, 1996 (incorporated by
reference to the Registration Statement)
10.33.5 -- The Bank of N.T. Butterfield & Son Limited Letter dated
May 10, 1996 (incorporated by reference to the
Registration Statement)
10.33.6 -- The Bank of N.T. Butterfield & Son Limited Letter dated
May 19, 1997 (incorporated by reference to the
Registration Statement)
10.34.1 -- Abshire Tide Blanket Time Charter dated February 9, 1996,
between Tidewater Marine, Inc. and Horizon Seismic Inc.
(incorporated by reference to the Registration Statement)
10.34.2 -- Letter Agreement dated February 12, 1996 relating to
Abshire Tide Blanket Time Charter (incorporated by
reference to the Registration Statement)
10.34.3 -- Tidewater Marine letter to Horizon Seismic, Inc. dated
September 19, 1996 regarding the letter agreement dated
February 12, 1996 governing the Time Charter of the MV
Abshire Tide (incorporated by reference to the
Registration Statement)
10.34.4 -- Tidewater Marine letter to Horizon Seismic, Inc. dated
March 25, 1996 regarding the letter agreement dated
February 12, 1996 governing the Time Charter of the MV
Abshire Tide (incorporated by reference to the
Registration Statement)
10.35.1 -- Supplemental Security Agreement No. One dated February
22, 1996 between Seitel Geophysical, Inc. and MetLife
Capital Corporation (incorporated by reference to the
Registration Statement)
10.35.2 -- Term Promissory Note ($433,000) dated March 14, 1996, by
Seitel Geophysical, Inc. in favor of MetLife Capital
Corporation (incorporated by reference to the
Registration Statement)
10.36 -- Service Agreement for MV Discoverer dated April 12, 1994,
between Horizon Seismic, Inc. and Shanghai Bureau of
Marine Geological Survey, as amended (incorporated by
reference to the Registration Statement)
10.37 -- Underlease dated April 21, 1997, between Payless
Properties Limited and HEL (incorporated by reference to
the Registration Statement)
10.38 -- Lease Agreement between Pincay Oaks, Inc. and HEL
(incorporated by reference to the Registration Statement)
10.39 -- Lease dated February 1, 1997, between Tuscan Property
Developments Limited and HEL (incorporated by reference
to the Registration Statement)
10.40 -- Set-off and Charge dated August 30, 1994, between HEL and
The Bank of N.T. Butterfield & Son Limited (incorporated
by reference to the Registration Statement)
10.41 -- Deed relating to 6 Pembroke Road Sevenoaks Kent dated
August 25, 1993, between Marley Waterproofing Limited and
HEL (incorporated by reference to the Registration
Statement)
10.42 -- Debenture dated August 12, 1994, between HEL and The Bank
of N.T. Butterfield & Son Limited (incorporated by
reference to the Registration Statement)
10.43 -- Chattel Mortgage between HEL and The Bank of N.T.
Butterfield & Son Limited (incorporated by reference to
the Registration Statement)
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.44 -- Stock Purchase Agreement dated June 2, 1997, among Gerald
Harrison, George Purdie, Neil Campbell, David Burns,
Oliveira Limited, Dormera Limited, Balmedie Limited,
Larlane Limited and Eagle Geophysical, Inc. (incorporated
by reference to the Registration Statement)
10.45 -- Operating Lease of Marine Seismic Equipment dated as of
July 1, 1996, between Seismic Geophysical, Inc. and HEL
(incorporated by reference to the Registration Statement)
10.46 -- Assignment between HEL and The Bank of NT Butterfield &
Sons Limited (incorporated by reference to the
Registration Statement)
10.47 -- Letter of Hypothecation and Pledge dated August 30, 1994,
between Seismic Exploration Ltd. and The Bank of N.T.
Butterfield & Son Limited (incorporated by reference to
the Registration Statement)
10.48 -- Lease Agreement dated January 7, 1997, between DigiCOURSE
INC. and HEL (incorporated by reference to the
Registration Statement)
10.49 -- Lease Agreement dated March 27, 1997, between DigiCOURSE
INC. and HEL (incorporated by reference to the
Registration Statement)
10.50 -- Initial Definitive Trust Deed -- Horizon Pension Plan
(incorporated by reference to the Registration Statement)
10.51 -- Operating Lease dated February 3, 1997, between Eagle
Geophysical, Inc. and HEL (incorporated by reference to
the Registration Statement)
10.52 -- Contribution Agreement dated as of May 30, 1997, between
Seitel, Inc. and Eagle Geophysical, Inc. (incorporated by
reference to the Registration Statement)
10.53 -- Assignment of Life Insurance dated December 9, 1993
insuring G.M. Harrison (incorporated by reference to the
Registration Statement)
10.54 -- Lease dated December 12, 1995, between Newington Bricks
Limited and HEL (incorporated by reference to the
Registration Statement)
10.55 -- Lease dated August 25, 1993, between Marley Waterproofing
Limited and HEL (incorporated by reference to the
Registration Statement)
10.56 -- Master Agreement for Geophysical Services by and between
Eagle Geophysical Onshore, Inc. and Seitel Data, Ltd.
(incorporated by reference to the Registration Statement)
10.57 -- Master Agreement for Geophysical Services by and between
Eagle Geophysical Onshore, Inc. and DDD Energy, Ltd.
(incorporated by reference to the Registration Statement)
10.58 -- Employee Benefits Allocation Agreement between Seitel,
Inc. and Eagle Geophysical, Inc. dated August 11, 1997
(incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997 (the
"1997 Form 10-K")
10.59 -- Revolving Credit Agreement dated October 21, 1997 between
Bank One, Texas, N.A. ("Bank") and Eagle Geophysical,
Inc. ("Eagle"), Eagle Geophysical Onshore, Inc.
("Onshore"), Eagle Geophysical Offshore, Inc.
("Offshore"), Eagle Geophysical de Mexico, Inc. ("de
Mexico"), and Eagle Geophysical GOM, Inc. ("GOM," and
collectively with Eagle, Onshore, Offshore and de Mexico,
"Borrowers") (incorporated by reference to the 1997 Form
10-K)
10.60 -- Promissory Note in the original principal amount of
$20,000,000 dated October 21, 1997 payable to the order
of Bank, made by Borrowers (incorporated by reference to
the 1997 Form 10-K)
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.61 -- Form of Security Agreement dated October 21, 1997 between
Bank and each of Eagle Onshore, Offshore, de Mexico and
GOM (incorporated by reference to the 1997 Form 10-K).
10.62 -- Revolving Credit Agreement between Bank and HEL
(incorporated by reference to the 1997 Form 10-K)
10.63 -- Promissory Note in the original principal amount of
$20,000,000 dated October 21, 1997 payable to the order
of Bank, made by HEL (incorporated by reference to the
1997 Form 10-K)
10.64 -- Charge on Receivables dated October 21, 1997 between Bank
and HEL (incorporated by reference to the 1997 Form 10-K)
10.65 -- Guaranty dated October 21, 1997 by Eagle Geophysical,
Inc. to Bank (incorporated by reference to the 1997 Form
10-K)
10.66 -- Agreement for the Sale and Purchase of m.v. Labrador
Horizon dated April 1, 1998 among Royal Bank of Scotland
(Industrial Leasing) Limited, British Linen Shipping
Limited and Horizon Exploration Limited (incorporated by
reference to the Company's 1998 Form 10-Q for the quarter
ended June 30, 1998)
10.67 -- Hire Purchase Agreement for m.v. Labrador Horizon dated
April 1, 1998 among British Linen Shipping Limited,
Horizon Exploration Limited and Eagle Geophysical
Offshore, Inc. (incorporated by reference to the
Company's 1998 Form 10-Q for the quarter ended June 30,
1998)
10.68 -- Corporate Guarantee dated April 1, 1998 among Eagle
Geophysical, Inc. ("Eagle"), Energy Research
International and British Linen Shipping Limited
(incorporated by reference to the Company's 1998 Form
10-Q for the quarter ended June 30, 1998)
10.69 -- First Amendment to Loan Agreement dated October 21, 1997
among Bank One, Texas, N.A. ("Bank One"), Eagle and
certain subsidiaries of Eagle dated June 10, 1998)
(incorporated by reference to the Company's 1998 Form
10-Q for the quarter ended June 30, 1998)
10.70 -- Amended and Restated Revolving Note dated June 10, 1998
(incorporated by reference to the Company's 1998 Form
10-Q for the quarter ended June 30, 1998)
10.71 -- First Amendment to Loan Agreement dated October 21, 1997
between Bank One and Horizon Exploration Limited dated
June 10, 1998 (incorporated by reference to the Company's
1998 Form 10-Q for the quarter ended June 30, 1998)
10.72 -- Credit Agreement -- $29,000,000 Unsecured Advancing Line
of Credit between Bank One and Eagle dated June 5, 1998
(incorporated by reference to the Company's 1998 Form
10-Q for the quarter ended June 30, 1998)
10.73 -- Advancing Note dated June 5, 1998 (incorporated by
reference to the Company's 1998 Form 10-Q for the quarter
ended June 30, 1998)
10.74 -- Form of Guarantee Agreement entered into between Bank One
and each of Eagle Geophysical Onshore, Inc., Eagle
Geophysical Offshore, Inc., Eagle Geophysical de Mexico,
Inc. Eagle Geophysical GOM, Inc., Eagle Geophysical
Management, Inc. and Eagle Front End Services, Ltd. dated
June 5, 1998 (incorporated by reference to the Company's
1998 Form 10-Q for the quarter ended June 30, 1998)
10.75 -- Master Security Agreement dated January 28, 1998 between
Fleet Capital Corporation ("Fleet") and Eagle Geophysical
Onshore, Inc. ("Eagle Onshore") (incorporated by
reference to the Company's 1998 Form 10-Q for the quarter
ended June 30, 1998)
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.76 -- Equipment Security Agreement dated February 11, 1998
between Fleet and Eagle Onshore (incorporated by
reference to the Company's 1998 Form 10-Q for the quarter
ended June 30, 1998)
10.77 -- Promissory Note dated April 30, 1998 payable to Fleet by
Eagle Onshore (incorporated by reference to the Company's
1998 Form 10-Q for the quarter ended June 30, 1998)
10.78 -- Guaranty dated January 28, 1998 between Fleet and Eagle
(incorporated by reference to the Company's 1998 Form
10-Q for the quarter ended June 30, 1998)
10.79 -- Purchase Agreement dated July 15, 1998 among Prudential
Securities Incorporated and Banc One Capital Markets,
Inc. (incorporated by reference to the Registration
Statement on Form S-4 (Reg. No. 333-63747) of Eagle
Geophysical, Inc.)
10.80* -- Arrangement Agreement among Natural Resources Geophysical
Corporation and Eagle Canada, inc. and Eagle Geophysical,
Inc. dated October 27, 1998
23 -- Report of KPMG, Independent Public Accountants, for the
financial statements of ERI for the period from August
11, 1997 to December 31, 1997 (incorporated by reference
to the 1997 Form 10-K).
23.1* -- Consent of Arthur Andersen LLP, independent public
accountants
27* -- Financial data schedule
</TABLE>
- - ---------------
* Filed herewith
29
<PAGE> 32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Eagle Geophysical, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Eagle
Geophysical, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1997 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the 1997 financial statements of Energy Research International, which
statements reflect total assets and total revenues of 41 percent and 22 percent
in 1997, respectively, of the consolidated totals. Those statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for that entity, is based solely
on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Eagle Geophysical, Inc. and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 4, 1999 (except with respect to the matter
discussed in Note O, as to which the date
is March 26, 1999)
30
<PAGE> 33
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 14,980 $ 10,331
Restricted Cash......................................... 4,502 5,000
Receivables:
Trade, billed, net of allowance for doubtful accounts of
$132 and $-0- at December 31, 1997 and 1998,
respectively........................................... 11,291 4,029
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 2,576 7,075
Other................................................... 546 1,076
Due from affiliate........................................ 12,500 25,756
Inventory................................................. 1,334 2,230
Prepaid expenses and other assets......................... 2,273 2,738
Deferred income taxes..................................... 515 632
-------- --------
Total current assets................................ 50,517 58,867
PROPERTY AND EQUIPMENT, AT COST:
Geophysical equipment..................................... 69,418 148,489
Construction in progress.................................. -- 56,782
Furniture, fixtures and other............................. 652 1,528
-------- --------
70,070 206,799
Less: Accumulated depreciation.......................... (14,873) (31,561)
-------- --------
Net property and equipment.......................... 55,197 175,238
MULTI-CLIENT DATA LIBRARY................................... 371 15,910
GOODWILL, net of accumulated amortization of $477 and $1,851
at December 31, 1997 and 1998, respectively............... 17,990 19,176
DEFERRED INCOME TAXES....................................... 104 --
OTHER LONG-TERM ASSETS, net................................. 126 4,004
-------- --------
TOTAL ASSETS........................................ $124,305 $273,195
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ -- $ 1,830
Current portion of capital lease obligations.............. 2,816 6,063
Accounts payable.......................................... 15,671 17,073
Accrued liabilities....................................... 7,849 24,459
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... 6,029 3,367
-------- --------
Total current liabilities........................... 32,365 52,792
LONG-TERM DEBT.............................................. -- 105,385
CAPITAL LEASE OBLIGATIONS................................... 7,944 22,343
DEFERRED INCOME TAXES AND OTHER OBLIGATIONS................. -- 2,875
-------- --------
TOTAL LIABILITIES................................... 40,309 183,395
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, 5,000,000 shares authorized, none issued
and outstanding......................................... -- --
Common stock, par value $.01 per share; 25,000,000 shares
authorized; 8,489,000 shares issued and outstanding at
December 31, 1997 and 8,788,310 at December 31, 1998.... 85 88
Additional paid-in capital................................ 82,622 84,412
Retained earnings......................................... 1,714 5,725
Note receivable from stockholder.......................... (425) (425)
-------- --------
TOTAL STOCKHOLDERS' EQUITY.......................... 83,996 89,800
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $124,305 $273,195
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE> 34
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
REVENUES(1)................................................. $48,136 $79,061 $121,503
EXPENSES
Operating expenses (exclusive of depreciation and
amortization shown below)(1)........................... 34,917 56,470 82,397
Depreciation and amortization............................. 3,409 8,584 18,847
Selling, general and administrative expenses.............. 2,680 6,408 10,050
Interest expense.......................................... 699 1,586 5,247
Interest income........................................... (168) (1,263) (1,617)
Other, net................................................ -- (118) (477)
------- ------- --------
41,537 71,667 114,447
------- ------- --------
Income before provision for income taxes.................. 6,599 7,394 7,056
Provision for income taxes................................ 2,420 2,994 3,045
------- ------- --------
NET INCOME.................................................. $ 4,179 $ 4,400 $ 4,011
======= ======= ========
Basic earnings per share.................................. $ 1.23 $ 0.81 $ 0.47
======= ======= ========
Weighted average number of common shares (basic).......... 3,400 5,418 8,587
======= ======= ========
Diluted earnings per share................................ $ 1.23 $ 0.81 $ 0.46
======= ======= ========
Weighted average number of common shares (diluted)........ 3,400 5,436 8,754
======= ======= ========
</TABLE>
- - ---------------
(1) Includes revenue from affiliates of $27,217, $42,265 and $74,771 for the
periods ended December 31, 1996, 1997 and 1998, respectively, and operating
expenses related to such affiliate revenue of $20,078, $34,514 and $54,069
for the periods ended December 31, 1996, 1997 and 1998, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE> 35
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS 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, 1995....... 3,400 $34 $ 3,576 $ -- $ -- $ 3,610
Net income..................... -- -- 4,179 -- -- 4,179
----- --- ------- ------- ----- -------
Balance, December 31, 1996....... 3,400 $34 $ 7,755 -- -- 7,789
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 69,084 -- -- 69,129
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 December 31, 1997........ -- -- -- 1,714 -- 1,714
----- --- ------- ------- ----- -------
Balance, December 31, 1997....... 8,489 85 82,622 1,714 (425) 83,996
Acquisition of Seismic Drilling
& Services, Inc............. 98 1 1,124 -- -- 1,125
Acquisition of NRG Services,
Inc......................... 201 2 846 -- -- 848
Other, net..................... -- -- (180) -- -- (180)
Net income..................... -- -- -- 4,011 -- 4,011
----- --- ------- ------- ----- -------
Balance, December 31, 1998....... 8,788 $88 $84,412 $ 5,725 $(425) $89,800
===== === ======= ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE> 36
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 4,179 $ 4,400 $ 4,011
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 3,409 8,584 18,847
Income contributed to former parent, Seitel, Inc. ...... -- (6,651) --
Bad debt expense........................................ -- 582 1,884
Loss (Gain) on sale of property and equipment........... -- (19) 98
Deferred income tax provision........................... 58 219 2,472
Increase in receivables................................. (3,726) (2,280) (6,843)
Increase in other assets................................ (833) (886) (5,998)
Increase in accounts payable and other liabilities...... 1,553 9,311 13,075
------- -------- ---------
Total adjustments.................................. 461 8,860 23,535
------- -------- ---------
Net cash provided by operating activities.......... 4,640 13,260 27,546
------- -------- ---------
Cash flows from investing activities:
Purchase of property and equipment........................ (7,928) (32,375) (103,233)
Cash acquired from the purchase of Energy Research
International........................................... -- 145 --
Cash deposited in connection with a capital lease......... -- (4,502) (498)
Cash paid for multi-client data library................... -- (371) (15,105)
Cash paid for shot-hole drilling company, net of cash
acquired................................................ -- -- (3,516)
Cash paid for assets of NRG Services, Inc. ............... -- -- (1,508)
Cash received on sale of property and equipment........... -- 24 204
------- -------- ---------
Net cash used in investing activities.............. (7,928) (37,079) (123,656)
------- -------- ---------
Cash flows from financing activities:
Issuance of Senior Notes, net of offering costs........... -- -- 96,364
Borrowings under term loans............................... 7,694 7,564 --
Principal payments on term loans.......................... (1,518) (27,886) (662)
Borrowings under credit facility.......................... -- -- 35,500
Repayments under credit facility.......................... -- -- (35,500)
Principal payments on capital leases...................... (1,247) (7,005) (4,061)
Receipts (payments) to affiliate.......................... (1,699) (3,003) --
Issuance of common stock, net............................. -- 69,129 --
Other, net................................................ -- -- (180)
------- -------- ---------
Net cash provided by financing activities.......... 3,230 38,799 91,461
------- -------- ---------
Net increase (decrease) in cash and cash equivalents........ (58) 14,980 (4,649)
Cash and cash equivalents at beginning of period............ 58 -- 14,980
------- -------- ---------
Cash and cash equivalents at end of period.................. $ -- $ 14,980 $ 10,331
======= ======== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net........................................... $ 637 $ 1,472 $ 2,986
======= ======== =========
Income taxes............................................ $ -- $ 1,950 $ 2,816
======= ======== =========
Non-cash investing activities:
Capital lease obligations............................... $ 41 $ 374 $ 21,707
======= ======== =========
Purchase of shot-hole drilling company for 98,360 shares
of common stock....................................... $ -- $ -- $ 1,125
======= ======== =========
Purchase of assets of NRG Services, Inc. for 200,950
shares of common stock................................ $ -- $ -- $ 848
======= ======== =========
Equipment purchased through term loan................... $ -- $ -- $ 5,864
======= ======== =========
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.
34
<PAGE> 37
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- BUSINESS, FORMATION OF THE COMPANY AND ACQUISITIONS
BUSINESS
Eagle Geophysical, Inc. (the "Company") is an international oilfield
service company engaged in seismic data acquisition services, with a
specialization in the acquisition of high-resolution, three dimensional seismic
data in logistically difficult wetland environments and in congested offshore
areas primarily in the U.S. Gulf Coast region. Since its inception and through
August 11, 1997, the Company was a wholly-owned subsidiary of Seitel, Inc.
("Seitel"), which has subsidiaries that are significant purchasers of the
Company's services -- See Note J.
FORMATION OF THE COMPANY AND ACQUISITIONS
The Company was formed from the onshore seismic data acquisition business
of Seitel Geophysical, Inc., a wholly-owned subsidiary of Seitel that began
operations in December 1992. Eagle Geophysical, Inc., indirectly a wholly-owned
subsidiary of Seitel and Eagle Geophysical Onshore, Inc. were both formed on
December 18, 1996. Effective December 31, 1996, substantially all of the net
assets of Seitel Geophysical, Inc. were contributed to Eagle Geophysical
Onshore, Inc.
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 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 and 180,000 shares sold by the former owners of ERI)
resulting in net proceeds to the Company of $69.1 million after deducting
offering-related expenses (the "IPO"). After the IPO, Seitel owns 1,520,000
shares or 17.3% of the Company's common stock.
On August 11, 1997, the Company acquired the remaining 81% of ERI in
exchange for 600,000 shares of common stock valued at the initial offering price
of $17 per share (the "ERI Acquisition"). The ERI 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
recorded as goodwill.
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,
98,360 shares of the Company's common stock, and deferred compensation payable
to the former owner of $500,000 (the "SDS Acquisition"). The SDS Acquisition was
accounted for as a purchase transaction.
In November 1998, the Company completed the acquisition of assets from NRG
Services, a land based seismic data acquisition company operating in Canada for
a purchase price of approximately $4.5 million consisting of $1.5 million in
cash, the assumption of approximately $2 million in debt, and 200,950 shares of
the Company's common stock (the "NRG Acquisition"). The NRG Acquisition was
accounted for as a purchase transaction.
35
<PAGE> 38
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the unaudited pro forma effects of the IPO,
the application of the net proceeds thereof, the ERI Acquisition, the SDS
Acquisition, and the NRG Acquisition as if such transactions had occurred on
January 1, 1997.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
(UNAUDITED)
(IN THOUSANDS EXCEPT
PER SHARE INFORMATION)
<S> <C> <C>
Pro Forma Revenues.......................................... $123,105 $129,844
Pro Forma Income Before Taxes............................... 10,103 5,719
Pro Forma Net Income........................................ 6,012 3,271
Pro Forma Weighted Average Number of Common Shares
Outstanding -- Basic...................................... 8,788 8,788
Pro Forma Basic Earnings Per Common Share................... $ .68 $ .37
-------- --------
</TABLE>
NOTE B -- SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates: The preparation of these consolidated financial
statements in accordance with generally accepted accounting principles requires
the use of certain estimates by management in determining the Company's assets,
liabilities, contingencies, revenues and expenses. One important estimate
relates to the percentage of revenue recognized based on the stage of completion
of seismic acquisition projects. Actual results could differ from estimates.
Basis of Presentation: The accompanying consolidated financial statements
include the accounts of Eagle Geophysical, Inc., indirectly a wholly-owned
subsidiary of Seitel until August 11, 1997, and the accounts of its wholly-owned
subsidiaries. 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. The accompanying consolidated
financial statements include the results of operations of ERI for the period
after the ERI Acquisition (August 11, 1997).
Cash and Cash Equivalents: Cash and cash equivalents include short-term
investments with original maturities of three months or less.
Inventory: Inventory which consists primarily of spare parts for equipment
is stated at the lower of cost or market value on a first-in, first-out basis.
Property and Equipment: Property and equipment are carried at cost and
include assets under capital leases. Maintenance and repairs are charged to
expense as incurred and expenditures for major improvements are capitalized.
Gains and losses from retirement or replacement of property and equipment are
included in operations.
Depreciation of property of equipment and assets under capital leases is
provided over the estimated useful lives of the assets, which range from three
to five years or the term of the lease, using the straight-line method.
Depreciation for owned vessels is provided over a period of ten to twenty years
using the straight-line method.
Multi-client Data Library: The Company acquires certain seismic data for
its own account to which it retains ownership rights and which it resells to
clients on a non-transferable, non-exclusive basis. The Company may obtain
precommitted sales contracts to fund the cash requirements of these surveys,
which
36
<PAGE> 39
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
generally last from 3 to 7 months. The Company capitalizes the unfunded portion
using an estimated sales method. Under that method the amount capitalized equals
actual costs incurred less costs attributed to the precommitted sales contracts
based on the percentage of total estimated costs to total estimated sales
multiplied by actual sales. The capitalized cost of multi-client data library is
likewise charged to operations in the period subsequent sales occur based on the
percentage of total estimated costs to total estimated sales multiplied by
actual sales. The Company periodically reviews the carrying value of the
multi-client data library to assess whether there has been a permanent
impairment of value and records losses when the total estimated costs exceed
total estimated sales or when it is determined that estimated sales would not be
sufficient to cover the carrying value of the asset. In general, costs are
expected to be recovered from sales over a period of less than 4 years.
Intangible Assets: Goodwill which resulted from the ERI Acquisition and the
SDS Acquisition is amortized on a straight-line basis over a period of 15 years.
Organization costs, which are classified as other long-term assets, are
amortized on a straight-line basis over a period of three years. Such
organization costs are fully amortized as of December 31, 1997. The Company
evaluates intangible assets periodically in accordance with Statement of
Financial Accounting Standards No. 121 "Accounting for Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of" to determine whether they are
properly reflected in the financial statements based upon future undiscounted
operating cash flows. If an impairment is determined to exist, then the asset is
written down to fair market value.
Income Taxes: The Company and all of its active U.S. subsidiaries file a
consolidated federal income tax return. ERI and its subsidiaries file a
consolidated income tax return in the United Kingdom. The Company does not
provide deferred taxes (benefit) on the undistributed earnings (loss) of its
foreign subsidiaries which amounted to $192,000 and $3,132,000 for the years
ended December 31, 1997 and 1998, respectively, as such earnings are intended to
be permanently invested in those operations.
Revenue and Cost Recognition: 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 has not retained
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. Revenue from the acquisition of onshore seismic data is recognized on
the percentage-of-completion method based on the work effort completed compared
with the total work effort estimated for the contract. Revenue received in
advance of being earned is deferred until earned. For contracts accounted for
under the percentage of completion method, the Company's contracts provide that
the customer accepts work completed throughout the duration of the project and
owes the Company, based on the pricing provisions and job completion to date,
measured in terms of time incurred or other performance milestones.
Operating expenses include all direct material and labor costs and indirect
costs related to the acquisition of seismic data such as supplies, tools and
repairs. Selling, general and administrative costs are charged to expense as
incurred. Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions and estimated profitability, including those arising from contract
penalty provisions, and final contract settlements may result in revisions to
costs and income and are recognized in the period in which the revisions are
determined.
The asset, "costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenue recognized in excess of amounts
billed. The liability, "billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of revenue recognized.
Included in 1998 revenues is $5.5 million of revenue earned in connection
with a vessel charter hire contract and related services provided to a third
party.
37
<PAGE> 40
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign Currency Translation: The Company's functional currency is the U.S.
Dollar. Accordingly, foreign entities translate monetary assets and liabilities
at period end exchange rates, while non-monetary items are translated at
historical rates. Income and expense accounts are translated at the average
rates in effect during the year except for depreciation and amortization, which
are translated at historical rates. Gains and losses resulting from the
translation of foreign financial statements and from foreign currency
transactions are included in other income and expense. The Company recorded no
foreign currency translation gains or losses in 1996 and approximately $117,000
and $455,000 in net gains for the years ended December 31, 1997 and 1998
respectively.
Earnings per Share: Earnings per share is based on the weighted average
number of outstanding shares of common stock during the respective years, and
where dilutive, the effect of common stock contingently issuable, which arises
from the exercise of stock options. In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") 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 dilutive
earnings per share. The Company adopted this statement effective for the fiscal
year ended December 31, 1997. The adoption of this statement had no effect on
the Company's earnings per share for either of the years ended December 31, 1996
and 1997. The weighted average number of common shares outstanding for
calculation of basic earnings per share was 3,400,000, 5,418,000 and 8,587,000
for the years ended December 31, 1996, 1997 and 1998 respectively. The weighted
average number of common shares outstanding for calculation of diluted earnings
per share was 3,400,000, 5,436,000 and 8,754,000 for the years ended December
31, 1996, 1997 and 1998 respectively.
Stock-Based Compensation: The Company accounts for employee stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." Reference is made to Note G, "Stockholders' Equity," for a summary
of the pro forma effect of SFAS No. 123, "Accounting for Stock Based
Compensation" on the Company's results of operations for 1997 and 1998.
Fair Value of Financial Instruments: The estimated fair value amounts have
been determined by the Company using available market data and valuation
methodologies. The book values of cash and cash equivalents, accounts receivable
and accounts payable approximate their fair value as of December 31, 1997 and
1998, because of the short-term maturity of these instruments. Based upon the
rates available to the Company, the fair value of the Company's combined debt
and capital lease obligations was $10,186,000 compared to a carrying value of
$10,760,000 as of December 31, 1997 and $119,444,000 compared to a carrying
value of $135,621,000 as of December 31, 1998.
Recent Accounting Pronouncements: In June 1997, the Financial Accounting
Standards Board (FASB) 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 years ended December
31, 1996, 1997 and 1998 and therefore, comprehensive income is equal to net
income for each period.
In June 1997, the FASB 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. The Company
adopted this statement during its fiscal year ending December 31, 1998.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits." The statement amends the
disclosure requirements of previously issued FASB statements and requires
additional disclosure of the employer's projected benefit obligation for pension
and
38
<PAGE> 41
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
postretirement plans, the plan's funding status, and changes in the plan's
assets. The Company adopted this statement during its fiscal year ending
December 31, 1998. The Company does not believe the adoption of this statement
had a material effect on its consolidated financial statements.
In June 1998, the FASB issued 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 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 an impact on its financial position and
results of operations, as the Company does not currently engage in any hedging
activities.
Reclassifications: Certain reclassifications of 1997 amounts have been made
to conform with the 1998 presentation. The reclassifications have no impact on
1997 results of operations or stockholders' equity.
NOTE C -- INCOME TAXES
The provision for income taxes for each of the three years ended December
31, 1998, consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Current
-- Federal.............................................. $2,105 $2,603 $ 451
-- State................................................ 257 443 414
-- Foreign.............................................. -- (271) (292)
------ ------ ------
2,362 2,775 573
------ ------ ------
Deferred
-- Federal.............................................. 51 (227) 795
-- State................................................ 7 (33) 78
-- Foreign.............................................. -- 479 1,599
------ ------ ------
58 219 2,472
------ ------ ------
Tax Provision
-- Federal.............................................. 2,156 2,376 1,246
-- State................................................ 264 410 492
-- Foreign.............................................. -- 208 1,307
------ ------ ------
$2,420 $2,994 $3,045
====== ====== ======
</TABLE>
39
<PAGE> 42
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The difference between U.S. Federal income taxes computed at the statutory
rate (34%) and the Company's income tax provision are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Statutory Federal income tax............................... $2,244 $2,514 $2,399
State income tax, less Federal benefit..................... 174 272 325
Nondeductible goodwill, foreign............................ -- 162 367
Effect of difference in U.S. and Foreign Rates............. -- (6) (96)
Other, net................................................. 2 52 50
------ ------ ------
Income tax expense......................................... $2,420 $2,994 $3,045
====== ====== ======
</TABLE>
The components of the net deferred income tax asset and liability reflected
in the Company's consolidated balance sheets at December 31, 1997 and 1998 were
as follows (in thousands):
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS
(LIABILITIES)
AT DECEMBER 31,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Net operating loss carryforward............................. $ 2,263 $ 2,402
Accrued expense and other assets............................ 1,008 690
------- -------
Total deferred tax assets................................... 3,271 3,092
Less: valuation allowance................................... (291) --
------- -------
Deferred tax assets, net of valuation allowance........... 2,980 3,092
------- -------
Depreciation and amortization............................... (2,361) (4,935)
------- -------
Total deferred tax liabilities............................ (2,361) (4,935)
------- -------
Net deferred tax asset (liability).......................... $ 619 $(1,843)
======= =======
</TABLE>
Included in the deferred federal tax provisions are the following: excess
of tax depreciation expense over book depreciation expense and expenses accrued
for financial statement purposes which are not yet deductible for tax purposes.
In connection with the ERI Acquisition, the Company acquired approximately $6.0
million of net operating loss carryforwards (currently with no expiration date)
and $1.3 million of other items not currently deductible for tax purposes in the
United Kingdom related to ERI's United Kingdom subsidiary, Horizon Exploration
Ltd. resulting in a deferred tax asset of approximately $2.6 million. Horizon's
net operating loss carryforwards as of December 31, 1998 are approximately $8.0
million. Such deferred tax asset was recorded by the Company in accordance with
the provisions of SFAS No. 109, "Accounting for Income Taxes," with only the
portion of such tax assets that are in management's opinion, more likely than
not, expected to be realized considering ERI's results subsequent to the ERI
Acquisition. Accordingly, a $291,000 valuation allowance was provided on such
deferred assets as of December 31, 1997. Based on management's current
estimates, no such reserve was provided for deferred tax asset of approximately
$3.1 million as of December 31, 1998, which included $2.4 million of net
operating loss carryforwards.
40
<PAGE> 43
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS
The following is a summary of the Company's estimated costs and earnings on
uncompleted contacts as of December 31, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Costs incurred and estimated earnings on uncompleted
contracts................................................. $ 19,748 $ 19,847
Billings on uncompleted contracts........................... (23,201) (16,139)
-------- --------
$ (3,453) $ 3,708
======== ========
Included in accompanying balance sheets under the following
captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. $ 2,576 $ 7,075
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. (6,029) (3,367)
-------- --------
$ (3,453) $ 3,708
======== ========
</TABLE>
NOTE E -- LONG TERM DEBT
The following is a summary of the Company's long-term debt at December 31,
1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
10 3/4% Senior Notes Due 2008............................... -- $100,000
Fleet Capital Term Loan..................................... -- 5,286
Other term loans............................................ -- 1,929
-- --------
107,215
Less amounts due within one year............................ -- (1,830)
-- --------
Total long-term debt.............................. $-- $105,385
== ========
</TABLE>
In July 1998, the Company completed an 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 "Offering"). The
Company used approximately $27.5 million of the proceeds to repay borrowings
under the short-term loan and its revolving credit facility used for upgrades to
the Austral Horizon and the Atlantic Horizon and has used the rest of the
proceeds to fund the remaining upgrades of these two vessels.
The Company had 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 "Bank One Credit Facility). The amount the Company could borrow
under the facility was 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 was
payable monthly or at the end of LIBOR interest periods, and the credit facility
was payable in full on June 1, 1999. Mandatory prepayments were required if
borrowings exceed the borrowing base. Interest accrued 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 was less than 1 to 1, and 1.625% if such ratio was equal to
or greater than 1 to 1. As of December 31, 1998, the Company had a borrowing
base of approximately $20 million under this facility and no borrowings were
outstanding. This credit facility was terminated on March 26, 1999 when the
41
<PAGE> 44
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company entered into a new credit facility with Norwest Business Credit, Inc.
See Note O "Subsequent Events."
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
are payable under the loan, with the Opseis system pledged as security for the
loan.
In June 1998, the Company entered into the $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.
In connection with the NRG Acquisition in November 1998, the Company
assumed approximately $2.0 million of term loans payable. The notes have monthly
payments ranging from approximately $5,300 to $26,000, interest rates ranging
from 5.75% to 9.7%, and maturities ranging from April 2000 to August 2002.
The annual maturities of debt for succeeding years are as follows:
<TABLE>
<CAPTION>
YEAR IN THOUSANDS
- - ---- ------------
<S> <C>
1999........................................................ $ 1,830
2000........................................................ 1,866
2001........................................................ 1,609
2002........................................................ 1,335
2003........................................................ 575
Thereafter.................................................. 100,000
--------
Total............................................. $107,215
========
</TABLE>
The Company capitalized approximately $1,931,000 of interest expense for the
year ended December 31, 1998, primarily related to the upgrades of the Austral
Horizon and Atlantic Horizon. No interest was capitalized for the years ended
December 31, 1996 and 1997.
NOTE F -- LEASE OBLIGATIONS
Property and equipment in the accompanying consolidated balance sheets
includes the following assets held under capital leases (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Geophysical equipment....................................... $15,311 $31,739
Accumulated amortization.................................... (6,704) (2,988)
------- -------
Assets under capital lease, net............................. $ 8,607 $28,751
======= =======
</TABLE>
For the year ended December 31, 1997 and the nine months ended September
30, 1998, the Company was allocated a portion of the office lease expense
incurred by Seitel under its operating lease for the corporate office based on
the actual cost of such office space pro-rated to the square footage utilized by
the Company. Additionally, the Company directly leases office space and charters
vessels and geophysical equipment under certain non-cancelable operating leases.
Rental expense for 1996, 1997 and 1998 was approximately $142,000, $4,293,000
and $11,613,000, respectively, related to these leases.
42
<PAGE> 45
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments for each of the five years subsequent to
December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1999........................................................ $ 7,914 $ 6,764
2000........................................................ 7,914 3,146
2001........................................................ 7,914 1,284
2002........................................................ 7,914 764
2003........................................................ 1,319 649
Thereafter.................................................. -- 3,870
------- -------
Total minimum lease payments................................ 32,975 $16,477
=======
Less amount representing interest........................... (4,569)
-------
Present value of net minimum lease payments................. $28,406
=======
</TABLE>
The capital lease obligation outstanding as of December 31, 1998 with
British Linen Bank has an annual interest rate of approximately 7.36%.
NOTE G -- STOCKHOLDERS' EQUITY
Common Stock: 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 consolidated financial statements has been adjusted to give
retroactive effect to the split.
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 which represented the
fair value of the Company's common stock at that date. The note bears interest
at 6% and is for a term of eight years. Interest is payable quarterly until
September 2000 when equal payments of principal plus interest are payable
monthly until July 2005. The note is secured by a pledge of the 25,000 shares of
common stock in favor of the Company.
Preferred Stock: In May 1997, the Company amended its Certificate of
Incorporation to authorize the issuance of 5,000,000 shares of preferred stock,
the terms and conditions to be determined by the Board of Directors in creating
any particular series.
Seitel Contribution: In May 1997, Seitel contributed to the Company all of
the shares that it owned of Energy Research International, which represented a
19% ownership interest. Energy Research International 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.
Securities Offering, ERI Acquisition: 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 to the
Company after deducting offering-related expenses. Also on August 11, 1997, the
Company acquired the remaining 81% of Energy Research International in exchange
for 600,000 shares of common stock.
Shareholder Rights Plan: 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
43
<PAGE> 46
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
1998 Acquisitions: In March 1998, the Company completed the acquisition of
a privately held shot-hole drilling and front-end service company for a purchase
price of approximately $6.3 million consisting of cash and 98,360 shares of the
Company's common stock. In November 1998, the Company completed the acquisition
of the assets of NRG Services, a Canadian land-based seismic company for a
purchase price of approximately $4.5 million consisting of cash, assumption of
debt, and the issuance of 200,950 shares of the Company's common stock.
Stock Option Plans: In May 1997, the Company adopted a stock option plan
(the "1997 Stock Option Plan") whereby 1,100,000 shares of common stock were
reserved for issuance pursuant to such plan. Under the stock option plan, the
Company may grant both incentive stock options intended to qualify under Section
422 of the Internal Revenue Code and options that are not qualified as incentive
stock options. Options are granted at or above the market price of the Company's
stock on the date of grant. As of December 31, 1997 and 1998, 763,250 and
878,050, respectively, options are outstanding under the plan.
In May 1997, the Company adopted an independent directors stock option plan
and 100,000 shares were reserved for issuance pursuant to such plan. Under this
plan, options are automatically granted to independent directors upon their
election and reelection as directors of the Company. Such options are granted at
the fair market value of the Company's stock on the date of grant. As of
December 31, 1997 and 1998, 30,000 and 40,000, respectively, options are
outstanding under the plan.
Effective December 11, 1998, the Company amended the exercise price of all
options outstanding under the 1997 Stock Option Plan and the Independent
Directors Stock Option Plan to $8 per share.
The following summarizes information with regard to the stock option plans
for the years ended December 31, 1997 and 1998 (shares in thousands):
<TABLE>
<CAPTION>
1997 1998
------------------------- -------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.......... -- -- 793 $16.81
Granted................................. 793.. $16.81 153 10.38
Exercised............................... --.. -- -- --
Forfeited............................... --.. -- (28) 16.84
--- ------ --- ------
Outstanding at end of year................ 793.. $16.81 918 $ 8.00
=== ====== === ======
Options exercisable at end of year........ -- -- 305 $ 8.00
=== ====== === ======
</TABLE>
44
<PAGE> 47
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information for the options outstanding at
December 31, 1998 (shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ----------------------
WEIGHTED
NUMBER OF AVERAGE WEIGHTED NUMBER OF WEIGHTED
OPTIONS REMAINING AVERAGE OPTIONS AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/98 LIFE IN YEARS PRICE AT 12/31/98 PRICE
- - ------------------------ ----------- ------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$8.00............................... 918 8.4 $8.00 305 $8.00
=== ==== ===== === =====
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock-based compensation plans. APB Opinion No. 25 does not
require compensation costs to be recorded on options which have exercise prices
at least equal to the market price of the stock on the date of grant.
Accordingly, no compensation cost has been recognized for the Company's
stock-based plans. Had compensation costs for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the optional accounting method
prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C> <C>
Net income....................... As reported...................... $4,400 $4,011
Pro Forma........................ 3,635 1,504
Basic earnings per share......... As reported...................... $ 0.81 $ 0.47
Pro Forma........................ 0.67 0.18
Diluted earnings per share....... As reported...................... $ 0.81 $ 0.46
Pro Forma........................ 0.67 0.17
</TABLE>
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions for 1997 and
1998: risk-free interest rates ranging from 5.5% to 6.5%; dividend yield of 0%;
stock price volatility ranging from 40.6% to 45.2%; and an expected option life
of ten years. The weighted-average fair value of options granted during 1997 and
1998 was $12.06 and $5.82 per option, respectively.
NOTE H -- COMMITMENTS AND CONTINGENCIES
Employment Agreements: In connection with the completion of the IPO in
August 1997, the Company entered into employment agreements with five of its
executive officers. In February 1999, the Company entered into an employment
agreement with one additional executive.
Litigation: The Company is involved in or threatened with various legal
proceedings from time to time arising in the ordinary 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 consolidated results
of operations or financial position.
Financing Commitments: In February 1999, the Company obtained a non-binding
commitment from a financial institution for a financing of $10.0 million to be
secured by seismic equipment and the vessel Atlantic Horizon. The financing will
be for a term of seven years, with an interest rate of approximately 8.5%, and
monthly payments of approximately $122,000 with the remaining principal and
interest payable at the end of the term.
45
<PAGE> 48
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- EMPLOYEE BENEFIT PLANS
In July 1997, the Company adopted the Eagle Geophysical, Inc. 401k
Retirement Plan (the "Plan") which is a defined contribution plan for all
eligible employees in the United States. The Company matches employee
contributions up to specified limits and may contribute a portion of the net
profits of the Company in accordance with the Plan. For the years ended December
31, 1997 and 1998, the Company incurred expenses of approximately $32,000 and
$123,000 respectively, for its matching contributions to the Plan.
The Company provides for the retirement of its United Kingdom employees
through The Horizon Pension Plan (the "Pension Plan"). The Pension Plan provides
defined retirement benefits as defined in the Trust Deed and is managed by the
Trustees. The following table sets forth the projected benefit obligation and
the funded status of the Pension Plan as of December 31, 1997 and 1998 in
accordance with SFAS No. 132 "Employer's Disclosures about Pensions and Other
Postretirement Benefits" (in thousands):
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Projected Benefit Obligation -- Beginning of Year........... $4,733 $6,230
Service Cost................................................ 406 1,325
Interest Cost............................................... 403 442
Employee Contributions...................................... 151 604
Actuarial (Gain)/Loss....................................... 667 1,032
Benefits Paid............................................... (130) (75)
------ ------
Projected Benefit Obligation -- End of Year................. $6,230 $9,558
====== ======
</TABLE>
The following table sets forth the activity related to the Pension Plan's
assets for the years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Fair Value of Plan Assets -- Beginning of Year.............. $5,969 $7,271
Actual Return on Plan Assets................................ 1,099 931
Employer Contributions...................................... 430 747
Employee Contributions...................................... 151 604
Benefits Paid............................................... (130) (75)
Foreign Exchange Gain/(Loss)................................ (248) 86
------ ------
Fair Value of Plan Assets -- End of Year.................... $7,271 $9,564
====== ======
</TABLE>
The following tables present the funded status and the net periodic pension
cost of the Pension Plan:
<TABLE>
<CAPTION>
1997 1998
------ -----
<S> <C> <C>
FUNDED STATUS
Funded Status -- Unrecognized............................. $1,041 $ (66)
Unrecognized, Net Loss (Gain)............................. 159 852
Unrecognized Transition Obligation (Asset)................ (597) (530)
------ -----
Prepaid (accrued) Pension Cost............................ $ 603 $ 256
====== =====
</TABLE>
46
<PAGE> 49
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996 1997 1998
----- ------ ------
<S> <C> <C> <C>
NET PENSION COST
Service Cost.............................................. $ 379 $ 406 $1,325
Interest Cost............................................. 330 403 442
Expected Return on Plan Assets............................ (627) (1,102) (589)
Net Amortization and Deferral............................. 118 512 (75)
----- ------ ------
Net Pension Cost.......................................... $ 200 $ 219 $1,103
===== ====== ======
</TABLE>
The major assumptions used in computing the net pension cost were:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Discount rate............................................... 9.0% 8.5% 5.0%
Expected long term rate of return on plan assets............ 9.5% 9.0% 8.0%
Rate of increase in compensation levels..................... 6.5% 6.5% 3.5%
</TABLE>
NOTE J -- RELATED PARTY TRANSACTIONS
The Company enters into various 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 years ended December 31, 1996, 1997 and 1998, the Company
recognized revenue of $27,217,000, $42,265,000 and $74,771,000, 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 on 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 period
from January 1, 1997 to August 11, 1997, the Company recorded general and
administrative costs allocated from Seitel of $818,000. Prior to August 11,
1997, Seitel funded the Company's direct operating costs through intercompany
advances and was reimbursed for such advances with 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 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 Seitel for its
receivable for work performed by the Company for Seitel and its subsidiaries
prior to the IPO. On August 11, 1997, the Company settled this receivable
through a non-cash dividend, which amounted to approximately $6,651,000.
Prior to the IPO, the Company leased certain marine seismic equipment to
Horizon Exploration Ltd., a marine seismic company wholly-owned by ERI, under a
five-year operating rental agreement expiring June 30, 2001. For the years ended
December 31, 1996, 1997, and 1998, the Company recognized revenues of $828,000,
$1,783,000 and $1,794,000, respectively, related to this lease. Subsequent to
the IPO and the ERI acquisition, $694,000 and $1,794,000 of such rental income
and expense has been eliminated in the Company's consolidated results of
operations, for the years ended December 31, 1997 and 1998, respectively.
47
<PAGE> 50
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 IPO. 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 IPO including liabilities under the Securities Act with
respect to the IPO. 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 provided 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 provided for the Company to utilize
certain shared office equipment, such as phone systems and central computer
systems, for an additional charge. The Company terminated this agreement
effective September 30, 1998 after occupying a new corporate office, at no
additional expense to the Company.
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 IPO at the expense of the Company.
Tax Indemnity Agreement: Prior to the IPO, the Company was a member of the
Seitel affiliated group and filed its tax returns on a consolidated basis with
such group. After the IPO, 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 IPO. 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 IPO, and is responsible for federal income taxes from its
operations on and after the date of the IPO. 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 IPO 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 entered into an
Administrative Services Agreement pursuant to which Seitel provides the Company
with administrative services, primarily accounting services, at or up to the
same levels as provided prior to the IPO. Seitel provided these services for a
90-day transition period after the IPO to allow the Company adequate time to
build an internal administrative staff. The Company paid Seitel approximately
$5,500 for these services at Seitel's actual cost of providing these services
for the year ended December 31, 1997.
48
<PAGE> 51
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- MAJOR CUSTOMERS
During each of the years ended December 31, 1996, 1997 and 1998, certain
customers accounted for 10% or more of the Company's consolidated revenue as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Affiliated companies, wholly-owned subsidiaries of Seitel:
Seitel Data, Ltd.......................................... 28% 46% 54%
DDD Energy Inc............................................ 29% 8% 7%
Unaffiliated companies...................................... 20% -- --
</TABLE>
The Company extends credit to various companies in the oil and gas industry
for the acquisition of seismic data, which results in a concentration of credit
risk. 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
24 months old. Management currently believes that this receivable is
collectible, although in light of the age of the receivable, the Company has
provided a valuation reserve of $1,884,000 and has classified the net receivable
as a long-term asset as of December 31, 1998.
NOTE L -- OPERATING SEGMENT DISCLOSURES
The Company's principal operations are in the United States, Europe and
Canada. Financial information by geographic area is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Operating revenues:
United States....................................... $48,136 $ 70,185 $ 90,162
Europe and other areas.............................. -- 8,876 31,341
------- -------- --------
Total operating revenues.................... $48,136 $ 79,061 $121,503
======= ======== ========
Operating Income:
United States....................................... $10,539 $ 15,998 $ 19,920
Europe and other areas.............................. -- 2,255 13,589
General corporate expense........................... -- (2,070) (4,453)
------- -------- --------
Total operating income........................... 10,539 16,183 29,056
Depreciation and amortization.................... 3,409 8,584 18,847
Net interest and other expense................... 531 205 3,153
------- -------- --------
Income before provision for income taxes......... $ 6,599 $ 7,394 $ 7,056
======= ======== ========
Identifiable Assets:
United States....................................... $26,721 $ 47,568 $176,553
Europe and other areas.............................. -- 66,668 83,166
------- -------- --------
Total Identifiable assets........................ 26,721 114,236 259,719
Corporate assets................................. -- 10,069 13,476
------- -------- --------
Total assets................................ $26,721 $124,305 $273,195
======= ======== ========
</TABLE>
49
<PAGE> 52
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of business segment information prepared in
accordance with the requirements of SFAS No. 131 "Disclosure about Segments of
an Enterprise and Related Information". Management of the Company reviews the
financial information primarily by its two seismic operating segments, onshore
seismic data acquisition and offshore seismic data acquisition. The onshore
operating segment includes the shot-hole drilling operation acquired from the
SDS Acquisition in March 1998 and the Canadian onshore operation acquired from
the NRG Acquisition in November 1998 (in thousands).
<TABLE>
<CAPTION>
ONSHORE OFFSHORE CORPORATE
OPERATIONS OPERATIONS OFFICE TOTAL
---------- ---------- --------- --------
<S> <C> <C> <C> <C>
1998
Operating Revenues............................... $79,372 $ 42,131 $ -- $121,503
Operating Income................................. 20,865 12,644 (4,453) 29,056
Depreciation & Amortization...................... 9,341 9,442 64 18,847
Interest & other, net............................ 236 3,340 (423) 3,153
Income before taxes.............................. 11,288 (138) (4,094) 7,056
Identifiable Assets.............................. 65,295 194,424 13,476 273,195
Capital Expenditures............................. 19,236 127,292 364 146,892
1997
Operating Revenues............................... 61,745 17,316 -- 79,061
Operating Income................................. 15,024 3,229 (2,070) 16,183
Depreciation & Amortization...................... 6,071 2,509 4 8,584
Interest & other, net............................ 601 (43) (353) 205
Income before taxes.............................. 8,352 763 (1,721) 7,394
Identifiable Assets.............................. 46,882 67,700 9,723 124,305
Capital Expenditures............................. 14,041 18,276 58 32,375
1996
Operating Revenues............................... 48,136 -- -- 48,136
Operating Income................................. 10,539 -- -- 10,539
Depreciation & Amortization...................... 3,409 -- -- 3,409
Interest & other, net............................ 531 -- -- 531
Income before taxes.............................. 6,599 -- -- 6,599
Identifiable Assets.............................. 26,721 -- -- 26,721
Capital Expenditures............................. 7,928 -- -- 7,928
</TABLE>
50
<PAGE> 53
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for the years ended December 31, 1996, 1997 and 1998 (in thousands) :
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1996
Revenues............................... $ 5,974 $11,777 $12,138 $18,247
Operating costs and expenses........... 4,697 9,412 9,660 13,828
(excluding depreciation and
amortization)
Depreciation and amortization.......... 657 640 1,018 1,094
Interest and other, net................ 136 158 167 70
Income before income taxes............. 484 1,567 1,293 3,255
Net income applicable to common
shares.............................. 306 993 819 2,061
Net income per common
share -- basic(1)................... $ .09 $ .29 $ .24 $ .61
Net income per common share --
diluted(1).......................... $ .09 $ .29 $ .24 $ .61
1997
Revenues............................... $12,981 $15,785 $25,216 $25,079
Operating costs and expenses........... 9,736 12,608 20,451 20,083
(excluding depreciation and
amortization)
Depreciation and amortization.......... 1,302 1,470 2,613 3,199
Interest and other, net................ 158 (124) 646 (475)
Income before income taxes............. 1,785 1,831 1,506 2,272
Net income applicable to common
shares.............................. 1,130 1,160 913 1,197
Net income per common
share -- basic(1)................... $ .33 $ .34 $ .14 $ .14
Net income per common share --
diluted(1).......................... $ .33 $ .34 $ .14 $ .14
1998
Revenues............................... $23,880 $34,336 $33,930 $29,357
Operating costs and expenses........... 19,935 25,404 22,384 24,724
(excluding depreciation and
amortization)
Depreciation and amortization.......... 2,888 4,799 5,191 5,969
Interest and other, net................ 13 338 2,196 606
Income before income taxes............. 1,044 3,795 4,159 (1,942)
Net income (loss) applicable to common
shares.............................. 621 2,258 2,490 (1,358)
Net income (loss) per common share --
basic(1)............................ $ .07 $ .26 $ .29 $ (.16)
Net income (loss) per common share --
diluted(1).......................... $ .07 $ .26 $ .29 $ (.16)
</TABLE>
- - ---------------
(1) The sum of individual quarterly earnings per share may not agree with the
year to date earnings per share as each period's computation is based on the
weighted average number of common shares outstanding during the period.
51
<PAGE> 54
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE N -- 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 a short-term loan and the revolving credit facility to pay for upgrades to
the Austral Horizon and the 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 December 31, 1998 and December 31, 1997 and the
related condensed consolidating statements of operations and cash flows for each
of three years in the period ended December 31, 1998.
52
<PAGE> 55
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY BALANCE SHEET
DECEMBER 31, 1998
(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............ $ 352 $ 7,597 $ 3,547 $ (1,165) $ 10,331
Restricted cash.......... -- -- 5,000 -- 5,000
Receivables, net......... -- 35,462 2,474 -- 37,936
Inventory................ -- -- 2,230 -- 2,230
Prepaid expenses and
other assets........... 50 1,354 1,966 -- 3,370
--------- -------- ------- -------- --------
Total Current
Assets.......... 402 44,413 15,217 (1,165) 58,867
Property and equipment,
net.................... -- 129,041 46,197 -- 175,238
Goodwill, net............ -- 2,359 16,817 -- 19,176
Other assets, net........ 3,477 14,465 1,972 -- 19,914
Intercompany investments
and advances........... 19,152 -- -- (19,152) --
--------- -------- ------- -------- --------
Total Assets...... $ 23,031 $190,278 $80,203 $(20,317) $273,195
========= ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of
long-term debt and
capital lease
obligations.............. $ -- $ 1,830 $ 6,063 $ -- $ 7,893
Accounts payable........... -- 13,193 5,045 (1,165) 17,073
Intercompany payables,
net...................... (157,828) 149,091 25,418 (16,681) --
Accrued liabilities........ 632 4,895 18,932 -- 24,459
Billings in excess of costs
and estimated earnings on
uncompleted contracts.... -- 3,367 -- -- 3,367
--------- -------- ------- -------- --------
Total Current
Liabilities..... (157,196) 172,376 55,458 (17,846) 52,792
Long-term debt............. 100,000 5,385 -- -- 105,385
Capital leases
obligations.............. -- -- 22,343 -- 22,343
Deferred income taxes and
other obligations........ 1,353 1,522 -- -- 2,875
--------- -------- ------- -------- --------
Total
Liabilities..... (55,843) 179,283 77,801 (17,846) 183,395
--------- -------- ------- -------- --------
Stockholders' Equity....... 78,874 10,995 2,402 (2,471) 89,800
--------- -------- ------- -------- --------
Total Liabilities
and
Stockholders'
Equity.......... $ 23,031 $190,278 $80,203 $(20,317) $273,195
========= ======== ======= ======== ========
</TABLE>
53
<PAGE> 56
EAGLE GEOPHYSICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
EAGLE RECLASSIFICATIONS EAGLE
GEOPHYSICAL, INC. GUARANTOR NON-GUARANTOR AND 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 $ 4,659 $ -- $ 14,980
Restricted cash........... -- -- 4,502 -- 4,502
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............ 11,789 -- -- (11,789) --
-------- ------- ------- -------- --------
Total Assets...... $ 22,843 $50,463 $66,606 $(15,607) $124,305
======== ======= ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of 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>
54
<PAGE> 1
ARRANGEMENT AGREEMENT
Among
NATURAL RESOURCES GEOPHYSICAL CORPORATION
and
EAGLE CANADA, INC.
and
EAGLE GEOPHYSICAL, INC.
October 27, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
Article 1....................................................................................................... 1
Definitions, Interpretation and Exhibits............................................................... 1
1.1 Definitions.......................................................................... 1
1.2 Currency............................................................................. 5
1.3 Interpretation Not Affected by Headings.............................................. 5
1.4 Number and Gender.................................................................... 6
1.5 Date for Any Action.................................................................. 6
1.6 Meaning.............................................................................. 6
1.7 Schedules and Exhibits............................................................... 6
Article 2....................................................................................................... 7
Arrangement............................................................................................ 7
2.1 Arrangement.......................................................................... 7
2.2 Recommendation of the Board of Directors of NRG...................................... 7
2.3 Effective Date of Arrangement........................................................ 7
2.4 Filing of Articles of Arrangement.................................................... 7
Article 3....................................................................................................... 8
Transfer of Assets and Assumption of Debt.............................................................. 8
3.1 Transfer of Assets................................................................... 8
3.2 Excluded Assets...................................................................... 9
3.3 Instruments of Conveyance and Transfer............................................... 10
3.4 Further Assurances................................................................... 11
3.5 Liabilities.......................................................................... 11
3.6 Expenses: Consents and Taxes........................................................ 12
Article 4....................................................................................................... 12
Closing .............................................................................................. 12
4.1 Pre-Closing.......................................................................... 12
4.2 Exchange of Assets for Cash and Eagle Shares......................................... 12
4.3 Purchase Price Allocation............................................................ 13
4.4 GST Election......................................................................... 13
Article 5....................................................................................................... 13
Representations and Warranties......................................................................... 13
5.1 Representations and Warranties of NRG................................................ 13
5.2 Representations and Warranties of Eagle Canada....................................... 23
5.3 Representations and Warranties of Eagle Geophysical.................................. 24
5.4 Survival of Representations and Warranties........................................... 25
Article 6....................................................................................................... 25
Covenants, Actions Prior to Closing.................................................................... 25
6.1 Access to Information................................................................ 25
6.2 Conduct of the Business.............................................................. 26
</TABLE>
<PAGE> 3
ii
<TABLE>
<S> <C> <C>
6.3 Court Approval....................................................................... 27
6.4 Cooperation; Consents and Approvals.................................................. 27
6.5 Further Actions...................................................................... 28
6.6 Notification......................................................................... 29
6.7 No Inconsistent Action............................................................... 29
6.8 Acquisition Proposals................................................................ 29
6.9 Public Announcements................................................................. 29
Article 7....................................................................................................... 30
Conditions Precedent................................................................................... 30
7.1 Conditions Precedent to Obligations of All Parties................................... 30
7.2 Conditions Precedent to Obligations of Eagle Canada.................................. 31
7.3 Conditions Precedent to the Obligations of NRG....................................... 32
Article 8....................................................................................................... 33
Employees.............................................................................................. 33
8.1 Employment........................................................................... 33
8.2 No Eagle Canada Liability............................................................ 33
Article 9....................................................................................................... 34
Termination............................................................................................ 34
9.1 General.............................................................................. 34
9.2 No Liabilities in Event of Termination............................................... 34
Article 10...................................................................................................... 35
Covenants, Action Subsequent to Closing................................................................ 35
10.1 Access to Books and Records.......................................................... 35
10.2 Mail................................................................................. 35
10.3 Use of Names......................................................................... 35
10.4 Third Party Consents................................................................. 35
10.5 Confidentiality...................................................................... 36
Article 11...................................................................................................... 36
Indemnification........................................................................................ 36
11.1 Indemnification by NRG............................................................... 36
11.2 Indemnification by Eagle Canada...................................................... 36
11.3 Indemnification by Eagle Geophysical................................................. 36
11.4 Indemnification Procedures........................................................... 37
Article 12...................................................................................................... 38
Miscellaneous.......................................................................................... 38
12.1 Payment of Certain Fees and Expenses................................................. 38
12.2 Notices.............................................................................. 38
12.3 Entire Agreement..................................................................... 39
12.4 Binding Effect; Benefit.............................................................. 39
12.5 Assignability........................................................................ 40
</TABLE>
<PAGE> 4
iii
<TABLE>
<S> <C> <C>
12.6 Amendment; Waiver.................................................................... 40
12.7 Severability......................................................................... 40
12.8 Counterparts......................................................................... 40
12.9 Applicable Law....................................................................... 40
12.10 Execution by Eagle Geophysical....................................................... 41
</TABLE>
<PAGE> 5
ARRANGEMENT AGREEMENT
October 27, 1998
AMONG:
NATURAL RESOURCES GEOPHYSICAL CORPORATION,
an Alberta corporation ("NRG")
AND
EAGLE CANADA, INC., a Delaware corporation ("EAGLE
CANADA")
AND
EAGLE GEOPHYSICAL, INC., a Delaware corporation ("Eagle
Geophysical"), for the limited purposes set forth in Section
5.3 and Article 11 hereof
RECITALS
A. NRG is an oilfield service company specializing in the acquisition of
seismic data on behalf of clients and customers (the "Business");
B. Pursuant to a Plan of Arrangement, Eagle Canada proposes to acquire
substantially all of the assets of NRG as utilized in the Business;
C. NRG proposes to convene meetings of its Securityholders to approve the
Arrangement in accordance with the provisions of the ABCA; and
D. Upon the Arrangement becoming effective, among other things, Eagle
Canada will acquire substantially all of the assets and assume certain
debt of NRG, NRG will receive cash and shares of Eagle Geophysical,
twenty-five percent (25%) of such shares will be distributed to the
security holders of NRG, and NRG will change its name, all in
accordance with the provisions of this Agreement and the Plan of
Arrangement.
THE PARTIES AGREE AS FOLLOWS:
ARTICLE 1
DEFINITIONS, INTERPRETATION AND EXHIBITS
1.1 DEFINITIONS
In this Agreement, the following capitalized words and terms shall
have the following meanings:
<PAGE> 6
2
"ABCA" means the Business Corporations Act (Alberta), S.A. 1981, c.
B-15, as amended, including the regulations promulgated thereunder;
"ACQUISITION PROPOSAL" means any bona fide written offer or proposal
for any arrangement, amalgamation, merger, takeover bid, tender offer,
reorganization, recapitalization, purchase of assets out of the
ordinary course of business or assumption of liability transactions,
liquidation or winding up of, or other business combination or similar
transaction involving NRG or the acquisition of a substantial equity
interest in, or the acquisition of all or a material portion of the
assets of NRG other than the Arrangement;
"AFFILIATE" means, with respect to any person, any other person that,
directly or indirectly, through one or more intermediaries, controls,
is controlled by, or is under common control with, such person;
"AGREEMENT" means this arrangement agreement including the schedules
and exhibits attached hereto as the same may be supplemented or
amended from time to time;
"APPLICABLE LAW" means any statute, law, rule or regulation or any
judgment, order, writ, injunction or decree of any Governmental Entity
to which a specified person or property is subject;
"ARRANGEMENT" means the transfer of all of the Assets to Eagle Canada,
the assumption by Eagle Canada of the Assumed Liabilities, the payment
of cash by and delivery of Eagle Shares by Eagle Canada to NRG, the
distribution of 25% of such shares to Securityholders on a pro rata
basis and the change of NRG's name to 582990 Alberta Ltd., all
pursuant to the ABCA as contemplated by the provisions of this
Agreement and the Plan of Arrangement;
"ARTICLES OF ARRANGEMENT" means the articles of arrangement in respect
of the Arrangement required by the ABCA to be sent to the Registrar
after the Final Order is made;
"BUSINESS DAY" means a day which is not a Saturday, Sunday or
statutory holiday in the Province of Alberta;
"CASH AMOUNT" means $1,506,644;
"CONSTATING DOCUMENTS" means articles and by-laws, as the case may be;
"COURT" means the Court of Queen's Bench of Alberta;
"EAGLE CANADA" means Eagle Canada, Inc., a Delaware corporation;
"EAGLE GEOPHYSICAL" means Eagle Geophysical, Inc., a Delaware
corporation;
"EAGLE SHARES" means the common stock issued by Eagle Geophysical,
which Eagle Canada will deliver pursuant to Section 4.2(b)(iii)
hereof;
<PAGE> 7
3
"EFFECTIVE DATE" means the date set out in the Certificate of
Amendment issued by the Registrar, or if no certificate is required to
be issued, on the date the Articles of Arrangement are filed with the
Registrar;
"EFFECTIVE TIME" means 12:01 a.m. (Calgary time) on the Effective Date;
"ENCUMBRANCES" means liens, charges, pledges, options, mortgages,
deeds of trust, security interests, claims, restrictions (whether on
voting, sale, transfer, disposition or otherwise), easements and other
encumbrances of every type and description, whether imposed by law,
agreement, understanding or otherwise;
"FINAL ORDER" means the final order of the Court approving the
Arrangement to be applied for following the NRG Meetings pursuant to
the provisions of subsection 186(9) of the ABCA, as such order may be
amended or modified by the highest court to which an appeal may be
made;
"GAAP" means generally accepted accounting principles as in effect in
Canada on the date of this Agreement;
"GOVERNMENTAL ENTITY" means any court or tribunal in any jurisdiction
(domestic or foreign) or any public, governmental or regulatory body,
agency, department, commission, board, bureau or other authority or
instrumentality (domestic or foreign);
"INFORMATION CIRCULAR" means the information circular of NRG to be
sent to the Securityholders in connection with the NRG Meetings,
including the schedules attached thereto;
"INTELLECTUAL PROPERTY" means patents, trademarks, service marks,
trade names, copyrights, trade secrets, know-how, inventions, and
similar rights, and all registrations, applications, licenses and
rights with respect to any of the foregoing;
"INTERIM ORDER" means the order of the Court to be applied for
providing orders and directions in connection with the Arrangement;
"NRG" means Natural Resources Geophysical Corporation, a corporation
incorporated under the provisions of the ABCA;
"NRG MEETINGS" means the special meetings of the Securityholders to be
held to consider and, if deemed advisable, approve the Arrangement and
includes any adjournment thereof;
"NRG SECURITIES" means the outstanding common shares, preferred shares
and special warrants issued by NRG;
"PERMITS" means licenses, permits, franchises, consents, approvals and
other authorizations of or from Governmental Entities;
<PAGE> 8
4
"PERSON" means any individual, partnership, association, body
corporate, trustee, executor, administrator, legal representative,
government, regulatory authority or other entity;
"PLAN OF ARRANGEMENT" means the plan of arrangement in the form
annexed to this Agreement as Exhibit A;
"PROCEEDINGS" means all proceedings, actions, claims, suits,
investigations and inquiries by or before any arbitrator or
Governmental Entity;
"REGISTRAR" means the Registrar of Corporations appointed pursuant to
Section 253 of the ABCA; and
"SECURITYHOLDERS" means the holders of the NRG Securities;
"SUBSIDIARY" means, with respect to a specified body corporate, a body
corporate of which more than 50% of the outstanding shares ordinarily
entitled to elect a majority of the directors thereof, whether or not
shares of any other class or classes shall or might be entitled to
vote upon the happening of any event or contingency, are at the time
owned, directly or indirectly, by such specified body corporate, and
includes a body corporate in like relation to a Subsidiary;
"SUPERIOR PROPOSAL" means any written Acquisition Proposal which, in
the opinion of NRG's board of directors after consultation with and on
the basis of written advice from its financial advisors, constitutes a
commercially feasible transaction for which adequate financial
arrangements have been made and which could be carried out within a
time frame that is reasonable in the circumstances and, if
consummated, would be superior to the Arrangement from a financial
point of view to NRG's shareholders;
"TAX RETURN" means any return or report, including any related or
supporting information, with respect to Taxes;
"TAXES" means any income taxes or similar assessments or any sales,
excise, occupation, use, ad valorem, property, production, severance,
transportation, employment, payroll, franchise or other tax imposed by
any federal, provincial or local (or any foreign or state) taxing
authority, including any interest, penalties or additions attributable
thereto; and
"U.S. SECURITIES ACT" means the United States Securities Act of 1933,
as amended, together with all rules and regulations promulgated
thereunder.
In addition to such terms as are defined above, the following terms
are used in this Agreement as defined in the Sections of this Agreement
referenced opposite such terms:
Defined Terms Reference
Accounts Receivable Section 3.2(b)
Assets Section 3.1
<PAGE> 9
5
Assumed Debt Section 3.5
Assumed Liabilities Section 3.5
Audited Financial Statements Section 5.1(d)
Business Recital A
Business Locations Section 3.1(a)
Claim Section 11.3(a)
Contracts Section 3.1(c)
Damages Section 11.1
Data Section 3.1(j)
Environmental Laws Section 5.1(n)
Equipment Section 3.1(a)
Excluded Assets Section 3.2
Financial Statements Section 5.1(d)
Hazardous Material Section 5.1(n)
Indemnified Party Section 11.3(a)
Indemnifying Party Section 11.3(a)
Key Employees Section 8.1
Liabilities Section 3.5
NRG Affiliates Section 6.4(g)
Permitted Encumbrances Section 5.1(e)
Purchase Price Section 4.2(a)
Retained Liabilities Section 3.5
Sales Quotations Section 3.1(i)
Surviving Warranties Section 5.3
Unaudited Financial Statements Section 5.1(d)
1.2 CURRENCY
All amounts of money which are referred to in this Agreement are
expressed in lawful money of the United States unless otherwise specified.
1.3 INTERPRETATION NOT AFFECTED BY HEADINGS
The division of this Agreement into articles, sections, subsections,
paragraphs and subparagraphs and the insertion of headings are for convenience
of reference only and shall not affect the construction or interpretation of
the provisions of this Agreement. The terms "this Agreement", "hereof",
"herein", "hereunder" and similar expressions refer to this Agreement and the
schedules and exhibits hereto as a whole and not to any particular article,
section, subsection, paragraph or subparagraph hereof and include any agreement
or instrument supplementary or ancillary hereto.
1.4 NUMBER AND GENDER
In this Agreement, unless the context otherwise requires, words
importing the singular number only shall include the plural and vice versa and
words importing the use of either gender shall include both genders and neuter.
<PAGE> 10
6
1.5 DATE FOR ANY ACTION
In the event that any date on which any action is required to be taken
hereunder by any party is not a Business Day such action shall be required to
be taken on the next succeeding day which is a Business Day.
1.6 MEANING
Words and phrases used herein and defined in the ABCA shall have the
same meaning herein as in the ABCA unless the context otherwise requires.
1.7 SCHEDULES AND EXHIBITS
The Schedules and Exhibits attached hereto shall be deemed to be
incorporated into and form part of this Agreement, and are comprised of the
following:
EXHIBITS
Exhibit A - Plan of Arrangement
Exhibit B - Opinion of NRG Counsel
Exhibit C - Opinion of Eagle Counsel
SCHEDULES
Schedule 3.1(a) - Equipment
Schedule 3.1(c) - Contracts
Schedule 5.1(a) - NRG Affiliates
Schedule 5.1(c) - Consents and Approvals
Schedule 5.1(d) - Financial Information
Schedule 5.1(e)(i) - Permitted Encumbrances
Schedule 5.1(e)(ii) - Data
Schedule 5.1(g) - Properties, Contracts, Permits and Other Data
Schedule 5.1(h) - Legal Proceedings
Schedule 5.1(i) - Insurance
Schedule 5.1(n) - Defects in Environmental Compliance
Schedule 5.1(u) - Additional Information
Schedule 5.1(w) - Employee Benefit Plans
Schedule 5.1(y) - Transactions with Affiliates
Schedule 5.1(aa) - Sales Quotations
Schedule 5.1(bb) - Accounts Receivable
Schedule 5.1(cc) - Omitted Material Assets
<PAGE> 11
7
ARTICLE 2
ARRANGEMENT
2.1 ARRANGEMENT
Under the Arrangement pursuant to the provisions of the ABCA:
(i) NRG transfers the Assets to Eagle Canada,
(ii) Eagle Canada assumes the Assumed Liabilities,
(iii) Eagle Canada pays to NRG the Cash Amount and delivers to NRG
the Eagle Shares,
(iv) 25% of the Eagle Shares are distributed to the
Securityholders on a pro-rata basis, and
(v) the name of NRG is changed to 582990 Alberta Ltd.,
all on the terms and subject to the conditions contained in this Agreement and
the Plan of Arrangement.
2.2 RECOMMENDATION OF THE BOARD OF DIRECTORS OF NRG
(a) NRG hereby confirms that its board of directors has
unanimously determined that the Arrangement is in the best
interests of NRG and that it has approved the Arrangement and
this Agreement and has resolved to unanimously recommend
approval of the Arrangement by the Securityholders. The
Information Circular will set forth (among other things) the
recommendation of the board of directors of NRG as described
above. NRG shall provide Eagle Canada with a draft copy of
the Information Circular prior to mailing for its review and
comment.
(b) The board of directors of NRG has been advised that the
directors and senior officers of NRG intend to vote their NRG
Securities now held and subsequently acquired, if any, in
favour of the Arrangement. The Information Circular shall
reflect such intentions to vote the NRG Securities now held
and subsequently acquired in favour of the Arrangement.
2.3 EFFECTIVE DATE OF ARRANGEMENT
The Arrangement shall become effective at the Effective Time.
2.4 FILING OF ARTICLES OF ARRANGEMENT
Subject to the rights of termination contained in Article 9 hereof,
upon the holders of each class of NRG Securities approving the Arrangement by
special resolution in accordance with the provisions of the ABCA and NRG
obtaining the Final Order and the satisfaction or waiver of all
<PAGE> 12
8
condition precedents, NRG shall file with the Registrar under the ABCA Articles
of Arrangement, together with such other documents as may be required in order
to effect the Arrangement.
ARTICLE 3
TRANSFER OF ASSETS AND ASSUMPTION OF DEBT
3.1 TRANSFER OF ASSETS
On the terms and subject to the conditions set forth in this Agreement
and the Plan of Arrangement, at the Effective Time NRG shall convey, assign,
transfer and deliver to Eagle Canada, and Eagle Canada shall acquire from NRG
(except as provided in Section 3.2 hereof), all of the tangible and intangible
assets, rights and properties of NRG and any Subsidiaries or Affiliates of NRG
used by or associated with the Business other than the Excluded Assets,
including, without limitation, the following:
(a) the equipment, machinery, vehicles, tools, spare parts,
fuels, lubricants, furniture, furnishings, office supplies,
computers, software and other tangible personal property
associated with the Business, including, without limitation,
all leasehold improvements relating to the office space and
any other facility or business locations of NRG (the
"Business Locations") and those major items of personal
property listed on Schedule 3.1(a) hereto (collectively, the
"Equipment"), and all warranties and guarantees, if any,
express or implied, existing for the benefit of NRG in
connection with the Equipment to the extent assignable;
(b) all right, title and interest of NRG in, to and under all
price lists, customer lists, computer programs, disks and
tapes, distribution lists, files and records, sales promotion
and advertising materials, vendor lists, catalogs, research
material, technical information, specifications, operating
manuals, designs, drawings and quality control and other
similar data used in the Business;
(c) the rights of NRG relating to the Business under all
contracts, agreements and arrangements; purchase commitments
for materials and other services; and agreements with
suppliers, personal property lessors, personal property
lessees, licensors, licensees, consignors and consignees,
including, but not limited to, those listed on Schedule
3.1(c) hereto (collectively, the "Contracts");
(d) the rights of NRG under all licenses, permits, consents,
approvals, authorizations, qualifications, orders, or
franchises issued by any federal, state, provincial or local
authority relating to the development, use, maintenance or
occupation of the Business Locations or the conduct of the
Business, to the extent that such licenses, permits or
franchises are transferable;
(e) all Intellectual Property, and any good will associated
therewith, including, without limitation, ownership of the
name "Natural Resources Geophysical Corporation" and any
variations thereof to the extent assignable and the assets
identified on Schedule 3.1(e) hereto;
<PAGE> 13
9
(f) all inventories of materials, spare parts and replacement and
component parts of NRG on hand or in transit as of the
Effective Date;
(g) all personnel files and other materials relating to employees
of NRG who may be offered employment by Eagle Canada
including, without limitation, those contemplated by Article
8 hereof;
(h) all records of compliance and non-compliance with Applicable
Laws to which the Business is subject;
(i) all right, title and interest of NRG in, to and under any
oral or written bid, quotation or proposal relating to the
Business ("Sales Quotations");
(j) all right, title and interest of NRG in and to the seismic
data and related data and information of NRG, consisting of
approximately 946 kilometers of 2D data, including, without
limitation, all processed tapes, field tapes, all other tapes
and support data, files, films, microfilms, mylar,
black-lines, sections (stack, migration or other displays in
any format existing), shock point base maps, x-y coordinates
and derivatives related to the speculative seismic data, and
all Intellectual Property existing in or primarily and
directly related to the foregoing (collectively, the "Data");
(k) all requests and studies for capital expenditures made by or
for NRG or the Business;
(l) all deposits, prepayments and prepaid expenses relating to
the operations of NRG to the extent such deposits,
prepayments and prepaid expenses are transferable;
(m) All rights, claims or choses in action of NRG against any
person relating to the Assets;
(n) all goodwill of NRG; and
(o) the originals of all information, files, records, data and
contracts related to the foregoing.
The assets described in this Section 3.1 as being sold, conveyed, assigned,
transferred and delivered to Eagle Canada pursuant to the Arrangement are
referred to collectively as the "Assets".
3.2 EXCLUDED ASSETS
It is expressly understood and agreed that the Assets shall not
include the following (the "Excluded Assets"):
(a) cash and cash equivalents or similar type investments, such
as certificates of deposit, Treasury bills and other
marketable securities;
<PAGE> 14
10
(b) accounts receivable of NRG (the "Accounts Receivable")
arising out of the Business as of the Effective Date;
(c) any assets of any employee benefit plan maintained by NRG or
any of its Affiliates and any of the plans or agreements of
the type described in Section 5.1(w) or 5.1(y);
(d) the original corporate minute books, stock books, financial
records, tax returns and corporate policies and procedures
manuals of NRG (provided, however, that Buyer shall be
furnished copies); and
(e) any asset of NRG which Eagle Canada elects to exclude from
the Assets on or before the Effective Date.
3.3 INSTRUMENTS OF CONVEYANCE AND TRANSFER
On the Effective Date, NRG shall deliver or cause to be delivered to
Eagle Canada the following in a form reasonably acceptable to Eagle Canada:
(a) A general conveyance transferring to Eagle Canada good,
marketable and indefeasible title to all of the tangible
personal property included in the Assets, subject only to
Permitted Encumbrances;
(b) An assignment or sublease to Eagle Canada of NRG's right,
title and interest in each of the Contracts referred to in
Section 3.1(c) hereof, together with all consents of third
parties required to make each such assignment or sublease
effective as to such third parties;
(c) All appropriate documents for the assignment as of the
Effective Date of NRG's rights under the licenses, permits
and franchises referred to in Section 3.1(d) hereof and of
all registrations, permits, licenses, equipment or motor
vehicle leasing agreements, motor vehicle and rolling stock
titles, rights under sales and/or purchase orders and rights
under all other contracts constituting a part of the Assets,
together with all consents of third parties required to make
such assignments effective as to such third parties;
(d) All appropriate documents for the assignment as of the
Effective Date of any and all patents, trademarks, trade
names and other Intellectual Property referred to in Section
3.1(e) hereof;
(e) Originals of all of the Contracts, commitments, books,
records, files and other data that (i) are included in the
Assets or (ii) relate to or affect the Assets as of the
Effective Date and are reasonably necessary for the continued
conduct of the Business; and
<PAGE> 15
11
(f) Such other instruments of transfer and assignment in respect
of the Assets as Eagle Canada shall reasonably require and as
shall be consistent with the terms and provisions of this
Agreement.
Prior to the Effective Date, NRG will take such reasonable steps as may be
requisite or appropriate so that no later than the close of business on the
Effective Date, Eagle Canada will be placed in actual possession and control of
all of the Assets, including, without limitation, paying or causing the payment
of all costs and expenses necessary to obtain the consents of the third parties
contemplated by paragraphs (b) and (c) above and elsewhere in this Agreement.
3.4 FURTHER ASSURANCES
From time to time after the Effective Date, NRG will execute and
deliver, or cause to be executed and delivered, without further consideration,
such other instruments of conveyance, assignment, transfer and delivery and
will take such other actions as Eagle Canada may reasonably request in order to
more effectively transfer, convey, assign and deliver to Eagle Canada, and to
place Eagle Canada in possession and control of the Assets or to enable Eagle
Canada to exercise and enjoy all rights and benefits of NRG with respect
thereto.
3.5 LIABILITIES
From and after the Effective Date, Eagle Canada will assume and pay,
perform, fulfill and discharge, all obligations of NRG which accrue subsequent
to the Effective Date and are due and payable (or performable) subsequent to
the Effective Date under the Contracts listed on Schedule 3.1(c), including,
without limitation, the debt of NRG to AT&T Capital Inc., RoyNat Inc. and
National Trust totalling approximately Two Million Twenty Two Thousand Eight
Hundred Sixty Seven Dollars ($2,022,867) (the "Assumed Debt"), or otherwise
entered into after the date hereof in accordance with the terms of Section 6.2;
provided that the rights thereunder have been duly and effectively assigned to
Eagle Canada (collectively, the "Assumed Liabilities"). Eagle Canada does not
assume any direct or indirect duties, liabilities or obligations of NRG of any
kind or nature, fixed or unfixed, choate or inchoate, liquidated or
unliquidated, secured or unsecured, known or unknown, accrued, absolute,
contingent or otherwise (collectively, the "Liabilities"), other than the
Assumed Liabilities. It is understood and agreed that all such Liabilities
other than the Assumed Liabilities are retained by NRG (the "Retained
Liabilities"), and NRG shall be responsible for the payment and discharge of
all such Retained Liabilities. Without limiting the generality of the
foregoing, Eagle Canada shall not be liable for any Liabilities (i) with
respect to any federal, provincial or local income, property or other tax
attributable to the Business or the ownership of the Assets with respect to any
period prior to the Effective Date, (ii) with respect to any claim, action,
suit or proceeding, whether disclosed or not, including any arising out of or
relating to the violation by NRG of any agreement, contract or understanding by
which NRG is bound, or the violation of any law, rule, regulation or order that
applies to NRG or the Business, (iii) arising out of or existing due to any
breach or untimely performance by NRG, including NRG's failure to perform or
the negligent, improper or untimely performance of, any Contract in accordance
with its terms prior to the Effective Date, (iv) relating to any asset not
included in the Assets, (v) based upon, arising from or attributable to claims
made before, on or after the Effective Date for personal injuries (including
claims for wrongful death), property damages or consequential damages with
respect thereto in each
<PAGE> 16
12
case with third parties, which liability arises from or is attributable to the
operations of NRG prior to the Effective Date, and (vi) arising out of,
resulting from or relating to a breach by NRG of (x) any representation or
warranty contained in this Agreement for which NRG has an indemnification
obligation pursuant to the terms of this Agreement, (y) any covenant or
agreement contained in this Agreement, or (z) any trade payable or other
accounts payable or debt of NRG.
3.6 EXPENSES: CONSENTS AND TAXES
NRG shall pay, or cause to be paid, (i) all costs and expenses of
obtaining all consents of third parties to the assignments and subleases
contemplated by subparagraphs (c) and (d) of Section 3.3 hereof, and (ii) all
transfer, stamp, sales, use or other similar taxes or duties payable in
connection with the sale and transfer of the Assets to Eagle Canada.
ARTICLE 4
CLOSING
4.1 PRE-CLOSING
The pre-closing with respect to the transactions provided for in this
Agreement shall take place at the offices of Fraser Milner, counsel to NRG,
30th floor, 237 - 4th Avenue S.W., Calgary, Alberta T2P 4X7, at 10:00 a.m.,
local time, on November 20, 1998, or at such other time and place as shall be
agreed upon by NRG and Eagle Canada.
4.2 EXCHANGE OF ASSETS FOR CASH AND EAGLE SHARES
(a) NRG and Eagle Canada agree that the value of the
consideration (the "Purchase Price") to be received by NRG
for the Assets shall be $5,539,011, payable as provided in
Section 4.2(b) below.
(b) At the pre-closing, Eagle Canada shall:
(i) pay to NRG the Cash Amount by certified cheque, bank
draft or wire transfer in immediately available
funds to such bank account as designated by NRG in
writing at least three Business Days prior to the
pre-closing,
(ii) assume the Assumed Debt totalling approximately
$2,022,867, and
(iii) deliver that number of Eagle Shares valued at an
amount equal to the balance of the Purchase Price,
based on the closing price of Eagle Shares on the
NASDAQ National Market System as reported in The
Wall Street Journal on the Business Day immediately
preceding the first day of the NRG Meetings,
provided, however, that such conversion price shall
not be less than $10.00 per share.
<PAGE> 17
13
4.3 PURCHASE PRICE ALLOCATION
As soon as practicable after the Effective Date, NRG and Eagle Canada
shall jointly prepare IRS Form 8594 to report the allocation of the Purchase
Price among the Assets, consistent with the manner provided for in Schedule
3.1(a) attached hereto. Each party hereto agrees not to assert, in connection
with any tax return, tax audit or similar proceeding, any allocation that
differs from that set forth in such Form 8594.
4.4 GST ELECTION
As soon as practicable after the Effective Date, NRG and Eagle Canada
shall jointly execute and file Form 44 with Revenue Canada - Customs, Excise
and Taxation, with respect to the waiver of the goods and services tax.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
5.1 REPRESENTATIONS AND WARRANTIES OF NRG
NRG represents and warrants to Eagle Canada and Eagle Geophysical as
follows:
(a) Due Organization; Good Standing and Power. NRG is a
corporation duly organized, validly existing and in good
standing under the laws of the province of Alberta. NRG has
the corporate power and authority to own, lease and operate
its respective assets and to conduct its respective business
as now conducted. NRG is duly authorized, qualified or
licensed to do business as a foreign corporation and is in
good standing in each jurisdiction in which its right, title
or interest in or to any of its assets, or the conduct of is
business, requires such authorization, qualification or
licensing, except where the failure to so qualify or to be in
good standing in such other jurisdictions would not have a
material adverse effect on any of the assets, the business or
the results of operations of NRG. No actions or proceedings
to dissolve NRG are pending. NRG has no Affiliates or any
equity or partnership interest in any other person other than
as listed in Schedule 5.1(a) hereto.
(b) Corporate Authority. The execution, delivery and performance
of this Agreement by NRG has been duly authorized by all
requisite action on its part, subject to the requisite
approval by the Securityholders. No other corporate action is
necessary for the authorization, execution, delivery, and
performance by NRG of this Agreement and the consummation by
NRG of the transactions contemplated hereby.
(c) Validity of Agreement; Approvals; No Conflict with
Instruments. This Agreement has been duly executed and
delivered by NRG and constitutes a legal, valid and binding
obligation of it, enforceable against it in accordance with
its terms, except as the same may be limited by bankruptcy,
insolvency or other similar laws affecting creditors' rights
generally and by general equity principles. Except as
described in Schedule 5.1(c) hereto, the execution, delivery
and performance of this Agreement
<PAGE> 18
14
by NRG and the consummation by it of the transactions
contemplated hereby (i) will not violate (with or without the
giving of notice or the lapse of time or both) or require any
consent, approval, filing or notice under, any provision of
any law, rule or regulation, court order, judgment or decree
applicable to NRG and (ii) will not conflict with, or result
in the breach or termination of any provision of, or
constitute a default under, or result in the acceleration of
the performance of the obligations of NRG under, or result in
the creation of a lien, charge or encumbrance upon any
portion of the assets of NRG pursuant to, the charter or
bylaws of NRG, or any indenture, mortgage, deed of trust,
lease, licensing agreement, contract, instrument or other
agreement to which NRG is a party or by which it or any of
its assets is bound or affected.
(d) Financial Information and Absence of Certain Changes. NRG has
delivered to Eagle Canada accurate and complete copies of (i)
the audited consolidated balance sheets of NRG as of December
31, 1996 and December 31, 1997, and the related audited
consolidated statements of earnings and retained earnings and
consolidated statements of changes in financial position for
each of the years then ended, and the notes thereto, prepared
in conformity with GAAP (the "Audited Financial Statements"),
(ii) NRG's September 30, 1998 unaudited consolidated balance
sheet, and unaudited statements of operations for the nine
(9) month period ended September 30, 1998 (the "Unaudited
Financial Statements") certified by NRG's Chief Financial
Officer, and (iii) NRG's October 31, 1998 fiscal asset
schedule and balance sheet accounts for the ten month period
ended October 31, 1998 attached as Schedule 3.1(a) hereto
(the "Valuation Statements") certified by NRG's Chief
Financial Officer (collectively, the "Financial Statements").
The Financial Statements (i) represent actual bona fide
transactions, (ii) have been prepared from the books and
records of NRG in conformity with GAAP applied on a basis
consistent with preceding years throughout the periods
involved, except that the Unaudited Financial Statements and
Valuation Statements are not accompanied by notes or other
textual disclosure required by GAAP, and (iii) accurately,
completely and fairly present NRG's financial position as of
the respective dates thereof and its consolidated results of
operations and cash flows for the periods then ended, except
that the Unaudited Financial Statements and Valuation
Statements are subject to normal year-end adjustments
consistent with past practice, which will not be material in
the aggregate. NRG does not have any liability or obligation
that would materially and adversely affect the business,
assets, financial condition or results of operations of NRG,
whether accrued, absolute, contingent, or otherwise, except
as set forth on the Unaudited Financial Statements. Except as
disclosed on Schedule 5.1(d), since the date of the Unaudited
Financial Statements as at September 30, 1998, there has not
been nor will there be any change in the assets, liabilities,
financial condition, or operations of NRG from that reflected
in the Financial Statements, other than changes in the
ordinary course of business, none of which individually or in
the aggregate have had or will have a material adverse effect
on such assets, liabilities, financial condition, or
operations. Without limiting any of the foregoing, since the
date of the Unaudited Financial Statements and until the
Effective Date, except as disclosed on Schedule 3.1(a) NRG
has not and will not have:
<PAGE> 19
15
(i) incurred or become subject to, or agreed to incur or
become subject to, any obligation or liability,
absolute or contingent, except current liabilities
incurred in the ordinary course of business;
(ii) mortgaged, pledged, or subjected to any Encumbrance
(or agreed to do so with respect to) any of the
Assets, or discharged or satisfied any Encumbrance,
or paid or satisfied any obligation or liability
other than in the ordinary course of business and
consistent with past practice;
(iii) sold or transferred, or agreed to sell or transfer,
any of the Assets;
(iv) engaged in any transactions adversely affecting the
Business or the Assets or suffered any extraordinary
losses or waived any rights of substantial value not
in the ordinary course of business;
(v) entered into any representative, distributorship,
service, installation, support and maintenance,
agency or other similar agreements;
(vi) incurred or suffered any damage, destruction, or
loss, whether or not covered by insurance,
materially affecting the Business or any of the
Assets;
(vii) made or applied to make any change in accounting
methods or practices, including for tax purposes; or
(viii) entered into any agreement, commitment or
understanding, whether or not in writing, with
respect to any of the foregoing.
(e) Title to Properties; Absence of Liens and Encumbrances. NRG
owns good, marketable and indefeasible title to all of the
Assets, free and clear of all claims, liens, security
interests, charges, leases, Encumbrances, licenses or
sublicenses and other restrictions of any kind and nature,
other than the claims, liens, security interests, charges,
leases, Encumbrances, licenses or sublicenses specifically
set forth on Schedule 5.1(e)(i) hereto (the items listed on
Schedule 5.1(e)(i) hereto are herein referred to as the
"Permitted Encumbrances"). NRG has, and will convey to Eagle
Canada on the Effective Date, one hundred percent (100%) of
all right, title and interest in and to, and good and
marketable title to, the Data, including, without limitation,
the exclusive right to manage and operate and otherwise
market and license the Data and the exclusive right to
receive all revenues from the sale, licensing or other use of
the Data, without any obligation to pay any proceeds of any
such sale, licensing or other use to any third parties (other
than the payment of Taxes). Schedule 5.1(e)(ii) hereto
contains a complete and correct list of all Data.
(f) Condition and Sufficiency of Assets. To the best of NRG's
knowledge, the buildings, structures and equipment included
in the Assets are structurally sound, and in good operating
condition and repair, and are adequate for the uses to which
they are being put, and none of such buildings, structures or
equipment is in need of maintenance
<PAGE> 20
16
or repairs except for ordinary, routine maintenance and
repairs that are not material in nature or cost. The
building, structures and equipment included in the Assets are
sufficient for the continued conduct of the Business after
the Closing in substantially the same manner as conducted
prior to the Closing.
(g) Properties, Contracts, Permits and Other Data
(i) Schedule 3.1(c) hereto contains a complete and
correct list of all contracts, service agreements,
maintenance agreements, purchase commitments for
materials and other services, leases under which NRG
is a lessor or lessee and other agreements
pertaining to the Business to which NRG, or an
affiliate of NRG is a party, the benefits of which
are enjoyed in the Business or to which any of the
assets of NRG is subject;
(ii) Schedule 5.1(g) hereto contains a complete and
correct list of all Business Locations. Except for
the Business Locations on Schedule 5.1(g), NRG does
not own, lease or otherwise utilize any real
property in the conduct of the Business; and
(iii) There are no Permits relating to the development,
use, maintenance or occupation of the Business
Locations and the conduct of the Business which are
transferable.
True and complete copies of all documents (including all
amendments thereto) referred to in Schedule 5.1(g) hereto
have been delivered to or made available for inspection by
Eagle Canada. All rights, licenses, leases, registrations,
applications, contracts, commitments, Permits and other
arrangements by NRG referred to in Schedules 5.1(g) are in
full force and effect and are valid and enforceable in
accordance with their respective terms (subject to usual
creditors rights), except where the failure to be in full
force and effect and valid and enforceable would not in the
aggregate have an adverse effect on the assets of NRG or on
its results of operations. NRG and its affiliates are not in
breach or default in the performance of any material
obligation thereunder and to the best of NRG's knowledge no
other party is in such breach or default and no event has
occurred or has failed to occur whereby any of the other
parties thereto have been or will be released therefrom or
will be entitled to refuse to perform thereunder. Except as
set forth in Schedule 3.1(c) hereto, there are no contracts,
agreements, licenses, Permits, franchises or rights to which
NRG or any of its affiliates is a party which are material to
the ownership of any of NRG's assets or to the conduct of the
Business as conducted by NRG.
(h) Legal Proceedings. Except as described in Schedule 5.1(h)
hereto, (i) there is no litigation, proceeding, claim or
governmental investigation pending or threatened seeking
relief or damages which, if granted, would adversely affect
the Assets, or the ability of Eagle Canada to use and operate
the Assets or which would prevent the consummation of the
transactions contemplated by this Agreement and (ii) NRG has
<PAGE> 21
17
not been charged with any violation of or threatened with a
charge or violation of, nor is NRG aware of any facts or
circumstances that, if discovered by third parties, could
give rise to a charge or a violation of, any provision of
Applicable Law or regulation which charge or violation, if
determined adversely to NRG would adversely affect the
Business or the results of operations of NRG or that might
reasonably be expected to affect the right of Eagle Canada to
own the Assets or operate NRG's Business after the Effective
Date in substantially the manner in which it is currently
operated.
(i) Insurance. Schedule 5.1(i) hereto sets forth a list and brief
description of the insurance policies relating to the
insurable properties of NRG and its Affiliates and the
conduct of the Business of NRG. All premiums due and arising
thereon have been paid and such policies are in full force
and effect.
(j) Intellectual Property. NRG owns and possesses all of the
Intellectual Property needed for the conduct of the Business
as presently conducted. To the knowledge of NRG, there is no
basis for the assertion by any person of any claim against
Eagle Canada or NRG with respect to the use by NRG or Eagle
Canada of any of the Intellectual Property. NRG is not
infringing or violating, and to the knowledge of NRG, NRG has
not infringed or violated, any rights of any person with
respect to any of the Intellectual Property, and the
Intellectual Property is not subject to any order, injunction
or agreement respecting its use.
(k) Government Licenses, Permits and Related Approvals. NRG has
and will have following the Closing, all licenses, Permits,
consents, approvals, authorizations, qualifications and
orders of Governmental Entities required for the conduct of
the Business as presently conducted.
(l) Conduct of Business in Compliance with Regulatory and
Contractual Requirements. NRG has conducted the Business so
as to comply with all Applicable Laws, ordinances,
regulations, rights of concession, licenses, know-how or
other proprietary rights of others, the failure to comply
with which would individually or in the aggregate have a
material adverse effect on the Business or the results of
operations of NRG.
(m) Certain Fees. Neither NRG, nor its officers, directors or
employees on behalf of NRG, have employed any broker or
finder or incurred any other liability for any brokerage
fees, commissions or finders' fees in connection with the
transactions contemplated hereby.
(n) Environmental, Health and Safety Compliance. Except as
described on Schedule 5.1(n) hereto:
(i) NRG is and has continuously been in compliance with
all Environmental Laws;
<PAGE> 22
18
(ii) all material notices, Permits, licenses or similar
authorizations, if any, required to be obtained or
filed under any Environmental Law in connection with
the operation of the Business have been obtained or
filed;
(iii) there are no past, pending or threatened
investigations, proceedings or claims against NRG
relating to the presence, release or remediation of
any Hazardous Material or for non-compliance with
any Environmental Law;
(iv) Hazardous Materials have not been treated, stored or
disposed of on, to or from any property relating in
any way to NRG or that is or was owned or leased by
NRG (including, without limitation, the Business
Locations);
(v) none of the properties owned, leased or operated by
NRG (including, without limitation, the Business
Locations) have been used as landfill or waste
disposal sites or contain any underground storage
tanks;
(vi) no conditions or circumstances are known to NRG to
exist or to have existed with respect to NRG or the
Business Locations, including, without limitation,
the off-site disposal of Hazardous Materials, that
could give rise to any remedial action under, or
impose any liability on NRG or Eagle Canada with
respect to any Environmental Law;
(vii) NRG has not received any notice or claim, and is not
aware of any facts suggesting, that NRG is or may be
liable to any person as a result of any Hazardous
Material generated, treated or stored at any real
estate at any time owned or leased by NRG
(including, without limitation, the Business
Locations) or discharged, emitted, released or
transported from any real estate at any time owned
or leased by NRG (including, without limitation, the
Business Locations) or any other source in the
conduct of the Business of NRG;
(viii) no conditions or circumstances are known by NRG to
exist or to have existed, and no activities are
known by NRG to be occurring or to have occurred,
that are resulting or have resulted in the exposure
of any person or property to a Hazardous Material
such that the owner, operator or lessee of the
Business Locations or the owner of the Business may
in the future be liable to such persons or to the
owners of such property for personal or other
injuries or damages resulting from such exposure;
and
(ix) there are no federal or provincial air emission
credits or air or water discharge Permits related to
the Business Locations.
For purposes of this Agreement, the term "Environmental Laws"
shall mean, as to the Business Locations or any given asset
or operation of NRG, all applicable laws, statutes,
ordinances, rules and regulations of any Governmental Entity
pertaining to protection of the environment in effect as of
the Effective Date. For purposes of this
<PAGE> 23
19
Agreement, the term "Hazardous Material" shall mean any
substance which is listed or defined as a hazardous
substance, hazardous constituent or solid waste pursuant to
any Environmental Law.
(o) Inventories. The inventories reflected on the Unaudited
Financial Statements and those constructed or acquired by NRG
after the date of the Unaudited Financial Statements, except
to the extent disposed of since such date in the ordinary
conduct of the Business by NRG, are in good, merchantable and
usable condition and have been reflected on the books of NRG
in accordance with GAAP. Except as set forth on Schedule
5.1(e) hereto, all such inventories are owned by NRG free and
clear of any liens or Encumbrances.
(p) Books and Records. All of the books and records of NRG have
been prepared and maintained in accordance with good business
practices and, where applicable, in conformity with GAAP and,
to the best of NRG's knowledge, in compliance with all
Applicable Laws, regulations and other requirements.
(q) Powers of Attorney. There are no outstanding powers of
attorney relating to or affecting NRG.
(r) Taxes. NRG has caused to be timely filed with appropriate
federal, provincial, local and other Governmental Entities
all Tax Returns required to be filed with respect to NRG or
the conduct of the Business and has paid, caused to be paid,
or adequately reserved in the Financial Statements all Taxes
due or claimed to be due from or with respect to such Tax
Returns. No extension of time has been requested or granted
with respect to the filing of any Tax Return or payment of
any Taxes, and no issue has been raised or adjustment
proposed by Revenue Canada or any other taxing authority in
connection with any of NRG's Tax Returns, and there are no
outstanding agreements or waivers that extend any statutory
period of limitations applicable to any federal, provincial
or local Tax Returns that include or reflect the use and
operation of NRG or the conduct of the Business. Except as
set forth on Schedule 5.1(r), NRG has not received or does
not have knowledge of any notice of deficiency, assessment,
audit, investigation, or proposed deficiency, assessment or
audit with respect to NRG or the conduct of the Business from
any taxing authority. NRG has not taken action which is not
in accordance with past practice that could defer any
liability for Taxes from any taxable period ending on or
before the Effective Date to any taxable period ending after
such date.
(s) Rights of Third Parties. Except as specifically set forth on
one or more of the Schedules hereto, the Assets are
transferable and assignable to Eagle Canada as contemplated
by this Agreement without the waiver of any right of first
refusal or the consent of any other party being obtained, and
there exists no preferential right of purchase in favor of
any person with respect to any of the Assets or the Business.
(t) Disclosure. No representation or warranty in this Section 5.1
or in any Schedule or Exhibit to this Agreement, or in any
written statement, certificate or other document
<PAGE> 24
20
furnished to Eagle Canada contains or will contain any untrue
statement of a material fact or omits or will omit a material
fact necessary to make the statements therein not misleading.
There is no fact known to NRG that has, or in the future may
have, a material adverse effect on the Business or the
results of operations of NRG, which fact has not been set
forth in this Agreement or in the Schedules hereto.
(u) Additional Information. Schedule 5.1(u) hereto contains
accurate lists and summary descriptions of the following:
(i) the names and titles of and current hourly rates for
all employees of NRG, together with the vacation and
severance benefits to which each such person is
entitled; and
(ii) all names under which NRG has conducted any business
or which it has otherwise used.
(v) Labor Matters. NRG has not suffered any strike, slowdown,
picketing or work stoppage by any union or other group of
employees. NRG is not a party to any collective bargaining
agreement; no such agreement determines the terms and
conditions of employment of any employee of NRG; no
collective bargaining agent has been certified as a
representative of any of the employees of NRG; and no
representation campaign or election is now in progress with
respect to any of the employees of NRG. NRG has not taken or
failed to take any action that would cause Eagle Canada to
incur any liability in the event Eagle Canada chooses not to
employ any of NRG's employees following the Closing. NRG has
complied in all material respects with all laws relating to
the employment of labor in the conduct of the Business,
including provisions thereof relating to wages, hours, equal
opportunity and the payment of pension contributions, social
security and other taxes.
(w) Employee Benefit Plans and Arrangements.
(i) Schedule 5.1(w) hereto lists all employee benefit
plans and employment agreements and severance
agreements or other similar arrangements, whether or
not in writing (together with all documents or
instruments establishing or constituting any related
trust, annuity contract or other funding instrument)
to which NRG is (or ever has been) a party or by
which NRG is (or ever has been) bound, including,
without limitation, (1) any profit-sharing, deferred
compensation, bonus, stock option, stock purchase,
pension, retainer, consulting, retirement,
severance, or incentive compensation plan, agreement
or arrangement, (2) any welfare benefit plan,
agreement or arrangement or any plan, agreement or
arrangement providing for "fringe benefits" or
perquisites to employees, officers, directors or
agents, including but not limited to benefits
relating to automobiles, clubs, vacation, child
care, parenting or maternity leave, sabbaticals,
sick leave, medical expenses, dental expenses,
disability, accidental death or dismemberment,
hospitalization, life
<PAGE> 25
21
insurance and other types of insurance, (3) any
employment agreement, or (4) any other employee
benefit plan.
(ii) NRG has delivered to Eagle Canada true, correct and
complete copies of all plan documents and/or
contracts (including, where applicable, any
documents and/or instruments establishing or
constituting any related trust, annuity contract or
funding instrument) and summary plan descriptions
with respect to the plans, agreements and
arrangements listed in Schedule 5.1(w) hereto, or
summary descriptions of any such plans, agreements
or arrangements not otherwise in writing. NRG has
provided Eagle Canada with true, correct and
complete copies of any document filed with any
Governmental Entity with respect to each plan
identified in Schedule 5.1(w) hereto. Each of such
documents accurately reflects the financial status
of the plan to which it relates as of the dates
specified therein. In addition, NRG has provided
Eagle Canada with (a) true, correct and complete
copies of any and all written communications notices
or claims that NRG has received from the Revenue
Canada or any other Governmental Entity concerning
any plan, arrangement or agreements identified in
Schedule 5.1(w) hereto that give notice of possible
imposition of a fine, penalty or liability with
respect to such plan, arrangement or agreement and
(b) true, correct and complete copies of any
complaints, petitions, claims or other notices of
liability relating to any such plan, arrangement or
agreement that have been filed by any other party.
(iii) For each of the plans, agreements and arrangements
identified in Schedule 5.1(w) hereto, there are no
negotiations, demands or proposals that are pending
or have been made since the dates of the respective
items furnished pursuant to Section 5.1(w)(ii)
hereto which concern matters now covered, or that
would be covered, by plans, agreements or
arrangements of the type described in this Section.
(iv) NRG and each of the plans, agreements and
arrangements identified in Schedule 5.1(w) hereto
are in full compliance with Applicable Law. NRG has
performed all of its obligations under all such
plans, agreements and arrangements including, but
not limited to, the full payment when due of all
amounts required to be made as contributions thereto
or otherwise. There are no actions, suits or claims
(other than routine claims for benefits) pending or
threatened against such plans or their assets, or
arising out of such plans, agreements or
arrangements, and, to the best knowledge of NRG, no
facts exist which could give rise to any such
actions, suits or claims that might have a material
adverse effect on such plans, agreements or
arrangements or give rise to a fine, penalty, tax or
related charge by any Governmental Entity.
(v) Except as specified in Schedule 5.1(w) hereto, each
of the plans, agreements or arrangements can be
terminated by NRG within a period of 30 days,
without payment of any additional compensation or
amount or the additional vesting or acceleration of
any such benefits.
<PAGE> 26
22
(vi) With respect to each plan identified in Schedule
5.1(w), no transaction has occurred which is
prohibited by, or which could give rise to a
material liability under, Applicable Law.
(x) Guarantees. NRG is not a guarantor or otherwise liable for
any liability or obligation (including, without limitation,
indebtedness) of any other person.
(y) Transactions with Affiliates. Except as disclosed on Schedule
5.1(y), no shareholder, director or officer of NRG or any
associate of any such shareholder, director or officer is
currently, directly or indirectly, a party to any transaction
with NRG, including any agreement, arrangement or
understanding, written or oral, providing for the employment
of, furnishing of services by, rental of real or personal
property from, or otherwise requiring payments to any such
shareholder, director, officer or associate. To the best
knowledge of NRG, no shareholder, director or officer of NRG
or any associate of any such shareholder, director or officer
owns, directly or indirectly, any interest in, or serves as a
director, officer, or employee of, any customer, supplier or
competitor of NRG. For purposes of this Section 5.1(y) only,
an "associate" of any shareholder, director or officer means
any member of the immediate family of such shareholder,
director or officer or any corporation, partnership, trust or
other entity in which such shareholder, director, officer or
employee has a substantial ownership or beneficial interest
(other than an interest in a public corporation which does
not exceed three percent of its outstanding securities) or is
a director, officer, partner, or trustee or person holding a
similar position.
(z) Services. Within the past two (2) years there have been no
complaints of customers not cured or which are not reflected
in NRG's customers' complaint records.
(aa) Sales Quotations. Schedule 5.1(aa) hereto sets forth a
complete and correct list of all current Sales Quotations for
which the charge for services is $50,000 CAN or more.
(bb) Accounts Receivable. The Accounts Receivable which are
reflected in the Unaudited Financial Statements and all
Accounts Receivable which have arisen since the Unaudited
Financial Statements, have arisen only from bona fide
transactions in the ordinary course of business. NRG has no
knowledge of any fact or circumstances which would result in
any increase in the uncollectability of the Accounts
Receivable as a class in excess of the reserve provided for
in accordance with GAAP. All of the Accounts Receivable are
valid and enforceable claims, not subject to any valid
defenses or offsets as of the date hereof. Schedule 5.1(bb)
attached hereto sets forth an accurate list of all Accounts
Receivable as included in the Unaudited Financial Statements.
The Cash Amount, NRG's cash on hand and the Accounts
Receivable are or will be sufficient to satisfy all debts,
liabilities and other obligations of NRG at the Effective
Date.
(cc) Material Assets. Except as set forth in Schedule 5.1(cc), the
Assets comprise of all the assets the use of which is
necessary for the continued conduct by Eagle Canada
<PAGE> 27
23
of the Business as now being conducted by NRG. Upon
consummation of the transactions provided for herein, NRG
will not have assets relating to the Business, in the
aggregate, of a material value, other than cash on hand, the
Accounts Receivable and the Eagle Shares which are not
immediately distributed to the Securityholders.
(dd) The representations and warranties set forth in this Article
5 shall apply in all applicable respects to any Subsidiary or
Affiliate of NRG, and without limiting the foregoing, shall
specifically apply in respect of any Assets owned by any such
Subsidiary or Affiliate.
5.2 REPRESENTATIONS AND WARRANTIES OF EAGLE CANADA
Eagle Canada represents and warrants to NRG as follows:
(a) Due Organization; Good Standing and Power. Eagle Canada is a
corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. Eagle
Canada has all corporate power and authority to enter into
this Agreement (and each other agreement expressly provided
for herein) and to perform its respective obligations
hereunder and thereunder.
(b) Authorization and Validity of Agreement. The execution,
delivery and performance of this Agreement by Eagle Canada
and the consummation by Eagle Canada of the transactions
contemplated hereby have been duly authorized by all
requisite corporate action on its part. No other corporate
action is necessary for the authorization, execution,
delivery and performance by Eagle Canada of this Agreement
and the consummation by Eagle Canada of the transactions
contemplated hereby. This Agreement has been duly executed
and delivered by Eagle Canada and constitutes a legal, valid
and binding obligation of Eagle Canada, enforceable against
Eagle Canada in accordance with its terms, except as the same
may be limited by bankruptcy, insolvency or other similar
laws affecting creditors' rights generally and by general
equity principles.
(c) No Approvals or Notices Required; No Conflict with
Instruments. The execution, delivery and performance of this
Agreement by Eagle Canada and the consummation by it of the
transactions contemplated hereby (i) will not violate (with
or without the giving of notice or the lapse of time or
both), or require any consent, approval, filing or notice
under any provision of any law, rule or regulation, court
order, judgment or decree applicable to Eagle Canada, and
(ii) will not conflict with, or result in the breach or
termination of any provision of, or constitute a default
under, or result in the acceleration of the performance of
the obligations of Eagle Canada, under, the charter or bylaws
of Eagle Canada or any indenture, mortgage, deed of trust,
lease, licensing agreement, contract, instrument or other
agreement to which Eagle Canada is a party or by which Eagle
Canada or any of its assets or properties is bound.
<PAGE> 28
24
(d) Certain Fees. Neither Eagle Canada nor any of its officers,
directors or employees, on behalf of it, has employed any
broker or finder or incurred any other liability for any
brokerage fees, commissions or finders' fees in connection
with the transactions contemplated hereby.
5.3 REPRESENTATIONS AND WARRANTIES OF EAGLE GEOPHYSICAL
Eagle Geophysical represents and warrants to NRG as follows:
(a) Due Organization; Good Standing and Power. Eagle Geophysical
is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. Eagle
Geophysical has all corporate power and authority to enter
into this Agreement (and each other agreement expressly
provided for herein) and to perform its respective
obligations hereunder and thereunder.
(b) Authorization and Validity of Agreement. The execution,
delivery and performance of this Agreement by Eagle
Geophysical and the consummation by Eagle Geophysical of the
transactions contemplated hereby have been duly authorized by
all requisite corporate action on its part. No other
corporate action is necessary for the authorization,
execution, delivery and performance by Eagle Geophysical of
this Agreement and the consummation by Eagle Geophysical of
the transactions contemplated hereby. This Agreement has been
duly executed and delivered by Eagle Geophysical and
constitutes a legal, valid and binding obligation of Eagle
Geophysical, enforceable against Eagle Geophysical in
accordance with its terms, except as the same may be limited
by bankruptcy, insolvency or other similar laws affecting
creditors' rights generally and by general equity principles.
(c) No Approvals or Notices Required; No Conflict with
Instruments. Other than the filing for approval of the
listing of the Eagle Shares on the NASDAQ National Market
System, the execution, delivery and performance of this
Agreement by Eagle Geophysical and the consummation by it of
the transactions contemplated hereby (i) will not violate
(with or without the giving of notice or the lapse of time or
both), or require any consent, approval, filing or notice
under any provision of any law, rule or regulation, court
order, judgment or decree applicable to Eagle Geophysical,
and (ii) will not conflict with, or result in the breach or
termination of any provision of, or constitute a default
under, or result in the acceleration of the performance of
the obligations of Eagle Geophysical, under, the charter or
bylaws of Eagle Geophysical or any indenture, mortgage, deed
of trust, lease, licensing agreement, contract, instrument or
other agreement to which Eagle Geophysical is a party or by
which Eagle Geophysical or any of its assets or properties is
bound.
(d) Certain Fees. Neither Eagle Geophysical nor any of its
officers, directors or employees, on behalf of it, has
employed any broker or finder or incurred any other liability
for any brokerage fees, commissions or finders' fees in
connection with the transactions contemplated hereby.
<PAGE> 29
25
(e) Information Supplied. The information supplied or to be
supplied by Eagle Geophysical for inclusion or incorporation
by reference in the Information Circular shall, at the date
the Information Circular is first mailed to the
Securityholders and at the time of the NRG Meetings, be true
and complete in all material respects and shall not contain
any misrepresentation (as defined in the Securities Act
(Alberta)).
(f) Authorization for Eagle Shares. Eagle Geophysical has taken
all necessary action to permit it to issue the number of
shares of Eagle Shares required to be issued pursuant to the
terms of the Plan of Arrangement and this Agreement. The
Eagle Shares issued pursuant to the terms of the Plan of
Arrangement and this Agreement will, when issued, be validly
issued, fully paid and non-assessable and not subject to
pre-emptive rights.
5.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES
Notwithstanding the right of Eagle Canada to investigate the Assets
and the affairs of NRG, Eagle Canada shall have the right to rely fully upon
the representations and warranties, covenants and agreements of NRG contained
in this Agreement, and to pursue all rights and remedies in connection
therewith. Notwithstanding the right of NRG to investigate the Eagle Shares and
the affairs of Eagle Canada and Eagle Geophysical, NRG shall have the right to
rely fully upon the representations and warranties, covenants and agreements of
Eagle Canada and Eagle Geophysical contained in this Agreement, and to pursue
all rights and remedies in connection therewith. The respective representations
and warranties of the parties contained herein (other than those set forth in
Sections 3.1(c), (e), (n), (r) and (bb) hereof (the "Surviving Warranties"))
shall expire on the fourth anniversary of the Effective Date; provided that
there shall be no expiration of any such representation or warranty as to which
a bona fide claim has been asserted by written notice of such claim delivered
to the party or parties making such representation or warranty during the
survival period. The Surviving Warranties and all other covenants and
agreements of the parties hereto shall survive the Closing indefinitely.
ARTICLE 6
COVENANTS, ACTIONS PRIOR TO CLOSING
6.1 ACCESS TO INFORMATION
During the period beginning on the date hereof and ending on the
Effective Date, NRG will (a) give or cause to be given to Eagle Canada and its
representatives such access, during normal business hours, to the Business
Locations, properties, books and records of NRG as Eagle Canada shall from time
to time reasonably request and (b) furnish or cause to be furnished to Eagle
Canada such financial and operating data and other information with respect to
NRG as Eagle Canada shall from time to time reasonably request. Eagle Canada
and its representatives shall be entitled to such access to the
representatives, officers and employees of NRG as Eagle Canada may reasonably
request. NRG shall permit Eagle Canada and its representatives to confirm, on
reasonable notice and on the basis of agreed methods, with NRG's principal
vendors, customers, and trade affiliates, that the acquisition by Eagle Canada
of NRG will be acceptable to such vendors, customers, and trade affiliates and
that the acquisition will not adversely effect the relationship of such
vendors,
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26
customers and trade affiliates with the Business. NRG agrees that such access
by Eagle Canada and its representatives shall include the right to conduct such
environmental investigations of the Business Locations as Eagle Canada shall
deem necessary or appropriate to determine on-site conditions and the presence
or absence of any Hazardous Materials. In connection with such environmental
investigations, NRG will provide to or make available for inspection by Eagle
Canada and its representatives all records relating to environmental matters.
6.2 CONDUCT OF THE BUSINESS
Except as specifically required or contemplated by this Agreement or
otherwise consented to or approved in writing by Eagle Canada, during the
period commencing on the date hereof and ending on the Effective Date, NRG
will:
(a) conduct the Business only in the usual, regular and ordinary
manner consistent with current practice and, to the extent
consistent with such operation, use its reasonable best
efforts to keep available the services of the present
employees of NRG and preserve NRG's present relationships
with persons having business dealings with NRG;
(b) maintain NRG's books, accounts and records in the usual,
regular and ordinary manner, on a basis consistent with past
practice, and comply in all material respects with all
Applicable Laws and other obligations of NRG;
(c) not (i) sell, lease or otherwise dispose of any of the Assets
of NRG, (ii) modify or change in any material respect any
contract of NRG, other than in the ordinary course of
business, (iii) enter into any new contract, commitment or
agreement relating to the Business, or (iv) agree, whether in
writing or otherwise, to do any of the foregoing; and
(d) not (i) permit or allow any of the Assets of NRG or the
Business Locations to become subject to any liens or
Encumbrances, (ii) waive any claims or rights relating to the
Business, except in the ordinary course of business and
consistent with past practice, (iii) grant any increase in
the compensation of any employees employed in the conduct of
the Business, except for reasonable increases in the ordinary
course of business and consistent with past practice or as
required by contractual arrangements existing on the date
hereof, and reasonable payments in normal sales compensation
plans, including bonuses, or (iv) agree, whether in writing
or otherwise, to do any of the foregoing.
6.3 COURT APPROVAL
As soon as reasonably practicable, NRG and Eagle Canada shall apply to
the Court pursuant to Section 186 of the ABCA for an order approving the
Arrangement pursuant to the terms hereof and the Plan of Arrangement and in
connection with such application shall:
<PAGE> 31
27
(a) forthwith file, proceed with and diligently prosecute an
application for an Interim Order under Section 186(4) of the
ABCA providing for, among other things, the calling and
holding of the NRG Meetings for the purpose of considering
and, if deemed advisable, approving the Arrangement pursuant
to the terms hereof and the Plan of Arrangement; and
(b) subject to obtaining such approvals of the Securityholders at
the NRG Meetings as may be directed by the Court in the
Interim Order, take the steps necessary to submit the Plan of
Arrangement to the Court and apply for the Final Order, and,
subject to the fulfillment of the conditions set forth in
Article 7 hereof, shall deliver to the Registrar, Articles of
Arrangement and such other documents as may be required to
give effect to the Plan of Arrangement.
6.4 COOPERATION; CONSENTS AND APPROVALS
In cooperation with Eagle Canada, NRG shall prepare all necessary
documents and filings and obtain all approvals, including the obtaining of the
Interim Order and the Final Order and the preparation of the Information
Circular.
(a) Without limiting the foregoing, NRG shall use all reasonable
efforts to, as soon as practicable, (i) complete the
preparation of the Information Circular as agreed with Eagle
Canada, and (ii) subject to the grant of the Interim Order,
mail to the Securityholders and file in all jurisdictions
where required the Information Circular, Notices of NRG
Meetings and forms of proxy and other documentation required
in connection with the NRG Meetings, the Interim Order and
Applicable Law. NRG shall use all reasonable efforts, subject
to the grant of the Interim Order, as soon as practicable,
and in any event on the dates specified in the Interim Order,
to convene the NRG Meetings for the purpose of approving the
Plan of Arrangement and this Agreement in accordance with the
Interim Order.
(b) NRG agrees to mail to Eagle Canada the Information Circular,
Notices of NRG Meetings and forms of proxy concurrent with
the mailing to the Securityholders.
(c) NRG shall ensure that the Information Circular complies with
all applicable disclosure laws and all other Applicable Laws
as they relate to the disclosure of information regarding NRG
and, without limiting the generality of the foregoing,
provides the Securityholders to which such Information
Circular is sent with information in sufficient detail to
permit them to form a reasoned judgment concerning the
matters before them.
(d) Eagle Canada shall provide all such information reasonably
required for inclusion in the Information Circular to permit
NRG to comply with Section 6.4(c) hereof.
(e) Subject to the terms and conditions set forth in Article 7
hereof and the fiduciary obligations of the Board of
Directors of NRG with respect to such matters, the Board of
Directors of NRG shall (i) recommend at the NRG Meetings that
the
<PAGE> 32
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Securityholders vote to approve the Plan of Arrangement, (ii)
use its reasonable efforts to solicit from the
Securityholders proxies in favor of such approval, and (iii)
take all other action reasonably necessary to secure a vote
of the Securityholders in favor of the approval of the
Arrangement.
(f) Prior to the Effective Date, Eagle Canada shall have taken
all necessary action to permit it to issue the number of
Eagle Shares issuable as part of the Purchase Price upon the
Closing, and the Eagle Shares to be so issued will, when
issued pursuant to the terms hereof, be validly issued, fully
paid and non-assessable and not subject to any preemptive
rights.
(g) NRG shall deliver to Eagle Canada a list of such persons, if
any, that Eagle Canada, after discussions with counsel for
NRG, believes may be "Affiliates" of NRG (the "NRG
Affiliates") within the meaning of Rule 145 promulgated under
the U.S. Securities Act. NRG shall deliver or cause to be
delivered to Eagle Canada an undertaking by each NRG
Affiliate in form satisfactory to Eagle Canada that no Eagle
Shares received or to be received by such NRG Affiliate
pursuant to the Plan of Arrangement will be sold or disposed
of except pursuant to an effective registration statement
under the U.S. Securities Act or in accordance with the
provisions of Rule 144 or Rule 145(d) promulgated under the
U.S. Securities Act or another exemption from registration
under the U.S. Securities Act.
(h) Counsel to Eagle shall deliver an opinion, substantially in
the form attached as Exhibit "C" that the Eagle Shares issued
to NRG and distributed to its Securityholders are, subject to
certain limitations, freely tradeable.
6.5 FURTHER ACTIONS
Subject to the terms and conditions hereof, NRG and Eagle Canada will
each use their reasonable best efforts to take, or cause to be taken, all
action and to do, or cause to be done, all things necessary, proper or
advisable to consummate and make effective the transactions contemplated by
this Agreement, including using reasonable best efforts: (i) to obtain prior to
the Effective Date all consents, licenses, Permits, approvals, authorizations,
qualifications and orders of Governmental Entities and parties to contracts
with NRG as are necessary for the consummation of the transactions contemplated
hereby; (ii) to effect all necessary registrations and filings; and (iii) to
furnish to each other such information and assistance as reasonably may be
requested in connection with the foregoing. Where the consent of any third
party is required under the terms of any of NRG's leases or contracts to the
transactions contemplated by this Agreement, NRG will use reasonable best
efforts to obtain such consent on terms and conditions not less favorable than
as in effect on the date hereof. NRG and Eagle Canada shall cooperate fully
with each other to the extent reasonably required to obtain such consents.
6.6 NOTIFICATION
NRG shall promptly notify Eagle Canada in writing and keep it advised
as to (i) any litigation or administrative proceeding filed or pending against
NRG or, to its knowledge, threatened
<PAGE> 33
29
against it, including any such litigation or administrative proceeding that
challenges the transactions contemplated hereby; (ii) any material damage or
destruction of any of the assets of NRG; (iii) any material adverse change in
the results of operations of NRG; and (iv) any variance from the
representations and warranties contained in Section 5.1 hereof or of any
failure or inability on the part of NRG to comply with any of its covenants
contained in this Article 6.
6.7 NO INCONSISTENT ACTION
Subject to Sections 9.1 and 9.2 hereof, no party hereto shall take any
action inconsistent with its obligations under this Agreement or which could
materially hinder or delay the consummation of the transactions contemplated by
this Agreement.
6.8 ACQUISITION PROPOSALS
Subject to the board of directors' fiduciary duty to its shareholders,
none of NRG or any Affiliate, director, officer, employee or representative of
NRG shall, directly or indirectly (i) solicit, initiate or knowingly encourage
any Acquisition Proposal or (ii) engage in discussions or negotiations with any
person that is considering making or has made an Acquisition Proposal. NRG
shall immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any persons conducted heretofore with respect
to any Acquisition Proposal and shall promptly request each such person who has
heretofore entered into a confidentiality agreement in connection with
Acquisition Proposal to return to NRG all confidential information hereto
furnished to such person by or on behalf of NRG.
6.9 PUBLIC ANNOUNCEMENTS
Except as may be required by Applicable Law or stock exchange or
National Association of Securities Dealers, Inc. regulation, neither Eagle
Canada, on the one hand, nor NRG, on the other, shall issue any press release
or otherwise make any public statements with respect to this Agreement or the
transactions contemplated hereby without the prior written consent of the other
party.
ARTICLE 7
CONDITIONS PRECEDENT
7.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF ALL PARTIES
The respective obligations of the parties to consummate the
transactions contemplated by this Agreement and to file articles of arrangement
to give effect to the Arrangement shall be subject to the satisfaction (or
waiver by each party) on or prior to the Effective Date, of each of the
following conditions:
(a) No Governmental Action. No action of any private party or
Governmental Entity shall have been taken or threatened and
no statute, rule, regulation or executive order shall have
been proposed, promulgated or enacted by any Governmental
Entity which seeks to restrain, enjoin or otherwise prohibit
or to obtain damages or other relief in connection with this
Agreement or the transactions contemplated hereby.
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30
(b) Court Ordered Plan of Arrangement. A Final Order approving
the Plan of Arrangement shall have been obtained, such that
the Eagle Shares to be delivered by Eagle Canada to NRG shall
not require registration under the U.S. Securities Act.
(c) Securityholders Approval. NRG shall have obtained from the
Securityholders and the holders of all outstanding options
under its share option plan the requisite approval of the
Arrangement.
(d) Articles of Arrangement. The Articles of Arrangement relating
to the Arrangement shall be in form and substance
satisfactory to NRG and Eagle Canada, acting reasonably.
(e) Exercise of Rights of Dissent. Holders of not more than 10%
of the Common Shares, 10% of the Preferred Shares and 10% of
the Special Warrants shall have exercised rights of dissent
in relation to the Arrangement.
(f) NRG Affiliates. The obligations of NRG pursuant to Section
6.4(g) hereof shall have been fully satisfied.
(g) Regulatory Orders. NRG shall have obtained any orders or
determinations of applicable regulatory authorities required
under Applicable Laws in Canada to permit the resale of Eagle
Shares by NRG Securityholders resident in Canada without the
need to file a prospectus or make any other filing, except in
respect of insiders or control persons.
7.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF EAGLE CANADA
The obligations of Eagle Canada to complete the transactions
contemplated under this Agreement are subject to the satisfaction (or waiver by
Eagle Canada) on or prior to the Effective Date of each of the following
conditions:
(a) Accuracy of Representations and Warranties. All
representations and warranties of NRG contained herein or in
any certificate or document delivered to Eagle Canada
pursuant hereto shall be true and correct in all material
respects on and as of the Effective Date, with the same force
and effect as though such representations and warranties had
been made on and as of the Effective Date, except as
contemplated or permitted by this Agreement.
(b) Performance of Agreements. NRG shall have, in all material
respects, performed all obligations and agreements, and
complied with all covenants and conditions, contained in this
Agreement to be performed or complied with by it prior to or
at the Effective Date.
(c) Actions and Proceedings. All corporate actions, proceedings,
instruments and documents required to carry out the
transactions contemplated by this Agreement or incidental
thereto and all other related legal matters shall be
reasonably satisfactory
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31
to counsel for Eagle Canada, and such counsel shall have been
furnished with such certified copies of such corporate
actions and proceedings and such other instruments and
documents as it shall have reasonably requested.
(d) Title. On the Effective Date, Eagle Canada shall be satisfied
in its reasonable discretion as to NRG's ownership of the
Assets, free and clear of all liens, easements, claims,
charges and Encumbrances, other than Permitted Encumbrances.
(e) Licenses and Consents. All licenses, Permits, consents,
approvals, authorizations, qualifications and orders of
governmental authorities that are transferable and are
reasonably necessary to enable Eagle Canada to own the Assets
(and lease and operate the Business Locations) and conduct
the Business after the Effective Date in substantially the
same manner as the assets of NRG are owned (and the Business
Locations are operated) and the Business is being conducted
as of the date hereof shall be in full force and effect.
(f) Environmental Matters. Eagle Canada shall not have discovered
any events, occurrences or conditions at or affecting the
Business Locations or the Business, which in the aggregate
could reasonably be expected to cause NRG to incur expenses
in excess of $5,000 for remediation of existing environmental
conditions or for past exposure on-site or off-site of any
person or property to any Hazardous Materials.
(g) Opinion of Counsel to NRG. Fraser Milner, counsel for NRG,
shall have furnished to Eagle Canada its written opinion,
dated the Effective Date, substantially in the form attached
as Exhibit "B" or as otherwise agreed between counsel to NRG
and counsel to Eagle Canada and Eagle Geophysical.
(h) Operation. The Business shall have been operated and
maintained substantially in the manner in which it has been
operated and maintained previously in the ordinary course of
business and NRG shall not have taken any action which is not
in the ordinary course of business and in compliance with the
terms of this Agreement, without the prior written approval
of Eagle Canada.
(i) Material Adverse Change. There shall have been no material
adverse change in the financial condition, profitability or
the results of operations of the Business from the date of
this Agreement until the Effective Date.
(j) Facts or Omissions. Eagle Canada shall not have discovered
any fact or omission materially adverse to the condition,
results of operations or prospects of NRG.
(k) Audit. Eagle Canada shall have reviewed the equipment of NRG
and, in its sole discretion, found such equipment to be in
good and usable condition and to have been reflected on the
books of NRG in accordance with GAAP.
(l) Payoff Letters. NRG shall have provided Eagle Canada with (i)
payoff letters, with per diem interest amounts, and (ii)
financing statements and other releases executed
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32
by the secured party, if any, which release any filed or
other liens or security interests that encumber the Assets,
all at NRG's expense, from its lenders (other than the
lenders of the Assumed Debt).
(m) Third Party Consents. All necessary third party consents
relating to the transactions contemplated by this Agreement
shall have been obtained, including any consents required for
the assignment of any Contract by NRG to Eagle Canada
pursuant to the terms hereof.
(n) Lender Consent. The lenders under the Assumed Debt shall have
consented to the consummation of the transactions
contemplated by this Agreement in a form reasonably
satisfactory to Eagle Canada.
(o) Employees. Eagle Canada shall have entered into employment
arrangements with such Key Employees as Eagle Canada deems
necessary for its operation of the Business.
7.3 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF NRG
The obligations of NRG to complete the transactions contemplated under
this Agreement and to file articles of arrangement to give effect to the
Arrangement are subject to the satisfaction (or waiver by NRG) at or prior to
the Effective Date of each of the following conditions:
(a) Accuracy of Representations and Warranties. All
representations and warranties of Eagle Canada contained
herein or in any certificate or document delivered to NRG
pursuant hereto shall be true and correct on and as of the
Effective Date, with the same force and effect as though such
representations and warranties had been made on and as of the
Effective Date, except as contemplated or permitted by this
Agreement.
(b) Performance of Agreements. Eagle Canada shall have performed
all obligations and agreements, and complied with all
covenants and conditions contained in this Agreement to be
performed or complied with by it prior to or at the Effective
Date.
(c) Actions and Proceedings. All corporate actions, proceedings,
instruments and documents required to carry out the
transactions contemplated by this Agreement or incidental
thereto and all other related legal matters shall be
reasonably satisfactory to counsel for NRG, and such counsel
shall have been furnished with such certified copies of such
corporate actions and proceedings and such other instruments
and documents as it shall have reasonably requested.
(d) Opinion of Counsel to Eagle Geophysical and Eagle Canada.
Gardere Wynne Sewell & Riggs, L.L.P., counsel to Eagle
Geophysical and Eagle Canada, shall have furnished to NRG its
written opinion, dated the Effective Date, substantially in
the form attached as Exhibit "C" or as otherwise agreed
between counsel to Eagle Geophysical and Eagle Canada and
counsel to NRG.
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33
(e) Material Adverse Change. There shall have been no material
adverse change in the financial condition, profit ability or
the results of operations of Eagle Geophysical from the date
of this Agreement until the Effective Date.
(f) Facts or Omissions. NRG shall not have discovered any fact or
omission materially adverse to the condition, results of
operations or prospects of Eagle Geophysical.
ARTICLE 8
EMPLOYEES
8.1 EMPLOYMENT
NRG consents to Eagle Canada contacting NRG's officers and employees
regarding potential employment by Eagle Canada, including, without limitation,
Robert Wood, Ivan Bishko, Ron Skelton, Kevin Anton, Brad Culver, Patricia
Campbell, Elizabeth Griffith, Jay Simmons, Lynn Brown and Brent Murdoff (the
"Key Employees"). Eagle Canada shall have no obligation to offer employment to
any of NRG's employees following the Effective Date, but may offer employment
to any or all of them, as Eagle Canada deems appropriate.
8.2 NO EAGLE CANADA LIABILITY
Eagle Canada shall have no responsibility, liability or obligation,
whether to employees, former employees, their beneficiaries or to any other
person with respect to, and NRG shall indemnify, defend and hold Eagle Canada
harmless with respect to, any employee benefit plan, practice, program or
arrangement (including without limitation the establishment, operation or
termination thereof) maintained for employees of NRG prior to the Effective
Date. NRG shall remain responsible for all expenses, taxes, claims, obligations
or liabilities associated with, arising out of or relating to any employee
benefit plan, practice, program or arrangement maintained by NRG with respect
to NRG prior to the Effective Date, including without limitation medical or
disability claims incurred but unreported prior to the Effective Date and
medical benefits with respect to any employee of NRG whose employment by NRG
was terminated on or before the Effective Date. Eagle Canada shall be under no
obligation to maintain or continue the medical and long-term disability
insurance policies currently maintained by NRG for NRG's employees.
ARTICLE 9
TERMINATION
9.1 GENERAL
Either NRG or Eagle Canada may terminate this Agreement provided such
party is not then in breach of its obligations hereunder at any time prior to
the Effective Date, upon notice to the other party if:
(a) the Interim Order has been granted, set aside or modified in
any manner unacceptable to NRG or Eagle Canada on appeal or
otherwise;
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34
(b) the Securityholders do not approve the Arrangement in
accordance with the terms of the Interim Order;
(c) in the event the Final Order is refused and no appeal thereof
is applied for before the period to appeal has expired;
(d) the Final Order has not been granted in form and substance
satisfactory to NRG and Eagle Canada on or before January 1,
1999; or
(e) the Arrangement has not become effective on or before January
1, 1999.
9.2 NO LIABILITIES IN EVENT OF TERMINATION
In the event of any termination of this Agreement as provided above,
this Agreement shall forthwith become wholly void and of no further force or
effect and there shall be no liability on the part of Eagle Canada, Eagle
Geophysical, NRG or their respective officers, directors, or agents, except
that the provisions of Section 12.1 hereof shall remain in full force and
effect, and provided that nothing contained herein shall release any party from
liability for any willful failure to comply with any provision, covenant or
agreement contained herein.
ARTICLE 10
COVENANTS, ACTION SUBSEQUENT TO CLOSING
10.1 ACCESS TO BOOKS AND RECORDS
Until the sixth anniversary of the Effective Date, NRG shall afford,
and will cause its affiliates to afford, to Eagle Canada, its counsel,
accountants and other authorized representatives, during normal business hours,
reasonable access to the books, records and other data of NRG and the Business
with respect to periods ending on or prior to the Effective Date to the extent
that such access may be reasonably required by Eagle Canada to facilitate (i)
the investigation, litigation and final disposition of any claims which may
have been or may be made against Eagle Canada in connection with the Business
or (ii) for any other reasonable business purpose.
10.2 MAIL
NRG authorizes and empowers Eagle Canada on and after the Effective
Date to receive and open all mail received by Eagle Canada relating to the
Business or the Assets and to deal with the contents of such communications in
any proper manner. NRG shall promptly deliver to Eagle Canada any mail or other
communication received by it after the Effective Date pertaining to the
Business or the Assets. Eagle Canada shall promptly deliver to NRG any mail or
other communication received by it after the Effective Date pertaining to the
Excluded Assets and any cash, checks or other instruments of payment in respect
of such assets.
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10.3 USE OF NAMES
After the Effective Date, NRG agrees that neither it, nor any of its
Affiliates shall use the names, trademarks, slogans, trade names, logos or
labels to be transferred to Eagle Canada as provided in Section 3.1 hereof.
10.4 THIRD PARTY CONSENTS
To the extent that NRG's rights under any Contract or other Asset
which is to be transferred to Eagle Canada pursuant to the terms hereof may not
be transferred without the consent or approval of another person which has not
been obtained at the Effective Time despite the exercise by NRG of its
reasonable best efforts, this Agreement shall not constitute an agreement to
transfer the same if an attempted transfer would constitute a breach thereof or
be unlawful, and NRG, at its expense, shall use its reasonable best efforts to
obtain any such required consent or approval as promptly as possible, and Eagle
Canada shall reasonably cooperate with such efforts. If any such consent or
approval shall not be obtained or if any attempted transfer would be
ineffective or impair Eagle Canada's rights to the Assets in question so that
Eagle Canada would not in effect acquire the benefit of all such rights, NRG,
to the maximum extent permitted by law, (a) shall act after the Effective Time
as Eagle Canada's agent in order to obtain for Eagle Canada the benefits
thereunder, and (b) shall cooperate to the maximum extent permitted by law,
with Eagle Canada in any other reasonable arrangement designed to provide such
benefits to Eagle Canada, including by agreeing to remain liable under any
Contract to be assigned to Eagle Canada hereunder. Nothing contained in this
Section 10.4 shall relieve NRG of its obligations under any other provisions of
this Agreement or modify the rights of Eagle Canada under Section 7.2 of this
Agreement.
10.5 CONFIDENTIALITY
NRG acknowledges and agrees that irreparable damage would occur in the
event any confidential information regarding the business, assets, results of
operations or financial condition of NRG or Eagle Canada were disclosed to or
utilized on behalf of any person which is in competition in any respect with
the Business (or the business of Eagle Canada conducted following the Closing).
Accordingly, NRG covenants and agrees that it will not, directly or indirectly,
without the prior written consent of Eagle Canada, use or disclose any of such
confidential information. The provisions of this Section 10.5 shall not
prohibit a party from disclosing any confidential information covered by this
Section 10.5 pursuant to a subpoena or other validly issued administrative or
judicial process requesting such information; provided, however, that prompt
notice is provided to Eagle Canada of the requirement of such disclosure.
ARTICLE 11
INDEMNIFICATION
11.1 INDEMNIFICATION BY NRG
Subject to the provisions of this Article 11, NRG shall protect,
indemnify, defend and hold harmless Eagle Canada and Eagle Geophysical, each
officer, director and agent of Eagle Canada and Eagle Geophysical and each
person who controls Eagle Canada and Eagle Geophysical in respect
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of any losses, claims, damages, liabilities, deficiencies, delinquencies,
defaults, assessments, fees, penalties or related costs or expenses, including,
but not limited to, court costs and attorneys', and accountants' fees and
disbursements, and any federal, provincial, state or local income or franchise
taxes payable in respect of the receipt of cash or money in discharge of the
foregoing (collectively referred to herein as "Damages") arising out of or are
based upon (i) the Retained Liabilities, or (ii) the breach of any of the
representations, warranties, covenants or agreements made by NRG in this
Agreement, including the Exhibits and Schedules hereto, or in any certificate
or instrument delivered by or on behalf of NRG pursuant to this Agreement.
11.2 INDEMNIFICATION BY EAGLE CANADA
Subject to the provisions of this Article 11, Eagle Canada shall
protect, defend, indemnify and hold harmless NRG, in respect of any Damages
arising out of or based upon (i) the Assumed Liabilities or (ii) the breach of
any of the representations, warranties, covenants or agreements made by Eagle
Canada in this Agreement, including the Exhibits and Schedules hereto.
11.3 INDEMNIFICATION BY EAGLE GEOPHYSICAL
Subject to the provisions of this Article 11, Eagle Geophysical shall
protect, defend, indemnify and hold harmless NRG, in respect of any Damages
arising out of or based upon the breach of any of the representations,
warranties and covenants or agreements made by Eagle Geophysical made pursuant
to Section 5.3 of this Agreement.
11.4 INDEMNIFICATION PROCEDURES
The obligations and liabilities of each indemnifying party hereunder
with respect to claims resulting from the assertion of liability by the other
party or third parties shall be subject to the following terms and conditions:
(a) If any person shall notify an indemnified party (the
"Indemnified Party") with respect to any matter which may
give rise to a claim for indemnification (a "Claim") against
Eagle Canada on the one hand or NRG on the other (the
"Indemnifying Party") under this Article 11, then the
Indemnified Party shall promptly notify each Indemnifying
Party thereof in writing; provided, however, that no delay on
the part of the Indemnified Party in notifying any
Indemnifying Party shall relieve the Indemnifying Party from
any obligation hereunder unless (and then solely to the
extent) the Indemnifying Party thereby is prejudiced.
(b) Any Indemnifying Party will have the right to defend the
Indemnified Party against the Claim with counsel of its
choice reasonably satisfactory to the Indemnified Party so
long as (i) the Indemnifying Party notifies the Indemnified
Party in writing within 15 days after the Indemnified Party
has given notice of the Claim that the Indemnifying Party
will indemnify the Indemnified Party from and against the
entirety of any Damages the Indemnified Party may suffer
resulting from, arising out of, relating to, in the nature of
or caused by the Claim, (ii) the Indemnifying Party provides
the Indemnified Party with evidence reasonably acceptable to
the
<PAGE> 41
37
Indemnified Party that the Indemnifying Party will have the
financial resources to defend against the Claim and fulfill
its indemnification obligations hereunder, (iii) the Claim
involves only money damages and does not seek an injunction
or other equitable relief, (iv) settlement of, or an adverse
judgment with respect to, the Claim is not, in the good faith
judgment of the Indemnifying Party, likely to establish a
precedential custom or practice materially adverse to the
continuing business interests of the Indemnified Party, and
(v) the Indemnifying Party conducts the defense of the Claim
actively and diligently and in good faith.
(c) So long as the Indemnifying Party is conducting the defense
of the Claim in accordance with Section 11.4(b) above, (i)
the Indemnified Party may retain separate co-counsel at its
sole cost and expense and participate in the defense of the
Claim, (ii) the Indemnified Party will not consent to the
entry of any judgment or enter into any settlement with
respect to the Claim without the prior written consent of the
Indemnifying Party (not to be withheld unreasonably), and
(iii) the Indemnifying Party will not consent to the entry of
any judgment or enter into any settlement with respect to the
Claim without the prior written consent of the Indemnified
Party (not to be withheld unreasonably).
(d) In the event any of the conditions in Section 11.4(b) above
is or becomes unsatisfied, however, (i) the Indemnified Party
may defend against, and consent to the entry of any judgment
or enter into any settlement with respect to, the Claim in
any manner it reasonably may deem appropriate (and the
Indemnified Party need not consult with, or obtain any
consent from, any Indemnifying Party in connection
therewith), (ii) the Indemnifying Party will remain
responsible for any damages the Indemnified Party may suffer
resulting from, arising out of, relating to, in the nature
of, or caused by the Claim to the fullest extent provided in
this Article 11.
(e) EACH OF THE AGREEMENTS TO INDEMNIFY, DEFEND OR HOLD
HARMLESS CONTAINED IN THIS ARTICLE 11 SHALL APPLY
IRRESPECTIVE OF WHETHER THE SUBJECT CLAIM IS BASED IN
WHOLE OR IN PART UPON SOLE OR CONTRIBUTORY NEGLIGENCE
(WHETHER ACTIVE, PASSIVE OR GROSS), BREACH OF WARRANTY
OR BREACH OR VIOLATION OF ANY DUTY IMPOSED BY ANY LAW
OR REGULATION, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED
IN THIS AGREEMENT.
ARTICLE 12
MISCELLANEOUS
12.1 PAYMENT OF CERTAIN FEES AND EXPENSES
Each of the parties hereto shall pay the fees and expenses
incurred by it in connection with the negotiation, preparation, execution and
performance of this Agreement, including, without limitation, brokers' fees,
attorneys' fees and accountants' fees.
<PAGE> 42
38
12.2 NOTICES
All notices, requests, demands and other communications which are
required or may be given under this Agreement shall be in writing and shall be
deemed to have been duly given if delivered personally or by facsimile or
mailed, first class mail, postage prepaid, return receipt requested, as
follows:
(a) If to NRG:
Natural Resources Geophysical Corporation
Suite 600, 209 - 8th Avenue S.W.
Calgary, Alberta T2P 1B8
Attn: Mr. Robert Wood, President
Facsimile number: (403) 263-7776
with a copy to:
Fraser Milner
30th Floor, 237 - 4th Avenue S.W.
Calgary, Alberta T2P 4X7
Attn: Ms. Gail L. Harding
Facsimile number: (403) 268-3100
(b) If to Eagle Canada:
Eagle Canada, Inc.
2603 Augusta, Suite 1400
Houston, Texas 77057
Attn: Mr. Jay N. Silverman, President
Facsimile number: (713) 243-6101
with a copy to:
Gardere Wynne Sewell & Riggs, L.L.P.
333 Clay Avenue, Suite 800
Houston, Texas 77002
Attn: Mr. N. L. Stevens III
Facsimile number: (713) 308-5555
and a copy to:
Burstall Ward
3100, 324 - 8th Avenue S.W.
Calgary, Alberta T2P 2Z2
Attn: Mr. Harley L. Winger
Facsimile number: (403) 266-6016
<PAGE> 43
39
or to such other address as either party shall have specified by notice in
writing to the other party. All such notices, requests, demands and
communications shall be deemed to have been received on the earlier of the date
of delivery or on the fifth business day after the mailing thereof.
12.3 ENTIRE AGREEMENT
This Agreement (including the Exhibits and Schedules hereto)
constitutes the entire agreement between the parties hereto and supersedes all
prior agreements and understandings, oral and written, between the parties
hereto with respect to the subject matter hereof.
12.4 BINDING EFFECT; BENEFIT
This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective permitted heirs, personal representatives,
successors and assigns. Nothing in this Agreement, expressed or implied, is
intended to confer on any person other than the parties hereto or their
respective heirs, personal representatives, successors and assigns, any rights,
remedies, obligations or liabilities under or by reason of this Agreement.
12.5 ASSIGNABILITY
This Agreement shall not be assignable by either party without the
prior written consent of the other party; provided, however, that Eagle Canada
shall be entitled to assign this Agreement to an Affiliate without the consent
of NRG.
12.6 AMENDMENT; WAIVER
This Agreement may be amended, supplemented or otherwise modified only
by a written instrument executed by the parties hereto. No waiver by any party
of any of the provisions hereof shall be effective unless explicitly set forth
in writing and executed by the party so waiving. Except as provided in the
preceding sentence, no action taken pursuant to this Agreement, including
without limitation, any investigation by or on behalf of any party, shall be
deemed to constitute a waiver by the party taking such action of compliance
with any representations, warranties, covenants, or agreements contained
herein, and in any documents delivered or to be delivered pursuant to this
Agreement and in connection with the transactions contemplated hereunder. The
waiver by any party hereto of a breach of any provision of this Agreement shall
not operate or be construed as a waiver of any subsequent breach.
12.7 SEVERABILITY
If any provision of this Agreement shall be declared by any court of
competent jurisdiction to be illegal, void or unenforceable, all other
provisions of this Agreement shall not be affected and shall remain in full
force and effect.
<PAGE> 44
40
12.8 COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original and all of which together shall be
deemed to be one and the same instrument.
12.9 APPLICABLE LAW
This Agreement shall be governed by, and construed in accordance with,
the laws of the Province of Alberta.
12.10 EXECUTION BY EAGLE GEOPHYSICAL
Eagle Geophysical executes and delivers this Agreement solely for the
purposes of representing and warranting to NRG the representations and
warranties set forth in Section 5.3 hereof and entering into the agreements set
forth in Article 11 hereof.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement on the date first above written.
NATURAL RESOURCES EAGLE CANADA, INC.
GEOPHYSICAL CORPORATION
Per: /s/ Robert Wood Per: /s/ Richard W. McNairy
--------------------------- ----------------------------------
Name: Robert Wood Name: Richard W. McNairy
Title: President Title: Vice President
EAGLE GEOPHYSICAL, INC.
Per: /s/ Richard W. McNairy
-------------------------------
Name: Richard W. McNairy
Title: Vice President
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statements File Nos. 333-60509 and 333-61923.
ARTHUR ANDERSEN LLP
Houston, Texas
March 31, 1999
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