SEAL FLEET, INC.
ANNUAL REPORT
DECEMBER 31, 1994
<PAGE>
SEAL FLEET, INC. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT
DECEMBER 31, 1994
PAGE
Message from the Chairman 2
General Business Development 3
Operational Business of the Company 3
Market for the Company's Common Stock 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Report of Independent Auditors 9
Consolidated Balance Sheets for
December 31, 1994 and 1993 10
Consolidated Statements of Operations for
Years ended December 31, 1994 and 1993 12
Consolidated Statements of Shareholders' Equity
for Years ended December 31, 1994 and 1993 13
Consolidated Statements of Cash Flows for
Years ended December 31, 1994 and 1993 14
Notes to Consolidated Financial Statements 15
Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 21
Officers and Directors
Other Corporate Information
<PAGE>
MESSAGE FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Drilling activity for natural gas in the Gulf of Mexico softened in
1994 as gas prices deteriorated. Drilling for crude oil also remained at a
low level even though there was considerable interest expressed in recent
sub-salt oil discoveries. This reduced activity adversely affects the
supply vessel market with weak day rates and reduced utilization. However
the activity was at a level sufficient to allow the Company to maintain a
high utilization rate of its vessels.
Advanced technology, on the other hand, has almost eliminated the
market for certain types of special service vessels such as those operated
by the Company for so many years. In the geophysical industry, for
example, the trend is toward huge special design vessels capable of towing
up to eight streamers. Of the ten vessels that are operated by the
Company, only one vessel operates in the deep water seismic industry while
three continue on term charters with the ocean bottom cable division of one
of the three remaining major geophysical companies. The remaining six
vessels are engaged as offshore supply vessels. Three of these six
offshore supply vessels were previously engaged in seismic work and were
returned to the offshore supply service during 1994.
Mergers and acquisitions of marine service companies continued during
1994 leaving fewer small companies such as Seal Fleet to compete with the
large companies. Revenues derived from the Company's vessel brokerage
business was down somewhat from the previous year, but continued to be a
contributor in keeping the Company profitable.
With no indication that natural gas prices will make a significant
recovery, there is little cause for optimism in our industry. The recently
announced decision by the Minerals Management Service to continue area wide
leasing is a positive sign, but drilling moratoria leave few United States
outer continental shelf opportunities other than in the Gulf of Mexico.
The Company will continue to seek and pursue opportunities to expand
into other areas in an effort to increase profitability.
Sincerely,
John W. Bissell
(Signature)
Chairman, President and CEO
<PAGE>
GENERAL BUSINESS DEVELOPMENT
Seal Fleet, Inc., ("Seal Fleet" or "the Company") is a corporation
organized in November 1969 under the laws of the state of Nevada. All its
business is carried on through subsidiaries. As used in this report, the
terms "Seal Fleet" and "the Company" refer to Seal Fleet, Inc. and its
subsidiaries unless the context indicates otherwise.
Prior to 1979, Seal Fleet's primary business was life insurance and the
Company operated under the name of First National Corporation. In 1979,
the Company went through a quasi-reorganization where it sold its insurance
business, and had a simultaneous reverse and forward stock split. At that
time the Company purchased an offshore service boat company and amended its
Articles of Incorporation to change its name from First National
Corporation to Seal Fleet, Inc. to better describe the nature of its
business.
During the year ended December 31, 1994, the Company was not involved in
any bankruptcy, receivership or similar proceedings, the disposition of any
material subsidiary or any acquisition or disposition of any material
amount of assets other than in the ordinary course of business. During
such year, there were no material changes in the method in which the
Company conducts its business.
OPERATIONAL BUSINESS OF THE COMPANY
PRINCIPAL PRODUCTS AND SERVICES. The primary business of the Company is
the ownership and operation of offshore service ships. The Company's ships
range in size from 176 to 250 feet in length and are capable of carrying
drill pipe, drilling mud and other equipment and supplies to offshore
drilling rigs and other locations. Some of the ships are modified for
seismic operations which allows customers to gather geophysical data to
assist them in evaluating areas of geological interest. Secondly, the
Company owns and operates a travel agency through which it provides travel
services for the Company's crew members, related parties and the general
public.
SEALCRAFT OPERATORS, INC. ("SEALCRAFT"). Sealcraft is a wholly-owned
subsidiary of the Company. Sealcraft manages the Company's fleet of ten
vessels. Eight ships are operated under management agreements, and two are
under bare-boat charters. The ten ships are owned as follows: three ships
are owned by subsidiaries of the Company, five ships by Three R Trusts (of
which Robert Moody is settlor), one ship by National Boat Corporation, and
one ship by Hornbeck Offshore Services, Inc.
Sealcraft-operated ships are chartered principally to oil and geophysical
companies. The terms of each charter are determined through negotiation
and therefore vary. Under a typical charter, Sealcraft provides a
designated ship with a specified crew for the term of the charter.
Sealcraft agrees to maintain the ship, pay wages and other operating
expenses and, in general, to be responsible for the operation of the ship.
The charter specifies in detail the rights and duties of the parties. Some
<PAGE>
charters and operating agreements are cancelable upon relatively short
notice.
Sealcraft-operated ships are hired primarily by United States customers for
use throughout the world. At the present time, one ship is working in
foreign waters. The ships are chartered to, or operated for, United States
companies, and all payments under their charters are made in United States
dollars.
If the Company charters ships to foreign customers, and to the extent that
current charters call for use in foreign waters, the Company is or would be
subject to the laws and regulations of foreign nations as well as those of
the United States.
SEAL MARINE MANAGEMENT COMPANY ("SMMCO"). SMMCO is a wholly-owned
subsidiary of the Company and manages a vessel brokerage business. SMMCO
acts as broker for vessels owned by unrelated companies. SMMCO's sales
force has a knowledge of the industry jobs available as well as the
equipment available. For a fee, SMMCO brings together a company who has a
job but needs equipment and a company who has equipment but needs a job.
The Company brokered over 100 different vessels in 1994 and is expected to
do as well in 1995.
CARIBE COMPANY ("CARIBE"). Caribe is a wholly-owned subsidiary of the
Company and operates a travel agency which began business in February 1990.
The travel agency provides travel arrangements for Sealcraft's crew members
during the crew changes of the ships. The agency also provides travel
services for other related parties and for the general public.
SOUTH CORPORATION ("SOUTH"). South is a wholly-owned subsidiary of the
Company. South owns one vessel which is operated by Sealcraft.
SEAL (GP), INC. ("GP"). GP is a wholly-owned subsidiary of the Company.
GP owns two vessels which are operated by Sealcraft.
COMPETITIVE CONDITIONS. The Company competes with numerous other owners
and operators of offshore service vessels in its operating areas which
include the Gulf of Mexico and various foreign waters. In addition, since
vessels can be easily moved from one geographic area to another, additional
competition could come from operators not now active in the Gulf of Mexico
or other areas in which the Company operates. Some of these competitors
own many more vessels and have much greater financial resources than the
Company.
The Company believes that its largest competitor in the industry is
Tidewater, Inc. which is publicly owned. Other large competing concerns
are privately owned or are subsidiaries of other corporations. Therefore,
the Company cannot accurately estimate its competitive position in its
industry, although it considers itself to be only a minor factor in its
market. Furthermore, some potential customers own and maintain offshore
service and geophysical ships.
<PAGE>
Competition in the offshore service ship industry involves such factors as
availability of vessels of the type needed by a customer, experience and
reputation of the operator and its crews, quality and availability of
equipment, price and charter terms. Charters are sometimes obtained in
competitive bidding, but with established customers they are typically
obtained through negotiation.
GOVERNMENTAL REGULATIONS. Many aspects of the offshore service ship
business are subject to direct governmental regulation. Seal Fleet is
subject to the jurisdiction of the United States Coast Guard, the National
Transportation Safety Board and United States Customs Service, as well as
private industry organizations such as the American Bureau of Shipping.
The Coast Guard and the National Transportation Safety Board set safety
standards and are authorized to investigate vessel accidents and to
recommend improved safety standards. The United States Customs Service is
authorized to inspect vessels at will. To the extent the Company's vessels
operate in foreign waters, the Company is also subject to regulation by the
foreign governments in whose waters it operates.
All of the ships operated by the Company are United States flag vessels,
and their operation and maintenance are subject to federal statutes and
regulations. They are regularly inspected by the United States Coast Guard
and by the American Bureau of Shipping.
In addition to laws and regulations directly affecting the Company, the
Company's business is also influenced by laws, regulations and policies
which impact its customers and the oil and gas industry as a whole.
While management expects the operation of its ships to be subjected to
increasingly stringent industry regulation and that such regulation will
increase its costs of operation, management also believes that any such
additional regulations will affect the Company's competitors in the same
manner and therefore will not adversely impact the Company's relative
position.
Although offshore service vessels are used in almost every phase of
offshore oil and gas exploration, development and production, demand for
them is significantly impacted by the level of drilling activity. The
level of drilling activity in turn is affected by a number of complex
factors, principally the net after-tax prices received or expected to be
received for oil and gas. At least some oil and gas prices are, and
probably will continue to be, controlled or affected directly, or
indirectly, by federal and state regulations. However, they are also
affected by a variety of other factors outside the control of the Company
and its customers, including the cost and availability of imported oil, the
effect of economic conditions on demand for oil and gas, and the cost and
availability of alternative energy sources. The Company can give no
assurance whatsoever as to the future prices of oil or gas.
ENVIRONMENTAL DISCLOSURE. During the past several years a number of
federal, state and local laws relating to environmental quality control
have been enacted, and some of these directly affect the Company. The Oil
Pollution Act of 1990 imposes responsibility for cleanup of any spill on
<PAGE>
the owner of the product spilled. It also imposes liability for the cost
of cleanup and damages to marine facilities on the party that caused the
spill. Regulations promulgated by the United States Coast Guard pursuant
to these laws, dealing with matters such as taking on and discharging of
fuel, have generally increased the cost of operating vessels. It is
possible that even more stringent laws or regulations will be imposed in
the future.
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION. There is no public market for the class B common
stock, all of which is owned by the Three R Trusts.
The class A common stock (2,432,248 shares outstanding, including 447,621
shares held in treasury, as of March 16, 1995) is publicly traded in the
over-the-counter market and through November 1987, was listed on the
National Association of Securities Dealers Automated Quotation ("NASDAQ")
under the symbol SEALA. In November 1987, NASDAQ dropped the listing
because the Company no longer maintained the required equity level.
Subsequent to November 1987, the stock has been listed on the National
Daily Quotation Service ("Pink Sheets"). The following table provides
information regarding the price for class A common stock during the periods
indicated.
<TABLE>
<CAPTION>
1994 1993
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $.88 $.63 $.04 $.02
Second Quarter .94 .65 .10 .04
Third Quarter .75 .50 .94 .82
Fourth Quarter .75 .50 .88 .75
</TABLE>
HOLDERS. The number of stockholders of record as of March 16, 1995, were
5,155 for class A common stock and four for class B common stock.
DIVIDENDS. The Company's current borrowing agreements prohibit the
payment of cash dividends on common shares and the Company has never
declared or paid cash dividends. The Company has never had any redeemable
preferred stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
GENERAL. The Company realized a profit on 1994. However, revenue
decreased by over 4% as compared in 1993. The decrease is due to the loss
of two management contracts during 1994 and a decrease in brokerage
commissions and crewing commissions.
<PAGE>
FINANCIAL CONDITION. Seal Fleet satisfies its short-term working capital
needs with funds generated from operations. Capital expenditures have been
kept at a minimum for the past several years and there are no capital
expenditures scheduled for 1995.
The Company's current operations are as follows: two non-owned vessels are
under bare-boat charter, five vessels which belong to a related party are
under management agreements, and three vessels are company-owned.
Management continues with its plan to enter into more contracts but it
cannot ensure that it will acquire additional contracts or that it will
keep the ones now in existence beyond the current contract terms.
During 1990 a bank note was paid with funds borrowed from National Western
Life Insurance Company, ("NWLIC"), a related party. NWLIC required the
restriction of certain asset and certain transactions. First preferred
ship mortgages on the Company's three ships with a net book value of
$3,091,000 at December 31, 1994, spare parts inventories and accounts
receivable pertaining to the three ships serve as collateral for the note.
In addition, the Company is obligated to pay fifty percent of cash flow
generated by two of the ships and such obligation is dependent upon the
assets attaining certain levels of cash flows. The note agreement also
requires the Company to maintain an interest bearing segregated Cash
Reserve Account for repair and maintenance of two ships and restricts the
Company from declaring or paying any dividend other than dividends payable
in stock.
In 1992, the Company renegotiated the terms of the note with NWLIC. Two
percentage points of interest have been deferred until maturity and 10% is
payable monthly for the term of the note. The Company paid NWLIC $332,000
in principal and $278,000 in interest in 1994, and $253,000 in principal
and $343,000 in interest in 1993 on this note.
In early 1990, a wholly-owned subsidiary started a travel agency to provide
travel arrangements for the crew personnel on the ships. Travel services
are also provided for other related parties and for the general public.
The travel agency reported net loss of $18,000 in 1994 and a net income of
$61,000 in 1993. Certain airlines have capped the amount of commission
they are willing to pay on certain flights. This will have an adverse
effect on the earnings of the travel agency.
RESULTS OF OPERATIONS. The Company realized a net profit of $478,000.
Net sales decreased for the year ended December 31, 1994 by over 4% as
compared to the previous year. The loss of two management contracts and
several crewing contracts caused the decrease in total revenues. Operating
fees decreased by over 50% and crewing fees decreased by over 60%.
Total costs and expenses increased by approximately 3% over the previous
year. Direct operating costs increased by approximately 4% due to an
increase in bareboat charter rates. Drydock amortization also increased by
25%. Drydock amortization expense, whether an increase or a decrease,
always reflect prior year expenditures which were deferred and amortized
over a period of 18 months to 4 years, depending on the expected time of
benefit of these major repairs. Combined selling, general and
<PAGE>
administrative expense, on the other hand, remain unchanged as compared to
the previous year. An allowance for bad debt and legal fees is recorded in
the travel agency general and administrative expense reflecting a possible
loss due to a customer filing for protection under bankruptcy laws.
<PAGE>
PKF WORLDWIDE PANNELL
KERR
FORSTER
of
TEXAS
Certified Public Accountants
Report of Independent Auditors
Shareholders and Board of Directors
Seal Fleet, Inc.
We have audited the consolidated balance sheets of Seal Fleet, Inc. and
subsidiaries as of December 31, 1994 and 1993 and the related consolidated
statements of operations, shareholders' equity and cash flows for the years
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
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
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Seal
Fleet, Inc. and subsidiaries at December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Seal
Fleet, Inc. will continue as a going concern. As more fully described in
Note A, the Company has historically incurred operating losses and has a
working capital deficiency at December 31, 1994. In addition, the Company
is currently in default on a substantial note payable to a related party.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters
are also described in Note A. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classification of
liabilities that may result from the possible inability of Seal Fleet, Inc.
to continue as a going concern.
PANNELL KERR FORSTER OF TEXAS, P.C.
(Signature)
Houston, Texas
March 16, 1995
<PAGE>
SEAL FLEET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31
1994 1993
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash includes $58 and $221 of time deposits
in 1994 and 1993--Note C $ 561 $ 1,244
Notes and accounts receivable:
Trade (includes $301 of unbilled receivables
in 1993, and net of allowance for doubtful
accounts of $64 and $35 in 1994 and 1993)
--Note F 5,483 5,822
Related Party--Note D 1,771
Other 84 65
Materials and supplies 113 142
Deferred drydocking costs--current 243 344
Prepaid expense 31 26
TOTAL CURRENT ASSETS 8,286 7,643
PROPERTY AND EQUIPMENT--NOTES A AND C
Ships and related equipment 9,922 9,922
Furniture and equipment 214 214
Leasehold improvements 120 123
TOTAL PROPERTY AND EQUIPMENT 10,256 10,259
Less accumulated depreciation 7,016 6,509
PROPERTY AND EQUIPMENT--NET 3,240 3,750
OTHER ASSETS
Deferred drydocking costs--non current 83 309
Land--Note B 154 154
Other assets 42 39
TOTAL ASSETS $11,805 $11,895
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
SEAL FLEET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31
1994 1993
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to related party--Note D $ 6,655 $ 6,655
Current portion of long-term debt--Note C 367 332
Trade accounts payable and accrued expenses 4,848 4,213
Accounts payable to related party--Note D 1,037
Accrued interest payable to related party 772 606
TOTAL CURRENT LIABILITIES 12,642 12,843
LONG-TERM DEBT, LESS CURRENT PORTION--
NOTES C AND D:
To related party 2,668 3,035
TOTAL LIABILITIES 15,310 15,878
CONTINGENCIES--NOTE A
SHAREHOLDERS' EQUITY--NOTES C AND D
Class A common stock, $.10 par value;
3,700,000 shares authorized;
2,432,248 shares issued and outstanding 243 243
Class B common stock, $.10 par value;
50,000 shares authorized, issued
and outstanding 5 5
Additional paid-in capital 4,456 4,456
Retained deficit (8,079) (8,557)
Less 447,621 shares of class A common
stock held in treasury, at cost ( 130) ( 130)
TOTAL EQUITY (3,505) (3,983)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,805 $11,895
<FN>
See notes to consolidated financial statements
</FN>
</TABLE>
<PAGE>
SEAL FLEET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
December 31
1994 1993
<S> <C> <C>
REVENUES
Charter revenues--Note D $ 6,443 $ 6,343
Operating fees 332 673
Crewing fees 63 162
Travel agency commissions 295 225
TOTAL REVENUES 7,133 7,403
COSTS AND EXPENSES
Direct operating costs--Notes D and G 2,650 2,574
Selling, general and administrative
expenses--Note D 2,020 2,152
Selling, general and administrative
expenses for travel agency 307 157
Drydocking amortization 349 260
Depreciation and amortization 543 542
TOTAL COSTS AND EXPENSES 5,869 5,685
INCOME FROM OPERATIONS 1,264 1,718
OTHER INCOME (EXPENSE)
Interest income 23 28
Interest expense ( 852) ( 899)
Other 62 58
TOTAL OTHER INCOME (EXPENSE) ( 767) ( 813)
NET INCOME BEFORE PROVISION FOR FEDERAL
INCOME TAX 497 905
Provision for Federal Income Tax--Note E 19 10
NET INCOME $ 478 $ 895
NET INCOME PER COMMON SHARE $ .23 $ .44
WEIGHTED AVERAGE SHARES OUTSTANDING 2,034,627 2,034,627
<FN>
See notes to consolidated financial statements
</FN>
</TABLE>
<PAGE>
SEAL FLEET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
COMMON STOCK Additional
Par Paid-in Retained Treasury
Shares Value Capital Deficit Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balances at
Dec 31, 1992 2,482,248 $248 $4,456 $(9,452) $(130) $(4,878)
Net income 895 895
Balances at
Dec 31, 1993 2,482,248 248 4,456 (8,557) (130) (3,983)
Net income 478 478
Balances at
Dec 31, 1994 2,482,248 $248 $4,456 $(8,079) $(130) $(3,505)
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
SEAL FLEET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31
1994 1993
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 478 $ 895
Adjustments to reconcile net income to net cash
provided (required) by operating activities:
Depreciation and amortization 890 802
Loss on disposition of assets 1
Changes in assets and liabilities:
Materials and supplies 29 94
Trade accounts receivable 339 (2,646)
Accounts receivable from related party (1,771)
Other receivables ( 22) 188
Other current assets ( 5) 7
Trade accounts payable and accrued expenses 635 1,722
Accounts payable to related party (1,037) 288
Interest payable to related party 166 117
NET CASH PROVIDED (REQUIRED) BY OPERATING
ACTIVITIES ( 298) 1,468
INVESTING ACTIVITIES
Decrease (increase) in note receivable 3 ( 9)
Purchases of property and equipment ( 32) ( 55)
Proceeds from sale of furniture & equipment 1
Deferred drydocking additions ( 22) ( 541)
Decrease (increase) in other assets ( 3) 9
NET CASH PROVIDED (REQUIRED) BY INVESTING
ACTIVITIES ( 53) ( 596)
FINANCING ACTIVITIES
Decrease in long-term debt ( 332) ( 353)
NET CASH REQUIRED BY FINANCING ACTIVITIES ( 332) ( 353)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ( 683) 519
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,244 725
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 561 $ 1,244
INTEREST PAID TO RELATED PARTIES $ 686 $ 757
<FN>
See notes to consolidated financial statements
</FN>
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following are the significant accounting policies followed by Seal
Fleet, Inc. ("Seal Fleet" or "the Company") in the preparation of its
consolidated financial statements.
CONSOLIDATION.
The accompanying financial statements include the accounts of Seal Fleet,
Inc. and all of its subsidiaries. All significant intercompany accounts
and transactions are eliminated in consolidation.
STATEMENT OF CASH FLOWS.
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
CONCENTRATION OF CREDIT RISK.
Financial instruments which subject the Company to concentrations of credit
risk consist principally of cash and trade receivables. The cash in local
banks exceeds the insured limit of $100,000 from time to time. The terms
of these deposits are on demand to minimize risk. The Company has not
incurred losses related to these deposits.
The Company sells its services to U.S. Gulf Coast customers of different
economic characteristics operating in the Gulf Coast area and in foreign
waters. Accounts receivable are uncollateralized and are from geophysical
companies, major oil and gas and independent oil and gas companies. The
Company evaluates each customer's financial condition on a continual basis.
The carrying value of the Company's financial instruments approximates the
fair value as of December 31, 1994 and 1993.
GOING CONCERN STATUS.
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. Although the Company
recognized net income of $478,000 and $895,000 during 1994 and 1993,
respectively, it has historically realized substantial losses. At December
31, 1994, the Company's total liabilities exceeded its total assets by
$3,505,000. Further, the Company is currently in default on a significant
portion of notes payable to a related party (see Note D).
These factors indicate that the Company may be unable to continue in its
present form as a going concern. Realization of the net book value of the
ships and related inventory, deferred drydocking costs, and equipment is
dependent upon the Company's ability to satisfactorily increase revenues to
a level which will generate sufficient operating income to recover the
recorded costs of the assets or to make a satisfactory disposition of the
assets. The financial statements do not include any adjustments relating
<PAGE>
to the recoverability and classification of recorded asset amounts,
including the net book value of the ships and related equipment, or the
amount of classification of liabilities that might be necessary should the
Company be unable to continue in existence.
Management continues to pursue additional contracts to manage ships and to
provide ship crewing for other companies. There is no assurance, however,
that any additional contracts will be obtained, that debts can be
satisfactorily serviced, or that any other measures will be successfully
undertaken to ensure the Company's continued existence as a going concern
and the realization of book value of its assets.
MATERIALS AND SUPPLIES. Materials and supplies are stated at the lower of
average cost or market.
REVENUE RECOGNITION. Charter revenues and operating fees include gross
amounts earned from the charter of company-owned and leased boats. Direct
operating costs and drydocking amortization directly relate to the cost of
operating these boats. Also included in charter revenues are the
commissions realized from the vessel brokerage business.
Crewing fees represent net amounts earned for crewing vessels owned by
others. Expenses paid on behalf of the vessel owners in connection with
such operations were $315,000 ad $1,091,000 in 1994 and 1993, respectively.
Travel agency commissions represent approximately 10% of ticket sales. Of
the total commissions earned, approximately 75% are from related parties.
Commissions are recognized at the time of sale.
DRYDOCKING COSTS. Drydocking costs are capitalized and amortized over the
period benefited, which is estimated to be from eighteen months to four
years. These costs are expensed as incurred for federal income tax
purposes.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost. For
financial reporting purposes, the Company records depreciation and
amortization expense on the straight-line method over the estimated useful
lives of the related assets (ships and related equipment--18-25 years;
leasehold improvements--6-25 years; furniture and equipment--3-8 years).
For tax purposes depreciation and amortization expense are computed using
straight-line and accelerated methods. The cost and accumulated
depreciation and amortization of assets sold or otherwise disposed of are
removed from the accounts and any gain or loss thereon is reflected in
operations.
Income Taxes.
The Company adopted Statement of Financial Accounting Standards No. 109 for
the year ended December 31, 1993. The statement requires the use of an
asset and liability approach for financial accounting and reporting for
income taxes.
Deferred income taxes are provided for differences in timing of reporting
certain expenses for financial statement and tax purposes. Deferred tax
<PAGE>
liabilities result primarily from (1) the use of accelerated depreciation
for tax reporting and straight-line depreciation for financial statement
reporting, and (2) deferral of certain expenses for financial accounting
purposes. Deferred tax assets relate to net operating loss carryforwards
and tax credits remaining at December 31, 1994. If it is more likely than
not that some portion or all of a deferred tax asset will not be realized,
a valuation allowance is recognized (see Note E).
NET INCOME OR LOSS PER COMMON SHARE. Net income or loss per common share
is based on the weighted average number of shares outstanding (2,034,627 in
1994 and 1993).
LEASES. Non-capitalized operating leases include those for office space
and automobiles. See Note D and H.
NOTE B. LAND
The Company owns a 516-acre tract of unimproved land in Brazoria County,
Texas. It is recorded at its estimated fair market value of $154,000.
NOTE C. LONG-TERM DEBT.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31
1994 1993
(thousands of dollars)
<S> <C> <C>
Note payable to related party $ 2,535 $ 2,867
Unsecured debentures payable
to related party 500 500
TOTAL DEBT 3,035 3,367
Less current portion of long-term debt ( 367) ( 332)
LONG-TERM DEBT $ 2,668 $ 3,035
</TABLE>
Note payable to National Western Life Insurance Company ("NWLIC"), a
related party, in the face amount of $3,450,000 was entered into in May
1990 with a maturity date of June 2000 and interest of 12%. The note is
collateralized primarily by first preferred ship mortgages on the Company's
three ships.
In January 1992, the Company renegotiated the terms of the NWLIC note which
reduced the interest rate payable to 10% for the remaining term of the
note, and the other 2% per annum is deferred until maturity. Future
<PAGE>
required principal payments by year are as follows
1995 367,000
1996 905,000
1997 448,000
1998 495,000
1999 546,000
thereafter 274,000
Additionally, the Company may be obligated to pay fifty percent of cash
flow generated by a portion of the collateralized assets when and if the
assets attain certain levels of cash flows. The note agreement also
requires the Company to maintain an interest bearing segregated cash
reserve account for repairs and maintenance and restricts the Company from
declaring or paying any dividend other than those payable in stock. The
balances of the cash reserve account were $227,000 and $265,000 at December
31, 1994 and 1993, respectively. This note is collateralized by first
preferred ship mortgages of three ships with a net book value of $3,091,000
at December 31, 1994, spare parts inventory and accounts receivable
pertaining to the three ships.
The unsecured debentures are due August 5, 1996, and interest is payable
quarterly at a rate of 8%.
NOTE D. RELATED PARTY TRANSACTIONS.
Three R Trusts ("Trusts") own approximately 9% of the class A common stock
and all of the class B common stock of the Company. The Trusts, as the
owner of the class B stock, have the right to elect 51% of the board of
directors. The four children of Robert L. Moody, Sr. are the beneficiaries
of the Trusts. Mr. Moody owned no class A common stock at December 31,
1994.
Transactions with the Trusts, Mr. Moody, and other related parties were as
follows:
MANAGEMENT INCOME AND RECEIVABLES. The Company manages and operates
various ships owned by the Trusts. The Company earns fees based on 6% of
the ships' revenues. Fees earned on the Trusts' ships totaled $249,000 and
$264,000 during 1994 and 1993, respectively.
ACCOUNTS RECEIVABLE-PAYABLE. On behalf of the related parties, the
Company collects revenues and pays expenses for the management of these
ships. This activity resulted in a receivable from the Trusts of
$1,771,000 at December 31, 1994 and a payable to the Trusts of $1,037,000
at December 31, 1993.
RENTS AND LEASES. The Company leases its office space from a partnership
in which Mr. Moody participates. Rent expense was $20,000 in 1994 and
1993. This amount represents the minimum annual rental under the lease.
The lease expires in 1996, but favorable renewal options are available.
The Company also pays for repairs, insurance and taxes.
<PAGE>
The Company leased hunting grounds from Robert L. Moody, Jr. Lease expense
was $13,000 in 1994 and 1993.
CONSULTING FEE. Mr. Moody earned consulting fees from the Company of
$50,000 and $54,000 in 1994 and 1993, respectively.
NOTES PAYABLE. The Company has a note payable to the Trusts, face amount
of $5,825,000, stated interest at 7%, collateralized by the common stock of
six subsidiaries of the Company. The note was originally discounted by
$1,330,000 using an imputed rate of 10%. This discount was fully amortized
in 1989. Principal payments were due in two equal installments on December
27, 1990 and 1991. The Company was unable to make the principal payments
to the Three R Trusts putting the Company in default. In 1993, the Company
made a principal payment of $100,000. The Trust have not called the note
and orally have granted an indefinite extension. The entire balance is
classified as current at December 31, 1994 and 1993.
During each of the years 1986 through 1989 the Company paid one-half of the
interest due to the Trusts during the year and gave a promissory note for
the remainder totaling $208,000 per year. The total of these notes is
$830,000, and they were due on December 27, 1991. Total interest expense
on these notes is $489,000 at December 31, 1994 and 1993.
LEGAL FEES. Greer Herz and Adams received $1,000 of legal fees in 1994
and 1993, respectively. Mr. Irwin M. Herz, Jr. is a trustee of the Three R
Trusts.
CASH DEPOSITS. The company has $378,000 and $1,087,000 of cash on deposit
at Moody National Bank in 1994 and 1993, respectively.
NOTE E. FEDERAL INCOME TAX.
The Company files a consolidated federal income tax return. At December
31, 1994 for federal income tax purposes, the Company had investment tax
and jobs credit carryforwards totaling $803,000 expiring in various years
from 1995 to 2000, and unused net operating loss carryforwards of
$8,318,000 which expire in various years from 1999 to 2007.
Deferred taxes as of December 31 consist of the following (in thousands):
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Deferred tax liabilities $(1,150) $(1,410)
Deferred tax assets 3,653 4,121
Deferred tax asset valuation allowance (2,503) (2,711)
TOTAL $ -0- $ -0-
</TABLE>
Approximately $83,000 of the deferred tax liability and deferred tax asset
is current at December 31, 1994. The Company has recorded a valuation
<PAGE>
allowance to offset the deferred tax assets which may not be realized. The
valuation allowance decreased by $208,000 in 1994 due primarily to the
utilization of net operating loss carryforwards and expiration of certain
tax credits for the year ended December 31, 1994.
The following reconciles the expected tax provision obtained by applying
statutory rates to 1994 and 1993 pretax income:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Expected tax provision $ 169,000 $ 304,000
Excess book depreciation 161,000 148,000
Deferred expenses 111,000 ( 95,000)
Non deductible expenses 17,000 4,000
Other 8,000
Tax benefit of NOL carryforwards (466,000) (361,000)
TOTAL $ -0- $ -0-
</TABLE>
The Company is subject to alternative minimum tax of $19,000 and $10,000 at
December 31, 1994 and 1993, respectively.
NOTE F. INDUSTRY AND MAJOR CUSTOMERS.
The major business of the Company is operation of offshore geophysical
research and supply ships. Following is an analysis of revenues derived
from its non-related customers which accounted for 10% or more of revenue
for the years ended December 31, 1994 and 1993 (dollars in thousands):
<TABLE>
<CAPTION>
1994 1993
Revenue Percent Revenue Percent
<S> <C> <C> <C> <C>
Customer A $2,324 33% $1,658 22%
Customer B 940 13
Customer C 742 10
</TABLE>
NOTE G. SUPPLEMENTARY INCOME STATEMENT INFORMATION
Maintenance and repairs were $700,000 and $646,000 for the years ended
December 31, 1994 and 1993, respectively.
NOTE H. COMMITMENTS
The Company rents vehicles under non-cancelable leases which expire through
1997. The total rentals charged to administrative expense amounted to
$70,000 and $53,000 in 1994 and 1993, respectively.
<PAGE>
Minimum lease payments for vehicle rental are as follows:
Year Minimum rentals
1995 $57,000
1996 31,000
1997 8,000
TOTAL $96,000
NOTE I. 401-K EMPLOYEE RETIREMENT PLAN
The Company adopted a 401-K Employee Retirement Plan ("Plan") effective
January 1, 1985. The Plan covers all eligible Company employee and has
been approved by the Internal Revenue Service. Contributions can be made
by an employee at a percentage of salary but not to exceed the maximum
allowed by the Internal Revenue Service. The Company does not contribute
to the Plan. It does, however, pay administrative fees which are deemed to
be immaterial.
ITEM 8. CHANGES IN THE DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements in the fiscal years ended December 31 1994 and
1993 or in the interim periods subsequent to December 31, 1994.
DIRECTORS AND CORPORATE OFFICERS
John W. Bissell Trinidad C. Salinas
Chairman of the Board Financial Vice President
President and CEO Treasurer and Assistant
Director Corporate Secretary
Ann McLeod Moody Carl H. Haglund
Corporate Secretary Executive Vice President
Director
Louis E. Pauls, Jr. Robert L. Moody, Jr.
Director Director
Harold C. MacDonald Gerald J. Smith
Director Director
Russell S. Moody
Director
OTHER CORPORATE INFORMATION
CORPORATE OFFICE
3305 Avenue S
Galveston, Texas 77553-1168
Phone: 409-763-8878
Phone: 800-562-7325
Fax: 409-763-8892
TRANSFER AGENT
Society National Bank
c/o KeyCorp Shareholder Services Inc.
700 Louisiana, Suite 2620
Houston, Texas 77002-2729
Phone: 800-539-6549
Fax: 713-546-5510
INDEPENDENT AUDITORS
Pannell Kerr Forster of Texas, P.C.
5847 San Felipe, Suite 2300
Houston, Texas 77057
Phone: 713-546-5500
STOCK SYMBOL
SEALA
