SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

FORM 20-F

 

Commission File Number 001-14622

 

 

 

 

Compagnie Générale de Géophysique-Veritas

(Exact name of registrant as specified in its charter)

CGGVeritas

(Translation of registrant’s name into English)

Republic of France

(Jurisdiction of incorporation or organization)

Tour Maine Montparnasse

33, avenue du Maine

75015 Paris France

(Address of principal executive offices)

Stephane-Paul Frydman

Chief Financial Officer

CGGVeritas

Tour Maine Montparnasse

33, avenue du Maine

75015 Paris France

tel: +33 (0) 16467 4500

fax: +33 (0) 16447 3429

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

 

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

(Title of class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

71/2% Senior Notes due 2015

73/4% Senior Notes due 2017

91/2% Senior Notes due 2016

(Title of class)

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

151,146,594 Ordinary Shares, nominal value €0.40 per share

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o     No þ

 

Note — checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those sections.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 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 þ     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: U.S. GAAP o

 

International Financial Reporting Standards as issued by the International Accounting Standards Board þ     Other o

 

If “other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:

Item 17 o     Item 18 o

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No þ

 

 

PRESENTATION OF INFORMATION

 

On January 12, 2007, CGG merged with Veritas (the “merger”) in a part cash, part stock transaction and upon completion of the merger, CGG was renamed Compagnie Générale de Géophysique-Veritas (abbreviated as CGGVeritas). Accordingly, where this annual report provides information for dates prior to January 12, 2007, such information relates to CGG only. We have also provided certain information relating to Veritas prior to January 12, 2007. Information in this annual report on or after January 12, 2007 relates to CGGVeritas.

 

As used in this annual report “CGG” refers to Compagnie Générale de Géophysique and its subsidiaries, except as otherwise indicated, “Veritas” refers to Veritas DGC Inc. and its subsidiaries before the merger and to CGGVeritas Services Holding (U.S.) Inc. following the merger. “CGGVeritas” refers to Compagnie Générale de Géophysique-Veritas, and “we”, “us”, “our” and “Group” refers to Compagnie Générale de Géophysique-Veritas and its subsidiaries after the merger and Compagnie Générale de Géophysique and its subsidiaries before the merger, except as otherwise indicated.

 

In this annual report, references to “United States” or “U.S.” are to the United States of America, references to “U.S. dollars”, “$” or “U.S.$” are to United States dollars, references to “France” are to the Republic of France, references to “Norway” are to the Kingdom of Norway, references to “NOK” are to Norwegian kroner and references to “euro” or “€” are to the single currency introduced at the start of the third stage of European Economic and Monetary Union pursuant to the Treaty establishing the European Union.

 

As our shares are listed on the New York Stock Exchange (in the form of American Depositary Shares), we are required to file an annual report on Form 20-F with the SEC. Our annual report includes our annual financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) and its interpretations as issued by the International Accounting Standards Board (IASB). These consolidated financial statements were also prepared in accordance with IFRS as adopted by the European Union at December 31, 2009.

 

Unless otherwise indicated, statements in this annual report relating to market share, ranking and data are derived from management estimates based, in part, on independent industry publications, reports by market research firms or other published independent sources. Any discrepancies in any table between totals and the sums of the amounts listed in such table are due to rounding.

 

FORWARD-LOOKING STATEMENTS

 

This annual report includes “forward-looking statements” within the meaning of the federal securities laws, which involve risks and uncertainties, including, without limitation, certain statements made in the sections entitled “Information on the Company” and “Operating and Financial Review and Prospects”. You can identify forward-looking statements because they contain words such as “believes”, “expects”, “may”, “should”, “seeks”, “approximately”, “intends”, “plans”, “estimates”, or “anticipates” or similar expressions that relate to our strategy, plans or intentions. These forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those that we expected. We have based these forward-looking statements on our current views and assumptions about future events. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are based upon information available to us on the date of this annual report.

 

Important factors that could cause actual results to differ materially from our expectations (“cautionary statements”) are disclosed under “Item 3: Key Information — Risk Factors” and elsewhere in this annual report, including, without limitation, in conjunction with the forward-looking statements included in this annual report. Some of the factors that we believe could affect our actual results include:

 

 

 

We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. In addition, in light of these risks, uncertainties and assumptions, the forward-looking events discussed in this annual report might not occur. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements included in this annual report, including those described in “Item 3: Key Information — Risk Factors” of this annual report.

 

TABLE OF CONTENTS

 

 

 

Not applicable.

 

 

Not applicable.

 

 

Selected Financial Data

 

The selected financial data included below should be read in conjunction with, and are qualified in their entirety by reference to, our consolidated financial statements and “Item 5: Operating and Financial Review and Prospects” included elsewhere in this annual report. The selected financial data included below are for CGG prior to the merger with Veritas, which was completed on January 12, 2007, and for CGGVeritas thereafter. The selected financial data for each of the years in the five-year period ended December 31, 2009 have been derived from our audited consolidated financial statements prepared in accordance with IFRS.

 

 

 

 

 

Exchange Rates

 

The following table shows, for the periods indicated, information concerning the exchange rate between the U.S. dollar and the euro. This information is provided solely for your information, and we do not represent that euros could be converted into U.S. dollars at these rates or at any other rate. These rates are not the rates used by us in the preparation of our consolidated financial statements.

 

The data provided in the following table is expressed in U.S. dollars per euro and is based on noon buying rates published by the Federal Reserve Bank of New York for the euro. On April 16, 2010, the most recent practicable day prior to the date of this annual report, the exchange rate as published by the Federal Reserve Bank of New York was €1.00 = $1.3487.

 

 

 

Notes:

 

 

Capitalization and Indebtedness

 

Not applicable.

 

Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

Risk Factors

 

Risks related to our business

 

  Current economic uncertainty and the volatility of the oil and natural gas prices could have a significant adverse effect on demand for certain of our products and services, our results of operations, our cash flows, our financial condition and our ability to borrow.

 

Since late 2008, global market and economic conditions have been uncertain and volatile. In the past, economic contractions have weakened demand and lowered prices for oil and natural gas, which entailed a reduction of the levels of exploration for hydrocarbons. Historically, demand for our products and services has been sensitive to the level of exploration spending by oil and gas companies; as a result the demand for our products and services declines when the global level of exploration expenditures declines.

 

Difficult conditions in the credit and capital markets and the uncertainty about the global economy have had and are likely to continue to have a significant adverse impact on industrial and commercial performance and the solvency of many companies, which may affect some of our customers and suppliers. Some companies have found their access to liquidity constrained or subject to more onerous terms. In this context, there can be no assurance that our customers will be able to borrow money on a timely basis or on reasonable terms, which could have a negative impact on their demand for our products, and impair the ability of our customers to pay us for our products and services on a timely basis, or at all. More generally, the current economic climate may lead customers to cancel or delay orders. Suppliers may also fail to provide goods and services as agreed. These developments could have a material adverse effect on our business, results of operations, financial condition and cash flows.

 

The recent turmoil in the credit markets and its potential impact on the liquidity of major financial institutions may also have an adverse effect on our ability to fund our business strategy through borrowings under either existing or new debt facilities in the public or private markets and on terms we believe to be reasonable. Persistent volatility in the financial markets could have a material adverse effect on our ability to refinance all or a portion of our indebtedness and to otherwise fund our operational requirements.

 

It is difficult to predict how long the current economic conditions will persist, whether they will deteriorate further, and which of our products and services will be adversely affected. We may have impairment losses as events or changes in circumstances occur which reduce the fair value of an asset below its carrying amount. As a result, these conditions could adversely affect our financial condition and results of operations, and we may be subject to increased disputes and litigation because of these events and issues.

 

  We are subject to risks related to our international operations that could harm our business and results of operations.

 

With operations worldwide, including in emerging markets, our business and results of operations are subject to various risks inherent in international operations. These risks include:

 

 

We are exposed to these risks in all of our foreign operations to some degree, and such exposure could be material to our financial condition and results of operations in emerging markets where the political and legal environment is less stable. We cannot assure you that we will not be subject to material adverse developments with respect to our international operations or that any insurance coverage we have will be adequate to compensate us for any losses arising from such risks.

 

Revenue generating activities in certain foreign countries may require prior United States government approval in the form of an export license and may otherwise be subject to tariffs and import/export restrictions. These laws can change over time and may result in limitations on our ability to compete globally. In addition, non-U.S. persons employed by our separately incorporated non-U.S. entities may conduct business in some foreign jurisdictions that are subject to U.S. trade embargoes and sanctions by the U.S. Office of Foreign Assets Control. We have typically generated revenue in these countries through the performance of data processing and reservoir consulting services and the sale of software licenses and software maintenance. We have current and ongoing relationships with customers in these countries. We have procedures in place to conduct these operations in compliance with applicable U.S. laws. However, failure to comply with U.S. laws on equipment and services

exports could result in material fines and penalties and/or damage to our reputation. In addition, our presence in these countries could reduce demand for our securities among certain investors.

 

Certain of our clients and certain tax, social security or customs authorities may request that we or certain of our subsidiaries post performance bonds or guarantees issued by banks or insurance companies, including in the form of stand-by letters of credit, in order to guarantee our legal or contractual obligations. We cannot assure you that we will be able to provide these bonds or guarantees in the amounts or durations required or for the benefit of the necessary parties. Our failure to comply with these requests could reduce our capacity to conduct business or perform our contracts. In addition, if we do provide these bonds or guarantees, our clients or the relevant authorities may call them under circumstances that we believe to be improper, and we may not be able to challenge such actions effectively in local courts.

 

We and certain of our subsidiaries and affiliated entities also conduct business in countries that experience government corruption. We are committed to doing business in accordance with all applicable laws and our codes of ethics, but there is a risk that we, our subsidiaries or affiliated entities or their respective officers, directors, employees or agents may act in violation of applicable laws, including the Foreign Corrupt Practices Act of 1977 or any laws enforced by the US Office of Foreign assets control. Any such violations could result in substantial civil and/or criminal penalties and might materially adversely affect our business and results of operations or financial condition.

 

  We are subject to certain risks related to acquisitions, and these risks may materially adversely affect our revenues, expenses, operating results and financial condition.

 

In the past we have grown by acquisitions, some of which, such as the merger with Veritas in 2007 or the Wavefield acquisition in 2008, were quite significant. Such transactions, whether completed, pending or likely to be completed in the future, present various financial and management-related risks that can be material, such as integration of the acquired businesses in a cost-effective manner; implementation of a combined business strategy; diversion of management’s attention; outstanding or unforeseen legal, regulatory, contractual, labor or other issues arising from the acquisitions; additional capital expenditure requirements; retention of customers; combination of different company and management cultures; operations in new geographic markets; the need for more extensive management coordination; and retention, hiring and training of key personnel. Should any of these risks associated with acquisitions materialize, it could have a material adverse effect on our business, financial condition and results of operations.

 

  We may need to write down goodwill from our balance sheet.

 

We have been involved in a number of business combinations in the past, leading to the recognition of large amounts of goodwill on our balance sheet. Goodwill totaled €1,868.1 million on our balance sheet as of December 31, 2009. Goodwill is allocated to cash generating units (“CGUs”) (as described in note 11 to our consolidated financial statements for the year ended December 31, 2009). The recoverable amount of a CGU is estimated at each balance sheet date and is generally determined on the basis of a group-wide estimate of future cash flows expected from the CGU in question. The estimate takes into account, in particular, the removal from service of certain assets used in our business (such as decommissioning or coldstacking vessels) or any significant underperformance in cash generation relative to previously-expected results, which may arise, for example, from the underperformance of certain assets, a deterioration in industry conditions or a decline in the economic environment. At each balance sheet date, if we expect that a CGU’s recoverable amount will fall below the amount of goodwill recorded on the balance sheet, we may write down that goodwill in part or in whole. Such a write-down would not in itself have an impact on cash flow, but could have a substantial negative impact on our operating income and net income, and as a result, on our shareholders’ equity and net debt/equity ratio. In the fourth quarter of 2009, we recognized an impairment loss on goodwill of €216 million on our marine cash generating unit.

 

  We invest significant amounts of money in acquiring and processing seismic data for multi-client surveys and for our data library without knowing precisely how much of the data we will be able to sell or when and at what price we will be able to sell the data.

 

We invest significant amounts of money in acquiring and processing seismic data that we own. By making such investments, we are exposed to the following risks:

 

 

 

  Our results of operations may be significantly affected by currency fluctuations.

 

We derive a substantial portion of our revenues from international sales, subjecting us to risks relating to fluctuations in currency exchange rates. Our revenues and expenses are mainly denominated in U.S. dollars and euros, and to a significantly lesser extent, in Canadian dollars, Brazilian reais, Australian dollars, Norwegian kroner and British pounds. Historically, a significant portion of our revenues that were invoiced in euros related to contracts that were effectively priced in U.S. dollars, as the U.S. dollar often serves as the reference currency when bidding for contracts to provide geophysical services.

 

Fluctuations in the exchange rate of the euro against such other currencies, particularly the U.S. dollar, have had in the past and will have in the future a significant effect upon our results of operations, which are reported in euros. For financial reporting purposes, depreciation of the U.S. dollar against the euro will negatively affect our reported results of operations since U.S. dollar-denominated earnings that are converted to euros are stated at a decreased value. Moreover, and in addition to the impact of the conversion of the U.S. dollar at a decreased value, since we participate in competitive bids for data acquisition contracts that are denominated in U.S. dollars, the depreciation of the U.S. dollar against the euro harms our competitive position against companies whose costs and expenses are denominated to a greater extent in U.S. dollars. While we attempt to reduce the risks associated with such exchange rate fluctuations through our hedging policywe cannot assure you that we will maintain our profitability level or that fluctuations in the values of the currencies in which we operate will not materially adversely affect our future results of operations. As of the date of this annual report, our annual fixed expenses in euros are equal to approximately €400 million and as a consequence, an unfavorable variation of US$0.10 in the exchange rate between the U.S. dollar and the euro would reduce our operating income and our shareholders’ equity by approximately US$40 million. As of December 31, 2009 we and our subsidiaries whose functional currency is the euro had dollar-denominated assets and liabilities of U.S.$2,185.9 million and U.S.$2,165.3 million, respectively. Our net balance sheet exchange rate exposure was thus U.S.$20.6 million before hedging and U.S.$(41.2) million after taking into account hedging arrangements of U.S.$(61.8) million. As a result of our compliance with IAS 12 (Income Taxes), our results of operation are also exposed to the effect of exchange rate variations on our deferred tax amounts when the functional currency for an entity that owns an asset is not the same as the currency used for taxation purposes. This is the case for several Norwegian subsidiaries that own offshore assets (vessels and equipment) for which the functional currency is the U.S. dollar, whereas the taxable currency is the Norwegian kroner. We estimate that as of the date of this annual report, a decrease of NOK 1 in the value of the Norwegian kroner relative to the U.S. dollar would increase our deferred tax liability by approximately US$8 million.

 

  Our working capital needs are difficult to forecast and may vary significantly, which could result in additional financing requirements that we may not be able to meet on satisfactory terms, or at all.

 

It is difficult for us to predict with certainty our working capital needs. This difficulty is due primarily to working capital requirements related to the marine seismic acquisition business and related to the development and introduction of new lines of geophysical equipment products. For example, under specific circumstances, we may have to extend the length of payment terms we grant to customers or may increase our inventories substantially. We may therefore be subject to significant and rapid increases in our working capital needs that we may have difficulty financing on satisfactory terms, or at all, due notably to limitations in our debt agreements.

 

  Technological changes and new products and services are frequently introduced in the market, and our technology could be rendered obsolete by these introductions, or we may not be able to develop and produce new and enhanced products on a cost-effective and timely basis.

 

Technology changes rapidly in the seismic industry, and new and enhanced products are frequently introduced in the market for our products and services, particularly in our equipment manufacturing and data processing and

geosciences sectors. Our success depends to a significant extent upon our ability to develop and produce new and enhanced products and services on a cost-effective and timely basis in accordance with industry demands. While we commit substantial resources to research and development, we may encounter resource constraints or technical or other difficulties that could delay the introduction of new and enhanced products and services in the future. In addition, the continuing development of new products risks making our older products obsolete. New and enhanced products and services, if introduced, may not gain market acceptance and may be materially adversely affected by technological changes or product or service introductions by one of our competitors.

 

  The nature of our business subjects us to significant ongoing operating risks for which we may not have adequate insurance or for which we may not be able to procure adequate insurance on acceptable terms, if at all.

 

Our seismic data acquisition activities, particularly in deepwater marine areas, are often conducted under harsh weather and other hazardous operating conditions. These operations are subject to risks of loss to property and injury to personnel from fires, accidental explosions, ice floes and high seas. These types of events could result in loss from business interruption, delay, equipment damage or other liability. We carry insurance against damage to or the destruction of our seismic equipment and against business interruption for our Services data processing centers and Sercel production centers in amounts we consider appropriate in accordance with industry practice. However, our insurance coverage may not be adequate in all circumstances or against all hazards, and we may not be able to maintain adequate insurance coverage in the future at commercially reasonable rates or on acceptable terms.

 

  We depend on proprietary technology and are exposed to risks associated with the misappropriation or infringement of that technology.

 

Our results of operations depend in part upon our proprietary technology. We rely on a combination of patents, trademarks and trade secret laws to establish and protect our proprietary technology. We currently hold or have applied for 205 patents in various countries for products and processes. These patents last up to 20 years, depending on the date of filing and the protection accorded by each country. In addition, we enter into confidentiality and license agreements with our employees, customers and potential customers which limit access to and distribution of our technology. However, actions that we take to protect our proprietary rights may not be adequate to deter the misappropriation or independent third-party development of our technology. Although we are not currently involved in any material litigation regarding our intellectual property rights or the possible infringement of intellectual property rights of others, such litigation may be brought in the future. In addition, the laws of certain foreign countries do not protect proprietary rights to the same extent as either the laws of France or the laws of the United States, which may limit our ability to pursue third parties that misappropriate our proprietary technology.

 

  Our failure to attract and retain qualified employees may materially adversely affect our future business and operations.

 

Our future results of operations will depend in part upon our ability to retain our existing highly skilled and qualified employees and to attract new employees. A number of our employees are highly skilled scientists and technicians. We compete with other seismic products and services companies and, to a lesser extent, companies in the oil industry for skilled geophysical and seismic personnel, particularly in times when demand for seismic services is relatively high. A limited number of such skilled personnel is available, and demand from other companies may limit our ability to fill our human resources needs. If we are unable to hire, train and retain a sufficient number of qualified employees, this could impair our ability to compete in the geophysical services industry and to develop and protect our know-how. Our success also depends to a significant extent upon the abilities and efforts of members of our senior management, the loss of whom could materially adversely affect our business and results of operations.

 

  CGGVeritas has had losses in the past and there is no assurance of our profitability for the future.

 

Before they merged, CGG and Veritas have had losses in the past. In 2007 and 2008, our net profit attributable to shareholders amounted to €245.5 million and €332.8 million, respectively. In 2009, we recorded a net loss attributable to shareholders of €264.3 million. There is therefore no assurance as to our profitability for the future.

Risks related to our industry:

 

  The volume of our business depends on the level of capital expenditures by the oil and gas industry, and reductions in such expenditures may have a material adverse effect on our business.

 

Demand for our products and services has historically been dependent upon the level of capital expenditures by oil and gas companies for exploration, production and development activities. These expenditures are significantly influenced by hydrocarbons prices and by expectations regarding future hydrocarbons prices. Oil and gas prices may fluctuate based on relatively minor changes in the supply of and demand for oil and gas, expectations regarding future supply of and demand for hydrocarbons and certain other factors beyond our control. Lower or volatile oil and gas prices tend to limit the demand for seismic services and products.

 

Factors affecting the prices of hydrocarbons (and, consequently, demand for our products and services) include:

 

 

  Our backlog includes contracts that can be unilaterally terminated at the client’s option.

 

In accordance with industry practice, contracts for the provision of seismic services typically can be canceled at the sole option of the oil or gas client without payment of significant cancellation costs to the service provider.

 

As a result, even if contracts are not recorded in backlog unless they represent a firm commitment by the client, there can be no assurance that such contracts will be wholly executed by us and generate actual revenue, or even that the total costs already incurred by us in connection with the contract would be covered in full by any cancellation clause.

 

  We are subject to intense competition in the markets where we carry out our operations, which could limit our ability to maintain or increase our market share or to maintain our prices at profitable levels.

 

Most of our contracts are obtained through a competitive bidding process, which is standard for the seismic services industry in which we operate. Competitive factors in recent years have included price, crew availability, technological expertise and reputation for quality, safety and dependability. While no single company competes with us in all of our segments, we are subject to intense competition in each of our segments. We compete with large, international companies as well as smaller, local companies. In addition, we compete with major service providers and government-sponsored enterprises and affiliates. Some of our competitors operate more data acquisition crews than we do and have greater financial and other resources. These and other competitors may be better positioned to withstand and adjust more quickly to volatile market conditions, such as fluctuations in oil and gas prices and production levels, as well as changes in government regulations. In addition, if geophysical service competitors increase their capacity (or do not reduce capacity if demand decreases), the excess supply in the seismic services market could apply downward pressure on prices. The negative effects of the competitive environment in which we operate could have a material adverse effect on our results of operations.

 

  As a result of current conditions in the seismic market, we have taken significant measures to reduce our fleet of vessels and we may take temporary additional measures to further reduce our fleet capacity in the future if called for by the situation in the seismic market.

 

In order to adjust to the conditions in the seismic market and to reposition our fleet toward high capacity vessels, we decided in 2009 to reduce our fleet capacity on a permanent basis to 18 vessels, by decommissioning nine vessels. As of December 31, 2009, six of these vessels had been decommissioned and the three remaining vessels are scheduled to be decommissioned in 2010. In the future, economic conditions in the seismic market could

lead us to further adjust our marine acquisition capacity on a temporary basis, for example by cold stacking certain of our vessels. Reductions in capacity can generate additional operating costs.

 

  We have high levels of fixed costs that are incurred regardless of our level of business activity.

 

We have high fixed costs and data acquisition activities that require substantial capital expenditures. As a result, downtime or low productivity due to reduced demand, weather interruptions, equipment failures or other causes could result in significant operating losses.

 

  The revenues we derive from land and marine seismic data acquisition vary significantly during the year.

 

Our land and marine seismic data acquisition revenues are partially seasonal in nature. The marine data acquisition business is, by its nature, exposed to unproductive interim periods due to necessary repairs or transit time from one operational zone to another during which revenue is not recognized. Other factors that cause variations from quarter to quarter include the effects of weather conditions in a given operating area, the internal budgeting process of some important clients for their exploration expenses, and the time needed to mobilize production means or obtain the administrative authorizations necessary to commence data acquisition contracts.

 

  Our business is subject to governmental regulation, which may adversely affect our future operations.

 

Our operations are subject to a variety of federal, provincial, state, foreign and local laws and regulations, including environmental, health and safety and labor laws. We invest financial and managerial resources to comply with these laws and related permit requirements. Our failure to do so could result in fines or penalties, enforcement actions, claims for personal injury or property damages, or obligations to investigate and/or remediate contamination. Failure to obtain the required permits on a timely basis may also prevent us from operating in some cases, resulting in crew downtime and operating losses. Moreover, if applicable laws and regulations, including environmental, health and safety requirements, or the interpretation or enforcement thereof, become more stringent in the future, we could incur capital or operating costs beyond those currently anticipated. The adoption of laws and regulations that directly or indirectly curtail exploration by oil and gas companies could also materially adversely affect our operations by reducing the demand for our geophysical products and services.

 

In particular, we may be affected by new environmental laws or regulations intended to limit or reduce emissions of gases, such as carbon dioxide and methane, that may be contributing to climate change. The European Union has already established greenhouse gas regulations, and many other countries, including the United States, are in the process of doing so. This could cause us to incur additional direct costs in complying with any new environmental regulations, as well as increase indirect costs resulting from our customers, suppliers or both incurring additional compliance costs that get passed on to us. Moreover, passage of climate change legislation or other regulatory initiatives that target emissions of greenhouse gases may curtail production and demand for fossil fuels such as oil and gas and thus adversely affect future demand for our products and services. Reductions in our revenues or increases in our expenses as a result of climate control initiatives could have adverse effects on our business, financial position, results of operations and prospects.

 

Risks related to our indebtedness

 

  Our substantial debt could adversely affect our financial health and prevent us from fulfilling our obligations.

 

We have a significant amount of debt. As of December 31, 2009, our net debt, total assets and shareholders’ equity were €918.7 million, € 4,921.2 million and €2,661.3 million, respectively. We cannot assure you that we will be able to generate sufficient cash to service our debt or sufficient earnings to cover fixed charges in future years.

 

As of December 31, 2009, our financial debt consisted primarily of:

 

 

Our substantial debt could have important consequences. In particular, it could:

 

 

  Our debt agreements contain restrictive covenants that may limit our ability to respond to changes in market conditions or pursue business opportunities.

 

The indentures governing our senior notes and the agreements governing our senior credit facilities and our French revolving facility contain restrictive covenants that limit our ability and the ability of certain of our subsidiaries to, among other things:

 

 

Complying with the restrictions contained in some of these covenants requires us to meet certain ratios and tests, notably, in the case of our senior facilities, (i) a minimum ratio of EBITDA to total interest costs of 4.00:1 for the 12-month testing period ended December 31, 2009 (the actual ratio as of December 31, 2009 was 7.2:1) and (ii) a maximum ratio of total net debt to EBITDA of 2.25:1 for the 12-month testing period ended December 31, 2009 (the actual ratio as of December 31, 2009 was 1.3:1). Information relating to our indebtedness and the restrictive covenants contained in our debt agreements is provided in note 13 to our consolidated financial statements for the year ended December 31, 2009. The requirement that we comply with these provisions may materially adversely affect our ability to react to changes in market conditions, take advantage of business opportunities we believe to be desirable, obtain future financing, fund needed capital expenditures, or withstand a continuing or future downturn in our business.

 

  If we are unable to comply with the restrictions and covenants in the indentures governing our senior notes, senior facilities agreement, the French revolving facility agreement and other current and future debt agreements, there could be a default under the terms of these indentures and agreements, which could result in an acceleration of repayment.

 

If we are unable to comply with the restrictions and covenants in the indentures governing our senior notes or in other current or future debt agreements, including the senior facilities agreement and the French revolving facility agreement, there could be a default under the terms of these indentures and agreements. Our ability to comply with these restrictions and covenants, including meeting financial ratios and tests, may be affected by events beyond our control. As a result, we cannot assure you that we will be able to comply with these restrictions and covenants or meet such financial ratios and tests. In the event of a default under these agreements, lenders could terminate their commitments to lend or accelerate the loans and declare all amounts borrowed due and payable. Borrowings under other debt instruments that contain cross-acceleration or cross-default provisions may also be accelerated and become due and payable. If any of these events occur, our assets might not be sufficient to repay in full all of our outstanding indebtedness and we may be unable to find alternative financing. Even if we could obtain alternative financing, it might not be on terms that are favorable or acceptable to us.

  We and our subsidiaries may incur substantially more debt.

 

We and our subsidiaries may incur substantial additional debt (including secured debt) in the future. The terms of the indentures governing our Senior Notes, the senior facilities agreement, the French revolving facility agreement and our other existing senior indebtedness limit, but do not prohibit, us and our subsidiaries from doing so. As of December 31, 2009, we had drawn €35 million under our existing revolving credit facilities and long-term confirmed and undrawn credit lines amounted to €185 million.

 

If new debt is added to our current debt levels, the related risks for us could intensify.

 

  To service our indebtedness, we require a significant amount of cash, and our ability to generate cash will depend on many factors beyond our control.

 

Our ability to make payments on and to refinance our indebtedness, and to fund planned capital expenditures depends in part on our ability to generate cash in the future. This ability is, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

 

We cannot assure you that we will generate sufficient cash flow from operations, that we will realize operating improvements on schedule or that future borrowings will be available to us in an amount sufficient to enable us to service and repay our indebtedness or to fund our other liquidity needs. If we are unable to satisfy our debt obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our indebtedness, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We cannot assure you that any refinancing or debt restructuring would be possible, that any assets could be sold or that, if sold, the timing of the sales and the amount of proceeds realized from those sales would be favorable to us or that additional financing could be obtained on acceptable terms. Disruptions in the capital and credit markets, as have been experienced since 2008, could adversely affect our ability to meet our liquidity needs or to refinance our indebtedness, including our ability to draw on our existing credit facilities or enter into new credit facilities. Banks that are party to our existing credit facilities may not be able to meet their funding commitments to us if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests from us and other borrowers within a short period of time.

 

Increases in interest rates could adversely affect our results of operations

 

A significant proportion of our debt consists of fixed-rate bonds, along with some fixed-rate finance leases and fixed-rate medium-term bank credit facilities with variable maturities. This debt is not exposed to interest rate fluctuations. However, drawings under our credit facilities incur interest at variable rates that are reset at each interest period (generally between one and 12 months). As a result, our interest expenses on this debt vary in line with movements in short-term interest rates. In particular, our senior facilities are subject to interest based on U.S. dollar LIBOR. As a result, our interest expenses may increase significantly if short-term interest rates increase. Based on our borrowings outstanding as of December 31, 2009, each 50 basis point increase in the U.S. dollar LIBOR would increase our interest expense by US$3 million per year.

 

 

Introduction

 

We are a global participant in the geophysical seismic industry, as both a manufacturer of geophysical equipment and a provider of a wide range of services (including seismic data acquisition and related processing and interpretation software) principally to clients in the oil and gas exploration and production industry. Our operations are organized into two segments: Services and Equipment, in accordance with our internal reporting system, which we use to manage and measure our performance.

 

Our geophysical Equipment segment operates through our subsidiary Sercel, the market leader in the development and production of seismic acquisition systems and specialized equipment in the land and marine seismic markets.

 

The geophysical Services segment is composed of the following activities:

 

 

 

We are a recognized leader in data processing and imaging services, which we provide through a worldwide network of 29 open seismic data processing centers and 12 client-dedicated centers. A suite of advanced technologies, developed and improved through continuous innovation, take seismic data processing into the reservoir and have the potential to greatly enhance reservoir knowledge in order to improve exploitation.

 

We also offer the Hampson-Russell software that has delivered innovative interpretive solutions since 1987. The Hampson-Russell software makes sophisticated technology accessible to the working geophysicist. It has an installed base of more than 1,400 licenses at over 500 petroleum and service companies worldwide.

 

CGGVeritas has 110 years of combined operating experience (through CGG and Veritas) and a recognized track record of technological leadership in the science of geophysics. We believe we are well placed to capitalize on the growing importance of seismic technology to enhance the exploration and production performance of our broad base of clients, which includes independent, international and national oil companies.

 

Services accounted for 77% and Equipment accounted for 23% of our consolidated operating revenues for the year ended December 31, 2009.

 

For the year ended December 31, 2009, 22% of our consolidated operating revenues were from North America, 7% from South and Central Americas, 44% from Europe, Africa, Middle East, and 27% from Asia Pacific.

 

Compagnie Générale de Géophysique-Veritas is the parent company of the CGGVeritas Group. We are a société anonyme incorporated under the laws of the Republic of France and operating under the French Commercial Code. Our registered office is at Tour Maine Montparnasse, 33, avenue du Maine, 75015 Paris, France. Our telephone number is (33) 1 64 47 45 00.

 

  Acquisition of Wavefield

 

In January 2009, we completed the purchase of 100% of Wavefield, a Norwegian marine geophysical company providing proprietary data acquisition services and seabed seismic equipment. Wavefield also offers a portfolio of non-exclusive multi-client data to global exploration clients, developed in partnership with oil companies and governments. The range of marine services includes long offset 2D, high capacity 3D, 4D, multi-azimuth and wide-azimuth data acquired with highly specialized vessels and the latest seismic equipment. Wavefield’s main offices are in Bergen and Oslo, Norway with other locations in Trondheim, London, Houston and Perth. Wavefield operations and teams were integrated in our operations during 2009.

 

Our Strategy

 

We intend to continue to strengthen our competitive position in the global geophysical services and equipment markets by capitalizing on growth opportunities resulting from both the application of new technologies in every sector of the oil and gas business — from exploration to production and reservoir management — and from our worldwide presence.

 

To achieve this objective, we have adopted the following strategies:

 

  Actively respond to the current market environment

 

The volatile and adverse global market and economic conditions commencing in late 2008 and the decreased level of capital expenditures by oil and gas companies have adversely affected demand for seismic products and services. In response to current market conditions, we are rigorously reducing costs across the organization by adjusting our manufacturing and crew costs in line with our market outlook. We have removed vessels from the fleet, postponed new builds and plan to remove more. See “Services — Marine Business Line — Marine Seismic Acquisition Fleet”. In addition, we are taking a disciplined approach to capital spending in order to focus on our priority of free cash flow generation. We also plan to decrease capital spending on our multi-client library. We are also maintaining strong research and development spending levels and further increasing our focus on leadership in advanced technology.

  Focus on growth areas for geophysical services

 

We believe that our proprietary equipment and software provide us with a competitive advantage in specific growth markets, such as data acquisition in transition zones and difficult terrain, where recent technological advances have made seismic acquisition more feasible. We intend to focus on developing our technological capabilities in emerging markets for geophysical services, such as reservoir appraisal and production monitoring. We also believe that we have unique experience and expertise in complex land seismic acquisition projects in both desert and arctic regions. Further, we believe our geographic footprint will allow us to respond to the growing demand for seismic imaging and reservoir solutions.

 

We also intend to maintain our position in the marine and land seismic market for multi-client data by developing our multi-client data library. We believe that a strong position in this market segment enhances our global competitive position and may provide opportunities for continuing future sales. In developing our multi-client data library, we carefully select survey opportunities in order to maximize our return on investment. We also intend to apply the latest advances in depth imaging technology to a selected part of our existing library.

 

Given the growing importance of geophysics in reservoir characterization, we intend to further develop the synergies between our data processing and reservoir services. This approach places us in a better position to meet the requirements of our clients with an extensive range of integrated services. With the increasing market use of wide-azimuth in the Gulf of Mexico and the growing demand for advanced imaging capabilities, we also intend to increase our processing capability in developing disciplines, such as reservoir description and monitoring, including wide-azimuth, multi-component and 4D studies. We also plan to continue promoting and developing our dedicated processing centers within our clients’ offices and developing our regional centers. We have also achieved the full convergence of our legacy software technologies in 2009.

 

  Develop technological synergies for products and capitalize on new generation equipment

 

We believe Sercel is the leading manufacturer of land, marine and subsea geophysical equipment. We plan to continue developing synergies among the technologies available to Sercel and to capitalize fully on our position as a market leader. Through our research and development, we seek to improve existing products and maintain an active new product development program in all segments of the geophysical equipment market (land, marine and ocean-bottom).

 

  Develop and utilize innovative technology

 

The significant technological developments in seismic services over the last decade have produced a marked change in the sector. The development of 4D and wide-azimuth techniques (providing time lapse views and enhanced illumination of the reservoir as well as improved image resolution) now allows operators to better locate and monitor reservoir performance. This possibility broadens the use of seismic techniques from pure exploration (early cycle) into a tool for reservoir development, management and production (late cycle). Importantly, these techniques require more vessel time than traditional data acquisition. For example, three to six times more vessel time is required to shoot wide-azimuth data than traditional 3D.

 

We believe that growth in demand for geophysical services will continue to be driven in part by the development of new technologies. The industry is increasingly demanding clearer seismic imaging and better visibility, particularly underneath salt layers. We expect multi-azimuth, wide azimuth, multi-component (3C/4C) surveys and time-lapse (4D) surveys to become increasingly important for new production-related applications, particularly in the marine sector, and expect specialized recording equipment for difficult terrain to become more important in land seismic data acquisition, particularly in transition zones, shallow water and arctic areas. We believe that to remain competitive, geophysical services companies will need to combine advanced data acquisition technology with consistently improving processing capacity in order to reduce further delivery times for seismic services.

 

Our strategy is to continue our high level of research and development investment to reinforce our technological leadership. We also intend to take advantage of our full range of integrated services to enhance our position as a market leader in:

 

 

  Emphasize client service

 

We believe it is important to operate in close proximity to our clients to develop a better understanding of their individual needs and to add measurable value to their business processes. We respond to these needs by creating new products or product enhancements that improve the quality of data and reduce the data delivery time to clients. We believe that our regional multi-client and dedicated data processing centers in our clients’ offices provide us with an advantage in identifying contract opportunities, optimizing service to clients and developing products responsive to new market demands, such as seismic techniques applied to reservoir management. We believe that we are well positioned to benefit from the industry trend towards increased outsourcing. This trend is leading oil and gas companies to place greater emphasis on relationships and service quality (including health, safety and protection of the environment) in their selection of third party service providers, including geophysical services providers.

 

  Provide integrated services

 

We are committed to providing clients with a full array of seismic data services, from acquisition and processing to data interpretation and management. We believe that integration of compatible technology and equipment increases the accuracy of data acquisition and processing, enhances the quality of our client service and thereby improves productivity in oil and gas exploration and production. Our clients increasingly seek integrated solutions to better evaluate known reserves and improve the ratio of recoverable hydrocarbons from producing fields. We are continuing to develop our ability to provide geosciences solutions through a combination of various exploration and production services, including technical data management, reservoir characterization and interpretation of well information.

 

  Develop well-positioned data libraries

 

We intend to take advantage of our recent vintage, well-positioned seismic data libraries and will capitalize on our strong experience in the wide azimuth technology. The industry’s growing interest in wide-azimuth technology to explore complex geological environments has translated into high pre-funding levels for the Gulf of Mexico. Walker Ridge, Green Canyon, Garden Banks and Three Corners surveys may generate interest from deep offshore large oil and gas companies. Onshore, our land library offers additional potential in North America. Our seismic data library is a strength in a market where a global library portfolio is increasingly attractive to clients.

 

  Develop reservoir applications

 

Seismic data is currently mainly used by oil and gas companies for exploration purposes. However, we are progressively extending our core business towards compiling and analyzing seismic data of existing reservoirs. Through high-resolution images and our expertise in 4D seismic and permanent monitoring, we aim to assist hydrocarbon producers in better characterizing and predicting the static properties and dynamic behavior of their reservoirs.

 

  Enhance our cash liquidity position

 

We are also taking steps to enhance our cash liquidity position, increase our flexibility under our credit facilities, extend our existing debt maturities, and bolster our balance sheet in an uncertain global economic environment. To those ends, we issued US$350 million principal amount of 91/2% senior notes due 2016 on June 9, 2009, we amended our US senior facilities agreement on May 21, 2009 and we amended our French revolving facility agreement on May 27, 2009.

 

These amendments (i) increase our flexibility under the financial covenants by modifying the interest coverage and leverage ratios, (ii) include an additional covenant limiting capital expenditures, (iii) allow us to dispose of additional seismic vessels and (iv) increase our ability to incur unsecured senior debt. In consideration of these additional amendments, we (i) repaid $100 million of the term loan B on May 21, 2009 and (ii) increased the applicable percentage for all borrowing under the US senior facilities and French revolving facility by 100 basis points. See “Item 5: Operating and Financial Review and Prospectus — Liquidity and Capital Resources — Financing Arrangements

 

Industry Conditions

 

Overall demand for geophysical services and equipment is dependent on spending by oil and gas companies for exploration, production development and field management activities. This spending depends in part on present and expected future oil and gas prices and the ability of our customers, particularly the small independent oil and gas companies, to secure financing for their projects. We believe that the short-term outlook for the geophysical services

sector, particularly the marine segment, is characterized by a slowdown in demand and an overcapacity in supply resulting in a significant decrease in both volumes and prices. These conditions have also led to a recent decrease in volumes of sales in our equipment segment. We believe that two fundamental factors have contributed to this situation.

 

First, global geopolitical uncertainty, particularly following the current economic and financial crisis, has translated into a strong drop in oil prices and has not created the confidence and visibility that are essential in our clients’ decision-making processes. Consequently, clients have delayed their decision-making or their projects or have canceled projects.

 

Second, given the level of energy prices in 2007 and much of 2008, the geophysical services market has developed strongly especially in marine acquisition and in supporting geophysical equipment. We estimate that the worldwide offshore fleet of 3D vessels with more than six streamers increased from 40 vessels at the end of 2006 to 58 vessels by the end of 2008. In 2009 the offshore exclusive market was characterized by a significant decline in demand as a direct result the global financial crisis and reductions in exploration and production spending.. In this context, the industry moved to drastically reduce the total capacity down to 52 3D vessels with more than six streamers by the end of 2009, through vessel retirements and conversions and delayed entry of some of the planned new builds into the market (see “— Our Strategy — Actively respond to current market conditions” for certain steps that we are taking to address current market conditions.). Despite those efforts, demand and supply remained unbalanced during 2009, leading to a year-on-year price decrease estimated at more than 30% on average. In 2010 some recovery is expected as the supply-demand balance should be restored through continued industry discipline and increased demand as a result of increased exploration and production budgets. We expect that these trends will help stabilize prices and may have a positive impact on market prices towards the end of 2010.

 

Adverse economic and financing conditions have also affected levels of discretionary spending by oil and gas companies in our land business line, particularly by independent oil companies, and in North America. Such conditions, together with, delayed decision-making by our clients, have also significantly adversely affected multi-client after sales.

 

Nevertheless, we also believe that the medium-term outlook for the geophysical services sector, particularly the marine segment, and the demand for geophysical equipment is fundamentally positive for a number of reasons:

 

 

The strong technological developments in seismic equipment and services over the last decade have advanced their use in reservoir development and production, broadening the use of seismic techniques over the lifecycle of reservoirs.

 

Each day, three to four million barrels of new oil have to be found in deeper and more complex basins to offset declining reserve rates. We expect these fundamental trends to continue to drive increased demand for high-end seismic equipment and services in the medium-term. We believe that CGGVeritas is in a strong position to benefit from these long term favorable industry conditions.

 

History and Development of the Company

 

CGG was established on July 23, 1931 to market geophysical techniques for appraising underground geological resources. Since that time, it has gradually come to specialize in seismic techniques adapted to exploration for and production of oil and gas, while continuing to carry on other geophysical activities. On January 12, 2007, CGG acquired Veritas in a part cash, part stock transaction and upon completion of the acquisition, CGG was renamed Compagnie Générale de Géophysique-Veritas. Compagnie Générale de Géophysique-Veritas is a société anonyme incorporated under the laws of the Republic of France and operating under the French Code de commerce.

Over the course of the last four years, we have completed numerous acquisitions and dispositions which are described under “

 

Item 5: Operating and Financial Review and Prospects — Factors Affecting our Results of Operations — Acquisitions and Disposals” included elsewhere in this annual report.

 

Business Overview

 

Our operations have historically been organized into two main segments: Services and Equipment. Services accounted for 77% and Equipment accounted for 23% of our consolidated revenues for the year ended December 31, 2009.

 

We generate revenues (by location of customers) on a worldwide basis. For the year ended December 31, 2009, 22% of our consolidated revenues were from North America, 7% from South and Central Americas, 44% from Europe, Africa, Middle East, and 27% from Asia Pacific.

 

In 2009, our two most significant customers accounted for 6.8% and 5.3% of our consolidated revenues compared with 3.9% and 3.8% in 2008 and 4.5% and 2.8% in 2007.

 

Operating Revenues Data

 

  Revenues by Business Lines

 

The following table sets forth our consolidated operating revenues by activity in millions of euros or dollars, as the case may be, and the percentage of total consolidated operating revenues represented thereby, for the periods indicated:

 

 

 

Notes:

 

 

  Revenues by Region (by location of customers)

 

The following table sets forth our consolidated operating revenues by region in millions of euros or dollars, as the case may be, and the percentage of total consolidated operating revenues represented thereby, for the periods indicated:

 

 

Services

 

The geophysical Services segment is composed of the following activities:

 

 

Our Services segment is organized by region to better promote our entire spectrum of services in our main markets, focusing on providing comprehensive solutions to client problems. We believe that our capacity to provide integrated geophysical services is a significant competitive advantage.

 

  Land Business Line

 

  Land Seismic Acquisition

 

Land seismic acquisition includes all seismic surveying techniques where the recording sensor is either in direct contact with, or in close proximity to, the ground. Our land business line offers integrated services, including the acquisition and on site processing of seismic data on land, in transition zones and on the ocean floor (seabed surveys). We undertake land surveys with both a contract and multi-client basis.

 

We are a significant land seismic acquisition contractor worldwide, including in North America, and particularly in difficult terrain. In 2009, we had an average of 17 active land crews performing specialized 3D and 2D seismic surveys. Total land seismic acquisition activities accounted for 16% of our consolidated operating revenues in 2009. Contracts for land seismic acquisition accounted for 13% and land multi-client surveys accounted for 3% of our consolidated operating revenue in 2009.

 

Our land operations include surveying crews and recording crews. Surveying crews lay out the lines to be recorded and mark the sites for shot-hole placement or equipment location (except for “stake-less” operations where the sources locations are indicated through GPS tools rather than marked on the field). Recording crews produce acoustic impulses and use recording units to synchronize the shooting and record the seismic signals via geophones. On a land survey where explosives are used as the acoustic source, the recording crew is supported by several drill crews. Drill crews operate in advance of the recording crew and bore shallow holes for explosive charges which, when detonated by the recording crew, produce the necessary acoustic impulse. Seismic surveying in transition zones and on the sea-bed is carried out by laying cables or other stationary measuring devices on the ocean floor.

 

Land seismic crews are equipped with advanced equipment and software used in each stage of the land seismic acquisition process, including: the Sercel 408UL and 428XL seismic data recorders; the Sercel Nomad 65 vibrators, the Sercel VE 432 and VE 464 vibrator electronic control system used to synchronize and verify the emission of acoustical waves by vibrators; DSU3 Sercel digital 3 components sensors; patented high vibroseis technologies

such as HPVA and V1 which seek to increase the productivity of a crew; and on-site processing software for acquired data.

 

We believe that our technology and our experience enable us to offer high quality, fully integrated land seismic services. We have pioneered real-time positioning of geophones and seismic sources, quality control of positioning during land surveys, and on-site processing, which together increase the accuracy and efficiency of such surveys.

 

One of the challenges inherent in land seismic acquisition surveys is gathering data without disrupting the sensitive ecosystems in which such surveys are frequently located. We have developed a strong position in environmentally sensitive zones, such as mountainous regions, tropical forests and swamps, by following a strict policy of preserving the natural environment to the extent possible. We also work in conjunction with the local community at site locations, hiring local employees and obtaining necessary local authorizations to alleviate potential opposition to our operations.

 

The difficulty of access to survey sites is a major factor in determining the number of personnel required to carry out a survey and the cost of a survey. A full crew for a land or transition zone survey may range from a total of less than 100 to a few thousand members (principally composed of local employees in the latter case), and the cost of a survey can range from several hundred thousand to several million dollars per month, depending on the size of the team and the type and difficulty of the survey.

 

We work closely with our clients to plan surveys in accordance with their specifications. This provides us with a competitive advantage in being selected to carry out surveys, whether such surveys are awarded based on competitive bids or directly negotiated agreements with clients. We regularly conduct land seismic acquisition surveys for national and international oil companies.

 

We have developed partnerships with local industry-related companies in several countries, including Saudi Arabia, other Gulf Cooperation Council (GCC) countries and Indonesia. We contribute our international expertise, technical know-how, equipment and experienced key personnel to these partnerships as needed, while local partners provide their logistical resources, equipment and knowledge of the environment and local market.

 

In Saudi Arabia, our land seismic acquisition activities are conducted through Arabian Geophysical & Surveying Co. (“Argas”), a joint venture owned 49% by us and 51% by TAQA, our local partner. Since June 2006, our other Middle East operations are conducted through Ardiseis, a joint venture owned 51% by us and 49% by TAQA.

 

Land Multi-Client Library

 

In 2009, we invested €49 million (US$68 million) in multi-client land seismic surveys, mainly in North America. Total revenues from multi-client land seismic surveys in 2009 were €73 million (US$102 million), a 34% decrease in dollar terms year on year. Multi-client after-sales were €33 million (US$46 million) for 2009 driven by demand in our Canadian and US lower 48 states data library. The pre-financing level was high at 82% and as of December 31, 2009, the net book value of our land multi-client library was €101 million (US$145 million).

 

  Land Seismic Acquisition Business Development Strategy

 

Our land seismic acquisition services are geographically and technologically well placed for high-end positioning and further development of local partnerships. We have developed a unique expertise in North America’s arctic regions.

 

In North America, we believe that the demand for land seismic acquisition services and for technology in particular should remain moderate for contract activities. The strong interest for shale gas plays should however represent an opportunity for the land multi-client production. In other geographical areas, the national oil companies are notably requesting increasingly advanced technologies, either in desert areas with very large channel count crews and high vibroseis productivity, or complex shallow water surveys using Ocean Bottom Cables such as the 4C Sercel SeaRay system. Our strategy for the land acquisition business line is therefore to:

 

 

 

We also plan to continue investing in non-exclusive land seismic data libraries, especially in the U.S. and in Canada, where we have a strong and recent vintage library.

 

  Marine Business Line

 

  Marine Seismic Acquisition

 

We provide a full range of 3D marine seismic services, principally in the Gulf of Mexico, the North Sea and off the coasts of West Africa and Brazil, as well as in the Asia-Pacific region.

 

Marine seismic surveys are conducted through the deployment of submersible cables (streamers) and acoustic sources (airguns) from marine vessels. Such streamers are each up to 10 kilometers long and carry hydrophone groups normally spaced 12.5 meters apart along the length of the streamer. The recording capacity of a vessel is dependent upon the number of streamers it tows and the number of acoustic sources it carries, as well as the configuration of its data recording system. By increasing the number of streamers and acoustic sources used, a marine seismic operator can perform large surveys more rapidly and efficiently.

 

We undertake both contract and multi-client marine seismic surveys. Contract surveys generally provide for us to be paid a fixed fee per square kilometer of data acquired. When we acquire marine seismic data on a contract basis, the customer contracts to pay for and directs the scope and extent of the survey and retains ownership of the data obtained. In regions where there is extensive petroleum exploration, such as Brazil, the Gulf of Mexico, West Africa, the Mediterranean Sea and the North Sea, we also undertake multi-client surveys, in which we fund the survey ourselves and retain ownership of the seismic data. This enables us to provide multiple companies access to the data by way of license. As a result, we have the potential to obtain multiple and higher revenues, while our customers who license the data have the opportunity to pay lower prices. The capacity to both acquire and process marine seismic data is an important element of our overall strategy to maintain and develop our leading position in marine seismic data acquisition and processing.

 

We operated more than 83% of our high-end 3D fleet on contract in 2009.

 

Total marine activities accounted for 48% of our consolidated operating revenue in 2009. Marine seismic acquisition contracts accounted for 35% and multi-client marine accounted for 13% of our consolidated operating revenue in 2009.

 

  Marine Seismic Acquisition Fleet

 

We operated a combined fleet of 21 vessels at the end of 2009, including fourteen high capacity 3D vessels, four small capacity 3D/2D vessels and three 2D vessels that are to be decommissioned in 2010. With this fleet, we can increase our geographical coverage and minimize unproductive time by reducing vessels’ transit between areas of operation. Each vessel is equipped with geophysical recording instrumentation, digital geophysical streamer cable, cable location and geophysical data location systems, multiple navigation systems, a source control system that controls the synchronization of the energy source, and a firing system that generates the acoustic impulses. Streamer cables contain hydrophones that receive the acoustic impulses reflected by variations in the subsurface strata.

 

The Alizé, Challenger, Symphony, Viking Vision, Viking, Viking Vantage, Viking Vanquish, Champion, Endeavour and GeoVoyager are each capable of deploying more than ten streamers simultaneously. Most of our high capacity 3D vessels are equipped with Sentinel solid streamers, which offer numerous advantages over fluid-filled streamers, such as the ability to work in rougher seas and to record more desirable frequencies with less noise and less downtime. In 2009, we continued performance upgrades, equipping three vessels, the Alize, Symphony and GeoVoyager, with the Nautilus system making the towed streamers steerable.

 

Our 2D vessels are used for 2D surveys or, when required, as source vessels for more complex operations, which have higher margins, such as for wide azimuth or complex undershooting surveys.

 

We own some of our vessels, we co-own one and we use the others pursuant to time charters. This flexibility allows us to adjust our fleet according to market requirements. The 3D vessels we own are the Amadeus and the Symphony. The low capacity 3D/2D vessels we own are the Venturer and the Princess. We co-own the Alizé and charter with a final purchase option the Challenger. The other vessels are chartered without purchase options.

In 2007, we entered into an agreement with Eidesvik Offshore ASA for the supply of two large seismic vessels to be newly built. The two vessels will be of an extremely advanced specification, incorporating many unique features, based on the most recent X-BOW design of Ulstein Design AS, and will be delivered in 2010 and 2011 under 12-year time charter agreements. These two high-capacity, innovative vessels are key components of our strategy of progressive fleet renewal, involving the staged retirement of the former generation of lower capacity vessels in conjunction with the introduction of these new platforms. The new vessels are purpose-designed for the efficient deployment of industry-leading Sercel solid streamer technology and Nautilus steerable streamer capability and configured for spreads of up to 16 long streamers, or 20 shorter streamers for high-density applications.

 

In 2009, a total of four mid-capacity 3D vessels, the Harmattan, the Föhn, the Orion and the Search, and two low capacity 2D vessels (the Duke and Discoverer 2) were decommissioned as part of our marine capacity adjustment program. Three additional vessels, the Malene, Pacific Titan and Pacific Sword, are scheduled to be decommissioned in 2010.

 

The following table provides certain information concerning the seismic vessels we currently operate.

 

 

 

Notes:

 

 

  Marine Multi-client Library

 

Our policy is generally to require a minimum share of the estimated cost of each multi-client survey to be covered by pre-commitments from clients (pre-funding) prior to commencement. We treat these multi-client projects as investments. In determining whether to undertake multi-client surveys, we consider factors that include the availability of oil and gas companies to pre-fund the survey, the location to be surveyed, the probability and

timing of any future lease concessions and development activity in the area and the availability, quality and price of competing data. Once the final products are available to the market, customers license the data as-is (“after-sales”).

 

Multi-client survey production accounted for 17% of our high-end 3D fleet utilization in 2009. See “Item 3: Key Information — Risk Factors — Risks Related to Our Business — We invest significant amounts of money in acquiring and processing seismic data for multi-client surveys and for our data library without knowing precisely how much of the data we will be able to sell or when and at what price we will be able to sell the data.”

 

The multi-client libraries provide “prospect-ready” 3D or 2D data and therefore accelerate the exploration-production process. We believe that having a high quality and well located multi-client data library is important for our ability to generate cash flow in the future.

 

In 2009, we expanded the size and the value of our US Gulf of Mexico, Brazilian, and North Sea multi-client dataset by acquiring new blocks in key areas and by imaging the subsurface with our latest processing technology. In particular, we used wide azimuth technology in the deep offshore waters of the Gulf of Mexico for improved sub-salt illumination.

 

We have also continued to invest in established library projects in the UK, Norway and Kazakhstan. In addition we acquired, processed and reprocessed approximately 20,000 line kilometers of 2D seismic data and 5000 km² of Gravity Gradiometry data in anticipation of the 10th Gabonese Licensing Round due to open in May 2010. We partnered with the Gabonese government for this venture and sprovide technical support and data for the promotion of the deepwater licensing round. This data has generated significant interest from companies searching for discoveries analogous to the recent Pre Salt discoveries in Brazil

 

In 2009, we invested US$251 million (€180 million) totally in multi client library acquisition and processing. Total revenues from multi-client marine seismic acquisition were US$414 million (€297 million) in 2009, a 30% decrease in dollar terms from 2008.

 

The pre-funding level was strong at 104% while well positioned multi-client libraries benefited from increased customer interest. As of December 31, 2009, the net book value of our offshore multi-clients library was US$530 million (€368 million).

 

In 2009, our wide-azimuth surveys in the Gulf of Mexico continued to receive a very high level of interest from all actors involved in deep water exploration. The acquisition of our Green Canyon wide-azimuth program was completed in February 2009 and our new wide azimuth survey Three Corners commenced in April 2009 and was completed in June 2009. At that point our wide-azimuth coverage stood at 1,547 OCS blocks, equivalent to 35,000 km². We are currently acquiring a large extension to the Three Corners survey that will give us 1,924 blocks when complete.

 

In Brazil we are extending our existing Cluster survey in the Santos basin to the south, targeting key pre-salt prospects. The new survey is generating a significant interest in the industry as demonstrated by a coverage ratio of approximately 90% at the end of 2009.

 

  Seabed

 

Marine seismic data can also be acquired on the seabed and Ocean Bottom Seismic (OBC) data is of superior quality, but because this method was cumbersome and expensive in the early days, the towed streamer method became the dominant way to collect seismic data at sea. In recent years the improvements in equipment and survey efficiency and the need for more sophisticated data have revived OBC as a viable seismic data survey method. Today, oil companies frequently consider OBC to be the best seismic method for complex and subtle reservoirs analysis. For many years, we have been a leader in OBC both in shallow and deep waters. The two most common ways to collect OBC data are by deploying a cable or by placing discrete point receivers (nodes) on the seafloor which record data before retrieval and redeployment to cover a wide area. We are currently the only company in the industry that offers both methods. Our OBC group, with its strong focus on R&D, is located in the city of Bergen, on the west coast of Norway.

 

Recently, another dimension has been added to seabed seismic data acquisition by trenching cables into the seafloor for permanent reservoir monitoring. An early mover in this area, we offer high-end electrical cables through Sercel and modern fiber optic cables through Optoplan. We believe we are the only company in the industry that can offer a total package of equipment, installation, data collection, processing and reservoir characterization for permanent reservoir monitoring.

  Marine Seismic Acquisition Business Development Strategy

 

Marine contract

 

We believe that marine seismic services constitute one of the essential pillars of a firm presence in the seismic sector and therefore want to maintain a strong position especially in the high-end 3D seismic segments in contract and multi-client surveys.

 

The acquisition of Wavefield strengthened our fleet and operational capacity, adding five high-capacity vessels. Our marine capacity adjustment program initiated in mid-2009 will contribute to rejuvenating the fleet, with the average vessel-age decreasing below 11 years, and to repositioning the fleet in the high -end 3D segment, with the average number of towed streamers per 3D vessels increasing above 11 in 2011.

 

  Marine multi-client

 

We intend to take advantage of our recent vintage, well positioned seismic data library. We will actively pursue our investment in wide azimuth programs in the Gulf of Mexico and other established data library areas.

 

For 2010, our EAME (Europe, Africa and Middle East) Data Library will focus on core areas using advanced technology such as Wide Azimuth acquisition. New surveys are expected to contribute to portfolio renewal and the expansion of existing surveys.

 

  Processing and Imaging Business Line

 

  Processing and Imaging

 

Seismic data processing operations transform seismic data acquired in the field into 2D cross-sections, or 3D images of the earth’s subsurface or 4D time-lapse seismic data using geovation and Hampson-Russell software, our proprietary seismic software, or third party applications. These images are then interpreted by geophysicists and geologists for use by oil and gas companies in evaluating prospective areas, selecting drilling sites and managing producing reservoirs.

 

We provide seismic data processing and reservoir services through our network of data processing centers and reservoir teams located around the world. We operated 41 worldwide processing and imaging centers, including 12 dedicated client centers at December 31, 2009. Contract revenues from our Processing and Imaging business line accounted for approximately 13% of our consolidated revenues in 2009.

 

  Data Processing Activity

 

We process seismic data acquired by our land and marine seismic acquisition crews as well as seismic data acquired by non-affiliated third parties. Wide-Azimuth and high-density acquisition trends in marine and land seismic data have been a significant source of the growth in demand for our data processing services. In addition, we reprocess previously processed data using new techniques to improve the quality of seismic images. Demand for processing and imaging remained relatively strong overall in 2009, driven by rapid market adoption of wide-azimuth, high-density acquisition and the growing demand for our advanced imaging capabilities.

 

We complement our network of international centers with both regional centers, open to all our customers, and dedicated centers that bring processing facilities within our clients’ premises. Twelve of our data processing centers are “dedicated” centers that are located in clients’ offices. We believe that these dedicated centers are responsive to the trend among oil and gas companies to outsource processing work. Each of the principal computers used at our centers is leased for a period of approximately two years, permitting us to upgrade to more advanced equipment at the time of renewal.

 

Beyond conventional processing and reprocessing, we are also increasingly involved in reservoir-applied geophysics, an activity that encompasses large integrated reservoir studies from reprocessing to full reservoir simulation. It also includes advanced technology studies such as reservoir characterization, stratigraphic inversion and stochastic reservoir modeling. Our delivery time has decreased in recent years, enabling delivery of data to clients within the same timeframe as work performed directly onboard marine vessels.

 

We operate visualization centers in our Houston, London and Singapore hubs which allow teams of our customers’ geoscientists and engineers to view and interpret large volumes of complex 3D data. The visualization centers have imaging tools used for advanced interpretive techniques that enhance the understanding of regional as well as detailed reservoir geology. These visualization centers allow us to offer our expertise combined with the type of collaborative geophysical model building that is enabling oil companies to explore areas of complex geology such as the large sub-salt plays in the deepwater Gulf of Mexico.

We have groups of scientists available to perform advanced geophysical and geological interpretation on a contract basis. These experts work around the world, using third party and our own proprietary software to create subsurface models for our clients and advise them on how best to exploit their reservoirs. Their work is related to exploration as well as production activities. Convergence of CGG and Veritas legacy software technology has been completed and the new system, geovation, is being progressively rolled-out.

 

Additionally, we license our proprietary Hampson-Russell software to companies desiring to do their own geophysical interpretation.

 

  Data Processing Business Development Strategy

 

Our position in data processing and imaging as well as the skills and reputation of our experts and geoscientists make us the industry benchmark in this segment. Our strategy for the Processing and Imaging business line is to enhance our particular competences in advanced technologies such as depth imaging, wide azimuth, 4D processing and reservoir characterization as well as to reinforce our close links with clients through both our open and dedicated centers.

 

Equipment

 

We conduct our equipment development and production operations through Sercel and its subsidiaries. We believe Sercel is the market leader in the development and production of seismic acquisition systems and specialized equipment in the land and marine seismic markets. Sercel is operated as an independent division and makes most of its sales to purchasers other than CGGVeritas. Sercel currently operates five seismic equipment manufacturing facilities, located in Nantes and Saint Gaudens in France, Houston, Singapore and Alfreton in England. In China, Sercel operates through Sercel-JunFeng Geophysical Equipment Co Ltd (“JunFeng”), based in Hebei (China), in which Sercel acquired a 51% equity stake in 2004 and through Xian-Sercel a manufacturing joint venture with BGP, in which Sercel holds a 40% interest. In addition, four sites in Toulouse, Les Ulis, Toulon and Brest (France) are dedicated to borehole tools, marine sources and submarine acoustic instrumentation, respectively.

 

In 2009, Sercel had revenues of US$858 million (€616 million), a 29% decline in dollar terms from record 2008 levels (€832 million or US$1,209 million). Sercel represented 23% of our consolidated revenue in 2009.

 

We estimate that the worldwide demand for geophysical equipment declined by around one third in 2009, due to the current overcapacity experienced by geophysical contractors which caused a freeze on capital expenditure programs, and delays in rigging new vessels already in shipyards. Sercel’s market share in the seismic equipment market is estimated at around 65%.

 

  Sercel Activity

 

Sercel offers and supports worldwide a complete range of geophysical equipment for seismic data acquisition, including seismic recording equipment, software and seismic sources, and provides its clients with integrated solutions. Sercel’s principal product line is seismic recording equipment, particularly the 400 family of recording systems, the 408UL and the 428XL.

 

The 428XL was launched on November 2005 as a successor to the 408UL system. We believe that our 400 product series represents the market standard. The 428XL continues the characteristics that made the 408 a success, such as an evolutive architecture and the option of mixing different communication media (cable, radio, micro-wave, laser and fiber-optic) to form a true network allowing the user to define data routing and hence avoid obstacles in the field. In addition, the 428 XL offers enhanced possibilities in high density and multi-component land acquisition and is compatible with 408 field equipment.

 

Like the 408 system, the 428 system can be used with the digital sensor unit (DSU) featuring three component digital sensors based on MicroElectroMechanicalSystems (MEMS). Sercel enhanced its product range in September 2006 by acquiring Vibration Technology Ltd., a Scottish company specialized in wireless acquisition systems whose Unite technology is now fully integrated in the 428 environment.

 

Sercel is also a market leader for vibroseismic vehicles and for vibrator electronic systems (VE 464). Sercel’s latest vibrator family, called Nomad, offers high reliability and unique ergonomic features. Nomad is available with either normal tires or a tracked drive system. The track drive system allows Nomad vibrators to operate in terrain not accessible to vehicles with tires. In sand dunes or arctic conditions, this can improve crew productivity. In particular, the Nomad 90 is capable of exerting a peak force 90,000 pounds and is believed to represent the heaviest vibrator on the market.

In the downhole domain, Sercel is offering its latest generation VSP tool, MaxiWave, which was well received by our customers in 2009 following its introduction.

 

The Seal, our marine seismic data recording system, capitalizes on the 408 architecture and on our many years of experience in streamer manufacturing and is now implementing the latest 428 technological enhancements. The Seal is currently the sole system with integrated electronics. In 2005, Sercel launched the Sentinel solid streamer, a new product in its Seal line that is the outcome of the technological synergies realized in recent acquisitions. We estimate that Sentinel cables are used to equip a majority of new seismic vessels. In November 2006, Sercel launched SeaRay, an ocean bottom cable offered under several configurations for depth of 100 to 500 meters. This cable is based on the 428 family acquisition systems technology and integrates DSU 3 components.

 

The marine range of products has been further improved with the launch of SeaProNav, a navigation software allowing the real-time positioning for streamers and Nautilus, a totally integrated system for positioning seismic streamers.

 

In addition to recording systems, Sercel develops and produces a complete range of geophysical equipment for seismic data acquisition and other ancillary geophysical products such as geophones, cables and connectors. Sercel significantly expanded its product range and increased its market share in the seismic equipment industry with the acquisitions of GeoScience Corporation in December 1999 and Mark Product in 2000. In October 2003, Sercel acquired Sodera S.A., a leading provider of air gun sources used mainly in marine seismic data acquisition. In January 2004, Sercel acquired a division of Thales Underwater Systems Pty Ltd. that develops and manufactures surface marine seismic acquisition systems, particularly solid streamers, and seabed marine seismic acquisition systems. The acquisition of a 51% stake in JunFeng, based in China, in January 2004 reinforced our manufacturing capabilities for geophone, cables and connectors, as well as our presence on the Chinese seismic market. Both Thales’ seismic equipment business and JunFeng have been consolidated within the CGG group from January 2004. In addition, through the acquisitions of Createch and Orca in 2004, Sercel is continuing its expansion while strengthening its position in two areas with perceived growth potential: sea-floor seismic systems and borehole seismic tools. In September 2006, Sercel acquired Vibration Technology Ltd, a Scottish company specialized in wireless systems. In May, 2008, Sercel acquired Metrolog, specialized in down-hole gauges, and in December 2008, Sercel acquired Quest Geo Solutions, a UK company focusing on navigation software. Early in 2009, Sercel acquired Optoplan, the Norwegian subsidiary of Wavefield specialized in permanent seabed recording systems using fiber optic technology.

 

As a result of these acquisitions, Sercel is a market leader in the development and production of both marine and land geophysical equipment. It is a global provider for the seismic acquisition industry with a balanced industrial position in terms of both product range and geographical presence.

 

  Equipment Business Development Strategy

 

Our strategy for the Equipment segment is to:

 

 

Seasonality

 

Our land activity has increased in North America in the first quarter due to the Alaskan and Canadian winter season but significantly decreases thereafter. In marine seismic acquisition activities are seasonal in nature. We generally experience decreased revenues in the first quarter of each year due to the effects of weather conditions in the Northern Hemisphere and to the fact that our principal clients are generally not prepared to fully commit their annual exploration budget to specific projects during that period.

 

We have historically experienced higher levels of activity in our equipment manufacturing operations in the fourth quarter as our clients seek to fully deploy annual budgeted capital.

 

Intellectual Property

 

We continually seek the most effective and appropriate protection for our products, processes and software and, as a general rule, will file for patent, copyright or other statutory protection whenever possible. Our patents,

trademarks, service marks, copyrights, licenses and technical information collectively represent a material asset to our business. However, no single patent, trademark, copyright, license or piece of technical information is of material importance to our business when taken as a whole. As of December 31, 2009, we held or had applied for 205 patents in respect of different products and processes worldwide, including the Optoplan patents acquired with Wavefield. These patents last up to 20 years, depending upon the date filed and the duration of protection granted by each country.

 

Competition

 

  General

 

Most contracts are obtained through a competitive bidding process, which is standard for the industry in which we operate. Important factors in awarding contracts include service quality, technological capacity, performance, reputation, experience of personnel, customer relations and long-standing relationships, as well as price. While no single company competes with us in all of our segments, we are subject to intense competition with respect to each of our segments. We compete with large, international companies as well as smaller, local companies. In addition, we compete with major service providers and government-sponsored enterprises and affiliates. Some of our competitors operate more data acquisition crews than we do and have substantially greater financial and other resources.

 

  Land

 

The land seismic market is extremely fragmented and characterized by intense price competition. The entrance on the international market of a significant number of formerly national competitors has driven down prices in this sector and decreased the market share of incumbents. In addition, certain very active services markets, such as China and Russia, are not practically accessible to international services providers like us. In addition to CGGVeritas, the other significant service providers in the land seismic market are Western Geco, BGP, and Geokinetics, with its recent purchase of PGS onshore. We believe that technology, quality of services and price are the principal bases of competition in this market, as well as relationships with local service providers, which are important, as is experience in unusual terrain. Volume in the land seismic market decreased by more than 20% in 2009, with a negative impact on market prices.

 

  Marine

 

The offshore sector has four leading participants: Western Geco, PGS, Fugro and CGGVeritas. From 1999 to mid-2004, the offshore market experienced excess supply, which put downward pressure on prices. Because of the high fixed costs in this sector, excess supply was not reduced by operators but rather channeled into multi-client libraries. With supply flat since 2003, however, and demand increasing gradually until mid-2004 and more rapidly thereafter, prices recovered significantly in this market. The market upturn was confirmed in the second half of 2004 with a continuous increase of exclusive volumes and sales from the multi-client existing libraries. We estimated the number of large 3D vessels (six or more streamers) at 58 vessels at the end of 2008, down to 52 at the end of 2009, with planned capacity increase in 2010. We believe that following the decline in oil prices in the second half of 2008 and 2009, demand in seismic services has significantly decreased, which, together with the increase in the global fleet, has led to over-capacity in the offshore acquisition market and consequent downward pressure on prices. We have implemented capacity reductions, as have certain of our major competitors. See “— Our Strategy — Actively respond to current market conditions” for certain steps that we are taking to address current market conditions.

 

  Processing

 

The processing sector is led by CGGVeritas and Western Geco. This market is characterized by greater client loyalty than the acquisition sector, as evidenced by the presence of processing centers on client premises. Processing capacity has multiplied in recent years as a result of improvements in computing technology. This increase in computing power has allowed improved processing and the use of more complex and accurate algorithms. We estimate that the processing market was down 15% in 2009.

 

  Equipment

 

Our principal competitor for the manufacture of seismic survey equipment is Ion Geophysical Inc. The market for seismic survey equipment is highly competitive and is characterized by continual and rapid technological change. We believe that technology is the principal basis for competition in this market, as oil and gas companies have increasingly demanded new equipment for activities such as reservoir management and data acquisition in difficult terrain. Oil and gas companies have also become more demanding with regard to the quality of data acquired. Other competitive factors include price and customer support services. The volume of sales in the seismic equipment market decreased by around one third in 2009, with similar decreases in marine and in land equipment segments.

Organizational Structure

 

We are the parent company of the CGGVeritas group. Our principal subsidiaries are as follows:

 

 

In 2009, to streamline operations and realize other benefits, we continued reorganizing our Services segment by moving several of our subsidiaries, including CGG Australia, Veritas DGC Australia, CGGVeritas Services India, CGGVeritas Services Malaysia Sdn. Bhd., CGGVeritas Services de Mexico SA de C.V., Veritas Geophysical Asia Pacific (Singapore), and 94.35% of CGGVeritas Services Holding UK B.V. to CGGVeritas Services Holding B.V., a newly-formed subsidiary organized under the laws of the Netherlands.

Property, Plant and Equipment

 

The following table sets forth certain information relating to the principal properties of CGGVeritas group :

 

 

We also lease other offices worldwide to support our operations. We believe that our existing facilities are adequate to meet our current requirements.

 

Information concerning our seismic vessels is set out under “Marine Business Line” above.

 

Environmental Matters and Safety

 

Our operations are subject to a variety of laws and regulations relating to environmental protection. We invest financial and managerial resources to comply with such laws and regulations. Although such expenditures historically have not been material to us, and we believe that we are in compliance in all material respects with applicable environmental laws and regulations, the fact that such laws and regulations are changed frequently prevents us from predicting the cost of impact of such laws and regulations on our future operations. We are not involved in any legal proceedings concerning environmental matters and are not aware of any claims or potential liability concerning environmental matters that could have a material adverse impact on our business or consolidated financial condition.

Efforts to improve safety and environmental performance over the last few years continued as some procedures were strengthened and others implemented to increase awareness among personnel and subcontractors, including obligatory regular meetings in the field and onboard. A comprehensive Health, Safety and Environment management system, placing particular emphasis on risk management, has been in place for many years, covering all activities and is continuously adapted for each segment. It is now fully integrated into a sustainable development program called PRISM (People Responsibility Integrated Sustainable Management) which is in place company-wide.

 

Legal Proceedings

 

From time to time we are involved in legal proceedings arising in the normal course of our business. We do not expect that any of these proceedings, either individually or in the aggregate, will result in a material adverse effect on our consolidated financial condition or results of operations.

 

On October 20, 2006, a complaint was filed by ION against our subsidiary, Sercel Inc., in the United States District Court for the Eastern District of Texas. The complaint alleged that several of Sercel Inc.’s seismic data acquisition products that include micro electromechanical systems (MEMS) infringe a U.S. patent allegedly owned by ION. On January 29, 2010, a jury found that Sercel Inc. infringed United States Patent No. 5,852,242 and that ION was entitled to U.S.$25.2 million in lost profits. Sercel Inc. will ask the court to overturn the jury’s finding on several grounds, including ION’s failure to prove by a preponderance of the evidence that the patent was infringed by Sercel Inc. and the invalidity of the patent due to ION’s failure to disclose in the patent the best way of making the invention. The court has asked the parties to brief these issues by April 2010, and we do not expect any further action from the court until this briefing is completed. The court had previously found the product claims in respect of the patent to be invalid, and there was no infringement in respect of one of the claims for a method of manufacturing.

 

Sercel is confident that the products do not infringe any valid claims of the patent at in question. We do not believe this litigation could have a material adverse effect on our financial position or profitability. Accordingly, no provision was recorded in the consolidated financial statements, except for the fees related to preparing the defense.

 

On July 7, 2008, we brought suit against Arrow Seismic ASA in order to seek compensation for the loss we suffered (approximately U.S.$70 million at the date of the claim) following Arrow Seismic ASA’s withdrawal from negotiations for the construction of a 3D seismic vessel. The negotiations were terminated after Arrow Seismic ASA was acquired by PGS. Discussions between us and Arrow Seismic ASA were at such an advanced stage that, in the Group’s view, the parties were contractually committed. A judgment was rendered on April 8, 2009 in favor of Arrow Seismic ASA. We have decided not to appeal.

 

 

None.

 

 

Introduction

 

We report financial information by operating segment in accordance with our internal reporting system and the internal segment information that is used to manage and measure our performance. We divide our business into two operating segments, geophysical Services and geophysical Equipment.

 

Our geophysical Services segment comprises:

 

 

Our geophysical Equipment segment, which we conduct through Sercel Holding S.A. and its subsidiaries, comprises our manufacturing and sales activities for seismic equipment used for data acquisition, both on land and marine.

Operating Results

 

The following operating and financial review and prospects should be read in conjunction with our consolidated annual financial statements and the notes thereto included elsewhere in this annual report, which have been prepared in accordance with IFRS (International Financial Reporting Standards) as issued by the IASB (International Accounting Standards Board) and as adopted by the European Union on December 31, 2009.

 

Factors affecting our results of operations

 

Our operating results are generally affected by a variety of factors, including changes in exchange rates, particularly the value of the euro against the dollar, and changes in oil prices, which are also generally denominated in dollars. See “Trend Information” and “Geophysical market environment” herein.

 

  Foreign exchange fluctuations

 

We face foreign exchange risks because a large percentage of our revenues and cash receipts are denominated in U.S. dollars, while a significant portion of our operating expenses and income taxes accrue in euro and other currencies. Movements between the U.S. dollar and euro or other currencies may adversely affect our business by negatively impacting our revenues and income.

 

As certain trends in our business may be obscured by currency fluctuations, we have converted certain euro amounts in this Operating and Financial Review and Prospects into U.S. dollars. Converted figures are presented only to assist the reader in understanding our results and are not part of our reported financial statements and may not be indicative of changes in our actual or anticipated results. See “Trend Information — Currency Fluctuations” below.

 

Unless otherwise indicated, balance sheet data expressed in U.S. dollars have been converted from euros at the exchange rate on the relevant balance sheet date, and income statement data in U.S. dollars have been converted from euros at the average exchange rate for the relevant year. The exchange rates as of December 31, 2007, 2008 and 2009 were U.S.$1.4721, U.S.$1.3917 and U.S.$1.4401, respectively, per euro, and the average exchange rates for the years 2007, 2008 and 2009 were U.S.$1.3692, U.S.$1.4793 and U.S.$1.3923, respectively, per euro.

 

  Geophysical Market Environment

 

Overall demand for geophysical services and equipment is dependent on spending by oil and gas companies for exploration, development and production and field management activities. We believe the level of spending of such companies depends on their assessment of their ability to efficiently supply the oil and gas market in the future and the current balance of hydrocarbon supply and demand.

 

The geophysical market has historically been extremely cyclical. We believe many factors contribute to the volatility of this market, such as the geopolitical uncertainties that can harm the confidence and visibility that are essential to our clients’ long-term decision-making processes and the expected balance in the mid to long term between supply and demand for hydrocarbons. In the fourth quarter of 2009, we recognized an impairment loss on goodwill of €216 million on our marine business line as a result of market conditions.

 

See “Item 4: Information on the Company — Industry Conditions” for a discussion of developments in the geophysical Industry.

 

  Acquisitions and disposals

 

Acquisitions and disposals have had a significant impact on our year-on-year revenues. Recent acquisitions and disposals have included:

 

  During 2009

 

 

On January 8, 2009, Cybernetix conducted a €4 million share capital increase that was entirely subscribed by Sercel Holding, bringing its stake to a total of 749,480 shares, representing 46.10% of Cybernetix’s share capital and 43.07% of its voting rights. The French financial markets regulator (Autorité des Marchés Financiers) exempted Sercel Holding from the requirement to conduct a tender offer for all shares when its holding exceeded 33.33%. The consideration for the share capital increase was €2 million in cash and the incorporation of a €2 million cash advance granted by Sercel Holding to Cybernetix in November 2008. Following disposals in 2009, Sercel

Holding owns 44.56% of Cybernetix’s share capital and 42.98% of its voting rights as of December 31, 2009. Cybernetix is accounted for under the equity method in our financial statements as we do not have the control.

 

 

Pursuant to the general meeting of Norfield AS’s shareholders held on May 19, 2009, Wavefield subscribed to a capital increase in Norfield for approximately €3.6 million (US$5 million) by capitalizing an outstanding long-term loan owed to it by Norfield. The capital increase was pro rata to the shareholders’ existing interests in Norfield. As a result, Wavefield’s interest in Norfield remained unchanged at 33%.

 

 

On May 29, 2009, Statoil Hydro Venture AS exercised its put option with our subsidiary Wavefield with respect to a 37% stake in Multifield for €2.9 million (NOK26 million). As a result, our shareholding in Multifield increased to 80.97%. Multifield is fully consolidated in our financial statements since June 30, 2009.

 

 

On December 10, 2009, Exploration Investment Resources II AS, a wholly-owned subsidiary of CGGVeritas, set up a joint venture with Eidesvik Shipping AS in order to share ownership of the two X-BOW vessels that are currently under construction. As of December 31, 2009, the Group’s interest in the joint venture, Eidesvik Seismic Vessel AS is 49%. This company is accounted for under the equity method in our financial statements as of December 31, 2009.

 

  During 2008

 

 

On May 26, 2008, Sercel acquired Metrolog, a privately held company, for €25.7 million paid in cash (including legal fees). Metrolog is a leading provider of high-pressure, high-temperature gauges and other downhole instruments to the oil and gas industry. The purchase price allocation resulted in a goodwill of €14.3 million.

 

 

On June 25, 2008, in conjunction with the Oman business transfer from Veritas DGC Ltd to Ardiseis, we subscribed to the increase of 805 shares in the capital of our subsidiary Ardiseis, and sold 407 Ardiseis shares to Industrialization & Energy Services Company (TAQA) for a total consideration of U.S.$11.8 million. At the end of this transaction our interest in Ardiseis remained unchanged at 51%.

 

 

On October 20, 2008, CGGVeritas Services Holding BV was incorporated in the Netherlands. This allows us to benefit from a structure comparable to similar-sized international industrial groups, within a tax and legal environment better suited to our business needs. With the creation of CGGVeritas Services Holding B.V., all Services operations are conducted under a unified structure at the level of this new entity by the Services management team, which also oversees CGGVeritas Services SA.

 

 

On November 25, 2008, we launched a voluntary exchange offer to acquire 100% of the share capital of Wavefield-Inseis ASA (“Wavefield”). We offered Wavefield shareholders one newly issued CGGVeritas share for every seven Wavefield shares. A total of 90,480,237 shares were tendered in the offer, representing 69.9% of the share capital of Wavefield. In consideration of the Wavefield shares tendered to the offer, we issued 12,925,749 new shares on December 18, 2008. The fair value of those issued shares amounted to €139.0 million.

 

On December 30, 2008, we launched a mandatory public offer for the remaining 38,903,024 outstanding shares (i.e, 30.1% of the share capital) as well as for the 2,892,875 shares that could result from the exercise of stock options. The offer price calculated in accordance with the provisions of Chapter VI of the Norwegian Securities Trading Act amounted to NOK 15.17 per share to be paid in cash. At the end of this mandatory offer period, which expired on January 27, 2009, we acquired 37,043,013 additional shares for a total of 98.6% of Wavefield’s share capital. We then launched a squeeze-out process for the remaining outstanding shares of Wavefield at a price of NOK 15.17 per share to be paid in cash. In February 2009, we acquired Wavefield’s remaining shares for €62 million, which was paid after the objection period expired. As a result, the minority interests on our balance sheet at December 31, 2008, recognized as a financial debt of €62 million due to our obligation to conduct a mandatory public offer, have been cancelled.

As of February 13, 2009, we owned 100% of Wavefield’s share capital. Wavefield was de-listed from the Oslo Bors on February 16, 2009. The preliminary goodwill determined as of December 31, 2008 has been revised upwards by an additional €87.7 million, resulting in a total goodwill related to the acquisition of €96.3 million as of December 31, 2009. The principal adjustments were related to fixed assets and unfavorable time charters. The total consideration for the acquisition in our financial statements, including the remaining 30.1% acquired in February 2009, was €207.1 million (US$288.2 million).

 

Total direct transaction costs related to the acquisition (including advisory fees and legal fees) amounted to €5.9 million and were recognized as part of the cost of the acquisition.

 

 

On December 12, 2008, Sercel acquired Quest Geo Solutions Ltd (“Quest”), a UK-based company, for a price of €5.1 million (GBP3 million, with an additional GBP1 million that will be paid in 2011 provided a certain level of revenues is achieved). Quest is specialized in navigation software for the seismic industry and was already cooperating with Sercel with respect to its SeaProNav products at the date of the acquisition. The purchase price allocation resulted in goodwill of €2.8 million.

 

  During 2007

 

 

  Merger consideration

 

On September 4, 2006, CGG entered into a definitive merger agreement with Veritas to acquire Veritas in a part cash, part stock transaction. The merger was completed on January 12, 2007. The combined company was renamed “Compagnie Générale de Géophysique-Veritas,” abbreviated as “CGGVeritas”.

 

At the merger closing date, and according to the formula set out in the merger agreement, the per share cash consideration to holders of Veritas stock was U.S.$85.50 and the per share stock consideration was 2.0097 CGGVeritas ADSs upon the election of Veritas’ shareholders.

 

Of the 40,420,483 shares of Veritas common stock outstanding as of the merger date (January 12, 2007):

 

 

Stockholders electing cash received, on average, 0.9446 CGGVeritas’ ADSs and U.S.$45.32 in cash per share of Veritas common stock. Stockholders electing ADSs and stockholders making no valid election received 2.0097 CGGVeritas’ ADSs per share of Veritas common stock. In aggregate, approximately U.S.$1.5 billion and approximately 46.1 million shares represented by ADSs were paid to Veritas stockholders as merger consideration. Based on a valuation of CGGVeritas’ ADS at U.S.$40.5 on January 12, 2007, the total consideration of the merger amounted to approximately €2.7 billion (U.S.$3.5 billion).

 

Total direct transaction costs related to the merger (including advisory fees and legal fees) amounted to €26.3 million (U.S.$34.6 million) and were recognized as a cost of the acquisition.

 

  Financing of the Veritas merger

 

  Bridge loan facility

 

On November 22, 2006, CGG, as borrower, and certain of its subsidiaries, as guarantors, entered into a U.S.$1.6 billion senior secured bridge loan facility agreement with Credit Suisse International, as agent and security agent, and the lenders party thereto. On January 12, 2007, CGG borrowed U.S.$700 million under the bridge loan facility, and the proceeds were used to:

 

 

Upon such borrowing and the concurrent funding of the U.S.$1.0 billion term loan facility described below, the unused commitments of U.S.$900 million were terminated.

We used the net proceeds of our Senior Notes offering described below, together with cash on hand, to repay in full the bridge loan facility in February 2007.

 

  Senior Facilities

 

On January 12, 2007, Volnay Acquisition Co. I (which subsequently changed its name to CGGVeritas Services Holding (U.S.) Inc.), as borrower, and CGG entered into a U.S.$1.115 billion senior secured credit agreement with Credit Suisse, as administrative agent and collateral agent, and the lenders party thereto, pursuant to which Volnay Acquisition Co. I borrowed a U.S.$1.0 billion senior secured “term loan B” and obtained a U.S.$115 million senior secured U.S. revolving facility (which revolving facility includes letter of credit and swingline subfacilities). Aggregate commitments under the U.S. revolving facility were increased to U.S.$140 million on January 26, 2007. The proceeds of the term loan B facility were used to:

 

 

See “— Liquidity and Capital Resources — Financing Arrangements”

 

  Additional Senior Notes

 

On February 9, 2007, we issued an additional U.S.$200 million in aggregate principal amount of 71/2% Senior Notes due 2015 and U.S.$400 million in aggregate principal amount of 73/4% Senior Notes due 2017. Both series of Senior Notes were guaranteed on a senior basis by certain of our subsidiaries. The Senior Notes are listed on the Euro MTF market of the Luxembourg Stock Exchange. We used the net proceeds from the offering of the Senior Notes plus cash on hand to repay in full the U.S.$700 million outstanding under the bridge loan facility described above.

 

  Capital increases

 

In connection with the Veritas merger, we issued a total of 9,215,845 ordinary shares that were deposited with The Bank of New York Trust as ADS depository, which issued 46,079,225 ADSs to be paid as merger consideration to former holders of Veritas stock.

 

On January 26, 2007, we issued a further 108,723 ordinary shares that were deposited with The Bank of New York as ADS depository, which issued 543,614 ADSs to a holder of U.S.$6.5 million in principal amount of Veritas’ convertible senior notes due 2024 that delivered a conversion notice on January 19, 2007.

 

On February 27, 2007, we issued a further 301,079 ordinary shares that were deposited with The Bank of New York as ADS depository, which issued 1,505,393 ADSs to a holder of U.S.$18 million in principal amount of Veritas’ convertible senior notes due 2024 that delivered a conversion notice on February 23, 2007. No further Veritas convertible notes remain outstanding.

 

 

Geomar is a subsidiary, owned 49% by CGGVeritas and 51% by Louis Dreyfus Armateurs (“LDA”), that has owned the seismic vessel Alizé since March 29, 2007. On April 1, 2007, Geomar entered into a new charter agreement with LDA and LDA entered into a new charter agreement with CGG Services. Additionally, on April 10, 2007, CGG Services acquired a call right and LDA a put on the 51% stake of Geomar held by LDA. In light of the risks and benefits related to these new agreements for CGGVeritas, Geomar has been fully consolidated in our financial statements since April 1, 2007. Prior to that date, Geomar was accounted for under the equity method.

 

 

On June 27, 2007, Sercel Holding acquired 121,125 Cybernetix shares bringing its total holding to 352,125 shares, representing 32.01% of Cybernetix’s share capital and 26.57% of its voting rights. On November 5, 2007, Sercel Holding increased its investment for a total amount of €0.8 million, bringing its total holding to 416,147 shares, representing for 32.20% of Cybernetix’s share capital. Since June 30, 2007, Cybernetix has been consolidated under the equity method in our financial statements.

 

 

On July 17, 2007, we entered into strategic joint operating agreement with Offshore Hydrocarbon Mapping plc (“OHM”) under which both companies will work together to develop Controlled Source ElectroMagnetic imaging

activities (CSEM) and on seismic and CSEM integration opportunities. On August 21, 2007, subsequent to the approval by the shareholders of OHM, we acquired 6,395,571 shares of OHM at a price of 240 GBP pence per share. On October 19, 2007, we acquired an additional 80,695 shares at a price of 240 GBP pence per share. We thus paid in total €22.9 million for 14.99% of OHM’s issued share capital. In 2008, we recognized an impairment loss of €22.6 million on this investment.

 

 

On November 12, 2007, we acquired 30.9 million shares of Eastern Echo Holding plc (ECHO NO) for a total consideration of approximately €55 million (NOK 431 million), representing 12.67% of Eastern Echo’s issued share capital. Eastern Echo is a geophysical company specializing in acquisition of high quality 3D seismic data. Our intent, with this minority stake, was to best position ourselves, and especially Sercel, for continuing cooperation with Eastern Echo in the expanding seismic market. On November 23, 2007, further to the cash offer launched by Schlumberger BV on November 16, 2007, we tendered all our shares of Eastern Echo to Schlumberger BV at price of NOK 15 per share. We therefore recognized a gain of €2.8 million.

 

  Backlog

 

Backlog estimates are based on a number of assumptions and estimates, including assumptions as to exchange rates between the euro and the U.S. dollar and estimates of the percentage of completion contracts. Contracts for services are occasionally modified by mutual consent and in certain instances are cancelable by the customer on short notice without penalty. Consequently, backlog as of any particular date may not be indicative of actual operating results for any succeeding period.

 

Backlog for our Services segment represents the revenues it expects to receive from commitments for contract services it has with its customers and, in connection with the acquisition of multi-client data, represents the amount of pre-sale commitments for such data. Backlog for our Equipment segment represents the total value of orders it has received but not yet fulfilled.

 

Our backlog for our Services and Equipment segments, as of February 1, 2010 was U.S.$1.56 billion.

 

Critical Accounting Policies and Estimates

 

Our significant accounting policies, which we have applied consistently, are fully described in note 1 to our consolidated financial statements included elsewhere in this document. However, certain of our accounting policies are particularly important to the portrayal of our financial position and results of operations, and these are described below.

 

In applying our accounting policies, management makes estimates, assumptions and judgment about uncertain matters that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ materially from those estimates under different assumptions or conditions.

 

Our significant estimates relate mainly to the expected cash-flows used to measure the recoverability of certain intangible assets such as deferred tax assets, our multi-client data library and goodwill and to determine the amortization rate of our multi-client surveys. To calculate the recoverable amount of our goodwill, we use estimates that are based on our outlook for the seismic industry, as well as the expected cash flows in our three-year plan and what we consider to be normative cash flows for the years thereafter. In 2009, our outlook for the seismic industry assumed a recovery starting progressively in the second half of 2010. See note 11 to our consolidated financial statements included elsewhere in this document for the key assumptions used in our determination of asset recoverability and the sensitivity in changes in assumptions. Changed assumptions, in particular the discount rate and the normative cash flow, could significantly affect our impairment result.

 

  Operating revenues

 

Operating revenues are recognized when they can be measured reliably, and when it is likely that the economic benefits associated with a transaction will flow to the entity, which is at the point that such revenues have been realized or are considered realizable. For contracts where the percentage of completion method of accounting is being applied, revenues are only recognized when the costs incurred for the transaction and the cost to complete the transaction can be measured reliably and such revenues are considered earned and realizable.

 

Revenues related to multi-client surveys result from (i) pre-commitments and (ii) licenses after completion of the surveys (“after-sales”).

 

Pre-commitments — Generally, we obtain commitments from a limited number of customers before a seismic project is completed. These pre-commitments cover part or all of the survey area blocks. In return for the commitment, the customer typically gains the right to direct or influence the project specifications, advance access to data as it is being acquired, and favorable pricing. We record payments that we receive during periods of mobilization as advance billing in the balance sheet in the line item “Advance billings to customers”.

 

We recognize pre-commitments as revenue when production has begun based on the physical progress of the project.

 

After sales — Generally, we grant a license entitling non-exclusive access to a complete and ready for use, specifically-defined portion of our multi-client data library in exchange for a fixed and determinable payment. We recognize after sales revenue upon the client executing a valid license agreement and having been granted access to the data. Within thirty days of execution and access, the client may exercise our warranty that the medium on which the data is transmitted (a magnetic cartridge) is free from technical defects. If the warranty is exercised, we will provide the same data on a new magnetic cartridge. The cost of providing new magnetic cartridges is negligible.

 

After sales volume agreements — We enter into customer arrangements in which we agree to grant licenses to the customer for access to a specified number of blocks of the multi-client library. These arrangements typically enable the customer to select and access the specific blocks for a limited period of time. We recognize revenue when the blocks are selected and the client has been granted access to the data and if the corresponding revenue can be reliably estimated. Within thirty days of execution and access, the client may exercise our warranty that the medium on which the data is transmitted (a magnetic cartridge) is free from technical defects. If the warranty is exercised, we will provide the same data on a new magnetic cartridge. The cost of providing new magnetic cartridges is negligible.

 

 

In exclusive surveys, we perform seismic services (acquisition and processing) for a specific customer. We recognize proprietary/contract revenues as the services are rendered. We evaluate the progress to date, in a manner generally consistent with the physical progress of the project, and recognize revenues based on the ratio of the project cost incurred during that period to the total estimated project cost.

 

The billings and the costs related to the transits of seismic vessels at the beginning of the survey are deferred and recognized over the contractual production period by reference to the technical stage of completion.

 

In some exclusive survey contracts and a limited number of multi-client survey contracts, we are required to meet certain milestones. We defer recognition of revenue on such contracts until all milestones that provide the customer a right of cancellation or refund of amounts paid have been met.

 

 

We recognize revenues on equipment sales upon delivery to the customer. Any advance billings to customers are recorded in current liabilities.

 

 

We recognize revenues from the sale of software and hardware products following acceptance of the product by the customer at which time we have no further significant vendor obligations remaining. Any advance billings to customers are recorded in current liabilities.

 

If an arrangement to deliver software, either alone or together with other products or services, requires significant production, modification, or customization of software, the entire arrangement is accounted for as a production-type contract, i.e. using the percentage of completion method.

 

If the software arrangement provides for multiple deliverables (e.g. upgrades or enhancements, post-contract customer support such as maintenance, or services), the revenue is allocated to the various elements based on specific objective evidence of fair value, regardless of any separate allocations stated within the contract for each element. Each element is appropriately accounted for under the applicable accounting standard.

 

Maintenance revenues consist primarily of post contract customer support agreements and are recorded as advance billings to customers and recognized as revenue on a proportional performance basis over the contract period.

 

Revenues from our other geophysical sales services are recognized as the services are performed and, when related to long-term contracts, using the performance method of recognizing income.

 

 

We may grant award credits to our main clients. These award credits are contractually based on cumulative services provided during the calendar year and attributable to future services.

 

These credits are considered as a separate component of the initial sale and measured at their fair value by reference to the contractual rates and the forecasted cumulative revenues for the calendar year. These proceeds are recognized as revenue only when the obligation has been fulfilled.

 

IFRIC 13 “Loyalty Programs” issued by the IASB in June 2007 has been applied from December 31, 2008 with the accumulated impact, net of tax, on previous periods recorded in equity as of December 31, 2008. The impact was not material.

 

  Multi-client surveys

 

Multi-client surveys consist of seismic surveys to be licensed to customers on a non-exclusive basis. All costs directly incurred in acquiring, processing and otherwise completing seismic surveys are capitalized into the multi-client surveys (including transit costs when applicable). The value of our multi-client library is stated on our balance sheet at the aggregate of those costs less accumulated amortization or at fair value if lower. We review the library for potential impairment at each balance sheet date at the relevant level (independent surveys or groups of surveys).

 

We amortize the multi-client surveys over the period during which the data is expected to be marketed using a pro-rata method based on recognized revenues as a percentage of total estimated sales.

 

In this respect, we use five amortization rates 50%, 65%, 75%, 80% or 83.3% of revenues depending on the category of the surveys. Multi-client surveys are classified into a same category when they are located in the same area with the same estimated sales ratio, such estimates generally relying on historical patterns. The 65% amortization rate is applied to the surveys acquired as a result of our acquisition of Veritas.

 

For all categories of surveys and starting from data delivery, a minimum straight-line depreciation scheme is applied over a five-year period, if total accumulated depreciation from the applicable amortization rate is below this minimum level.

 

  Development costs

 

Expenditures on research activities undertaken with the prospect of gaining new scientific or technological knowledge and understanding are recognized in the income statement as expenses as incurred and are presented as “Research and development expenses — net”.

 

Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, are capitalized if:

 

 

Expenditures capitalized include the cost of materials, direct labor and an appropriate proportion of overhead. Other development expenditures are recognized in the income statement as expenses as incurred and are presented as “Research and development expenses — net”.

 

Capitalized development expenditures are stated at cost less accumulated amortization and impairment losses.

 

We amortize capitalized developments costs over 5 years.

 

Research and development expenses in our income statement represent the net cost of development costs that are not capitalized, of research costs, offset by government grants acquired for research and development.

  Impairment

 

In accordance with IAS 36 “Impairment of assets”, the carrying amounts of our assets, other than inventories and deferred tax assets, are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, we estimate the asset’s recoverable amount. Factors we consider important that could trigger an impairment review include the following:

 

 

The recoverable amount of tangible and intangible assets is the greater of their net fair value less costs to sell and value in use.

 

Goodwill, assets that have an indefinite useful life and intangible assets are allocated to cash generating units. We estimate the recoverable amount of these cash generating units at each balance sheet closing date.

 

We determine the recoverable amounts by estimating future cash flows expected from the assets or from the cash generating units, discounted to their present value using a discount rate that reflects the expected return on invested capital given the characteristics and the risks attached to the asset.

 

We recognize an impairment loss whenever the carrying amount of an asset exceeds its recoverable amount. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

 

Impairment losses are recognized in the income statement. Impairment losses recognized in respect of a group of non independent assets allocated to a cash-generating unit are allocated first to reduce the carrying amount of any goodwill allocated to cash-generating units (group of units) and then, to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis.

 

  Onerous contracts

 

We record a provision for onerous contracts equal to the excess of the unavoidable costs of meeting the obligations under the contract over the economic benefits expected to be received under it, as estimated by the Group.

 

Year ended December 31, 2009 compared with year ended December 31, 2008

 

  Operating revenues

 

The following table sets forth our consolidated operating revenues by business line, and the percentage of total consolidated operating revenues represented thereby, during each of the periods stated:

 

 

 

Notes:

 

 

Our consolidated operating revenues for the year ended December 31, 2009 decreased 14% to €2,233.2 million from €2,602.5 million for 2008. Expressed in U.S. dollars, our consolidated operating revenues decreased 19% to U.S.$3,109.3 million for the year ended December 31, 2009 from U.S.$3,849.8 million for 2008. This decrease was mainly due to the decline in demand in our Equipment segment while our Services segment benefited from the change of consolidation scope with the acquisition of Wavefield in December 2008.

 

Services

 

Operating revenues for our Services segment decreased 7% to €1,708.4 million for the year ended December 31, 2009 from €1,837.3 million for 2008 and decreased 12% in U.S. dollar terms. This decrease, due to weak market conditions, was offset in part by the addition of Wavefield to the marine business line, continued robust processing performance and strong multi-client sales in the last three months of 2009.

 

We began implementation of our vessel capacity reduction and high-end fleet refocusing plan with the decommissioning in 2009 of six seismic vessels including four mid-capacity 3D vessels (Harmattan, Fohn, Orion and Search) and two 2D vessels (Duke and Discoverer II), with three additional vessels to be decommissioned in 2010.

 

     Marine

 

Operating revenues from our Marine business line for the year ended December 31, 2009 decreased 4% to €1,071.6 million from €1,112.7 million for 2008 and decreased 9% in U.S. dollar terms as a result of reduced market demand.

 

Contract revenues increased 9% to €774.4 million for the year ended December 31, 2009 from €712.9 million for 2008 and increased 2% in U.S. dollar terms with the addition of the Wavefield fleet. In 2009, our vessel availability rate was 89%, including a 4% impact related to standby between contracts, and our production rate was 89%. Contract revenues accounted for 72% of marine revenues for the year ended December 31, 2009 compared to 64% for 2008.

 

Multi-client marine data library revenues decreased 26% to €297.2 million for the year ended December 31, 2009 from €399.8 million for 2008 and decreased 30% in U.S. dollar terms as multi-client expenditures were reduced by 37%. Prefunding was €188.1 million for the year ended December 31, 2009 with a high prefunding rate of 104% reflecting the strong interest for our Brazil Santos Cluster extension program and our Gulf of Mexico wide-azimuth surveys compared to €276.9 million for 2008. After-sales decreased 11% to €109.2 million for the year ended December 31, 2009 from €122.9 million for the year ended December 31, 2008. In U.S. dollar terms, the decrease was 16%.

 

     Land

 

Operating revenues from our Land business line decreased 24% to €347.2 million for the year ended December 31, 2009 from €454.4 million for 2008 and decreased 28% in U.S. dollar terms.

 

Contract revenues decreased 22% to €274.2 million in the year ended December 31, 2009 from €350.3 million for 2008 and decreased 26% in U.S. dollar terms, mainly due to low gas prices in the North American market. We operated on average 12 crews worldwide in 2009 compared to 22 crews in 2008, including Argas crews in Saudi Arabia. Contract revenues accounted for 79% of land revenues for the year ended December 31, 2009 compared to 77% for 2008.

 

Multi-client land data library revenues decreased 30% to €73.0 million for the year ended December 31, 2009 from €104.1 million for the comparable period of 2008 and decreased 34% in U.S. dollar terms. Prefunding was €40.0 million with a prefunding rate of 82% for the year ended December 31, 2009 compared to €41.0 million for 2008. After-sales were €33.0 million for the year ended December 31, 2009 compared to €62.9 million for 2008. Both prefunding and after-sales were affected by low activity in North America as a result of reduced expenditures by oil and gas companies due to low gas prices.

 

     Processing and Imaging

 

Operating revenues from our Processing and Imaging business line increased 7% to €289.6 million for the year ended December 31, 2009 from €270.2 million for 2008 and increased 1% in U.S. dollar terms as the performance and demand for our high-end depth imaging technologies continued to grow especially for Gulf of Mexico sub-salt depth imaging and multi-component processing.

     Equipment

 

Operating revenues for our Equipment segment decreased 26% to €616.2 million for the year ended December 31, 2009 from €832.1 million for 2008. In U.S. dollar terms, revenues decreased 29% to U.S.$858.0 million for the year ended December 31, 2009 from U.S.$1,209.1 million for 2008.

 

Operating revenues, excluding intra-group sales, decreased 31% to €524.8 million from €765.2 million for 2008 and decreased 34% in U.S. dollar terms. Demand for marine equipment was down as industry future fleet plans were scaled back.

 

  Operating Expenses

 

Cost of operations, including depreciation and amortization, decreased 1% to €1,710.5 million for the year ended December 31, 2009 from €1,722.5 million for 2008 due to the decommissioning of six of our seismic vessels during the second half of 2009, although this was offset in part by the changed scope of consolidation with the acquisition of Wavefield and a higher U.S.$/€ exchange rate. As a percentage of operating revenues, cost of operations increased to 77% for the year ended December 31, 2009 from 66% for 2008. Gross profit decreased 40% to €530.2 million for the year ended December 31, 2009 from €881.7 million for 2008, representing 24% and 34% of operating revenues, respectively.

 

Research and development expenditures, net of government grants, increased 42% to €62.1 million for the year ended December 31, 2009 from €43.8 for 2008, representing approximately 3% and 2% of operating revenues for 2009 and 2008, respectively. This increase was mainly attributable to the change in the scope of consolidation, with the addition of Wavefield, and to increased research and development expenditures by our Equipment segment.

 

Selling, general and administrative expenses, before share-based compensation, were stable at €232.6 million for the year ended December 31, 2009 compared to €232.3 million for 2008. Share based compensation expenses decreased to €10.7 million for the year ended December 31, 2009 from €23.8 million for 2008, notably due to the 2008 performance share plan for which performance conditions were not met.

 

As a percentage of operating revenues, selling, general and administrative costs increased to 11% for the year ended December 31, 2009 compared to 10% for the year ended December 31, 2008.

 

Other expenses amounted to €167.8 million for the year ended December 31, 2009 compared to €36.4 million for the year ended December 31, 2008 due to the implementation of our marine restructuring plan. As the seismic market became increasingly challenging in low-end marine, we repositioned our fleet to the high-end 10+ streamer vessel segment, leading to the decommissioning of nine seismic vessels, of which six were decommissioned in 2009 and three are scheduled for 2010, and a redundancy plan involving more than 300 persons. Total costs for the marine restructuring plan amounted to approximately €102 million (U.S.$144 million).

 

The fleet restructuring plan and recent changes in the seismic market led to the write-off of certain intangible assets. We recognized an impairment loss of goodwill of €216 million (U.S.$300 million) on our marine cash generating unit, and an impairment loss of €64 million (U.S.$89 million) of the legacy Veritas multi-client surveys acquired before 2007 presented in “Other expenses”.

 

Other expenses in 2008 included primarily an impairment loss of €22.6 million on our investment in OHM and the unfavorable impact of €9.3 million on hedging activity.

 

  Operating Income (Loss)

 

Our operating loss amounted to €160.6 million for the year ended December 31, 2009 compared to an operating income of €540.6 million for 2008 as a result of the factors described above. Before restructuring costs and impairment losses, operating income for 2009 was approximately €221 million (U.S.$309 million).

 

Operating loss from our Services segment was €258.8 million for the year ended December 31, 2009 compared to an operating income of €353.0 million for the year ended December 31, 2008. In U.S. dollar terms, operating loss was U.S.$360.3 million for 2009 compared to an operating income of U.S.$522.2 million for 2008. Before restructuring costs and impairment losses, operating income for 2009 was approximately €122 million (U.S.$173 million).

 

Operating income from our Equipment segment decreased 50% to €133.8 million for the year ended December 31, 2009 from €268.1 million for 2008. In U.S. dollar terms, operating income decreased 52% to U.S.$186.3 million from U.S.$386.4 million.

  Financial Income and Expenses

 

Cost of net financial debt increased 26% to €105.2 million for the year ended December 31, 2009 compared to €83.8 million for 2008. This increase was mainly due to (i) the issuance on June 9, 2009 of U.S.$350 million principal amount of 91/2% senior notes due 2016, which was partially offset by the early repayment of US$310 million of our term loan B, (ii) the change of scope of consolidation with the acquisition of Wavefield in December 2008 and (iii) less financial income generated by cash deposits.

 

Other financial loss was €11.2 million for the year ended December 31, 2009 compared to €11.5 million for 2008.

 

  Equity in Income (Losses) of Affiliates

 

Income from investments accounted for under the equity method increased to €8.3 million for the year ended December 31, 2009 from €3.0 million for the year ended December 31, 2008 mainly due to our share in the income of Argas, our joint venture in Saudi Arabia.

 

  Income Taxes

 

Tax credits amounted to €9.8 million for the year ended December 31, 2009 compared to income taxes of €108.3 million for 2008. The effective tax rate, before impairment of goodwill, restructuring costs and other non-recurring items was 36% and 24% for the years ended December 31, 2009 and 2008, respectively.

 

  Net Income (Loss)

 

Net loss was €258.9 million for the year ended December 31, 2009 compared to €340.0 million for 2008 as a result of the factors discussed above.

 

Year ended December 31, 2008 compared with year ended December 31, 2007

 

  Operating revenues

 

The following table sets forth our consolidated operating revenues by business line, and the percentage of total consolidated operating revenues represented thereby, during each of the periods stated.