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

(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.

150,247,083 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):

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

 

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, 2008.

 

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, 2008 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 21, 2009, the most recent practicable day prior to the date of this annual report, the exchange rate as published by Bloomberg at approximately noon (New York time) was €1.00 = $1.2982.

 

 

 

Notes:

 

 

Capitalization and Indebtedness

 

Not applicable.

 

Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

Risk Factors

 

Risks related to our business

 

  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 our exposure could be material to its financial condition and results of operations in emerging markets where the political and legal environment is less stable.

 

We cannot assure 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 its securities among certain investors.

 

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 ethics¹, 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. 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, including the merger with Veritas DGC Inc., and these risks may materially adversely affect our revenues, expenses, operating results and financial condition.

 

In the past hawse have grown by acquisitions, some of which, such as the merger with Veritas DGC Inc. in 2007 or the Waivefield-Inseis acquisition in December 2008, have been quite significant. Such operations, whether completed, pending or likely to be completed in the future, present various financial and management-related risks which can be material, such as integration of the acquired businesses in a cost-effective manner; implementation of a combined business strategy; diversion of CGGVeritas 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

 

 

¹ In 2005, we combined our internal control policies in a financial security program based on applicable laws and regulations in force, such as the Sarbanes-Oxley Act, the French Financial Security Law (LSF) and the Foreign Corrupt Practices Act. This program involves all of our operational and financial officers in a process of ongoing improvement to our control procedures. The program also reflects our code of ethics and code of conduct, which are sent to managers and integrated into their training modules. In particular, to improve management of corruption risk and compliance with U.S. and European anti-corruption regulations, an external consultancy was appointed in 2005 to review the our internal rules, particularly for managing sales agents. Each agent was audited and selection and control procedures were strengthened. Best practices training was implemented within the Group in 2006.

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.

 

More particularly, the merger with Veritas DGC Inc. involved the integration of two companies, CGG and Veritas, that had previously operated independently and as competitors. Achieving the anticipated long-term benefits of the merger depends in particular on achieving the initially-anticipated cost synergies, the redeployment of both companies’ respective support resources and the combination and integration of their significant global activities. There can be no assurance that these objectives are being achieved or will be achieved successfully.

 

  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 €2,055.1 million on our balance sheet as at December 31, 2008. Goodwill is allocated to cash generating units (CGUs) (as described in note 11 to our consolidated financial statements for the year ended December 31, 2008). 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 the possibility of significant underperformance in cash generation relative to previously-expected results, which may arise, for example, from the underperformance of certain assets or a change in the industry and/or economic environment. On this basis, 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 due to substantial underperformance, 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.

 

  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 amount 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. dollar and euro, and to a significantly lesser extent, in Canadian dollar, Brazilian real, Australian dollar, British pound and the Norwegian kroner. 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. The merger with Veritas DGC Inc. very significantly increased both the dollar-denominated revenues and expenses of the Group, as Veritas’s revenues and expenses were historically denominated largely in U.S. dollars. Thus, 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 its 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 policy, we cannot assure 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 fixed expenses in euros amount to €500 million and as a consequence, an unfavorable variation of U.S.$0.10 in the exchange rate between the U.S. dollar and the euro would reduce our operating income by approximately U.S.$50 million.

 

The following table shows our exchange rate exposure as of December 31, 2008.

 

 

Our net foreign-exchange exposure is principally to the U.S. dollar and currencies pegged to the U.S. dollar. We seek to reduce our foreign-exchange position by selling our future receivables as soon as they enter the backlog and taking out dollar-denominated loans supported by long-term assets. Although we attempt to reduce the risks associated with exchange rate fluctuations, we cannot assure 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, a decrease of U.S.$0.10 in the value of the U.S. dollar relative to the euro would reduce our operating income by U.S.$50 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 U.S.$7 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 extend the length of payment terms we grant to customers or 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 destruction or other liability. We carry insurance against the destruction of or damage to our seismic equipment and against business interruption for our data processing activities 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 165 patents in various countries for products and processes. These patents last between four and twenty 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 and which limits 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 its 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.

 

  CGG and Veritas have had losses in the past and there is no assurance of our profitability for the future.

 

CGG recorded net losses in 2004 and 2005 (attributable to shareholders) of €6.4 million and €7.8 million, respectively, although excluding the accounting impact under IFRS of our 7.75% subordinated convertible bonds due 2012 denominated in U.S. dollars, our net income would have been positive.

 

  We have ordered two new vessels whose construction may be delayed.

 

We signed an agreement with the Norwegian company Eidesvik Offshore on July 2, 2007 for the construction of two large-capacity seismic vessels, with a total contractual value of approximately U.S.$420 million. The two vessels should be delivered in 2010 and operated under a time charter for a period of 12 years. We have the necessary expertise to successfully carry out the project management, and thus ensure within the specified timeframe that the vessels’ construction meets appropriate quality standards. However, the construction and planning of these vessels remain a long and complex process involving many parties (the shipyard, Eidesvik offshore and others) and subject to many factors.

 

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 oil and gas prices and by expectations regarding future oil and gas 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 oil and gas 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 oil and gas include:

 

 

We believe that the current crisis in the credit markets, the general slowdown of the global economy, global geopolitical uncertainty and the rapid decrease in the price of oil price to near U.S.$40, far from its record peak in 2008, could cause hydrocarbon companies to suddenly delay or cancel some of their development projects and, as a consequence, reduce their need for seismic services. Given these uncertainties, we cannot predict future demand for seismic services and products.

 

  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 its 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 in the future (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 thus have a material adverse effect on our results of operations.

 

  Our fleet of vessels may be subject to temporary or permanent measures to reduce capacity as a result of future conditions in the seismic market.

 

Following our acquisition of Wavefield, we operate a fleet of 27 vessels composed of 13 large-capacity vessels with eight to 14 streamers, seven medium-capacity vessels with four to six streamers and seven smaller 3D/2D vessels. We own five 3D vessels and two 3D/2D vessels, hold purchase options on five 3D vessels, and operate the

11 other 3D vessels and four other 3D/2D vessels under time charters running from one to seven years, with a weighted average term of 5 years. These time charters include extension clauses that, if exercised, would extend the weighted average term to 13 years. Taking into account only vessels that we own or over which we have purchase options, the average age of the vessels is 19 years. The oldest vessels in the fleet are 26 and 29 years old, respectively.

 

Future economic conditions in the seismic market could lead us to implement a plan to reduce our marine acquisition capacity, either permanently, by decommissioning the oldest vessels in our fleet, or temporarily, by ceasing to use of certain vessels for a period. This would result in additional industrial adjustment costs that could possibly be offset by improved commercial conditions for the vessels remaining in operation.

 

  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 offshore 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 usually 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 relative to their exploration expenses, and the time needed to mobilize production means and/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, labor laws. We need to 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 result 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.

 

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 at December 31, 2008, our net financial debt, total assets and shareholders’ equity were €1,029.1 million, €5,634.2 million and €2,960.1 million, respectively. We cannot assure that we will be able to generate sufficient cash to service our debt or sufficient earnings to cover fixed charges in future years.

 

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 71/2% senior notes due 2015 and 73/4% senior notes due 2017 (hereinafter the “Senior Notes”) and the agreements governing our credit facilities (including our U.S.$1.14 billion senior credit facilities dated January 12, 2007 (hereinafter the “Senior Facilities”) and our U.S.$200 million French revolving facility dated February 7, 2007 (hereinafter the “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 with respect to consolidated interest coverage, total assets, net debt, equity and net income. 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, 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 the 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 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, French revolving facility agreement and our other existing senior indebtedness limit, but do not prohibit, we and our subsidiaries from doing so. As at December 31, 2008, we had drawn U.S.$35.0 million under our existing credit facilities. The Group also benefited at such date from other long-term confirmed and undrawn credit lines amounting to €203.5 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 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 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 during 2008 and 2009 to date, could adversely affect our ability to meet our liquidity needs, 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.

 

  Interest-rate risk as of December 31, 2008.

 

We may have to subscribe part of our borrowings with financial institutions at variable interest rates depending upon the duration of the drawing periods, which can range from one to 60 months. As a result, interest expenses vary in line with movements in short-term interest rates. In particular, our senior credit 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. Each 50 basis point increase in the U.S. dollar LIBOR would increase our interest expense by U.S.$4 million per year.

 

However, this risk is mitigated by the fact that a large proportion of the Group’s debt consists of fixed-rate bonds, along with some fixed-rate finance leases and fixed-rate medium-term bank credit facilities with variable maturities.

 

The following table shows our variable interest rate exposure by maturity as of December 2008.

 

 

 

Notes:

 

 

As of December 31, 2008, the group’s variable-rate assets (net of liabilities) due in less than one year totaled €203.9 million.

 

Other financial risks

 

  Risks related to certain of our shareholdings

 

Our investment policy does not authorize investments in the shares of other companies. Any transactions involving the Company’s shares are decided by general management in accordance with the applicable regulations.

 

As at December 31, 2008, we owned 855,350 of our own shares, worth €9,066,710 million. A 10% fall in the price of these treasury shares would therefore reduce shareholders’ equity by €0.9 million, but would have no impact on earnings.

 

We also hold minority interests in the following listed companies pursuant to our long-term investment strategy:

 

 

 

  Risk relating to the current financial crisis

 

The current situation in the credit and capital markets is likely to have a significant adverse impact on industrial and commercial performance and the solvency of many companies in general, which may affect some of our customers and suppliers. As a result, the current economic climate may have an adverse impact on our business if customers cancel orders or delay or default on payment, or if suppliers fail to provide goods and services as agreed.

 

To deal with these risks as effectively as possible,

 

 

 

 

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 offshore 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 28 open seismic data processing centers and 12 client-dedicated centers. A suite of advanced technologies, developed and honed 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. Hampson-Russell software makes sophisticated technology accessible to the working geophysicist. It has an installed base of more than 1400 licenses at over 500 petroleum and service companies worldwide.

 

CGG and Veritas together have 110 years of combined operating experience 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 71% and Equipment accounted for 29% of our consolidated revenues for the year ended December 31, 2008.

 

For the year ended December 31, 2008, 31% of our consolidated revenues were from North America, 10% from South America, 32% from Europe, Africa, Middle East, and 27% from Asia Pacific.

 

Compagnie Générale de Géophysique-Veritas is the parent company of the 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 Tour Maine Montparnasse, 33, avenue du Maine, 75015 Paris, France. Our telephone number is (33) 1 64 47 45 00.

 

  Acquisition of Wavefield

 

On December 19, 2008, we acquired 70% 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 specified 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. As of the date of this report, we own 100% of Wavefield’s share capital.

 

Our Strengths

 

We believe a number of strategic factors favor our development:

 

The merger with Wavefield is a strategic transaction within a consolidating market

 

The geophysical market has witnessed consolidation in recent years among both customers and suppliers. The geophysical market demands a wider range of solutions, as well as size, flexibility and global reach. Following the merger with Wavefield, we believe we are positioned to meet these demands in geophysical services and equipment in the world’s principal markets for oil and gas exploration and production.

 

With a combined workforce of approximately 8,500 employees operating worldwide, including Sercel, a history of innovation and a broad base of customers, including independent, international and national oil and gas companies, we believe we are an industry leader in seismic technology, services and equipment.

 

Meeting the geophysical challenges of the future

 

As worldwide oil and gas supplies continue to face constraints and exploration and development for reserve replacement is conducted in more challenging areas, high-end seismic and related technical expertise is required. We are positioned as a leading geophysical provider, with an expanded product offering to meet these future challenges. We believe our positions in data processing and imaging and the skill and reputation of our experts and geoscientists are an industry benchmark in this segment. We are particularly strong in advanced technologies such as depth imaging, 4D processing and reservoir characterization.

 

Strengthening fleet capability

 

Following our acquisition of Wavefield, we operate a high-end, recently equipped, fleet of 18 3D vessels. Our expanded overall fleet of 27 vessels is made up of vessels already in operation and does not add further capacity to the market. As a result of this acquisition, no additional material investments will be required to grow our capacity and we can reduce the risk of potential delays associated with building new vessels.

 

Strong operational expertise establishes Marine centre of excellence

 

We believe that the proven performance of Wavefield, combined with our existing center of Marine excellence in Norway, has created one of the industry’s leading teams of marine seismic operational talent.

 

An expanded and complementary product offering based on innovative technology

 

Wavefield’s Optoplan subsidiary brings to CGGVeritas a recognized leader in seabed fiber optic technology and a new product offering for our customers. The technology offering of Optoplan is complementary to CGGVeritas, and to Sercel in particular. Optoplan’s equipment manufacturing infrastructure will benefit from Sercel’s long standing expertise with equipment manufacturing and assembly. We believe that when Optoplan’s offerings are developed and marketed alongside Sercel’s current established product offering, we can add value in the emerging field of reservoir monitoring and accelerate the market entry of next generation technologies.

 

Continue to build customer relationships

 

We hope to benefit from deeper global market penetration and be able to extend our long-term customer relationships and be a seismic provider of choice. As an example, our supply of land seismic acquisition services is geographically and technologically well placed for high-end positioning and further development of local partnerships;

 

Providing strong profitable growth potential

 

We believe the acquisition of Wavefield may increase profitability potential in both the Services and Equipment segments by creating further business opportunities in data processing and imaging as well as in multi-client activities. The addition of Wavefield vessels also provides us with increased fleet management flexibility in current and future vessel operations.

 

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. We believe that the short-term outlook for the geophysical services sector, particularly the offshore segment, is characterized by a slowdown in demand and an overcapacity in supply resulting in a significant decrease in prices. 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’ long-term decision-making processes, with many projects being possibly delayed or cancelled.

 

Second, given the relatively high energy prices in 2007 and much of 2008, the geophysical services market has developed strongly especially in offshore acquisition. We believe that following the decline in oil prices in the second half of 2008 and 2009 to date, geophysical services providers as a whole have not reacted efficiently, in particular in terms of capacity adjustment, which has resulted in excess supply applying downward pricing pressure on the market. The worldwide offshore fleet of large 3D vessels (with more than six streamers) increased from 31 vessels at the end of 2005 to 60 vessels by the end of 2008.

 

Nevertheless, we also believe that the medium-term outlook for the geophysical services sector, particularly the offshore 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 the use of seismic in reservoir development and production, broadening the use of seismic techniques over the lifecycle of reservoirs.

 

Every year, 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.

 

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:

 

  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.

 

We believe that 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 are also actively continuing the convergence of our legacy software technologies in order to achieve full synergy expected 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 and Garden Banks surveys may generate interest from deep offshore large oil and gas companies. Onshore, CGGVeritas’ 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.

 

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

 

Our geophysical Services segment is composed of:

 

 

 

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 2008, we had an average of 22 active land crews performing specialized 3D and 2D seismic surveys. Total land seismic acquisition activities accounted for 17% of our consolidated operating revenues in 2008. Contracts for land seismic acquisition accounted for 13% and land multi-client surveys accounted for 4% of our consolidated operating revenue in 2008.

 

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 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^TM and V1^TM 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 thousands 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, Kazakhstan, 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 2008, we invested €55 million (U.S.$82 million) in multi-client land seismic surveys, mainly in North America. Total revenues from multi-client land seismic surveys in 2008 were €104 million (U.S.$154 million), a 16% decrease in dollar terms year on year. Multi-client after-sales were €63 million (U.S.$93 million) for 2008 driven by demand in our Canadian and US lower 48 states data library. The pre-financing level was high at 74% and as of December 31, 2008, the net book value of our land multi-client library was €120 million (U.S.$166 million).

 

  Land Seismic Acquisition Business Development Strategy

 

Land Seismic Acquisition Contract Activity.  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.

 

The demand for land seismic acquisition services and for technology in particular remains strong and our strategy for the land acquisition business line is to:

 

 

Multi-client.  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 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 66% of our high-end 3D fleet on contract in 2008, mostly in the Eastern Hemisphere (85%).

 

Total marine activities accounted for 43% of our consolidated operating revenue in 2008. Marine seismic acquisition contracts accounted for 27% and multi-client marine accounted for 16% of our consolidated operating revenue in 2008.

 

  Marine Business Line

 

  Marine Seismic Acquisition Fleet

 

We operated a combined fleet of 19 vessels at the end of 2008 (before the integration of Wavefield), including eight high capacity vessels, seven mid capacity vessels and four small 3D/2D vessels. All vessels are equipped with Sercel’s solid or fluid streamers. In 2008, we continued performance upgrades, with the Alizé now capable of towing 14 streamers.

 

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, the Symphony, the Orion and the Search. The low capacity 3D/2D vessels we own are the Venturer, the Princess and the Duke. We co-own the vessel Alizé and charter, with a final purchase option, the following 3D vessels: the Challenger, the Fohn and the Harmattan. The other 3D vessels we charter are the Viking Vision, the Viking Vanquish, the Viking, the Viking II and the Viking Vantage. The low capacity 3D/2D vessels we charter are the Voyager, the Pacific Titan and the Pacific Sword.

 

The 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.

 

With more vessels, 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, the Viking, the Viking II, the Viking Vantage, the Viking Vision and the Viking Vanquish are each capable of deploying eight to fourteen streamers simultaneously. The Alizé, the Challenger, the Symphony, the Viking, the Viking II, the Viking Vantage, the Viking Vision, the Viking Vanquish, the Voyager, the Princess and the Titan are equipped with solid streamers, which offer numerous advantages over fluid-filled streamers. The solid streamers allow these vessels to work in rougher seas and record more desirable frequencies with less noise and less downtime than is possible with fluid-filled streamers.

 

On July 2, 2007, we entered into an agreement, amended on March 14, 2008, 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^tm design of Ulstein Design AS, and will be delivered in two or three years 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 configured for spreads of up to 16 long streamers, or 20 shorter streamers in high-density applications.

 

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 34% of our high-end 3D fleet utilization in 2008. 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 2008, 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.

 

In 2008, we invested €288 million (U.S.$426 million) mainly in the Gulf of Mexico but also in Brazil, in the North Sea and in Kazakhstan. Total revenues from multi-client marine seismic acquisition were €400 million (U.S.$591 million) in 2008, a 5% decrease in dollar terms from 2007.

 

The pre-funding level was strong at 96% while well positioned multi-client libraries benefited from increased customer interest. As of December 31, 2008, the net book value of our offshore multi-clients library was €416 million (U.S.$579 million).

 

In 2008, 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 Garden Bank wide-azimuth program was completed in November 2008 and our third survey (Green Canyon) commenced in December 2008 and was completed in March 2009. At that point our wide-azimuth coverage will stand at 1,452 OCS blocks, equivalent to 33,000 km².

 

Multi-client after-sales in 2008 were €123 million (U.S.$182 million), driven by strong interest for our Brazil and Gulf of Mexico data libraries.

 

  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, a subsidiary of Wavefield. 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 in both the 3D and 2D marine seismic segments in contract and multi-clients surveys. Historically, 2D was typically limited to pre-exploration efforts, as clients wished to have a rudimentary 2D image of an entire area in order to rapidly identify zones that justified 3D imaging. The possession of a mixed 2D/3D fleet thus becomes a strategic advantage and an essential factor in a company’s credibility with oil company clients.

 

The acquisition of Wavefield strengthens our fleet and operational capacity, adding eight vessels of which five are high-capacity vessels. Most of the additional vessels are recently-built and equipped with the latest Sercel solid streamer technology. The Wavefield acquisition also reinforces our operational team and expertise and brings a strong backlog with visibility well into 2009.

 

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.

 

  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 Geocluster 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 40 worldwide processing and imaging centers, including 12 dedicated client centers at December 31, 2008. Contract revenues from our Processing and Imaging business line accounted for approximately 10% of our consolidated revenues in 2008.

 

  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. Marine seismic data has 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 strong worldwide in 2008, driven by marine data volumes, especially with the rapid market adoption of wide-azimuth in the Gulf of Mexico 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 is on track with full synergy expected in 2009.

 

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 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 offshore seismic markets. Sercel is operated as an independent division and makes most of its sales to purchasers other than CGGVeritas. Sercel currently operates seven seismic equipment manufacturing facilities, located in Nantes and Saint Gaudens in France, Houston, Singapore, Alfreton in England, Larbert in Scotland and Calgary. 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, three sites in Toulouse, Les Ulis and Brest (France) are dedicated to borehole tools and submarine acoustic instrumentation, respectively.

 

In 2008, Sercel had record revenues of €832 million (U.S.$1,209 million), a 12% increase in dollar terms from 2007 (€789 million or U.S.$1,080 million). Sercel represented 29% of our consolidated revenue in 2008.

 

We estimate that the equipment market increased by around 7% in 2008, driven by the marine equipment market while the land equipment market remained flat. Sercel’s market share in the seismic equipment market is estimated at around 60%.

 

  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, 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 the MicroElectroMechanicalSystem (MEMS). Sercel enhanced its product range in September 2006 by acquiring Vibration Technology Ltd., a Scottish company specialized in wireless acquisition systems.

 

Sercel is also a market leader for vibroseismic vehicles. 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.

 

The Seal, our marine seismic data recording system, capitalizes on the 408 architecture and on our many years of experience in streamer manufacturing. 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 400 family acquisition systems technology and integrates DSU 3 components.

 

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

 

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, an UK company focusing on navigation software.

 

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 and 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, 2008, we held or had applied for 165 patents in respect of different products and processes worldwide. The duration of these patents varies from four 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 of a significant number of local competitors, mostly Chinese, seeking to expand their international market share beginning in 2000 has driven down prices in this sector and decreased the market share of established participants. 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 and BGP. 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 increased by almost 10% in 2008 with a positive, but moderate, impact on market prices.

 

  Marine

 

The offshore sector has four leading participants: WesternGeco, 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 2005 with a continuous increase of exclusive volumes and sales from the multi-client existing libraries. We estimate the number of large 3D vessels (six or more streamers) at around 60 vessels at the end of 2008, which was originally expected to grow to 74 vessels by the end of 2009 and 85 vessels in 2010. The current financial crisis and industry consolidation (such as our recent acquisition of Wavefield), may lead to of the number of vessels in the market being fewer than expected, partly due to vessel retirements. We believe that the supply / demand equilibrium should remain largely stable because 85% of the 3D worldwide fleet is concentrated among the four main players and they should adjust capacity in line with demand. The offshore market increased by approximately 20% in 2008 including a positive impact on market price, and was driven mostly by growth in the marine acquisition contract segment.

 

  Processing

 

The processing sector is led by Western Geco and CGGVeritas. 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 increased by 10% in 2008.

 

  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 increased by around 7% in 2008, mainly driven by demand for marine equipment, while the land market remained flat.

 

Organizational Structure

 

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

 

 

In 2008, to streamline operations and realize other benefits, we reorganized our Services segment by moving several of our subsidiaries, including CGGVeritas Services Holding (U.S.) Inc. and CGG Americas, Inc., 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 against CGG’s subsidiary, Sercel Inc., in the United States District Court for the Eastern District of Texas. The complaint alleges that several of Sercel Inc.’s seismic data acquisition products that include micro electromechanical systems (MEMS) infringe a U.S. patent allegedly owned by the plaintiff. The plaintiff has requested a permanent injunction prohibiting Sercel Inc. from making, using, selling, offering for sale or importing the equipment in question into the United States. In addition, the plaintiff has requested damages based on lost profits in the amount of U.S.$14,672,261 plus prejudgment interest of U.S.$775,254. In the alternative, the plaintiff is requesting damages based on a reasonable royalty in the amount of U.S.$6,185,924 plus prejudgment interest of U.S.$374,898. Sercel is confident that the products in question do not infringe any valid claims under the patent in question and intends to contest this claim vigorously. During 2008, the discovery process was completed and the Court provided a claim construction opinion. The Court has found that three of the seven of the patent claims are invalid for indefiniteness and one claim is not infringed. We do not believe this litigation will have a material adverse effect on our financial position or results of operations. Accordingly, no provision has been recorded in our consolidated financial statements, except for the fees related to preparing the defence.

 

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 judgement was rendered on April 8, 2009 in favour of Arrow Seismic ASA. CGGVeritas has 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 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 offshore.

 

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 adopted by the European Union on December 31, 2008.

 

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.

 

In order to present trends in our business that 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, 2006, 2007 and 2008 were U.S.$1.3170, U.S.$1.4721 and U.S.$1.3917, respectively, per euro, and the average exchange rates for the years 2006, 2007 and 2008 were U.S.$1.2561, U.S.$1.3692 and U.S.$1.4793, 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 cyclical, with notably a trough in 1999 following a sharp drop in the price of oil to U.S.$10 per barrel. 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.

 

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 2008

 

 

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 12,925,743 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. As of February 13, 2009, we owned 100% of Wavefield’s share capital. Wavefield was de-listed from the Oslo Bors on February 16, 2008.

 

The total consideration for the acquisition in our financial statements, including the remaining 30.1% acquired in February 2009, was €206.6 million (US$287.6 million). The minority interest outstanding as of December 31, 2008 was treated like a put option by the shareholders (because of an obligation to conduct a mandatory public offer) and was recognized as financial debt at the fair value of the put option for an amount of €62.1 million as of December 31, 2008.

 

Total direct transaction costs related to the acquisition (including advisory fees and legal fees) amounted to €5.5 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 a preliminary goodwill of €2.8 million.

 

 

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 preliminary 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 its 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 the Group’s interest in Ardiseis remained unchanged at 51%.

 

  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), approximately:

 

 

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:

 

 

On June 29, 2007 we prepaid U.S.$100 million of the term loan B facility. We prepaid an additional U.S.$50 million on December 12, 2008.

 

Proceeds of loans under the U.S. revolving facility may be used for general corporate purposes by CGGVeritas.

 

  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.

 

 

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.

 

  During 2006

 

 

On June 24, 2006, Industrialization & Energy Services Company (TAQA), our long term Saudi Partner in Arabian Geophysical and Surveying Company (“Argas”), acquired, for €16.8 million, 49% of the capital of CGG Ardiseis, a newly formed CGG subsidiary dedicated to land and shallow water seismic data acquisition in the Middle East, and we maintained a 51% interest. CGG Ardiseis, renamed Ardiseis, whose headquarters are located in Dubai, provides its clients with the complete range of land and shallow water acquisition services. As part of our agreement with TAQA, Ardiseis activities in the Gulf Cooperation Council countries are operated by Argas.

 

 

On July 10, 2006, Sercel acquired a 20% interest (17% of voting rights) in the French listed company Cybernetix, a specialist in robotics, with the aim of strengthening our technical partnership with Cybernetix in offshore oil equipment, and an additional 1% interest by the end of the year 2006. The aggregate consideration for the transactions was €4.0 million.

 

 

On September 28, 2006, Sercel acquired the Scottish company Vibration Technologies Limited (“Vibtech”), pioneer in the use of advanced wireless technologies for seismic recording. The Unite system, and field trials of this new generation equipment, which have attracted interest from both oil companies and seismic contractors, is a unique, versatile product capable of recording and transmitting data in a stand alone or real time mode, enabling quality control while recording and is capable of handling thousands of channels. Use of new transmission technologies also reduces limitations inherent to radio frequencies. We expect that the combination of Sercel expertise in seismic recording and new skills arising from Vibtech’s development group will help expand the

capabilities of the Sercel portfolio of products and integrate advanced wireless technology with its latest generation products. The cash consideration was €49.5 million (GBP 33.3 million) and our valuation of the technological assets purchased was €11.6 million more (GBP 7.8 million), which led us to record goodwill of €35.6 million. The cash acquired was in an amount of €1.3 million (GBP 0.9 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, 2009 was U.S.$1.98 billion (U.S.$1.6 billion for the Services segment and U.S.$344 million for the Equipment segment excluding intra-group sales with CGGVeritas).

 

Critical Accounting Policies

 

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. As we must exercise significant judgment when we apply these policies, their application is subject to an inherent degree of uncertainty.

 

  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 relevant 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.

 

 

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. 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 of our independent surveys on an ongoing basis.

 

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 is 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. 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. We believe this ratio to be generally consistent with the physical progress of the project.

 

The billings and the costs related to the transits of seismic vessels at the beginning of the survey are deferred and recognized over the duration of the contract 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.

 

 

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

 

 

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 straight-line basis over the contract period.

 

  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 of our independent surveys on an ongoing basis.

 

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 four amortization rates 50%, 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.

 

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.

 

Multi-client surveys acquired as part of the merger with Veritas and which have been valued for purchase price allocation purposes are amortized based on 65% of revenues and an impairment loss is recognized on a survey by survey basis in case of any indication of impairment.

 

Until December 1, 2006, an amortization rate of 66.6% of revenues with a minimum straight-line depreciation over a three-year period was used instead of 50% over a five-year period. The impact of this change of estimates applied from December 1, 2006 was a reduction in depreciation expenses of €1.2 million over the year ended December 31, 2006 and lower depreciation of €2.7 million over the year ended December 31, 2007.

 

From January 12, 2007 to October 1, 2007, we applied an amortization rate of 66.6% of revenues instead of 50% for a certain category of surveys. The impact of this change of estimates applied from October 1, 2007 is a reduction in depreciation expenses of €3.1 million for the year ended December 31, 2007.

 

  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.

 

For cash generating units comprised of goodwill, assets that have an indefinite useful life or intangible assets that are not yet available for use, we estimate the recoverable amount at each balance sheet 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 current market assessments of the time value of money and the risks specific 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 recognize a provision for onerous contracts corresponding to our estimates of the excess of the unavoidable costs of meeting the obligations under the contract over the economic benefits expected to be received under the contract estimated by the Group.

 

  Convertible bonds

 

As our U.S.$85 million 7.75% subordinated bonds due 2012 convertible into new ordinary shares or redeemable into new shares and/or existing shares and/or in cash issued in 2004 were denominated in U.S. dollars and convertible into new ordinary shares denominated in euros, the embedded conversion option was bifurcated and accounted separately within non-current liabilities. The conversion option and the debt component were initially recognized at fair value on issuance. The amount of the debt component recorded in our financial statements was discounted at the rate of 10.75%, the rate borne by comparable indebtedness without a conversion option. As a result, we bifurcated the embedded conversion option by €10.5 million at the issuance of the bonds as “Other non-current assets”. The discounting of the bonds at issuance was accounted for as “Cost of financial debt” until the maturity of the bonds. Those convertible bonds were fully converted at December 31, 2006.

 

Changes in the fair value of the embedded derivative were recognized in the consolidated income statement in the line item “Variance on derivative convertible bonds”. The fair value of the embedded derivative was determined using a binomial model.

 

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.