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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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| X | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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OR
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| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period to .
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Commission File Number 0-14488
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SEITEL, INC.
(Exact name of registrant as specified in charter)
DELAWARE 76-0025431
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
50 Briar Hollow Lane
West Building, 7th Floor
HOUSTON, TEXAS 77027
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(Address of principal (Zip Code)
executive offices)
(713) 881-8900
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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Former name, former address and former fiscal year,
if changed since last report.
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 X No
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As of November 11, 1998 there were 23,448,547 shares of the Company's common
stock, par value $.01 per share, outstanding.
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<PAGE>
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1998 (Unaudited) and December 31, 1997............. 3
Consolidated Statements of Operations (Unaudited) for the
Three Months Ended September 30, 1998 and 1997................... 4
Consolidated Statements of Operations (Unaudited) for the
Nine Months Ended September 30, 1998 and 1997.................... 5
Consolidated Statements of Stockholders' Equity (Unaudited)
for the Nine Months Ended September 30, 1998..................... 6
Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months Ended September 30, 1998 and 1997................... 7
Notes to Consolidated Interim Financial Statements............... 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 11
PART II. OTHER INFORMATION............................................... 16
<PAGE>
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1998 1997
------------- ---------
<S> <C> <C>
ASSETS
Cash and equivalents $ 3,805 $ 4,881
Receivables
Trade 40,529 44,563
Notes and other 2,007 2,121
Net data bank 245,622 180,936
Net oil and gas properties 136,809 112,915
Net other property and equipment 2,367 2,349
Investment in affiliate 15,982 15,054
Prepaid expenses, deferred charges and other assets 2,917 2,863
--------- ---------
TOTAL ASSETS $ 450,038 $ 365,682
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 34,122 $ 28,014
Payable to affiliate 20,994 12,500
Income taxes payable 3,735 1,242
Debt
Senior Notes 75,000 75,000
Line of Credit 60,000 15,000
Term Loans 215 477
Obligations under capital leases 30 89
Contingent payables 274 274
Deferred income taxes 22,985 18,050
Deferred revenue 6,385 7,763
--------- ---------
TOTAL LIABILITIES 223,740 158,409
--------- ---------
CONTINGENCIES AND COMMITMENTS
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share; authorized -- --
5,000,000 shares; none issued
Common stock, par value $.01 per share; authorized
50,000,000 shares; issued and outstanding
22,652,847 and 22,548,408 at September 30, 1998
and December 31, 1997, respectively 226 225
Additional paid-in capital 129,698 128,406
Retained earnings 100,264 82,742
Treasury stock, 175,818 shares at cost at September
30, 1998 and December 31, 1997 (2,977) (2,977)
Notes receivable from officers and employees (1,033) (1,109)
Accumulated other comprehensive income (loss) 120 (14)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 226,298 207,273
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 450,038 $ 365,682
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
REVENUE $ 38,332 $ 30,793
EXPENSES:
Depreciation, depletion and amortization 19,551 12,653
Cost of sales 1,175 3,382
Selling, general and administrative expenses 6,453 5,377
-------- --------
27,179 21,412
-------- --------
INCOME FROM OPERATIONS 11,153 9,381
Interest expense, net (1,516) (691)
Equity in earnings (loss) of affiliate 344 (58)
Gain on sale of subsidiary stock -- 18,449
Gain on increase in underlying equity of affiliate -- 10,750
Extinguishment of volumetric production payment -- (4,133)
-------- --------
Income before provision for income taxes 9,981 33,698
Provision for income taxes 3,693 12,002
-------- --------
NET INCOME $ 6,288 $ 21,696
======== ========
Earnings per share:
Basic $ .28 $ 1.00
======== ========
Diluted $ .28 $ .98
======== ========
Weighted average number of common and common equivalent shares:
Basic 22,634 21,657
======== ========
Diluted 22,818 22,205
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------
1998 1997
--------- --------
<S> <C> <C>
REVENUE $ 106,235 $ 92,685
EXPENSES:
Depreciation, depletion and amortization 52,433 34,321
Cost of sales 3,654 15,813
Selling, general and administrative expenses 18,875 16,391
--------- --------
74,962 66,525
--------- --------
INCOME FROM OPERATIONS 31,273 26,160
Interest expense, net (3,913) (2,714)
Equity in earnings (loss) of affiliate 469 (58)
Gain on sale of subsidiary stock -- 18,449
Gain on increase in underlying equity of affiliate -- 10,750
Extinguishment of volumetric production payment -- (4,133)
--------- --------
Income before provision for income taxes 27,829 48,454
Provision for income taxes 10,307 17,270
--------- --------
NET INCOME $ 17,522 $ 31,184
========= ========
Earnings per share:
Basic $ .78 $ 1.48
========= ========
Diluted $ .76 $ 1.43
========= ========
Weighted average number of common and common equivalent shares:
Basic 22,593 21,094
========= ========
Diluted 22,960 21,821
========= ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Notes Accumulated
Receivable Other
Compre- Common Stock Additional Treasury Stock from Compre-
hensive ------------------- Paid-In Retained ------------------ Officers & hensive
Income Shares Amount Capital Earnings Shares Amount Employees Income
--------- ---------- ------- --------- -------- -------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 10,362,102 $ 104 $ 105,544 $ 51,185 (409) $ (4) $ (1,205) $ 17
Net proceeds from issuance
of common stock 912,472 8 17,318 -- -- -- --
Two-for-one stock split 11,273,834 113 (113) -- (409) -- -- --
Tax reduction from exercise
of stock options -- -- 5,657 -- -- -- -- --
Treasury stock purchased -- -- -- -- (175,000) (2,973) -- --
Payments received on notes
receivable from officers
and employees -- -- -- -- -- -- 96 --
Net income $ 31,557 -- -- -- 31,557 -- -- -- --
Foreign currency translation
adjustments (31) -- -- -- -- -- -- -- (31)
---------
Comprehensive income $ 31,526
========= ---------- ------- --------- -------- -------- ------- --------- ---------
Balance, December 31, 1997 22,548,408 225 128,406 82,742 (175,818) (2,977) (1,109) (14)
Net proceeds from issuance
of common stock 104,439 1 948 -- -- -- -- --
Tax reduction from exercise
of stock options -- -- 344 -- -- -- -- --
Payments received on
notes receivable from
officers and employees -- -- -- -- -- -- 76
Net income $ 17,522 -- -- -- 17,522 -- -- -- --
Foreign currency translation
adjustments net of
income tax expense
of $77 134 -- -- -- -- -- -- -- 134
---------
Comprehensive income $ 17,656
========= ---------- ------- --------- -------- -------- ------- --------- ---------
Balance, September 30, 1998
(unaudited) 22,652,847 $ 226 $ 129,698 $100,264 (175,818) $(2,977) $ (1,033) $ 120
========== ======= ========= ======== ======== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------
1998 1997
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 108,661 $ 90,783
Cash paid to suppliers and employees (17,284) (31,378)
Extinguishment of volumetric production payment -- (11,720)
Interest paid (3,320) (2,936)
Interest received 298 863
Income taxes paid (2,535) (40)
--------- --------
Net cash provided by operating activities 85,820 45,572
--------- --------
Cash flows from investing activities:
Cash invested in seismic data (100,429) (42,979)
Cash invested in oil and gas properties (31,586) (31,189)
Cash paid to acquire property and equipment (681) (8,500)
Cash from disposal of property and equipment 17 28
Proceeds from sale of stock of subsidiary -- 29,723
Costs related to sale of stock subsidiary -- (5,435)
Cash received from affiliate for advances -- 2,094
Collections on loans made -- 5,385
--------- --------
Net cash used in investing activities (132,679) (50,873)
--------- --------
Cash flows from financing activities:
Borrowings under line of credit agreements 69,207 41,500
Principal payments under line of credit (24,207) (41,500)
Borrowings under term loans -- 7,925
Principal payments on term loans (262) (2,212)
Principal payments on capital lease obligations (59) (811)
Proceeds from issuance of common stock 1,015 11,164
Costs of debt and equity transactions (66) (6)
Payments on receivables from officers and employees 76 96
--------- --------
Net cash provided by financing activities 45,704 16,156
--------- --------
Effect of exchange rate changes 79 (8)
--------- --------
Net increase (decrease) in cash and equivalents (1,076) 10,847
Cash and cash equivalents at beginning of period 4,881 3,340
--------- --------
Cash and cash equivalents at end of period $ 3,805 $ 14,187
========= ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited), continued
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------
1998 1997
----------- --------
<S> <C> <C>
Reconciliation of net income to net cash provided by
operating activities:
Net income $ 17,522 $ 31,184
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on sale of subsidiary stock -- (18,449)
Gain on increase in underlying equity of affiliate -- (10,750)
Equity in loss (earnings) of affiliate (469) 58
Depreciation, depletion and amortization 52,432 35,346
Deferred income tax provision 4,935 8,635
Non-cash sale (1,140) --
Amortization of deferred revenue -- (4,079)
Discount on note receivable -- (198)
Gain on sale of property and equipment (13) (16)
Decrease (increase) in receivables 3,623 (778)
Decrease (increase) in other assets 347 (1,986)
Increase in other liabilities 8,583 6,605
-------- --------
Total adjustments 68,298 14,388
-------- --------
Net cash provided by operating activities $ 85,820 $ 45,572
======== ========
Supplemental schedule of non-cash investing activities:
Capital lease obligations incurred $ -- $ 374
======== ========
Increase in the underlying equity of affiliate $ -- $ 13,031
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
SEITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Unaudited)
September 30, 1998
NOTE A-BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions of Regulation S-X. Accordingly, they do
not include all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Certain reclassifications
have been made to the amounts in the prior year's financial statements to
conform to the current year's presentation. Operating results for the nine
months ended September 30, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998. For further
information, refer to the financial statements and notes thereto for the year
ended December 31, 1997.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income," the Company has reported comprehensive
income for the quarter and nine-month periods ended September 30, 1998.
Accumulated other comprehensive income consists of foreign currency translation
adjustments.
NOTE B-EARNINGS PER SHARE
In accordance with SFAS No. 128, "Earnings per Share," basic earnings per
share is computed based on the weighted average shares of common stock
outstanding during the periods. Diluted earnings per share is computed based on
the weighted average shares of common stock plus the assumed issuance of common
stock for all potentially dilutive securities. Earnings per share computations
to reconcile basic and diluted net income for the three and nine months ended
September 30, 1998 and 1997 consist of the following (in thousands except per
share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 6,288 $21,696 $17,522 $31,184
======= ======= ======= =======
Basic weighted average shares 22,634 21,657 22,593 21,094
Effect of dilutive securities: (1)<F1>
Options and warrants 184 548 367 727
------- ------- ------- -------
Diluted weighted average shares 22,818 22,205 22,960 21,821
======= ======= ======= =======
Per share income:
Basic $ .28 $ 1.00 $ .78 $ 1.48
Diluted $ .28 $ .98 $ .76 $ 1.43
- -------------------
<FN>
(1)<F1> During the third quarter of 1998 and 1997 and the first nine months of
1998 and 1997, a weighted average number of options and warrants to
purchase 3,873,000, 59,000, 2,563,000 and 485,000 shares of common
stock were outstanding, respectively, but were not included in the
computation of diluted per share income because their exercise prices
were greater than the average market price of the common shares.
</FN>
</TABLE>
<PAGE>
NOTE C-DATA BANK
Costs incurred in the creation of proprietary seismic data, including the
direct and incremental costs of Company personnel engaged in project management
and design, are capitalized. Seismic data costs are amortized for each project
in the proportion that its revenue for a period relates to management's estimate
of ultimate revenue. Since inception, management has established guidelines
regarding its annual charge for amortization. Under these guidelines, 90% of the
cost incurred in the creation of proprietary seismic data is amortized within
five years of inception for two-dimensional seismic data and within seven years
of inception for three-dimensional seismic data, and the final 10% is amortized
on a straight-line basis over the next fifteen years. Costs of existing seismic
data libraries purchased by the Company are fully amortized within ten years
from date of purchase. On a periodic basis, the carrying value of seismic data
is compared to its estimated future revenue and, if appropriate, is reduced to
its estimated net realizable value.
NOTE D-OIL AND GAS PROPERTIES
The Company accounts for its oil and gas exploration and production
activities using the full-cost method of accounting. Under this method, all
costs associated with acquisition, exploration and development of oil and gas
reserves, including directly related overhead costs and interest costs related
to its unevaluated properties and certain properties under development which are
not currently being amortized, are capitalized. For the nine months ended
September 30, 1998 and 1997, general and administrative costs of $1,276,000 and
$1,017,000, respectively, have been capitalized to oil and gas properties. For
the nine months ended September 30, 1998 and 1997, interest costs of $1,790,000
and $1,535,000, respectively, have been capitalized to oil and gas properties.
NOTE E-VOLUMETRIC PRODUCTION PAYMENT
During the third quarter of 1997, the Company entered into an agreement to
extinguish its volumetric production payment, which was effective July 1, 1997.
The cost to acquire the production payment liability exceeded its book value. As
a result of this transaction, the Company recorded a pre-tax loss of $4,133,000
in the accompanying consolidated statement of operations for the three and nine
months ended September 30, 1997.
NOTE F-ACCOUNTING FOR SALES OF STOCK BY SUBSIDIARY COMPANIES
The Company recognizes gains or losses on sales of stock by its subsidiary
companies when such sales are not made as part of a larger plan of corporate
reorganization. Such gains or losses are based upon the difference between the
book value of the Company's investment in the subsidiary immediately after the
sale and the historical book value of the Company's investment immediately prior
to the sale.
On August 11, 1997, the Company's wholly-owned seismic data acquisition
crew subsidiary, Eagle Geophysical, Inc. ("Eagle"), completed an initial public
offering in which the Company sold 1,880,000 of its 3,400,000 shares of Eagle
common stock as a selling stockholder. As a result of the offering, the Company
now owns 1,520,000 shares of Eagle common stock. The Company received net
proceeds of $29,723,000 from its participation in the offering, resulting in a
pre-tax gain, net of costs, on the sale of Eagle common stock of $18,449,000
that is reported in the accompanying consolidated statement of operations for
the three and nine months ended September 30, 1997. Additionally, the Company
recorded a pre-tax gain, net of costs, of $10,750,000 representing an increase
in the Company's underlying equity of Eagle as a result of Eagle's issuance of
stock in connection with the offering that is reported in the accompanying
consolidated statement of operations for the three and nine months ended
September 30, 1997.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company's net income for the three and nine months ended September 30,
1998, was $6,288,000 and $17,522,000 respectively, as compared to income from
core seismic marketing and exploration and production operations of $5,471,000
and $14,372,000 for the three and nine months ended September 30, 1997,
respectively.
During the third quarter of 1997, the Company spun-off its wholly-owned
seismic crew subsidiary, Eagle Geophysical, Inc. ("Eagle). As a result of this
transaction, the financial results of Eagle are no longer consolidated in the
Company's financial statements beginning August 11, 1997.
RESULTS OF OPERATIONS
Total revenue increased from $30,793,000 during the third quarter of 1997
to $38,332,000 during the third quarter of 1998. During the first nine months
total revenue increased from $92,685,000 in 1997 to $106,235,000 in 1998.
Revenue primarily consists of revenue generated from the marketing of seismic
data and oil and gas production. The third quarter and first nine months of 1997
include revenue of $2,762,000 and $16,316,000, respectively, related to
proprietary seismic data acquisition services performed by Eagle.
Revenue from the marketing of seismic data increased from $21,955,000 in
the third quarter of 1997 to $33,714,000 in the third quarter of 1998 and
increased from $57,013,000 in the first nine months of 1997 to $91,807,000 in
the first nine months of 1998. These increases are primarily attributable to an
increase in demand for high-resolution seismic data, which is being used
increasingly in oil and gas development as well as exploration efforts.
Oil and gas revenue was $4,618,000 in the third quarter of 1998 compared to
$6,076,000 in the third quarter of 1997 and was $14,428,000 in the first nine
months of 1998 compared to $19,356,000 in the first nine months of 1997. The
decrease in oil and gas revenue between the third quarters of 1997 and 1998 was
caused primarily by lower natural gas production. The decrease in oil and gas
revenue between the first nine months of 1997 and 1998 was caused by both lower
production volumes and lower commodity prices. The production decline from
certain of the Company's shallow, short-lived producing properties has not yet
been offset by production from new wells. The Company has experienced delays in
new wells coming on-line due to adverse weather conditions and lengthy pipeline
negotiations. Additionally, development wells have not been drilled in the time
frame anticipated by the Company as a result of some of its partners delaying
plans to drill such wells due to lower commodity prices, reallocation of budget
funds and consolidations within the industry. Third quarter 1998 production
volumes increased approximately 4% from the second quarter 1998 volumes. Net
volume and price information for the Company's oil and gas production for the
third quarters and first nine months of 1998 and 1997 is summarized in the
following table:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Natural gas volumes (mmcf) 1,622 1,918 4,543 5,551
Average natural gas price ($/mcf) $2.20 $2.18 $2.35 $2.49
Crude oil/condensate volumes (mbbl) 88 98 286 313
Average crude oil/condensate price ($/bbl) $11.22 $18.27 $12.36 $16.62
</TABLE>
<PAGE>
Depreciation, depletion and amortization consists primarily of data bank
amortization and depletion of oil and gas properties. Data bank amortization
increased from $9,268,000 during the third quarter of 1997 to $16,009,000 during
the third quarter of 1998 and increased from $23,452,000 to $42,085,000 for the
first nine months of 1997 and 1998, respectively. As a percentage of revenue
from licensing seismic data, data bank amortization was 43% and 48% for the
third quarters of 1997 and 1998, respectively, and 42% and 46% for the first
nine months of 1997 and 1998, respectively. These changes are primarily due to
the mix of sales of 2D and 3D data amortized at varying percentages based on
each data program's current and expected future revenue stream.
Depletion of oil and gas properties was $3,323,000 for the third quarter of
1998 compared to $2,977,000 for the third quarter of 1997, which amounted to
$1.55 and $1.19, respectively, per mcfe of gas produced during such periods.
Depletion of oil and gas properties was $9,697,000 and $9,234,000 during the
first nine months of 1998 and 1997, respectively, which amounted to $1.55 and
$1.24, respectively, per mcfe of gas produced during such periods. The increase
in the rate reflects the amount of exploration and development costs incurred
increasing at a higher rate than the proven reserve base. The depletion rate per
mcfe of gas produced was $1.55 for both the first and second quarters of 1998.
Cost of sales consists of expenses associated with oil and gas production
and seismic resale support services, as well as geophysical services in the
third quarter and first nine months of 1997. The decrease in cost of sales from
$3,382,000 to $1,175,000 for the third quarter of 1997 and 1998, respectively,
and from $15,813,000 to $3,654,000 for the first nine months of 1997 and 1998,
respectively, is primarily due to the third quarter and first nine months of
1997 including cost of sales associated with geophysical services of $2,058,000
and $12,401,000, respectively, whereas in 1998 there are none due to the
spin-off of Eagle in 1997. Oil and gas production costs amounted to $.53 and
$.56 per mcfe of gas produced in the third quarter and first nine months of
1998, respectively, compared to $.48 and $.42 per mcfe in the same periods in
1997. The increase in rate is primarily due to an increase in workover and
maintenance costs on some of the Company's older wells along with increased
operating costs on some of the Company's newer wells that are producing from
deeper and higher pressure horizons.
The Company's selling, general and administrative expenses increased during
the 1998 periods as compared to the 1997 periods primarily as a result of
variable expenses related to the increased volume of business. As a percentage
of total revenue, these expenses were 17% for the third quarters of 1997 and
1998, and were 18% for the first nine months of 1997 and 1998.
Net interest expense increased from $691,000 to $1,516,000 in the third
quarter of 1997 and 1998, respectively, and $2,714,000 to $3,913,000 during the
first nine months of 1997 and 1998, respectively, primarily due to increased
borrowings made under the Company's revolving line of credit during the1998
periods.
On August 11, 1997, Eagle completed an initial public offering in which the
Company sold 1,880,000 of its 3,400,000 shares of Eagle common stock as a
selling stockholder. As a result of the offering, the Company now owns 1,520,000
shares of Eagle common stock. The Company received net proceeds of $29,723,000
from its participation in the offering, resulting in a pre-tax gain, net of
costs, on the sale of Eagle common stock of $18,449,000. Additionally, the
Company recorded a pre-tax gain, net of costs, of $10,750,000 representing an
increase in the Company's underlying equity of Eagle as a result of Eagle's
issuance of stock in connection with the offering. The Company's equity in
earnings of Eagle was $344,000 and $469,000 in the third quarter and first nine
months of 1998, respectively and amounted to a loss of $58,000 for the period
from August 11, 1997 to September 30, 1997.
During the third quarter of 1997, the Company entered into an agreement to
extinguish its volumetric production payment, which was effective July 1, 1997.
The cost to acquire the production payment liability exceeded its book value. As
a result of this transaction, the Company recorded a pre-tax loss of $4,133,000
for the three and nine months ended September 30, 1997.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
On March 16, 1998, the Company increased its $50,000,000 unsecured
revolving line of credit facility to $75,000,000. The facility bears interest at
a rate determined by the ratio of the Company's debt to cash flow from
operations. Pursuant to the interest rate pricing structure, funds can currently
be borrowed at LIBOR plus 3/4%, the bank's prevailing prime rate, or the sum of
the Federal Funds effective rate for such day plus 1/2%. The facility matures on
March 16, 2001. The balance outstanding on the revolving line of credit was
$66,500,000 at November 11, 1998.
On December 28, 1995, the Company completed a private placement of three
series of unsecured Senior Notes totaling $75 million. The Company
contemporaneously issued its Series A Notes and Series B Notes, which total
$52.5 million and bear interest at a fixed rate of 7.17%. On April 9, 1996, the
Company issued its Series C Notes, which total $22.5 million and bear interest
at a fixed rate of 7.48%. The Series A Notes mature on December 30, 2001, and
require annual principal payments of $8.3 million beginning December 30, 1999.
The Series B and Series C Notes mature on December 30, 2002, and require
combined annual principal payments of $10 million beginning December 30, 1998.
Interest on all series of the notes is payable semi-annually on June 30 and
December 30.
On October 2, 1998, the Company completed a sale of 794,400 shares of its
common stock to its employees. The Company granted five-year loans to its
employees for the purchase of which 60% of the loan amount is being paid in
equal monthly, quarterly or annual payments, as applicable, and a balloon
payment of the remaining 40% is due on October 2, 2003.
The Company may offer from time to time in one or more series (i) unsecured
debt securities, which may be senior or subordinated, (ii) preferred stock, par
value $0.01 per share, and (iii) common stock, par value $.01 per share, or any
combination of the foregoing, up to an aggregate of $41,041,600 pursuant to an
effective "shelf" registration statement filed with the Securities and Exchange
Commission.
From November 1995 to April 1997, the Company and two of its wholly-owned
subsidiaries obtained three separate three-year term loans totaling $747,000.
One of the loans bears interest at the rate of 8.413%, and two at the rate of
7.9%. The proceeds were used for the purchase of certain property and equipment,
which secures the debt. Monthly principal and interest payments total
approximately $23,000. The balance outstanding on the loans at November 11,
1998, was $193,000.
The Company owns 1,520,000 shares of Eagle common stock. As of September
30, 1998, the market value of the Company's remaining equity interest in Eagle
was $10,545,000 based on the September 30, 1998 closing price of $6.9375 per
share as quoted by NASDAQ. These shares are subject to certain trading
restrictions.
From January 1, 1998, through November 11, 1998, the Company received
$1,057,000 from the exercise of common stock purchase warrants and options and
the Company's 401(k) stock purchases. In connection with these exercises, the
Company will also receive approximately $344,000 in tax savings.
During December 1997, the Company repurchased 175,000 shares of its common
stock in the open market at a cost of $2,973,000, pursuant to a stock repurchase
program authorized by the Board of Directors on December 12, 1997. The Board has
authorized expenditures of up to $25 million towards the repurchase of its
common stock.
During the first nine months of 1998, gross seismic data bank additions and
capitalized oil and gas exploration and development costs amounted to
$106,792,000 and $33,590,000 respectively. These capital expenditures, as well
as taxes, interest expenses, cost of sales and general and administrative
expenses, were funded by operations and borrowings under the Company's revolving
line of credit.
Currently, the Company anticipates capital expenditures for the remainder
of 1998 to total approximately $36.5 million. Such expenditures include
approximately $30 million for the creation of proprietary seismic data, and
approximately $6.5 million for oil and gas exploration and development efforts.
The Company believes its current cash balances, revenues from operating sources
<PAGE>
and proceeds from the sale of common stock and exercise of common stock purchase
warrants and options, combined with its available revolving line of credit,
should be sufficient to fund the 1998 capital expenditures, along with
expenditures for operating and general and administrative expenses. In addition,
the Company is currently negotiating with its banks to increase its revolving
line of credit to allow for future growth. In the event the Company does not
increase its revolving line of credit, it may arrange for additional debt or
equity financing; however, there can be no assurance that the Company would be
able to accomplish any such debt or equity financing on satisfactory terms. If
such debt or equity financing is not available on satisfactory terms, the
Company would reduce its capital budget and fund expenditures with cash flow
generated from operating sources.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." Under the
new standard, companies will be required to report certain information about
operating segments in consolidated statements. Operating segments will be
determined based on the method by which management organizes its business for
making operating decisions and assessing performance. The standard also requires
that companies report certain information about their products and services, the
geographic areas in which they operate, and their major customers. SFAS No. 131
is effective for financial statements for periods beginning after December 15,
1997.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. Statement 133 is effective for fiscal years beginning after
June 15, 1999. Statement 133 cannot be applied retroactively. Statement 133 must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998). The Company has not yet quantified the impact of adopting Statement
133 on its consolidated financial statements and has not determined the timing
of or method of its adoption of Statement 133. However, the Company anticipates
that application of the statement will not have a material effect on its
consolidated financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities." Under this SOP, all costs of start-up activities and organizational
costs are to be expensed as incurred. SOP 98-5 is effective for fiscal years
beginning after December 15, 1998, although earlier implementation is permitted.
As of September 30, 1998, the Company had not adopted this SOP; however, the
Company anticipates that the application of this SOP will not have a material
effect on its consolidated financial statements.
YEAR 2000
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software used by many companies may need to be upgraded to comply
with such "Year 2000" requirements. Significant uncertainty exists concerning
the potential effects associated with such compliance, but systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail.
The Company has made a preliminary review of both its information
technology and its non-information technology systems to determine whether they
are Year 2000 compliant. The Company has not identified any material systems
which are not Year 2000 compliant. The Company is currently preparing a formal
questionnaire for all significant suppliers, customers and service providers to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate the Year 2000 problem. The Company has received oral
assurances of Year 2000 compliance from many of the third parties with whom it
has relationships. The Company believes that its operations will not be
<PAGE>
significantly disrupted even if third parties with whom the Company has
relationships are not Year 2000 compliant. Further, the Company believes that it
will not be required to make any material expenditures to address the Year 2000
problem as it relates to its existing systems. While it is not possible at
present to quantify the cost of corrective actions, management does not expect
that these actions will materially exceed the cost of normal software upgrades
and replacements expected to occur throughout the Year 2000. However,
uncertainty exists concerning the potential costs and effects associated with
any Year 2000 compliance, and the Company intends to continue to make efforts to
ensure that third parties with whom it has relationships are Year 2000
compliant. Therefore, there can be no assurance that unexpected Year 2000
compliance problems of either the Company or its vendors, customers and service
providers would not materially and adversely affect the Company's business,
financial condition or operating results. The Company will continue to consider
the likelihood of a material business interruption due to the Year 2000 issue,
and, if necessary, implement appropriate contingency plans.
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Although the Company believes that its
expectations are based on reasonable assumptions, it can give no assurance that
its goals will be achieved. Important factors that could cause actual results to
differ materially from those in the forward looking statements herein include,
but are not limited to, changes in the exploration budgets of the Company's
seismic data and related services customers, actual customer demand for the
Company's seismic data and related services, the extent of the Company's success
in acquiring oil and gas properties and in discovering, developing and producing
reserves, the timing and extent of changes in commodity prices for natural gas,
crude oil and condensate and natural gas liquids and conditions in the capital
markets and equity markets during the periods covered by the forward looking
statements.
<PAGE>
PART II - OTHER INFORMATION
Items 1., 2., 3. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's Annual Meeting of Stockholders was held on July 29, 1998.
Matters voted upon at the Annual Meeting, and the results of those votes are as
follows:
1. The election of nine directors to serve until the 1999 Annual Meeting.
Name No. of Votes For No. of Votes Withheld
------------------- ---------------- ---------------------
Herbert M. Pearlman 19,748,241 316,044
Paul A. Frame 19,748,241 316,044
Horace A. Calvert 19,884,477 179,808
David S. Lawi 19,748,241 316,044
Debra D. Valice 19,884,177 180,108
Walter M. Craig, Jr. 19,748,241 316,044
William Lerner 19,747,941 316,344
John E. Stieglitz 19,747,841 316,444
Fred S. Zeidman 19,748,041 316,244
2. Approval of proposed amendments to the Company's Non-Employee Directors'
Stock Option Plan.
No. of Votes For No. of Votes Against No. of Votes Abstained
------------------- -------------------- ----------------------
17,840,870 2,062,312 161,103
3. Approval of the appointment of the public accounting firm of Arthur
Andersen LLP to act as the Company's independent Certified Public
Accountants for the year of 1998.
No. of Votes For No. of Votes Against No. of Votes Abstained
------------------- -------------------- ----------------------
19,952,970 50,335 60,980
Item 5. Other Information.
A shareholder who wishes to make a proposal at the 1999 Annual Meeting of
Shareholders without complying with the requirements of Rule 14a-8 under the
Securities Exchange Act of 1934, as amended (and therefore without including the
proposal in the Company's proxy materials) should notify the Company's
Secretary, at the Company's principal executive offices, of that proposal by May
15, 1999. If a shareholder fails to give that notice by that date, then the
persons named as proxies in the proxy cards solicited by the Company's Board of
Directors for that meeting will be entitled to vote the proxy cards held by them
regarding that proposal, if properly raised at the meeting, in their discretion.
Item 6. Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEITEL, INC.
Dated: November 12, 1998 /s/ Paul A. Frame
---------------------------------
Paul A. Frame
President
Dated: November 12, 1998 /s/ Debra D. Valice
---------------------------------
Debra D. Valice
Chief Financial Officer
Dated: November 12, 1998 /s/ Marcia H. Kendrick
---------------------------------
Marcia H. Kendrick
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,805
<SECURITIES> 0
<RECEIVABLES> 43,397
<ALLOWANCES> 861
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 186,311<F2>
<DEPRECIATION> 47,135
<TOTAL-ASSETS> 450,038
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 135,245
0
0
<COMMON> 226
<OTHER-SE> 226,072
<TOTAL-LIABILITY-AND-EQUITY> 450,038
<SALES> 106,235
<TOTAL-REVENUES> 106,235
<CGS> 3,654
<TOTAL-COSTS> 3,654
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,913
<INCOME-PRETAX> 27,829
<INCOME-TAX> 10,307
<INCOME-CONTINUING> 17,522
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,522
<EPS-PRIMARY> .78<F3>
<EPS-DILUTED> .76
<FN>
<F1> The Company does not present a classified balance sheet; therefore, current
assets and current liabilities are not reflected in the Company's financial
statement.
<F2> PP&E does not include seismic data bank assets with a cost of $480,712,000
and related accumulated amortization of $235,090,000.
<F3> Reflects basic earnings per share.
</FN>
</TABLE>
