- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
- -----
| X | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
--------------
OR
- -----
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period to .
------ ------
Commission File Number 0-14488
-------
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
-------------- -----
(Address of principal (Zip Code)
executive offices)
(713) 881-8900
--------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
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
---- ----
As of May 13, 1999 there were 28,311,013 shares of the Company's common stock,
par value $.01 per share, outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1999 (Unaudited) and December 31, 1998................ 3
Consolidated Statements of Operations (Unaudited) for the
Three Months Ended March 31, 1999 and 1998...................... 4
Consolidated Statements of Stockholders' Equity (Unaudited)
for the Three Months Ended March 31, 1999....................... 5
Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended March 31, 1999 and 1998.............. 6
Notes to Consolidated Interim Financial Statements.............. 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 10
Item 3. Quantitative and Qualitative Disclosures
about Market Risk....................................... 14
PART II. OTHER INFORMATION............................................... 15
<PAGE>
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Cash and equivalents $ 9,432 $ 3,161
Receivables
Trade (net) 46,520 59,244
Notes and other 605 581
Net data bank 303,404 262,950
Net oil and gas properties 156,516 148,977
Net other property and equipment 2,206 2,294
Investment in affiliate 6,365 15,544
Prepaid expenses, deferred charges and other assets 4,442 3,016
-------- --------
TOTAL ASSETS $ 529,490 $ 495,767
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 32,119 $ 44,438
Payable to affiliate 23,257 27,117
Dividends payable 6,365 -
Income taxes payable 3,728 1,056
Debt
Senior Notes 203,000 65,000
Line of credit - 85,500
Term loans 131 172
Obligations under capital leases - 18
Contingent payables 274 274
Deferred income taxes 25,732 28,039
Deferred revenue 2,591 6,566
-------- --------
TOTAL LIABILITIES 297,197 258,180
-------- --------
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
23,811,013 and 23,804,508 at March 31, 1999
and December 31,1998, respectively 238 238
Additional paid-in capital 141,870 141,826
Retained earnings 101,487 107,102
Treasury stock, 175,818 shares at cost at
March 31, 1999 and December 31, 1998 (2,977) (2,977)
Notes receivable from officers and employees (8,312) (8,651)
Accumulated other comprehensive income (loss) (13) 49
-------- --------
TOTAL STOCKHOLDERS' EQUITY 232,293 237,587
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 529,490 $ 495,767
======== ========
</TABLE>
<PAGE>
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
--------- --------
<S> <C> <C>
REVENUE $ 37,881 $ 30,927
EXPENSES
Depreciation, depletion and amortization 17,739 15,156
Cost of sales 1,292 1,129
Selling, general and administrative expenses 7,204 5,950
--------- --------
26,235 22,235
--------- --------
INCOME FROM OPERATIONS 11,646 8,692
Interest expense, net (2,163) (995)
Equity in earnings (loss) of affiliate (91) 41
Impairment due to dividend distribution
of affiliate stock (7,794) -
--------- --------
Income before provision for income taxes 1,598 7,738
Provision for income taxes 848 2,873
--------- --------
NET INCOME $ 750 $ 4,865
========= ========
Net income per share:
Basic $ .03 $ .22
========= ========
Diluted $ .03 $ .21
========= ========
Weighted average number of common and common equivalent shares:
Basic 23,635 22,552
========= ========
Diluted 23,945 22,968
========= ========
</TABLE>
<PAGE>
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Notes
Receivable Accumulated
Common Stock Additional Treasury Stock from Other
Comprehensive------------------ Paid-In Retained --------------- Officers & Comprehensive
Income Shares Amount Capital Earnings Shares Amount Employees Income
-------- ---------- ------ ------- ------- ------- ------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 106,067 1 983 - - - - -
Tax reduction from
exercise
of stock options - - 344 - - - - -
Sale of common stock to
officers and employees 794,300 8 8,183 - - - (8,191) -
Acquisition of oil and
gas properties 355,733 4 3,910 - - - - -
Payments received on
notes receivable from
officers and employees - - - - - - 649 -
Net income $ 24,360 - - - 24,360 - - - -
Foreign currency
translation
adjustments net of
income tax expense
of $67 63 - - - - - - - 63
--------
Comprehensive income $ 24,423
======== ---------- ------ ------- ------- ------- ------ -------- ----------
Balance, December 31, 1998 23,804,508 $ 238 $141,826 $107,102 (175,818)$(2,977) $ (8,651) $ 49
Net proceeds from
issuance
of common stock 6,505 - 29 - - - - -
Tax reduction from
exercise
of stock options - - 15 - - - - -
Payments received on
notes receivable from
officers and employees - - - - - - 339 -
Distribution of Eagle
Geophysical, Inc.
shares - - - (6,365) - - - -
Net income $ 750 - - - 750 - - - -
Foreign currency
translation
adjustments net of
income tax expense
of $34 (62) - - - - - - - (62)
--------
Comprehensive income $ 688
======== ---------- ------ ------- ------- ------- ------ -------- ----------
Balance, March 31, 1999
(unaudited) 23,811,013 $ 238 $141,870 $101,487 (175,818)$(2,977) $ (8,312) $ (13)
========== ====== ======= ======= ======= ====== ======== ==========
</TABLE>
<PAGE>
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 42,579 $ 33,809
Cash paid to suppliers and employees (12,426) (2,651)
Interest paid (840) (298)
Interest received 199 33
Income taxes paid (466) (646)
-------- --------
Net cash provided by operating activities 29,046 30,247
-------- --------
Cash flows from investing activities:
Cash invested in seismic data (62,623) (23,435)
Cash invested in oil and gas properties (10,786) (11,593)
Cash paid to acquire property and equipment (143) (299)
-------- --------
Net cash used in investing activities (73,552) (35,327)
-------- --------
Cash flows from financing activities:
Borrowings under line of credit agreement 18,323 6,000
Principal payments under line of credit (103,823) (3,000)
Principal payments on term loans (41) (102)
Principal payments under capital lease obligations (18) (23)
Proceeds from issuance of senior notes 138,000 -
Proceeds from issuance of common stock 45 84
Costs of debt and equity transactions (2,018) (1)
Payments on notes receivable from officers and employees 339 -
-------- --------
Net cash provided by financing activities 50,807 2,958
-------- --------
Effect of exchange rate changes (30) (30)
-------- --------
Net increase (decrease) in cash and equivalents 6,271 (2,152)
Cash and cash equivalents at beginning of period 3,161 4,881
-------- --------
Cash and equivalents at end of period $ 9,432 $ 2,729
======== ========
</TABLE>
<PAGE>
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited), continued
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Reconciliation of net income to net cash provided by operating
activities:
Net income $ 750 $ 4,865
Adjustments to reconcile net income to net cash provided by
operating activities:
Impairment due to dividend distribution of affiliate stock 7,794 -
Depreciation, depletion and amortization 17,739 15,156
Deferred income tax provision (benefit) (2,307) 1,356
Non-cash sales (4,035) -
Equity in loss (earnings) of affiliate 91 (41)
Decrease (increase) in receivables 12,684 (113)
Decrease (increase) in other assets 486 (350)
Increase (decrease) in accounts payable and other liabilities (4,156) 9,374
-------- --------
Total adjustments 28,296 25,382
-------- --------
Net cash provided by operating activities $ 29,046 $ 30,247
======== ========
Supplemental schedule of non-cash investing and
financing activities:
Dividend payable of affiliate stock $ 6,365 $ -
======== ========
</TABLE>
<PAGE>
SEITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
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 three
months ended March 31, 1999 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1999. For further information,
refer to the financial statements and notes thereto for the year ended December
31, 1998.
NOTE B-EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards ("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 diluted
securities. Earnings per share computations to reconcile basic and diluted net
income for the three months ended March 31, 1999 and 1998 consist of the
following (in thousands except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Net income $ 750 $ 4,865
======== ========
Basic weighted average shares 23,635 22,552
Effect of dilutive securities: (1)<F1>
Options and warrants 310 416
-------- --------
Diluted weighted average shares 23,945 22,968
======== ========
Per share income:
Basic $ .03 $ .22
Diluted $ .03 $ .21
- -------------------
<FN>
(1)<F1> A weighted average quarter-to-date number of options and warrants to
purchase 4,758,000 and 2,468,000 shares of common stock were
outstanding during the first quarter of 1999 and 1998, 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>
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. Substantially all (greater than 87%) of the costs
incurred to develop the Company's data bank have been for programs created by
the Company. The Company uses the income forecast method to amortize the costs
of seismic data programs it creates. Under the income forecast method, seismic
data costs are amortized in the proportion that revenue for a period relates to
management's estimate of ultimate revenues. Since inception, management has
established guidelines regarding its annual charge for amortization. Under these
guidelines, seismic data created by the Company is amortized in a set period of
time based on historical experience with both the timing and amount of revenue.
<PAGE>
Management estimates that 90% of the costs incurred in the creation of seismic
data is amortized within five years of such data becoming available for resale
for two-dimensional seismic data and within seven years of such data becoming
available for resale for three-dimensional seismic data. If anticipated sales
fall below the benchmark guidelines, amortization is accelerated. Depending on
actual sales performance, the costs of the Company's seismic data are fully
amortized within 20 years or less. The Company also purchases existing seismic
data programs from other companies. The costs of purchased seismic data programs
are generally amortized on a straight-line basis over ten years; however, the
costs of a significant purchase (greater than 5% of the net book value of the
data bank), are amortized using the greater of the income forecast method or
ten-year straight-line method.
In certain cases, the Company grants seismic licenses to third parties for
data to be used in their operations (not for resale) in exchange for exclusive
ownership of seismic data from the third party. The Company recognizes revenue
for the licenses granted and records a data library asset for the seismic data
acquired. These transactions are accounted for as non-monetary exchanges and are
valued at the fair market value of such licenses based on values realized in
cash transactions to other parties for similar seismic data. During the first
quarter of 1999, the Company licensed seismic data valued at $4,035,000 in
exchange for the purchase of seismic data for its library.
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 are capitalized, including directly related overhead costs, and
interest costs related to its unevaluated properties and certain properties
under development which are not currently being amortized. For the three months
ended March 31, 1999 and 1998, exploration and development related overhead
costs of $479,000 and $421,000, respectively, have been capitalized to oil and
gas properties. For the three months ended March 31, 1999 and 1998, interest
costs of $775,000 and $608,000, respectively, have been capitalized to oil and
gas properties.
NOTE E-INDUSTRY SEGMENTS
SFAS NO. 131, "Disclosures About Segments of an Enterprise and Related
Information," established standards for reporting information about operating
segments in annual financial statements and requires selected information in
interim financial reports. Selected financial information for the three months
ended March 31, 1999 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
Exploration
and Total
Seismic Production Segments
-------- --------- ---------
<S> <C> <C> <C>
Three Months Ended March 31, 1999
- ---------------------------------
Revenue from external purchasers $ 33,922 $ 3,959 $ 37,881
Depreciation, depletion
and amortization 15,378 2,081 17,459
Cost of sales 65 1,227 1,292
Segment operating income 18,479 651 19,130
Capital expenditures (a)<F1> 55,789 9,699 65,488
Assets 347,358 161,947 509,305
Three Months Ended March 31, 1998
- ---------------------------------
Revenue from external purchasers $ 26,316 $ 4,611 $ 30,927
Depreciation, depletion
and amortization 11,972 2,975 14,947
Cost of sales 81 1,048 1,129
Segment operating income 14,263 588 14,851
Capital expenditures 25,386 10,451 35,837
Assets (b)<F2> 317,292 156,623 473,915
<FN>
(a)<F1> Includes other ancillary equipment.
(b)<F2> Balance as of December 31, 1998.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------
1999 1998
-------- -------
<S> <C> <C>
Income from continuing operations before income taxes:
Total reportable segment operating income $ 19,130 $ 14,851
Selling general and administrative expense (7,204) (5,950)
Interest expense, net (2,163) (995)
Equity in earnings (loss) of affiliate (91) 41
Impairment due to dividend distribution of affiliate stock (7,794) -
Eliminations and other (280) (209)
-------- -------
Income from continuing operations before income taxes $ 1,598 $ 7,738
======== =======
</TABLE>
NOTE F-INVESTMENT IN EAGLE GEOPHYSICAL, INC.
On April 22, 1999, the Board of Directors of Seitel, Inc. declared to its
common stockholders a dividend consisting of the 1,520,000 shares of the common
stock of Eagle Geophysical, Inc. ("Eagle") currently owned by the Company. The
dividend was declared at the rate of approximately 0.064 shares of Eagle common
stock for each share of Seitel, Inc. common stock owned as of the close of
business on the record date of May 18, 1999.
The fair market value of the common stock of Eagle held by the Company on
the date this dividend was declared was lower than the carrying value of the
stock on the Company's balance sheet; therefore, a non-cash, non-recurring,
pre-tax impairment, net of bonus effect, of $7,794,000 was recorded at March 31,
1999. The dividend payable has been reflected on the balance sheet as of March
31, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-----------------------------------------------------------
OVERVIEW
The Company's income from core seismic marketing and exploration and
production operations was $5,875,000 for the first quarter of 1999 as compared
to $4,838,000 for the first quarter of 1998. Additionally, in the first quarter
of 1999, the Company recorded a non-cash, non-operating loss on the dividend
distribution of affiliate stock totaling $5,066,000, net of tax, along with
equity in loss of affiliate of $59,000, net of tax, bringing first quarter 1999
net income to $750,000. In the first quarter of 1998, the Company recorded its
equity in the earnings of affiliate of $27,000, net of tax, bringing first
quarter 1998 net income to $4,865,000.
RESULTS OF OPERATIONS
Total revenue was $37,881,000 and $30,927,000 in the first quarters of 1999
and 1998, respectively, representing an increase of 22%. Revenue primarily
consists of revenue generated from the marketing of seismic data and oil and gas
production.
Revenue from the marketing of seismic data increased from $26,316,000
during the first quarter of 1998 to $33,922,000 during the first quarter of
1999. The increase is primarily due to more data being available for licensing
because of the increased size of the Company's data library. The Company's data
library has increased significantly since the first quarter of 1998 due to the
creation of seismic data during 1998 and the first quarter of 1999 and the
purchase of the Amoco Canada data library in February 1999.
<PAGE>
Oil and gas revenue decreased from $4,611,000 during the first quarter of
1998 to $3,959,000 during the first quarter of 1999. The decrease in oil and gas
revenue was primarily caused by lower oil and gas prices in the 1999 quarter.
Net volume and price information for the Company's oil and gas production for
the first quarters of 1999 and 1998 is summarized in the following table:
<TABLE>
<CAPTION>
Quarter Ended
March 31,
----------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Natural gas volumes (mmcf) 1,630 1,357
Average natural gas price ($/mcf) $ 1.85 $ 2.40
Crude oil/condensate volumes (mbbl) 84 93
Average crude oil/condensate price ($/bbl) $ 10.12 $ 13.67
</TABLE>
Depreciation, depletion and amortization consists primarily of data bank
amortization and depletion of oil and gas properties. Data bank amortization
increased from $11,972,000 during the first quarter of 1998 to $15,378,000
during the first quarter of 1999 as a result of the increase in seismic
marketing revenue. As a percentage of revenue from licensing seismic data, data
bank amortization was 46% for the first quarters of 1999 and 1998. See Note C
for a discussion of the Company's seismic data amortization policy.
Depletion of oil and gas properties was $2,975,000 for the first quarter of
1998 compared to $2,081,000 for the first quarter of 1999, which amounted to
$1.55 and $.98, respectively, per mcfe of gas produced during such periods. The
decrease in the rate is due to the significant increase in the Company's proved
reserves as of January 1, 1999 as determined by the Company's independent
reserve engineers resulting from both new discoveries in 1998 and positive
revisions to previous reserve estimates.
Cost of sales consists of expenses associated with oil and gas production
and seismic resale support services. Oil and gas production costs amounted to
$.57 per mcfe of gas produced in the first quarter of 1999 compared to $.55 per
mcfe in 1998. The increase in this rate is primarily due to higher workover
costs in the first quarter of 1999 as compared to 1998.
The Company's selling, general and administrative expenses increased from
$5,950,000 during the first quarter of 1998 to $7,204,000 during the first
quarter of 1999 primarily as a result of variable expenses related to the
increased volume of business. As a percentage of total revenue, these expenses
were 19% in both the first quarter of 1998 and the first quarter of 1999.
Net interest expense increased from $995,000 in the first quarter of 1998
to $2,163,000 in the first quarter of 1999. The increase is primarily due to the
addition of $138 million of senior notes on February 12, 1999 at an average
interest rate of 7.3% and increased borrowings under the Company's line of
credit during January and early February 1999 as compared to the first quarter
of 1998.
On April 22, 1999, the Board of Directors of Seitel, Inc. declared to its
common stockholders a dividend consisting of the 1,520,000 shares of the common
stock of Eagle Geophysical, Inc. currently owned by the Company. The fair market
value of the common stock of Eagle held by the Company on the date this dividend
was declared was lower than the carrying value of the stock on the Company's
balance sheet; therefore, a non-cash, non-recurring, pre-tax impairment, net of
bonus effect, of $7,794,000 was recorded at March 31, 1999.
The Company's effective income tax rate was 53% for the first quarter of
1999 compared to 37% for the first quarter of 1998. Income tax expense in the
first quarter of 1999 consists of two items: (1) income tax expense on income
from core operations at the Company's estimated annual tax rate of 38% offset by
(2) income tax benefit on the non-recurring loss on dividend distribution of
affiliate stock at the tax rate of 35%. The net of these two items results in
the higher effective tax rate. The Company's effective tax rate for the
remainder of 1999 is estimated to be approximately 38%.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operations was $29,046,000, and $30,247,000
for the three months ended March 31, 1999 and 1998, respectively. The decrease
from 1998 to 1999 was primarily due to an increase in collections from customers
offset by an increase in payments to suppliers and employees.
The Company has a $75 million unsecured revolving line of credit facility
that matures on March 16, 2001. 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%. As of May 13, 1999, the balance
outstanding on the revolving line of credit amounted to $7,196,000 bearing an
interest rate of 6.03%.
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 which began on December 30,
1998. Interest on all series of the notes is payable semi-annually on June 30
and December 30.
On February 12, 1999, the Company completed a private placement of three
series of unsecured Senior Notes totaling $138 million. The Series D Notes total
$20 million, bear interest at a fixed rate of 7.03% and mature on February 15,
2004, with no principal payments due until maturity. The Series E Notes total
$75 million, bear interest at a fixed rate of 7.28% and mature on February 15,
2009, with annual principal payments of $12.5 million beginning February 15,
2004. The Series F Notes total $43 million, bear interest at a fixed rate of
7.43% and mature on February 15, 2009, with no principal payments due until
maturity. Interest on all series of the notes is payable semi-annually beginning
on August 15, 1999. The Company used a majority of the proceeds to repay amounts
outstanding under its revolving lines of credit and the remainder for capital
expenditures.
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 January 1, 1999, through May 13, 1999, the Company received $45,000
from the exercise of common stock purchase warrants and options. In connection
with these exercises, the Company will also receive approximately $15,000 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 three months of 1999, gross seismic data bank additions
and capitalized oil and gas exploration and development costs amounted to
$55,789,000 and $9,619,000 respectively. These capital expenditures, as well as
taxes, interest expenses, cost of sales and general and administrative expenses,
were funded by operations, borrowings under the Company's revolving line of
credit and proceeds from the issuance of senior notes.
Currently, the Company anticipates capital expenditures for the remainder
of 1999 to total approximately $105 million. Such expenditures include
approximately $93 million for the creation of proprietary seismic data, and
approximately $12 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 exercise of common stock purchase warrants and options,
combined with its available revolving line of credit, should be sufficient to
fund the 1999 capital expenditures, along with expenditures for operating and
general and administrative expenses. If these sources are not sufficient to
cover the Company's anticipated expenditures or if the Company were to increase
its planned capital expenditures for 1999, the Company could arrange for
additional debt or equity financing during 1999; 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 could reduce its current capital
budget or any proposed increases to its capital budget, and fund expenditures
with cash flow generated from operating sources.
RECENT ACCOUNTING PRONOUNCEMENTS
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 and 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. However,
the Company anticipates that application of the statement 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.
Compliance Program. In order to address the Year 2000 issue, the Company
appointed the Chief Operating Officer ("COO") to assure that key automated
systems and related processors would remain functional through the year 2000.
The COO and the Company's Information Systems Manager addressed the project by
reviewing the information technology ("IT") and non-information technology
systems to determine whether they were Year 2000 compliant. Also, they prepared
a formal questionnaire for all significant suppliers, customers, and service
providers to determine the extent to which the Company was vulnerable to those
third parties' failure to remediate the Year 2000 problem.
Company's State of Readiness. A review and assessment of the information
technology and non-information technology systems was completed as of January
31, 1999 and did not identify any material systems which are not Year 2000
compliant. The Company has prepared 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. This questionnaire has been sent to all significant suppliers,
customers and service providers. The Company has requested that these companies
respond no later than June 30, 1999. 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
significantly disrupted even if third parties with whom the Company has
relationships are not Year 2000 compliant.
Costs to Address Year 2000 Compliance Issues. 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. To date, costs incurred to
address Year 2000 compliance have been internal in nature and have been charged
to income as incurred. Such costs have been funded from cash provided by
operating activities. 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. The Company is not aware of any IT
projects that have been delayed due to the Year 2000 compliance program.
<PAGE>
Risk of Non-Compliance and Contingency Plan. The goal of the Year 2000
project has been to ensure that all of the critical systems and processes, which
are under the direct control of the Company, remain functional. However, because
certain systems and processes may be interrelated with systems outside of the
control of the Company, there can be no assurance that all implementations will
be successful. The principal area of risk to the Company is thought to be the
contracting of seismic acquisition crews and vessels. A likely worst case
scenario is that despite the Company's efforts, there could be a failure of the
global positioning system used by seismic acquisition crews and vessels that the
Company contracts which could result in the temporary cessation of the
acquisition of seismic data. However, the Company believes that the risk of such
occurrence is low based upon its discussions concerning Year 2000 compliance
with third party seismic contractors. As part of the Year 2000 project,
contingency plans will be developed to respond to any potential failures as they
may be identified. 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 throughout
1999 to consider the likelihood of a material business interruption due to the
Year 2000 issue.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company is exposed to market risk, including adverse changes in
commodity prices, interest rates and foreign currency exchange rates. Refer to
the Company's Form 10-K for the year ended December 31, 1998 for a detailed
discussion of these risks. The following information discusses changes in the
Company's market risk exposures since December 31, 1998.
COMMODITY PRICE RISK
Subsequent to March 31, 1999, the Company entered into natural gas swaps in
order to hedge a portion of anticipated natural gas production. As of May 13,
1999, the Company had open commodity price hedges totaling 974,000 mmbtu at an
average price of $2.26 per mmbtu.
INTEREST RATE RISK
In February 1999, the Company completed a private placement of three series
of unsecured Senior Notes totaling $138 million at an average interest rate of
7.3%. The Series D Notes total $20 million, bear interest at a fixed rate of
7.03% and mature on February 15, 2004, with no principal payments due until
maturity. The Series E Notes total $75 million, bear interest at a fixed rate of
7.28% and mature on February 15, 2009, with annual principal payments of $12.5
million beginning February 15, 2004. The Series F Notes total $43 million, bear
interest at a fixed rate of 7.43% and mature on February 15, 2009, with no
principal payments due until maturity. The carrying value and fair value of this
debt are the same.
<PAGE>
PART II - OTHER INFORMATION
ITEMS 1., 2., 3., 4., AND 5. Not applicable.
- ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) Exhibits
--------
10.1 Amendment To Note Purchase Agreement dated as of February
12, 1999 between the Company and Senior Noteholders as of
December 28, 1995.
(b) 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: May 17, 1999 /s/ Paul A. Frame
-------------------------------------
Paul A. Frame
President
Dated: May 17, 1999 /s/ Debra D. Valice
-------------------------------------
Debra D. Valice
Chief Financial Officer
Dated: May 17, 1999 /s/ Marcia H. Kendrick
-------------------------------------
Marcia H. Kendrick
Chief Accounting Officer
<PAGE>
EXHIBIT
INDEX
- --------------------------------------------------------------------------------
Page
Exhibit Title Number
- --------------------------------------------------------------------------------
10.1 Amendment To Note Purchase Agreement dated as of February 18
12, 1999 between the Company and Senior Noteholders as of
December 28, 1995
EXHIBIT 10.1
AMENDMENT TO NOTE PURCHASE AGREEMENT
THIS AMENDMENT dated as of February 12, 1999 (the "AMENDMENT") to the
separate Note Purchase Agreements dated as of December 28, 1995, is among
Seitel, Inc. (the "COMPANY") and each of the institutions which is a signatory
to this Amendment (collectively, the "NOTEHOLDERS").
RECITALS:
A. The Company and each of the Noteholders have heretofore entered into
separate Note Purchase Agreements dated as of December 28, 1995 (collectively,
as in effect immediately prior to this Amendment, the "NOTE PURCHASE
AGREEMENT"). The Company has heretofore issued pursuant to the Note Purchase
Agreement: (a) $25,000,000 aggregate principal amount of its 7.17% Series A
Senior Notes due December 30, 2001 (the "SERIES A NOTES"), (b) $27,500,000
aggregate principal amount of its 7.17% Series B Senior Notes due December 30,
2002 (the "SERIES B NOTES"), and (c) $22,500,000 of its Series C Senior Notes
due December 30, 2002 (the "SERIES C NOTES", and together with the Series A
Notes and the Series B Notes, the "NOTES"). Capitalized terms used herein shall
have the respective meanings ascribed thereto in the Note Purchase Agreement
unless herein defined or the context shall otherwise require.
B. The Company and the Noteholders now desire to amend the Note Purchase
Agreement in the respects, but only in the respects, hereinafter set forth.
C. All requirements of law have been fully complied with and all other acts
and things necessary to make this Amendment a legal, valid and binding
instrument according to its terms for the purposes herein expressed have been
done or performed.
NOW, THEREFORE, for good and valuable consideration the receipt and
sufficiency of which are hereby acknowledged, the Company and the Noteholders do
hereby agree as follows:
SECTION 1. AMENDMENTS.
1.1 Section 7.1(b) of the Note Purchase Agreement is hereby amended and
restated in its entirety as follows:
(B) ANNUAL STATEMENTS -- within ninety (90) days after the end of each
fiscal year of the Company, duplicate copies of,
(i) a consolidated balance sheet of the Company and its
consolidated Subsidiaries as at the end of such year,
(ii) consolidated statements of operations, stockholders' equity
and cash flows of the Company and its consolidated Subsidiaries for
such year, and
(iii) a condensed consolidating balance sheet, and condensed
consolidating statements of operations and cash flows of the Company
and its Subsidiaries setting forth, in each case, consolidating
information sufficient to show the financial position and results of
operations and cash flows of the Company and the Restricted
Subsidiaries,
setting forth in each case in comparative form the figures for the previous
fiscal year, all in reasonable detail, prepared in accordance with GAAP,
and accompanied by
(A) in the case of the financial statements identified in
the foregoing clauses (i) and (ii), an opinion thereon of
independent certified public accountants of recognized national
standing, which opinion shall state that such financial
statements present fairly, in all material respects, the
financial position of the companies being reported upon and their
<PAGE>
results of operations and cash flows and have been prepared in
conformity with GAAP, and that the examination of such
accountants in connection with such financial statements has been
made in accordance with generally accepted auditing standards,
and that such audit provides a reasonable basis for such opinion
in the circumstances, and
(B) a certificate of such accountants stating that they have
reviewed this Agreement and stating further whether, in making
their audit, they have become aware of any condition or event
that then constitutes a Default or an Event of Default, and, if
they are aware that any such condition or event then exists,
specifying the nature and period of the existence thereof (it
being understood that such accountants shall not be liable,
directly or indirectly, for any failure to obtain knowledge of
any Default or Event of Default unless such accountants should
have obtained knowledge thereof in making an audit in accordance
with generally accepted auditing standards or did not make such
an audit),
PROVIDED that, so long as the Company shall not have any Unrestricted
Subsidiaries, the delivery within the time period specified above of the
Company's Annual Report on Form 10-K for such fiscal year (together with
the Company's annual report to shareholders, if any, prepared pursuant to
Rule 14a-3 under the Exchange Act) prepared in accordance with the
requirements therefor and filed with the Securities and Exchange
Commission, together with the accountants' certificates described in
clauses (A) and (B) above, shall be deemed to satisfy the requirements of
this Section 7.1(b);
1.2 Section 7.1(j) of the Note Purchase Agreement shall be relettered as
Section 7.1(k), and a new Section 7.1(j) shall be inserted in its place to read
as follows:
(J) AUDITED FINANCIAL STATEMENTS FOR RESTRICTED GROUP -- with respect
to any fiscal year of the Company as to which both of the following
conditions would be satisfied:
(i) the assets of all Unrestricted Subsidiaries, determined on a
combined basis as of the last day of such year, exceed 20% of the
consolidated total assets of the Company and its consolidated
Subsidiaries, and
(ii) the revenues of all Unrestricted Subsidiaries, determined on
a combined basis for such fiscal year, exceed 20% of the consolidated
revenues of the Company and its consolidated Subsidiaries,
upon the written request of the Required Holders, the Company will deliver
to each holder that is an Institutional Investor the same financial
statements and opinion with respect to the Company and its Restricted
Subsidiaries as is provided pursuant to clauses (i) and (ii) of Section
7.1(b) with respect to the Company and its consolidated Subsidiaries (such
delivery to be made no later than the later of (x) the time delivery is
made of the financial statements referred to in such clauses, if such
request is made at least 60 days before such time, or (y) 60 days after
such request is made).
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
To induce the Noteholders to execute and deliver this Amendment (which
representations shall survive such execution and delivery), the Company
represents and warrants to the Noteholders that:
(a) the Company is a corporation duly organized, validly existing and
in good standing under the laws of the state of Delaware;
(b) this Amendment has been duly authorized, executed and delivered by
the Company and this Amendment constitutes a legal, valid and binding
obligation, contract and agreement of the Company enforceable against it in
accordance with its terms, except as enforcement may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws or
equitable principles relating to or limiting creditors' rights generally;
(c) the Note Purchase Agreement, as amended by this Amendment,
constitutes the legal, valid and binding obligation, contract and agreement
<PAGE>
of the Company enforceable against it in accordance with its terms, except
as enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws or equitable principles relating to or limiting
creditors' rights generally;
(d) the execution, delivery and performance by the Company of this
Amendment (i) has been duly authorized by all requisite corporate action
and, if required, shareholder action, (ii) does not require the consent or
approval of any governmental or regulatory body or agency, and (iii) will
not (A) violate (1) any provision of law, statute, rule or regulation or
its certificate of incorporation or bylaws, (2) any order of any court or
any rule, regulation or order of any other agency or government binding
upon it, or (3) any provision of any material indenture, agreement or other
instrument to which it is a party or by which its properties or assets are
or may be bound, or (B) result in a breach of or constitute (alone or with
due notice or lapse of time or both) a default under any indenture,
agreement or other instrument referred to in clause (iii)(A)(3) of this
paragraph (c); and
(e) as of the date hereof and after giving effect to this Amendment,
no Default or Event of Default has occurred which is continuing.
SECTION 3. MISCELLANEOUS.
3.1 This Amendment shall be construed in connection with and as part of the
Note Purchase Agreement, and except as modified and expressly amended by this
Amendment, all terms, conditions and covenants contained in the Note Purchase
Agreement and the Notes are hereby ratified and shall be and remain in full
force and effect.
3.2 This Amendment constitutes a contract between the Company and the
Noteholders for the uses and purposes hereinabove set forth, and may be executed
in any number of counterparts, each executed counterpart constituting an
original, but all together only one agreement.
3.3 Whenever any of the parties hereto is referred to, such reference shall
be deemed to include the successors and assigns of such party, and all the
promises and agreements contained in this Amendment by or on behalf of the
Company and the Noteholders shall bind and inure to the benefit of the
respective successors and assigns of such parties, whether so expressed or not.
3.4 This Amendment constitutes the final written expression of all of the
terms hereof and is a complete and exclusive statement of those terms.
3.5 This Amendment shall be governed by and construed in accordance with
the law of the State of New York.
3.6 This Amendment shall become effective at such time as it has been
executed by the Company and the Required Holders.
[The remainder of this page is intentionally left blank]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused the execution of this
Amendment by duly authorized officers of each as of the date hereof.
SEITEL, INC.
By /s/DEBRA D. VALICE
--------------------------------
Its EXECUTIVE V.P. OF FINANCE
--------------------------------
Accepted and Agreed to:
PRINCIPAL LIFE INSURANCE COMPANY,
By Principal Capital Management, LLC,
a Delaware limited liability company,
Its authorized signatory
By: /s/JON C HEINY
---------------------------------------
Its: COUNSEL
---------------------------------------
By: /s/RUSSELL S. ROWLEY
---------------------------------------
Its: INVESTMENT MANAGER
---------------------------------------
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
By: /s/RICHARD C. MORRISON
---------------------------------------
Name: Richard C. Morrison
Title: Managing Director
FIRST SUNAMERICA LIFE INSURANCE COMPANY
By: /s/CURT M. BURNS
---------------------------------------
Name: Curt M. Burns
Title: Authorized Agent
J. ROMEO & CO.
By: /s/PETER COCCIA
---------------------------------------
Name: Peter Coccia
Title: Partner
UNITED OF OMAHA LIFE INSURANCE COMPANY
By: /s/EDWIN H. HARRISON JR.
---------------------------------------
Name: Edwin H. Garrison Jr.
Title: First Vice President
PAN-AMERICAN LIFE INSURANCE COMPANY
By: /s/F. ANDERSON STONE
---------------------------------------
Name: F. Anderson Stone
Title: Vice President
Corporate Securities
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 9,432
<SECURITIES> 0
<RECEIVABLES> 48,192
<ALLOWANCES> 1,067
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 210,575<F2>
<DEPRECIATION> 51,853
<TOTAL-ASSETS> 529,490
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 203,131
0
0
<COMMON> 238
<OTHER-SE> 232,055
<TOTAL-LIABILITY-AND-EQUITY> 529,490
<SALES> 37,881
<TOTAL-REVENUES> 37,881
<CGS> 1,292
<TOTAL-COSTS> 1,292
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,163
<INCOME-PRETAX> 1,598
<INCOME-TAX> 848
<INCOME-CONTINUING> 750
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 750
<EPS-PRIMARY> .03<F3>
<EPS-DILUTED> .03
<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 $568,826,000
and related accumulated amortization of $265,422,000.
<F3> Reflects basic earnings per share.
</FN>
</TABLE>
