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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 June 30, 2000
OR
-------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------- EXCHANGE ACT OF 1934
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)
Registrant's telephone number, including area code: (713) 881-8900
--------------
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 August 10, 2000 there were 24,030,581 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
June 30, 2000 (Unaudited) and December 31, 1999.................. 3
Consolidated Statements of Income (Unaudited)
for the Three Months Ended June 30, 2000 and 1999................ 4
Consolidated Statements of Income (Unaudited)
for the Six Months Ended June 30, 2000 and 1999.................. 5
Consolidated Statements of Stockholders' Equity
for the Six Months Ended June 30, 2000 (Unaudited)
and for the year ended December 31, 1999......................... 6
Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended June 30, 2000 and 1999.................. 7
Notes to Consolidated Interim Financial Statements (Unaudited)... 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 12
Item 3. Quantitative and Qualitative
Disclosures About Market Risk.................................... 17
PART II. OTHER INFORMATION................................................ 17
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Cash and equivalents $ 1,863 $ 5,188
Receivables
Trade, net of allowance 53,419 62,240
Notes and other 366 436
Net data bank 342,303 329,885
Net oil and gas properties 152,841 150,166
Net other property and equipment 2,227 2,421
Investment in marketable securities 1,508 993
Prepaid expenses, deferred charges and other assets 5,030 4,590
--------- ---------
TOTAL ASSETS $ 559,557 $ 555,919
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 44,336 $ 49,785
Income taxes payable 1,915 373
Debt
Senior Notes 184,667 184,667
Lines of credit 42,498 40,500
Term loans -- 33
Obligations under capital leases 24 23
Contingent payables 274 274
Deferred income taxes 34,259 32,778
Deferred revenue 175 4,462
--------- ---------
TOTAL LIABILITIES 308,148 312,895
--------- ---------
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
24,321,131 and 24,285,795 at June 30, 2000
and December 31,1999, respectively 243 243
Additional paid-in capital 147,727 147,549
Retained earnings 113,497 110,117
Treasury stock, 305,518 and 680,518 shares at cost
at June 30, 2000 and December 31, 1999, respectively (2,818) (6,279)
Notes receivable from officers and employees (6,415) (6,915)
Accumulated other comprehensive income (loss) (825) (1,691)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 251,409 243,024
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 559,557 $ 555,919
========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
2000 1999
-------- --------
<S> <C> <C>
REVENUE $ 40,067 $ 34,127
EXPENSES
Depreciation, depletion and amortization 18,722 15,048
Cost of sales 1,557 1,187
Selling, general and administrative expenses 8,011 7,278
Restructuring charge 4,394 --
-------- --------
32,684 23,513
-------- --------
INCOME FROM OPERATIONS 7,383 10,614
Interest expense, net (3,143) (2,860)
-------- --------
Income before provision for income taxes 4,240 7,754
Provision for income taxes 2,374 2,879
-------- --------
NET INCOME $ 1,866 $ 4,875
======== ========
Net income per share:
Basic $ .08 $ .20
======== ========
Diluted $ .08 $ .20
======== ========
Weighted average number of common and common equivalent shares:
Basic 23,661 23,809
======== ========
Diluted 23,751 24,844
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
2000 1999
-------- --------
<S> <C> <C>
REVENUE $ 68,498 $ 72,008
EXPENSES
Depreciation, depletion and amortization 31,881 32,787
Cost of sales 3,207 2,479
Selling, general and administrative expenses 14,681 14,482
Restructuring charge 4,394 --
-------- --------
54,163 49,748
-------- --------
INCOME FROM OPERATIONS 14,335 22,260
Interest expense, net (6,241) (5,023)
Equity in loss of affiliate -- (91)
Impairment due to dividend distribution
of affiliate stock -- (7,794)
-------- --------
Income before provision for income taxes 8,094 9,352
Provision for income taxes 3,723 3,727
-------- --------
NET INCOME $ 4,371 $ 5,625
======== ========
Net income per share:
Basic $ .18 $ .24
======== ========
Diluted $ .18 $ .23
======== ========
Weighted average number of common and common equivalent shares:
Basic 23,643 23,720
======== ========
Diluted 23,747 24,318
======== ========
</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
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>
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 481,287 5 5,126 - - - - -
Tax reduction from exer-
cise of stock options - - 597 - - - - -
Treasury stock purchased - - - - (504,700) (3,302) - -
Payments received on
notes receivable from
officers and employees - - - - - - 1,736 -
Distribution of Eagle Geo-
physical, Inc.shares - - - (6,365) - - - -
Net income $ 9,380 - - - 9,380 - - - -
Foreign currency trans-
lation adjustments (695) - - - - - - - (695)
Unrealized loss on
marketable securities
net of income
tax benefit of $526 (1,045) - - - - - - - (1,045)
--------
Comprehensive income $ 7,640
======== ---------- ----- --------- --------- -------- ------- -------- ----------
Balance, December 31, 1999 24,285,795 243 147,549 110,117 (680,518) (6,279) (6,915) (1,691)
Net proceeds from issuance
of common stock 35,336 - 156 - - - - -
Tax reduction from exer-
cise of stock options - - 22 - - - - -
Issuance of shares in
connection with
restructuring - - - (991) 375,000 3,461 - -
Payments received on
notes receivable from
officers and employees - - - - - - 500 -
Net income $ 4,371 4,371
Foreign currency trans-
lation adjustments 523 - - - - - - - 523
Unrealized gain on mar-
ketable securities
net of income tax
expense of $172 343 - - - - - - - 343
--------
Comprehensive income $ 5,237
======== ---------- ----- --------- --------- -------- ------- -------- ----------
Balance, June 30, 2000
(unaudited) 24,321,131 $ 243 $ 147,727 $ 113,497 (305,518) $(2,818) $ (6,415) $ (825)
========== ===== ========= ========= ======== ======= ======== ==========
</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>
Six Months Ended June 30,
--------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 73,032 $ 70,882
Cash paid to suppliers and employees (22,181) (18,962)
Interest paid (6,621) (1,683)
Interest received 392 327
Income taxes paid (720) (1,766)
-------- --------
Net cash provided by operating activities 43,902 48,798
-------- --------
Cash flows from investing activities:
Cash invested in seismic data (38,503) (92,291)
Cash invested in oil and gas properties (10,647) (22,360)
Cash paid to acquire property and equipment (288) (616)
Deferred IPO Costs (889) --
Investment in marketable securities -- (3,043)
-------- --------
Net cash used in investing activities (50,327) (118,310)
-------- --------
Cash flows from financing activities:
Borrowings under line of credit agreement 26,697 40,282
Principal payments under line of credit (24,699) (113,470)
Principal payments on term loans (33) (74)
Principal payments on capital lease obligations (21) (18)
Proceeds from issuance of senior notes -- 138,000
Proceeds from issuance of common stock 158 5,175
Costs of debt and equity transactions (2) (2,034)
Payments on notes receivable from officers and employees 500 1,241
-------- --------
Net cash provided by financing activities 2,600 69,102
-------- --------
Effect of exchange rate changes 500 25
-------- --------
Net decrease in cash and equivalents (3,325) (385)
Cash and equivalents at beginning of period 5,188 3,161
-------- --------
Cash and equivalents at end of period $ 1,863 $ 2,776
======== ========
</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>
Six Months Ended June 30,
---------------------------
2000 1999
-------- --------
<S> <C> <C>
Reconciliation of net income to net cash provided by operating activities:
Net income $ 4,371 $ 5,625
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 31,888 32,787
Restructuring charge 2,470 --
Deferred income tax provision 1,450 1,938
Non-cash sales -- (6,363)
Equity in loss of affiliate -- 91
Decrease in receivables 8,891 10,291
Increase in other assets (356) (288)
Decrease in accounts payable and other liabilities (4,812) (3,077)
-------- --------
Total adjustments 39,531 43,173
-------- --------
Net cash provided by operating activities $ 43,902 $ 48,798
======== ========
Supplemental schedule of non-cash investing and financing activities:
Dividend distribution of affiliate stock $ -- $ 6,365
======== ========
Capital lease obligations incurred $ 22 $ --
======== ========
</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)
June 30, 2000
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 accounting principles
generally accepted in the United States 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 six months ended June 30, 2000 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2000. For
further information, refer to the financial statements and notes thereto for the
year ended December 31, 1999 contained in the Company's Annual Report filed on
Form 10-K with the Securities and Exchange Commission.
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 six months ended
June 30, 2000 and 1999 consist of the following (in thousands except per share
amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 1,866 $ 4,875 $ 4,371 $ 5,625
======= ======= ======= =======
Basic weighted average shares 23,661 23,809 23,643 23,720
Effect of dilutive securities: (1)<F1>
Options and warrants 90 1,035 104 598
------- ------- ------- -------
Diluted weighted average shares 23,751 24,844 23,747 24,318
======= ======= ======= =======
Net income per share:
Basic $ .08 $ .20 $ .18 $ .24
Diluted $ .08 $ .20 $ .18 $ .23
-------
-------------------------
<FN>
(1)<F1> During the second quarter of 2000 and 1999 and the first six months of
2000 and 1999, a weighted average number of options and warrants to
purchase 6,169,000, 342,000, 6,208,000, and 265,000 shares of common
stock were outstanding, respectively, but were not included in the
computation of diluted net income per share 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. Substantially all (greater than 89%) 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. 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
expectations, amortization is accelerated. 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. As of June 30, 2000, almost all (97%)
of the net costs of the Company's data bank are expected to be fully amortized
within 10 years from when such data becomes available for resale.
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 with other parties for similar seismic
data. During the first six months of 1999, the Company licensed seismic data
valued at $6,363,000 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 salaries, benefits and other internal costs
directly attributable to these activities. Costs associated with production and
general corporate activities are expensed in the period incurred. For the six
months ended June 30, 2000 and 1999, exploration and development related
overhead costs of $946,000 and $973,000, respectively, have been capitalized to
oil and gas properties. Interest costs related to unproved properties and
certain properties under development are also capitalized to oil and gas
properties. For the six months ended June 30, 2000 and 1999, interest costs of
$1,484,000 and $1,582,000, respectively, have been capitalized to oil and gas
properties.
In August 2000, the Company sold its working interest in 8 producing
oil and gas wells and associated leasehold for proceeds of $16.9 million or
approximately $12.6 million, net of revenues and costs. In accordance with full
cost accounting rules, proceeds from the sale of oil and gas properties are
accounted for as a reduction of capitalized costs.
<PAGE>
NOTE E-RESTRUCTURING
On June 23, 2000, the Company announced that its management incentive
bonus compensation contracts had been restructured to reduce bonuses on pre-tax
profits to 8.5% from 17.5%. In connection with the restructuring, the Company
issued 375,000 restricted shares of its Common Stock to three members of
management and made cash payments totaling $1,771,000. As a result, the Company
recorded a restructuring charge in the second quarter of 2000 totaling
$4,394,000 ($3,743,000 net of tax) to reflect the cost of the shares issued and
the cash payments made. In addition, the Company will, subject to continued
employment, make (i) four annual payments of $187,500, net of taxes, to Herbert
Pearlman, Chairman of the Board of Directors, beginning January 1, 2001; (ii)
four annual payments of $125,000, net of taxes, to Paul Frame, President and
Chief Executive Officer, beginning January 1, 2001; and (iii) payments totaling
$1.4 million, net of taxes, to David Lawi payable over four years beginning
January 1, 2001. The withholding taxes on these payments will total 35%. The
Company will also make annual payments of $850,000 to Horace Calvert beginning
July 1, 2000 through May 31, 2004, subject to continued employment. These
payments will be charged to expense over the period earned.
NOTE F-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 and six
months ended June 30, 2000 and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Exploration
and Total
Seismic Production Segments
-------- -------- --------
<S> <C> <C> <C>
Three months ended June 30, 2000
--------------------------------
Revenue from external purchasers $ 33,980 $ 6,087 $ 40,067
Depreciation, depletion
and amortization 15,461 2,970 18,431
Cost of sales 403 1,154 1,557
Segment operating income 18,116 1,963 20,079
Capital expenditures (a)<F1> 18,318 4,433 22,751
Assets 392,132 159,740 551,872
Three months ended June 30, 1999
--------------------------------
Revenue from external purchasers $ 29,540 $ 4,587 $ 34,127
Depreciation, depletion
and amortization 12,702 2,057 14,759
Cost of sales 66 1,121 1,187
Segment operating income 16,772 1,409 18,181
Capital expenditures (a)<F1> 23,414 4,426 27,840
Assets 365,473 163,988 529,461
Six months ended June 30, 2000
------------------------------
Revenue from external purchasers $ 56,999 $ 11,499 $ 68,498
Depreciation, depletion
and amortization 25,749 5,542 31,291
Cost of sales 480 2,727 3,207
Segment operating income 30,770 3,230 34,000
Capital expenditures (a)<F1> 38,076 8,242 46,318
Assets 392,132 159,740 551,872
Six months ended June 30, 1999
------------------------------
Revenue from external purchasers $ 63,462 $ 8,546 $ 72,008
Depreciation, depletion
and amortization 28,080 4,138 32,218
Cost of sales 131 2,348 2,479
Segment operating income 35,251 2,060 37,311
Capital expenditures (a)<F1> 79,203 14,125 93,328
Assets 365,473 163,988 529,461
<FN>
(a)<F1> Includes other ancillary equipment.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Income from continuing operations before income taxes:
Total reportable segment operating income $20,079 $18,181 $34,000 $37,311
Selling general and administrative expense (8,011) (7,278) (14,681) (14,482)
Restructuring charge (4,394) -- (4,394) --
Interest expense, net (3,143) (2,860) (6,241) (5,023)
Equity in loss of affiliate -- -- -- (91)
Impairment due to dividend distribution of
affiliate stock -- -- -- (7,794)
Eliminations and other (291) (289) (590) (569)
------- ------- ------- -------
Income from continuing operations before
income taxes $ 4,240 $ 7,754 $ 8,094 $ 9,352
======= ======= ======= =======
</TABLE>
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 $5,609,000 for the second quarter of 2000 and
$8,114,000 for the six months ended June 30, 2000 as compared to $4,875,000 for
the second quarter of 1999 and $10,750,000 for the six months ended June 30,
1999. Additionally, in the second quarter and first six months of 2000, the
Company recorded a non-recurring restructuring charge of $3,743,000, net of tax,
bringing net income for the second quarter and first six months of 2000 to
$1,866,000 and $4,371,000, respectively. Additionally, in the first six months
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 net income for the
six months ended June 30, 1999 to $5,625,000.
RESULTS OF OPERATIONS
Total revenue was $40,067,000 and $34,127,000 in the second quarters of
2000 and 1999, respectively, and $68,498,000 and $72,008,000 in the first six
months of 2000 and 1999, respectively. Revenue primarily consists of revenue
generated from the marketing of seismic data and oil and gas production.
Revenue from the marketing of seismic data was $33,980,000 in the
second quarter of 2000 compared to $29,540,000 in the second quarter of 1999.
This increase in revenue was primarily due to an increase in licensing of
existing data from the Company's data library. Revenue from the marketing of
seismic data was $56,999,000 in the first six months of 2000 compared to
$63,462,000 in the first six months of 1999. In May 1999, the Company made a
management decision to focus its marketing team on licensing existing data that
would generate current cash flow. Management continued this decision to limit
data creation in the first half of 2000, which was the primary reason for lower
seismic revenue than in the first half of 1999. However, with the increase in
demand for seismic data that the Company has experienced since mid-June, the
Company has started to commit more capital to new data creation beginning in the
third quarter of 2000.
<PAGE>
Net volume and price information for the Company's oil and gas
production for the second quarters and first six months of 2000 and 1999 are
summarized in the following table:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Natural gas volumes (mmcf) 1,305 1,446 2,610 3,076
Average natural gas price ($/mcf) $ 3.01 $ 2.16 $ 2.88 $ 2.00
Crude oil/condensate volumes (mbbl) 83 97 153 181
Average crude oil/condensate price ($/bbl) $ 25.24 $ 14.45 $ 25.25 $ 12.44
</TABLE>
Oil and gas revenue was $6,087,000 in the second quarter of 2000
compared to $4,587,000 in the second quarter of 1999 and was $11,499,000 in the
first six months of 2000 compared to $8,546,000 in the first six months of 1999.
The increase in oil and gas revenue was attributable to higher market prices in
2000 offset by lower production volumes as compared to the second quarter and
first half of 1999. The decline in oil and gas production was primarily due to
normal production declines experienced on several of the Company's older wells
as well as a decline related to a group of wells that was sold in July 1999.
These declines were partially offset by production from newer wells.
Oil and gas revenue includes losses from hedging activities of $851,000
in the second quarter of 2000 and $102,000 in the second quarter of 1999. The
loss from hedging activities for the six months ended June 30, 2000 and 1999 was
$913,000 and $102,000 respectively. The Company's hedges expire in August 2000.
In August 2000, the Company sold its interest in 8 producing oil and
gas wells and associated leasehold for proceeds of $16.9 million or
approximately $12.6 million, net of revenues and costs. Production from these
wells totaled approximately 12,000 barrels of oil and 485 mmcf in the second
quarter of 2000.
Depreciation, depletion and amortization consists primarily of data
bank amortization and depletion of oil and gas properties. Data bank
amortization was $15,461,000 during the second quarter of 2000 compared to
$12,702,000 during the second quarter of 1999 and was $25,749,000 during the
first six months of 2000 compared to $28,080,000 during the first six months of
1999. The amount of seismic data amortization fluctuates based on the level of
seismic marketing revenue. As a percentage of revenue from licensing seismic
data, data bank amortization was 46% and 44% for the second quarters of 2000 and
1999, respectively, and was 46% and 45% for the first six months of 2000 and
1999, respectively. See Note C for a discussion of the Company's seismic data
amortization policy.
Depletion of oil and gas properties was $2,970,000 for the second
quarter of 2000 compared to $2,057,000 for the second quarter of 1999, which
amounted to $1.65 and $1.01, respectively, per mcfe of gas produced during such
periods. For the six months ended June 30, 2000 and 1999, depletion of oil and
gas properties was $5,542,000 and $4,138,000, respectively, which amounted to
$1.57 and $.99, respectively, per mcfe of gas produced during such periods. The
depletion rate per mcfe varies with the estimate of proved oil and gas reserves
of the Company at each quarter end, as well as evaluated property costs. The
increase in the rate between periods was primarily due to lower proved reserves
at June 30, 2000 than at June 30, 1999.
Cost of sales primarily consists of expenses associated with oil and
gas production and seismic resale support services. Oil and gas production costs
amounted to $1,154,000 or $.64 per mcfe of gas produced in the second quarter of
2000 compared to $1,121,000, or $.55 per mcfe of gas produced in the second
quarter of 1999. Oil and gas production costs amounted to $2,727,000 or $.77 per
mcfe of gas produced in the first six months of 2000 compared to $2,348,000 or
$.56 per mcfe of gas produced in the first six months of 1999. The increase in
this rate between periods was primarily due to higher workover costs incurred in
2000 and higher production taxes in 2000 due to higher oil and gas prices.
The Company's selling, general and administrative expenses were
$8,011,000 and $14,681,000 during the second quarter and first six months of
2000, respectively, compared to $7,278,000 and $14,482,000 during the second
quarter and first six months of 1999, respectively. The increases primarily
resulted from an increase in overhead costs due to the growth of the Company's
operations in Canada between periods and certain nonrecurring costs incurred in
the first quarter of 2000, partially offset by a decrease in variable expenses
related to revenue and pre-tax profits. As a percentage of total revenue, these
expenses were 20% and 21% for the second quarter and first six months of 2000,
respectively, and 21% and 20% for the second quarter and first six months of
1999, respectively.
<PAGE>
Net interest expense was $3,143,000 and $6,241,000 in the second
quarter and first six months of 2000, respectively, compared to $2,860,000 and
$5,023,000 in the second quarter and first six months of 1999, respectively. The
increase between periods was primarily due to an increase in interest expense on
the Company's revolving line of credit due to higher amounts outstanding in the
second quarter of 2000 partially offset by lower interest expense on the
Company's Series A, B, and C Senior Notes as a result of $18.3 million of
principal payments made in December 1999. Additionally, for the six months ended
June 30, 2000, the Series D, E, and F Senior Notes totaling $138 million were
outstanding for the entire period, whereas in 1999 they were only outstanding
for 4-1/2 months, resulting in increased interest expense in 2000 as compared to
1999.
On June 23, 2000, the Company announced that its management incentive
bonus compensation contracts had been restructured to reduce bonuses on pre-tax
profits to 8.5% from 17.5%. In connection with the restructuring, the Company
issued 375,000 restricted shares of its Common Stock to three members of
management and made cash payments totaling $1,771,000. As a result, the Company
recorded a restructuring charge in the second quarter of 2000 totaling
$4,394,000 ($3,743,000 net of tax) to reflect the cost of the shares issued and
the cash payments made. In addition, the Company will, subject to continued
employment, make (i) four annual payments of $187,500, net of taxes, to Herbert
Pearlman, Chairman of the Board of Directors, beginning January 1, 2001; (ii)
four annual payments of $125,000, net of taxes, to Paul Frame, President and
Chief Executive Officer, beginning January 1, 2001; and (iii) payments totaling
$1.4 million, net of taxes, to David Lawi payable over four years beginning
January 1, 2001. The withholding taxes on these payments will total 35%. The
Company will also make annual payments of $850,000 to Horace Calvert beginning
July 1, 2000 through May 31, 2004, subject to continued employment. These
payments will be charged to expense over the period earned.
On April 22, 1999, the Board of Directors of Seitel, Inc. declared a
dividend to its common stockholders consisting of the 1,520,000 shares of the
common stock of Eagle Geophysical, Inc. 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 for the six months ended June 30, 1999.
The Company's effective income tax rate was 56% and 46% for the second
quarter and first six months of 2000, respectively, compared to 37% and 40% for
the second quarter and first six months of 1999, respectively. Income tax
expense in the second quarter and the first six months of 2000, consisted of two
items: (1) income tax expense on income from core operations before
restructuring charge at the Company's estimated annual tax rate of 35% offset by
(2) income tax benefit on the restructuring charge totaling $651,000, which
represented 15% of the restructuring charge. The Company will only receive a tax
benefit on the restructuring charge of $651,000 due to limitations imposed by
Section 162(m) of the Internal Revenue Code. Income tax expense in the first six
months of 1999 consisted 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 items resulted in the
higher effective tax rates. The lower estimated tax rate on 2000 income before
special items was primarily due to lower taxes estimated for Canadian operations
in 2000 as compared to 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operations was $43,902,000 and $48,798,000
for the six months ended June 30, 2000 and 1999, respectively. The decrease from
1999 to 2000 was primarily attributable to an increase in interest expense paid.
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 1 1/2%, the bank's prevailing prime rate, or the sum of the
Federal Funds effective rate for such day plus 1/2%. Certain restrictions exist
that limit the amount of borrowing that the Company can make under this
facility. The balance outstanding on this revolving line of credit at August 10,
2000 was $30.5 million bearing an average interest rate of 7.38%.
<PAGE>
On November 9, 1999, the Company's wholly-owned subsidiary, Olympic
Seismic Ltd. ("Olympic"), entered into revolving credit facilities which allow
it to borrow up to $5 million (Canadian dollars) by way of prime based loans,
bankers' acceptances, or letters of credit. Prime based loans and bankers'
acceptances bear interest at the rate of the bank's prime rate plus 0.35% per
annum and 0.50% per annum, respectively. Letter of credit fees are based on
scheduled rates in effect at the time of issuance. The facility is secured by
Olympic's assets, but is not guaranteed by Seitel, Inc. or any of its other
subsidiaries. Borrowings under the facility are limited to 75% of trade
receivables less than 90 days old. The facility is subject to repayment upon
demand and is available from time to time at the Bank's sole discretion. As of
August 10, 2000, no amounts were outstanding on this revolving line of credit.
Olympic is not a party to any of the debt issued by Seitel, Inc.
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 on
February 15 and August 15. As of August 10, 2000, the balance outstanding on the
Series D, E and F Notes was $138 million.
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 which began on 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. As of August 10, 2000, the balance outstanding on the Series A,
B, and C Notes was $46,667,000.
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 and (iii) common stock, or any combination of the foregoing, up to an
aggregate of $41,041,600 pursuant to an effective "shelf" registration statement
filed with the SEC. In addition, under another effective "shelf" registration
statement filed with the SEC, the Company may offer up to an aggregate of
$200,000,000 of the following securities, in any combination, from time to time
in one or more series: (i) unsecured debt securities, which may be senior or
unsubordinated; (ii) preferred stock; (iii) common stock, and (iv) trust
preferred securities.
From January 1, 2000, through August 10, 2000, the Company received
$318,000 from the exercise of common stock purchase warrants and options. In
connection with these exercises, the Company will also receive approximately
$31,000 in tax savings.
In August 2000, the Company's wholly-owned subsidiary, DDD Energy,
Inc., sold its working interest in 8 producing oil and gas wells and associated
leasehold for proceeds of $16.9 million or approximately $12.6 million, net of
revenues and costs. The Company temporarily used these funds to reduce its
borrowings under its line of credit.
In November 1999, the Company's 19% owned subsidiary, Vision Energy,
Inc., filed a registration statement with the SEC to accomplish the spin-off of
DDD Energy through an initial public offering. In the first quarter of 2000, the
Company made a decision to defer the timing of the offering due to market
conditions. With the departure of DDD Energy's former president in May, the
Company is evaluating how to best maximize the value of DDD Energy's properties,
including (i) proceeding with the previously deferred spin-off through an
initial public offering, (ii) sale or other disposition of some or all of DDD
Energy's properties, (iii) continuing to operate the properties to realize value
through additional exploration and production, or (iv) some combination of these
alternatives. As of June 30, 2000, the Company had incurred costs related to
this offering totaling $999,000, which are included in prepaid expenses in the
Company's balance sheet as of June 30, 2000. These costs will be realized when
the offering occurs or written off if it is determined that the spin-off will
not take place.
<PAGE>
During November and December 1999, the Company repurchased 504,700
shares of its common stock in the open market at a cost of $3,302,000, pursuant
to a stock repurchase program authorized by the Board of Directors in 1997. The
Board has authorized expenditures of up to $25 million towards the repurchase of
its common stock. As of August 10, 2000, the Company has repurchased a total of
679,700 shares of its common stock at a cost of $6,275,000 since 1997 under this
plan.
During the first six months of 2000, gross seismic data bank additions
and capitalized oil and gas exploration and development costs amounted to
$38,076,000 and $8,216,000 respectively. These capital expenditures, as well as
taxes, interest expenses, cost of sales and general and administrative expenses,
were funded by operations, proceeds from the exercise of common stock purchase
warrants and options, and borrowings under the Company's revolving line of
credit.
Currently, the Company anticipates capital expenditures to
total approximately $45 million for seismic data bank additions and
approximately $12 million for oil and gas exploration and development efforts
for the remainder of 2000. The Company believes its current cash balances,
revenues from operating sources, proceeds from the sale of oil and gas
properties, 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 currently anticipated 2000 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 2000,
the Company could arrange for additional debt or equity financing during 2000;
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." SFAS No.
133, as amended by SFAS No. 137, is required to be adopted on January 1, 2001,
although earlier adoption is permitted. 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 formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting treatment. Management does not
believe that the adoption of SFAS No. 133 will have a material impact on the
Company's financial position or results of operations.
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
<PAGE>
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. The foregoing and other risk factors are identified in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission for
the year ended December 31, 1999.
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, 1999 for a detailed
discussion of these risks. The following information discusses changes in the
Company's market risk exposures since December 31, 1999.
Commodity Price Risk
During the first six months of 2000, the Company recognized net hedging
losses of $913,000. As of June 30, 2000, the Company had open commodity price
hedges totaling 465,000 MMBtu at an average price of $2.53 per MMBtu.
Interest Rate Risk
The Company may enter into various financial instruments, such as
interest rate swaps, to manage the impact of changes in interest rates.
Currently, the Company has no open interest rate swap or interest rate lock
agreements. Therefore, the Company's exposure to changes in interest rates
primarily results from its short-term and long-term debt with both fixed and
floating interest rates.
Foreign Currency Exchange Rate Risk
The Company conducts business in the Canadian dollar and pounds
sterling and is therefore subject to foreign currency exchange rate risk on cash
flows related to sales, expenses, financing and investing transactions. On March
31, 2000, the Company entered into forward exchange contracts to hedge a portion
of its foreign currency exchange risk related to its Canadian activities. As of
June 30, 2000, the Company had open forward exchange contracts totaling $10
million (Canadian dollars) at an exchange rate into U.S. dollars of .6925
maturing in equal amounts of $1 million (Canadian dollars) each month from July
2000 to April 2001. Exposure from market rate fluctuations related to activities
in the Cayman Islands, where the Company's functional currency is pounds
sterling, is not material at this time.
PART II - OTHER INFORMATION
Items 1., 3., 4., and 5. Not applicable.
Item 2. Changes in Securities and Use of Proceeds
In June 2000, the Company issued and sold the following securities in
private transactions exempt from the registration provisions of the Securities
Act pursuant to Section 4(2) thereof as transactions not involving a public
offering:
100,000 shares of common stock to Paul A. Frame, President and Chief
Executive Officer of the Company;
150,000 shares of common stock to Herbert M. Pearlman, Chairman of the
Board of the Company; and
125,000 shares of common stock to David S. Lawi, a former officer and
director of the Company.
Messrs. Frame, Pearlman and Lawi were the only offerees in these
transactions, and no public solicitation was made. All of the offerees had
access to all information regarding the Company by virtue of their relationships
to the Company, and the share certificates issued to each of them contain a
restrictive legend prohibiting transfer of the shares in violation of federal
securities laws. These shares were issued to Messrs. Frame, Pearlman and Lawi in
connection with and as partial consideration for amendments to their employment
agreements with the Company.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Amended and Restated By-Laws of Seitel, Inc. effective
July 26, 2000
10.1 Horace A. Calvert's Amended and Restated Employment
Agreement dated as of April 1, 2000
10.2 Paul A. Frame's Employment Contract Amendment No. 2
dated as of June 26, 2000
10.3 Herbert M. Pearlman's Employment Contract Amendment No.
2 dated as of June 26, 2000
10.4 David S. Lawi's Employment Contract Amendment No. 2
dated as of June 26, 2000
10.5 Letter to David S. Lawi from Seitel, Inc. dated June
26, 2000 regarding his October 2, 1998 Promissory Note
10.6 David S. Lawi's Promissory Note dated as of June 26,
2000
(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: August 11, 2000 /s/ Paul A. Frame
-----------------------------------
Paul A. Frame
President
Dated: August 11, 2000 /s/ Debra D. Valice
-----------------------------------
Debra D. Valice
Chief Financial Officer
Dated: August 11, 2000 /s/ Marcia H. Kendrick
-----------------------------------
Marcia H. Kendrick
Chief Accounting Officer
<PAGE>
EXHIBIT
INDEX
--------- ----------------------------------------------------------------------
Exhibit Title Page
Number
--------------------------------------------------------------------------------
3.1 Amended and Restated By-Laws of Seitel, Inc.
effective July 26, 2000 21
10.1 Horace A. Calvert's Amended and Restated
Employment Agreement dated as of April 1, 2000 40
10.2 Paul A. Frame's Employment Contract Amendment
No. 2 dated as of June 26, 2000 46
10.3 Herbert M. Pearlman's Employment Contract
Amendment No. 2 dated as of June 26, 2000 51
10.4 David S. Lawi's Employment Contract Amendment
No. 2 dated as of June 26, 2000 56
10.5 Letter to David S. Lawi from Seitel, Inc.
dated June 26, 2000 regarding his October 2, 1998
Promissory Note 62
10.6 David S. Lawi's Promissory Note dated
as of June 26, 2000 64
