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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 September 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 November 10, 2000 there were 24,355,393 shares of the Company's common
stock, par value $.01 per share outstanding.
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<PAGE>
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 2000 (Unaudited) and December 31, 1999.............. 3
Consolidated Statements of Operations (Unaudited) for the
Three Months Ended September 30, 2000 and 1999.................... 4
Consolidated Statements of Operations (Unaudited) for the
Nine Months Ended September 30, 2000 and 1999..................... 5
Consolidated Statements of Stockholders' Equity (Unaudited)
for the Nine Months Ended September 30, 2000...................... 6
Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months Ended September 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................................................. 18
<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)
September 30, December 31,
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Cash and equivalents $ 2,530 $ 5,188
Receivables
Trade, net of allowance 58,698 62,240
Notes and other 900 436
Net data bank 341,496 329,885
Net oil and gas properties 140,021 150,166
Net other property and equipment 2,517 2,421
Investment in marketable securities 1,831 993
Prepaid expenses, deferred charges and other assets 5,182 4,590
--------- ---------
TOTAL ASSETS $ 553,175 $ 555,919
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 38,085 $ 49,785
Income taxes payable 1,018 373
Debt
Senior Notes 184,667 184,667
Line of Credit 30,730 40,500
Term Loans -- 33
Obligations under capital leases 278 23
Contingent payables 274 274
Deferred income taxes 36,584 32,778
Deferred revenue 1,345 4,462
--------- ---------
TOTAL LIABILITIES 292,981 312,895
--------- ---------
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
24,410,863 and 24,285,795 at September 30, 2000
and December 31, 1999, respectively 244 243
Additional paid-in capital 148,835 147,549
Retained earnings 120,729 110,117
Treasury stock, 325,318 and 680,518 shares at cost at
September 30, 2000 and December 31, 1999, respectively (3,086) (6,279)
Notes receivable from officers and employees (5,896) (6,915)
Accumulated other comprehensive income (loss) (632) (1,691)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 260,194 243,024
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 553,175 $ 555,919
========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------
2000 1999
-------- --------
<S> <C> <C>
REVENUE $ 44,827 $ 24,617
EXPENSES:
Depreciation, depletion and amortization 20,214 11,792
Cost of sales 1,072 1,488
Selling, general and administrative expenses 9,397 6,549
-------- --------
30,683 19,829
-------- --------
INCOME FROM OPERATIONS 14,144 4,788
Interest expense, net (3,018) (3,114)
-------- --------
Income before provision for income taxes 11,126 1,674
Provision for income taxes 3,894 850
-------- --------
NET INCOME $ 7,232 $ 824
======== ========
Earnings per share:
Basic $ .30 $ .03
======== ========
Diluted $ .30 $ .03
======== ========
Weighted average number of common and common equivalent shares:
Basic 24,037 24,110
======== ========
Diluted 24,417 24,489
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------
2000 1999
--------- --------
<S> <C> <C>
REVENUE $ 113,325 $ 96,625
EXPENSES:
Depreciation, depletion and amortization 52,095 44,579
Cost of sales 4,279 3,967
Selling, general and administrative expenses 24,078 21,031
Restructuring charge 4,394 --
--------- --------
84,846 69,577
--------- --------
INCOME FROM OPERATIONS 28,479 27,048
Interest expense, net (9,259) (8,137)
Equity in loss of affiliate -- (91)
Impairment due to dividend distribution of affiliate stock -- (7,794)
--------- --------
Income before provision for income taxes 19,220 11,026
Provision for income taxes 7,617 4,577
--------- --------
NET INCOME $ 11,603 $ 6,449
========= ========
Earnings per share:
Basic $ .49 $ .27
========= ========
Diluted $ .48 $ .26
========= ========
Weighted average number of common and common equivalent shares:
Basic 23,775 23,850
========= ========
Diluted 23,935 24,361
========= ========
</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 125,068 1 1,086 - - - - -
Tax reduction from exer-
cise of stock options - - 200 - - - - -
Treasury stock purchased - - - - (19,800) (268) - -
Issuance of shares in
connection with
restructuring - - - (991) 375,000 3,461 - -
Payments received on
notes receivable from
officers and employees - - - - - - 1,019 -
Net income $ 11,603 11,603
Foreign currency trans-
lation adjustments 501 - - - - - - - 501
Unrealized gain on mar-
ketable securities
net of income tax
expense of $280 558 - - - - - - - 558
--------
Comprehensive income $ 12,662
======== ---------- ----- --------- --------- -------- ------- -------- ----------
Balance, September 30, 2000
(unaudited) 24,410,863 $ 244 $ 148,835 $ 120,729 (325,318) $(3,086) $ (5,896) $ (632)
========== ===== ========= ========= ======== ======= ======== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------
2000 1999
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $113,750 $ 89,473
Cash paid to suppliers and employees (31,300) (26,631)
Interest paid (11,653) (6,215)
Interest received 701 321
Income taxes paid (3,103) (1,553)
-------- --------
Net cash provided by operating activities 68,395 55,395
-------- --------
Cash flows from investing activities:
Cash invested in seismic data (60,826) (111,636)
Cash invested in oil and gas properties (13,567) (25,440)
Net proceeds from sale of oil and gas properties 12,782 11,657
Cash paid to acquire property and equipment (492) (920)
Deferred IPO costs (925) -
Investment in marketable securities - (3,043)
-------- --------
Net cash used in investing activities (63,028) (129,382)
-------- --------
Cash flows from financing activities:
Borrowings under line of credit agreements 35,028 63,908
Principal payments under line of credit (44,798) (130,408)
Principal payments on term loans (33) (106)
Principal payments on capital lease obligations (47) (23)
Proceeds from issuance of senior notes - 138,000
Proceeds from issuance of common stock 1,102 5,175
Costs of debt and equity transactions (15) (2,038)
Repurchase of common stock (268) -
Payments on receivables from officers and employees 1,019 1,665
Loans to employee and director (525) -
-------- --------
Net cash provided by (used in) financing activities (8,537) 76,173
-------- --------
Effect of exchange rate changes 512 39
-------- --------
Net increase (decrease) in cash and equivalents (2,658) 2,225
Cash and cash equivalents at beginning of period 5,188 3,161
-------- --------
Cash and cash equivalents at end of period $ 2,530 $ 5,386
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited), continued
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------
2000 1999
-------- --------
<S> <C> <C>
Reconciliation of net income to net cash provided by operating activities:
Net income $ 11,603 $ 6,449
Adjustments to reconcile net income to net cash provided by
operating activities:
Impairment due to dividend distribution of affiliate stock -- 7,794
Equity in loss of affiliate -- 91
Depreciation, depletion and amortization 52,101 44,579
Restructuring charge 2,470 --
Deferred income tax provision 3,650 2,799
Non-cash sales -- (6,522)
Decrease in receivables 3,603 4,545
Increase in other assets (626) (40)
Decrease in other liabilities (4,406) (4,300)
-------- --------
Total adjustments 56,792 48,946
-------- --------
Net cash provided by operating activities $ 68,395 $ 55,395
======== ========
Supplemental schedule of non-cash investing and financing activities:
Dividend payable of affiliate stock $ -- $ 6,365
======== ========
Capital lease obligations incurred $ 302 $ 33
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
SEITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Unaudited)
September 30, 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 nine months ended September 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 nine months ended
September 30, 2000 and 1999 consist of the following (in thousands except per
share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
2000 1999 2000 1999
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 7,232 $ 824 $ 11,603 $ 6,449
========= ========== ========== ==========
Basic weighted average shares 24,037 24,110 23,775 23,850
Effect of dilutive securities: (1)<F1>
Options and warrants 380 379 160 511
--------- ---------- ---------- ----------
Diluted weighted average shares 24,417 24,489 23,935 24,361
========= ========== ========== ==========
Net income per share:
Basic $ .30 $ .03 $ .49 $ .27
Diluted $ .30 $ .03 $ .48 $ .26
-------------------
<FN>
(1)<F1> During the third quarter of 2000 and 1999 and the first nine months of
2000 and 1999, a weighted average number of options and warrants to
purchase 4,218,000, 4,543,000, 6,253,000, and 4,072,000 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 88%) 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 10 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 10-year
straight-line method. As of September 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
nine months of 1999, the Company licensed seismic data valued at $6,522,000 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 nine
months ended September 30, 2000 and 1999, exploration and development related
overhead costs of $1,341,000 and $1,474,000, 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 nine months ended September 30, 2000 and 1999, interest
costs of $2,202,000 and $2,343,000, respectively, have been capitalized to oil
and gas properties.
In August 2000, the Company sold its working interest in eight producing
oil and gas wells and associated leasehold for proceeds of $16.9 million or
approximately $12.8 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.
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
<PAGE>
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 nine
months ended September 30, 2000 and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Exploration
and Total
Seismic Production Segments
------------ ------------- -------------
<S> <C> <C> <C>
Three months ended September 30, 2000
-------------------------------------
Revenue from external purchasers $ 38,762 $ 6,065 $ 44,827
Depreciation, depletion
and amortization 17,560 2,418 19,978
Cost of sales 45 1,027 1,072
Segment operating income 21,157 2,620 23,777
Capital expenditures (a)<F1> 16,891 2,517 19,408
Assets 406,836 145,839 552,675
Three months ended September 30, 1999
-------------------------------------
Revenue from external purchasers $ 19,804 $ 4,813 $ 24,617
Depreciation, depletion
and amortization 9,300 2,188 11,488
Cost of sales 96 1,392 1,488
Segment operating income 10,408 1,233 11,641
Capital expenditures (a)<F1> 18,795 3,845 22,640
Assets 379,784 154,867 534,651
Nine months ended September 30, 2000
------------------------------------
Revenue from external purchasers $ 95,761 $ 17,564 $ 113,325
Depreciation, depletion
and amortization 43,309 7,960 51,269
Cost of sales 525 3,754 4,279
Segment operating income 51,927 5,850 57,777
Capital expenditures (a)<F1> 54,967 10,759 65,726
Assets 406,836 145,839 552,675
Nine months ended September 30, 1999
------------------------------------
Revenue from external purchasers $ 83,266 $ 13,359 $ 96,625
Depreciation, depletion
and amortization 37,380 6,326 43,706
Cost of sales 227 3,740 3,967
Segment operating income 45,659 3,293 48,952
Capital expenditures (a)<F1> 97,998 17,970 115,968
Assets 379,784 154,867 534,651
<FN>
(a)<F1> Includes other ancillary equipment.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Income from continuing operations before income taxes:
Total reportable segment operating income $ 23,777 $ 11,641 $ 57,777 $ 48,952
Selling general and administrative expense (9,397) (6,549) (24,078) (21,031)
Restructuring charge - - (4,394) -
Interest expense, net (3,018) (3,114) (9,259) (8,137)
Equity in loss of affiliate - - - (91)
Impairment due to dividend distribution of
affiliate stock - - - (7,794)
Eliminations and other (236) (304) (826) (873)
----------- ------------
------------ -----------
Income from continuing operations before
income taxes $ 11,126 $ 1,674 $ 19,220 $ 11,026
============ =========== =========== ============
</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 $7,232,000 for the third quarter of 2000 and
$15,346,000 for the nine months ended September 30, 2000 as compared to $824,000
for the third quarter of 1999 and $11,574,000 for the nine months ended
September 30, 1999. Additionally, in the first nine months of 2000, the Company
recorded a non-recurring restructuring charge of $3,743,000, net of tax,
bringing net income for the first nine months of 2000 to $11,603,000.
Additionally, in the first nine 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 nine months ended September 30, 1999 to
$6,449,000.
RESULTS OF OPERATIONS
---------------------
Total revenue was $44,827,000 and $24,617,000 in the third quarters of 2000
and 1999, respectively, and $113,325,000 and $96,625,000 in the first nine
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 $38,762,000 in the third
quarter of 2000 compared to $19,804,000 in the third quarter of 1999. This
increase in revenue was due to an increase in licensing of existing data from
the Company's data library. The Company has experienced increased demand for its
seismic data due to the recent resurgence of oil and gas exploration. Revenue
from the marketing of seismic data was $95,761,000 in the first nine months of
2000 compared to $83,266,000 in the first nine months of 1999. This increase
resulted from an increase in licensing of existing data from the Company's data
library partially offset by a decrease in new seismic data creation revenue. In
May 1999, the Company made a management decision to focus its marketing team on
licensing existing data that would generate current cash flow. Management
continued this decision to limit data creation in the first nine months of 2000.
Revenue from licensing of existing data can fluctuate from quarter to quarter
based on oil and gas industry capital expenditure budgets and spending patterns.
The third quarter 2000 revenue included resale revenue resulting from the merger
and acquisition of some of its oil and gas company customers.
<PAGE>
Net volume and price information for the Company's oil and gas production
for the third quarters and first nine months of 2000 and 1999 are summarized in
the following table:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Natural gas volumes (mmcf) 1,014 1,150 3,624 4,226
Average natural gas price ($/mcf) $ 3.83 $ 2.65 $ 3.15 $ 2.18
Crude oil/condensate volumes (mbbl) 74 101 227 282
Average crude oil/condensate price ($/bbl) $ 28.91 $ 16.50 $ 26.46 $ 13.73
</TABLE>
Oil and gas revenue was $6,065,000 in the third quarter of 2000 compared to
$4,813,000 in the third quarter of 1999 and was $17,564,000 in the first nine
months of 2000 compared to $13,359,000 in the first nine 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 third quarter and first
nine months 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 the effect of the sale of a group of wells in July 1999 and in August
2000. These declines were partially offset by production from newer wells.
Oil and gas revenue includes losses from hedging activities of $779,000 in
the third quarter of 2000 and $166,000 in the third quarter of 1999. The losses
from hedging activities for the nine months ended September 30, 2000 and 1999
were $1,692,000 and $268,000, respectively. The Company's hedges expired in
August 2000.
In August 2000, the Company sold its interest in eight producing oil and
gas wells and associated leasehold for proceeds of $16.9 million or
approximately $12.8 million, net of revenues and costs.
Depreciation, depletion and amortization consists primarily of data bank
amortization and depletion of oil and gas properties. Data bank amortization was
$17,560,000 during the third quarter of 2000 compared to $9,300,000 during the
third quarter of 1999 and was $43,309,000 during the first nine months of 2000
compared to $37,380,000 during the first nine 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 48% for the third quarters of 2000 and 1999,
respectively, and was 46% for the first nine months of 2000 and 1999. See Note C
for a discussion of the Company's seismic data amortization policy.
Depletion of oil and gas properties was $2,418,000 for the third quarter of
2000 compared to $2,188,000 for the third quarter of 1999, which amounted to
$1.66 and $1.25, respectively, per mcfe of gas produced during such periods. For
the nine months ended September 30, 2000 and 1999, depletion of oil and gas
properties was $7,960,000 and $6,326,000, respectively, which amounted to $1.60
and $1.07, 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 September 30, 2000 than at September 30, 1999 primarily due to the sales of
proved reserves in August 2000 and revisions to estimated reserve volumes.
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 $1,027,000 or $.70 per mcfe of gas produced in the third quarter of
2000 compared to $1,392,000, or $.79 per mcfe of gas produced in the third
quarter of 1999. The decrease in this rate was primarily due to lower workover
costs incurred in the third quarter of 2000 as compared to 1999 partially offset
by higher production taxes in the 2000 period due to higher oil and gas prices.
Oil and gas production costs amounted to $3,754,000 or $.75 per mcfe of gas
produced in the first nine months of 2000 compared to $3,740,000 or $.63 per
mcfe of gas produced in the first nine months of 1999. The increase in this rate
between periods was primarily due to higher workover costs incurred for the nine
months ended September 30, 2000 and higher production taxes in 2000 due to
higher oil and gas prices.
The Company's selling, general and administrative expenses were $9,397,000
and $24,078,000 during the third quarter and first nine months of 2000,
respectively, compared to $6,549,000 and $21,031,000 during the third quarter
and first nine months of 1999, respectively. The increase between the third
quarter periods was primarily due to an increase in variable expenses related to
commissions on increased revenue and compensation on increased pre-tax profits.
The increase between the nine months periods was primarily due to an increase in
overhead costs due to the growth of the Company between periods as well as an
increase in variable expenses related to commission on increased revenue. These
increases were partially offset by a decrease in management's incentive bonus
compensation resulting from the restructuring that occurred in June 2000. As a
percentage of total revenue, these expenses were 21% for both the third quarter
and first nine months of 2000 and 27% and 22% for the third quarter and first
nine months of 1999, respectively.
Net interest expense was $3,018,000 and $9,259,000 in the third quarter and
first nine months of 2000, respectively, compared to $3,114,000 and $8,137,000
in the third quarter and first nine months of 1999, respectively. The increase
between the nine month periods was primarily due to the Series D, E, and F
Senior Notes totaling $138 million being outstanding for the entire 2000 period,
whereas in 1999 they were only outstanding for 7-1/2 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. Selling, general and
administrative expenses for the third quarter of 2000 included $760,000 related
to these payments.
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 nine months ended September 30,
1999.
The Company's effective income tax rate was 35% and 40% for the third
quarter and first nine months of 2000, respectively, compared to 51% and 42% for
the third quarter and first nine months of 1999, respectively. The third quarter
1999 effective income tax rate was high due to the estimated effective tax rate
for the year increasing to 38.7% from 37.7% as estimated at June 30, 1999 as a
result of Canadian operations reflecting a larger percentage of pre-tax profits
than had been originally estimated. Income tax expense in the first nine 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 nine 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 38.7% 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 rate. The lower estimated
tax rate on 2000 income from core operations 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 $68,395,000 and $55,395,000 for
the nine months ended September 30, 2000 and 1999, respectively. The increase
from 1999 to 2000 was primarily attributable to an increase in cash received
<PAGE>
from customers resulting from the increase in revenue partially offset by an
increase in interest expense and taxes 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 November 10, 2000 was $28.5
million bearing an average interest rate of 7.375%.
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 November 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 November 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 November 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 November 10, 2000, the Company received
$5,282,000 from the exercise of common stock purchase warrants and options. In
connection with these exercises, the Company will also receive approximately
$1,331,000 in tax savings.
In August 2000, the Company's wholly-owned subsidiary, DDD Energy, Inc.,
sold its working interest in eight producing oil and gas wells and associated
leasehold for proceeds of $16.9 million or approximately $12.8 million, net of
revenues and costs. The Company temporarily used these funds to reduce its
borrowings under its line of credit.
<PAGE>
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. Following the resignation of DDD Energy's former president in May,
the Company has been 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.
During September and October 2000, the Company repurchased 219,200 shares
of its common stock in the open market at a cost of $3,246,000, 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 November 10, 2000, the Company has repurchased a total of
898,900 shares of its common stock at a cost of $9,521,000 since 1997 under this
plan.
During the first nine months of 2000, gross seismic data bank additions and
capitalized oil and gas exploration and development costs amounted to
$54,704,000 and $10,676,000 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 sale of oil and gas properties, and
proceeds from the exercise of common stock purchase warrants and options.
Currently, the Company anticipates capital expenditures to total
approximately $16 million for seismic data bank additions and approximately $4
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, 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 and debt
repayments. 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
------------------------------------------------
Statements contained in this Report about Seitel's future outlook,
prospects and plans, including those that express belief, expectation, estimates
or intentions, as well as those that are not statements of historical fact, are
forward looking. These statements represent Seitel's reasonable belief and are
based on Seitel's current expectations and assumptions with respect to future
events. While Seitel believes its expectations and assumptions are reasonable,
they involve risks and uncertainties beyond Seitel's control that could cause
the actual results or outcome to differ materially from the expected results or
<PAGE>
outcome. Such factors include any significant change in the oil and gas business
or the economy generally, 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, as well as the risk factors discussed in Seitel's other filings with
the Securities and Exchange Commission, including its most recent Annual Report
on Form 10-K, a copy of which may be obtained from the Company without charge.
The forward-looking statements contained in this Report speak only as of the
date hereof, and Seitel disclaims any duty to update these 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, 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 nine months of 2000, the Company recognized net hedging
losses of $1,692,000. As of September 30, 2000, the Company did not have any
open commodity price hedges.
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
September 30, 2000, the Company had open forward exchange contracts totaling $7
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
October 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.
<PAGE>
PART II - OTHER INFORMATION
Items 1., 2., 3. Not applicable.
----------------
Item 4. Submission of Matters to a Vote of Security Holders.
-------------------------------------------------------------
The Company's Annual Meeting of Stockholders was held on October 19, 2000.
Matters voted upon at the Annual Meeting, and the results of those votes are as
follows:
1. The election of nine directors to serve until the 2001 Annual Meeting.
Name No. of Votes For No. of Votes Withheld
--------------------- -------------------- -----------------------
Herbert M. Pearlman 20,954,798 912,529
Paul A. Frame 20,954,698 912,629
Debra D. Valice 20,954,696 912,631
Walter M. Craig, Jr. 20,881,298 986,029
William Lerner 20,954,598 912,729
John E. Stieglitz 20,954,598 912,729
Fred S. Zeidman 20,954,598 912,729
Item 5. Other Information.
--------------------------
A shareholder who wishes to make a proposal at the 2001 Annual Meeting of
Shareholders without complying with the requirements of Rule 14a-8 under the
Securities Exchange Act of 1934, as amended (and therefore without including the
proposal in the Company's proxy materials) should notify the Company's
Secretary, at the Company's principal executive offices, of that proposal by
December 31, 2000. If a shareholder fails to give that notice by that date, then
the persons named as proxies in the proxy cards solicited by the Company's Board
of Directors for that meeting will be entitled to vote the proxy cards held by
them regarding that proposal, if properly raised at the meeting, in their
discretion.
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits
10.1 Seitel, Inc. 2000 Stock Option Plan Agreement
(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: November 13, 2000 /s/ Paul A. Frame
--------------------------------
Paul A. Frame
President
Dated: November 13, 2000 /s/ Debra D. Valice
--------------------------------
Debra D. Valice
Chief Financial Officer
Dated: November 13, 2000 /s/ Marcia H. Kendrick
--------------------------------
Marcia H. Kendrick
Chief Accounting Officer
<PAGE>
EXHIBIT
INDEX
--------- ----------------------------------------------------------------------
Exhibit Title Page
Number
--------------------------------------------------------------------------------
10.1 Seitel, Inc. 2000 Stock Option Plan Agreement 21
