10-Q 1 0001.txt FORM 10-Q 2ND QUARTER 2000 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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 PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS SEITEL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts)
(Unaudited) June 30, December 31, 2000 1999 --------- --------- 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 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. SEITEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share amounts)
Three Months Ended June 30, --------------------------- 2000 1999 -------- -------- 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 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. SEITEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share amounts)
Six Months Ended June 30, --------------------------- 2000 1999 -------- -------- 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 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. SEITEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share amounts)
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 --------- ---------- ----- --------- --------- -------- ------- -------- ---------- 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) ========== ===== ========= ========= ======== ======= ======== ==========
The accompanying notes are an integral part of these consolidated financial statements. SEITEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Six Months Ended June 30, -------------------------- 2000 1999 -------- -------- 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 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. SEITEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited), continued (In thousands)
Six Months Ended June 30, --------------------------- 2000 1999 -------- -------- 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 $ -- ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 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):
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 2000 1999 2000 1999 ------- ------- ------- ------- 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) 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 ------- ------------------------- (1) 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.
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. 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):
Exploration and Total Seismic Production Segments -------- -------- -------- 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) 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) 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) 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) 79,203 14,125 93,328 Assets 365,473 163,988 529,461 (a) Includes other ancillary equipment.
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 2000 1999 2000 1999 ------- ------- ------- ------- 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 ======= ======= ======= =======
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 $63,462,000 in the first six months of 1999. In May 1999, the Company made a management decision to focus its marketing team on licensing existing data that would generate current cash flow. Management continued this decision to limit data creation in the first half of 2000, which was the primary reason for lower seismic revenue than in the first half of 1999. However, with the increase in demand for seismic data that the Company has experienced since mid-June, the Company has started to commit more capital to new data creation beginning in the third quarter of 2000. Net volume and price information for the Company's oil and gas production for the second quarters and first six months of 2000 and 1999 are summarized in the following table:
Quarter Ended Six Months Ended June 30, June 30, ---------------------------- ---------------------------- 2000 1999 2000 1999 --------- --------- --------- --------- Natural gas volumes (mmcf) 1,305 1,446 2,610 3,076 Average natural gas price ($/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
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. 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%. 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. 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 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. 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 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 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