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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For Fiscal Year Ended DECEMBER 31, 1996
-----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required] For the transition period
to .
------------ ------------
Commission File No. 0-14488
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SEITEL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0025431
- - -------------------------------- ----------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
50 Briar Hollow Lane, West 7th Floor
HOUSTON, TEXAS 77027
- - ------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (713) 627-1990
---------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
- - ---------------------------- ---------------------
Common Stock, Par Value $.01 New York
Securities registered pursuant to Section 12(g) of the Act:
NONE
--------------
(Title of Class)
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
-----
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 26, 1997 was approximately $357,851,804. For these purposes,
the term "affiliate" is deemed to mean officers and directors of the registrant.
On such date, the closing price of the Common Stock on the New York Stock
Exchange was $36.50 and there were a total of 10,384,932 shares of Common Stock
outstanding.
Documents Incorporated by Reference:
DOCUMENT PART
------------------------------------ -----
Definitive Proxy Statement for III
1997 Annual Stockholders Meeting
ITEM 1. BUSINESS
- - -----------------
GENERAL
- - -------
Seitel, Inc. (the "Company") is a leading provider of seismic data and
corollary geophysical technology used in petroleum exploration and production.
The Company sells its proprietary information-technology to petroleum companies
either for cash or selectively in exchange for working equity-interests in
exploration, development and ownership of natural gas and crude oil reserves.
See Note P to the Company's Consolidated Financial Statements for financial
information relating to industry segments.
SEISMIC OPERATIONS
- - ------------------
Since its inception in 1982, the Company has been engaged in the
development of a proprietary library of seismic data, created by both the
Company and others. The Company's seismic data library is owned and marketed by
Seitel Data, Ltd., a Texas limited partnership of which wholly-owned Seitel
subsidiaries constitute all of the limited and general partners. Seitel Data,
Ltd. markets the data library, which consists of both two-dimensional ("2D") and
three-dimensional ("3D") data, to oil and gas companies under license
agreements. Seismic surveys and the analysis of seismic data for the
identification and definition of underground geological structures are principal
techniques used in oil and gas exploration and development to determine the
existence and location of subsurface hydrocarbons.
In 1996, over 300 different petroleum companies entered into seismic data
license agreements with the Company. At December 31, 1996, the Company owned
approximately 880,000 linear miles of 2D and approximately 6,600 square miles of
3D seismic data which it maintained in its library, constituting the second
largest seismic data base marketed publicly in North America. While the majority
of the seismic surveys cover onshore and offshore the U.S. Gulf Coast, the
Company's data bases extend to virtually every major domestic exploration and
development region and 32 foreign countries.
The Company's marketing team of 17 seismic sales specialists markets data
from its library and the creation of new seismic surveys. The Company's
marketing philosophy is that seismic data, like most other products, must be
sold aggressively as opposed to waiting passively for customer purchases. The
marketing team monitors petroleum industry exploration and development
activities through close interaction with oil and gas companies on a daily basis
to maximize seismic sales opportunities.
The Company has a 27 member staff of geotechnical professionals who have in
excess of 500 years of collective geophysical experience. Together, the
marketing team and geotechnical professionals help clients evaluate their
respective seismic requirements, design data creation programs to meet market
demand, and supervise the reprocessing of data in the Company's library to
enhance future resales.
The Company strives to maximize its resales of seismic data, which require
minimal incremental cash outlays by the Company and, in turn, can generate both
strong profits and cash flow. In addition to aggressive marketing and periodic
data-reprocessing refinements, the Company supplements its existing seismic
library by the acquisition of additional data.
Through its wholly-owned subsidiary Eagle Geophysical, Inc., the Company
conducts advanced 3D land seismic crew operations. The Company operates three
1,850 channel state-of-the-art radio-telemetry systems, which the Company
believes to be among the largest and fastest real-time systems of their kind in
operation today. These systems, providing seismic recording capability totaling
5,550 channels, enable the Company to efficiently record complex 3D surveys in
the difficult marsh/swamp and transition-zone areas onshore the Gulf Coast where
the Company's data creation activities are concentrated. Most seismic recording
equipment use cables to transmit data and do not operate as efficiently in
wetland areas as telemetric systems, which use radio signals for data
transmission.
Three-dimensional seismic data provide a graphic geophysical depiction of
the earth's subsurface from two horizontal dimensions and one vertical
dimension, rendering a more detailed picture than 2D data, which present a
cross-sectional view from one vertical and one horizontal dimension. The more
comprehensive geophysical information provided by 3D surveys significantly
enhances an interpreter's ability to evaluate the probability of the existence
and location of subsurface hydrocarbons. The proper use of 3D surveys can
significantly increase drilling success rates and reduce the occurrence of
costly dry holes and, correspondingly, significantly lower exploration and
development finding costs. However, the cost to create 3D seismic data is
significantly more than the cost to create 2D seismic data, particularly for
onshore data. As a result, 2D data remain economically more efficient for
preliminary, broad-scale exploration evaluation and to determine the location
for 3D surveys. Also, the best way to design a 3D survey is from 2D data grids
of the respective area. The 3D surveys can then be used for more site-specific
analysis to maximize actual drilling potential.
The Company conducts onshore data creation activities in three ways. It
performs multiclient ("group-shoot") programs, under which several petroleum
companies share in the expense of a survey and thereby materially reduce their
respective cost of the survey. In a group-shoot survey, the Company retains
ownership of the data created and markets licenses to use the data both to the
group-shoot participants and subsequently to others who make selections after
the data are added to the Company's library. (Seismic data cannot be transferred
by a licensee to another party; each individual user must purchase a respective
license.) The Company also conducts proprietary creation programs for individual
petroleum companies, under which the Company receives revenue for creating a
seismic survey, the ownership of which is retained by the petroleum company
contracting for the survey.
Seismic surveys also are conducted for the Company's wholly-owned petroleum
exploration and production subsidiary, DDD Energy, Inc. ("DDD Energy"). The DDD
Energy 3D surveys are intended to assist participation in petroleum exploration
and development, whereby DDD Energy's ownership interest in any resultant
production will be accounted for as "oil and gas" revenues and reserves. Surveys
conducted for DDD Energy constitute intercompany transactions and the Company
does not record seismic revenue for those projects. To date, over 1,100 square
miles of advanced 3D seismic surveys have been conducted for DDD Energy and its
exploration partners. In excess of 425 square miles of 3D surveys are already
scheduled to be conducted in 1997 by the Company for DDD Energy and its
partners, and over 275 square miles of additional surveys are in the planning
stage.
The Company contracts with selected marine seismic companies to conduct
offshore 3D seismic data surveys due to the cost inherent in operating advanced
seismic vessels. The Company has a 19% ownership interest in Energy Research
International, a holding company owning two marine-seismic companies, which
provides the Company with access to offshore vessels. The Company's 3D marine
activities are concentrated on group-shoot programs in the Gulf of Mexico. The
Company's wholly-owned subsidiary, Seitel International, Inc., entered into a
50% joint-venture agreement to conduct three high-resolution 2D surveys,
totaling approximately 8,455 kilometers (in excess of 5,000 miles) in the Irish
sector of the Atlantic Ocean, designed for exploration lease-block sales by the
Irish government beginning in March 1997. The Company's extensive in-house
geophysical team designs all of the offshore surveys and supervises the
respective marine contractor utilized to shoot the actual survey.
The Company has developed fully-integrated 3D technology and operations,
which extend from its expansive 2D seismic library from which to best design the
parameters for 3D surveys, state-of-the-art land seismic recording systems and
crews specifically to conduct 3D surveys, a processing center and proprietary
computer technology coupled with extensive geophysical application expertise to
effectively interpret 3D data. The Company's processing and interpretation
technology and operations are utilized exclusively by DDD Energy to provide
optimum quality control and confidentiality for the exploration and production
programs in which DDD Energy participates.
OIL AND GAS EXPLORATION AND PRODUCTION OPERATIONS
- - -------------------------------------------------
The Company formed DDD Energy, Inc., a wholly-owned subsidiary, in March
1993 to participate directly in petroleum exploration, development and ownership
of hydrocarbon reserves through partnering relationships with oil and gas
companies, whereby the Company exchanges its proprietary seismic technology for
working interests. The Company's strategy is to combine its 3D and 2D seismic
resources and related geophysical technologies with the land position and
geology, engineering and drilling expertise of selected petroleum producers in
exploration and development programs. The Company believes that this combination
will result in higher drilling success rates, thereby allowing the Company to
participate in oil and gas exploration and development on a relatively low
cost/low risk basis, and to build an asset base of oil and gas reserves which
complement its seismic data library.
From inception, DDD Energy has entered into and maintained cost and
revenue-sharing relationships with more than 90 petroleum companies and, in
doing so, has received the benefit of these petroleum companies' land,
geological, engineering and drilling staffs. Approximately 350 qualified
exploration and development prospects have been identified, located primarily
onshore Texas and Louisiana, and also onshore Alabama, Mississippi and Arkansas.
DDD Energy's working interest in these prospects ranges from approximately 10%
to 50%.
Since inception, DDD Energy has participated in the drilling of 167 wells,
113 of which are commercially productive for a 68% success rate. Since the
beginning of 1994, the Company has conducted over 1,100 square miles of advanced
3D surveys, with more than 700 square miles of new surveys currently scheduled
to be conducted or in the planning stage, for DDD Energy and its partners. These
surveys cover more than 800,000 gross acres, in which DDD Energy averages more
than a 25% net working interest. The majority of the well locations pinpointed
by the surveys that have already been completed and interpreted should be
drilled during the next three years.
CUSTOMERS
- - ---------
During each of 1996, 1995 and 1994, the Company's seismic data customers
consisted of more than 300 oil and gas companies. No one customer accounted for
as much as 10% of the Company's revenues during the years 1996, 1995 or 1994. As
a result, the Company does not believe that the loss of any customer would have
a material adverse impact on its seismic business. The Company believes the size
of its customer base is due to its seismic technology and capabilities and the
increasing size of its data-library base.
COMPETITION
- - -----------
The creation and resale of seismic data are highly competitive in the
United States. There are a number of independent oil-service companies that
create and market seismic data, and numerous oil and gas companies create
seismic data and maintain their own seismic data banks. Some of the Company's
competitors have longer operating histories, greater financial resources and
larger sales volumes than the Company. However, the number of independent
seismic companies has decreased significantly during the last decade due to
difficult industry conditions. At the same time, oil and gas companies have
reduced their internal geophysical staffs and have out-sourced more for services
such as seismic data.
The Company believes it can compete favorably because of the expansiveness
of its data-library base, the expertise of its marketing staff, the technical
proficiency and exploration experience of its geotechnical staff and the
state-of-the-art technology of its seismic recording crews. These resources
enable the Company to provide high-quality service and to create and market
high-grade data.
In the exploration for and development of natural gas and crude oil
reserves, the Company believes it can participate effectively because of its
fully-integrated seismic resources and corollary geophysical expertise combined
with the geological and engineering experience and land positions of the
Company's petroleum company partners.
SEASONALITY AND TIMING FACTORS
- - ------------------------------
The Company's seismic data revenues are influenced by petroleum industry
capital expenditure budgets and spending patterns. Those budgets are not
necessarily spent in either equal or progressive increments during the year,
with spending patterns affected by individual petroleum company requirements as
well as industry-wide conditions. As a result, the Company's seismic data
revenues do not necessarily flow evenly or progressively on a sequential
quarterly basis during the year. In addition, certain weather-related events may
delay the Company's data creation operations during any given year.
The Company's oil and gas exploration and production operations also can be
impacted by certain weather-related events as well as by mechanical and
equipment problems and other factors, which may delay the hookup of successfully
completed wells and delay the resultant production revenues. Also, some
producing wells may be required periodically to go off line temporarily for
pipeline maintenance.
See Note Q to the Company's Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
EMPLOYEES
- - ---------
As of December 31, 1996, the Company and its subsidiaries had 109 full-time
employees and three employees who devote part of their time to the Company who
are also officers of other corporations. None of the Company's employees are
covered by collective bargaining agreements. Of these employees, 84 are related
to the seismic operations and 10 are related to the oil and gas operations. The
Company believes it has a favorable relationship with its employees. The Company
has employment contracts with five of its senior corporate executives.
OTHER
- - -----
The Company is not dependent on any particular raw materials, patents,
trademarks or copyrights for its business operations.
ITEM 2. PROPERTIES
- - -------------------
The Company's wholly-owned subsidiary Eagle Geophysical, Inc., owns three
1,850-channel radio-telemetry seismic data acquisition systems, providing
seismic recording capability totaling 5,550 channels, which are used in the
creation of 3D onshore seismic data.
The Company, through its wholly-owned subsidiary DDD Energy, participates
in oil and gas exploration and development efforts. The following table sets
forth the number of productive oil and gas wells (including producing wells and
wells capable of production) in which the Company owned an interest as of
December 31, 1996. All of the wells are operated by the Company's petroleum
company partners.
GROSS WELLS NET WELLS
----------- ---------
Oil 19 3.02
Gas 84 14.29
The following table sets forth the number of net wells drilled in the last
three fiscal years in which the Company participated.
Exploratory Development
------------------------------- --------------------------------
PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
---------- --- ----- ---------- --- -----
1996
- - ----
Texas 2.85 .90 3.75 2.91 - 2.91
Mississippi .69 2.48 3.17 - .15 .15
Louisiana .25 .26 .51 - - -
1995
- - ----
Texas 4.45 1.54 5.99 1.49 1.08 2.57
Alabama - .21 .21 - - -
Mississippi .51 .31 .82 - .60 .60
Louisiana .27 .96 1.23 .24 .24 .48
Arkansas - .12 .12 - - -
1994
- - ----
Texas 2.44 .94 3.38 1.74 .24 1.98
Alabama - - - - .05 .05
Mississippi .43 .31 .74 - - -
As of December 31, 1996, the Company was participating in the drilling of
four gross and 1.13 net wells.
The following table sets forth certain information regarding the Company's
developed and undeveloped lease acreage as of December 31, 1996. The table does
not include additional acreage which the Company may earn upon completion of
pending 3D seismic data projects.
Developed Acres Undeveloped Acres
---------------------------- ----------------------------
Gross Net Gross Net
------------ ------------- ------------- ------------
Texas 18,130 5,562 68,902 21,717
Louisiana 1,725 245 35,265 10,495
Alabama 160 5 1,516 270
Mississippi 3,080 993 27,826 16,567
Arkansas - - 3,560 445
------------ ------------- ------------- ------------
Total 23,095 6,805 137,069 49,494
============ ============= ============= ============
The following table describes for each of the last three fiscal years,
crude oil (including condensate and natural gas liquids) and natural gas
production for the Company, average production costs and average sales prices.
All such production comes from the U.S. Gulf Coast region. The Company has not
filed any different estimates of its December 31, 1996 reserves with any federal
agencies.
Net Production Average Sales Price
--------------------- ---------------------
Year Ended Oil Gas Average Oil Gas
DECEMBER 31, (MBBLS) (MMCF) Production (BBLS) (MCF)
------------ ------- ------ ------------- ------ -----
1996 363 4,902 $.44 $18.52 $2.28
1995 193 1,170 .66 13.85 1.55
1994 54 268 .53 12.32 1.76
The amounts in 1996 include 84,000 barrels and 2,094 million cubic feet
delivered under the terms of a volumetric production payment agreement effective
July 1, 1996 at an average price of $14.91 per barrel and $2.15 per mcf. For
estimates of the Company's net proved and proved developed oil and gas reserves
as of December 31, 1996, see Note R to the Company's Consolidated Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS
- - --------------------------
On May 25, 1995, Seitel Geophysical, Inc. ("SGI"), a wholly-owned
subsidiary of the Company, filed suit in United States District Court for the
Eastern District of Louisiana against Greenhill Petroleum Corporation
("Greenhill") for breach of contract. SGI sought to recover approximately $1.4
million owed by Greenhill to SGI for seismic data acquisition services provided
to Greenhill by SGI in 1994 in connection with a 3D seismic data shoot in
southern Louisiana. Greenhill generally denied SGI's allegations and asserted
counter-claims against SGI. Prior to SGI bringing the suit against Greenhill,
Greenhill had already paid SGI in excess of $7 million under the contract, and
SGI had provided the seismic data acquired under the contract to Greenhill. This
lawsuit was tried in late May, 1996, and judgment was entered on June 10, 1996
in favor of SGI for damages of approximately $940,000, including legal fees,
expenses, and pre-judgment interest. The trial court denied all of Greenhill's
counter-claims against SGI. Greenhill is appealing this judgment. Post-judgment
interest of 5.62%, which is based on the rate of one year Treasury Bills
immediately prior to the entry of the judgment, is accruing on the full amount
of the judgment. While the outcome of this appeal cannot be predicted with
certainty, the Company believes that the trial court's award will be upheld.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - ------------------------------------------------------------
NONE
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
- - ---------------------------------------------------------
The Company's Common Stock is traded on the New York Stock Exchange. The
following table sets forth the high and low sales prices for the Common Stock
for 1996 and 1995 as reported by the New York Stock Exchange.
1996 1995
------------------------------- -------------------------------
High Low High Low
------------- -------------- ------------- -------------
First Quarter 35-1/2 23-1/4 33-1/2 18-7/8
Second Quarter 28-5/8 25 34-3/4 27
Third Quarter 37-3/4 26-1/4 31-1/4 23-7/8
Fourth Quarter 43-3/4 36-1/4 35-1/2 23-3/4
On March 26, 1997, the closing price for the Common Stock was $36.50. To
the best of the Company's knowledge, there are approximately 1,272 record
holders of the Company's Common Stock as of March 26, 1997.
DIVIDEND POLICY
- - ---------------
The Company did not pay cash dividends during 1995 or 1996, and it intends
to retain future earnings in order to provide funds for use in the operation and
expansion of its business. Because the payment of dividends is dependent upon
earnings, capital requirements, financial conditions, any required consents of
lenders and other factors, there is no assurance that dividends, whether in the
form of stock or cash, will be paid in the future.
On July 3, 1996, the Company entered into an agreement with Olivera
Limited, Dormera Limited, and Balmedie Limited ("Sellers"), shareholders of
Energy Research International ("ERI"), whereby such Sellers sold an aggregate of
50,000 Ordinary Shares of ERI, comprising 50% of the outstanding shares of ERI,
to the Company in exchange for the Company issuing an aggregate of 132,075
shares of its Common Stock, par value $0.01 per share ("Company Stock"), to the
Sellers. Each Seller received one-third of the Company stock. ERI conducts
offshore seismic data acquisition services through its operating subsidiaries.
The issuance of the Company stock was made by the Company without registration
pursuant to Section 4(2) of the Securities Act of 1993, as amended, and
Regulation D promulgated thereunder, as a transaction by the Company not
involving any public offering. The resale of the Company Stock by the Sellers
was subsequently registered by the Company on a registration statement on Form
S-3, declared effective by the Securities and Exchange Commission on August 6,
1996.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (in thousands,
except per share data)
- - -------------------------------------------------------------
The following table summarizes certain historical consolidated financial
data of the Company and is qualified in its entirety by the more detailed
consolidated financial statements and notes thereto included in Item 8 hereof.
Year Ended December 31,
Statement of Operations Data: 1996 1995 1994 1993 1992
--------- -------- --------- -------- --------
Revenue $ 106,002 $ 74,439 $ 70,902 $ 43,456 $ 28,354
Expenses and costs:
Depreciation, depletion and
amortization 39,249 26,872 27,181 19,852 13,486
Cost of sales 19,402 13,071 10,499 3,202 506
Selling, general and administrative 19,165 15,393 14,672 9,132 6,412
Net interest expense 2,900 3,078 3,198 2,126 1,470
--------- -------- --------- -------- --------
Total expenses and costs 80,716 58,414 55,550 34,312 21,874
Equity in loss of affiliate (186) - - - -
--------- -------- --------- -------- --------
Income from continuing operations
before provision for income
taxes, extraordinary item and change
in accounting principle 25,100 16,025 15,352 9,144 6,480
Provision for income taxes 8,863 5,898 5,681 3,328 2,134
--------- -------- --------- -------- --------
Income from continuing operations
before extraordinary item and
change in accounting principle 16,237 10,127 9,671 5,816 4,346
Loss from discontinued operations,
net of tax (988) (1,196) (52) (99) -
Loss on disposal of discontinued
operations, net of tax - (252) - - -
--------- -------- --------- -------- --------
Income before extraordinary item
and change in accounting principle 15,249 8,679 9,619 5,717 4,346
Extraordinary charge on early
extinguishment of debt, net of tax - - (304) - -
Cumulative effect on prior years of
change in accounting principle - - - - 204
--------- -------- --------- -------- --------
Net income $ 15,249 $ 8,679 $ 9,315 $ 5,717 $ 4,550
========= ======== ========= ======== ========
Year Ended December 31,
-----------------------------------------------------
Statement of Operations Data: 1996 1995 1994 1993 1992
--------- -------- -------- -------- --------
Earnings per share:
Primary:
Income from continuing operations
before extraordinary item and
change in accounting principle $ 1.58 $ 1.03 $ 1.24 $ .93 $ .76
Discontinued operations (.10) (.15) (.01) (.01) -
Extraordinary item - - (.04) - -
Change in accounting principle - - - - .04
--------- -------- -------- -------- --------
Net income $ 1.48 $ .88 $ 1.19 $ .92 $ .80
========= ======== ======== ======== ========
Assuming full dilution:
Income from continuing operations
before extraordinary item and
change in accounting principle $ 1.55 $ .99 $ 1.11 $ .83 $ .72
Discontinued operations (.09) (.14) (.01) (.01) -
Extraordinary item - - (.03) - -
Change in accounting principle - - - - .03
--------- -------- -------- -------- --------
Net income $ 1.46 $ .85 $ 1.07 $ .82 $ .75
========= ======== ======== ======== ========
Weighted average shares
- Primary 10,289 9,872 7,800 6,893 5,713
- Assuming full dilution 10,476 10,358 9,001 8,279 7,645
Cash dividends per share $ - $ - $ - $ - $ .05
-----------------------------------------------------------------
As of December 31,
-----------------------------------------------------------------
Balance Sheet Data: 1996 1995 1994 1993 1992
----------- ----------- ----------- ---------- ----------
Data bank, net $ 126,998 $ 105,369 $ 95,801 $ 58,583 $ 55,278
Oil and gas properties, net 86,572 42,424 21,389 4,811 -
Property and equipment, net 14,022 10,126 11,035 6,985 698
Total assets 294,679 209,567 166,769 92,554 73,136
Total debt 84,025 57,560 11,839 31,866 26,746
Stockholders' equity 155,641 120,378 101,329 41,583 35,643
Stockholders' equity per common share
outstanding at December 31 $ 15.02 $ 12.76 $ 11.48 $ 6.95 $ 5.96
Common shares outstanding at
December 31 10,362 9,437 8,826 5,987 5,976
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- - ---------------------------------------------------------------------
INTRODUCTION
- - ------------
The following table sets forth for the periods indicated (i) the percentage
which certain items in the financial statements of the Company bear to revenues
and (ii) the percent change in the dollar amount of such items from period to
period.
Percentage of Percentage of
Total Revenues Increase (Decrease)
Year Ended December 31, Years Ended December 31,
---------------------------------- -----------------------------------
1996 1995
vs. vs.
1996 1995 1994 1995 1994
--------- --------- --------- ---------------- ---------------
Revenue:
Seismic 83% 94% 98% 26% *
Oil and Gas 17% 6% 2% 280% 299%
--------- --------- ---------
Total revenue 100% 100% 100% 42% 5%
Expenses and costs:
Depreciation, depletion and
amortization 37% 36% 38% 46% (1%)
Cost of sales 18% 17% 15% 48% 24%
Selling, general and administrative 18% 21% 21% 25% 5%
Net interest 3% 4% 4% (6%) (4%)
--------- --------- ---------
Total expenses and costs 76% 78% 78% 38% 5%
Equity in loss of affiliate * - - n/a -
Provision for income taxes 9% 8% 8% 50% 4%
--------- --------- ---------
Income from continuing operations 15% 14% 14% 60% 5%
========= ========= =========
* Less than 1%
RESULTS OF OPERATIONS
- - ---------------------
Total revenue was $106,002,000, 74,439,000 and $70,902,000 in 1996, 1995
and 1994, respectively, representing increases of 42% from 1995 to 1996 and 5%
from 1994 to 1995. Revenue primarily consists of revenue generated from the
seismic business and oil and gas production.
Seismic revenue was $87,747,000, $69,598,000 and $69,579,000 during 1996,
1995, and 1994, respectively. The increase of $18,149,000 in seismic revenue
from 1995 to 1996 is primarily attributable to an increase in demand for
three-dimensional seismic data resulting in an increase in licensing of data
from the Company's data library and proprietary data acquisition performed for
non-affiliated parties by the Company's crew subsidiary. The slight increase in
seismic revenue between 1995 and 1994 primarily resulted from an increase in
revenue generated from the licensing of seismic data currently in the Company's
library, which was offset by a decrease in revenue generated from the creation
of new seismic data. During 1995, the Company's focus was more on generating
revenue from data that had been recently added to the library (both onshore and
offshore 3D seismic data) than on the creation of new data. The Company believes
the demand for its seismic data remains strong due to several factors: large
integrated oil and gas companies have reduced internal seismic data crew staffs
and are using outside sources to provide more of these services; the majority of
the Company's seismic data is located in the Gulf Coast region, which continues
to be of particular interest to the oil and gas industry; and the high quality
of the Company's seismic data. Additionally, management believes that the
Company's 2D data library will continue to generate significant revenue because
2D data is less expensive than 3D and 2D data is the most cost-efficient means
to preliminarily identify exploration and development leads, which are then best
evaluated with 3D data.
Oil and gas revenue was $18,255,000, $4,806,000 and $1,204,000 during 1996,
1995 and 1994, respectively. The increases in oil and gas revenue are primarily
due to higher production resulting from more wells being on line in 1995 and
1996 and increased revenue interest in certain wells. The first year of oil and
gas operations for the Company was 1993. Since then, the Company has steadily
increased its exploration and development efforts resulting in the number of
wells producing as of December 31, 1994 to increase from 23 to 68 at December
31, 1995 and to 92 at December 31, 1996. Net production of oil and gas has
increased from 54,000 barrels and 268 million cubic feet ("mmcf") for the year
ended December 31, 1994, to 193,000 barrels and 1,170 mmcf for the year ended
December 31, 1995, and to 363,000 barrels and 4,902 mmcf for the year ended
December 31, 1996. Additionally, average oil prices increased from $12.32 per
barrel in 1994 to $13.85 per barrel in 1995 and to $18.52 per barrel in 1996.
Average gas prices were $1.76 and $1.55 per mcf in 1994 and 1995, respectively,
and increased to $2.28 per mcf in 1996.
Depreciation, depletion and amortization consist primarily of data bank
amortization. Data bank amortization amounted to $30,477,000, $23,852,000 and
$25,777,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
As a percentage of revenue from licensing seismic data, data bank amortization
was 47%, 45% and 46% for 1996, 1995 and 1994, respectively. These changes
between years are primarily due to the mix of sales of 2D and 3D data amortized
at varying percentages based on each data program's current and expected future
revenue stream. The costs of the Company's proprietary seismic data are
amortized for each project in the proportion that its revenue for a period
relates to management's estimate of its ultimate revenues. Revenue is expected
to be more evenly received over the lives of existing seismic data libraries
purchased by the Company. Accordingly, the Company amortizes the cash invested
in purchases of existing seismic data libraries evenly over ten years.
Since inception, management has established guidelines regarding its annual
charge for amortization. Under these guidelines, 90% of the cost incurred in the
creation of proprietary seismic data is amortized within five years of inception
for 2D seismic data and within seven years of inception for 3D data, and the
final 10% is amortized on a straight-line basis over fifteen years. Under these
guidelines, costs of existing seismic data libraries purchased by the Company
are fully amortized within ten years from date of purchase. On a periodic basis,
the carrying value of seismic data is compared to its estimated future revenue
and, if appropriate, is reduced to its estimated net realizable value.
Trends in the Company's (and its industry's) seismic revenue are evaluated
and results are used in estimating future revenue expected to be received on its
seismic data. Pricing of seismic data is significant when it indicates a
revision to estimated future revenue. During periods of downturn, the Company
may reduce its estimates of future revenue, causing the amortization rate to
rise and liquidity and operating results to decline. If the Company perceives an
impairment in value due to reduced, or a lack of, estimated future revenue, a
write-down of the asset is recognized. In periods of upturn, the opposite may
occur, except, however, that prior write-downs are not reversed. Management
believes that the economic outlook for the Company is stable and the possibility
for significant improvement exists.
Cost of sales consists of expenses associated with the acquisition of
seismic data for non-affiliated parties, seismic resale support services, and
oil and gas production. The increase in cost of sales from $10,499,000 in 1994
to $13,071,000 in 1995 and to $19,402,000 in 1996 is due to the corresponding
increase in revenue from these areas because of their continued growth. Revenues
from these areas increased from $14,033,000 in 1994 to $19,773,000 in 1995 to
$39,534,000 in 1996. Gross profit margin related to the acquisition of seismic
data for non-affiliated parties was 21%, 22% and 20% for 1996, 1995 and 1994,
respectively. Gross profit margin related to oil and gas production (revenue
less production costs) was 83%, 67% and 72% for 1996, 1995 and 1994,
respectively.
The Company's selling, general and administrative expenses increased from
$14,672,000 in 1994 and $15,393,000 in 1995 to $19,165,000 in 1996. The increase
for each year was primarily a result of variable expenses related to the
increased volume of business. As a percentage of total revenue, these expenses
were 21% in 1994 and 1995 and decreased to 18% in 1996. The decrease in 1996 is
primarily due to ongoing cost reduction programs.
The Company's interest expense was $3,455,000 in 1994, $3,407,000 in 1995
and $4,063,000 in 1996. The slight decrease in interest expense from 1994 to
1995 resulted from less interest expense incurred on the Company's 9%
convertible debentures due to the conversions and exchanges into common stock,
offset by increased interest expense being incurred primarily on amounts owed to
a seismic acquisition contractor. The increase in interest expense from 1995 to
1996 was primarily due to interest expense incurred on the Company's Senior
Notes; $52.5 million was outstanding during all of 1996 and an additional $22.5
million was outstanding for approximately nine months of 1996.
Interest income increased from $257,000 in 1994 and $329,000 in 1995 to
$1,163,000 in 1996. The increase in 1996 was primarily attributable to interest
earned on the investment of increased cash balances.
On July 3, 1996, the Company acquired a 50% ownership interest in Energy
Research International ("ERI"), a holding company which wholly owns two marine
seismic companies, Horizon Exploration Limited and Horizon Seismic Inc. During
1996, the Company recognized a net loss from its interest in ERI of $186,000,
which excludes profits earned by ERI on the work performed for the Company. In
the fourth quarter of 1996, the Company reduced its ownership interest in ERI to
19%. Since then, the Company has not recorded any portion of ERI's income or
loss in the Company's consolidated financial statements. This investment
provides the Company with greater access to offshore vessels to better meet the
demand for new marine seismic data.
On March 22, 1996, the Company's Board of Directors unanimously adopted a
plan of disposal to discontinue the Company's gas marketing operations, the
final disposal and sale of which was completed during the third quarter of 1996.
Accordingly, the Company's consolidated financial statements present the gas
marketing operations as discontinued operations for all periods presented. The
Company decided to refocus and concentrate on its higher margin seismic
technology operations and related petroleum exploration and production
operations in order to maximize profitability and growth opportunities. A loss
from discontinued operations of $1,196,000, which is net of an income tax
benefit of $703,000, was recorded as of December 31, 1995. During 1996, an
additional loss from discontinued operations was recorded totaling $988,000,
which is net of an income tax benefit of $580,000. The additional loss resulted
from changes in market prices to purchase gas supply. Such loss represented the
final charge related to the discontinued operations. The loss on disposal of
discontinued operations recorded as of December 31, 1995, was $252,000, which is
net of an income tax benefit of $148,000, and included costs such as severance
benefits and personnel costs to continue to honor the Company's obligations
until the gas marketing contracts were transferred or terminated.
In October 1994, the company called for redemption of its 12-1/2%
subordinated debentures due 1999 totaling $3,725,000. As a result, the Company
recorded an extraordinary charge of $304,000, net of a $163,000 income tax
benefit, associated with the early extinguishment of indebtedness, which has
been reflected as an extraordinary item for the year ended December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
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 $8.333 million beginning December 30, 1999.
The Series B and Series C Notes mature on December 30, 2002, and require
combined annual principal payments of $10 million beginning December 30, 1998.
Interest on all series of the notes is payable semi-annually on June 30 and
December 30. The Company used the majority of the proceeds of the Series A and
Series B Notes to repay amounts outstanding under its $25 million revolving line
of credit, amounts outstanding under a wholly-owned subsidiary's $75 million
reducing revolving line of credit, and amounts owed to a seismic contractor. The
proceeds of the Series C Notes are being used primarily to fund petroleum
exploration and development activities of its wholly-owned subsidiary and for
other working capital or general corporate purposes.
The Company filed a registration statement on Form S-3 (the "Shelf
Registration Statement") in June 1994 to offer from time to time in one or more
series (i) unsecured debt securities, which may be senior or subordinated, (ii)
preferred stock, par value $0.01 per share, and (iii) common stock, par value
$.01 per share, or any combination of the foregoing, at an aggregate initial
offering price not to exceed $75,000,000. The Shelf Registration Statement was
declared effective by the Securities and Exchange Commission on June 30, 1994.
In August 1994, the Company completed a public offering of 1,061,200 shares of
its common stock priced at $32 per share pursuant to the Shelf Registration
Statement. The net proceeds from the offering (after underwriting commission and
offering expenses) totaled $31,917,000. After this sale of common stock at an
initial aggregate offering price of $33,958,400, the Company may offer
additional securities in the future for up to an aggregate initial offering
price of $41,041,600 pursuant to the Shelf Registration Statement.
On July 22, 1996, the Company entered into an agreement with The First
National Bank of Chicago for a $25,000,000 unsecured revolving line of credit
facility. The facility bears interest at a rate determined by the ratio of the
Company's debt to cash flow from operations. Pursuant to the interest rate
pricing structure, funds can currently be borrowed at LIBOR plus 3/4%, the
bank's prevailing prime rate, or the sum of the Federal Funds effective rate for
such day plus 1/2%. The facility matures on July 22, 1999. As of March 26, 1997,
the balance outstanding on the revolving line of credit amounted to $3,000,000
bearing an interest rate of 6.125% The Company has received a commitment from
its lenders to increase its revolving line of credit facility to $50,000,000,
subject to execution of formal loan documents to evidence this increase.
On February 6, 1997, a wholly-owned subsidiary of the Company entered into
a commitment to obtain two term loans aggregating $7,564,000 for the purchase of
a third 3D seismic recording system and other related equipment. The first loan
will have a principal amount of $558,000, will be for a term of three years and
will bear interest at the rate of 1.48% above the two year U.S. treasury yield.
The second loan will have a principal amount of $7,006,000, will be for a term
of five years and will bear interest at the rate of 1.58% above the three year
U.S. treasury yield. Interim advances totaling $7,564,000 at March 26, 1997 have
been made and bear interest at the rate of LIBOR plus 1.30%.
On July 9, 1996, a wholly-owned subsidiary of the Company obtained two term
loans aggregating $7,264,000 for the purchase of land and marine seismic
equipment which secures the debt. The first term loan has a principal amount of
$5,902,000, is for a term of five years and bears interest at the rate of 8%.
Monthly principal and interest payments total $120,000. The balance outstanding
on this loan at March 26, 1997 was $5,245,000. The second term loan has a
principal amount of $1,362,000, is for a term of three years and bears interest
at the rate of 8.06%. Monthly principal and interest payments on the second term
loan total $43,000. The balance outstanding on this loan at March 26, 1997 was
$1,122,000. The majority of this equipment is under a five year rental agreement
expiring June 30, 2001, whereby the Company receives $138,000 per month.
From 1993 to March 1996, the Company and two of its wholly-owned
subsidiaries obtained four separate term loans totaling $5,449,000, three of
which have a three year term and one which has a five year term. Two of the
loans bear interest at the rate of 8.413%, one at the rate of 7.61% and one at
the rate of 7.52%. The proceeds were used for the purchase of certain property
and equipment which secures the debt. Monthly principal and interest payments
total approximately $121,000. The balance outstanding on the loans at March 26,
1997, was $1,980,000.
In June 1996, a wholly-owned subsidiary of the Company sold a volumetric
production payment for $19 million to certain limited partnerships. Under the
terms of the production payment agreements, the Company conveyed a mineral
property interest of approximately 7.6 billion cubic feet of certain natural gas
and approximately 363,000 barrels of other hydrocarbons to the purchasers. The
Company retains responsibility for its working interest share of the cost of
operations. The proceeds of the sale were applied toward the acquisition cost of
certain oil and gas properties. The Company accounted for the proceeds received
in the transaction as deferred revenue which will be amortized into revenue and
income as natural gas and other hydrocarbons are produced and delivered during
the term of the volumetric production payment agreements.
During 1994 and 1995, the Company entered into three capital leases which
relate to the purchase of a 3D seismic recording system and a seismic data
processing center. These lease agreements are for terms of three to five years.
Monthly principal and interest payments total approximately $125,000. The
balance outstanding under these capital lease obligations was $2,130,000 at
March 26, 1997.
During 1996 and 1995, the Company received $11,182,000 and $6,942,000,
respectively, from the exercise of common stock purchase warrants and options
and the Company's 401(k) stock purchases. In connection with the option and
warrant exercises in 1996 and 1995, the Company also received $3,204,000 and
$1,900,000, respectively, in tax savings. From January 1, 1997, through March
26, 1997, the Company received $247,000 from the exercise of common stock
purchase warrants and options and the Company's 401(k) stock purchases.
In February 1996, the Company called for the March 31, 1996 redemption of
its 9% convertible subordinated debentures, thereby eliminating future interest
and sinking fund payments. All remaining outstanding debentures converted to
common stock.
During 1996, gross seismic data bank additions and capitalized oil and gas
exploration and development costs amounted to $52,143,000 and $51,361,000,
respectively. These capital expenditures, as well as taxes, interest expenses,
cost of sales and general and administrative expenses, were funded by
operations, proceeds received from the exercise of common stock purchase
warrants and options combined with tax savings received on the exercise of the
warrants and options, proceeds from the private placement described above, and
proceeds from the sale of the volumetric production payment described above.
Acquisitions of geophysical equipment and other property and equipment were
funded partially by cash from operations and the remainder through capital lease
financing and term loans.
Currently, the Company anticipates capital expenditures for 1997 to total
approximately $72 million. Such expenditures include approximately $46 million
for the creation of proprietary seismic data, and approximately $26 million for
oil and gas exploration and development efforts. 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 1997
capital expenditures, along with expenditures for operating and general and
administrative expenses. Additionally, the Company could arrange for additional
debt or equity financing during 1997; however, there can be no assurance that
the Company would be able to accomplish any such debt or equity financing on
terms satisfactory to it.
IMPACT OF INFLATION AND CHANGING PRICES
- - ---------------------------------------
The general availability of seismic equipment and crews and the level of
exploration activity in the oil and gas industry directly affect the cost of
creating seismic data. The pricing of the Company's products and services is
primarily a function of these factors. For these reasons, the Company does not
believe inflationary trends have had any significant impact on its financial
operating results during the three years ended December 31, 1996.
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
- - ------------------------------------------------
This Annual Report on Form 10-K includes forward looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Although the Company believes that its
expectations are based on reasonable assumptions, it can give no assurance that
its goals will be achieved. Important factors that could cause actual results to
differ materially from those in the forward looking statements herein include,
but are not limited to, changes in the exploration budgets of the Company's
seismic data and related services customers, actual customer demand for the
Company's seismic data and related services, the extent of the Company's success
in acquiring oil and gas properties and in discovering, developing and producing
reserves, the timing and extent of changes in commodity prices for natural gas,
crude oil and condensate and natural gas liquids and conditions in the capital
markets and equity markets during the periods covered by the forward looking
statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- - ----------------------------------------------------
The financial statements and financial statement schedules required by this
Item are set forth at the pages indicated in ITEM 14(a) (1) and (2) below.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- - -------------------------------------------------------------
NONE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- - -----------------------------------------------------------
The information required to be set forth in this Item is incorporated by
reference to a similarly titled heading in the Company's definitive proxy
statement relating to the 1997 annual meeting of its stockholders to be filed
with the Securities and Exchange Commission not later than 120 days after the
end of the fiscal year covered by this Form 10-K (hereinafter the "Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
- - -------------------------------
The information required to be set forth in this Item is incorporated by
reference to a similarly titled heading in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
- - ---------------------------------------------------------------
The information required to be set forth in this Item is incorporated by
reference to a similarly titled heading in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- - -------------------------------------------------------
The information required to be set forth in this Item is incorporated by
reference to a similarly titled heading in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
- - ----------------------------------------------------------------
(a) DOCUMENTS FILED AS PART OF THIS REPORT PAGE
(1) Financial Statements:
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of
December 31, 1996 and 1995 F-2
Consolidated Statements of Operations
for the years ended December 31,
1996, 1995, and 1994 F-4
Consolidated Statements of Stockholders'
Equity for the years ended
December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows
for the years ended December 31,
1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-8
(2) All schedules are omitted because they are not applicable or
the required information is shown in the financial
statements or the notes to the financial statements.
(3) Exhibits:
3.1 Certificate of Incorporation of the Company filed May 7,
1982 and Amendment to Certificate of Incorporation filed
April 25, 1984 (1)
3.2 Amendment to Certificate of Incorporation filed August 4,
1987 (3)
3.3 Amendment to Certificate of Incorporation filed January 18,
1989 (4)
3.4 Amendment to Certificate of Incorporation filed July 13,
1989 (5)
3.5 Amendment to Certificate of Incorporation filed August 3,
1993 (12)
3.6 By-Laws of the Company (1)
3.7 Corporate Resolution reflecting an Amendment to the By-Laws
of the Company adopted January 6, 1989 (3)
3.8 Corporate Resolution reflecting an Amendment to the By-Laws
of the Company adopted May 19, 1986 (5)
(3) Exhibits, continued:
4.1 Specimen of Common Stock Certificate (1)
4.2 Form of Warrant Certificate granted to employees of the
Company in February 1990 (5)
4.3 Form of Warrant Certificate granted to certain employees and
one Director of the Company in December 1990 and expiring in
December 1997 (8)
4.4 Form of Warrant Certificate granted to certain employees and
one Director of the Company in December 1990 and expiring in
December 2000 (8)
4.5 Indenture of Trust between the Company and United States
Trust Company of New York relating to Convertible
Subordinated Debentures due December 31, 2001, including
Form of such Debenture (9)
4.6 Form of Underwriter's Warrant Certificate (9)
4.7 Form of Promissory Note for Employee Stock Purchase dated
July 21, 1992 (11)
4.8 Form of Subscription Agreement for Employee Stock Purchase
dated July 21, 1992 (11)
4.9 Form of Pledge for Employee Stock Purchase dated July 21,
1992 (11)
4.10 Form of Warrant Certificate granted under the 1994 Warrant
Plans (15)
4.11 Form of Warrant Certificate granted to certain Debenture
holders (16)
4.12 Form of Warrant Certificate granted under the 1995 Warrant
Reload Plan (19)
10.1 Incentive Stock Option Plan of the Company (1)
10.2 Non-Qualified Stock Option Plan of the Company (1)
10.3 1993 Incentive Stock Option Plan of the Company (12)
10.4 Amendment No. 1 to the Seitel, Inc. 1993 Incentive Stock
Option Plan (18)
10.5 Statement of Amendments effective November 29, 1995, to the
Seitel, Inc. 1993 Incentive Stock Option Plan (21)
10.6 Statement of Amendments effective April 22, 1996, to the
Seitel, Inc. 1993 Incentive Stock Option Plan (21)
10.7 Amendment to the Seitel, Inc. 1993 Incentive Stock Option
Plan effective December 31, 1996*
10.8 Non-Employee Directors' Stock Option Plan of the Company
(14)
10.9 Amendment to the Seitel, Inc. Non-Employee Directors' Stock
Option Plan effective December 31, 1996*
10.10 Seitel, Inc. Non-Employee Directors' Deferred Compensation
Plan (21)
10.11 Seitel, Inc. Amended and Restated 1995 Warrant Reload Plan
(22)
10.12 Amendment to the Seitel, Inc. Amended and Restated 1995
Warrant Reload Plan effective December 31, 1996*
(3) Exhibits, continued:
10.13 Memorandum of Understanding between the Company and
Triangle Geophysical Company dated as of June 7, 1984 (1)
10.14 Lease Agreement by and between the Company and Commonwealth
Computer Advisors, Inc. (2)
10.15 The Company's 401(k) Plan adopted February 27, 1995 (15)
10.16 Executive Services Agreement dated April 3, 1990 between
the Company and Helm Resources, Inc. (7)
10.17 Employment Agreement effective as of January 1, 1991
between the Company and Paul A. Frame, Jr. (10)
10.18 Employment Agreement effective as of January 1, 1991
between the Company and Horace A. Calvert (10)
10.19 Employment Agreement effective as of January 1, 1991
between the Company and Herbert M. Pearlman (10)
10.20 Employment Agreement effective as of January 1, 1991
between the Company and David S. Lawi (10)
10.21 Employment Agreement effective as of January 1, 1993
between the Company and Debra D. Valice (13)
10.22 Joint Venture Agreement dated April 5, 1990 by and between
Seitel Offshore Corp., a wholly-owned subsidiary of the
Company, and Digicon Data Inc., a wholly-owned subsidiary of
Digicon Geophysical Corp. (6)
10.23 Term Note dated July 15, 1993 between Seitel Geophysical,
Inc. (Company's wholly-owned subsidiary) and Central Bank of
the South (12)
10.24 Term Credit and Security Agreement dated July 15, 1993
between Seitel Geophysical, Inc. (Company's wholly-owned
subsidiary) and Central Bank of the South (12)
10.25 Continuing Guaranty dated July 15, 1993 between the Company
and Central Bank of the South (12)
10.26 Side Letter Agreement dated July 15, 1993 between the
Company and Central Bank of the South (12)
10.27 Loan Modification Agreement and Amendment to Loan Documents
effective as of December 28, 1995, between Seitel
Geophysical, Inc. (Company's wholly-owned subsidiary) and
Compass Bank (20)
10.28 Assumption and Loan Modification Agreement dated effective
December 31, 1996, among Seitel Geophysical, Inc. (Company's
wholly-owned subsidiary), Eagle Geophysical, Inc. (Company's
wholly-owned subsidiary), Compass Bank and Seitel, Inc.*
10.29 Master Equipment Lease Agreement dated May 20, 1994,
between Seitel Geophysical, Inc. (Company's wholly-owned
subsidiary) and MetLife Capital, Limited Partnership (14)
(3) Exhibits, continued:
10.30 Assignment and Assumption Agreement regarding Master Lease
dated December 31, 1996, between Eagle Geophysical, Inc.
(Company's wholly-owned subsidiary) and Seitel Geophysical,
Inc. (Company's wholly-owned subsidiary), consented to by
MetLife Capital Corporation*
10.31 Credit Agreement dated June 14, 1995, between DDD Energy,
Inc. (Company's wholly-owned subsidiary) and Bank One,
Texas, National Association, as a Bank and the Agent and
Compass Bank- Houston (18)
10.32 Promissory Note dated June 14, 1995, in the face amount of
$37,500,000, executed by DDD Energy, Inc. (Company's
wholly-owned subsidiary) and payable to the order of Bank
One, Texas, National Association (18)
10.33 Promissory Note dated June 14, 1995, in the face amount of
$37,500,000, executed by DDD Energy, Inc. (Company's
wholly-owned subsidiary) and payable to the order of Compass
Bank- Houston (18)
10.34 Guaranty dated June 14, 1995, by Seitel, Inc. in favor of
Bank One, Texas, National Association, Individually and as
Agent and Compass Bank-Houston (18)
10.35 Security Agreement (Stock Pledge) dated June 14, 1995, by
Seitel, Inc. in favor of Bank One, Texas, National
Association, as Agent (18)
10.36 Termination and Release Agreement dated as of December 28,
1995 between DDD Energy, Inc. (Company's wholly-owned
subsidiary) and Bank One, Texas, National Association and
Compass Bank-Houston (20)
10.37 Loan and Security Agreement dated as of July 9, 1996,
between Seitel Geophysical, Inc. (Company's wholly-owned
subsidiary) and NationsBanc Leasing Corporation of North
Carolina (21)
10.38 Assumption and Consent dated December 31, 1996, among
Seitel Geophysical, Inc. (Company's wholly-owned
subsidiary), Eagle Geophysical, Inc. (Company's wholly-owned
subsidiary), NationsBanc Leasing Corporation of North
Carolina, and Seitel, Inc.*
10.39 Revolving Credit Agreement dated as of July 22, 1996, among
Seitel, Inc. and The First National Bank of Chicago (21)
10.40 First Amendment to Seitel, Inc. Revolving Credit Agreement
dated as of August 30, 1996 among the Company and The First
National Bank of Chicago (22)
10.41 Loan and Security Agreement dated as of February 6, 1997,
between Eagle Geophysical, Inc. (Company's wholly-owned
subsidiary), Seitel Geophysical, Inc., (Company's
wholly-owned subsidiary), and NationsBanc Leasing
Corporation of North Carolina*
10.42 Incentive Compensation Agreement (11)
10.43 Shareholder Value Bonus Agreement effective as of March 18,
1994 (14)
10.44 Amendment to Shareholder Value Bonus Agreement effective as
of March 18, 1994 (17)
10.45 Seitel, Inc. 1995 Shareholder Value Incentive Bonus Plan
(18)
(3) Exhibits, continued:
10.46 Terms Agreement dated July 28, 1994, between the Company
and Bear, Stearns & Co., Inc. (14)
10.47 Note Purchase Agreement dated as of December 28, 1995,
between the Company and the Series A Purchasers, the Series
B Purchasers and the Series C Purchasers (20)
21.1 Subsidiaries of the Registrant *
23.1 Consent of Arthur Andersen LLP *
23.2 Consent of Miller and Lents, Ltd.*
----------------------
* Filed herewith
(1) Incorporated by reference to the Company's Registration
Statement, as amended, on Form S-1, No. 2-92572 as filed
with the Securities and Exchange Commission on August 3,
1984.
(2) Incorporated by reference to Post-Effective Amendment No. 2
to the Company's Registration Statement on Form S-2, File
No. 33-32838, as filed with the Securities and Exchange
Commission on October 10, 1991.
(3) Incorporated by reference to the Company's Registration
Statement, as amended, on Form S-2, No. 33-21300 as filed
with the Securities and Exchange Commission on April 18,
1988.
(4) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1988.
(5) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1989.
(6) Incorporated by reference to the Company's Form 8 amending
the Company's Annual Report on Form 10-K for the year ended
December 31, 1989.
(7) Incorporated by reference to the Company's Registration
Statement, as amended, on Form S-2, No. 33-34217 as filed
with the Commission on April 6, 1990.
(8) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1990.
(9) Incorporated by reference to the Company's Registration
Statement, as amended, on Form S-2, No. 33-44430 as filed
with the Commission on December 12, 1991.
(10) Incorporated by reference to the Company's Form 10-Q for the
quarter ended June 30, 1991.
(11) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1992.
(12) Incorporated by reference to the Company's Form 10-Q for the
quarter ended June 30, 1993.
(13) Incorporated by reference to the Company's Form 10-Q for the
quarter ended September 30, 1993.
(14) Incorporated by reference to the Company's Form 10-Q for the
quarter ended June 30, 1994.
(15) Incorporated by reference to the Company's Registration
Statement on Form S-8, No. 33-89934 as filed with the
Securities and Exchange Commission on March 2, 1995.
(16) Incorporated by reference to the Company's Registration
Statement on Form S-3, No. 33-89890 as filed with the
Securities and Exchange Commission on March 2, 1995.
(17) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994.
(18) Incorporated by reference to the Company's Form 10-Q for the
quarter ended June 30, 1995.
(19) Incorporated by reference to the Company's Registration
Statement on Form S-8, No. 333-01271 as filed with the
Securities and Exchange Commission on February 28, 1996.
(20) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
(21) Incorporated by reference to the Company's Form 10-Q for the
quarter ended June 30, 1996.
(22) Incorporated by reference to the Company's Form 10-Q for the
quarter ended September 30, 1996.
(b) Reports on Form 8-K filed during the quarter
ended December 31, 1996:
--------------------------------------------
NONE
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act of
1934, the Registrant has duly caused this report on Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, State of Texas, on the 27th of March, 1997.
SEITEL, INC.
By: /s/Paul A. Frame
----------------------------------------------
Paul A. Frame, President, Chief Executive
Officer and Director
By: /s/Debra D. Valice
----------------------------------------------
Debra D. Valice, Chief Financial Officer
By: /s/Marcia H. Kendrick
----------------------------------------------
Marcia H. Kendrick, Chief Accounting Officer
Pursuant to the requirements of the Securities Act of 1934, this Report on Form
10-K has been signed below by the following persons in the capacities and on the
date indicated.
SIGNATURE TITLE DATE
- - --------- ----- ----
/s/ Herbert M. Pearlman Chairman of the Board of March 27 , 1997
- - ------------------------- Directors
Herbert M. Pearlman
/s/ Paul A. Frame President and Chief March 27, 1997
- - ------------------------- Executive Officer,
Paul A. Frame Director
/s/ Horace A. Calvert Executive Vice President March 27 , 1997
- - ------------------------- and Chief Operating
Horace A. Calvert Officer, Director
/s/ Debra D. Valice Senior Vice President-Finance, March 27, 1997
- - ------------------------- Chief Financial Officer,
Debra D. Valice Secretary and Treasurer, Director
/s/ David S. Lawi Director March 27, 1997
- - -------------------------
David S. Lawi
/s/ Walter M. Craig, Jr. Director March 27, 1997
- - -------------------------
Walter M. Craig, Jr.
/s/ William Lerner Director March 27, 1997
- - -------------------------
William Lerner
/s/ William L. Lurie Director March 27, 1997
- - -------------------------
William L. Lurie
/s/ John Stieglitz Director March 27, 1997
- - -------------------------
John Stieglitz
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Seitel, Inc.:
We have audited the accompanying consolidated balance sheets of Seitel, Inc. (a
Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Seitel, Inc. and subsidiaries
as of December 31, 1996 and 1995,and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
March 19, 1997
F-1
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
-----------------------
1996 1995
---------- ----------
ASSETS
Cash and equivalents $ 3,340 $ 6,242
Receivables
Trade, less allowance for doubtful accounts of $336 and
$650 at December 31, 1996 and 1995, respectively 52,509 40,992
Notes and other, net of discount of $198 at
December 31, 1996 6,618 1,773
Data bank 284,847 232,704
Less: Accumulated amortization (157,849) (127,335)
---------- ----------
Net data bank 126,998 105,369
Property and equipment, at cost:
Oil and gas properties, full cost method of accounting,
including $30,709 and $20,862 not being amortized at
December 31, 1996 and 1995, respectively 96,045 44,684
Geophysical equipment 20,200 12,531
Furniture, fixtures and other 4,665 4,404
---------- ----------
120,910 61,619
Less: Accumulated depreciation, depletion and amortization (20,316) (9,069)
---------- ----------
Net property and equipment 100,594 52,550
Investment in affiliate 914 -
Prepaid expenses, deferred charges and other assets 3,706 2,641
---------- ----------
TOTAL ASSETS $ 294,679 $ 209,567
========== ==========
The accompanying notes are an integral part
of these consolidated financial statements.
F-2
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- continued
(In thousands, except share and per share amounts)
December 31,
-------------------------------
1996 1995
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 15,189 $ 9,830
Accrued liabilities 6,538 6,243
Employee compensation payable 3,403 2,349
Income taxes payable 302 227
Net liabilities of discontinued operations - 1,105
Debt
Senior Notes 75,000 52,500
Subordinated debentures - 1,989
Term loans 9,025 3,071
Obligations under capital leases 2,463 3,723
Contingent payables 274 279
Deferred income taxes 9,793 6,472
Deferred revenue 17,051 1,401
----------- -----------
TOTAL LIABILITIES 139,038 89,189
----------- -----------
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
20,000,000 shares; issued and outstanding 10,362,102
and 9,436,854 at December 31, 1996 and 1995, respectively 104 94
Additional paid-in capital 105,544 85,821
Retained earnings 51,185 35,936
Treasury stock, 409 and 414 shares at cost at
December 31, 1996 and 1995, respectively (4) (4)
Notes receivable from officers and employees (1,205) (1,395)
Cumulative translation adjustment 17 (74)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 155,641 120,378
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 294,679 $ 209,567
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- ---------
REVENUE $106,002 $ 74,439 $ 70,902
EXPENSES
Depreciation, depletion and amortization 39,249 26,872 27,181
Cost of sales 19,402 13,071 10,499
Selling, general and administrative expenses 19,165 15,393 14,672
Interest expense 4,063 3,407 3,455
Interest income (1,163) (329) (257)
-------- -------- ---------
80,716 58,414 55,550
-------- -------- ---------
Equity in loss of affiliate (186) - -
-------- -------- ---------
Income from continuing operations before provision for
income taxes and extraordinary item 25,100 16,025 15,352
Provision for income taxes 8,863 5,898 5,681
-------- -------- ---------
Income from continuing operations before
extraordinary item 16,237 10,127 9,671
Loss from discontinued operations, net of income tax
benefit of $580 for 1996, $703 for 1995 and
$30 for 1994 (988) (1,196) (52)
Loss on disposal of discontinued operations, net of
income tax benefit of $148 - (252) -
-------- -------- ---------
Income before extraordinary item 15,249 8,679 9,619
Extraordinary charge on early extinguishment of debt,
net of income tax benefit of $163 - - (304)
-------- -------- ---------
NET INCOME $ 15,249 $ 8,679 $ 9,315
======== ======== =========
Earnings per share:
Primary:
Income from continuing operations before
extraordinary item $ 1.58 $ 1.03 $ 1.24
Loss from discontinued operations (.10) (.12) (.01)
Loss on disposal of discontinued operations - (.03) -
Extraordinary item - - (.04)
-------- -------- ---------
Net income $ 1.48 $ .88 $ 1.19
======== ======== =========
Assuming full dilution:
Income from continuing operations before
extraordinary item $ 1.55 $ .99 $ 1.11
Loss from discontinued operations (.09) (.12) (.01)
Loss on disposal of discontinued operations - (.02) -
Extraordinary item - - (.03)
-------- -------- ---------
Net income $ 1.46 $ .85 $ 1.07
======== ======== =========
Weighted average number of common and common equivalent shares:
Primary 10,289 9,872 7,800
======== ======== =========
Assuming full dilution 10,476 10,358 9,001
======== ======== =========
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Notes
Receivable
Common Stock Additional Treasury Stock from Cumulative
----------------- Paid-In Retained ------------- Officers Translation
Shares Amount Capital Earnings Shares Amount & Employees Adjustments
---------- ------ ------- -------- ------ ----- ----------- -----------
Balance, December 31, 1993 5,987,388 $ 60 $ 25,709 $17,942 (414) $(4) $(2,039) $(85)
Sale of common stock through public offering 1,061,200 11 31,906 - - - - -
Net proceeds from issuance of common stock 770,364 7 7,280 - - - - -
Tax reduction from exercise of stock options - - 1,879 - - - - -
Conversion and exchanges of subordinated debentures 1,006,667 10 8,837 - - - - -
Payments received on notes receivable from officers
and employees - - - - - - 488 -
Foreign currency translation adjustment - - - - - - - 13
Net income - - - 9,315 - - - -
---------- ---- ------- ------ ---- --- ------- ----
Balance, December 31, 1994 8,825,619 88 75,611 27,257 (414) (4) (1,551) (72)
Net proceeds from issuance of common stock 445,939 4 6,894 - - - - -
Tax reduction from exercise of stock options - - 1,900 - - - - -
Conversions and exchanges of subordinated debentures 165,296 2 1,416 - - - - -
Payments received on notes receivable from officers
and employees - - - - - - 156 -
Foreign currency translation adjustment - - - - - - - (2)
Net income - - - 8,679 - - - -
---------- ---- ------- ------ ---- --- ------- ----
Balance, December 31, 1995 9,436,854 94 85,821 35,936 (414) (4) (1,395) (74)
Net proceeds from issuance of common stock 578,869 7 11,142 - 5 - - -
Acquisition of equity interest in affiliate 132,075 1 3,499 - - - - -
Tax reduction from exercise of stock options - - 3,204 - - - - -
Conversions and exchanges of subordinated debentures 214,304 2 1,878 - - - - -
Payments received on notes receivable from
officers and employees - - - - - - 190 -
Foreign currency translation adjustment - - - - - - - 91
Net Income - - - 15,249 - - - -
---------- ---- ------- ------ ---- --- ------- ----
Balance, December 31, 1996 10,362,102 $104 $105,544 $51,185 (409) $(4) $(1,205) $ 17
========== ==== ======= ====== ==== === ======= ====
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
---------------------------------------------------------
1996 1995 1994
----------- ----------- -----------
Cash flows from operating activities:
Cash received from customers $ 93,119 $ 80,981 $ 51,312
Proceeds from volumetric production payment 19,000 - -
Cash paid to suppliers and employees (40,066) (38,563) (24,540)
Interest paid (4,148) (4,551) (2,543)
Interest received 1,181 320 265
Income taxes paid (1,754) (2,218) (517)
----------- ----------- -----------
Net cash provided by operating activities 67,332 35,969 23,977
----------- ----------- -----------
Cash flows from investing activities:
Cash invested in seismic data (49,716) (59,286) (36,761)
Cash invested in oil and gas properties (48,429) (21,737) (15,269)
Cash paid to acquire property and equipment (8,224) (1,416) (615)
Cash from disposal of property and equipment 59 - -
Advances made to oil and gas joint venture partner - (1,142) -
Collections on loans made 327 108 -
Loan made to unconsolidated affiliate (2,000) - -
Cost of investment made in unconsolidated affiliate (109) - -
----------- ----------- -----------
Net cash used in investing activities (108,092) (83,473) (52,645)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings under line of credit agreement - 75,101 79,767
Principal payments under line of credit
agreement - (80,186) (85,745)
Borrowings under term loans 7,697 387 -
Principal payments on term loans (1,743) (876) (759)
Principal payments under capital lease
obligations (1,301) (1,375) (551)
Redemption of subordinated debentures - - (3,911)
Proceeds from issuance of senior notes 22,500 52,500 -
Proceeds from issuance of common stock 11,184 6,942 41,290
Costs of debt and equity transactions (860) (202) (2,135)
Payments on notes receivable from officers
and employees 190 156 488
----------- ----------- -----------
Net cash provided by financing activities 37,667 52,447 28,444
----------- ----------- -----------
Effect of exchange rate changes (43) (8) 6
----------- ----------- -----------
Net increase (decrease) in cash and equivalents (3,136) 4,935 (218)
Cash and equivalents at beginning of period:
Continuing operations 6,242 846 1,759
Discontinued operations 234 695 -
----------- ----------- -----------
Total cash and equivalents at beginning of period 6,476 1,541 1,759
----------- ----------- -----------
Cash and equivalents at end of period:
Continuing operations 3,340 6,242 846
Discontinued operations - 234 695
----------- ----------- -----------
Total cash and equivalents at end of period $ 3,340 $ 6,476 $ 1,541
=========== =========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--continued
(In thousands)
Year Ended December 31,
----------------------------------------
1996 1995 1994
-------- ------- -------
Reconciliation of net income to net cash provided
by operating activities:
Net income $ 15,249 $ 8,679 $ 9,315
-------- ------- -------
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss from discontinued operations, net of tax 988 1,448 52
Equity in loss of affiliate 186 - -
Extraordinary loss on extinguishment of debt, net of tax - - 304
Depreciation, depletion and amortization 40,229 27,663 27,929
Deferred income tax provision 3,321 2,970 2,455
Non-cash sales - (1,534) (3,162)
Gain on sale of property and equipment (40) - -
Amortization of deferred revenue (5,740) - -
Warrants issued in debenture exchange - - 180
Increase in receivables (12,155) (5,998) (17,322)
Increase in other assets (1,143) (705) (476)
Discount on note receivable 198 - -
Proceeds from volumetric production payment 19,000 - -
Increase in accounts payable and other liabilities 10,996 3,722 4,588
-------- ------- -------
Total adjustments 55,840 27,566 14,548
-------- ------- -------
Net cash provided by (used in) operating activities of:
Continuing operations 71,089 36,245 23,863
Discontinued operations (3,757) (276) 114
-------- ------- -------
Net cash provided by operating activities $ 67,332 $ 35,969 $ 23,977
======== ======= =======
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
SEITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: Seitel, Inc. (the "Company") is a leading provider of
seismic data and corollary geophysical services to the petroleum industry and
directly participates in exploration, development and ownership of natural gas
and crude oil reserves. The majority of the Company's seismic surveys cover
onshore and offshore the U.S. Gulf Coast region. The Company's oil and gas
exploration, development and production activities are on properties located
primarily onshore Texas and Louisiana, and also onshore Alabama, Mississippi and
Arkansas.
USE OF ESTIMATES: The preparation of these consolidated financial
statements requires the use of certain estimates by management in determining
the Company's assets, liabilities, revenues and expenses. Actual results could
differ from estimates. Data bank amortization is determined using estimates of
ultimate revenues from licensing of the seismic data. Refer to the data bank
discussion below for additional information on data bank amortization.
Depreciation, depletion and amortization of oil and gas properties and the
impairment of oil and gas properties are determined using estimates of proved
oil and gas reserves. There are numerous uncertainties in estimating the
quantity of proved reserves and in projecting the future rates of production and
timing of development expenditures. Refer to Note R, "Supplemental Oil and Gas
Information" for additional information regarding the process of estimating
proved oil and gas reserve quantities.
BASIS OF PRESENTATION: The accompanying consolidated financial statements
include the accounts of Seitel, Inc., the accounts of its wholly-owned
subsidiaries and the Company's pro rata share of its investments in joint
ventures. Investment in affiliate was accounted for under the equity method when
the Company owned 50% of such company and accounted for under the cost method
when the ownership was reduced to 19%. All material intercompany accounts and
transactions have been eliminated in consolidation. Certain reclassifications
have been made to the amounts in the prior years' financial statements to
conform to the current year's presentation.
The Company presents its consolidated balance sheets on an unclassified
basis. Because the portion of seismic data acquisition costs to be amortized
during the next year cannot be classified as a current asset, and classification
of all of these costs as noncurrent would be misleading to the reader because it
would not indicate the level of assets expected to be converted into cash in the
next year, the Company believes that the use of an unclassified balance sheet
results in improved financial reporting.
DATA BANK: Costs incurred in the creation of proprietary seismic data,
including the direct and incremental costs of Company personnel engaged in
project management and design, are capitalized. Seismic data costs are amortized
for each project in the proportion that its revenue for a period relates to
management's estimate of its ultimate revenues. Since inception, management has
established guidelines regarding its annual charge for amortization. Under these
guidelines, 90% of the cost incurred in the creation of proprietary seismic data
is amortized within five years of inception for two-dimensional seismic data and
within seven years of inception for three-dimensional data, and the final 10% is
amortized on a straight-line basis over fifteen years. Costs of existing seismic
data libraries purchased by the Company are fully amortized within ten years
from date of purchase. Using these guidelines, the Company would expect the
percentage of net data bank as of December 31, 1996 to be amortized to be 21%,
17%, 12%, 12%, 11%, and 27% for the years ending December 31, 1997, 1998, 1999,
2000, 2001 and thereafter, respectively. On a periodic basis, the carrying value
of seismic data is compared to its estimated future revenue and, if appropriate,
is reduced to its estimated net realizable value.
Net data bank at December 31, 1996 and 1995 was comprised of the following
(in thousands):
December 31,
--------------------------
1996 1995
----------- -----------
2D data created by the Company $ 20,277 $ 23,607
3D data created by the Company 96,100 70,069
Data purchased by the Company 10,621 11,693
--------- ---------
Net data bank $ 126,998 $ 105,369
========= =========
F-8
PROPERTY AND EQUIPMENT: The Company accounts for its oil and gas
exploration and production activities using the full-cost method of accounting.
Under this method, all costs associated with acquisition, exploration and
development of oil and gas reserves are capitalized, including directly related
overhead costs, and interest costs related to its unevaluated properties and
certain properties under development which are not currently being amortized.
For the three years ended December 31, 1996, exploration and development related
overhead costs of $1,146,000, $861,000 and $707,000, respectively, have been
capitalized to oil and gas properties. For the years ended December 31, 1996 and
1995, interest costs of $1,525,000 and $835,000, respectively, have been
capitalized to oil and gas properties.
Provisions for depreciation, depletion and amortization are calculated
using the units-of-production method. Estimated future site restoration,
dismantlement and abandonment costs, net of salvage value, are taken into
consideration. Such costs are not currently expected to be material. Capitalized
costs associated with the acquisition and evaluation of unproved properties and
certain properties under development are not currently depleted. Depletion of
the costs associated with these properties will commence when the properties or
projects are evaluated.
Capitalized costs are limited to the present value, discounted at 10
percent, of future net revenues calculated using period-end prices from
estimated proved reserves plus the lower of cost or fair value of unevaluated
properties, adjusted for the effects of related income taxes.
Depreciation of other property and equipment is calculated using the
straight-line method over the estimated useful lives of the assets of three to
five years.
INCOME TAXES: The Company and all of its subsidiaries file a consolidated
federal income tax return. The Company does not provide deferred taxes (benefit)
on the undistributed earnings (loss) of its foreign subsidiaries, which amounted
to $445,000, $(3,000), and $1,000 for the years ended December 31, 1996, 1995
and 1994, respectively, as such earnings are intended to be permanently
reinvested in those operations.
INCOME RECOGNITION: Revenue from seismic data licensing agreements is
recognized when each seismic data program is available for use by the licensees
and is presented net of revenue shared with other entities. Revenue from the
acquisition of seismic data for non-affiliated parties is recognized on the
percentage-of-completion method based on the work effort completed compared with
the total work effort estimated for the contract. Revenue received in advance of
being earned is deferred until earned.
HEDGING TRANSACTIONS: The Company may enter into futures transactions to
hedge commodity prices associated with the sales of natural gas and crude oil in
order to minimize the risk of market price fluctuations. Changes in the market
value of futures transactions are deferred until the gain or loss is recognized
on the hedged transactions. All future contracts permit settlement by delivery
of physical product.
COST OF SALES: Cost of sales consists of expenses associated with the
acquisition of seismic data for non-affiliated parties, oil and gas production,
and data resale support services. The cost of acquiring seismic data for
non-affiliated parties includes all direct material and labor costs and indirect
costs related to the acquisition such as supplies, tools, repairs and
depreciation.
EARNINGS PER SHARE: Earnings per share is based on the weighted average
number of outstanding shares of common stock during the respective years,
including common equivalent shares applicable to assumed exercise of stock
options and warrants when such common stock equivalents are dilutive, and the
Company's other potentially dilutive securities.
F-9
Earnings per share was determined by dividing net income, as adjusted
below, by applicable shares outstanding (in thousands):
Year Ended December 31,
---------------------------
1996 1995 1994
------- ------- -------
Total income used for primary earnings per share $15,249 $ 8,679 $ 9,315
======= ======= =======
Net income as reported $15,249 $ 8,679 $ 9,315
Interest eliminated on assumed conversion of 9% convertible
subordinated debentures, net of tax -- 95 329
------- ------- -------
Total income used for fully diluted earnings per share $15,249 $ 8,774 $ 9,644
======= ======= =======
Weighted average number of common and common equivalent shares 10,289 9,872 7,800
======= ======= =======
Weighted average number of common shares assuming full dilution 10,476 10,358 9,001
======= ======= =======
STOCK-BASED COMPENSATION: The Company accounts for employee stock-based
compensation using the intrinsic value method prescribed by Accounting
Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees."
Reference is made to Note G, "Stock Options and Warrants," for a summary of the
pro forma effect of Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation" on the Company's results of
operations in 1996 and 1995.
FAIR VALUE OF FINANCIAL INSTRUMENTS: SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure of the fair value of
certain financial instruments. The estimated fair value amounts have been
determined by the Company using available market data and valuation
methodologies. The book values of cash and equivalents, receivables and accounts
payable approximate their fair value as of December 31, 1996 and 1995, because
of the short-term maturity of these instruments. Based upon the rates available
to the Company, the fair value of the Senior Notes and the term loans
approximates the carrying value of this debt as of December 31, 1996 and 1995.
Based on the quoted market price, the fair value of the 9% convertible
subordinated debentures at December 31, 1995 was $6,962,000.
IMPAIRMENT OF LONG-LIVED ASSETS: In March 1995, the Financial Accounting
Standards Board issued SFAS No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." This statement requires
that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
realizable. The Company adopted SFAS No. 121 effective January 1, 1996; the
adoption of this statement did not have a material effect on the Company's
consolidated financial statements.
NOTE B--INCOME TAXES
The discussion of income taxes herein does not include the income tax
effects of the discontinued operations or the extraordinary item explained in
Note M and Note N, respectively, of these consolidated financial statements.
F-10
The provision (benefit) for income taxes for each of the three years
ended December 31, 1996, are comprised of the following (in thousands):
1996 1995 1994
------------ ------------- ------------
Current - Federal $ 5,214 $ 2,753 $ 2,706
- State 246 153 225
Foreign 82 22 295
------------ ------------- ------------
5,542 2,928 3,226
------------ ------------- ------------
Deferred - Federal 3,321 3,001 2,429
- State - (31) 26
------------ ------------- ------------
3,321 2,970 2,455
------------ ------------- ------------
Tax provision - Federal 8,535 5,754 5,135
- State 246 122 251
- Foreign 82 22 295
------------ ------------- ------------
$ 8,863 $ 5,898 $ 5,681
============ ============= ============
The differences between the U.S. Federal income taxes computed at the
statutory rate (34.7% for 1996, 34.6% for 1995, and 34.4% for 1994) and the
Company's income taxes for financial reporting purposes are as follows (in
thousands):
1996 1995 1994
------------ ----------- -----------
Statutory Federal income tax $ 8,716 $ 5,540 $ 5,280
State income tax, less Federal benefit 162 79 163
Other, net (15) 279 238
--------- -------- --------
Income tax expense $ 8,863 $ 5,898 $ 5,681
========= ======== ========
The components of the net deferred income tax liability reflected in the
Company's consolidated balance sheets at December 31, 1996 and 1995 were as
follows (in thousands):
Deferred Tax Assets
(Liabilities) at December 31,
---------------------------
1996 1995
---------- ----------
Alternative minimum tax credit carryforward $ 1,506 $ 958
Net operating loss carryforward 997 --
Partnership earnings 215 217
Investment tax credits 44 44
Other 553 820
------- -------
Total deferred tax assets 3,315 2,039
Less: Valuation allowance (44) (44)
------- -------
Deferred tax assets, net of
valuation allowance 3,271 1,995
------- -------
Depreciation, depletion and amortization (12,969) (8,370)
Other (95) (97)
------- -------
Total deferred tax liabilities (13,064) (8,467)
------- -------
Net deferred tax liability $ (9,793) $ (6,472)
======= =======
F-11
As of December 31, 1996, the Company has an alternative minimum tax (AMT)
credit carryforward of approximately $1,506,000 which can be used to offset
regular Federal income taxes payable in future years. The AMT credit has an
indefinite carryforward period. Additionally, as of December 31, 1996, the
Company has a net operating loss carryforward for regular Federal income tax
purposes of approximately $2,933,000 which will expire in 2011.
In connection with the exercise of non-qualified stock options and common
stock purchase warrants by employees during 1996, 1995 and 1994, the Company
received $3,204,000, $1,900,000 and $1,879,000, respectively, in Federal income
tax savings which has been reflected as a credit to additional paid-in capital.
NOTE C--DEBT
The following is a summary of the Company's debt at December 31, 1996 and
1995 (in thousands):
December 31,
----------------------
1996 1995
--------- ----------
Senior notes $ 75,000 $ 52,500
Subordinated debentures - 1,989
Term loans 9,025 3,071
--------- ----------
$ 84,025 $ 57,560
========= ==========
SENIOR NOTES: On December 28, 1995, the Company completed a private
placement of three series of unsecured Senior Notes totaling $75,000,000. The
Company contemporaneously issued its Series A Notes and Series B Notes, which
total $52,500,000 and bear interest at the fixed rate of 7.17%. On April 9,
1996, the Company issued its Series C Notes, which total $22,500,000 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 $8,333,000 beginning December 30,
1999. The Series B and Series C Notes mature on December 30, 2002, and require
combined annual principal payments of $10,000,000 beginning December 30, 1998.
Interest on the Senior Notes is payable semi-annually on June 30 and December
30.
TERM LOANS: On July 15, 1993, a wholly-owned subsidiary of the Company
obtained a $4,300,000, five year term loan bearing interest at the rate of 7.61%
for the purchase of a telemetry seismic data acquisition system and auxiliary
equipment. The debt is secured by such equipment. Monthly principal and interest
payments total approximately $86,000.
During 1995, the Company and one of its wholly-owned subsidiaries obtained
two separate three year term loans totaling $716,000, which both bear interest
at the rate of 8.413%, for the purchase of certain property and equipment. The
debt is secured by such equipment. Monthly principal and interest payments total
approximately $22,000.
On March 14, 1996, a wholly-owned subsidiary of the Company obtained a
$433,000, three year term loan bearing interest at the rate of 7.52% for the
purchase of geophysical equipment. The debt is secured by such equipment.
Monthly principal and interest payments total approximately $13,000.
On July 9, 1996, a wholly-owned subsidiary of the Company obtained two term
loans aggregating $7,264,000 for the purchase of land and marine seismic
equipment which secures the debt. The first loan is a $5,902,000, five year term
loan bearing interest at the rate of 8%. The second loan is a $1,362,000, three
year term loan bearing interest at the rate of 8.06%. Monthly principal and
interest payments on both term loans total approximately $163,000.
LINE OF CREDIT: On July 22, 1996, the Company entered into an agreement
with The First National Bank of Chicago for a $25,000,000 unsecured revolving
line of credit facility. The facility bears interest at a rate determined by the
ratio of the Company's debt to cash flow from operations. Pursuant to the
interest rate pricing structure, funds can currently be borrowed at LIBOR plus
3/4%, the bank's prevailing prime rate, or the sum of the Federal Funds
effective rate for such day plus 1/2%. No amounts were outstanding under this
line of credit at December 31, 1996.
F-12
Certain of the borrowings described above contain requirements as to the
maintenance of minimum net worth and limitations on liens, total debt, debt
issuance and disposition of assets.
Aggregate maturities of the Company's debt over the next five years are as
follows: $2,798,000 in 1997; $12,514,000 in 1998; $19,918,000 in 1999;
$19,647,000 in 2000; and $10,816,000 in 2001.
NOTE D--LEASE OBLIGATIONS
Property and equipment in the accompanying consolidated balance sheets
includes the following assets held under capital leases (in thousands):
December 31,
---------------------
1996 1995
--------- --------
Geophysical equipment $ 5,339 $ 5,298
Furniture, fixtures and other 324 324
--------- --------
Assets under capital lease 5,663 5,622
Accumulated amortization (2,827) (1,641)
--------- --------
Assets under capital lease, net $ 2,836 $ 3,981
========= ========
The Company also leases office space under operating leases. Rental expense
for 1996, 1995 and 1994 was approximately $619,000, $571,000 and $473,000,
respectively.
Future minimum lease payments for the five years subsequent to December 31,
1996 and in the aggregate are as follows (in thousands):
Capital Operating
Leases Leases
--------- ---------
1997 $ 1,179 $ 572
1998 955 552
1999 465 433
2000 11 54
2001 2 -
-------- --------
Total minimum lease payments 2,612 $ 1,611
========
Less amount representing interest (149)
--------
Present value of net minimum
lease payments $ 2,463
========
NOTE E-VOLUMETRIC PRODUCTION PAYMENT
In June 1996, the Company sold a volumetric production payment for $19
million to certain limited partnerships. Under the terms of the production
payment agreements, the Company conveyed a mineral property interest of
approximately 7.6 billion cubic feet of certain natural gas and approximately
363,000 barrels of other hydrocarbons to the purchasers. The Company retains
responsibility for its working interest share of the cost of operations. At
December 31, 1996, there were approximately 5.5 billion cubic feet of gas and
279,000 barrels of other hydrocarbons remaining to be delivered under the
agreements.
The Company accounted for the proceeds received in the transaction as
deferred revenue which is being amortized into revenue and income as natural gas
and other hydrocarbons are produced and delivered during the term of the
volumetric production payment agreements. Annual remaining amortization of
deferred revenue under the volumetric production payment agreements, at December
31, 1996 is estimated as follows (in thousands):
1997 $ 8,023
1998 3,901
1999 1,336
--------
Total $ 13,260
========
F-13
NOTE F--CONTINGENCIES AND COMMITMENTS
At December 31, 1996 and 1995, $274,000 and $279,000, respectively, of
charges for seismic surveys which are payable to joint venture partners only
from the collection of sales proceeds from those seismic surveys are included in
contingent payables.
On September 30, 1996, a wholly-owned subsidiary of the Company entered
into an agreement for the purchase of a telemetry seismic data acquisition
system at a cost of approximately $3,500,000. Payment was made upon delivery of
the system in January 1997.
On July 21, 1992, the Company's Board of Directors approved payment of a
one-time $2,500,000 bonus to be divided among five key employees upon the event
of the market price of the Company's stock maintaining or exceeding $20 per
share for at least 90 consecutive days (the "Target Date" ) at any time before
July 21, 1997. The Target Date was achieved in June 1994. The bonus vests
equally over the 12 quarters following the Target Date, contingent upon
continued full-time employment, except in the event of death or disability in
which case the balance of the bonus will be due and payable immediately. The
bonus expense is being recognized over the vesting period. For the years ended
December 31, 1996, 1995 and 1994, $833,000, $833,000 and $625,000, respectively,
was charged to expense for this bonus. As of December 31, 1996, $209,000 remains
to be charged to expense. Interest, at the prevailing prime rate, is paid
quarterly on the total outstanding bonus.
On January 27, 1995, the Company's Board of Directors approved a
shareholder value incentive bonus under which a cash bonus aggregating
$4,000,000 would be paid to all salaried employees if the market price of the
Company's stock reaches $60 per share on or before April 30, 1998, and maintains
that price for at least 90 consecutive days. This bonus would be shared by all
salaried employees on a basis proportionate to their respective compensation
ranking in the Company, and it would vest and be paid out in escalating
quarterly installments over a three-year period, subject to continued employment
with the Company. As of March 26, 1997, the market price of the Company's
common stock was $36.50 share.
NOTE G--STOCK OPTIONS AND WARRANTS
On July 7, 1984, the Company's Board of Directors adopted an Incentive
Stock Option Plan and a Non-Qualified Stock Option Plan. As of December 31,
1996, 115,600 shares have been reserved for issuance under the Incentive Stock
Option Plan and 270,900 shares have been reserved under the Non-Qualified Stock
Option Plan, of which all options have been issued under both original plans. On
July 28, 1993, the Company's Board of Directors adopted the 1993 Incentive Stock
Option Plan and on July 18, 1995 and July 25, 1996, approved amendments to that
plan to increase the total number of shares issuable under the option plan to
1,150,000. As of December 31, 1996, 838,997 options have been issued under the
plan. As of December 31, 1996, all options issued under these plans have been
issued at or above the market price of the Company's common stock as of the date
of issuance, have a term of ten years and are exercisable under the terms of the
respective option agreements. On June 17, 1994, the Company's Board of Directors
adopted the Non-Employee Directors Stock Option Plan which reserves 75,000
shares for issuance. As of December 31, 1996, 20,000 options have been issued at
the market price of the Company's common stock as of the date of issuance, have
a term of five years and are exercisable under the terms of the respective
option agreements. The following summarizes information with regard to the stock
option plans for the years ended December 31, 1996, 1995 and 1994 (shares in
thousands):
1996 1995 1994
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
Outstanding at beginning of year 640 $ 19.79 356 $ 12.26 288 $ 6.24
Granted 306 29.34 337 25.92 112 24.06
Exercised (122) 14.16 (52) 8.16 (43) 5.85
Forfeited (47) 25.10 (1) 11.31 (1) 5.85
------- ------- -------
Outstanding at end of year 777 24.12 640 19.79 356 12.26
======= ======= =======
Options exercisable at end of year 272 186 136
======= ======= =======
F-14
The following table summarizes information for the options outstanding at
December 31, 1996 (shares in thousands):
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Number of Weighted Number of
Options Average Weighted Options Weighted
Outstanding Contractual Average Exercisable Average
at Life in Exercise at Exercise
Range of Exercise Prices 12/31/96 Years Price 12/31/96 Price
- - ------------------------ -------- -------- ---------- --------- ---------
$ 1.22 - $10.00 118 4.6 $ 6.48 118 $ 6.48
$10.01 - $20.00 14 6.6 16.31 10 15.98
$20.01 - $30.00 476 8.8 25.25 119 24.92
$30.01 - $40.00 169 9.0 33.92 25 32.69
------- -------
$ 1.22 - $40.00 777 24.12 272 17.28
======= =======
During 1996 and 1995, the Company granted 262,141 and 307,144 warrants,
respectively, with a weighted average fair value on the date of grant of $17.38
and $15.04, respectively. At December 31, 1996, outstanding warrants to purchase
the Company's common stock were as follows (shares in thousands):
Number of Range of Year of
Shares Exercise Prices Expiration
------------- -------------------- -------------
Issued to underwriters in connection
with 9% convertible
subordinated debentures 20 $ 9.28 1997
Issued in debenture exchange 96 29.92 1997
Issued to employees 219 11.25 - 13.19 1997
Issued to employees 407 24.00 - 30.13 1999
Issued to employees 602 13.05 - 32.00 2000
Issued to employees 248 26.75 - 43.50 2001
Issued to an employee 10 5.38 2002
The Company applies APB Opinion 25 and related interpretations in
accounting for its stock-based compensation plans. APB Opinion 25 does not
require compensation costs to be recorded on options which have exercise prices
at least equal to the market price of the stock on the date of grant.
Accordingly, no compensation cost has been recognized for the Company's
stock-based plans. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the optional accounting method
prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below (in thousands, except per share data):
1996 1995
------------ ------------
Net income As reported $ 15,249 $ 8,679
Pro forma $ 10,050 $ 5,631
Primary earnings per share As reported $ 1.48 $ .88
Pro forma $ .99 $ .58
Fully diluted earnings per share As reported $ 1.46 $ .85
Pro forma $ .97 $ .56
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions for
1996 and 1995, respectively: risk-free interest rates ranging from 5.91% to
7.03% and 5.54% to 7.02%; dividend yield of 0% and 0%; stock price volatility
ranging from 46.49% to 62.62% and 47.18% to 65.06%; and expected option lives
ranging from 5 to 10 years and 2.8 to 10 years. The weighted-average fair value
of options granted during 1996 and 1995 was $22.40 and $19.32 per option,
F-15
respectively, for options granted at fair market value and $18.86 per option for
options granted above fair market value in 1995. The pro forma amounts shown
above may not be representative of future results because the SFAS No. 123
method of accounting has not been applied to options granted prior to January 1,
1995.
On July 25, 1996, the Company's Board of Directors adopted the Non-Employee
Directors' Deferred Compensation Plan which permits each non-employee director
to elect to receive annual director fees in the form of stock options and to
defer receipt of any directors fees in a deferred cash account or as deferred
shares. As of December 31, 1996, 30,000 shares have been reserved for issuance
under this plan and directors have accumulated 687 deferred shares in their
accounts which will not be distributed until such time as designated by the
director.
NOTE H--COMMON STOCK
The Company filed a registration statement on Form S-3 (the "Shelf
Registration Statement") in June 1994 to offer from time to time in one or more
series (i) unsecured debt securities, which may be senior or subordinated, (ii)
preferred stock, par value $0.01 per share, and (iii) common stock, par value
$.01 per share, or any combination of the foregoing, at an aggregate initial
offering price not to exceed $75,000,000. The Shelf Registration Statement was
declared effective by the Securities and Exchange Commission on June 30, 1994.
In August 1994, the Company completed a public offering of 1,061,200 shares of
its common stock priced at $32 per share pursuant to the Shelf Registration
Statement. The net proceeds from the offering (after underwriting commission and
offering expenses) totaled $31,917,000. After this sale of common stock at an
initial aggregate offering price of $33,958,400, the Company may offer
additional securities in the future for up to an aggregate initial offering
price of $41,041,600 pursuant to the Shelf Registration Statement.
On July 21, 1992, the Company granted ten year loans at an interest rate of
4% to most of its employees for purchases of the Company's common stock at the
then market price of $5.375 per share. The Company recorded related compensation
expense of $48,000, $56,000 and $64,000 for the years ended December 31, 1996,
1995 and 1994, respectively. Payments of 5% of the original principal balance
plus accrued interest are due annually August 1, with a balloon payment of the
remaining principal and accrued interest due August 1, 2002. During 1996, 1995
and 1994, the Company received $190,000, $156,000 and $488,000, respectively, as
principal payments on these notes. The stock certificates are held by the
Company as collateral until payment is received.
NOTE I--PREFERRED STOCK
The Company is authorized by its Amended Certificate of Incorporation to
issue 5,000,000 shares of preferred stock, the terms and conditions to be
determined by the Board of Directors in creating any particular series. As of
December 31, 1996, no preferred stock had been issued.
NOTE J--RELATED PARTY TRANSACTIONS
The Company owed Helm Resources, Inc. and its subsidiaries ("Helm"), a
company that has three executive officers who are directors of the Company,
$23,000 and $51,000 as of December 31, 1996 and 1995, respectively, for sales of
seismic data they jointly own and for general and administrative expenses paid
by Helm on behalf of the Company. The Company incurred charges of $80,000,
$78,000 and $84,000 for these general and administrative expenses during 1996,
1995 and 1994, respectively. Management believes that these expenses, which were
specifically related to the Company's business, represented costs which would
have been incurred in the same amount by the Company if such services that were
performed by Helm were performed by an unaffiliated entity.
Certain employees and directors of the Company contributed cash to
partnerships in 1996, 1995 and 1994 which invest in the exploration and
development of oil and gas properties on a working interest basis along with DDD
Energy, Inc. Each partnership's working interest amounts to 3% of the total
investment made by such partnership and DDD Energy, Inc. for the partnership
formed in 1996 and 5% for the partnerships formed in 1995 and 1994. Each
partnership invests in projects and prospects undertaken by DDD Energy, Inc. in
the year such partnership is formed and all subsequent development of those
projects and prospects. The terms of each partnership require the participants
to contribute their share of required capital contributions at the beginning of
the year and any future cash calls, as required. All transactions between the
partnerships and DDD Energy, Inc. are at arms length.
F-16
NOTE K--MAJOR CUSTOMERS
No customers accounted for 10% or more of revenues during the years 1996,
1995 or 1994.
The Company extends credit to various companies in the oil and gas industry
for the purchase of their seismic data, which results in a concentration of
credit risk. This concentration of credit risk may be affected by changes in
economic or other conditions and may accordingly impact the Company's overall
credit risk. However, management believes that the risk is mitigated by the
number, size, reputation and diversified nature of the companies to which they
extend credit. Historical credit losses incurred on receivables by the Company
have been immaterial.
NOTE L--PROFIT-SHARING PLAN
The Company has an Incentive Compensation Agreement for certain employees
under which annual contributions, ranging from 2.5% to 5% of revenues generated
on certain seismic programs, are required. Contributions amounted to $550,000,
$263,000 and $652,000, for 1996, 1995 and 1994, respectively.
NOTE M--DISCONTINUED OPERATIONS
On March 22, 1996, the Company's Board of Directors unanimously adopted a
plan of disposal to discontinue the Company's gas marketing operations.
Accordingly, the Company's consolidated financial statements present the gas
marketing operations as discontinued operations for all periods presented.
Effective August 1, 1996, the Company assigned substantially all of its
contracts to purchase and supply natural gas to a retail energy marketer.
The loss from discontinued operations amounted to $988,000, $1,196,000, and
$52,000 for the three years ended December 31, 1996, net of an income tax
benefit of $580,000 for 1996, $703,000 for 1995, and $30,000 for 1994. At
December 31, 1995, the Company had fixed price gas sales contracts which were
generally below the estimated market price at which the Company could purchase
gas supply and transportation. Then current market pricing models were used to
estimate the market price at which the Company could purchase gas supply and
transportation in the future. Such models were used to estimate the loss related
to future contractual commitments at December 31, 1995. During the first seven
months of 1996, the Company continued to deliver gas to customers under its
existing contracts. Effective August 1, 1996, the gas marketing operations were
disposed of. As a result of changes in market prices to purchase gas supply, an
additional $988,000 was recognized as a loss from discontinued operations in
1996. Such loss represented the final charge related to the discontinued
operations. The loss on disposal of discontinued operations recorded as of
December 31, 1995, was $252,000, net of an income tax benefit of $148,000, and
included costs such as severance benefits and estimated personnel costs to
continue to honor the Company's obligations until the gas marketing contracts
were transferred or terminated. No additional loss on disposal of discontinued
operations was incurred during 1996.
Revenue from the discontinued operations was $13,116,000 and $2,864,000 for
the years ended December 31, 1995 and 1994, respectively. The net liabilities of
discontinued operations at December 31, 1995, consisted primarily of accounts
payable and accrued liabilities offset by trade receivables and income tax
benefits. No assets or liabilities relating to the discontinued operations
remained at December 31, 1996.
NOTE N--EARLY EXTINGUISHMENT OF DEBT
In October 1994, the Company called for redemption of its 12-1/2%
subordinated debentures due 1999 totaling $3,725,000, which was funded by
proceeds from the public offering of common stock in 1994. As a result, the
Company recorded a charge of $304,000, net of a $163,000 income tax benefit,
associated with the early extinguishment of indebtedness, which has been
reflected in the Company's consolidated statement of operations as an
extraordinary item for the year ended December 31, 1994. This charge includes
the write-off of unamortized bond discount totaling $176,000.
F-17
NOTE O--STATEMENT OF CASH FLOW INFORMATION
For purposes of the statement of cash flows, the Company considers all
highly liquid investments or debt instruments with original maturity of three
months or less to be cash equivalents.
Operating cash flows reported in the consolidated statements of cash flows
do not reflect effects of changes in inventory levels because the Company
reports no inventories and classifies cash expenditures for its seismic data
library as an investing, rather than an operating, activity.
Significant non-cash investing and financing activities are as follows:
1. During 1996, 1995 and 1994, the Company issued 214,304, 165,296 and
1,006,667, respectively, shares of its common stock upon the
conversion and exchange of $1,989,000, $1,534,000 and $9,342,000,
respectively, of its 9% convertible subordinated debentures. In
connection with these conversions and exchanges, unamortized bond
issue costs totaling $109,000, $98,000 and $626,000 during 1996, 1995
and 1994, respectively, have been charged to additional paid-in
capital.
2. During 1996, the Company issued 132,075 shares of its common stock in
exchange for a 50% equity interest in a marine seismic company.
3. During 1996, the Company redeemed a portion of its equity interest in
a marine seismic company in exchange for a note totaling $2,680,000.
4. During 1995 and 1994, the Company licensed seismic data valued at
$1,534,000 and $3,162,000, respectively, in exchange for the purchase
of property and equipment and seismic data for its library.
5. During 1996, 1995 and 1994, capital lease obligations totaling
$41,000, $10,000 and $5,639,000, respectively, were incurred when the
Company entered into leases for property and equipment.
6. During 1995, the Company acquired $330,000 of property and equipment
by incurring a directly related term loan.
F-18
NOTE P--INDUSTRY SEGMENTS
Financial information by industry segment for the three years ended
December 31, 1996, was as follows (in thousands):
Exploration Corporate
and and Consolidating
Seismic Production Other Eliminations Consolidated
---------- ---------- ---------- ---------- ---------
1996
- - ----
Unaffiliated revenue $ 87,747 $ 18,255 $ - $ - $ 106,002
Intersegment revenue (a) 13,396 - - (13,396) -
---------- ---------- ---------- ---------- ---------
Total revenue $ 101,143 $ 18,255 $ - $ (13,396) $ 106,002
========== ========== ========== ========== =========
Depreciation, depletion
and amortization $ 31,428 $ 7,212 $ 609 $ - $ 39,249
========== ========== ========== ========== =========
Operating income (loss) $ 32,237 $ 5,984 $ (7,435) $ (2,786) $ 28,000
Interest expense, net - - (2,900) - (2,900)
---------- ---------- ---------- ---------- ---------
Income from continuing
operations before
income taxes and
extraordinary item $ 32,237 $ 5,984 $ (10,335) $ (2,786) $ 25,100
========== ========== ========== ========== =========
Identifiable assets $ 201,379 $ 93,521 $ 13,175 $ (13,396) $ 294,679
========== ========== ========== ========== =========
Capital expenditures $ 59,886 $ 51,428 $ 120 $ - $ 111,434
========== ========== ========== ========== =========
1995
- - ----
Unaffiliated revenue $ 69,598 $ 4,806 $ 35 $ - $ 74,439
Intersegment revenue (a) 10,877 - - (10,877) -
---------- ---------- ---------- ---------- ---------
Total revenue $ 80,475 $ 4,806 $ 35 $ (10,877) $ 74,439
========== ========== ========== ========== =========
Depreciation, depletion
and amortization $ 24,384 $ 1,625 $ 863 $ - $ 26,872
========== ========== ========== ========== =========
Operating income (loss) $ 25,465 $ 838 $ (4,840) $ (2,360) $ 19,103
Interest expense, net - - (3,078) - (3,078)
---------- ---------- ---------- ---------- ---------
Income from continuing
operations before
income taxes $ 25,465 $ 838 $ (7,918) $ (2,360) $ 16,025
========== ========== ========== ========== =========
Identifiable assets $ 164,886 $ 46,092 $ 9,466 $ (10,877) $ 209,567
========== ========== ========== ========== =========
Capital expenditures $ 34,137 $ 23,075 $ 985 $ - $ 58,197
========== ========== ========== ========== =========
(a) Intersegment sales are made at prices comparable to those received from unaffiliated customers.
F-19
NOTE P -- continued
Exploration Corporate
and and Consolidating
Seismic Production Other Eliminations Consolidated
---------- ---------- ---------- ---------- ---------
1994
- - ----
Unaffiliated revenue $ 69,579 $ 1,204 $ 119 $ - $ 70,902
Intersegment revenue (a) 9,755 - - (9,755) -
---------- ---------- ---------- ---------- ---------
Total revenue $ 79,334 $ 1,204 $ 119 $ (9,755) $ 70,902
========== ========== ========== ========== =========
Depreciation, depletion
and amortization $ 25,777 $ 296 $ 1,108 $ - $ 27,181
========== ========== ========== ========== =========
Operating income (loss) $ 19,797 $ 229 $ (6) $ (1,470) $ 18,550
Interest expense, net - - (3,198) - (3,198)
---------- ---------- ---------- ---------- ---------
Income from continuing
operations before
income taxes and
extraordinary item $ 19,797 $ 229 $ (3,204) $ (1,470) $ 15,352
========== ========== ========== ========== =========
Identifiable assets $ 151,614 $ 22,164 $ 2,746(b) $ (9,755) $ 166,769
========== ========== ========== ========== =========
Capital expenditures $ 69,095 $ 16,874 $ 134 $ - $ 86,103
========== ========== ========== ========== =========
(a) Intersegment sales are made at prices comparable to those received from unaffiliated customers.
(b) Includes net assets of discontinued operations of $529,000.
F-19(a)
NOTE Q--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for the years ended December 31, 1996 and 1995.
Quarter Ended
-------------------------------------------------------------
(In thousands, except per share amounts) March 31 June 30 Sept. 30 Dec. 31
------------ ------------ ----------- ------------
1996
- - ----
Revenue $ 20,266 $ 27,180 $ 30,307 $ 28,249
Gross profit 9,266 12,987 14,022 12,636
Provision for income taxes 1,799 2,441 2,836 1,787
Income from continuing operations 3,064 4,156 4,829 4,188
Net income 3,064 3,168 4,829 4,188
Earnings per share (1):
- Primary:
Income from continuing operations .31 .41 .45 .39
Loss from discontinued operations - (.10) - -
Net income .31 .31 .45 .39
- Assuming full dilution:
Income from continuing operations .30 .41 .44 .39
Loss from discontinued operations - (.10) - -
Net income .30 .31 .44 .39
1995
- - ----
Revenue $ 16,608 $ 22,143 $ 17,873 $ 17,815
Gross profit 9,338 10,808 8,289 7,456
Provision for income taxes 1,637 1,891 1,226 1,144
Income from continuing operations 2,787 3,221 2,088 2,031
Net income 2,974 3,341 2,182 182
Earnings per share (1):
- Primary:
Income from continuing operations .29 .33 .21 .20
Income (loss) from discontinued
operations .02 .01 .01 (.16)
Loss on disposal of discontinued
operations - - - (.02)
Net income .31 .34 .22 .02
- Assuming full dilution:
Income from continuing operations .27 .32 .21 .20
Income (loss) from discontinued
operations .02 .01 .01 (.16)
Loss on disposal of discontinued
operations - - - (.02)
Net income .29 .33 .22 .02
(1) The sum of the individual quarterly earnings (loss) per share may not
agree with the year to date earnings (loss) per share as each period's
computation is based on the weighted average number of common shares
outstanding during the period.
F-20
NOTE R--SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
The following information concerning the Company's oil and gas operations
is presented in accordance with SFAS No. 69, "Disclosures About Oil and Gas
Producing Activities."
OIL AND GAS RESERVES: Proved reserves represent estimated quantities of
crude oil, condensate, natural gas and natural gas liquids that geological and
engineering data demonstrate, with reasonable certainty, to be recoverable in
future years from known reservoirs under economic and operating conditions
existing at the time the estimates were made. Proved developed reserves are
proved reserves expected to be recovered through wells and equipment in place
and under operating methods being utilized at the time the estimates were made.
The Company has also presented, as additional information, proved reserves
including quantities dedicated to future deliveries required under the
volumetric production payment. The Company believes that this information is
informative to readers of its financial statements as the related oil and gas
properties costs and deferred revenue are included in the Company's balance
sheet for 1996. This additional information is not required to be presented in
accordance with SFAS No. 69; however, the Company believes this additional
information is useful in assessing its reserve and financial position on a
comprehensive basis.
The following table sets forth estimates of proved reserves and proved
developed reserves of crude oil (including condensate and natural gas liquids)
and natural gas attributable to the Company's interest in oil and gas
properties. The reserve estimates presented herein were prepared by the
independent petroleum engineering firms of Miller and Lents, Ltd. at December
31, 1996, and by Forrest A. Garb & Associates, Inc. at December 31, 1995 and
1994. It should be noted that these reserve quantities are estimates and may be
subject to substantial upward or downward revisions. The estimates are based on
the most current and reliable information available; however, additional
information obtained through future production and experience and additional
development of existing reservoirs may significantly alter previous estimates of
proved reserves.
F-21
Oil Gas
(Mbbl) (MMcf)
------------- --------------
Proved reserves at December 31, 1993 198 997
Revisions of previous estimates (25) 520
Extensions and discoveries 1,355 14,128
Production (54) (268)
------------ -------------
Proved reserves at December 31, 1994 1,474 15,377
Revisions of previous estimates (964) (9,075)
Purchases of reserves in place 782 1,851
Extensions and discoveries 413 7,028
Production (193) (1,170)
------------ -------------
Proved reserves at December 31, 1995 1,512 14,011
Revisions of previous estimates 249 1,966
Purchases of reserves in place 68 7,896
Extensions and discoveries 1,107 10,322
Sale of volumetric production payment (363) (7,626)
Production (279) (2,808)
------------ -------------
Proved reserves at December 31, 1996 2,294 23,761
Additional disclosures -
Volumes dedicated to volumetric
production payment 279 5,532
------------ -------------
Proved reserves at December 31, 1996,
including volumes dedicated to
volumetric production payment 2,573 29,293
============ =============
Proved developed reserves -
December 31, 1993 168 974
============ =============
December 31, 1994 487 7,315
============ =============
December 31, 1995 1,178 10,219
============ =============
December 31, 1996 902 11,563
============ =============
Proved developed reserves, including amounts
dedicated to volumetric production payment-
December 31, 1996 1,181 17,099
============ =============
In addition to the proved reserves disclosed above, the Company owned
proved sulfur reserves of 197,000 long tons, 239,000 long tons, and 261,000 long
tons at December 31, 1996, 1995 and 1994, respectively.
F-21(a)
CAPITALIZED COSTS OF OIL AND GAS PROPERTIES: As of December 31, 1996 and
1995, the Company's capitalized costs of oil and gas properties were as follows
(in thousands):
December 31,
1996 1995
------------- --------------
Unevaluated properties $ 30,709 $ 20,862
Evaluated properties 65,336 23,822
------------ -------------
Total capital costs 96,045 44,684
Less: Accumulated depreciation,
depletion and amortization (9,473) (2,260)
============ =============
Net capitalized costs $ 86,572 $ 42,424
============ =============
Of the total costs excluded from the amortization calculation as of
December 31, 1996, $17,459,000 was incurred during 1996, $7,238,000 was incurred
during 1995, $4,952,000 was incurred during 1994, and $1,060,000 was incurred
during 1993. The Company cannot accurately predict when these costs will be
included in the amortization base, but it is expected that these costs will be
evaluated in the next three to five years.
COSTS INCURRED IN OIL AND GAS ACTIVITIES: The following table sets forth
the Company's costs incurred for oil and gas activities for the years ended
December 31, 1996, 1995 and 1994 (in thousands):
1996 1995 1994
-------------- ------------ ------------
Acquisition of properties:
Evaluated $ 23,090 $ 3,643 $ -
Unevaluated 7,000 5,549 3,676
Exploration costs 17,358 11,963 10,853
Development costs 3,913 1,505 2,345
-------------- ------------ ------------
Total costs incurred $ 51,361 $ 22,660 $ 16,874
============== ============ ============
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES: The following
table sets forth the results of operations for oil and gas producing activities
for the years ended December 31, 1996, 1995 and 1994 (in thousands):
1996 1995 1994
---------- ---------- ---------
Revenue $ 17,921 $ 4,482 $ 1,137
Production costs (3,124) (1,553) (316)
Depreciation, depletion and amortization (7,212) (1,625) (296)
---------- ---------- ---------
Income before income taxes 7,585 1,304 525
Income tax expense (2,655) (456) (179)
---------- ---------- ---------
Results of operations $ 4,930 $ 848 $ 346
========== ========== =========
In addition to the revenues and production costs disclosed above, the
Company had revenues from sulfur sales and related production costs of $334,000
and $10,000, respectively, for the year ended December 31, 1996, $324,000 and
$19,000, respectively, for the year ended December 31, 1995 and $67,000 and
$24,000, respectively for the year ended December 31, 1994.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED
OIL AND GAS RESERVES: The following table sets forth the standardized measure of
the discounted future net cash flows attributable to the Company's proved oil
and gas reserves as prescribed by SFAS No. 69. Future cash inflows were computed
by applying year-end prices of oil and gas to the estimated future production of
proved oil and gas reserves. Future prices actually received may differ from the
estimates in the standardized measure.
F-22
Future production and development costs represent the estimated future
expenditures (based on current costs) to be incurred in developing and producing
the proved reserves, assuming continuation of existing economic conditions.
Future income tax expenses were computed by applying statutory income tax rates
to the difference between pre-tax net cash flows relating to the Company's
proved oil and gas reserves and the tax basis of proved oil and gas properties,
adjusted for tax credits and allowances. The resulting annual net cash flows
were then discounted to present value amounts by applying a 10 percent annual
discount factor.
Although the information presented is based on the Company's best estimates
of the required data, the methods and assumptions used in preparing the data
were those prescribed by the Financial Accounting Standards Board ("FASB").
Although not market sensitive, they were specified in order to achieve
uniformity in assumptions and to provide for the use of reasonably objective
data. It is important to note here that this information is neither fair market
value nor the present value of future cash flows and it does not reflect changes
in oil and gas prices experienced since the respective year end. It is primarily
a tool designed by the FASB to allow for a reasonable comparison of oil and gas
reserves and changes therein through the use of a standardized method.
Accordingly, the Company cautions that this data should not be used for other
than its intended purpose.
Management does not rely upon the following information in making
investment and operating decisions. The Company, along with its partners, base
such decisions upon a wide range of factors, including estimates of probable as
well as proved reserves, and varying price and cost assumptions considered more
representative of a range of possible economic conditions that may be
anticipated.
The presentation of the standardized measure of discounted future net cash
flows and changes therein excludes, for 1996, amounts dedicated to future
deliveries required under a volumetric production payment. The Company has also
presented, as additional information, the standardized measure of discounted
future net cash flows and changes therein including amounts dedicated to future
deliveries required under the volumetric production payment. The Company
believes that this information is informative to readers of its financial
statements because the related oil and gas properties costs and deferred revenue
are shown in the Company's balance sheet for 1996. This additional information
is not required to be presented in accordance with SFAS No. 69; however, the
Company believes this additional information is useful in assessing its reserve
and financial position on a comprehensive basis.
December 31,
(in thousands)
----------------------------------------------
1996 1995 1994
-------------- ------------- --------------
Future gross revenue $ 127,905 $ 43,724 $ 35,910
Future production costs (21,913) (8,951) (7,100)
Future development costs (10,101) (3,393) (6,998)
Future income taxes (26,524) (9,266) (6,024)
------------- ------------ -------------
Future net cash flows 69,367 22,114 15,788
10 percent annual discount for estimated timing of cash flows (17,277) (6,056) (4,958)
------------- ------------ -------------
Standardized measure of discounted future net cash flows 52,090 $ 16,058 $ 10,830
============ =============
Additional disclosures -
Amounts dedicated to volumetric production payment 7,911
-------------
Total discounted future net cash flows, including amounts
dedicated to volumetric production payment $ 60,001
=============
The above table excludes future net cash flows before income taxes of
$3,495,000, $5,061,000 and, $3,884,000 and discounted future net cash flows
before income taxes of $2,427,000, $3,926,000 and $2,939,000, as of December 31,
1996, 1995 and 1994, respectively, related to proved sulfur reserves.
F-23
The following are the principal sources of changes in the standardized
measure of discounted future net cash flows for the years ended December 31,
1996, 1995 and 1994 (in thousands):
1996 1995 1994
----------- ----------- ----------
Standardized measure, beginning of year $ 16,058 $ 10,830 $ 1,291
Extensions and discoveries, net of related costs 26,690 13,714 14,344
Sales of oil and gas produced, net of production costs (9,057) (2,929) (821)
Net changes in prices and production costs 24,561 77 (276)
Change in future development costs (355) 4,010 74
Development costs incurred during the period
that reduced future development costs 2,042 421 -
Revision of previous quantity estimates 3,077 (12,192) 201
Purchases of reserves in place 18,309 5,583 -
Sale of volumetric production payment (17,763) - -
Accretion of discount 2,532 1,525 154
Net change in income taxes (11,406) (2,583) (4,174)
Change in production rates and other (2,598) (2,398) 37
----------- ----------- ----------
Standardized measure, end of year 52,090 $ 16,058 $ 10,830
=========== ==========
Additional disclosures -
Amounts dedicated to volumetric
production payment 7,911
-----------
Total standardized measure, including
amounts dedicated to volumetric
production payment $ 60,001
===========
F-24
EXHIBIT
INDEX
- - --------------------------------------------------------------------------------
Exhibit Title Page
Number
- - --------------------------------------------------------------------------------
10.7 Amendment to the Seitel, Inc. 1993 Incentive Stock Option 47
Plan effective December 31, 1996
10.9 Amendment to the Seitel, Inc. Non-Employee Directors' Stock 49
Option Plan effective December 31, 1996
10.12 Amendment to the Seitel, Inc. Amended and Restated 1995 51
Warrant Reload Plan effective December 31, 1996
10.28 Assumption and Loan Modification Agreement dated effective 53
December 31, 1996, among Seitel Geophysical, Inc. (Company's
wholly-owned subsidiary), Eagle Geophysical, Inc. (Company's
wholly-owned subsidiary), Compass Bank and Seitel, Inc.
10.30 Assignment and Assumption Agreement regarding Master Lease 58
dated December 31, 1996, between Eagle Geophysical, Inc.
(Company's wholly-owned subsidiary) and Seitel Geophysical,
Inc. (Company's wholly-owned subsidiary), consent to by
MetLife Capital Corporation
10.38 Assumption and Consent dated December 31, 1996, among Seitel 62
Geophysical, Inc. (Company's wholly-owned subsidiary), Eagle
Geophysical, Inc. (Company's wholly-owned subsidiary),
NationsBanc Leasing Corporation of North Carolina, and
Seitel, Inc.
10.41 Loan and Security Agreement dated as of February 6, 1997, 67
between Eagle Geophysical, Inc. (Company's wholly-owned
subsidiary), Seitel Geophysical, Inc. (Company's
wholly-owned subsidiary), and NationsBanc Leasing
Corporation of North Carolina
21.1 Subsidiaries of the Registrant 123
23.1 Consent of Arthur Andersen LLP 125
23.2 Consent of Miller and Lents, Ltd. 127